Legend Oil & Gas, Ltd. - FORM 10-Q - August 20, 2014

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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 June 30, 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.)
 
555 Northpoint Center East, Suite 400
Alpharetta, GA 30022
 (Address of principal executive offices)
 
(678) 366-4400
(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 August 19, 2014, the registrant had 170,561,844 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 June 30, 2014
 
Table of Contents
 
             
     
  
Page
  
   
  
  
2
  
  
  
2
  
PART I. FINANCIAL INFORMATION
  
      
Item 1.
  
  
   3  
   
  
  
3
  
    Consolidated Statements of Operations and Comprehensive Income (loss) for the three and six months ended June 30, 2014 and 2013     4  
   
  
  
5
  
   
  
  
6
  
   
  
  
7
  
Item 2.
  
  
  
15
  
Item 4.
  
  
  
20
  
   
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.
 
 
2
 
 
PART I – FINANCIAL INFORMATION
 
ITEM 1           CONSOLIDATED FINANCIAL STATEMENTS

Legend Oil and Gas Ltd.
CONSOLIDATED BALANCE SHEETS
(unaudited) 

   
June 30,
    
December 31,
  
   
2014
    
2013
  
ASSETS
            
             
Current assets
            
     Cash and cash equivalents
   $ 485,540     $ 64,283  
     Accounts receivable
     11,598       329,123  
     Prepaid expenses
     147,459       102,191  
          Total current assets
     644,597       495,597  
                 
Oil and gas properties - full cost method of accounting
                
     Proven properties - net
     858,910       2,493,328  
     Unproven properties
     -       1,224,311  
          Total oil and gas properties
     858,910       3,717,639  
Deposits
     3,740       3,740  
                 
Total assets
   $ 1,507,247     $ 4,216,976  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
                
Current liabilities
                
     Accounts payable
   $ 1,424,904     $ 1,656,948  
     Note payable to bank
     1,453,210       2,018,951  
Current portion of long tern debt, net
     80,139       27,496  
Convertible debt, net
     -       612, 527  
Embedded derivative liabilities
     664,554       1,161,284  
          Total current liabilities
     3,622,807       5,477,206  
                 
Convertible debt, net
     1,149,870       -  
Asset retirement obligations
     264,647       1,533,121  
    Total liabilities
     5,037,324       7,010,327  
                 
Stockholders' equity
                
     Common stock
     164,810       109,343  
     Additional paid-in capital
     26,544,613       25,726,902  
     Accumulated other comprehensive loss
     127,774       17,188  
     Accumulated deficit
     (30,367,274 )     (28,646,784 )
Total stockholders' equity
     (3,530,077 )     (2,793,351 )
                 
Total liabilities and stockholders' equity
   $ 1,507,247     $ 4,216,976  
 
The accompanying notes are an integral part of these consolidated financial statements

 
3
 

Legend Oil and Gas Ltd.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(unaudited)
 
   
For the Three Months Ended
    
For the Six Months Ended
  
   
June 30, 2014
    
June 30, 2013
    
June 30, 2014
    
June 30, 2013
  
                         
Oil and gas revenue
  
$
112,936
    
$
627,449
    
$
406,407
    
$
1,150,773
  
                                 
Costs and Expenses
                                
General and administrative
    
 818,100
      
392,515
      
1,329,959
      
1,939,851
  
Production expenses
    
 31,404
      
411,327
      
189,510
      
762,672
  
Depletion, depreciation, and amortization
    
49,850
      
167,695
      
208,012
      
352,682
  
Impairment on oil and gas assets
    
429,450
      
38,961
      
429,450
      
149,983
  
Accretion on asset retirement obligation
    
8,549
      
14,342
      
23,223
      
28,899
  
Total costs and expenses
    
1,337,353
      
1,024,840
      
2,180,154
      
3,234,087
  
Operating Loss
    
(1,224,417
)
    
(397,391
)
    
(1,773,747
)
    
(2,083,314
)
                                 
Other Income and Expense
                                
Interest expense
    
(887,853
)
    
(49,719
)
    
(1,339,238
)
    
(87,196
)
Gain on embedded derivatives
    
1,179,328
      
( -
)
    
