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LOGL > SEC Filings for LOGL > Form 10-Q on 21-Aug-2014All Recent SEC Filings

Show all filings for LEGEND OIL & GAS, LTD.

Form 10-Q for LEGEND OIL & GAS, LTD.


21-Aug-2014

Quarterly Report


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 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.


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.


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.


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.


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.


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.

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