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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 

 
FORM 10-Q
 

 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2014
 
¨
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.)
 
1218 3rd Avenue, Suite 505
Seattle, Washington 98101
(Address of principal executive offices)
 
206-910-2687
(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  x    No  ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act
 
Large accelerated filer
 
¨
  
Accelerated filer
 
¨
       
Non-accelerated filer
 
¨
  
Smaller reporting company
 
x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
 
As of May 20, 2014, the registrant had 115,327,665  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, 2014
 
Table of Contents
 
   
  
Page
 
   
  
 
  2
  
  
 
2
 
PART I. FINANCIAL INFORMATION
  
     
Item 1.
  
 
  3
 
 
  
 
3
  
 
  
 
4
  
 
  
 
5
  
 
  
 
6
  
 
  
 
7
  
 
  
 
8
  
Item 2.
  
 
16
  
Item 4.
  
 
21
  
   
PART II. OTHER INFORMATION
  
     
Item 1.
   
22
 
Item 1A.
   
22
 
Item 2.
   
22
 
Item 3.
  
 
22
  
Item 5.
  
 
22
  
Item 6.
  
 
22
  
   
  
 
23
  
     
  
 
24
  
 
 
 
Unless otherwise indicated or the context otherwise requires, all references in this Quarterly Report on Form 10-Q (“Report”) to “we,” “us,” “our,” “Legend” and the “Company” are to Legend Oil and Gas, Ltd., a Colorado corporation, and references in this Report to “Legend Canada” are to Legend Energy Canada, Ltd., a wholly-owned subsidiary of the Company. All references to “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 demand loan facility with National Bank of Canada and Senior Secured Convertible Debentures to Hillair Capital Investments, L.P.;
     
 
Our ability to draw down on our equity line of credit with Lincoln Park Capital Fund, LLC, in amounts and times when needed;
     
 
Our ability to fund our 2014 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 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, 2013 filed with the Securities and Exchange Commission on April 15, 2014, 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.
 
 
PART I – FINANCIAL INFORMATION
 
ITEM 1           CONSOLIDATED FINANCIAL STATEMENTS
 
Legend Oil and Gas Ltd.
CONSOLIDATED BALANCE SHEETS
(unaudited)
 
   
March 31,
   
December 31,
 
   
2014
   
2013
 
ASSETS
           
Current Assets
           
Cash and cash equivalents
 
$
1,322
   
$
64,283
 
Accounts receivable
   
358,493
     
329,123
 
Prepaid expenses
   
147,459
     
102,191
 
Total current assets
   
507,274
     
495,597
 
                 
Deposits
   
3,740
     
3,740
 
Oil and gas property, plant and equipment
               
Proven property – net
   
1,984,398
     
2,493,328
 
Unproven property
   
1,124,762
     
1,224,311
 
Total oil and gas properties, net
   
3,109,160
     
3,717,639
 
Total assets
 
$
3,620,174
   
$
4,216,976
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
               
Current Liabilities
               
Accounts payable
 
$
1,813,947
   
$
1,656,948
 
Note payable to bank
   
1,453,210
     
2,018,951
 
Current portion of long term debt, net
   
80,139
     
27,496
 
Convertible debt, net
   
960,649
     
612,527
 
Embedded derivative liabilities
   
948,116
     
1,161,284
 
Total current liabilities
   
5,256,061
     
5,477,206
 
Asset retirement obligations
   
1,497,176
     
1,533,121
 
Total liabilities
   
6,753,237
     
7,010,327
 
                 
Stockholders’ Equity (Deficit)
               
                 
Common stock -  400,000,000 shares authorized; $0.001 par value; 115,327,665 and 109,343,534 shares issued and outstanding, respectively
   
115,326
     
109,343
 
Additional paid-in capital
   
26,085,580
     
25,726,902
 
Accumulated other comprehensive loss
   
100,362
     
17,188
 
Accumulated deficit
   
(29,434,331
)
   
(28,646,784
)
  Total stockholders’ equity (deficit)
   
(3,133,063
)
   
(2,793,351
)
Total liabilities and stockholders’ equity (deficit)
 
$
3,620,174
   
$
4,216,976
 
 
The accompanying notes are an integral part of these consolidated financial statements.

 
Legend Oil and Gas Ltd.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 
   
For the Three Months Ended
 
   
March 31, 2014
   
March 31, 2013
 
             
Oil and gas revenue
 
$
293,471
   
$
523,323
 
                 
Costs and Expenses
               
General and administrative
   
511,859
     
1,547,336
 
Production expenses
   
158,106
     
351,345
 
Depletion, depreciation, and amortization
   
158,162
     
184,986
 
Impairment of oil and gas property
   
-
     
111,023
 
Accretion on asset retirement obligation
   
14,674
     
14,557
 
Total costs and expenses
   
842,801
     
2,209,247
 
Operating Loss
   
(549,330
)
   
(1,685,924
)
                 
Other Income and Expense
               
Interest expense
   
(451,385
)
   
(37,477
)
Change in value of embedded derivative liabilities
   
213,168
     
-
 
Total other income and expense
   
(238,217
   
(37,477
)
Net loss
 
$
(787,547
)
 
$
(1,723,401
)
Basic and diluted weighted average shares outstanding
   
112,854,205
     
77,809,160
 
                 
Basic and diluted net loss per share
 
$
(0.01
)
 
$
(0.02
)
 
The accompanying notes are an integral part of these consolidated financial statements.


Legend Oil and Gas Ltd.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(unaudited)
 
   
For the Three Months Ended
 
   
March 31, 2014
   
March 31, 2013
 
             
Net loss
 
$
(787,547
)
 
$
(1,723,401
)
Other comprehensive loss
               
   Foreign currency translation adjustment
   
83,174
     
(133,303
Comprehensive loss
 
$
(704,373
)
 
$
(1,856,704
)
 
The accompanying notes are an integral part of these consolidated financial statements.