1,392,496
      
( -
)
Total other income and expense
    
291,475
      
(49,719
)
    
53,258
 
    
(87,196
)
                                 
Net loss before preferred dividends and comprehensive income (loss)
    
(932,942
)
    
(447,110
)
    
(1,720,490
)
    
(2,170,510
)
Preferred stock dividends
    
-
 
    
(691,150
)
    
-
 
    
(691,150
)
Net loss before other comprehensive income (loss)
    
(932,943
)
    
(1,138,260
)
    
(1,720,490
)
    
(2,861,660
)
Foreign translation adjustment
    
27,412
      
(199,636
)
    
110,586
      
(339,937
)
                                 
Net comprehensive loss
  
$
(905,531
)
  
$
(1,337,896
)
  
$
(1,609,904
)
  
$
(3,201,597
)
                                 
Basic and diluted weighted average shares outstanding
    
137,595,793
      
81,348,774
      
127,128,572
      
81,144,354
  
                                 
Basic and diluted net loss per common share
  
$
(0.007
)
  
$
(0.01
)
  
$
(0.014
)
  
$
(0.04
)
 
The accompanying notes are an integral part of these consolidated financial statements.

 
4
 
 
Legend Oil and Gas Ltd.
STATEMENTS OF CONSOLIDATED STOCKHOLDERS’ EQUITY (DEFICIT)
(unaudited)
 
                     
Accumulated
              
                     
Other
              
   
Common Stock
    
Additional
    
Comprehensive
    
Accumulated
        
   
Shares
    
Amount
    
Paid-in Capital
    
Income (Loss)
    
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
      
-
      
-
      
113,331,356
  
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
    
54,246,508
      
54,247
      
744,853
      
-
      
-
      
799,100
  
Stock issued for interest payment
    
1,220,798
      
1,220
      
50,256
      
-
      
-
      
51,476
  
Stock based compensation
    
-
      
-
      
22,602
      
-
      
-
      
22,602
  
Foreign currency translation
    
-
      
-
      
-
      
110,586
      
-
      
110,586
  
Net loss
    
-
      
-
      
-
      
-
      
(1,720,490
)
    
(1,720,490
)
Balance at June 30, 2014
    
164,810,840
    
$
164,810
    
$
26,544,613
    
$
127,774
    
$
(30,367,274
)
  
$
(3,530,077
)
 
The accompanying notes are an integral part of these consolidated financial statements.

 
5
 
 
Legend Oil and Gas Ltd.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

   
For the six months ended
  
   
June 30, 2014
    
June 30, 2013
  
CASH FLOWS FROM OPERATING ACTIVITIES:
            
Net loss
  
$
(1,720,490
) 
  
$
(2,170,510
) 
Adjustments to reconcile net loss to cash flows from operating activities:
                
Stock-based compensation
    
22,602
      
1,190,340
  
Discounts on notes payable
    
1,505,132
      
12,581
  
Impairment on assets     429,450       -  
Accretion on asset retirement obligation
    
23,223
      
28,899
  
Issuance of common stock for services
    
799,100
      
85,000
  
Gain on embedded derivative
    
(1,392,496
) 
    
-
  
       Depletion, depreciation, amortization and impairment
    
208,012
      
505,254
  
       Changes in operating assets and liabilities:
                
         Accounts receivable
    
317,525
      
(101,406
) 
         Prepaid expenses and other assets
    
(45,268
) 
    
36,062
  
         Accounts payable
    
(232,044
) 
    
601,955
  
 
    
 
      
 
  
Net cash flows from operating activities
    
(85,253
) 
    
188,175
  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
                
     Proceeds from oil and gas properties
    
450,318
      
(171,776
)
     Capital expenditures
    
(103,825
) 
    
-
  
Net cash flows from investing activities
    
346,493
      
(171,776
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
                
                 
Proceeds from notes payable
    
735,758
      
75,000
  
Proceeds (payments on) note payable to bank
    
(575,741
) 
    
(282,355
) 
Net cash flows from financing activities
    
160,017
      
(207,355
) 
                 
