LEXINGTON RESOURCES, INC.
A NEVADA CORPORATION
RELATING TO 1,947,039 WARRANTS TO PURCHASE SHARES OF LEXINGTON
RESOURCES, INC. COMMON STOCK AND UP TO 2,140,486 SHARES OF
LEXINGTON RESOURCES, INC. COMMON STOCK
The prospectus and the registration statement, of which it is a part, are
being filed with the SEC to satisfy our obligations to the recipients of certain
shares of common stock and warrants (the "Selling Shareholders") of Lexington
Resources, Inc. Accordingly, the prospectus and the registration statement
cover:
- The resale by certain Selling Shareholders of 1,700,686 shares of our
common stock which were issued from September 30, 2004 through
November 2, 2004 in connection with private placements;
- The resale by certain Selling Shareholders and their transferees,
donees or successors of 1,747,039 Warrants to Purchase Shares of
Common Stock at an exercise price of $1.68 per share (the "November
Warrants"). The November Warrants contain provisions for specified
anti-dilution adjustments and are exercisable for a term of 180 days
after a registration statement filed by of Lexington Resources, Inc.
for the resale of the common stock and the shares of common stock
underlying the November Warrants has been declared effective by the
Securities and Exchange Commission;
- The resale by certain Selling Shareholders of the 1,747,039 shares of
common stock issuable upon the exercise of the November Warrants;
- The issuance by Lexington Resources, Inc. of 1,747,039 shares of
common stock upon exercise of the November Warrants by holders other
than the original holders of the November Warrants;
- The resale by certain Selling Shareholders of 439,800 shares of our
common stock which were issued on May 3, 2004 in connection with
private placements;
- The resale by certain Selling Shareholders and their transferees,
donees or successors of the 200,000 Warrants to Purchase Shares of
Common Stock at an exercise price of $5.00 per share (the "April
Warrants"). The April Warrants contain provisions for specified
anti-dilution adjustments and expire on December 31, 2005;
- The resale by certain Selling Shareholders of 200,000 shares of common
stock issuable upon exercise of the April Warrants; and
- The issuance by Lexington Resources, Inc. of 200,000 shares of common
stock upon exercise of the April Warrants by holders other than the
original holders of the April Warrants.
The shares of common stock, warrants to purchase shares of common stock,
and the shares of common stock underlying the warrants were issued in private
placements by Lexington Resources, Inc. in April, September, October and
November 2004.
Our common stock is traded on the National Association of Securities
Dealers OTC Bulletin Board under the symbol "LXRS.OB". On January 18, 2005, the
closing bid price of our common stock was $1.54.
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 9 OF THIS PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is January 21, 2005.
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ABOUT THIS PROSPECTUS
This prospectus is part of a resale registration statement. The selling
shareholders ("Selling Shareholders") may sell some or all of their shares in
transactions from time to time.
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not authorized anyone else to provide you
with different information. If anyone provides you with different information,
you should not rely upon it. You should assume that the information appearing in
this prospectus, as well as the information we file with the Securities and
Exchange Commission ("SEC") and incorporate by reference in this prospectus is
accurate only as of the date of the documents containing the information. As
used in this prospectus, the terms "we", "us", "our", the "Company", and
"Lexington" mean Lexington Resources, Inc. and our wholly-owned subsidiary,
Lexington Oil & Gas Ltd. Co. LLC unless otherwise indicated. All dollar amounts
refer to United States dollars unless otherwise indicated.
PROSPECTUS SUMMARY
The following summary highlights selected information contained in this
prospectus. This summary does not contain all the information you should
consider before investing in the securities. Before making an investment
decision, you should read the entire prospectus carefully, including the "Risk
Factors" section, the financial statements and the notes to the financial
statements.
GENERAL
Lexington Resources, Inc. was incorporated under the laws of the State of
Nevada in 1996 under the name "All Wrapped Up, Inc." During 1997, the Company
changed it name to Intergold Corporation and was engaged in the business of
exploration of gold and precious metals in the United States. On November 20,
2003 we filed an amendment to our articles of incorporation changing our name to
"Lexington Resources, Inc."
