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 September 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 November 9, 2004
Common Stock, $.00025 par value 16,999,038
Transitional Small Business Disclosure Format (check one)
Yes [ ] No [X]
PART I. FINANCIAL INFORMATION
ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
INTERMIN CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
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
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEXINGTON RESOURCES, INC.
(AN EXPLORATION STAGE COMPANY)
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(UNAUDITED)
CONSOLIDATED BALANCE SHEETS
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
LEXINGTON RESOURCES, INC.
(an exploration stage company)
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2004 2003
________________________________________________________________________________________________________
(unaudited)
ASSETS
CURRENT ASSETS
Cash $ 1,484,637 $ 351,420
Prepaid expenses 7,000 450
Accounts Receivable 185,500 -
Deferred finance fee (Note 6) 30,833 -
________________________________________________________________________________________________________
1,707,970 351,870
FIXED ASSETS, net of depreciation 3,163 -
OIL AND GAS PROPERTIES (Note 4) 2,255,353 120,000
________________________________________________________________________________________________________
$ 3,966,486 $ 471,870
========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 799,966 $ 23,221
Drilling obligations (Note 5) 862,984 350,000
Convertible Promissory Notes (Note 6) 500,000 -
Due to related parties (Note 9) 436,226 796,467
________________________________________________________________________________________________________
2,599,176 1,169,688
DRILLING OBLIGATIONS (Note 5) 225,000 -
________________________________________________________________________________________________________
2,824,176 1,169,688
________________________________________________________________________________________________________
CONTINGENCIES AND COMMITMENTS (Notes 1, 4, 5 & 8)
STOCKHOLDERS' EQUITY (DEFICIENCY) (Note 7)
Common stock $0.00025 par value: 200,000,000 shares authorized
Preferred stock, $0.001 par value: 75,000,000 shares authorized
Issued and outstanding:
16,282,584 common shares (2003 - 1,563,552) 3,871 3,211
Additional paid-in capital 7,581,827 761,937
Common stock purchase warrants 207,246 12,500
Deficit accumulated during the exploration stage (6,650,634) (1,475,466)
________________________________________________________________________________________________________
1,142,310 (697,818)
________________________________________________________________________________________________________
$ 3,966,486 $ 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 Nine months Nine months from Sept 29, 2003
Ended Ended Ended Ended (inception) to
September 30, September 30, September 30, September 30, September 30,
2004 2003 2004 2003 2004
__________________________________________________________________________________________________________________________________
(Note 1) (Note 1) (Note 1)
OIL AND GAS REVENUE $ 211,549 $ - $ 305,756 $ - $ 305,756
__________________________________________________________________________________________________________________________________
EXPENSES
Depletion 105,628 - 112,186 - 112,186
Operating costs and taxes 14,458 21,641 21,641
__________________________________________________________________________________________________________________________________
120,086 133,827 133,827
__________________________________________________________________________________________________________________________________
OPERATING INCOME 91,463 - 171,929 - 171,929
__________________________________________________________________________________________________________________________________
OTHER EXPENSES
Consulting - stock based (Note 8) - - 2,989,221 - 2,989,221
General and administrative 949,459 - 2,307,567 - 2,406,749
Interest expense 23,924 - 50,309 - 53,044
__________________________________________________________________________________________________________________________________
973,383 - 5,347,097 - 5,449,014
__________________________________________________________________________________________________________________________________
NET LOSS FOR THE PERIOD $ (881,920) $ - $(5,175,168) $ - $(5,277,085)
==================================================================================================================================
BASIC NET LOSS PER SHARE $ (0.06) $ (0.00) $ (0.35) $ (0.00)
=========================================================================================================
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 15,319,693 9,000,000 14,632,326 9,000,000
=========================================================================================================
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 period
from
For the Nine September 29,
For the Nine month period 2003 (inception)
month period ended to
ended Sept 30, September 30, September 30,
2004 2003 2004
___________________________________________________________________________________________________________________________________
(Note 1) (Note 1)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) for the period $(5,175,168) $ - $(5,217,317)
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 19,167 - 19,167
Oil and gas depletion 112,186 - 112,186
Depreciation 332 - 332
Changes in working capital assets and liabilities
Prepaid expenses (6,550) - (7,000)
Accounts receivable (185,500) - (185,500)
Accounts payable 777,745 - 762,021
Accrued interest payable 24,453 - 24,453
Accrued and unpaid fees payable 30,000 - 30,000