 
Legend Oil and Gas Ltd.
STATEMENTS OF CONSOLIDATED STOCKHOLDERS’ EQUITY (DEFICIT)
(UNAUDITED)
 
    Common Stock     Additional
Paid-in Capital
    Accumulated Other
Comprehensive Income (Loss)
    Accumulated
Deficit
    Total  
Balance at December 31, 2012
    77,220,271     $ 77,220     $ (25,353,942 )   $ 152,634     $ (15,624,278 )   $ (40,748,366 )
Common stock issued for services
    7,700,000       7,700       482,300       -       -       490,000  
Stock based compensation
    -       -       1,206,994       -       -       1,206,994  
Foreign currency translation
    -       -       -       (135,446 )     -       (135,446 )
Conversion of note payable
    2,772,407       2,772       59,761       -       -       62,533  
Discount on short term note payable
    -       -       124,430       -       -       124,430  
Conversion of convertible preferred stock to common stock
    1,700,000       1,700       365,253       -       -       366,953  
Dividends on preferred stock
    13,823,000       13,823       677,327       -       (691,150 )     -  
Reclassification out of contingently redeemable common stock
    -       -       47,764,926       -       -       47,764,926  
Stock issued for interest payment
    955,128       955       30,405       -       -       31,360  
Stock issued to employees
    2,900,000       2,900       258,100       -       -       261,000  
Stock issued for property
    2,272,728       2,273       111,348       -       -       113,621  
Net loss
    -       -       -       -       (12,331,356 )     (12,331,356 )
Balance at December 31, 2013
    109,343,534       109,343       25,726,902       17,188       (28,646,784 )     (2,793,351 )
Stock issued for services
    4,763,333       4,763       304,853       -       -       309,616  
Stock issued for interest payment
    1,220,798       1,220       50,256       -       -       51,746  
Stock based compensation
    -       -       3,569       -       -       3,569  
Foreign currency translation
    -       -       -       83,174       -       83,174  
Net loss
    -       -       -       -       (787,547 )     (787,547 )
Balance at March 31, 2014
    115,327,665     $ 115,326     $ 26,085,580     $ 100,362     $ (29,434,331 )   $ (3,133,063 )
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
Legend Oil and Gas Ltd.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
   
For the Three Months Ended
 
   
March 31, 2014
   
March 31, 2013
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net loss
 
$
(787,547
)
 
$
(1,723,401
)
Adjustments to reconcile net loss to cash flows from operating activities:
               
Stock-based compensation
   
3,569
     
1,190,340
 
Amortization of discounts on notes payable
   
400,765
     
-
 
Accretion on asset retirement obligation
   
14,674
     
14,557
 
Issuance of common stock for services
   
309,616
     
50,000
 
Change in value of embedded derivative liabilities
   
(213,168
   
-
 
Depletion, depreciation, amortization and impairment
   
158,162
     
296,009
 
Changes in operating assets and liabilities :
               
Accounts receivable
   
(29,370
   
(27,788
)
Prepaid expenses and other assets
   
(45,268
   
8,538
 
Accounts payable
   
208,476
     
405,572
 
Net cash flows from operating activities
   
19,909
     
213,827
 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from sale of oil and gas properties
   
450,316
     
-
 
Oil and gas properties development costs
   
-
     
(150,369
)
Net cash flows from investing activities
   
450,316
     
(150,369
)
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Payments on note payable to bank
   
(565,741
)
   
(142,293
)
Net cash flows from financing activities
   
(565,741
)
   
(142,293
)
Change in cash and cash equivalents before effect of exchange rate changes
   
(95,516
)
   
(78,835
)
Effect of exchange rate changes
   
32,555
     
76,201
 
Net change in cash and cash equivalents
   
(62,961
)
   
(2,634
)
Cash and cash equivalents, beginning of period
   
64,283
     
12,989
 
Cash and cash equivalents, end of period
 
$
1,322
   
$
10,355
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
               
Cash paid during the year for:
               
Interest
 
$
50,620
   
$
37,477
 
 
The accompanying notes are an integral part of these consolidated financial statements.


Legend Oil and Gas Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND DESCRIPTION OF OPERATIONS

Description of Business
 
We are an oil and gas exploration, development and production company.  Our oil and gas property interests are located in Western Canada (in Berwyn and Medicine River in Alberta, and Clarke Lake in British Columbia) and in the United States (in the Piqua region of the State of Kansas in Woodson County and Crawford County).

The Company was incorporated under the laws of the State of Colorado on November 27, 2000 under the name “SIN Holdings, Inc.” From inception until June 2010, we pursued our original business plan of developing a web portal listing senior resources across the United States through our former wholly-owned subsidiary Senior-Inet, Inc. On July 29, 2010, Senior-Inet, Inc. was dissolved and we changed our business to the acquisition, exploration, development and production of oil and gas reserves. To align our name with our new business, on November 29, 2010, we changed our name to Legend Oil and Gas, Ltd.

On July 28, 2011, we formed a wholly owned subsidiary named Legend Energy Canada, Ltd. (“Legend Canada”), which is a corporation registered under the laws of Alberta, Canada. Legend Canada was formed to acquire, own and manage certain oil and gas properties and assets located in Canada.  Legend Canada completed the acquisition of significant oil and gas reserves located in Canada on October 20, 2011.

On January 23, 2014, we entered into an agreement with New Western Energy Corporation (“New Western”) to consummate a business combination.  On April 30, 2014, the agreement and plan of merger were terminated by mutual consent of both the Company and New Western.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, and our wholly-owned subsidiary Legend Canada.  Intercompany transactions and balances have been eliminated in consolidation.  We account for our undivided interest in oil and gas properties using the proportionate consolidation method, whereby our share of assets, liabilities, revenues and expenses are included in the financial statements.

Interim Reporting

The unaudited financial information furnished herein reflects all adjustments, consisting solely of normal recurring items, which in the opinion of management are necessary to fairly state the financial position of Legend Oil & Gas Ltd. and the results of its operations for the periods presented.  This report on Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended December 31, 2013.  The Company assumes that the users of the interim financial information herein have read or have access to the audited financial statements for the preceding fiscal year and that the adequacy of additional disclosure needed for a fair presentation may be determined in that context.  Accordingly, footnote disclosure, which would substantially duplicate the disclosure contained in the Company’s Form 10-K for the fiscal year ended December 31, 2013 has been omitted.  The results of operations for the three month periods ended March 31, 2014 are not necessarily indicative of results for the entire year ending December 31, 2014. The Company did not record an income tax provision during the periods presented due to net taxable losses.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Management’s judgments and estimates in these areas are to be based on information available from both internal and external sources, including engineers, geologists, consultants and historical experience in similar matters. The more significant reporting areas impacted by management’s judgments and estimates are fair values of the Company’s equity-linked instruments, accruals related to oil and gas sales and expenses, estimates of future oil and gas reserves, estimates used in the impairment of oil and gas properties, and the estimated future timing and cost of asset retirement obligations.

Actual results could differ from the estimates as additional information becomes known. The carrying values of oil and gas properties are particularly susceptible to change in the near term. Changes in the future estimated oil and gas reserves or the estimated future cash flows attributable to the reserves that are utilized for impairment analysis could have a significant impact on the future results of operations.
 
 
Comprehensive Income

For operations outside of the U.S. that prepare financial statements in currencies other than U.S. dollars, we translate the financial statements into U.S. dollars.  Results of operations and cash flows are translated at average exchange rates during the period, and assets and liabilities are translated at end of period exchange rates, except for equity transactions and advances not expected to be repaid in the foreseeable future, which are translated at historical costs.  The effects of exchange rate fluctuations on translating foreign currency assets and liabilities into U.S. dollars are accumulated as a separate component in other comprehensive income (loss).  Accumulated other comprehensive income (loss) consists entirely of foreign currency translation adjustments at March 31, 2014 and December 31, 2013.