On November 19, 2003, Intergold Corporation (now known as Lexington
Resources, Inc.), Lexington Oil & Gas Ltd. Co. LLC, an Oklahoma limited
liability company ("Lexington Oil & Gas"), and the shareholders of Lexington
(the "Lexington Oil & Gas Shareholders") entered into a share exchange agreement
(the "Share Exchange Agreement"). Pursuant to the terms of the Share Exchange
Agreement, we acquired from the Lexington Oil & Gas Shareholders one hundred
percent (100%) of the issued and outstanding shares of common stock of Lexington
Oil & Gas and issued 3,000,000 shares of our common stock to the Lexington Oil &
Gas Shareholders in proportion to their respective holdings in Lexington Oil &
Gas.
In accordance with the terms of the Agreement: (i) Lexington Oil & Gas
became our wholly-owned subsidiary; (ii) we changed our name to "Lexington
Resources, Inc." and our trading symbol to "LXRS"; and (iii) our sole business
operations are as a natural resource exploration company engaged in the
acquisition and development of oil and natural gas properties in the United
States.
This acquisition has been accounted for as a reverse acquisition with
Lexington Oil & Gas being treated as the accounting parent and Lexington
Resources, Inc., the legal parent, being treated as the accounting subsidiary.
Accordingly, the consolidated results of operations of the Company include those
of Lexington Oil & Gas for the period from its inception on September 29, 2003
and those of Lexington Resources, Inc. since the date of the reverse
acquisition.
Our executive offices are located at 7473 West Lake Mead Road Las Vegas,
Nevada 89128 and our telephone number is (702) 382-5139.
OUR BUSINESS
We are a natural resource exploration and production company currently
engaged in the exploration, acquisition and development of oil and gas
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properties in the United States. We hold a 100% working interest and a 75% net
revenue interest in approximately 590 gross acres of a gas lease located in
Pittsburg County, Oklahoma (the "Wagnon Lease") and have drilled, completed, and
are producing gas from the first three wells drilled on this lease. We expect to
drill a fourth well in the near future of an estimated total four to five wells
on the Wagnon lease. We have utilized private funding for the capital required
to drill wells on this lease. After invested capital is repaid to the working
interest parties who provided funding, we will back into a 53.2% working
interest in net operating cash flows from wells drilled on this lease.
During fiscal 2004 we consummated the acquisition of prospects in the
Arkoma Basin in the State of Oklahoma, including: 1,932 gross leasehold acres in
the Coal Creek Prospect, 292 gross acres in the Panther Creek Prospect, 320
gross acres in the Middlecreek Prospect, 1,144 gross acres in the South Lamar
Prospect, and 5,170 gross acres in the in the H-9 Prospect. We currently have an
aggregate of approximately 590 gross developed and 8,858 gross undeveloped acres
pursuant to leases and/or concessions.
THE OFFERING
The prospectus and the registration statement, of which it is a part, are
being filed with the SEC to satisfy our obligations to the recipients of certain
shares of common stock and warrants (the "Selling Shareholders") of Lexington
Resources, Inc. Accordingly, the prospectus and the registration statement
cover:
- The resale by certain Selling Shareholders of 1,700,686 shares of our
common stock which were issued from September 30, 2004 through
November 2, 2004 in connection with private placements;
- The resale by certain Selling Shareholders and their transferees,
donees or successors of 1,747,039 Warrants to Purchase Shares of
Common Stock at an exercise price of $1.68 per share (the "November
Warrants"). The November Warrants contain provisions for specified
anti-dilution adjustments and are exercisable for a term of 180 days
after a registration statement filed by of Lexington Resources, Inc.