___________________________________________________________________________________________________________________________________
NET CASH FLOWS USED IN OPERATING ACTIVITIES (1,414,114) - (1,472,437)
___________________________________________________________________________________________________________________________________
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 (2,247,539) - (2,367,539)
___________________________________________________________________________________________________________________________________
NET CASH FLOWS USED IN INVESTING ACTIVITIES (2,251,034) - (2,370,134)
___________________________________________________________________________________________________________________________________
CASH FLOWS FROM FINANCING ACTIVITIES
Drilling obligations 737,984 - 1,087,984
Advances payable 279,306 - 207,849
Convertible Promissory Notes 500,000 - 500,000
Proceeds on sale of common stock 3,281,075 100 3,531,375
___________________________________________________________________________________________________________________________________
NET CASH FLOWS FROM FINANCING ACTIVITIES 4,798,365 100 5,327,208
___________________________________________________________________________________________________________________________________
INCREASE (DECREASE) IN CASH 1,133,217 100 1,484,637
CASH, BEGINNING OF PERIOD 351,420 - -
___________________________________________________________________________________________________________________________________
CASH, END OF PERIOD $ 1,484,637 $ 100 $ 1,484,637
===================================================================================================================================
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
SEPTEMBER 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. LLC, (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
Corporation 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 $891,206, 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 may 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 nine
months ended September 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. LLC ("Lexington").
Lexington was acquired by reverse acquisition on November 19, 2003. 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
SEPTEMBER 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
the forward stock split described in Note 7. 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
SEPTEMBER 30, 2004
________________________________________________________________________________
(unaudited)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
________________________________________________________________________________
The Company has elected to continue to account for stock-based employee
compensation arrangements 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. In addition, 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. 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.
The following table illustrates the pro forma effect on net income (loss) and
net income (loss) per share as if the Company had accounted for its stock-based
employee compensation using the fair value provisions of SFAS No. 123 using the
assumptions as described in Note 8:
For the period from
September 29, 2003
Nine months ended (inception) to
September 30, 2004 September 30, 2004
__________________________________________
Net loss for the period As reported $(5,175,168) $ -
SFAS 123 compensation expense Pro-forma (692,051) -
__________________________________________
Net loss for the period Pro-forma $ (5,867,219) $ -
==========================================
Pro-forma basic net loss per share Pro-forma $ (0.40) $ -
==========================================
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.
F-7
LEXINGTON RESOURCES, INC.
(an exploration stage company)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
________________________________________________________________________________
(unaudited)
NOTE 3 - ACQUISITION OF LEXINGTON OIL & GAS LTD. CO. LLC (CONT'D)
________________________________________________________________________________
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") re-evaluated 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).
Management of the Company decided not 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 did 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
Humphreys Purchase and Sale Agreement and the Paluca Agreement 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.
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).
MANAGEMENT COMPENSATION AGREEMENT
The Company and its subsidiary have negotiated a new compensation agreement
("New Agreement") with Humphreys for his assistance in overseeing the drilling
operations and the completion, management of wells, and for his increasing role
in development of the Company on a performance basis. Under the covenants
provided under the New Agreement and within its effective term, Humphreys, or
his designate: (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. These options were
granted in July 2004. (Refer to Note 8.)
During the third quarter the Company recorded additional compensation expense to
Humphreys of $100,000 being the estimated value of his 10% carried interest in
the Company's wells developed in the period.
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. ("Oakhills"), 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. (Refer to Note 9.)
F-8
LEXINGTON RESOURCES, INC.
(an exploration stage company)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
________________________________________________________________________________
(unaudited)
NOTE 3 - ACQUISITION OF LEXINGTON OIL & GAS LTD. CO. LLC (CONT'D)
________________________________________________________________________________
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 primarily during the
reverse takeover of Lexington Oil & Gas Ltd. Co.