Liquidity

We have incurred net operating losses and operating cash flow deficits over the last two years, continuing through 2014. We are in the early stages of acquisition and development of oil and gas leaseholds, and we have been funded primarily by a combination of equity issuances and borrowing under loan agreements and to a lesser extent by operating cash flows, to execute on our business plan for the acquisition, exploration, development and production of oil and gas reserves. At March 31, 2014, we had cash and cash equivalents totaling approximately $1,000.

In October 2011, we established a revolving demand loan with National Bank of Canada (the “Bank”) through our wholly-owned subsidiary, Legend Canada.  On August 22, 2013, the Company entered into a Forbearance Agreement with the Bank, which conveyed the Bank additional control over the assets of the Company, increased the interest payments to prime rate of interest plus 4%, and indicated through sale of assets or other means full repayment of the existing credit facility in full by November 29, 2013.  In addition, the Company had various conditions to adhere to, including ; (a) settlement of license liability with Alberta Energy Regulator, (b) engagement of marketing agent to facilitate the sale of Canadian properties to retire existing facility, (c) a release of various funds for operational upgrades and maintenance of select Canadian properties, (d) delinquent bank reporting to be completed and brought up to date, (e) dedication of funds from Hillair financing to Canadian facility and (f) continued and on-going monthly reporting on progress of activity within the Forbearance Agreement process.  It is the Company’s belief that these conditions were met where required, with the only exception being the license liability and this was due to a change in regulation allowing relief.  The Company closed the sale of Boundary Lake, Wildmere, and Inga properties in connection with the Forbearance Agreement in Q4 2013 and Q1 2014 and used the proceeds to partially repay the revolving demand loan.  In December 2013, the Bank elected to terminate the formal forbearance and has replaced it with a day to day effort to have the Company continue to sell assets, look for new sources of capital in order to determine the best course of action concerning the revolving demand loan.  On April 25, 2014, the Company received a Notice of Intention to Enforce Security from the Bank. Under the notice, the Bank states that it intends to enforce its rights against Legend Canada under the CA$6,000,000 Acknowledgement of Debt Revolving Demand Credit Agreement, dated August 15, 2011; the General Assignment of Book Debts, dated October 19, 2011; the CA$25,000,000 Fixed and Floating Charge Demand Debenture; the Pledge Agreement dated October 19, 2011; and the Negative Pledge and Undertaking dated October 19, 2011. On April 28, 2014 the Company received a Notice of Intention to Enforce Security from the Bank. Under the Company Notice, the Bank states that it intends to enforce its rights against the Company under the Letter of Guarantee, dated May 11, 2012; the General Security Agreement dated May 11, 2012; the Securities Pledge Agreement; the Subordination Agreement dated July 10, 2013; and the Set-off and Security Agreement dated July 10, 2013.  The bank claims the Company is in default under the Legend Canada Security and the Company Security agreements. The Bank has demanded payment in full of all amounts owing under the Legend Canada Security Agreements and the Company Security Agreements. The Bank claims  that the total amount due is $1,656,857.37 plus accruing interest, costs, expenses and fees including, without limitation, attorney’s fees.

During 2013, the Company issued two 8% Original Issue Discount Senior Secured Convertible Debentures to Hillair Capital Investments, L.P. (“Hillair”) payable on or before December 1, 2014.  On May 1, 2014, the Company received a Notice of Event of Default from Hillair with respect to the 8% Original Issue Discount Senior Secured Convertible Debentures. Hillair states that the Company is in default under the Debentures and has demanded payment in full of all amounts owing under the Debentures. Hillair further states that the total amount due is $2,111,200 plus accruing interest.

The Company is in negotiations with the Bank and Hillair in an attempt to resolve these issues.  The Company may be required to sell some or all of its properties as a result of the actions by the Bank and Hillair.

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

The uncertainties relating to the Company’s ability to repay the obligations to the Bank and Hillair (and to execute the Company’s business plan) continue to raise substantial doubt about the Company’s ability to continue as a going concern. These financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that could result should the Company be unable to continue as a going concern.
 
 
Full Cost Method of Accounting for Oil and Gas Properties

We have elected to utilize the full cost method of accounting for our oil and gas activities. In accordance with the full cost method of accounting, all costs associated with acquisition, exploration, and development of oil and gas reserves, including directly related overhead costs and related asset retirement costs are capitalized into a cost center.  Our cost centers consist of the Canadian cost center and the United States cost center.

All capitalized costs of oil and gas properties within each cost center, including the estimated future costs to develop proved reserves, are amortized on the unit-of-production method using estimates of proved reserves. Excluded from this amortization are costs associated with unevaluated properties, including capitalized interest on such costs. Unevaluated property costs are transferred to evaluated property costs at such time as wells are completed on the properties or management determines that these costs have been impaired.

Oil and gas properties without estimated proved reserves are not amortized until proved reserves associated with the properties can be determined or until impairment occurs. The cost of these properties is assessed quarterly, on a field-by-field basis, to determine whether the properties are recorded at the lower of cost or fair market value.

Sales of oil and gas properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas attributable to a cost center, in which case the gain or loss is recognized in income. In determining whether adjustments to capitalized costs result in a significant alteration, capitalized costs within the cost center are allocated between the reserves sold and reserves retained on the same basis used to compute amortization, unless there are substantial economic differences between the properties sold and those retained. When economic differences between properties sold and those retained exist, capitalized costs within the cost center are allocated on the basis of the relative fair values of the properties in determining whether adjustments to capitalized costs result in a significant alteration.

Full Cost Ceiling Test

At the end of each quarterly reporting period, the cost of oil and gas properties in each cost center are subject to a “ceiling test” which basically limits capitalized costs to the sum of the estimated future net revenues from proved reserves, discounted at 10% per annum to present value, based on current economic and operating conditions, at the end of the period, plus the cost of properties not being amortized, plus the lower of cost or fair market value of unproved properties included in costs being amortized, less the income tax effects related to book and tax basis differences of the properties.  If the cost of oil and gas properties exceeds the ceiling, the excess is reflected as a non-cash impairment charge to earnings.  The impairment charge is permanent and not reversible in future periods, even though higher oil and gas prices in the future may subsequently and significantly increase the ceiling amount.  Impairment charges for the period ended March 31, 2014 were $nil ($111,023 for period ended March 31, 2013).
 