Change in cash and cash equivalents before effect of exchange rate changes
    
421,257
      
(190,956
) 
Effect of exchange rate changes
    
-
      
193,982
  
Net change in cash and cash equivalents
    
421,257
      
3,026
  
                 
Cash and cash equivalents, beginning of period
    
64,283
      
12,989
  
Cash and cash equivalents, end of period
  
$
485,540
    
$
16,015
  

NON-CASH INVESTING AND FINANCING ACTIVITIES
            
   Conversion of convertible preferred stock to common stock
  
$
-
    
$
366,953
  
   Common stock reclassified from contingently redeemable
  
$
-
    
$
47,764,926
  
   Preferred stock dividend
  
$
-
    
$
691,150
  
   Discount on short term note payable
  
$
-
    
$
74,810
  
 
The accompanying notes are an integral part of these consolidated financial statements.

 
6
 
 
Legend Oil and Gas Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014

NOTE 1 - ORGANIZATION AND DESCRIPTION OF OPERATIONS

Description of Business
 
The Company was incorporated under the laws of the State of Colorado on November 27, 2000 under the name “SIN Holdings, Inc.” On July 29, 2010, 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. As of this date, Legend Canada has limited operations as described in Notes 2 and 6.

We are an oil and gas exploration, development and production company.  Our oil and gas property interests are located in the United States (Piqua and McCune, Kansas) and Western Canada (Berwyn, Medicine River, Boundary Lake, and Wildmere in Alberta, and Clarke Lake and Inga in British Columbia).  As of the date of these financial statements, the Company does not control significant oil and gas property located in Canada.

Our revenue producing and continuing oil exploration, development and production facilities are based in the United States (in the Piqua and McCune regions of the State of Kansas).
 
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.

Certain Canadian assets consisting of the proven and unproven oil and gas properties, along with their related accumulated depletion have been written off as asset impairments due to the limited Canadian operations described above.

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 six month period ended June 30, 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.
 
 
7
 
 
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 June 30, 2014 and December 31, 2013.

Liquidity

We have incurred net operating losses and operating cash flow deficits over the last several years, continuing through June 30, 2014. We are in the early stages of a risk managed process of acquisition, exploration, development and production of oil 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 June 30, 2014, we had cash and cash equivalents totaling approximately $486,000.

National Bank of Canada: In October 2011, we established a revolving demand loan with the 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 repay the bank 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 during the six month period ending June 30, 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.

On May 9, 2014, the Bank was granted a Consent Receivership Order in Canada, whereby the Bank appointed a receiver to take all legally appropriate means to recover the amounts Legend Canada defaulted on, including the managing of its assets, potential sales of its assets and other strategic measures to appropriately remediate the amounts due the Bank.

Company and National Bank of Canada Mutual Release: Throughout the period ended June 30, 2014 and thereafter, we have been in discussions with the Bank to resolve this issue such that a mutually satisfactory release could be obtained.  In August 2014, the Company and Bank signed a Mutual Release and Discharge.  The Company paid the Bank CA$250,000 to obtain this release which stipulates, among other things, that the Bank will immediately release the guaranty of the Bank’s debt by Legend US, and the Uniform Commercial Code (“UCC”) filing placed by the Bank on Legend US (the parent company guarantee).
 
 
8
 
 
Hillair Capital Investments, L.P. Convertible Debt Financing: 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 Capital Investments, L.P. Debt Restructuring: On May 29, 2014, the Company issued an 8% Original Issue Discount Senior Secured Convertible Debenture to Hillair Capital Investments, L.P. (“Hillair”) in the aggregate amount of $400,000, convertible at a rate of $0.01, subject to adjustments, and payable on or before April 1, 2016.
 
In conjunction with the Debenture and in consideration of Hillair’s entering into the Debenture agreement with the Company, the Company entered into a Securities Purchase Agreement (“SPA”) with Hillair for a common stock purchase warrant to purchase 117.6 million shares of common stock with an exercise price equal to $0.01, subject to adjustment therein. The SPA provides for additional tranches on August 31, 2014 and October 30, 2014, respectively, for $325,000 per tranche.
 
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.  
 
 
9
 
 
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.  At June 30, 2014, the asset retirement obligation of approximately $CA1.3 million, related to the Canadian assets was written off.
 
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.  
 
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. 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.
 
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.