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 undeveloped acreage of a
potential 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 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.
During the nine month period ended September 30, 2004 three gas wells (the
Kellster 1-5, Kyndal 2-2 and Bryce 3-2) have been put into production.
The Company is currently preparing to drill a fourth well on the Wagnon Property
(Caleigh 4-2). During the nine month period ended September 30, 2004 the Company
spent $998,662 on drilling expenditures on the Wagnon lease. (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. During the nine month period ended September 30, 2004 the Company
acquired approximately 1,930 net leasehold acres under the option. Under the
terms of the purchase of these leases, Lexington has an undivided 95% - 100%
working interest in the subject lands and a minimum 79% net revenue interest.
The terms of the leases are for two years.
PANTHER CREEK PROSPECT
In March 2004 the Company purchased a 3 year lease of approximately 300 acres
located in five separate sections to develop the Panther Creek Project in Hughes
County, Oklahoma. Lexington has an undivided 100% working interest in subject
lands and an approximate 81% net revenue interest.
SOUTH LAMAR PROSPECT
By agreement dated April 21, 2004, Lexington acquired a 100% working interest,
78.5% net revenue interest, in a three sections (960 acres) of farm-out acreage
in Hughes County, Oklahoma (the "South Lamar Prospect") with the intention to
develop coal bed methane gas producing wells. 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. The term of the lease is two years.
F-9
LEXINGTON RESOURCES, INC.
(an exploration stage company)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
________________________________________________________________________________
(unaudited)
NOTE 4 - OIL AND GAS PROPERTIES (CONT'D)
________________________________________________________________________________
H-9 PROSPECT
By agreement dated June 29, 2004, Lexington has obtained an option to purchase
an undivided 100% leasehold 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 concluded the purchase of the property on July 29, 2004. The terms of
leases acquired within the prospect are between three and four years.
On July 19, 2004 the Company acquired an additional 325 acres of gas target
drillable acreage in the northeast portion of Hughes County, Oklahoma in the
vicinity of the approximate 4,600 acres of farm out leases under acquisition
(H-9) Prospect. Drilling targets that are included in the lease include
Hartshorne and Booch Coal gas zones with a 100% Working Interest and a 78.3% Net
Revenue Interest. The acquired lease is held by production. The term of the
lease is three years.
NOTE 5: DRILLING OBLIGATIONS
________________________________________________________________________________
During the period ended December 31, 2003 Lexington, the Company, and Oakhills
entered into drilling agreements with 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 one-third of the Authorization For Expenditure ("AFE") capital
estimated at $360,000 for the drilling and completion of each of the first three
wells. As of September 30, 2004, the Company had received the total required
funding of $1,080,000 for the drilling and completion of the first three Wagnon
Lease wells and had successfully drilled and completed the Kellster 1-5 and the
Kyndal 2-2 wells. The Bryce 3-2 well, representing the third Wagnon Lease well,
was successfully drilled and completed in August, 2004. The terms of the
drilling agreements of all wells on the Wagnon Lease are the same for each well
on the property.
Lexington, the Company, and Oakhills entered into drilling agreements with the
Funding Investors for the expected drilling and completion of a fourth Wagnon
Lease well, the Caleigh 4-2 well that is expected to begin drilling no later
than the end of November 2004. As of September 30, 2004, $135,000 had been
received for the drilling of the Caleigh 4-2. As of September 30, 2004, the
Company had received a total of $1,215,000 for the drilling and completion of a
total of four wells on Company's Wagnon Lease. Subsequent to September 30, 2004,
an additional $270,000 was received, providing all AFE capital required for
intended drilling and completion of the Caleigh 4-2 well.
Wells to be drilled on the Wagnon Lease property 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 (see Note 3 - Management Compensation Agreement). A company related
to a director of the Company, Paluca, also owns a non-carried working interest
of 5% as part of capital participation funding provided by Paluca.