Asset Retirement Obligation
 
We record the fair value of a liability for an asset retirement obligation in the period in which the asset is acquired and a corresponding increase in the carrying amount of the related long-lived asset if a reasonable estimate of fair value can be made. The associated asset retirement cost capitalized as part of the related asset is allocated to expense over the asset’s useful life. If the liability is settled for an amount other than the recorded amount, a gain or loss is recognized. The asset retirement obligation is recorded at its estimated fair value and accretion is recognized over time as the discounted liability is accreted to its expected settlement value. Fair value is determined by using the expected future cash outflows discounted at our credit-adjusted risk-free interest rate.
 
Oil and Gas Revenue Recognition

Revenue from production on properties in which we share an economic interest with other owners is recognized on the basis of our interest. Revenues are reported on a gross basis for the amounts received before taking into account production taxes, royalties, and transportation costs, which are reported as production expenses. Revenue is recorded and receivables accrued using the sales method of accounting. Under this method, revenues are recognized based on the actual volumes of gas and oil sold to purchasers at a fixed or determinable price, when delivery has occurred and title has transferred, and if collectability of the revenue is probable. Delivery occurs and title is transferred when production has been delivered to a purchaser’s pipeline or truck. The volume sold may differ from the volumes we are entitled to, based on our individual interest in the property. We utilize a third-party marketer to sell oil and gas production in the open market. As a result of the requirements necessary to gather information from purchasers or various measurement locations, calculate volumes produced, perform field and wellhead allocations and distribute and disburse funds to various working interest partners and royalty owners, the collection of revenues from oil and gas production may take up to 45 days following the month of production. Therefore, we may make accruals for revenues and accounts receivable based on estimates of our share of production. Since the settlement process may take 30 to 60 days following the month of actual production, our financial results may include estimates of production and revenues for the related time period. We will record any differences between the actual amounts ultimately received and the original estimates in the period they become finalized.
 
 
Stock-based compensation

We measure compensation cost for stock-based awards at fair value and recognize it as compensation expense over the service period for awards expected to vest.  Stock-based compensation expense is also recognized upon cancellation of awards that were initially expected to vest.  Compensation cost (a non-cash expense) is recorded as a component of general and administrative expenses in the consolidated statements of operations, net of an estimated forfeiture rate, and amounted to $3,569 and $1,190,340 for the periods ended March 31, 2014 and 2013.
 
Net Loss Per Share

The computation of basic net loss per common share is based on the weighted average number of shares that were outstanding during the period, including contingently redeemable common stock. The computation of diluted net loss per common share is based on the weighted average number of shares used in the basic net loss per share calculation plus the number of common shares that would be issued assuming the exercise of all potentially dilutive common shares outstanding.  Potentially dilutive common shares include warrants to purchase shares of common stock (32,413,067 shares for 2014 and 4,150,000 shares for 2013), options to purchase shares of common stock (600,000 shares for 2014 and nil shares for 2013), Notes payable convertible into common stock (31,515,457 shares for 2014 and nil shares for 2013).  During the periods ended March 31, 2014 and 2013 potentially dilutive common shares were not included in the computation of diluted loss per shares as to do so would be anti-dilutive.
 
Fair Value Measurements
 
We measure fair value as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.  As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability.  We utilize a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1: Observable market inputs such as quoted prices in active markets;

Level 2: Observable market inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

Level 3: Unobservable inputs where there is little or no market data, which require the reporting entity to develop its own assumptions.

Fair Value of Financial Statements

The carrying amounts of financial assets and liabilities such as cash, accounts receivable and accounts payable approximate their fair values (determined based on level 1 inputs in the fair value hierarchy) due to the short term nature of these instruments. Due to conversion features and other terms, it is not practical to estimate the fair value of the Company’s note payable.
 
NOTE 3 - OIL AND GAS PROPERTIES

The amount of capitalized costs related to oil and gas property and the amount of related accumulated depletion, depreciation, and amortization are as follows:
 
   
March 31, 2014
   
December 31, 2013
 
Proven property, net of impairment
 
$
3,707,078
   
$
4,241,776
 
Accumulated depletion, depreciation, and amortization
   
(1,722,680
)
   
(1,748,448
)
     
1,984,398
     
2,493,328
 
Unproven property
   
1,124,762
     
1,224,311
 
   
$
3,109,160
   
$
3,717,639
 
 
On January 28, 2014, the Company sold its Inga property located in British Columbia, Canada for CA$435,000. The proceeds from the sale were accounted for as an adjustment to the capitalized costs in the Canadian cost center with no gain or loss recognized.
 
 
NOTE 4 – ASSET RETIREMENT OBLIGATION

The following table reconciles the value of the asset retirement obligation for the periods ended March 31, 2014 and March 31, 2013:

   
March 31, 2014
   
March 31, 2013
 
Opening balance, January 1
 
$
1,533,121
   
$
1,654,032
 
Foreign currency translation adjustment
   
(50,619
)
   
(32,744
Accretion expense
   
14,674
     
14,557
 
Ending balance, March 31
 
$
1,497,176
   
$
1,635,845
 

NOTE 5 - STOCKHOLDERS’ EQUITY (DEFICIT)

In January 2014, the Company issued 4,763,333 shares of common stock to Northpoint Energy Partners LLC in exchange for consulting services.  The stock had a fair value of $309,617. The fair value of the common stock was determined using the closing price of the shares on the date transferred.

In March 2014, the Company issued 1,220,798 shares of common stock with a fair value of $51,746 to Hillair in payment of accrued interest on convertible debt agreements. The fair value of the common stock was determined using the closed price of the shares on the date transferred.

Warrants

The following table summarizes outstanding warrants to purchase shares of our common stock as of March 31, 2014 and December 31, 2013:
 
   
Shares of Common Stock
Issuable from Warrants
Outstanding as of
         
   
March 31,
   
December 31,
   
Exercise
   
Date of Issue
 
2014
   
2013
   
Price
 
Expiration
February 2011
   
-
     
300,000
   
$
0.50
 
February 2014
April 2011
   
250,000
     
250,000
   
$
1.00
 
April 2014
August 2011
   
2,300,000
     
2,300,000
   
$
2.00
 
August 2014
July 2013
   
19,764,706 
     
19,764,706 
   
0.07 
 
  July 2018
November 2013
   
10,098,361
     
10,098,361
   
$
0.07
 
November 2018
     
32,413,067
     
32,713,067
           
 
As of March 31, 2014, none of the outstanding warrants had been exercised.  The warrants issued on February 2011 expired without exercise.

Stock Incentive Plan

The Company has a 2011 Stock Incentive Plan which provides for the grant of options to purchase shares of the Company’s common stock, and stock awards consisting of shares of our common stock, to eligible participants, including directors, executive officers, employees, and consultants of the Company.  There are 4,500,000 shares of common stock reserved for issuance under the 2011 Stock Incentive Plan.  The Company also has a 2013 Stock Incentive Plan which provides for similar grants and has 10,000,000 shares of common stock reserved.