for the resale of the common stock and the shares of common stock
underlying the November Warrants has been declared effective by the
Securities and Exchange Commission;
- The resale by certain Selling Shareholders of the 1,747,039 shares of
common stock issuable upon the exercise of the November Warrants;
- The issuance by Lexington Resources, Inc. of 1,747,039 shares of
common stock upon exercise of the November Warrants by holders other
than the original holders of the November Warrants;
- The resale by certain Selling Shareholders of 439,800 shares of our
common stock which were issued on May 3, 2004 in connection with
private placements;
- The resale by certain Selling Shareholders and their transferees,
donees or successors of the 200,000 Warrants to Purchase Shares of
Common Stock at an exercise price of $5.00 per share (the "April
Warrants"). The April Warrants contain provisions for specified
anti-dilution adjustments and expire on December 31, 2005;
- The resale by certain Selling Shareholders of 200,000 shares of common
stock issuable upon exercise of the April Warrants; and
- The issuance by Lexington Resources, Inc. of 200,000 shares of common
stock upon exercise of the April Warrants by holders other than the
original holders of the April Warrants.
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The Selling Shareholders or their permitted transferees or other successors
in interest may, but are not required to, sell their common stock in a number of
different ways and at varying prices. See "Plan of Distribution" on page 46 for
a further description of how the Selling Shareholders may dispose of the shares
covered by this prospectus.
THE NOVEMBER WARRANTS AND THE APRIL WARRANTS
The November Warrants give the holders the option to purchase up to
1,747,039 shares of our common stock at an exercise price of $1.68 per share.
The April Warrants give the holders the option to purchase up to 200,000 shares
of our common stock at an exercise price of $5.00 per share. Both the November
Warrants and the April Warrants contain provisions for specified anti-dilution
adjustments. The November Warrants are exercisable for a term of 180 days after
a registration statement filed by Lexington Resources, Inc. for the resale of
the common stock and the shares of common stock underlying the November Warrants
has been declared effective by the Securities and Exchange Commission. The April
Warrants expire on December 31, 2005.
We have agreed to use best efforts to list the November Warrants and the
April Warrants for trading on a national securities exchange. However, we can
give no assurance that we will be able to do so. In addition, we can give no
assurance as to the liquidity or development of any market for the November
Warrants or the April Warrants, the ability of a holder to sell the November
Warrants or the April Warrants or any portion thereof or the price at which a
holder would be able to sell the November Warrants or the April Warrants or any
portion thereof. The trading price of the November Warrants or the April
Warrants will depend on the price of our common stock, the market for similar
securities and other factors, including economic conditions and our financial
condition, performance and prospects.
NUMBER OF SHARES OUTSTANDING
There were 16,999,038 shares of our common stock issued and outstanding as
at November 25, 2004. If the November Warrants and the April Warrants are fully
exercised, there will be 18,946,077 shares of our common stock issued and
outstanding.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the shares of our
common stock being offered for sale by the Selling Shareholders or from the sale
of the November Warrants or the April Warrants. We may, however, receive cash
consideration in connection with the exercise of the November Warrants or the
April Warrants for cash. If the all of the November Warrants or the April
Warrants are fully exercised for cash, we would realize proceeds, before
expenses, in the amount of $3,935,025.52, subject to any adjustment due to the
anti-dilution provisions of the November Warrants and the April Warrants. We
will incur all costs associated with this prospectus and related registration
statement.
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RISK FACTORS
An investment in our common stock involves a number of very significant
risks. You should carefully consider the following risks and uncertainties in
addition to other information in this prospectus in evaluating our company and
its business before purchasing shares of our common stock. Our business,
operating results and financial condition could be seriously harmed due to any
of the following risks. The risks described below are all of the material risks
that we are currently aware of that are facing our company. Additional risks not
presently known to us may also impair our business operations. You could lose
all or part of your investment due to any of these risks.
