U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 0-25455
LEXINGTON RESOURCES, INC.
_________________________________________________________________
(Exact name of small business issuer as specified in its charter)
NEVADA 88-0365453
________________________________________________________________________________
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
7473 West Lake Mead Road
Las Vegas, Nevada 89128
________________________________________
(Address of Principal Executive Offices)
(702) 382-5139
___________________________
(Issuer's telephone number)
n/a
____________________________________________________
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
_______ _______
Applicable only to issuers involved in bankruptcy
proceedings during the preceding five years.
N/A
Check whether the Registrant filed all documents required to be filed
by Section 12, 13 and 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes No
_______ _______
Applicable only to corporate issuers
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Class Outstanding as of August 3, 2004
Common Stock, $.00025 par value 15,298,352*
*After taking into effect the reverse stock split of one-for-three hundred
shares of common stock effected August 8, 2003 and the forward stock split of
three-for-one shares of common stock effected January 26, 2004.
Transitional Small Business Disclosure Format (check one)
Yes No X
_______ _______
PART I. FINANCIAL INFORMATION
ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 2
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS 3
INTERMIN CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS 4
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION OR PLAN OF OPERATION
ITEM 3. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 16
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 21
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 22
ITEM 5. OTHER INFORMATION 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 22
SIGNATURES 23
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEXINGTON RESOURCES, INC.
(an exploration stage company)
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(unaudited)
CONSOLIDATED BALANCE SHEETS
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
F-1
LEXINGTON RESOURCES, INC.
(an exploration stage company)
INTERIM CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2004 2003
_______________________________________________________________________________________________________
(unaudited)
ASSETS
CURRENT ASSETS
Cash $ 780,759 $ 351,420
Prepaid expenses 14,000 450
Accounts Receivable 48,394 -
Deferred charges (Note 6) 43,333 -
_______________________________________________________________________________________________________
886,486 351,870
FIXED ASSETS (net of depreciation) 3,329 -
OIL AND GAS PROPERTIES (Note 4) 1,500,318 120,000
_______________________________________________________________________________________________________
$ 2,390,133 $ 471,870
=======================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 83,820 $ 23,221
Drilling obligations (Note 5) 938,869 350,000
Convertible Promissory Notes (Note 6) 500,000 -
Due to related parties (Note 9) 74,031 796,467
_______________________________________________________________________________________________________
1,596,720 1,169,688
DRILLING OBLIGATIONS (Note 5) 90,000 -
_______________________________________________________________________________________________________
1,686,720 1,169,688
_______________________________________________________________________________________________________
CONTINGENCIES AND COMMITMENTS (Notes 1, 4, 5 & 8)
STOCKHOLDERS' EQUITY (DEFICIENCY) (Note 7)
Common stock $.00025 par value: 200,000,000 shares authorized
Preferred stock, $.001 par value: 75,000,000 shares authorized
Issued and outstanding:
15,298,352 common shares (2003 - 12,843,552) 3,650 3,211
Additional paid-in capital 6,410,719 761,937
Common stock purchase warrants 57,500 12,500
Deficit accumulated during the exploration stage (5,768,456) (1,475,466)
_______________________________________________________________________________________________________
703,413 (697,818)
_______________________________________________________________________________________________________
$ 2,390,133 $ 471,870
=======================================================================================================
The accompanying notes are an integral part of these interim consolidated financial statements.
F-2
LEXINGTON RESOURCES, INC.
(an exploration stage company)
INTERIM CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
For the period
Three months Three months Six months Six months from Sept. 29,
Ended June 30, Ended June 30, Ended June 30, Ended June 30, 2003 (inception)
2004 2003 2004 2003 to June 30, 2004
__________________________________________________________________________________________________________________________________
(Note 1) (Note 1)
OIL AND GAS REVENUE $ 53,517 $ - $ 94,207 $ - $ 94,207
DEPLETION (3,879) - (6,558) - (6,558)
__________________________________________________________________________________________________________________________________
OPERATING INCOME 49,638 - 87,649 - 87,649
__________________________________________________________________________________________________________________________________
EXPENSES
Consulting - stock based (Note 8) - - 2,989,221 - 2,989,221
General and administrative 1,233,552 43,856 1,361,701 82,665 1,454,474
Interest expense 5,317 25,049 19,717 47,073 29,120
__________________________________________________________________________________________________________________________________
1,238,869 68,905 4,370,639 129,738 4,472,815
__________________________________________________________________________________________________________________________________
NET LOSS FOR THE PERIOD $(1,189,231) $ (68,905) $(4,282,990) $ (129,738) $(4,385,166)
==================================================================================================================================
BASIC NET LOSS PER SHARE $ (0.08) $ (0.04) $ (0.30) $ ( 0.10)
===========================================================================================================
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 14,618,332 1,563,289 14,282,945 1,286,130
===========================================================================================================
The accompanying notes are an integral part of these interim consolidated financial statements.
F-3
LEXINGTON RESOURCES, INC.
(an exploration stage company)
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the Six For the six For the period
month period month period from Sept. 29,
ended June 30, ended June 30, 2003 (inception)
2004 2003 to June 30, 2004
____________________________________________________________________________________________________________________________________
(Note 1) (Note 1)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) for the period $(4,282,990) $ (129,738) $(4,417,972)
Adjustments to reconcile net loss to net cash from operating activities:
Non-cash consulting fees 2,989,221 - 2,989,221
Non-cash finance fees 6,667 - 6,667
Oil and gas depletion 6,558 - 6,558
Depreciation 166 - 166
Changes in working capital assets and liabilities
Prepaid expenses (13,550) - (14,000)
Accounts receivable (48,394) - (48,394)
Accounts payable 18,147 9,776 2,423
Accrued interest payable 19,710 47,073 19,710
Accrued and unpaid fees payable 60,000 60,000 60,000
____________________________________________________________________________________________________________________________________
NET CASH FLOWS USED IN OPERATING ACTIVITIES (1,244,465) (12,889) (1,302,788)
____________________________________________________________________________________________________________________________________
CASH FLOWS FROM INVESTING ACTIVITIES
Cash acquired on acquisition of Lexington Oil & Gas Co. LLC - - 900
Fixed assets (3,495) - (3,495)
Oil and gas properties (1,386,876) - (1,506,876)
____________________________________________________________________________________________________________________________________
NET CASH FLOWS USED IN INVESTING ACTIVITIES (1,390,371) - (1,509,471)
____________________________________________________________________________________________________________________________________
CASH FLOWS FROM FINANCING ACTIVITIES
Drilling obligations 678,869 - 1,028,869
Advances payable (74,694) 12,800 (146,151)
Convertible Promissory Notes 500,000 - 500,000
Proceeds on sale of common stock 1,960,000 - 2,210,300
____________________________________________________________________________________________________________________________________
NET CASH FLOWS FROM FINANCING ACTIVITIES 3,064,175 12,800 3,593,018
____________________________________________________________________________________________________________________________________
INCREASE (DECREASE) IN CASH 429,339 (89) 780,759
CASH, BEGINNING OF PERIOD 351,420 227 -
____________________________________________________________________________________________________________________________________
CASH, END OF PERIOD $ 780,759 $ 138 $ 780,759
====================================================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION (Refer to Note 11.)
The accompanying notes are an integral part of these interim consolidated financial statements.
F-4
LEXINGTON RESOURCES, INC.
(an exploration stage company)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
________________________________________________________________________________
(unaudited)
NOTE 1: NATURE OF CONTINUED OPERATIONS AND BASIS OF PRESENTATION
________________________________________________________________________________
By Share Exchange Agreement dated November 19, 2003, Lexington Resources, Inc.
(formerly Intergold Corporation) ("LRI" or "the Company"), a Nevada corporation,
acquired 100% of the issued and outstanding shares of Lexington Oil & Gas Ltd.
Co., (an exploration stage company) ("Lexington"), in exchange for 9,000,000
(3,000,000 pre January 26, 2004 3:1 forward split) restricted shares of common
stock of the Company representing 85% of the total issued and outstanding shares
of the Company at the time. In connection with this transaction, Intergold
changed its name to Lexington Resources, Inc. (Refer to Note 3.)
This acquisition has been accounted for as a reverse acquisition with Lexington
being treated as the accounting parent and LRI, the legal parent, being treated
as the accounting subsidiary. Accordingly, the consolidated results of
operations of the Company include those of Lexington for the period from its
inception on September 29, 2003 and those of LRI since the date of the reverse
acquisition.
Lexington is an Oklahoma Limited Liability Corporation incorporated on September
29, 2003. Lexington is an exploration stage company which was formed for the
purpose of the acquisition and development of oil and natural gas properties.
The consolidated financial statements have been prepared on the basis of a going
concern which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company has a working capital
deficit of $710,234, has incurred significant losses since inception, and
further losses are anticipated in the development of its oil and gas properties
raising substantial doubt as to the Company's ability to continue as a going
concern. The ability of the Company to continue as a going concern is dependent
on raising additional capital to fund ongoing research and development and
ultimately on generating future profitable operations.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying unaudited interim consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB of Regulation
S-B. They do not include all information and footnotes required by generally
accepted accounting principles for complete financial statements. However,
except as disclosed herein, there have been no material changes in the
information disclosed in the notes to the financial statements for the year
ended December 31, 2003 included in the Company's Annual Report on Form 10-KSB
filed with the Securities and Exchange Commission. The interim unaudited
consolidated financial statements should be read in conjunction with those
financial statements included in the Form 10-KSB. In the opinion of Management,
all adjustments considered necessary for a fair presentation, consisting solely
of normal recurring adjustments, have been made. Operating results for the six
months ended June 30, 2004 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2004.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
________________________________________________________________________________
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, Lexington Oil & Gas Ltd. Co. ("Lexington").
Lexington was acquired by reverse acquisition on November 19, 2003. The
acquisition of Lexington has been accounted for on the purchase method of
accounting. All significant intercompany transactions and account balances have
been eliminated.
OIL AND GAS PROPERTIES
The Company follows the full cost method of accounting for its oil and gas
operations whereby all costs related to the acquisition of methane, petroleum,
and natural gas interests are capitalized. Such costs include land and lease
acquisition costs, annual carrying charges of non-producing properties,
geological and geophysical costs, costs of drilling and equipping productive and
non-productive wells, and direct exploration salaries and related benefits.