On May 15, 2014, the Company created the 2014 Stock Incentive Plan and reserved 40,000,000 shares of common stock for issuance thereunder.  The 2014 Stock Incentive Plan also provides the issuance of stock awards and grant of options to purchase shares of the Company's common stock.

 
A summary of stock option activity is as follows:

   
Outstanding Options
 
   
Number of Shares
   
Weighted Average Exercise Price
 
Balance at January 1, 2014
    600,000     $ 0.07  
Options granted
    -       -  
Options cancelled
    -       -  
Balance at March 31, 2014
    600,000     $ 0.07  
Exercisable, March 31, 2014
    200,000     $ 0.07  
Vested and expected to vest
    600,000     $ 0.07  
 
There were no stock option grants during the period presented.

The remaining contractual term of options outstanding and exercisable at March 31, 2014 is 9.5 years.  During the year ended December 31, 2013, 2,800,000 stock options originally granted during 2011 were cancelled, and the remaining compensation expense amounting to $1,190,340 was accelerated and recognized during 2013.  The aggregate intrinsic value of stock options outstanding and exercisable at March 31, 2014 was nil.  The intrinsic value of outstanding and exercisable stock options is calculated as the quoted market price of the stock at the balance sheet date less the exercise price of the option.  There were no stock options exercised during the periods presented.  At March 31, 2014, the Company had unrecognized compensation expense related to stock options of $19,033 to be recognized over a weighted-average period of 1.50 years.
 
NOTE 6 – NOTE PAYABLE TO BANK

Under a series of agreements with the Bank, as of December 31, 2013, we had a revolving credit facility with a maximum borrowing base of $2,018,951 through our wholly-owned subsidiary, Legend Canada.  Outstanding principal under the loan initially included interest at a rate equal to the Bank’s prime rate of interest (currently 3%) plus 1%.  Borrowings under the agreements are collateralized by a Fixed and Floating Charge Demand Debenture (the “Debenture”) to the Bank in the face amount of CA$25 million, to secure payment of all debts and liabilities owed by Legend Canada to the Bank. The interest rate on amounts drawn under the Debenture, as well as interest that is past due, is the prime rate, plus 7% per annum. As further collateral, Legend Canada also executed an Assignment of Book Debts on October 19, 2011, that grants, transfers and assigns to the Bank a continuing and specific security interest in specific collateral of Legend Canada, including all debts, proceeds, accounts, claims, money and chooses in action which currently or in the future are owing to Legend Canada.  On August 22, 2013 the Company entered into a Forbearance agreement with the Bank, which conveyed the Bank additional control over the assets of the Company, increased the interest payments to prime rate of interest plus 4%, and indicated through sale of assets or other means full repayment of the existing credit facility in full by November 29, 2013.  At December 31, 2013, the Company had closed a series of asset sales in efforts to work jointly with the Bank to meet the terms of the Forbearance agreement in the fourth quarter.  At December 31, 2013, $2,018,951 was outstanding.
  
On April 25, 2014, the Company received a Notice of Intention to Enforce Security from the Bank. Under the notice, the Bank states that it intends to enforce its rights against Legend Canada under the CA$6,000,000 Acknowledgement of Debt Revolving Demand Credit Agreement, dated August 15, 2011; the General Assignment of Book Debts, dated October 19, 2011; the CA$25,000,000 Fixed and Floating Charge Demand Debenture; the Pledge Agreement dated October 19, 2011; and the Negative Pledge and Undertaking dated October 19, 2011. On April 28, 2014 the Company received a Notice of Intention to Enforce Security from the Bank. Under the Company Notice, the Bank states that it intends to enforce its rights against the Company under the Letter of Guarantee, dated May 11, 2012; the General Security Agreement dated May 11, 2012; the Securities Pledge Agreement; the Subordination Agreement dated July 10, 2013; and the Set-off and Security Agreement dated July 10, 2013.  The Bank claims the Company is in default under the Legend Canada Security and the Company Security agreements. The Bank has demanded payment in full of all amounts owing under the Legend Canada Security Agreements and the Company Security Agreements. The Bank claims  that the total amount due is $1,656,857.37 plus accruing interest, costs, expenses and fees including, without limitation and attorney’s fees.
 
NOTE 7 – LONG TERM DEBT

Long term debt includes a series of convertible notes payable to JMJ Capital which originated during 2013.  Principal amounting to $27,500 plus interest at 12% is repayable on June 27, 2014; principal amounting to $27,500 plus interest at 12% is repayable on September 25, 2014, and principal amounting to $27,500 plus interest at 12% is repayable on December 9, 2014. The conversion price of the notes is the lesser of $0.05 or 60% of the lowest trading price of the Company’s common stock for 25 days prior to the conversion.  At both March 31, 2014 and December 31, 2013, the principal balance of the notes amounted to $82,500. The debt discount associated with the beneficial conversion feature amounted to $2,361 and $55,004 at March 31, 2014 and December 31, 2013, respectively.
 
 
NOTE 8 – CONVERTIBLE DEBT

On July 10, 2013, the Company received $900,000 from issuing an 8% Original Issue Discount Senior Secured Convertible Debenture to Hillair in the amount of $1,008,000, initially convertible at a rate of $0.0561, and payable on or before December 1, 2014.  On November 22, 2013, the Company received $550,000 from issuing an 8% Original Issue Discount Senior Secured Convertible Debenture to Hillair in the amount of $616,000, initially convertible at a rate of $0.0561, and payable on or before December 1, 2014.  The July 10, 2013 Debenture is secured by the property in Woodson County Kansas, while the November 22, 2013 Debenture is secured by the McCune property in Crawford County Kansas. The July 10, 2013 Debenture is convertible into 17,967,914 shares of common stock.  The November 22, 2013 Debenture is convertible into 10,980,392 shares of common stock.

In connection with each of the Debentures, the Company issued warrants to purchase shares of common stock with an exercise price of $0.0673, subject to further adjustments.  The number of warrants issued in connection with the July 10, 2013 Debenture was 19,764,706 and the number of warrants issued in connection with the November 22, 2013 Debenture was 10,098,361.

The Company accounts for warrants and conversion features as either equity instruments or derivative liabilities depending on the specific terms of the agreements.  Conversion features and warrants are accounted for as derivative financial instruments if they contain down-round protection, which preclude them from being considered indexed to the Company’s stock.  The conversion feature and the warrants issued to Hillair contain such down-round protection, and were bifurcated from the host debt contract and recorded at fair value.  The embedded features are subsequently adjusted to fair value at each reporting date, with the corresponding adjustment reflected as a non-operating credit / charge in the consolidated statement of operations.  The fair value of the conversion feature and warrants recorded as a debt discount on the date of issuance amounted to $1,372,742.  