 
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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:
 
   
June 30, 2014
    
December 31, 2013
  
Proven property, net of impairment
  
$
2,055,175
    
$
4,241,776
  
Accumulated depletion, depreciation, and amortization
    
(1,196,265
)
    
(1,748,448
)
     
858,910
      
2,493,328
  
Unproven property
    
-
      
1,224,311
  
   
$
      858,910
     $
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 asset retirement obligations for each of the six months ended June 30, 2014 and 2013 were $264,647 and $1,596,776.  During the three months ended June 30, 2014, the Company wrote off $1,395,222 to impairment of its Canadian oil and gas properties.

NOTE 5 - STOCKHOLDERS’ EQUITY (DEFICIT)

Warrants

The following table summarizes outstanding warrants to purchase shares of our common stock as of June 30, 2014 and December 31, 2013:

   
Shares of Common Stock
Issuable from Warrants
Outstanding as of
          
   
June 30,
    
December 31,
    
Exercise
    
Date of Issue
 
2014
    
2013
    
Price
  
Expiration
February 2011
    
-
      
300,000
    
$
0.50
  
February 2014
April 2011
    
-
      
250,000
    
$
1.00
  
April 2014
August 2011
    
2,300,000
      
2,300,000
    
$
2.00
  
August 2014
July 2013, restated
    
100,800,000
      
19,764,706 
    
$ 
    0.01 
  
  July 2018
November 2013, restated
    
61,600,000
      
10,098,361
    
$
0.01
  
November 2018
May 2014
    
117,600,000
      
-
     $
0.01
 
December 2018
     
282,300,000
      
32,713,067
            
 
As of June 30, 2014, none of the outstanding warrants had been exercised.  The warrants issued in February and April 2011, expired without exercise.

 
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Stock Incentive Plan

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
    
(600,000
 )     
0.07
  
Balance at June 30, 2014
    
-
    
$
    
 
There were no stock option grants during the period presented.

NOTE 6 – ADVANCE AGREEMENT

On January 23, 2014, the Company entered into an Agreement and Plan of Merger with New Western Energy Corporation (“NWTR”).  On April 1, 2014, NWTR advanced $75,000 to the Company.  The significant terms of the agreement were that if the planned merger was terminated, or the merger did not occur by December 31, 2014, the Company was obligated to repay the $75,000 within 60 days of such termination, or on February 28, 2015, whichever came first.  There was no interest due and payable on this advance.

In May 2014, the merger was terminated by mutual consent.  During the quarter ended June 30, 2014, the Company repaid $10,000 of this amount, with a balance of $65,000 remaining.  The Company is in technical default on this advance agreement; however, NWTR has taken no actions to enforce collection at the date of this filing
 
NOTE 7 – 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.
  
 
12
 
 
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.

Company and National Bank of Canada Mutual Release: Throughout the period ended June 30, 2014 and thereafter, we have been in discussions with the Bank to resolve this issue such that a mutually satisfactory release could be obtained.  In August 2014, the Company and Bank signed a Mutual Release and Discharge.  The Company paid the Bank CA$250,000 to obtain this release which stipulates, among other things, that the Bank will immediately release guaranty of the Bank’s debt by Legend US, and the Uniform Commercial Code (“UCC”) filing placed by the Bank on Legend US (the parent company guarantee).
 
NOTE 8 – 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% was payable 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 June 30, 2014, and as of the date of this report, the principal and interest payments due June 27, 2014, were not made. At both June 30, 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 $0 and $55,004 at June 30, 2014 and December 31, 2013, respectively.

NOTE 9 – 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.

On May 1, 2014, the Company received a default notice from Hillair.  In its default notice, Hillair stated that the Company owed $2,111,200 plus interest under the provisions of the Debentures.
 
On May 29, 2014, the Company restructured the defaulted debt with Hillair whereby it issued an 8% Original Issue Discount Senior Secured Convertible Debenture to Hillair in the aggregate amount of $400,000, convertible at a rate of $0.01, subject to adjustments, and payable on or before April 1, 2016.
 