Proceeds from the disposal of oil and gas properties are recorded as a reduction
of the related capitalized costs without recognition of a gain or loss unless
the disposal would result in a change of 20 percent or more in the depletion
rate. The Company currently operates solely in the U.S.A.
Depletion and depreciation of the capitalized costs are computed using the
units-of-production method based on the estimated proven reserves of oil and gas
determined by independent consultants.
F-5
LEXINGTON RESOURCES, INC.
(an exploration stage company)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
________________________________________________________________________________
(unaudited)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
________________________________________________________________________________
Estimated future removal and site restoration costs are provided over the life
of proven reserves on a units-of-production basis. Costs, which include
production equipment removal and environmental remediation, are estimated each
period by management based on current regulations, actual expenses incurred, and
technology and industry standards. The charge is included in the provision for
depletion and depreciation and the actual restoration expenditures are charged
to the accumulated provision amounts as incurred.
The Company applies a ceiling test to capitalized costs to ensure that such
costs do not exceed estimated future net revenues from production of proven
reserves at year end market prices less future production, administrative,
financing, site restoration, and income tax costs plus the lower of cost or
estimated market value of unproved properties. If capitalized costs are
determined to exceed estimated future net revenues, a write-down of carrying
value is charged to depletion in the period.
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed by dividing earnings (loss) for the
period by the weighted average number of common shares outstanding for the
period. Fully diluted earnings (loss) per share reflects the potential dilution
of securities by including other potential common stock, including convertible
preferred shares, in the weighted average number of common shares outstanding
for a period and is not presented where the effect is anti-dilutive. The
presentation is only of basic earnings (loss) per share as the effect of
potential dilution of securities has no impact on the current period's basic
earnings per share. Loss per share, as presented, has been restated to reflect
all share split described in Note 6. The weighted average number of shares
outstanding prior to the reverse acquisition is deemed to be the number of
shares issued in connection with the reverse acquisition being 9,000,000 shares
(3,000,000 pre January 26, 2004 3:1 forward split).
REVENUE RECOGNITION
Revenue associated with the sale of crude oil and natural gas is recorded when
title passes to the customer. Revenues from crude oil and natural gas production
from properties in which the Company has an interest with other producers are
recognized on the basis of the Company's net working interest.
FINANCIAL INSTRUMENTS
The fair value of the Company's financial assets and financial liabilities
approximate their carrying values due to the immediate or short-term maturity of
these financial instruments.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the period. Actual results
could differ from those estimates.
STOCK-BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure" ("SFAS No. 148"), an amendment of Financial
Accounting Standard No. 123 "Accounting for Stock-Based Compensation" ("SFAS No.
123"). The purpose of SFAS No. 148 is to: (1) provide alternative methods of
transition for an entity that voluntarily changes to the fair value based method
of accounting for stock-based employee compensation, (2) amend the disclosure
provisions to require prominent disclosure about the effects on reported net
income of an entity's accounting policy decisions with respect to stock-based
employee compensation, and (3) to require disclosure of those effects in interim
financial information. The disclosure provisions of SFAS No. 148 were effective
for the Company for the period ended December 31, 2003.
F-6
LEXINGTON RESOURCES, INC.
(an exploration stage company)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
________________________________________________________________________________
(unaudited)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
________________________________________________________________________________
The Company has elected to account for stock-based employee compensation
arrangements using the intrinsic value based method in accordance with the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees", ("APB No. 25") and comply with the disclosure provisions
of SFAS No. 123 as amended by SFAS No. 148 as described above. Under APB No. 25,
compensation expense is recognized based on the difference, if any, on the date
of grant between the estimated fair value of the Company's stock and the amount
an employee must pay to acquire the stock. Compensation expense is recognized
immediately for past services and pro-rata for future services over the
option-vesting period. In addition, with respect to stock options granted to
employees, the Company provides pro-forma information as required by SFAS No.
123 showing the results of applying the fair value method using the
Black-Scholes option pricing model.
In accordance with SFAS No. 123, the Company applies the fair value method using
the Black-Scholes option-pricing model in accounting for options granted to
consultants.
The Company accounts for equity instruments issued in exchange for the receipt
of goods or services from other than employees in accordance with SFAS No. 123
and the conclusions reached by the Emerging Issues Task Force in Issue No.
96-18. Costs are measured at the estimated fair market value of the
consideration received or the estimated fair value of the equity instruments
issued, whichever is more reliably measurable. The value of equity instruments
issued for consideration other than employee services is determined on the
earliest of a performance commitment or completion of performance by the
provider of goods or services as defined by EITF 96-18.
The Company has also adopted the provisions of the Financial Accounting
Standards Board Interpretation No.44, Accounting for Certain Transactions
Involving Stock Compensation - An Interpretation of APB Opinion No. 25 ("FIN
44"), which provides guidance as to certain applications of APB 25.
INCOME TAXES
The Company follows the liability method of accounting for income taxes. Under
this method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
balances. Deferred tax assets and liabilities are measured using enacted or
substantially enacted tax rates expected to apply to the taxable income in the
years in which those differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the date of enactment or
substantial enactment. A valuation allowance is provided for deferred tax assets
if it is more likely than not that the Company will not realize the future
benefit, or if future deductibility is uncertain.
NOTE 3 - ACQUISITION OF LEXINGTON OIL & GAS LTD. CO. LLC
________________________________________________________________________________
By Share Exchange Agreement dated November 19, 2003, the Company acquired 100%
of the issued and outstanding shares of Lexington (an exploration stage
company), in exchange for 9,000,000 (3,000,000 pre January 26, 2004 3:1 forward
split) restricted shares of common stock of the Company. As a result of this
transaction the former stockholders of Lexington acquired approximately 85% of
the total issued and outstanding shares of the Company as at November 19, 2003,
resulting in a change in control of the Company.
During January, 2004, the parties to the Share Exchange Agreement, Orient
Exploration Ltd. ("Orient"), Douglas Humphreys ("Humphreys"), the Company,
Lexington, and Paluca Petroleum Inc. ("Paluca") reevaluated the terms of the
original Share Exchange Agreement and upon further negotiations desired to
modify the terms of the original agreement in the best interest of all parties
such that: (i) 2,250,000 post forward split shares of restricted Common Stock of
the Company held of record by Humphreys were transferred to Orient in
consideration therefore; (ii) the Company assigned to Humphreys a 5% carried
working interest in every well drilled by the Company on the Wagnon Property;
(iii) the Company agreed to allow Humphreys to participate up to an additional
5% working interest in every well drilled by the Company on the Wagnon Property;
(iv) the Company agreed to transfer to Paluca certain assets previously acquired
by the Company (which included working interests and net revenue interests in
certain oil and gas leases located on the Doc Cole Property, the Atwood Booch
Sand Property, the Jeneva Property and the Sasakwa Gilcrease Sand Property.
F-7
LEXINGTON RESOURCES, INC.
(an exploration stage company)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
________________________________________________________________________________
(unaudited)
NOTE 3 - ACQUISITION OF LEXINGTON OIL & GAS LTD. CO. LLC (CONT'D)
________________________________________________________________________________
Management of the Company does not intend to proceed with the acquisition or
development of the described properties as set out in item (iv) due to
management's analysis that the properties do not contain the appropriate oil and
gas development elements that form part of the Company's current focus and
criteria for corporate oil and gas development initiatives.
In order to reflect the revised operating arrangement resulting from
modifications to the original terms of the Share Exchange Agreement the
following two agreements were simultaneously executed:
HUMPHREYS PURCHASE AND SALE AGREEMENT
On January 21, 2004, Orient and Douglas Humphreys, a director of the Company
("Humphreys") entered into a purchase and sale agreement (the "Humphreys
Purchase and Sale Agreement"). Pursuant to the terms and provisions of the
Humphreys Purchase and Sale Agreement: Humphreys agreed to transfer 2,250,000
shares of restricted Common Stock of the Company held of record by Humphreys to
Orient in consideration therefore.
PALUCA AGREEMENT
On January 21, 2004, the Company, Lexington, Paluca, and Humphreys entered into
an agreement whereby: (i) the Company assigned to Humphreys a 5% carried working
interest in every well drilled by the Company on the Wagnon Property; (ii) the
Company agreed to allow Humphreys to participate up to an additional 5% working
interest in every well drilled by the Company on the Wagnon Property; (iii)
Humphreys agreed to waive any and all other claims, debts or obligations owed to
Humphreys by the Company or by Lexington, and (iv) the Company agreed to
transfer to Paluca certain assets previously acquired by the Company (which
included working interests and net revenue interests in certain oil and gas
leases located on the Doc Cole Property, the Atwood Booch Sand Property, the
Jeneva Property and the Sasakwa Gilcrease Sand Property.
On July 12, 2004, the Company and its subsidiary negotiated a new compensation
agreement ("New Agreement") with Humphreys for his assistance in overseeing the
drilling operations and the completion and management of wells. Under the terms
of the New Agreement Humphreys: (1) will receive compensation of $7,500 per
month, effective April 1, 2004; (2) will be assigned a 10% carried working
interest in every well drilled by the Company on all properties held by the
Company, including the Wagnon property; (3) will have the right to purchase an
additional 5% working interest in all wells drilled by the Company on its
properties provided that funds for this participation are paid prior to the
commencement of drilling of said wells; and (4) will receive a further 200,000
options in the Company to be granted at $3.00 per share exercisable for a five
year term.
Doug Humphreys is a director of the Company and is the drilling operations
manager of Lexington Oil & Gas Ltd. Co., and also consults to Oak Hills Energy,
Inc., an oil and gas operating company based in Holdenville, Oklahoma that acts
as "operator" to Lexington. Mr. Humphreys is in charge of oil and gas operations
in Oklahoma.
Paluca Petroleum Inc. is a private Oklahoma based oil and gas services company
owned by Doug Humphreys and related parties thereto. Some of the services
provided by Humphreys to the Company are provided through this business entity.
Mr. Humphreys is the President of Paluca Petroleum Inc.
Lexington is an Oklahoma Limited Liability Corporation incorporated on September
29, 2003 formed for the purpose of the acquisition and development of oil and
natural gas properties in the United States, currently concentrating on coal bed
methane gas and other source gas acquisition and production initiatives.