At both March 31, 2014 and December 31, 2013, the principal outstanding payable to Hillair amounted to $1,624,000. The recorded amount of $960,649 and $612,527 at March 31, 2014 and December 31, 2013, respectively, is reported net of the debt discount (including the original issue discount).

On May 1, 2014, the Company received a default notice from Hillair.  In its default notice, Hillair states that the Company owes $2,111,200 plus interest under the provisions of the Debentures.

NOTE 9 – EMBEDDED DERIVATIVE LIABILITIES

The following table is a reconciliation of embedded derivative liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2013:
 
   
Embedded
Derivative
Liabilities
 
Balances, December 31, 2013
 
$
1,161,284
 
Changes in fair value
   
(213,168
Balances
 
$
948,116
 
 
The embedded derivative liabilities we incurred in connection with the Convertible Debentures issued to Hillair.  See Note 8. The Company valued the embedded derivative liabilities using the Black Scholes option pricing model using the following assumptions: term to expiration 0.67 years, historical volatility 100%, risk-free interest rate 0.13%.  No estimate was applied regarding the probability that the Company will issue equity securities at prices above or below the current contractual warrant exercise price and convertible debt conversion price resulting the occurrence of down-round protection.

NOTE 10 – SUBSEQUENT EVENTS

On May 1, 2014, the Company received a Notice of Default Event from Hillair with respect to its Debentures in total amount of $2,111,200 plus interest.

On April 30, 2014, the Company and New Western Energy Corporation (“New Western”) mutually terminated the Agreement and Plan of Merger between the parties dated January 23, 2014 (the “Agreement”).  There were no early termination penalties incurred by the Company.
 
 
On April 25, 2014, Legend Energy Canada Ltd., (“Legend Canada”) a wholly-owned subsidiary of the Company received a Notice of Intention to Enforce Security (the “Legend Canada Notice”) from the Bank. Under the Legend Canada Notice, the Bank states that it intends to enforce its rights against Legend Canada under the CA$6,000,000 Acknowledgement of Debt Revolving Demand Credit Agreement, dated August 15, 2011; the General Assignment of Book Debts, dated October 19, 2011; the $25,000,000 Fixed and Floating Charge Demand Debenture; the Pledge Agreement dated October 19, 2011; and the Negative Pledge and Undertaking dated October 19, 2011 (collectively the “Legend Canada Security”).

On April 28, 2014 the Company receive a Notice of Intention to Enforce Security (the “Company Notice”) from the Bank. Under the Company Notice, the Bank states that it intends to enforce its rights against the Company under the Letter of Guarantee, dated May 11, 2012; the General Security Agreement dated May 11, 2012; the Securities Pledge Agreement; the Subordination Agreement dated July 10, 2013; and the Set-off and Security Agreement dated July 10, 2013 (collectively the “Company Security”).

The Bank claims that Legend Canada and the Company are in default under the Legend Canada Security and the Company Security agreements. The Bank has demanded payment in full of all amounts owing under the Legend Canada Security Agreements and the Company Security Agreements. The Bank claims  that the total amount due is $1,656,857.37 plus accruing interest, costs, expenses and fees including, without limitation, attorney’s fees.

The Bank has the right to enforce its rights under the Legend Canada Security or the Company Security agreements until 10 days after the date the Notices were sent, which was April 25, 2014.

The Company is in negotiations with the Bank in an attempt to resolve these issues.
 
 
 
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, 2013 and 2012.  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

We are an oil and gas exploration, development and production company.  Our  oil and gas property interests are located in Western Canada (in Berwyn and Medicine River, in Alberta, and Clarke Lake in British Columbia) and in the United States (in the Piqua region of the State of Kansas).

Our business focus is to acquire producing and non-producing oil and gas right interests and develop oil and gas properties that we own or in which we have a leasehold interest. We also anticipate pursuing the acquisition of leaseholds and sites within other geographic areas that meet our general investment guidelines and targets. The majority of our operational duties are outsourced to consultants and independent contractors, including for drilling, maintaining and operating our wells, and we maintain a limited in-house employee base.

On October 20, 2011, our wholly-owned subsidiary, Legend Canada completed the acquisition of the majority of the petroleum and natural gas leases, lands and facilities held by Wi2Wi, formerly International Sovereign. The assets acquired consisted of substantially all of Wi2W’s assets, including interests in producing oil and gas leasehold properties in Western Canada that have been maintained through the drilling of internally generated low to medium risk exploration and development sites. The principal natural gas leasehold properties are located in Medicine River and Berwyn in Alberta, and Clarke Lake in British Columbia. The assets also include an interest in a light oil property in Inga in British Columbia.

Our Company was incorporated under the laws of the State of Colorado on November 27, 2000 under the name “SIN Holdings, Inc.” On November 29, 2010, we changed our name to Legend Oil and Gas, Ltd. Our only subsidiary is Legend Canada, which was formed in Alberta, Canada on July 28, 2011 to acquire the Wi2Wi assets. Neither we nor Legend Canada are reporting issuers in any province of Canada.

Results of Operations

The following is a discussion of our consolidated results of operations, financial condition and capital resources.  You should read this discussion in conjunction with our Consolidated Financial Statements and the Notes thereto contained elsewhere in this Form 10-Q.  Comparative results of operations for the periods indicated are discussed below.
 
 
The following table sets forth certain of our oil and gas operating information for the three months ended March 31, 2014, and March 31, 2013, respectively.
 
   
Three Months Ended March 31,
             
   
2014
   
2013
   
Change
   
% Change
 
Production Data :
                       
   Oil production (bbl)
   
1,217
     
5,226
     
(4,009
)
   
(76.7
)
   Average daily oil production (bbl/d)
   
14
     
57
     
(43
)
   
(75.4
)
   Natural gas production (mcf)
   
38,065
     
56,561
     
(18,496
)
   
(32.7
)
   Average daily natural gas production (mcf/d)
   
423
     
622
     
(199
)
   
(32.0
)
   Natural gas liquids production (bbl)
   
55
     
540
     
(485)
     
(89.8
)
   Average daily natural gas liquids production (bbl/d)
   
1
     
6
     
(5)
     
(83.3
)
   Total BOE
   
7,616
     
15,193
     
(7,577
)
   
(50.0
)
   Total BOE/d
   
85
     
167
     
(82
)
   
(49.1
)
                                 
Revenue Data :
                               
   Oil revenue ($)
   
112,000
     
336,000
     
(224,000
)
   
(66.7
)
   Average realized oil sales price ($/bbl)
   
91.72
     
64.34
     
27.38
     
42.6
 
   Gas revenue ($)
   
178,000
     
165,000
     
13,000
     
7.9
 
   Average realized gas sales price ($/mcf)
   
4.68
     
2.91
     
1.77
     
60.8
 
   Natural gas liquids revenue ($)
   
4,000
     
22,000
     
(18,000
)
   
(81.8
)
   Average realized natural gas liquids price ($/bbl)
   
66.93
     
39.58
     
27.35
     
69.1
 
Operating expenses :
                               
   Production expenses
   
158,000
     
351,000
     
(193,000
)
   
(55.0
)
   Average production expenses ($/boe)
   
20.76
     
23.10
     
(2.34)
     
(10.1
)
                                 
Operating Margin ($/boe)
   
17.77
     
11.32
     
6.45
     
57.0
 
                                 
Depreciation, depletion, and amortization
   
158,000
     
185,000
     
(27,000
)
   
(14.6
)
 
* Oil and natural gas were combined by converting natural gas to oil equivalent on the basis of 6 mcf of gas = 1 boe.