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 revert to an aggregate 20.1% working
interest, 15.075% net revenue interest, in the wells located on the Wagnon
Lease. Oak Hills, 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 wells located on the Wagnon Lease and the Company 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 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 September 30, 2004 is $225,000.
As of September 30, 2004, the Funding Investors have been repaid $127,016 of
their $720,000 investment in the Kellster 1-5 and Kyndall 2-2 wells.
F-10
LEXINGTON RESOURCES, INC.
(an exploration stage company)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
________________________________________________________________________________
(unaudited)
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.
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 finance fee, 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 September 30, 2004, $19,167 of the deferred finance
fee 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 charge
to shareholders' equity.
On October 29, 2004, a total of $500,000 in promissory notes and accrued
interest to that date were settled for private placement in units offered by the
Company at $1.47 per unit, with each unit comprised of one common share and one
share purchase warrant exerciseable at $1.68 per share (see Note 7).
NOTE 7: STOCKHOLDERS' EQUITY
________________________________________________________________________________
The authorized capital of the Company consists of 200,000,000 voting common
shares with $0.00025 par value, and 75,000,000 non-voting preferred shares with
$0.001 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.
STOCK OPTION EXERCISE
On January 22, 2004 the Company issued 1,200,000 pre forward split shares of its
common stock, upon the exercise of 1,200,000 stock options at $0.167 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 International, 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 November 26, 2003 the Company issued 300,000 restricted common shares at
$0.83 per share plus one-half warrant at $5.00 per share for each share
purchased, with warrant terms to December 31, 2004. The total amount raised in
this financing was $250,000. The value of the warrants was estimated to be
$12,500 and was recorded as a separate component of stockholders' equity.
F-11
LEXINGTON RESOURCES, INC.
(an exploration stage company)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
________________________________________________________________________________
(unaudited)
NOTE 7: STOCKHOLDERS' EQUITY
________________________________________________________________________________
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, with warrants terms to December 31, 2005. 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 was paid pursuant to the
transaction.
SHARE OFFERING
On September 9, 2004 the Company approved a financing of up to 4,150,000 units
of restricted common shares at a price of $1.47 per share plus a full share
purchase warrant exerciseable at a price of $1.68 per share for each share
purchased (the "September Unit(s)"). The warrants will expire six months from
the effective date of registration of the stock and warrants to be issued under
the offering. The amount approved to be raised in this financing is up to
$6,100,500. Brokers' fees payable on the September Units are: cash of 8% of
gross proceeds, brokers' warrants equal to 4% of the gross proceeds (to be
issued under the same terms as the warrants issued under the offering), and a
warrant exercise fee equal to 5% of proceeds received as a result of the future
exercise of the warrants by the investors. The Company has agreed to file a
registration statement with the Securities and Exchange Commission ("SEC")
within 45 days after completion of the transaction, covering the resale of
shares of common stock sold in the private placement or issuable upon exercise
of the warrants. Under the terms of the financing, the registration statement is
to become effective within 120 days after the filing date or the Company will be
subject to certain penalty provisions.
As of September 30, 2004, 984,232 September Units had been sold for proceeds of
$1,436,821, net of a $10,000 agent fee which was charged to additional paid in
capital. The fair value of the warrants was estimated to be $0.147 each and
$144,682 has been recorded as a separate component of stockholders' equity. In
connection with this portion of the financing, a brokers' fee payable of
$115,746 has been accrued. The fair value of the 34,448 broker warrants to be
issued to date has been estimated to be $0.147 per warrant and as a result,
$5,064 has been recorded as a separate component of stockholders' equity.
Subsequent to September 30, 2004 the Company placed an additional 716,454
September Units. Of the 716,454 units sold, 376,318 were non-brokered, and
340,136 were brokered. Proceeds received on the brokered portion of this
financing were $445,000, net of $55,000 in brokers' and administration fees.
Brokers' warrants payable total 11,905 warrants. The fair value of the broker
warrants is estimated to be $0.147 each and thus, $1,750 will be recorded as a
separate component of stockholders' equity. The non-brokered units in the amount
of 376,318 were issued upon: (1) settlement of the $500,000 convertible
promissory note and accrued interest of approximately $12,637 for 348,733 units;
and (2) pursuant to a non-brokered placee that paid $40,550 for 27,585 units.