Orient Exploration Ltd. is a private corporation that owns 9,000,000 restricted
common shares in the capital of the Company obtained during the reverse takeover
of Lexington Oil & Gas Ltd. Co.
F-8
LEXINGTON RESOURCES, INC.
(an exploration stage company)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
________________________________________________________________________________
(unaudited)
NOTE 4 - OIL AND GAS PROPERTIES
________________________________________________________________________________
WAGNON LEASE
By agreement dated October 9, 2003, Lexington acquired an interest in a section
of farm-out acreage with the intention to develop coal bed methane gas producing
wells in Pittsburg County, Oklahoma. Lexington holds a 100% working interest and
a 75% net revenue interest in approximately 590.2 gross partially developed
acreage of a gas producing property located in Pittsburg County, Oklahoma (the
"Wagnon Property"). The Company's interest relating to the Wagnon Property is
subject to farm-out agreements equating to 20% working interest between Paluca,
Oak Hills Energy and the lessee of the Wagnon Property.
A director and an officer of Lexington Resources, Inc. were minority owners in
Oak Hills Energy, Inc. in 2003. Their interest in Oak Hills was purchased by the
majority shareholder on January 26, 2004.
In February 2004 a well on the property (Kellster 1-5 Well) was put into
production and has been producing since the middle of February 2004.
In June 2004 a second well on the property (Kyndal 2-2 Well) was put into
production and has been producing since the middle of June 2004. The Company has
subsequent to June 30, 2004 drilled a third well on the Wagnon Property (Bryce
3-2). During the six-month period ended June 30, 2004 the Company spent $581,800
in well drilling costs on the Wagnon property. The Company raised these funds
from 3 private investors pursuant to drilling agreements. Refer to Note 5.
COAL CREEK PROSPECT
In March 2004 the Company obtained an option to purchase an undivided 95%
interest in approximately 2,500 net leasehold acres in 5 sections of the Coal
Creek Prospect located in Hughes and Pittsburg Counties, in the State of
Oklahoma. The option to purchase was extended from April 11, 2004 until April
27, 2004 when the Company completed the purchase of available acreage in the
aggregate amount of 1,536 acres.
On May 20, 2004 the Company acquired an additional 372.77 acres of the Coal
Creek CBM Prospect location in Hughes County, in the State of Oklahoma.
Under the terms of the purchase of these leases, Lexington has an undivided 95%
working interest in subject lands and a minimum 78-79% net revenue interest. The
terms of the leases are for two years.
PANTHER CREEK PROSPECT
In March 2004 the Company purchased a three year lease of approximately 300
acres located in five separate sections in Hughes County, Oklahoma. Lexington
has a 100% working interest in subject lands and an approximate 81% net revenue
interest.
SOUTH LAMAR PROSPECT
By agreement dated April 21, 2004, Lexington Oil & Gas acquired an interest in
three sections (960 acres) of farm-out acreage with the intention to develop
coal bed methane gas producing wells in Hughes County, Oklahoma. Lexington holds
a 100% working interest and a 78.5% net revenue interest in 960 gross
undeveloped acres of a potential gas producing property located in Hughes
County, Oklahoma (the "South Lamar Prospect"). The Company also holds all other
zones except for the Thurman and Jefferson formations. Other target zones will
be evaluated for potential drilling opportunities. The term of the lease is two
years. On July 26, 2004, the Company acquired a further 183.98 acres in the
South Lamar prospect and a 100% working interest and a 79% net revenue interest
in the additional acreage.
F-9
LEXINGTON RESOURCES, INC.
(an exploration stage company)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
________________________________________________________________________________
(unaudited)
NOTE 4 - OIL AND GAS PROPERTIES (CONT'D)
________________________________________________________________________________
H-9 PROSPECT
By agreement dated June 29, 2004, Lexington Oil & Gas has obtained an option to
purchase a 100% working interest, 79.25% net revenue interest, in approximately
4,600 net leasehold acres in approximately 38 sections of the H-9 Prospect
located in Hughes and McIntosh Counties, in the State of Oklahoma. The Company
has paid $125,000 towards the purchase price during the period and after
completion of due diligence paid the balance due of approximately $481,000 on
July 29, 2004.
NOTE 5: DRILLING OBLIGATIONS
________________________________________________________________________________
During the period ended December 31, 2003 Lexington entered into drilling
agreements with 3 private investors (the "Funding Investors") for the funding
for the first three wells, the Kellster 1-5, the Kyndal 2-2 and the Bryce 3-2,
located on the Wagnon Lease. The Funding Investors each provided capital for the
Authorization For Expenditure ("AFE") estimated at $360,000 for the drilling and
completion of each of the first three wells. As at June 30, 2004 the Company had
successfully completed the drilling of the Kellster 1-5 and the Kyndal 2-2. As
of June 30, 2004, of the Company has received the total required funding of
$1,080,000 for the completion and drilling of the first three wells. The terms
relating to the Drilling Agreements for the Kyndal 2-2 and the Bryce 3-2 are the
same as the Kellster 1-5. The Bryce 3-2 was subsequently drilled and completed
in July, 2004.
Wells to be drilled on the property will carry royalty interests totaling 25% to
land owners and property interest holders and carried working interests of 5% to
a land owner and 10% to a company related to a director of the Company. A
company related to a director of the Company, Paluca Petroleum, Inc., also owns
a non-carried working interest of 5%. Douglas Humphreys is a director of
Lexington Resources, Inc. and is the president of Paluca Petroleum, Inc., a
private family owned Oklahoma corporation.
The Funding Investors are provided an 80% working interest, 60% net revenue
interest, in the wells until their invested capital for each well is repaid,
after which time the Funding Investors will revert to a 20.1% working interest,
15.075% net revenue interest, in the first three wells located on the Wagnon
Lease. Oak Hills Energy, Inc., the operator of the well, will "back-in" to a
reversionary 6.7% Working Interest after invested capital is repaid to the
Funding Investors in the first three wells located on the Wagnon Lease.
Lexington will back-in to a reversionary 53.2% Working Interest. The Company's
repayment obligation to the Funding Investors is limited to the production
revenues generated from the first three wells located on the Wagnon Lease.
Accordingly, if any of the subject wells on the Wagnon Lease are unsuccessful
the drilling obligations will be written off when such determination is made.
Management has estimated that the non-current portion of the drilling
obligations as at June 30, 2004 is $90,000.
As of June 30, 2004, the Funding Investors have been repaid $51,131 of their
$360,000 investment in the Kellster 1-5. A further estimated $10,000 will be
repaid to the Funding Investors accruing from revenues pertaining to the month
of June, 2004.
NOTE 6: CONVERTIBLE PROMISSORY NOTES
________________________________________________________________________________
On April 26, 2004, Lexington borrowed $400,000 by way of an unsecured
convertible promissory note with a shareholder due on April 30, 2005. The
promissory note bears interest accrued monthly at the US prime lending rate plus
one percent simple interest per annum. The Holder shall have the right,
exercisable in whole or in part, to convert the outstanding principal and
accrued interest thereunder into fully paid, nonassessable restricted common
shares at a price of $5.00 per share.
On June 30, 2004, the Company borrowed an additional $100,000 from the same
shareholder by way of an unsecured promissory note due on June 30, 2005. The
promissory note bears interest accrued monthly at the US prime lending rate plus
one percent simple interest per annum. The Holder shall have the right,
exercisable in whole or in part, to convert the outstanding principal and
accrued interest thereunder into fully paid, nonassessable restricted common
shares at a price of $2.50 per share.
F-10
LEXINGTON RESOURCES, INC.
(an exploration stage company)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
________________________________________________________________________________
(unaudited)
NOTE 6: CONVERTIBLE PROMISSORY NOTES (CONT'D)
________________________________________________________________________________
Application of a relative-fair-value method has resulted in the convertible
promissory notes being recorded as separate debt and equity components. A
discount on the promissory notes payable of $50,000 has been accrued and
recorded as a deferred charge, to be amortized over the terms of the notes. The
discount was determined based upon a fair value interest rate for comparable
debt of 15% per annum. As of June 30, 2004, $6,667 of the deferred charge has
been expensed. The equity component, which is represented by the conversion
feature, has a carrying value of $50,000 being the difference between the face
amount of the convertible debenture and its fair value as calculated above. The
carrying value of the equity component has been recorded as a separate component
of shareholders' equity.
NOTE 7: STOCKHOLDERS' EQUITY
________________________________________________________________________________
The authorized capital of the Company consists of 200,000,000 voting common
shares with $.00025 par value, and 75,000,000 non-voting preferred shares with
$.001 par value.
FORWARD STOCK SPLIT
On January 26, 2004 the Company forward split its common shares on the basis of
three new shares for each common share outstanding. The par value and the number
of authorized but unissued shares of the Company's common stock was not changed
as a result of the forward stock split.
Unless otherwise noted, all references to common stock, common shares
outstanding, average numbers of common shares outstanding and per share amounts
in these Financial Statements and Notes to Financial Statements prior to the
effective date of the forward stock split have been restated to reflect the one
for three forward split on a retroactive basis.
On January 22, 2004 the Company issued 400,000 pre forward split shares of its
common stock, upon the exercise of 400,000 pre forward split stock options at
$0.50 per share for proceeds of $200,000, which was paid by way of offset of
$200,000 originally advanced to the Company by Investor Communications Inc.
("ICI") which was assigned by ICI to IMT designated option holders as described
in Note 8.
On May 18, 2004 the Company issued 495,000 shares of its common stock, upon the
exercise of 495,000 stock options at $1.00 per share for proceeds of $495,000,
which was paid by way of offset of $495,000 originally advanced to the Company
by ICI, which was assigned to a designated option holder, as described in Note
8.
PRIVATE PLACEMENT
On May 3, 2004 the Company concluded and issued 400,000 restricted common shares
at $2.50 per share plus one-half warrant at $5.00 per share for each share
purchased. The total amount raised in this financing was $1,000,000. The value
of the warrants was estimated to be $45,000 and was recorded as a separate
component of stockholders' equity. A finders fee of 39,800 restricted common
shares valued at $99,500 was paid pursuant to the transaction and charged to
additional paid in capital.
NOTE 8: EMPLOYEE STOCK OPTION PLAN
________________________________________________________________________________
By Directors' Resolution dated November 19, 2003 the Company adopted a Stock
Option Plan ("SOP"). The SOP provides authority for the Board to grant Options
for the purchase of a total number of shares of the Company's common stock, not
to exceed 1,000,000 pre forward split shares. The option period of options
granted under the SOP shall be up to 10 years.