In conjunction with the Debenture and in consideration of Hillair’s entering into the Debenture agreement with the Company, the Company entered into a Securities Purchase Agreement (“SPA”) with Hillair for a common stock purchase warrant to purchase 117.6 million shares of common stock, with an exercise price equal to $0.01, subject to adjustment therein. The SPA provides for additional tranches on August 31, 2014 and October 30, 2014, respectively, for $325,000 per tranche. During June 30, 2014, Hillair exercised the second debenture as the Company reached certain of its agreed upon milestones with Hillair prior to August 2014.
 
 
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The Company entered into similar securities purchase agreements to the SPA with Hillair in July 2013 and November 2013 respectively, and issued similar 8% Original Issue Discount Senior Secured Convertible Debentures and common stock purchase warrants (together, the “July and November 2013 Agreements”), where the Company and Hillair entered into a Forbearance Agreement, executed on May 29, 2014, whereby Hillair agreed to refrain and forebear from exercising certain rights and remedies afforded under the July and November 2013 Agreements.
 
The Company has also renegotiated the terms of the July and November 2013 Agreements pursuant to the terms and conditions contained in the Amendment Agreement, executed on May 29, 2014. Specifically, the Amendment Agreement amends and restates the 8% Original Issue Discount Senior Secured Convertible Debentures underlying the July and November 2013 Agreements and adjusts their maturity dates to August 1, 2016, amortization schedule, interest payment dates and conversion price to $0.01.  Additionally, the Amendment Agreement resets the exercise price and adjusts the amount of shares underlying the common stock purchase warrants issued in connection with the July and November 2013 Agreements.
 
Hillair and the Company have also entered into a Forbearance Agreement, on May 29, 2014, whereby Hillair shall refrain and forebear from exercising certain rights and remedies afforded under the July and November 2013 Agreements.
 
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.

At both June 30, 2014 and December 31, 2013, the principal outstanding payable to Hillair amounted to $2,436,000 and $1,624,000, respectively.

NOTE 10 – EMBEDDED DERIVATIVE LIABILITIES

The embedded derivative liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at June 30, 2014, and December 31, 2013 were $664,554 and $1,161,284.  The gain on the embedded derivative liabilities as a result of the fair value calculation for the three months ended June 30, 2014 was $1,179,328.

The embedded derivative liabilities we incurred in connection with the Convertible Debentures issued to Hillair (Note 9).  The Company valued the embedded derivative liabilities using the Black Scholes option pricing model using the following assumptions: term to expiration 1 year, historical volatility 112%, 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 11 – SUBSEQUENT EVENTS

Company and National Bank of Canada Mutual Release: Throughout the period ended June 30, 2014 and thereafter, we have been in discussions with the Bank to resolve this issue such that a mutually satisfactory release could be obtained.  In August 2014, the Company and Bank signed a Mutual Release and Discharge.  The Company paid the Bank CA$250,000 to obtain this release which stipulates, among other things, that the Bank will immediately release guaranty of the Bank’s debt by Legend US, and the Uniform Commercial Code (“UCC”) filing placed by the Bank on Legend US (the parent company guarantee).
 
Information Statement: In July 2014, the Company filed an Information Statement (Schedule 14C) with the Securities and Exchange Commission.  This Information Statement was filed to increase the number of authorized shares of stock from 500 million, with a par value of $.001, to 1.1 billion, with a par value of $.001, of which one billion will be designated as common stock, and 100 million will be designated as blank check preferred stock.  This Information Statement has not become effective as of this date.
 
 
14
 
 
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 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 (which are the properties in Alberta and British Columbia described above).  As of this date, Legend Canada has limited operations.

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.
 
 
15
 
 
The following table sets forth certain of our oil and gas operating information for the three and six months ended June 30, 2014, and June 30, 2013, respectively.