RISKS RELATED TO THIS OFFERING AND OUR COMMON STOCK
SALES OF A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK INTO THE PUBLIC
MARKET BY THE SELLING STOCKHOLDERS MAY RESULT IN SIGNIFICANT DOWNWARD PRESSURE
ON THE PRICE OF OUR COMMON STOCK AND COULD AFFECT THE ABILITY OF OUR
STOCKHOLDERS TO REALIZE THE CURRENT TRADING PRICE OF OUR COMMON STOCK.
Sales of a substantial number of shares of our common stock in the public
market could cause a reduction in the market price of our common stock. We had
16,999,038 shares of common stock issued and outstanding as of November 25,
2004. When this registration statement is declared effective, the Selling
Stockholders will be able to resell up to 2,140,486 shares of our common stock.
As a result, a substantial number of our shares of common stock may be issued
and may be available for immediate resale, which could have an adverse effect on
the price of our common stock. As a result of any such decreases in price of our
common stock, purchasers who acquire shares from the Selling Stockholders may
lose some or all of their investment.
Further, to the extent any of the Selling Stockholders exercise any of the
1,947,039 common stock purchase warrants, and then resell the shares of common
stock issued to them upon such exercise (subject to applicable securities law
restrictions), the price of our common stock may decrease due to the additional
shares of common stock in the market.
As of November 25, 2004, there are 12,417,935 outstanding shares of our
common stock that are restricted securities as that term is defined in Rule 144
under the Securities Act of 1933, as amended (the "Securities Act"). Although
the Securities Act and Rule 144 place certain prohibitions on the sale of
restricted securities, restricted securities may be sold into the public market
under certain conditions. Further, as of November 25, 2004, there are an
aggregate of 2,632,039 options and warrants outstanding.
Any significant downward pressure on the price of our common stock as the
selling stockholders sell their shares of our common stock could encourage short
sales by the selling stockholders or others. Any such short sales could place
further downward pressure on the price of our common stock.
THE TRADING PRICE OF OUR STOCK ON THE OTC BULLETIN BOARD HAS BEEN AND MAY
CONTINUE TO FLUCTUATE SIGNIFICANTLY AND STOCKHOLDERS MAY HAVE DIFFICULTY
RESELLING THEIR SHARES.
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Our Common Stock has traded as low as $0.17 and as high as $7.46 (adjusted
for pre split share prices on a 3 new shares for 1 old share effected January
28, 2004). In addition to volatility associated with Bulletin Board securities
in general, the value of your investment could decline due to the impact of any
of the following factors upon the market price of our common stock:
o Changes in the world wide price for oil or natural gas;
o Disappointing results from our discovery or development efforts;
o Failure to meet our revenue or profit goals or operating budget;
o Decline in demand for our common stock;
o Downward revisions in securities analysts' estimates or changes in
general market conditions;
o Technological innovations by competitors or in competing technologies;
o Lack of funding generated for operations;
o Investor perception of our industry or our prospects; and
o General economic trends
In addition, stock markets have experienced extreme price and volume
fluctuations and the market prices of securities have been highly volatile.
These fluctuations are often unrelated to operating performance and may
adversely affect the market price of our common stock. As a result, investors
may be unable to resell their shares at a fair price and you may lose all or
part of your investment.
RISKS RELATED TO OUR BUSINESS
OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE WE HAVE A LIMITED OPERATING
HISTORY.
In considering whether to invest in our common stock, you should consider
that there is only limited historical financial and operating information
available on which to base your evaluation of our performance. Our inception was
September 29, 2003 and, as a result, we have a limited operating history.
WE HAVE A HISTORY OF OPERATING LOSSES AND THERE CAN BE NO ASSURANCES WE WILL BE
PROFITABLE IN THE FUTURE.
We have a history of operating losses, expect to continue to incur losses,
and may never be profitable, and we must be considered to be in the development
stage. Further, we have been dependent on sales of our equity securities and
debt financing to meet our cash requirements. We have incurred losses totaling
approximately $5,175,168 for the nine months ending September 30, 2004, and
aggregate losses of $5,277,085 from September 29, 2003 (inception) to September
30, 2004. As of September 30, 2004, we had an accumulated deficit of $6,650,634.