On December 31, 2003, the terms of the Company's SOP were altered, whereby the
authorized total number of options was increased from 1,000,000 pre forward
split shares to 4,000,000 shares. As of June 30, 2004, 4,000,000 options under
the Company's current SOP have been granted.
A summary of the Company's stock options as of June 30, 2004, and changes during
the period ended is presented below:
F-11
LEXINGTON RESOURCES, INC.
(an exploration stage company)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
________________________________________________________________________________
(unaudited)
NOTE 8: EMPLOYEE STOCK OPTION PLAN (CONT'D)
________________________________________________________________________________
June 30, 2004
______________________________
Weighted
Number of average
options exercise price
__________ ______________
Outstanding at beginning of period 1,350,000 $ 0.167/share
Exercised January 22, 2004 (1,200,000) (0.167)/share
Grant February 2, 2004 1,000,000 2.00/share
Exercised May 18, 2004 (495,000) 1.00/share
Exercised June, 2004 (320,000) 3.00/share
__________ ______________
Exercisable at end of period 335,000 $ 1.70/share
========== ==============
In January 2004, 1,200,000 stock options (400,000 pre forward split shares) were
exercised at $0.167 per share ($0.50 per pre forward split share) for proceeds
of $200,000 which was paid by way of offset of $200,000 originally advanced to
the Company by ICI which was assigned by ICI to IMT designated option holders.
On February 2, 2004, an additional 1,000,000 share options were granted; 500,000
exercisable at $1.00 and 500,000 exercisable at $3.00. The term of these options
is five years. The fair value of these options at the date of grant of
$2,989,221 was estimated using the Black-Scholes option pricing model with an
expected life of 5 years, a risk free interest rate of 3%, a dividend yield of
0%, and an expected volatility of 251% and has been recorded as a consulting
expense in the period ended March 31, 2004. (Refer to Notes 8 and 11)
In April 2004 the Company registered 500,000 common stock options exercisable at
$1.00 per share under an S-8 Registration Statement.
On May 18, 2004, 495,000 stock options were exercised at $1.00 per share for
proceeds of $495,000 which was paid by way of offset of $495,000 originally
advanced to the Company by ICI which was assigned to a designated option holder.
In June 2004 the Company registered 400,000 common stock options exercisable at
$3.00 per share under an S-8 Registration Statement.
In June 2004, 320,000 stock options were exercised at $3.00 per share for
proceeds of $960,000.
By Directors' Resolution dated July 2, 2004 the Company (1) increased the
authorized number of options under the SOP from 4,000,000 to 5,000,000; and (2)
made the new 1,000,000 stock options exercisable at $3.00 per share for a 5 year
term.
NOTE 9: RELATED PARTY TRANSACTIONS
________________________________________________________________________________
Although the formal arrangement for services to be provided by ICI to the
Company ended on December 31, 2003, a month to month arrangement to provide
services to the Company has been agreed to as a transitional measure during the
first quarter of the year. This transition period ended March 31, 2004. During
the quarter ended March 31, 2004, a total of $30,000 (2003 - $110,000) was
incurred to ICI for managerial, administrative and investor relations services
provided to the Company and its subsidiary, no fees were incurred to ICI for the
3 month period ended June 30, 2004. As of June 30, 2004 the Company owed ICI a
total in loans of $56,196 and interest of $1,566 accrued at 10% per annum on
outstanding loans, for a total of $57,761 (2003 - $669,923).
The Company previously entered into a contract with International Market Trend
AG ("IMT") to provide consulting services relating to Oil and Gas industry and
market development services. The Company incurred $30,000 in fees to IMT for the
period ended June 30, 2004.
F-12
LEXINGTON RESOURCES, INC.
(an exploration stage company)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
________________________________________________________________________________
(unaudited)
NOTE 9: RELATED PARTY TRANSACTIONS (CONT'D)
________________________________________________________________________________
During the period ended March 31, 2004 the Company settled $200,000 of the
amounts due to ICI in exchange for the issuance of 400,000 pre forward split
shares of the Company's common stock by way of exercising options at $0.50 per
share.
During the period ended June 30, 2004 the Company settled $495,000 of the
amounts due to ICI in exchange for 495,000 shares of the Company's common stock
by way of exercising options at $1.00 per share.
Humphreys has been assigned a 10% carried Working Interest in each well to be
drilled on the Wagnon lease, as partial compensation for his involvement in
obtaining and facilitating the execution of the Farm-Out Agreement and to
compensate for his services relating to operation and completion of wells to be
located on the Wagnon Lease. Humphreys also has the right to purchase an
additional 5% working interest in each well to be located on the Wagnon Lease.
As of June 30, 2004 the Company has recorded $12,500 as a receivable from
Humphreys as full payment to be received for an additional 5% working interest
in the Kellster 1-5 and the Kyndal 2-2 (Refer to Notes 4 and 5.)
Of the 1,000,000 stock options granted on February 2, 2004, 105,000 were granted
to officers and directors and 895,000 stock options were granted to IMT.
Refer to Note 13.
NOTE 10: INCOME TAXES
________________________________________________________________________________
The Company has adopted FASB No. 109 for reporting purposes. As of June 30,
2004, the Company had net operating loss carry forwards that may be available to
reduce future years' taxable income and will expire between the years 2006 -
2023. Availability of loss usage is subject to change of ownership limitations
under Internal Revenue Code 382. Future tax benefits which may arise as a result
of these losses have not been recognized in these financial statements, as their
realization is determined not likely to occur and accordingly, the Company has
recorded a valuation allowance for the deferred tax asset relating to these tax
loss carryforwards.
NOTE 11: SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS
________________________________________________________________________________
Period ended June
30, 2004
________________________________________________________
Cash paid during the period for:
Interest $ -
Income taxes $ -
________________________________________________________
During the period ended June 30, 2004 the Company:
1. settled $200,000 of advances due to ICI for 400,000 pre-forward split
shares of common shares on the exercise of stock options at $0.50 per
share for the offset of prior advances in the amount of $200,000
(refer to Note 7);
2. settled $495,000 of the advances due to ICI in exchange for 495,000
shares of the Company's common stock by way of exercising options at
$1.00 per share (refer to Note 7);
3. issued 1,000,000 stock options in payment for consulting fees. A
non-cash expense of $2,989,221 has been recorded in connection with
these options. (refer to note 8.); and
4. issued 39,800 shares at a value of $99,500 as payment for finders'
fees. A non-cash cost of $99,500 has been charged to additional paid
in capital in connection with this private placement. (refer to Note
7).
F-13
LEXINGTON RESOURCES, INC.
(an exploration stage company)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
________________________________________________________________________________
(unaudited)
NOTE 12: COMMITMENTS
________________________________________________________________________________
On June 21, 2004 the Company entered into a one year contract with a business
and publicity news placement company and has committed to pay $7,000 a month for
these services.
(Refer to Note 3.)
NOTE 13: SUBSEQUENT EVENTS
________________________________________________________________________________
STOCK OPTIONS
On July 2, 2004, the Board of Directors resolved to amend the Company's Stock
Option Plan. (See Note 8.)
RELATED PARTY ADVANCES
Subsequent to June 30, 2004, $280,000 was advanced to the Company by a private
company that is one of the Funding Investors (refer to Note 5). These amounts
are non-interest bearing and have no fixed terms of repayment.
F-14
Statements made in this Form 10-QSB that are not historical or current
facts are "forward-looking statements" made pursuant to the safe harbor
provisions of Section 27A of the Securities Act of 1933 (the "Act") and Section
21E of the Securities Exchange Act of 1934. These statements often can be
identified by the use of terms such as "may," "will," "expect," "believe,"
"anticipate," "estimate," "approximate" or "continue," or the negative thereof.
The Company intends that such forward-looking statements be subject to the safe
harbors for such statements. The Company wishes to caution readers not to place
undue reliance on any such forward-looking statements, which speak only as of
the date made. Any forward-looking statements represent management's best
judgment as to what may occur in the future. However, forward-looking statements
are subject to risks, uncertainties and important factors beyond the control of
the Company that could cause actual results and events to differ materially from
historical results of operations and events and those presently anticipated or
projected. The Company disclaims any obligation subsequently to revise any
forward-looking statements to reflect events or circumstances after the date of
such statement or to reflect the occurrence of anticipated or unanticipated
events.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATION
GENERAL
Lexington Resources, Inc. is a corporation organized under the laws of
the State of Nevada (the "Company"). The Company currently trades on the OTC
Bulletin Board under the symbol "LXRS" and on the Frankfurt and Berlin Stock
Exchanges under the symbol "LX1"; WKN: A0BKLP.
CURRENT BUSINESS OPERATIONS
The Company is a natural resource exploration and production company
engaged in the acquisition and development of oil and gas properties in the
United States. The Company expects to weight its future development initiatives
towards gas production. The Company is committed to developing into a profitable
independent oil and gas producer through the systematical expansion of
operations and the acquisition of new drilling targets while organizing drilling
and production initiatives on leased properties.
Lexington acquired a section of farm-out acreage in Pittsburg County,
Oklahoma for the development and production of coal bed methane gas (the "Wagnon
Property"). There are no proven reserves on the property substantiated by
independent engineering reports, and methods to determine suitability for gas
production potential emanate from comparable well data in the area and historic
drilling logs that identify the gas production target in the vicinity of the
leased acreage. The Company has successfully completed three of a planned four
to five coal bed methane gas wells on the subject acreage. An independent
reserve report on the Wagnon Property has been commissioned. Cumulative coal bed
methane gas production has resulted in approximately 21,000,000 cubic feet of
average 0.96 BTU grade gas and produced gross revenues of approximately $94,000
for the period from February 15, 2004 to the end of second quarter.
The Company has also consummated the acquisition of certain additional
coal bed methane gas prospects as more fully described below, and is currently
working to complete the acquisition of several prospects that fall within the
criteria of providing a geological basis for development of drilling initiatives
that can provide near term revenue potential, fast drilling capital repatriation
from production cash flows, and undeveloped reserve potential. It is anticipated
that the Company's ongoing efforts, subject to adequate funding being available,
will continue to be focused on successfully concluding negotiations for
additional tracts of prime acreage in the coal bed methane gas producing domain,
and to implement additional development initiatives by drilling new wells to
prove undeveloped reserves and to provide revenues. The Company plans to
continue building and increasing a strategic base of proven reserves and
production opportunities first targeted within Oklahoma's Arkoma Basin.