SHARE PURCHASE WARRANTS
Share purchase warrants outstanding at September 30, 2004 are:
Weighted Average
Remaining
Range of Exercise Prices Contractual Life (yr)
Number of Shares
_______________________________________________________________________
$1.66 - $5.00 1,368,680 .95
=======================================================================
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 3,000,000 shares. The option period of options granted under the SOP
shall be up to 10 years and the option price per share shall be no less than the
fair market value of a share of common stock on the date of grant of the stock
option.
F-12
LEXINGTON RESOURCES, INC.
(an exploration stage company)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
________________________________________________________________________________
(unaudited)
NOTE 8: EMPLOYEE STOCK OPTION PLAN (CONT'D)
________________________________________________________________________________
On December 31, 2003, the terms of the Company's SOP were altered, whereby the
authorized total number of options was increased from 3,000,000 shares to
4,000,000 shares.
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. As of September 30, 2004, 4,200,000 options under the Company's current
SOP have been granted.
A summary of the Company's stock options as of Sept. 30, 2004, and changes
during the period ended is presented below:
Sept. 30,2004
________________________________
Number of Weighted 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
Grant July 26,2004 200,000 3.00/share
________________________________
Exercisable at September 30, 2004 535,000 $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.
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 of
these 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. And, in June 2004, 320,000
of these stock options were exercised at $3.00 per share for proceeds of
$960,000.
On July 12, 2004, 200,000 stock options were granted at $3.00 per share to
Humphreys. The term of these options is five years. The fair value of these
options at the date of grant of $692,051 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 222% and in
accordance with the provisions of SFAS 148, has been disclosed on a pro-forma
basis in Note 2.
NOTE 9: RELATED PARTY TRANSACTIONS
________________________________________________________________________________
Although the formal arrangement for services to be provided by ICI, a minority
shareholder and consulting services agent to the Company, ended on December 31,
2003, a month to month arrangement to provide services to the Company was 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 balance of the period ended
September 30, 2004. As of September 30, 2004 the Company owed ICI a total in
loans of $71,196 and interest
F-13
LEXINGTON RESOURCES, INC.
(an exploration stage company)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
________________________________________________________________________________
(unaudited)
NOTE 9: RELATED PARTY TRANSACTIONS (CONT'D)
________________________________________________________________________________
of $3,032 accrued at 10% per annum on outstanding loans, for a total of $74,228
(2003 - $1,263,762). Subsequent to September 30, 2004 the Company repaid ICI
$72,761 in loans and accrued interest leaving a total of $3,033 in accrued
interest still owing to ICI.
The Company previously entered into a contract with International Market Trend
AG ("IMT"), a private company to whom certain of the Company's directors and
officers provide consulting services relating to oil and gas industry and market
development services. The Company incurred $30,000 in fees to IMT for the three
month period ended September 30, 2004 and has incurred $60,000 for the nine
month period ended September 30, 2004. (2003 - nil). Of the 1,000,000 stock
options granted on February 2, 2004, 895,000 stock options were granted to IMT,
or its designates.
During the period ended March 31, 2004 the Company settled $200,000 of the
amounts due to ICI in exchange for the issuance of 1,200,000 shares of the
Company's common stock by way of exercising options at $0.167 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 September 30, 2004 the Company has recorded $27,500 as a receivable from
Humphreys as full payment to be received for an additional 5% working interest
in each of the Kellster 1-5, the Kyndal 2-2, and the Bryce (Refer to Notes 3, 4
and 5.)
Refer to Notes 5 and 8.
NOTE 10: INCOME TAXES
________________________________________________________________________________
The Company has adopted FASB No. 109 for reporting purposes. As of September 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 Sept. 30, 2004 Period ended Sept. 30, 2004
___________________________________________________________________________________________________
Cash paid during the period for:
Interest $ - $ -
Income taxes $ - $ -
___________________________________________________________________________________________________
During the nine month period ended September 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); and
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).