   
Three Months Ended June 30,
    
Six Months Ended June 30,
  
   
2014
    
2013
    
2014
    
2013
  
Production Data :
                        
   Oil production (bbls)
    
1,159
      
4,390
      
2,376
      
9,615
  
   Average daily oil production (bbl/d)
    
13
      
48
      
13.1
      
53
  
   Natural gas production (mcf)
    
-
      
62,366
      
23,750.5
      
118,928
  
   Average daily natural gas production  (mcf/d)
    
-
      
685
      
131.2
      
653
  
   Natural gas liquids production (bbl)
    
-
      
239
      
0
      
779
  
   Average daily natural gas liquids production (bbl/d)
    
-
      
3
      
0
      
4
  
   Total BOE
    
1,159
      
15,023
      
6,334.4
      
30,216
  
   Total BOE/d
    
13
      
165
      
35.0
      
166
  
Revenue Data :
                                
   Oil revenue ($)
    
108,661
      
379,000
      
212,747
      
714,000
  
   Average realized oil sales price ($/bbl)
    
93.75
      
86.48
      
89.54
      
74.25
  
   Gas revenue ($)
    
0
      
228,000
      
157,061
      
392,000
  
   Average realized gas sales price ($/mcf)
            
3.67
      
6.61
      
3.30
  
   Natural gas liquids revenue ($)
    
0
      
20,000
      
0
      
45,000
  
   Average realized natural gas liquids price ($/bbl)
            
87.37
              
54.03
  
Operating expenses :
                                
   Production expenses
    
20,100
      
411,000
      
125,000
      
763,000
  
   Average operating expenses ($/boe)
    
17.34
      
27.36
      
19.73
      
25.25
  
                                 
Operating Margin ($/boe)
    
76.41
      
14.45
      
38.65
      
12.84
  
                                 
Depreciation, depletion, and amortization
    
49,850
      
168,000
      
208,012
      
353,000
  

* 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 June 30,
    
Six Months Ended June 30,
   
2014
    
2013
    
Change
    
2014
    
2013
    
Change
Product revenues:
  
$
    
$
    
%
    
$
    
$
    
%
  
Crude oil sales
    
108,661
      
379,000
      
(71.3
 )     
212,747
      
714,000
      
(70.2
 ) 
Natural gas sales
    
0
      
228,000
      
(100
 )     
157,061
      
392,000
      
(59.9
 ) 
Natural gas liquids sales
    
0
      
20,000
      
(100
 )     
0
      
45,000
      
(100
 ) 
Product revenues
    
108,661
      
627,000
      
(82.7
 )     
369,808
      
1,151,000
      
(67.9
 ) 
 
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. 
 
 
16
 
 
Production

   
Three Months Ended June 30,
    
Six Months Ended June 30,
   
2014
    
2013
    
Change
    
2014
    
2013
    
Change
Sales Volume :
              
%
                
%
   Crude Oil(bbl)
    
1,159
      
4,390
      
(73.6
 )     
2,376
      
9,615
      
(75.3
 ) 
   Natural Gas(mcf)
    
0
      
62,366
      
(100
 )     
23,750
      
118,928
      
(80.0
 ) 
   Natural Gas Liquids(bbl)
    
0
      
239
      
(100
 )     
0
      
779
      
(100
 ) 
Total BOE
    
1,159
      
15,023
      
(92.2
 )     
6,334
      
30,216
      
(79.0
 ) 

* 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 in third quarter of 2013.  Natural gas volume decreases were due to asset sales, as well lower production in key areas in Canada such as Berwyn.  The decrease in liquids is reflective of the lower natural gas production in Canada.
 
Commodity Prices Realized

   
Three Months Ended June 30,
    
Six Months Ended June 30,
  
   
2014
    
2013
    
Change
    
2014
    
2013
    
Change
  
Sales Price :
  
$
    
$
    
%
    
$
    
$
    
%
  
   Crude Oil($/bbl)
    
93.75
      
86.48
      
8.4
      
89.54
      
74.25
      
20.6
  
   Natural Gas($/mcf)
    
0
      
3.67
              
6.61
      
3.30
      
100.3
  
   Natural Gas Liquids($/bbl)
    
0
      
87.37
              
0
      
54.03
          

The average price per barrel received by Legend during the second quarter of 2014 was $93.75, up from $86.48 in the same period 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.

Production Expenses

Production expenses decreased to $31,404 in the three months ended June 30, 2014 as a result of the decline in Canadian activities.
 
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 increased in the second quarter to $818,100, as compared to $393,000 for the same period in 2013.  The period-to-period increase is largely due to the non-cash stock issued for services rendered.  