OIL AND GAS PROPERTIES
As of the date of this Quarterly Report, the Company has not reported
or filed any reserve estimates with any Federal agencies, but has commenced
production from certain properties as more fully described below. The Company
maintains an approximate aggregate of 9,425 gross undeveloped acreage pursuant
to leases and/or concessions, and during the six-month period ended June 30,
2004 has paid an aggregate approximate amount of $1,370,000 for properties
discussed below. The following is a description of the Company's oil and gas
properties.
WAGNON PROPERTY
The Company holds a 100% working interest and a 75% net revenue
interest in approximately 590.2 gross undeveloped acreage of a gas lease located
in Pittsburg County, Oklahoma (the "Wagnon Property"). The gas lease relating to
the Wagnon Property is pursuant to a farm-out agreement from Quinton Rental &
Repair Services, Inc. (the "Farm-Out Agreement"). Pursuant to the terms and
provisions of the Farm-Out Agreement, the Company is required to drill a well
every six months to retain farm-out with a maximum number of five allowable
wells. Management of the Company plans to scale up drilling operations, and
anticipates that approximately four wells will be drilled. As of the date of
this Quarterly Report, three wells on the Wagnon Property have been drilled,
completed, and put into production as described below, and the Company is
currently planning to drill a fourth well. A third party contractor has been
retained to estimate reserves for the Company in this location. Gas quality
experienced to date is approximately .96 BTU factor.
During approximately February 2004, the Company completed drilling
operations on its first horizontal coal bed methane gas well to a depth of
approximately 2,400 feet vertically and 2,200 horizontally (the "Kellster
#1-5"), which was put into production and has been producing since the middle of
February 2004. The Kellster #1-5 coal bed methane gas well is still in
dewatering stages; production volumes can typically increase as the producing
reservoir strata further decreases in water content exposing producing reservoir
rock surfaces in the well. Management of the Company anticipates that if current
production trends and gas pricing experience remain stable, well drilling and
completion capital costs on the Kellster #1-5 well should be fully realized and
repaid in less than twelve to eighteen months from the date of well completion.
During approximately June 2004, the Company completed drilling
operations on its second horizontal coal bed methane gas well located within
close proximity to the Kellster #1-5 well (the "Kyndal #2-2"). The scientific,
geophysical, geological, surface support and drilling depths and protocols
utilized on the Kyndal #2-2 well were similar to those utilized on the Kellster
#1-5 well. The Kyndal #2-2 well feeds directly into the existing pipeline
infrastructure located on the Wagnon Property. The Kyndal #2-2 well is
undergoing dewatering processes predictable to coal bed methane gas wells that
can incline in production once dewatering phases expose further gas producing
reservoir rock. Drilling depths, production profile, target reservoir rock, and
resultant gas quality is similar to the Kellster #1-5 well.
During approximately July, 2004, the Company completed drilling
operations on its third horizontal coal bed methane gas well located within
close proximity to the Kellster #1-5 well (the "Bryce #3-2"). Completion
drilling of the Bryce #3-2 coal bed methane gas well resulted in vertical depths
of approximately 2,400 feet with an approximate 2,000 foot horizontally drilled
section utilizing drilling protocols similar to those previously utilized in the
drilling of the Kellster #1-5 and Kyndal #2-2 coal bed methane gas wells. Gas
pipeline connection to the Bryce #3-2 well has been completed and although gas
quality is not yet determined, management of the Company anticipates that gas
quality will be similar to the Kellster #1-5 and Kyndal #2-2 wells that average
approximately 0.96 BTU factor gas. Drilling depths, production profiles, and
target reservoir rock, are similar to the other wells drilled by the Lexington
on the Wagnon Property.
The Company has contracted with one of the largest coal bed methane gas
drillers in the State of Oklahoma. The Company may also contract with other
drilling consultants, geologists and engineers to obtain the leading edge of
horizontal drilling and coal bed methane completion for the project.
Initial drilling funding for the first three wells located on the
Wagnon Property has been arranged through drilling agreements with private
investors. The Company has entered into drilling agreements with private
investors for the funding of the Kellster #1-5 coal bed methane gas well
(collectively, the "Funding Agreements"). Pursuant to the terms and provisions
of the Funding Agreements, private investors provided the authorization for
expenditure capital estimated at $360,000 for the Kellster #1-5 coal bed methane
gas well. As at June 30, 2004, the Company has received the total required
funding of $1,080,000 for the completion and drilling of the first three wells.
During February 2004, the Company successfully completed drilling of the
Kellster #1-5 well. The net proceeds of approximately $73,000 resulting from gas
production beginning February 15 to June 30, 2004 from the Kellster #1-5 coal
bed methane gas well will be utilized for repayment of working interest capital
that provided the $360,000 for the drilling and establishment of the well, and
for carried working interests. Management has estimated that the non-current
portion of the drilling obligations as at June 30, 2004 is $90,000.
Pursuant to the terms and provisions of the Funding Agreements, the
private investors were provided with an 80% working interest and a 60% net
revenue interest in the Kellster #1-5, Kyndal #2-2, and Bryce #3-2 wells, until
their respective invested capital in each well is repaid, after which time the
investors will revert to a 20.1% working interest and a 15.075% net revenue
interest. Oakhills Energy, Inc., the operator of the Kellster #1-5, Kyndal #2-2,
and Bryce #3-2 wells, will "back-in" to a reversionary 6.7% working interest
after the working interest capital is repaid and the Company's subsidiary,
Lexington, will "back-in" to a reversionary 53.2% working interest. Pursuant to
the further terms and provisions of the Funding Agreements, all wells to be
drilled on the Wagnon Property will carry royalty interests totaling 25% to
landowners and property interest holders, and a carried working interest of 5%
to a landowner, and a 5% carried working interest to a company related to Mr.
Douglas Humphreys, a director of the Company (which company also owns a
non-carried working interest of 10%).
COAL CREEK PROSPECT
During March 2004, the Company entered into an option agreement
expiring on April 11, 2004 to purchase an undivided 95% interest in
approximately 2,500 net leasehold acres located in the Coal Creek Gas Prospect,
Hughes and Pittsburg Counties, State of Oklahoma (the "Coal Creek Lease Purchase
Agreement"). On April 27, 2004, the Company consummated the acquisition of the
1,536 acre lease pursuant to the terms and provisions of the Coal Creek Lease
Purchase Agreement. Pursuant to the terms and provisions of the Coal Creek Lease
Purchase Agreement, the Company paid a certain aggregate amount to complete the
purchase of the acreage then available totaling 1,536 acres of the lease. Under
the terms and provisions of the Coal Creek Lease Purchase Agreement, the Company
has a 95% working interest in the subject lands and a 79% net revenue interest.
On May 20, 2004, the Company paid an additional aggregate amount and
acquired an additional 372 acres of the Coal Creek Prospect. The Company has a
minimum 95% working interest in the subject lands and a 78% net revenue interest
in the additional lands. The terms of the leases are for two years. As of the
date of this Quarterly Report, the total acreage acquired in the Coal Creek Gas
Prospect is 1,909 gross acres. The primary drilling target on the Coal Creek Gas
Prospect is the Hartshorne coal at approximately 3,500 to 4,000 feet in depth.
Management of the Company anticipates that drilling operations will commence
before the end of third quarter 2004 on the Coal Creek Prospect.
PANTHER CREEK PROSPECT
During March 2004, the Company entered into a purchase agreement to
acquire a three-year lease of approximately 292 acres located in five separate
sections in the Panther Creek coal bed methane gas prospect, located in Hughes
County, State of Oklahoma (the "Panther Creek Lease Purchase Agreement").
Pursuant to the terms and provisions of the Panther Creek Lease Purchase
Agreement, the Company paid a certain aggregate amount to secure the three year
lease. The Company has a 100% working interest and an approximate 81% net
revenue interest in the subject property.
SOUTH LAMAR PROSPECT
On April 21, 2004, the Company entered into a purchase agreement to
acquire an interest in three sections of farm-out acreage to develop coal bed
methane gas wells in Hughes County, State of Oklahoma (the "South Lamar Purchase
Agreement"). Pursuant to the terms and provisions of the South Lamar Purchase
Agreement, the Company paid a certain aggregate amount and holds a 100% working
interest and a 78.5% net revenue interest in 960 gross undeveloped acres to
develop gas producing wells. On July 26, 2004, the Company acquired a further
184 acres in the South Lamar Prospect and a 100% working interest and a 78.5%
net revenue interest in the additional acreage. The Company also holds all other
zones except for the Thurman and Jefferson formations. Other target zones will
be evaluated for potential drilling opportunities.
MIDDLECREEK PROSPECT
During May 2004, the Company entered into an agreement to acquire a 320
acre drilling target in the Middlecreek Gas Prospect located in Hughes County,
State of Oklahoma. The agreement includes wells on the property with minor
production from the Gilchrease zone and represents an average 70% net revenue
interest and a 100% working interest. Rights to drill all geological zones are
included, and primary gas targets include the Caney shale and Hartshorne coal
zones with further possibilities in the Booch, Stuart and Savannah zones. The
Company paid a certain aggregate amount for the leases acquired in the Middle
Creek Prospect.
H-9 PROSPECT
During June 2004, the Company entered into an option to purchase a 100%
working interest and a 79.25% net revenue interest in approximately 4,600 net
leasehold acres in approximately 38 sections of the H-9 Prospect located in
Hughes and McIntosh counties in the State of Oklahoma (the "H-9 Prospect"). The
Company has paid a certain aggregate amount towards the purchase price with the
balance due after completion of due diligence by the Company. On July 29, 2004,
the Company paid an additional aggregate amount and completed the acquisition of
the H-9 Prospect, acquiring approximately 4,850 acres of coal bed methane gas
target drillable leases. A further 320 acres of gas target drillable leases in
the H-9 area of interest were subsequently acquired with a 100% working interest
and a 78.25% net revenue interest.