F-14
LEXINGTON RESOURCES, INC.
(an exploration stage company)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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
________________________________________________________________________________
Refer to Note 7.
F-15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATION
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.
In addition, our business and operations are subject to substantial
risks, which increase the uncertainty inherent in such forward-looking
statements. In light of the significant uncertainties inherent in the
forward-looking information included herein, the inclusion of such information
should not be regarded as a representation by us or any other person that our
objectives or plans will be achieved. The Private Securities Litigation Reform
Act of 1995 contains a safe harbor for forward-looking statements on which we
rely in making such disclosures. In connection with this safe harbor we are
hereby identifying important factors that could cause actual results to differ
materially from those contained in any forward-looking statements made by or on
our behalf. Any such statement is qualified by reference to the cautionary
statements included in this Quarterly Report.
OVERVIEW
Lexington Resources, Inc. is a corporation organized under the laws of
the State of Nevada (the "Company"). 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 "Share Exchange Agreement"). As a result of the Share Exchange Agreement,
the acquisition of Lexington has been accounted for as a reverse acquisition
with Lexington being treated as the accounting parent and the Company, the legal
parent, being treated as the accounting subsidiary.
The Company currently trades on the OTC Bulletin Board under the symbol
"LXRS.OB" and on the Frankfurt and Berlin Stock Exchanges under the symbol "LXR"
and WKN: A0BKLP.
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's wholly owned subsidiary, Lexington previously acquired a
section of farm-out acreage in Pittsburg County, Oklahoma for the development
and production of coal bed methane gas (the "Wagnon Property"). The Company has
reported production results for three of the coal bed methane gas wells located
on the Wagnon Property. During the quarter ended September 30, 2004, the coal
bed methane gross gas production produced gross revenues to Lexington of
approximately $211,549.
We have obtained an independent reserve and economic evaluation report
on the Wagnon Property as of September 1, 2004 conducted by Fletcher Lewis
Engineering, Inc. The report states that proved developed producing future net
reserves for three producing wells in the Wagnon Property are 1,176,008 MCF or
$4,353,737 and a 10% discount present worth of $3,446,997 utilizing a gas price
of $4.57 MCF.
As of the date of this Quarterly Report, the Company plans to drill its
fourth horizontal gas well (the "Caleigh #4-2). Site preparations have been
completed in advance of the drilling rig's arrival. Management of the Company
anticipates that the Caleigh #4-2 well will utilize existing base infrastructure
and gas gathering systems already established earlier by the Company on the
Wagnon lease. Management anticipates that a larger compressor will be installed
in connection with the Caleigh #4-2 well to better effect overall production.
Management believes that drilling will commence no later than the end of
November 2004 and be similar in drilled depths and drilling protocols as those
previously experienced in the drilling in the Wagnon Property. The Company has
entered into an additional drilling agreements with private investors for the
funding of the Caleigh #4-2 well. As of September 30, 2004, $135,000 has been
received by the Company for the drilling of the Caleigh #4-2 well. Subsequent to
September 30, 2004, the Company received an additional $270,000 for a total of
$405,000, which provides all estimated capital required for intended drilling
and completion of the Caleigh #4-2 well.
On November 9, 2004, the Company announced that it had reached an
agreement with Oak Hills Drilling and Operating, LLC, ("Oakhills Drilling") to
drill a ten well program. Oakhills Drilling is an Oklahoma based private
drilling contractor that will provide the Company with drill rig and drilling
expertise required for Lexington to execute its planned drilling initiatives
according to the Company's timetable.
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 79% net
revenue interest in the additional acreage.
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 provisions of the
Agreement: (i) Mr. Humphreys will be paid compensation of $7,500 per month
effective April 1, 2004; (ii) the Company will assign 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 (such Stock Options were
granted in July 2004). During the third quarter the Company recorded additional
compensation expense to Humphreys of $100,000 being the estimated value of his
10% carried interest in the Company's wells developed in the period.