Production and Revenue

Revenues

   
Three Months Ended March 31,
             
   
2014
   
2013
   
Change
   
Percent Change
 
Product revenues:
                       
Crude oil sales
 
$
112,000
   
$
336,000
   
$
(224,000
)
   
(66.7
)%
Natural gas sales
   
178,000
     
165,000
     
13,000
     
7.9
 %
Natural gas liquids sales
   
4,000
     
22,000
     
(18,000
)
   
(81.8
)%
                                 
Product revenues
 
$
294,000
   
$
523,000
   
$
(229,000
)
   
(43.8
)%

The asset sales in Canada were the main driver for the lower oil revenues, offset by higher prices realized in the first quarter of 2014.  Gas revenues were relatively flat, with the lower production volumes in Canada being offset by considerably higher pricing in 2014.  Liquids revenues were also reflective of asset sales in Canada, offset by higher prices in 2014.
 
 
Production
 
   
Three Months Ended March 31,
             
   
2014
   
2013
   
Change
   
Percent Change
 
Sales Volume :
                       
   Crude Oil(bbl)
   
1,217
     
5,226
     
(4,009
)
   
(76.7
)%
   Natural Gas(mcf)
   
38,065
     
56,561
     
(18,496
)
   
(32.7
)%
   Natural Gas Liquids(bbl)
   
55
     
540
     
(485
)
   
(89.8
)%
Total BOE
   
7,616
     
15,193
     
(7,577
)
   
(50.0
)%
 
* Oil and natural gas were combined by converting natural gas to oil equivalent on the basis of 6 mcf of gas = 1 boe.

The decrease in oil volumes is largely due to the asset sales in Canada.  Natural gas volume decreases were due to asset sales, as well as lower production in key areas in Canada.  The decrease in liquids is reflective of the asset sales and decreased gas production.
 
Commodity Prices Realized

   
Three Months Ended March 31,
             
   
2014
   
2013
   
Change
   
Percent Change
 
Sales Price :
                       
   Crude Oil($/bbl)
   
91.70
     
64.34
     
27.36
     
42.6
%
   Natural Gas($/mcf)
   
4.68
     
2.91
     
1.77
     
60.8
 %
   Natural Gas Liquids($/bbl)
   
66.93
     
39.58
     
27.35
     
69.1
%

The average price per barrel received by Legend during the first quarter of 2014 was $91.70, up from $64.34 in the first quarter of 2013, reflective of the prices the Company receives in the Kansas area. The natural gas prices reflect the considerably stronger gas price environment in 2014 in Canada.  Liquids pricing is linked to the oil pricing environment, which leads to the increase in liquids prices.  The prices we receive for our oil and natural gas production are determined by the market and heavily influence our revenue, profitability, access to capital and future rate of growth.

Lease Operating Expenses

Operating expenses decreased on an absolute basis to $158,000 in the first quarter of 2014 from $351,000 in the first quarter of 2013, linked to the lower production base.  On a per barrel basis, the operating expense decreased from $23.10/boe in the first quarter of 2013 to $20.76/boe in the corresponding period of 2014, due to increasing focus on reducing costs wherever possible.  Lease operating expenses consist of day-to-day operational expenses for production of oil and maintenance and repair expenses for the wells and property.

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 decreased to $512,000 for the first quarter of 2014, as compared to $1,547,000 for the same period in 2013, a $1,035,000 decrease. The period-to-period decrease is largely due to the non-cash stock based compensation expense due to the cancellation of the stock options in Q1 of 2013.  The stock based expense had no impact on total consolidated stockholders’ equity.  This decreased stock based compensation is offset by higher professional fees.
 
   
Three months ended March 31,
             
   
2014
   
2013
   
$ Change
   
% Change
 
General and administrative expenses
                       
     Professional Fees
 
$
312,000
   
$
100,000
   
$
212,000
     
213.0
%
     Salaries and benefits
   
136,000
     
178,000
     
(42,000
)
   
(23.6
)%
     Office and administration
   
60,000
     
79,000
     
(19,000
)
   
(24.1
)%
     Stock based compensation
   
4,000
     
1,190,000
     
(1,186,000
)
   
(100.0
)%
Total
 
$
512,000
   
$
1,547,000
   
$
(1,035,000
)
   
(66.9
)%
 
Stock based compensation is a significant item in the general and administrative, and the amount in the first quarter of 2013 reflects the full amortization of the fair value of options granted in 2011and 2012.   
 
 
Depletion, depreciation, amortization and impairment

The Company incurred $158,000 for depreciation, depletion, amortization for the three months ended March 31, 2014 ($185,000 in first quarter 2013), reflective of the lower production levels of the Company.  The Company also incurred $0 in non-cash impairment charges for the first quarter of 2014 ($111,000 in first quarter of 2013).

Accretion expense

For the three months ended March 31, 2014 the company had accretion expense of $15,000 ($15,000 in first quarter 2013) related to the Company’s asset retirement obligations.
 
Interest expense

Interest expense was $438,000 for the three months ended March 31, 2014($37,000 in first quarter 2013).  The increase in interest expenses is due to debentures held by Legend in 2014.

Net loss

The Company recorded a net loss of $788,000 in first three months of 2014, as compared to the net loss of $1,723,000 in the corresponding period in 2013.  The decrease in the loss is mainly due to the acceleration of stock based compensation in 2013, along with the reduction in costs generally.

Liquidity and Capital Resources

Liquidity

We have incurred net operating losses and operating cash flow deficits over the last two years, continuing through 2014. We are in the early stages of acquisition and development of oil and gas leaseholds, and we have been funded primarily by a combination of equity issuances and borrowing under loan agreements and to a lesser extent by operating cash flows, to execute on our business plan for the acquisition, exploration, development and production of oil and gas reserves. At March 31, 2014, we had cash and cash equivalents totaling approximately $1,000.