The H-9 Prospect area acquisitions brings drillable acreage for the
Company to approximately 9,425 acres with properties in the Wagnon, Panther,
Coal Creek, South Lamar, Middlecreek and H-9 prospects, as discussed above, all
located in the Arkoma Basin in the State of Oklahoma.
ACQUISITION OF LEXINGTON OIL & GAS LTD. CO.
SHARE EXCHANGE AGREEMENT
On November 19, 2003, Intergold Corporation (now known as Lexington
Resources, Inc.), Lexington Oil & Gas Ltd. Co., an Oklahoma limited liability
company ("Lexington"), and the shareholders of Lexington (the "Lexington
Shareholders") entered into a share exchange agreement (the "Agreement").
Pursuant to the terms of the Share Exchange Agreement: (i) the Company acquired
from the Lexington Shareholders one hundred percent (100%) of the issued and
outstanding shares of common stock of Lexington; and (ii) the Company issued
3,000,000 (pre-forward stock split) shares of its restricted Common Stock to the
Lexington Shareholders in proportion to their respective holdings in Lexington
(of which as of the date of this Quarterly Report, Humphreys has transferred
750,000 pre-forward stock split shares to Orient Exploration Ltd., a private
corporation ("Orient")).
PURCHASE AND SALE AGREEMENTS. During January, 2004, the parties to the
Share Exchange Agreement, Orient, Douglas Humphreys ("Humphreys"), the Company,
Lexington Oil & Gas Ltd. Co., an Oklahoma limited liability corporation
("Lexington"), Paluca Petroleum Inc., a private Oklahoma based oil and gas
services company ("Paluca") reevaluated the terms of the original Share Exchange
Agreement and upon further negotiations desired to modify the terms of the Share
Exchange Agreement as follows: (i) 750,000 (pre-forward stock split) shares of
restricted Common Stock of the Company held of record by Humphreys were
transferred to Orient in consideration therefore; (ii) the Company assigned to
Humphreys a 5% carried working interest in every well drilled by the Company on
the Wagnon Property; (iii) the Company agreed to allow Humphreys to participate
up to an additional 5% working interest in every well drilled by the Company on
the Wagnon Property; (iv) the Company agreed to transfer to Paluca certain
assets previously acquired by the Company (which included working interests and
net revenue interests in certain oil and gas leases located on the Doc Cole
Property, the Atwood Booch Sand Property, the Jeneva Property and the Sasakwa
Gilcrease Sand Property, as previously disclosed in prior filings)
In order to reflect the revised operating situation arrangement
resulting from modifications to the Share Exchange Agreement the following two
agreements were simultaneously executed.
HUMPHREYS/ORIENT AGREEMENT. On January 21, 2004, Orient and Humphreys
entered into an agreement (the "Humphreys/Orient Agreement"). Pursuant to the
terms and provisions of the Humphreys/Orient Agreement, Humphreys agreed to
transfer 750,000 (pre-forward stock split) shares of restricted Common Stock of
the Company held of record by Humphreys to Orient.
PALUCA AGREEMENT. On January 21, 2004, the Company, Lexington, Paluca
and Humphreys entered into an agreement (the "Paluca Agreement"). Pursuant to
the terms and provisions of the Paluca Agreement: (i) the Company assigned to
Humphreys a 5% carried working interest in every well drilled by the Company on
the Wagnon Property; (ii) the Company agreed to allow Humphreys to participate
up to an additional 5% working interest in every well drilled by the Company on
the Wagnon Property; (iii) Humphreys agreed to waive any and all other claims,
debts or obligations owed to Humphreys by the Company or by Lexington, and (iv)
the Company agreed to transfer to Paluca certain assets previously acquired by
the Company (which included working interests and net revenue interests in
certain oil and gas leases located on the Doc Cole Property, the Atwood Booch
Sand Property, the Jeneva Property and the Sasakwa Gilcrease Sand Property, as
previously disclosed in prior filings). Mr. Douglas Humphreys, a director of the
Company, is the sole officer and director and majority shareholder of Paluca.
Therefore, as of the date of this Quarterly Report, management of the
Company does not intend to proceed with the acquisition or development of the
above-described properties as disclosed in early filings due to management's
analysis that the properties do not contain the appropriate oil and gas
development elements that form part of the Company's current strategic focus and
criteria for corporate oil and gas development initiatives.
CONSULTATION AGREEMENT. On July 12, 2004, the Company, Lexington and
Douglas Humphreys, a director of the Company, entered into an agreement (the
"Agreement"), regarding Mr. Humphreys' assistance in overseeing the drilling
operations and the completion and management of wells. Pursuant to the terms and
conditions of the Agreement: (i) Mr. Humphreys will be paid compensation of
$7,500 per month effective April 1, 2003; (ii) the Company will assign to Mr.
Humphreys a 10% carried working interest in every well drilled by the Company on
all properties held by the Company, including the Wagnon Property; (iii) Mr.
Humphreys will have the right to purchase an additional 5% working interest in
all wells drilled by the Company on its properties provided that funds for this
participation are paid prior to the commencement of drilling of said wells; and
(iv) the Company will grant to Mr. Humphreys an additional 200,000 Stock Options
to be granted at $3.00 per share exercisable for a five-year term.
RESULTS OF OPERATION
SIX-MONTH PERIOD ENDED JUNE 30, 2004 COMPARED TO SIX-MONTH PERIOD ENDED JUNE 30,
2003
The Company's net loss for the six-month period ended June 30, 2004 was
approximately ($4,282,990) compared to ($129,738) during the six-month period
ended June 30, 2003. During the six-month period ended June 30, 2004, the
Company generated $94,207 in gross revenue primarily from the sale of gas
produced from the Kellster #1-5 coal bed methane gas well that started
production in mid February 2004, which gross revenue was reduced by $6,558 in
estimated depletion and operating costs, resulting in operating income of
$87,649. No revenue was generated during the six-month period ended June 30,
2003.
During the six-month period ended June 30, 2004, the Company recorded
$4,370,639 in operating expenses compared to $129,738 in operating expenses
incurred during the six-month period ended June 30, 2003 (an increase of
$4,240,901). During the six-month period ended June 30, 2004, the Company's
operating expenses consisted primarily of: (i) $2,989,221 in stock-based
compensation relating to the fair valuation of stock options granted to
consultants compared to $-0- during the six-month period ended June 30, 2003;
(ii) $1,361,701 as general and administrative expenses compared to $82,665
during the six-month period ended June 30, 2003; and (iii) $19,717 as interest
expense compared to $47,073 during the six-month period ended June 30, 2003.
General and administrative expenses generally include corporate overhead,
financial and administrative contracted services, marketing, and consulting
costs.
Operating expenses incurred during the six-month period increased
primarily due to the increase in general and administrative expenses relating to
corporate marketing and the recording of the non-cash expense of $2,989,221 in
connection with the grant of 2,200,000 stock options (400,000 pre-Forward Stock
Split options and 1,000,000 post-Forward Stock Split options). See "Part II.
Other Information. Item 2. Changes in Securities and Use of Proceeds."
Of the $1,361,701 incurred as operating expenses during the six-month
period ended June 30, 2004, an aggregate of $30,000 was incurred payable to
Investor Communications International, Inc. ("ICI") for amounts due and owing
for operational management, administrative and financial services rendered for
the quarter ended March 31, 2004 (no fees were incurred to ICI during the second
quarter ended June 30, 2004). As of June 30, 2004, the Company also owed ICI an
aggregate amount of $57,761 in loans inclusive of interest of $1,566 accrued at
ten percent (10%) per annum on outstanding loans and unpaid management fees.
During the six-month period ended June 30, 2004, the Company paid $-0- to ICI.
During the first quarter, the Company settled $200,000 of the amounts due and
owing ICI pursuant to which ICI assigned its right, title and interest into such
debt to certain designated holders of Stock Options, and the Company agreed to
accept such assignment of debt as payment for the exercise price of $0.50 per
share of 400,000 (pre-Forward Stock Split) Stock Options held by such designated
holders. During the second quarter, the Company settled $495,000 of amounts due
and owing to ICI in exchange for issuance of 495,000 shares of the Company's
restricted Common Stock pursuant to the exercise of options by certain
designated holders of Stock Options at $1.00 per share. See "Part II. Other
Information. Item 2. Changes in Securities and Use of Proceeds."
The Company and ICI entered into a two-year consulting services and
management agreement dated January 1, 1999 (the "Consulting Services
Agreement"). On January 1, 2001, the Company and ICI renewed the Consulting
Services Agreement for an additional two-year period. Although the Consulting
Services Agreement had been terminated by the Company, a month-to-month
agreement to provide services was established between the Company and ICI during
the first quarter of 2004 as a transitional measure, which transitional period
ended March 31, 2004.
Of the $1,361,701 incurred as operating expenses during the six-month
period ended June 30, 2004, an aggregate of $30,000 was incurred payable to
International Market Trend AG ("IMT") for amounts due and owing for operational,
administrative, and financial services rendered. On November 10, 2003, the
Company and IMT entered into a consulting agreement (the "Consulting
Agreement"), whereby IMT performs a wide range of management, administrative,
financial, and business development services to the Company.
As discussed above, the increase in net loss during the six-month
period ended June 30, 2004 compared to the six-month period ended June 30, 2003
is attributable primarily to the increase in general and administrative expenses
and the recording of the non-cash expense of $2,989,221 in connection with the
grant of 2,200,000 stock options (400,000 pre-Forward Stock Split options and
1,000,000 post-Forward Stock Split options). The Company's net loss during the
six-month period ended June 30, 2004 was approximately ($4,282,990) or ($0.30)
per share compared to a net loss of ($129,738) or ($0.10) during the six-month
period ended June 30, 2003. The weighted average number of shares outstanding
was 14,282,945 for the six-month period ended June 30, 2004 compared to
1,286,130 for the six-month period ended June 30, 2003 (which has been restated
in accordance with the forward stock split of three-for-one shares of common
stock effected January 26, 2004).
THREE-MONTH PERIOD ENDED JUNE 30, 2004 COMPARED TO THREE-MONTH PERIOD ENDED JUNE
30, 2003
The Company's net loss for the three-month period ended June 30, 2004
was approximately ($1,189,231) compared to ($68,905) during the three-month
period ended June 30, 2003. During the three-month period ended June 30, 2004,
the Company generated $53,517 in gross revenue primarily from the sale of gas
produced from the Kellster #1-5 coal bed methane gas well that started
production in mid February 2004, which gross revenue was reduced by $3,879 in
estimated depletion and operating costs, resulting in operating income of
$49,638. No revenue was generated during the three-month period ended June 20,
2003.