Depletion, depreciation, amortization and impairment

The Company incurred $49,850 for depreciation, depletion, amortization for the three months ended June 30, 2014 ($168,000 for the same period during 2013), reflective of the lower production levels of the company.  Depletion for the six months ended June 30, 2014 is $208,012 ($353,000 for the same period during 2013).  The Company also incurred $429,540 in non-cash impairment charges during the three month period ended June 30, 2014, with the Canadian assets totally impaired at June 30, 2014.

Accretion expense

For the three months ended June 30, 2014 the Company had accretion expense of $8,549 ($14,000 in second quarter 2013) related to the Company’s asset retirement obligations.  For the year to date periods, 2014 accretion is $23,223 compared to $29,000 in 2013.  Accretion expense is consistent for the periods presented due to the consistent level of asset retirement obligations during the periods, other than any impairment.
 
 
17
 
 
Interest expense

Interest expense was $887,853 for the three months ended June 30, 2014 ($50,000 in second quarter 2013).  For the year to date periods, 2014 interest expense is $1,339,238 compared to $87,000 in 2013 for the similar period.  Interest expense for the periods presented are principally the result of noncash amortization of convertible debt discounts.

Net loss

The Company recorded a net loss of $932,943 in second quarter of 2013 and $1,720,490 for the six months ended June 30, 2014, as compared to the net loss of $447,000 and $2,171,000 in the corresponding periods in 2013. The changes between the years are principally due to impairment of the Canadian oil and gas properties as well as interest expense as a result of the amortization of debt discounts.
 
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 convertible debt 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 June 30, 2014, we had cash and cash equivalents totaling approximately $486,000.

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.
 
 
18
 

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.
 
Any new debt or equity financing arrangements may not be available to us, or may be available only on unfavorable terms. Additionally, these alternatives could be highly dilutive to our existing shareholders, and may not provide us with sufficient funds to meet our long-term capital requirements. We have and may continue to incur substantial costs in the future in connection with raising capital to fund our business, including investment banking fees, legal fees, accounting fees, securities law compliance fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, which may adversely impact our financial condition. If the amount of capital we are able to raise from financing activities, together with our cash flow from operations, is not sufficient to satisfy our capital needs (even to the extent that we reduce our operations), we will be required to reduce operating costs, which could jeopardize our future strategic initiatives and business plans, and we may be required to sell some or all of our properties (which could be on unfavorable terms), seek joint ventures with one or more strategic partners, strategic acquisitions and other strategic alternatives, cease our operations, sell or merge our business, or file a petition for bankruptcy.

The uncertainties relating to our ability to repay our revolving demand loan and to successfully execute our business plan, combined with the difficult financing environment, continue to raise substantial doubt about our ability to continue as a going concern. Our financial statements were prepared assuming we would continue as a going concern, which contemplates that we will continue in operation for the foreseeable future and will be able to realize assets and settle liabilities and commitments in the normal course of business. 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 we be unable to continue as a going concern.
 
The following table summarizes our cash flows for the periods ended June 30, 2014 and June 30, 2013, respectively:

   
For the six months ended June 30,
  
   
2014
    
2013
  
Net cash flows from in operating activities
  
$
(85,253
 )   
$
188,000
  
Net cash flows from investing activities
    
346,493
      
(172,000
)
Net cash flows from financing activities
    
160,017
      
(207,000
)
Effect of exchange rate changes
    
0
      
194,000
  
     Net change in cash during period
  
$
421,457
    
$
3,000
  

Cash from Operating Activities

Cash used in operating activities was $85,253 for the six months ended June 30, 2014, as compared to $188,000 in the six months ended June 30, 2013. The decrease is principally due to the decline in operations of Legend Canada.

Cash from Investing Activities

Cash from investing activities for the six months ended June 30, 2014 was $346,493 as compared to uses of $172,000 during the six months ended June 30, 2013.  The increase is due to proceeds from the sale of the Inga Canadian asset.

Cash from Financing Activities

Total net cash provided by financing activities was $160,017 for the six months ended June 30, 2013, consisting of repayment of bank debt, offset by proceeds of a note payable. Total net cash from financing activities in the six months ended June 30, 2014 was $85,017, due to repayment to the Bank upon sale of the Inga Canadian property, and financing inflows of $660,758, due to the Hillair debentures.
 
Credit Facility

Currently, the Company does not have any credit facilities with available funds.
 