On November 1, 2004 the Company completed the sale of an aggregate of
1,351,953 Units (the "Units") of the Company at a purchase price of $1.47 per
Unit for gross proceeds of approximately $1,987,371. Further, the holder of two
outstanding promissory notes from the Company, in the aggregate principal amount
of $500,000, exchanged the promissory notes for Units, resulting in the issuance
of an additional 348,733 Units. Each Unit consists of one share of the Company's
$0.00025 par value common stock (the "Common Stock") and one warrant to purchase
a share of the Corporation's common stock at an exercise price of $1.68 (the
"Warrants"). The Warrants are exercisable for a term of 180 days after a
registration statement filed by the Corporation for the resale of the Common
Stock and the shares of common stock underlying the Warrants has been declared
effective by the Securities and Exchange Commission.
RESULTS OF OPERATION
As a result of the Share Exchange Agreement, discussed above, the
acquisition of Lexington has been accounted for as a reverse acquisition with
Lexington being treated as the accounting parent and the Company, the legal
parent, being treated as the accounting subsidiary. In accordance with reverse
acquisition accounting, the consolidated results of operations of the Company
include those of Lexington for all periods presented and those of the Company
subsequent to the date of the reverse acquisition. Because Lexington had no
operations for the period September 29, 2003 to September 30, 2003, comparative
results of operation are not presented or discussed.
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2004 COMPARED TO THE-MONTH PERIOD ENDED
SEPTEMBER 30, 2003
During the three-month period ended September 30, 2004, the Company
generated $211,549 in gross revenue primarily from the sale of gas produced from
the coal bed methane gas wells on the Wagnon Property which started production
in mid February 2004. Depletion and operating costs during the three-month
period ended September 30, 2004 was $120,086, resulting in operating income
during the period of $91,463.
During the three-month period ended September 30, 2004, the Company
recorded $973,383 in other expenses. Other expenses consisted of: (i)
$949,459 as general and administrative expenses, and (ii) $23,924 as interest
expense. General and administrative expenses consisted of corporate overhead,
financial and administrative contracted services, marketing, and consulting
costs.
As a result of the above, the Company's net loss for the three-month
period ended September 30, 2004 was approximately ($881,920) or ($0.06) per
share.
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2004 COMPARED TO NINE-MONTH PERIOD ENDED
SEPTEMBER 30, 2003
During the nine-month period ended September 30, 2004, the Company
generated $305,756 in gross revenue from the sale of gas produced from coal bed
methane gas wells on the Wagnon Property, which as a result of depletion and
operating costs was reduced by $133,827 resulting in operating income of
$171,929.
During the nine-month period ended September 30, 2004, the Company
recorded $5,347,097 in other expenses which consisted primarily of: (i)
$2,989,221 in stock-based compensation relating to the fair valuation of stock
options granted to consultants; (ii) $2,307,567 as general and administrative
expenses; and (iii) $50,309 as interest expense. General and administrative
expenses generally include corporate overhead, financial and administrative
contracted services, marketing, and consulting costs.
As a result of the above, the Company's net loss for the nine-month
period ended September 30, 2004 was $5,175,168.
LIQUIDITY AND CAPITAL RESOURCES
Generally, the Company has financed operations to date through the
proceeds of the private placement of equity and debt securities. In connection
with the Company's business plan, management anticipates additional increases in
operating expenses and capital expenditures relating to: (i) oil and gas
operating properties, (ii) drilling initiatives, and (iii) property
acquisitions. The Company intends to finance these expenses with further
issuances of securities by the Company and revenues from operations. Thereafter,
the Company expects it will need to raise additional capital and increase its
revenues to meet long-term operating requirements.
The Company has not generated positive cash flows from operating
activities. For the nine-month period ended September 30, 2004, net cash flows
used in operating activities was $1,414,114, consisting primarily of a net loss
of $5,175,168. Net cash flows used in operating activities was adjusted by
$2,989,221 to reconcile the non-cash expense of the grant of 2,200,000 stock
options.
During the nine-months ended September 30, 2004, net cash flows used in
investing activities was $2,251,034, which was primarily the result of the
acquisition of the oil and gas properties.