During the three-month period ended June 30, 2004, the Company recorded
$1,238,869 in operating expenses compared to $68,905 in operating expenses
incurred during the three-month period ended June 30, 2003 (an increase of
$1,169,964). During the three-month period ended June 30, 2004, the Company's
operating expenses consisted primarily of: (i) $1,233,552 as general and
administrative expenses compared to $43,856 during the three-month period ended
June 30, 2003; and (ii) $5,317 as interest expense compared to $25,049 during
the three-month period ended June 30, 2003. Operating expenses incurred during
the three-month period increased primarily due to the increase in general and
administrative expenses.
As discussed above, the increase in net loss during the three-month
period ended June 30, 2004 compared to the three-month period ended June 30,
2003 is attributable primarily to the increase in general and administrative
expenses. The Company's net loss during the three-month period ended June 30,
2004 was approximately ($1,189,231) or ($0.08) per share compared to a net loss
of ($68,905) or ($0.04) during the three-month period ended June 30, 2003. The
weighted average number of shares outstanding was 14,618,332 for the three-month
period ended June 30, 2004 compared to 1,563,289 for the three-month period
ended June 30, 2003.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial statements have been prepared assuming that it
will continue as a going concern and, accordingly, do not include adjustments
relating to the recoverability and realization of assets and classification of
liabilities that might be necessary should the Company be unable to continue in
operation.
SIX-MONTH PERIOD ENDED JUNE 30, 2004
As of the six-month period ended June 30, 2004, the Company's current
assets were $886,486 and its current liabilities were $1,596,720, which resulted
in a working capital deficit of $710,234. As of the six-month period ended June
30, 2004, the Company's total assets were $2,390,133 consisting of: (i) $780,759
in cash; (ii) $14,000 in prepaid expenses; (iii) $48,394 in accounts receivable;
(iii) $43,333 in deferred charges; (iv) $3,329 in fixed assets (net of
depreciation); and (v) $1,500,318 in carrying value of oil and gas properties.
As of the six-month period ended June 30, 2004, the Company's total liabilities
were $1,686,720 consisting of: (i) $1,028,869 in current and non-current
drilling obligations; (ii) $500,000 in convertible promissory notes; (iii)
$83,820 in accounts payable and accrued liabilities; and (iv) $74,031 due to
related parties. See "Part I. Financial Information. Item 2. Management's
Discussion and Analysis or Plan of Operation - Material Commitments" for a
discussion regarding the drilling commitments and "Part II. Other Information.
Item 2. Change in Securities and Use of Proceeds" for a discussion regarding the
convertible promissory notes.
Stockholders' equity increased from a deficit of ($697,818) for fiscal
year ended December 31, 2003 to $703,413 for the six-month period ended June 30,
2004.
The Company has not generated positive cash flows from operating
activities. For the six-month period ended June 30, 2004, net cash flows used in
operating activities was ($1,244,465) consisting primarily of a net loss of
($4,282,990), which was adjusted by $2,989,221 to reconcile net loss to net cash
from operating activities relating to the non-cash expense of the grant of
2,200,000 stock options.
Net cash flows used in investing activities was ($1,390,371) for the
six-month period ended June 30, 2004 pertaining to the acquisition and
development of the oil and gas properties.
Net cash flows from financing activities was $3,064,175 for the
six-month period ended June 30, 2004 pertaining primarily to $1,960,000 received
from proceeds on sale of Common Stock, $500,000 received pursuant to the issue
of convertible promissory notes and $678,869 in drilling obligations from
private third parties.
PLAN OF OPERATION
As of the date of this Quarterly Report, there has been a limited
amount of income realized from the business operations of the Company, with no
prior history of earnings prior to the share exchange agreement between
Intergold Corporation (now known as Lexington Resources, Inc.), Lexington Oil &
Gas Ltd. Co., an Oklahoma limited liability company ("Lexington"), and the
shareholders of Lexington. The Company's primary sources of financing during the
prior fiscal years before the Company changed its business premise to oil and
gas exploration and development has been from advances provided to the Company
as debt and private placement and warrant offerings.
In accordance with the acquisition of Lexington, management of the
Company anticipates a possible increase in operating expenses and capital
expenditures relating to oil and gas operating properties drilling initiatives
and property acquisitions. The Company may finance these expenses with further
issuances of Common Stock of the Company, sources of debt funding, and private
drilling funding agreements. The Company believes that any anticipated private
placements of equity capital and debt financing, if successful, may be adequate
to fund the Company's operations over the next six months. Thereafter, the
Company expects it will need to raise additional capital to meet long-term
operating requirements. The Company may encounter business endeavors that
require significant cash commitments or unanticipated problems or expenses that
could result in a requirement for additional cash before that time. If the
Company raises additional funds through the issuance of equity or convertible
debt securities other than to current shareholders, the percentage ownership of
its current shareholders would be reduced, and such securities might have
rights, preferences or privileges senior to its common stock. Additional
financing may not be available upon acceptable terms, or at all. If adequate
funds are not available or are not available on acceptable terms, the Company
may not be able to take advantage of prospective new business endeavors or
opportunities, which could significantly and materially restrict the Company's
business operations.
MATERIAL COMMITMENTS
A significant and estimated commitment for the Company for fiscal year
2004 relates to the drilling agreements with private investors (the "Funding
Investors") for the funding for the Kellster #1-5, Kyndal #2-2, and Bryce #3-2
coal bed methane gas wells. The Funding Investors each provided one-third of the
authorization for expenditures capital estimated at $360,000 for the Kellster
#1-5 coal bed methane gas well. As at June 30, 2004, $1,080,000 has been
received by the Company for the completion and drilling costs of the first three
wells. As of June 30, 2004, the Funding Investors have been repaid approximately
$63,000 of their $360,000 investment in the Kellster #1-5 well.
A significant commitment for the Company for fiscal year 2004 is the
principal amount of $400,000 due and owing pursuant to a convertible promissory
note dated April 26, 2004 and the principal amount of $100,000 due and owing
pursuant to a similar convertible promissory note dated June 30, 2004 Pursuant
to the terms and provisions of the $400,000 convertible promissory note, the
holder thereof has the right to convert principal and interest at anytime at
$5.00 per Common Share. Pursuant to the terms and provisions of the $100,000
convertible promissory note, the holder thereof has the right to convert
principal and interest at anytime at $2.50 per Common Share. Both convertible
promissory notes are unsecured and are issued for terms of one year with
interest accruing on each at the U.S. prime lending rate +1% per annum.
A significant and estimated commitment for the Company for fiscal year
2004 relates to the aggregate amount of $280,000, which was advanced to the
Company by a private company that is one of the Funding Investors. This amount
is non-interest bearing and has no fixed terms of repayment.
OFF-BALANCE SHEET ARRANGEMENTS
As of the date of this Quarterly Report, the Company does not have any
off-balance sheet arrangements that have or are reasonably likely to have a
current or future effect on the Company's financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that are material to investors. The
term "off-balance sheet arrangement" generally means any transaction, agreement
or other contractual arrangement to which an entity unconsolidated with the
Company is a party, under which the Company has (i) any obligation arising under
a guarantee contract, derivative instrument or variable interest; or (ii) a
retained or contingent interest in assets transferred to such entity or similar
arrangement that serves as credit, liquidity or market risk support for such
assets.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." Such standard requires costs
associated with exit or disposal activities (including restructurings) to be
recognized when the costs are incurred, rather than at a date of commitment to
an exit or disposal plan. SFAS No. 146 nullifies EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." Under SFAS No.
146, a liability related to an exit or disposal activity is not recognized until
such liability has actually been incurred whereas under EITF Issue No. 94-3 a
liability was recognized at the time of a commitment to an exit or disposal
plan. The provisions of this standard are effective for exit or disposal
activities initiated after December 31, 2002. The adoption of SFAS 146 did not
have a material effect on the Company's financial position or results of
operations.
In May 2003, SFAS 150, "Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity", was issued. This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. Generally, a financial instrument, whether
in the form of shares or otherwise, that is mandatorily redeemable, i.e. that
embodies an unconditional obligation requiring the issuer to redeem it by
transferring its shares or assets at a specified or determinable date (or dates)
or upon an event that is certain to occur, must be classified as a liability (or
asset in some circumstances). In some cases, a financial instrument that is
conditionally redeemable may also be subject to the same treatment. This
Statement does not apply to features that are embedded in a financial instrument
that is not a derivative (as defined) in its entirety. For public entities, this
Statement is effective for financial instruments entered into or modified after
May 31, 2003. The adoption of SFAS 150 did not affect the Company's financial
position or results of operations.
In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting for Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an interpretation of FASB
Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34,
Disclosure of Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45
clarifies the requirements for a guarantor's accounting for, and disclosure of,
certain guarantees issued and outstanding. It also requires a guarantor to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. This interpretation also
incorporates without reconsideration the guidance in FASB Interpretation No. 34,
which is being superseded. The adoption of FIN 45 did not affect the Company's
financial position or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities, an interpretation of Accounting
Research Bulletins ("ARB") No. 51, Consolidated Financial Statements ("FIN 46").
Fin 46 applies immediately to variable interest entitles created after January
31, 2003, and in the first interim period beginning after June 15, 2003 for
variable interest entities created prior to January 31, 2003. The interpretation
explains how to identify variable interest entities and how an enterprise
assesses its interest in a variable interest entity to decide whether to
consolidate that entity. The interpretation requires existing unconsolidated
variable interest entities to be consolidated by their primary beneficiaries if
the entities do not effectively disperse risks among parties involved. Variable
interest entities that effectively disperse risks will not be consolidated
unless a single party holds an interest or combination of interests that
effectively recombines risks that were previously dispersed. The adoption of FIN
46 did not affect the Company's financial position or results of operations.