In October 2011, we established a revolving demand loan with National Bank of Canada (the “Bank”) through our wholly-owned subsidiary, Legend Canada.  On August 22, 2013, the Company entered into a Forbearance Agreement with the Bank, which conveyed the Bank additional control over the assets of the Company, increased the interest payments to prime rate of interest plus 4%, and indicated through sale of assets or other means full repayment of the existing credit facility in full by November 29, 2013.  In addition, the Company had various conditions to adhere to, including ; (a) settlement of license liability with Alberta Energy Regulator, (b) engagement of marketing agent to facilitate the sale of Canadian properties to retire existing facility, (c) a release of various funds for operational upgrades and maintenance of select Canadian properties, (d) delinquent bank reporting to be completed and brought up to date, (e) dedication of funds from Hillair financing to Canadian facility and (f) continued and on-going monthly reporting on progress of activity within the Forbearance Agreement process.  It is the Company’s belief that these conditions were met where required, with the only exception being the license liability and this due to a change in regulation allowing relief.  The Company closed the sale of Boundary Lake, Wildmere, and Inga properties in connection with the Forbearance Agreement in Q4 2013 and Q1 2014 and used the proceeds to partially repay the revolving demand loan.  In December 2013, the Bank elected to terminate the formal forbearance and has replaced it with a day to day effort to have the Company continue to sell assets, look for new sources of capital in order to determine the best course of action concerning the revolving demand loan.  On April 25, 2014, the Company received a Notice of Intention to Enforce Security from the Bank. Under the notice, the Bank states that it intends to enforce its rights against Legend Canada under the CA$6,000,000 Acknowledgement of Debt Revolving Demand Credit Agreement, dated August 15, 2011; the General Assignment of Book Debts, dated October 19, 2011; the CA$25,000,000 Fixed and Floating Charge Demand Debenture; the Pledge Agreement dated October 19, 2011; and the Negative Pledge and Undertaking dated October 19, 2011. On April 28, 2014 the Company received a Notice of Intention to Enforce Security from the Bank. Under the Company Notice, the Bank states that it intends to enforce its rights against the Company under the Letter of Guarantee, dated May 11, 2012; the General Security Agreement dated May 11, 2012; the Securities Pledge Agreement; the Subordination Agreement dated July 10, 2013; and the Set-off and Security Agreement dated July 10, 2013.  The bank claims the Company is in default under the Legend Canada Security and the Company Security agreements. The Bank has demanded payment in full of all amounts owing under the Legend Canada Security Agreements and the Company Security Agreements. The Bank claims  that the total amount due is $1,656,857.37 plus accruing interest, costs, expenses and fees including, without limitation, attorney’s fees.
 
 
During 2013, the Company issued two 8% Original Issue Discount Senior Secured Convertible Debentures to Hillair Capital Investments, L.P. (“Hillair”) payable on or before December 1, 2014.  On May 1, 2014, the Company received a Notice of Event of Default from Hillair with respect to the 8% Original Issue Discount Senior Secured Convertible Debentures. Hillair states that the Company is in default under the Debentures and has demanded payment in full of all amounts owing under the Debentures. Hillair further states that the total amount due is $2,111,200 plus accruing interest.

The Company is in negotiations with the Bank and Hillair in an attempt to resolve these issues.  The Company may be required to sell some or all of its properties as a result of the actions by the Bank and Hillair.

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

The uncertainties relating to the Company’s ability to repay the obligations to the Bank and Hillair (and to execute the Company’s business plan) continue to raise substantial doubt about the Company’s ability to continue as a going concern. These financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that could result should the Company be unable to continue as a going concern.

The following table summarizes our cash flows for the three months ended March 31, 2014 and March 31, 2013, respectively:
 
   
For the Three Months Ended March 31,
 
   
2014
   
2013
 
Net cash provided by (used) in operating activities
 
$
19,900
   
$
214,000
)
Net cash used in investing activities
   
(450,316
)
   
(150,000
)
Net cash provided (used) by financing activities
   
(565,700
)
   
(142,000
)
Effect of exchange rate changes
   
  32,555
     
76,000
 
     Net increase (decrease) in cash during period
 
$
(62,961
)
 
$
(2,000
)
 
Cash from Operating Activities

Cash provided by operating activities was $19,900 for the three months ended March 31, 2014, as compared to cash used by operating activities of $214,000 in the three months ended March 31, 2013. The increase in cash provided is due to the lower operating and administrative costs of the Company.

Cash from Investing Activities

Cash used for investing activities for the three months ended March 31, 2014 was $450,316 as compared to $150,000 during the three months ended March 31, 2013.  The increase is due to the Company spending much of the first quarter of 2012 integrating the Wi2Wi assets, whereas in the first quarter of 2013 the Company was doing some recompletion work in Canada that led to capital costs incurred.

Cash from Financing Activities

Total net cash used by financing activities in the three months ended March 31, 2013 was $142,000 which was largely repayment of bank debt.  Total net cash used/provided in the three months ended March 31, 2014 was $565,700.
 
Credit Facility

At March 31, 2014, our revolving bank facility was CA$1,600,000.  On April 24, 2014, the Bank issued a demand notice indicating that the full balance of the outstanding credit facility was payable immediately.  The Company continues to negotiate with the Bank to fulfill this demand.

Planned Capital Expenditures

As funds allow, we plan to resume our drilling program on the Kansas properties.  
 
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 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. 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, 2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Internal Controls

Our management does not expect that our disclosure controls and procedures or our internal controls over financial reporting will necessarily prevent all fraud and material error. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving our objectives and our President and Chief Financial Officer concluded that our disclosure controls and procedures are effective at that reasonable assurance level. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the internal control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.
 

PART II - OTHER INFORMATION

ITEM 1           LEGAL PROCEEDINGS

On October 28, 2013, RR Donnelly & Sons Company filed a complaint against the Company in King County Superior Court, Washington, seeking to collect approximately Sixty-Eight Thousand Nine Hundred Thirteen Dollars and Twenty-One Cents ($68,913.21), plus interest for services rendered on or before November 30, 2012. On May 12, 2014, RR Donnelly & Sons Company filed a motion for summary judgment.  As of May 12, 2014, the principal plus interest was approximately $81,046.65.

On April 24, 2014, Cairncross and Hempelmann served the Company with a complaint for outstanding legal fees totaling $30,036.58, which includes $5,000 of attorney’s fees, plus interest of 12% per annum from April 1, 2014.

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 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.
 
 
 
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 27, 2014
 
By:
/s/ Marshall Diamond-Goldberg
     
Marshall Diamond-Goldberg
     
President and Chief Executive Officer
     
(Principal Executive Officer)
     
Dated: May 27, 2014
 
By:
/s/ James Vandeberg
     
James Vandeberg
     
Chief Financial Officer
     
(Principal Accounting and Financial Officer)
 
 
 
Exhibit
No.
  
 
Description
  
 
Location
     
     
31.1
  
  
Filed herewith.
     
31.2
  
  
Filed herewith.
     
32.1
  
  
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.
 
 
 
24