 
19
 
 
Planned Capital Expenditures

We are in the midst of a drilling program in Kansas, using the capital received from Hillair.

Off Balance Sheet Arrangements

We have no off-balance sheet arrangements.
 
ITEM 4           CONTROLS AND PROCEDURES

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 June 30, 2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except as described below.

Evaluation of Disclosure Controls and Procedures:
As required by Rule 13a-15 under the Exchange Act for the period ended June 30, 2014 we have carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), and based on this evaluation our Chief Restructuring Officer and Chief Financial Officer (the “Certifying Officers”) conclude that our disclosure controls and procedures were not effective as of June 30, 2014 because of identified material weaknesses in our internal control over financial reporting as detailed below under  “Material Weaknesses Identified.”
 
 
20
 
 
Management’s Report on Internal Control Over Financial Reporting:

Our Certifying Officers are responsible for establishing and maintaining our disclosure controls and procedures.  The Certifying Officers have designed established disclosure controls and other procedures that are designed to ensure that material information required to be disclosed by the issuer in the reports that it files or submits under the Act (15 U.S.C. 78a et seq) is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, as appropriate to allow timely discussions regarding required disclosure is made known to them, particularly during the period in which this report was prepared.
 
Material Weaknesses Identified:
Our Certifying Officer is aware that with the limited level of operations, financial resources and availability of personnel that material weaknesses exist in the controls and procedures, particularly in the concentration of duties, lack of an audit committee and access to additional financial expertise, both within and external to the current composition of the Board of Directors.  Specific weakness in internal control over financial reporting exists because of the following:

Our Company is managed by a small number of individuals working out of offices in Alpharetta, GA.  We do not have a large enough number of independent staff or management members to provide third party oversight in the review of our financial transactions on an ongoing basis.  Our CEO/Director/President, CFO and Principal Accounting Officer is responsible for initiating activities of the Company and, currently, our outsourced accountant is responsible for reviewing, recording the financial transactions, as well as the preparation and review of financial reports, including the preparation of the 10Q’s and 10K with my oversight and direction.  The electronically recorded and related physical records are maintained by the Alpharetta, GA office.

The Company’s Board of Directors consist of one member who is also the CEO, President, CFO and Principal Accounting Officer, resulting in inadequate independent oversight of the management function as well as not having member to staff board of director committees, in particular an audit committee.  The Company lacks a designated financial expert and no method of creating an effective whistleblower program.

Our limited operations and business practices include complex technical accounting issues that require significant accounting and SEC reporting expertise.  We do not have adequate accounting technical resources to ensure timely and accurate accounting and reporting for addressing such highly technical issues.  

There is a lack of independent supervisory review of accounting transactions, including the recording of general ledger journal entries, month end account reconciliations, and preparation of financial reporting.

Plan for Remediation of Material Weaknesses:
 
We have engaged two individual to serve as the Company’s Chief Restructuring Officer and Chief Financial Officer (Principal Accounting Officer), who are actively engaged in actions to resolve these deficiencies by:

1.  
Pursuing short term and long term funding.  Initial contracts are presently under active negotiation.

2.  
Actively recruiting members to add to the Board of Directors, which will bring the Board up to full strength.
 
3.  
Identifying and being in active negotiation with three potential candidates to fill the positions of the Company.

4.  
Pursuing active projects which include operational staffing to compliment the above actions and assist the Company in meeting its goals of fully meeting the requirements imposed by Sarbanes Oxley by its annual 2014 reporting date.
 
5.  
Developing adequate internal control structures to ensure financial and accounting transactions are properly recorded and reported in our financial statements.
 
 
21
 

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 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.

 
22
 
 
 
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:  August 20, 2014
      
By:
  
/s/ Marshall Diamond-Goldberg
           
Marshall Diamond-Goldberg
           
President and Chief Executive Officer
           
(Principal Executive Officer)
       
Dated:  August 20, 2014
      
By:
  
/s/ Marshall Diamond-Goldberg
           
Marshall Diamond-Goldberg
           
(Principal Accounting and Financial Officer)
             
 
 
23
 
 
 
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
  
 
 
 
 
24
 

Legend Oil & Gas, Ltd. Reports

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