ITEM III. CONTROLS AND PROCEDURES
An evaluation was conducted under the supervision and with the
participation of the Company's management, including Grant Atkins, the Company's
President and Chief Executive Officer, and Vaughn Barbon, the Company's
Treasurer and Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures as at June 30,
2004. Based on that evaluation, Mr. Atkins and Mr. Barbon concluded that the
Company's disclosure controls and procedures were effective as of such date to
ensure that information required to be disclosed in the reports that the Company
files or submits under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods specified
in Commission rules and forms. Such officers also confirm that there was no
change in the Company's internal control over financial reporting during the
six-month period ended June 30, 2004 that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
AUDIT COMMITTEE REPORT
The Board of Directors has established an audit committee. The members
of the audit committee are Mr. Steven Jewett, Mr. Doug Humphreys, and Mr. Norman
MacKinnon. Two of the three members of the audit committee are "independent"
within the meaning of Rule 10A-3 under the Exchange Act. The audit committee was
organized in April 2004 and operated under a written charter adopted by the
Board of Directors.
The audit committee has reviewed and discussed with management the
Company's unaudited financial statements as of and for the six-month period
ended June 30, 2004. The audit committee has also discussed with Dale Matheson
Carr-Hilton LaBonte the matters required to be discussed by Statement on
Auditing Standards No. 61, Communication with Audit Committees, as amended, by
the Auditing Standards Board of the American Institute of Certified Public
Accountants. The audit committee has received and reviewed the written
disclosures and the letter from Dale Matheson Carr-Hilton LaBonte required by
Independence Standards Board Standard No. 1, Independence Discussions with Audit
Committees, as amended, and has discussed with Dale Matheson Carr-Hilton LaBonte
their independence.
Based on the reviews and discussions referred to above, the audit
committee has recommended to the Board of Directors that the unaudited financial
statements referred to above be included in the Company's Quarterly Report on
Form 10-QSB for the six-month period ended June 30, 2004 filed with the
Securities and Exchange Commission.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No report required.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
PRIVATE PLACEMENT OFFERING
During the six-month period ended June 30, 2004, the Company engaged in
a private placement offering under Regulation S and Rule 506 of Regulation D of
the Securities Act of 1933, as amended (the "1933 Securities Act"), which has
been terminated. Pursuant to the terms of the private placement, the Company
offered 1,000,000 units in the capital of the Company (the "Unit"), at a
subscription price of $2.50 per Unit, with each such Unit being comprised of one
share of restricted Common Stock and one-half of one non-transferable share
purchase warrant (the "Warrant"). Each such whole Warrant entitles the holder
thereof to purchase one additional share of restricted Common Stock at an
exercise price of $5.00 per Warrant for a period commencing on the date of the
issuance of the Unit by the Company and ending on December 31, 2005. The Company
sold 400,000 Units at $2.50 per Unit, consisting of 400,000 shares of restricted
Common Stock and 200,000 Warrants, for aggregate gross proceeds of $1,000,000.
The per share price of the offering was arbitrarily determined by the Board of
Directors based upon analysis of certain factors including, but not limited to,
stage of development, industry status, investment climate, perceived investment
risks, assets and net estimated worth of the Company. The Company issued shares
of restricted Common Stock to one U.S. investor, who was deemed an accredited
investor as that term is defined under Regulation D, and to ten non-U.S.
resident investors. The investors executed subscription agreements and
acknowledged that the securities to be issued have not been registered under the
1933 Securities Act, that the investors understood the economic risk of an
investment in the securities, and that the investors had the opportunity to ask
questions of and receive answers from the Company's management concerning any
and all matters related to acquisition of the securities. No underwriter was
involved in the transaction.
A finders' fee was paid by the issuance of 39,800 restricted shares of
Common Stock.
FORWARD STOCK SPLIT
On January 14, 2004, the Board of Directors of the Company pursuant to
minutes of written consent in lieu of a special meeting authorized and approved
a forward stock split of three-for-one of the Company's issued and outstanding
shares of Common Stock (the "Forward Stock Split").
The Forward Stock Split was effectuated based on market conditions and
upon a determination by the Board of Directors that the Forward Stock Split was
in the best interests of the Company and the shareholders. In the Board's
judgment the Forward Stock Split would result in an increase in the Company's
trading float of shares of Common Stock available for sale resulting in
facilitation of investor liquidity and trading volume potential. The intent of
the Forward Stock Split was to increase the marketability of the Company's
Common Stock.
The Forward Stock Split was effectuated with a record date of January
26, 2004 upon filing the appropriate documentation with NASDAQ. The Forward
Stock Split increased the Company's issued and outstanding shares of Common
Stock from 4,681,184 to approximately 14,043,552 shares of Common Stock. The
Common Stock will continue to carry a $0.00025 par value.
ICI DEBT
During the six-month period ended June 30, 2004, the Company and ICI
entered into a settlement agreement (the "Settlement Agreement"), in which the
Company settled $495,000 of debt due and owing to ICI and ICI assigned its
right, title and interest into such debt to certain designated holders of Stock
Options, and the Company agreed to accept such assignment of debt as payment for
the exercise price of $1.00 per share. The Company issued 495,000 shares of its
trading Common Stock as registered under Form S-8 to designees of IMT pursuant
to the exercise of options at $1.00 per share. The shares of Common Stock were
issued under the exemption from registration pursuant to Section 4(2) of the
1933 Securities Act.
STOCK OPTION PLAN
On December 31, 2003, the Board of Directors of the Company ratified,
approved and confirmed the adoption of a new Stock Option Plan, which provided
authorization to the Board of Directors to grant up to 4,000,000 Stock Options
to directors, officers, employees and consultants of the Company and its
subsidiaries. Options granted under the Stock Option Plan shall be at prices and
for terms as determined by the Board of Directors with terms not to exceed ten
(10) years.
During November 2003, the Company caused to be filed with the
Securities and Exchange Commission a registration statement on "Form S-8 - For
Registration Under the Securities Act of 1933 of Securities to Be Offered to
Employees Pursuant to Employee Benefit Plans". The S-8 registration statement
became effective registering Stock Options under the Stock Option Plan in the
aggregate amount of 1,000,000 Stock Options exercisable at an exercise price of
$0.50 per share.
During April 2004, the Company caused to be filed with the Securities
and Exchange Commission a registration statement on "Form S-8 - For Registration
Under the Securities Act of 1933 of Securities to Be Offered to Employees
Pursuant to Employee Benefit Plans". The S-8 registration statement became
effective registering Stock Options under the Stock Option Plan in the aggregate
amount of 500,000 Stock Options exercisable at an exercise price of $1.00 per
share.
During June 2004, the Company caused to be filed with the Securities
and Exchange Commission a registration statement on "Form S-8 - For Registration
Under the Securities Act of 1933 of Securities to Be Offered to Employees
Pursuant to Employee Benefit Plans". The S-8 registration statement became
effective registering a further 400,000 Stock Options under the Stock Option
Plan exercisable at an exercise price of $3.00 per share.
On July 2, 2004, the Board of Directors of the Company ratified,
approved and confirmed the adoption of an amendment to the Stock Option Plan,
which provided authorization to the Board of Directors to grant up to a total of
5,000,000 Stock Options to directors, officers, employees and consultants of the
Company and its subsidiaries. The 1,000,000 share option increase in Options to
be granted under the Stock Option Plan shall be at $3.00 per share for a
five-year term.
STOCK OPTIONS GRANTED
In accordance with the terms and provisions of the Stock Option Plan,
and as of the date of this Quarterly Report, the Board of Directors of the
Company has granted an aggregate of 2,000,000 Stock Options as follows
(4,000,000 Stock Options post-Forward Stock Split): (i) 50,000 Stock Options
(pre-Forward Stock Split) exercisable at $0.50 per share to Douglas Humphreys
expiring February 12, 2013; (ii) 950,000 Stock Options (pre-Forward Stock Split)
exercisable at $0.50 per share to IMT and/or IMT's employees or consultants who,
in such capacities, rendered bona fide services on behalf of the Company (which
all such shares were subject to a S-8 registration statement as filed with the
Securities and Exchange Commission); (iii) 500,000 Stock Options (post-Forward
Stock Split) exercisable at $1.00 per share to IMT and two directors (which all
such shares were subject to the S-8 registration statement referenced above as
filed with the Securities and Exchange Commission); and (iv) 500,000 Stock
Options (post-Forward Stock Split) exercisable at $3.00 per share to IMT and one
director.
STOCK OPTIONS EXERCISED/ICI DEBT SETTLEMENT
Of the 4,000,000 aggregate Stock Options granted, and as of the date of
this Annual Report: (i) 868,870 Stock Options (pre-Forward Stock Split) have
been exercised at $0.50 per share for $434,435 in settlement and assignment of
debt in accordance with the terms of the respective notice and agreements of
exercise of option (2,606,610 Stock Options post-Forward Stock Split); (ii)
81,130 Stock Options (pre-Forward Stock Split) have been exercised at $0.50 per
share for $40,565 by employees or consultants of IMT in accordance with the
terms of the respective notice and agreements of exercise of option (243,390
Stock Options post-Forward Stock Split); (iii) 495,000 Stock Options
(post-Forward Stock Split) have been exercised at $1.00 per share for $495,000
by employees or consultants of IMT in accordance with the terms of the
respective notice and agreements of exercise of option for $495,000 in
settlement of debt to ICI and assignment of debt by ICI in accordance with the
terms of the respective notice and agreements of exercise of option; (iv)
320,000 Stock Options (post-Forward Stock Split) have been exercised at $3.00
per share for proceeds of $960,000 by employees or consultants of IMT in
accordance with the terms of the respective notice and agreements of exercise of
option.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
No report required.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No report required.
ITEM 5. OTHER INFORMATION
No report required.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
31.1 Certification of Chief Executive Officer pursuant to Securities
Exchange Act of 1934 Rule 13a-14(a) or 15d-14(a).
31.2 Certification of Chief Financial Officer pursuant to Securities
Exchange Act of 1934 Rule 13a-14(a) or 15d-14(a).
32.1 Certifications pursuant to Securities Exchange Act of 1934 Rule
13a- 14(b) or 15d-14(b) and 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Reports on Form 8-K:
Report on Form 8-K filed on May 4, 2004 regarding Item 5. Other Events
and Regulation FD Disclosure.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
LEXINGTON RESOURCES, INC.
Dated: August 6, 2004 By: /s/ GRANT ATKINS
______________________________
Grant Atkins, President and
Chief Executive Officer
Dated: August 6, 2004 By: /s/ VAUGHN BARBON
______________________________
Vaughn Barbon, Chief Financial
Officer