During the nine-months ended September 30, 2004, net cash flows from
financing activities was $4,798,368 pertaining primarily to $3,281,075 received
from proceeds on sale of Common Stock, $500,000 received pursuant to the issue
of convertible promissory notes and $737,984 in drilling obligations from
private third parties.
As of the nine-month period ended September 30, 2004, the Company's
current assets were $1,707,970 and its current liabilities were $2,599,176,
resulting in a working capital deficit of $891,206. We expect that working
capital requirements will continue to be funded through a combination of our
existing funds, cash flow from operations and further issuances of securities.
Our working capital requirements are expected to increase in line with the
growth of our business.
Additional issuances of equity or convertible debt securities will
result in dilution to the Company's current shareholders. Further, 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.
The independent auditors' report accompanying our December 31, 2003
consolidated financial statements contain an explanatory paragraph expressing
substantial doubt about the Company's ability to continue as a going concern.
The consolidated financial statements have been prepared "assuming that the
Company will continue as a going concern," which contemplates that the Company
will realize its assets and satisfy its liabilities and commitments in the
ordinary course of business.
ITEM 3. 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 September
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
nine-month period ended September 30, 2004 that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On approximately September 10, 2004, the Company filed a Complaint for
Replevin and Damages naming its transfer agent, X-Clearing Corporation, as
defendant, Case No. 04-CV-7556, in the District Court for the City and County of
Denver, State of Colorado (the "Complaint for Replevin"), regarding a dispute
between the Company and X-Clearing Corporation concerning the termination of
X-Clearing Corporation as the Company's transfer agent and the termination fees
which may be due and owing as a result of such termination. The Complaint
alleged that: (i) the defendant was wrongfully retaining the transfer records of
the Company and the Company was entitled to immediate and permanent possession,
use and disposition of the transfer records; (ii) the defendant breached its
contract with the Company; and (iii) the defendant breached its fiduciary duties
and obligations to the Company.
On August 27, 2004, the Company and X-Clearing Corporation entered into
a settlement agreement (the "Settlement Agreement"). Pursuant to the Settlement
Agreement, the terms of which are confidential, the Company received its
transfer records and such records have been provided to the Company's new
transfer agent, "Transfer Online" of Portland, Oregon, and all outstanding
issues relating to this litigation are fully settled.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
PRIVATE PLACEMENT OFFERING OF 1,351,953 UNITS AND
EXCHANGE OF CONVERTIBLE PROMISSORY NOTE
On November 1, 2004 the Company completed the sale of an aggregate of
1,351,953 Units (the "Units") of the Company at a purchase price of $1.47 per
Unit for gross proceeds of approximately $1,987,371. Further, the holder of two
outstanding promissory notes from the Company, in the aggregate principal amount
of $500,000, exchanged the promissory notes for Units, resulting in the issuance
of an additional 348,733 Units. Each Unit consists of one share of the Company's
$0.00025 par value common stock (the "Common Stock") and one warrant to purchase
a share of the Corporation's common stock at an exercise price of $1.68 (the
"Warrants"). The Warrants are exercisable for a term of 180 days after a
registration statement filed by the Corporation for the resale of the Common
Stock and the shares of common stock underlying the Warrants has been declared
effective by the Securities and Exchange Commission.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
On approximately July 21, 2004, the board of directors of the Company
approved the selection of a new transfer agent for the Company. The Company's
transfer agent is: Transfer Online, Inc., 317 SW Alder Street, Second Floor,
Portland, Oregon 97204, tel. (503) 227-2950, fax (503) 227-6874.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits:
10.1. Agreement between Lexington Resources, Inc. and Douglas Humphreys
dated July 12, 2004.
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 Certification of Chief Executive Officer 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.
32.2 Certification of Chief Financial Officer 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.
B. Reports on Form 8-K:
None.
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: November 15, 2004 By: /s/ GRANT ATKINS
___________________________
Grant Atkins
President and
Chief Executive Officer
Dated: November 15, 2004 By: /s/ VAUGHN BARBON
___________________________
Vaughn Barbon
Chief Financial Officer