Further, we do not expect positive cash flow from operations in the near term.
There is no assurance that actual cash requirements will not exceed our
estimates. In particular, additional capital may be required in the event that:
- the costs to acquire additional leases are more than we currently
anticipate;
- drilling and completion costs for additional wells increase beyond our
expectations; or
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- we encounter greater costs associated with general and administrative
expenses or offering costs.
Our development of and participation in an increasingly larger number of
oil and gas prospects has required and will continue to require substantial
capital expenditures. The uncertainty and factors described throughout this
section may impede our ability to economically find, develop, exploit, and
acquire natural gas and oil reserves. As a result, we may not be able to achieve
or sustain profitability or positive cash flows from operating activities in the
future.
WE HAVE RECEIVED A GOING CONCERN OPINION FROM OUR INDEPENDENT AUDITORS REPORT
ACCOMPANYING OUR DECEMBER 31, 2003 CONSOLIDATED FINANCIAL STATEMENTS.
The independent auditor's report accompanying our December 31, 2003
consolidated financial statements contains an explanatory paragraph expressing
substantial doubt about our 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 we will realize our
assets and satisfy our liabilities and commitments in the ordinary course of
business. Our ability to continue as a going concern is dependent on raising
additional capital to fund our operations and ultimately on generating future
profitable operations. There can be no assurance that we will be able to raise
sufficient additional capital or eventually have positive cash flow from
operations to address all of our cash flow needs. If we are not able to find
alternative sources of cash or generate positive cash flow from operations, our
business and shareholders will be materially and adversely affected.
WE WILL REQUIRE ADDITIONAL FUNDING IN THE FUTURE.
Based upon our historical losses from operations, we will require
additional funding in the future. If we cannot obtain capital through financings
or otherwise, our ability to execute our development plans and achieve
production levels will be greatly limited. Our current development plans require
us to make capital expenditures for the exploration and development of our oil
and natural gas properties. Historically, we have funded our operations through
the issuance of equity and short-term debt financing arrangements. We may not be
able to obtain additional financing on favorable terms, if at all. Our future
cash flows and the availability of financing will be subject to a number of
variables, including potential production and the market prices of oil and
natural gas. Further, debt financing could lead to a diversion of cash flow to
satisfy debt-servicing obligations and create restrictions on business
operations. If we are unable to raise additional funds, it would have a material
adverse effect upon our operations.
OUR ACQUISITIONS MAY NOT BE SUCCESSFUL.
As part of our growth strategy, we intend to acquire additional oil and gas
production properties. Such acquisitions may pose substantial risks to our
business, financial condition, and results of operations. In pursuing
acquisitions, we will compete with other companies, many of which have greater
financial and other resources to acquire attractive properties. Even if we are
successful in acquiring additional properties, some of the properties may not
produce revenues at anticipated levels or failure to conduct drilling on
prospects within specified time periods may cause the forfeiture of the lease in
that prospect. There can be no assurance that we will be able to successfully
integrate acquired properties, which could result in substantial costs and
7
delays or other operational, technical, or financial problems. Further,
acquisitions could disrupt ongoing business operations. If any of these events
occur, it would have a material adverse effect upon our operations and results
from operations.
OUR EXPLORATORY AND DEVELOPMENT DRILLING AND PRODUCTION OPERATIONS MAY NOT BE
SUCCESSFUL.
We intend to drill additional wells and continue production operations on
our current wells. There can be no assurance that our future drilling activities
will be successful, and we cannot be sure that our overall drilling success rate
or our production operations within a particular area will not decline. We may
not recover all or any portion of our capital investment in the wells or the
underlying leaseholds. Unsuccessful drilling activities would have a material
adverse effect upon our results of operations and financial condition. The cost
of drilling, completing, and operating wells is often uncertain, and a number of
factors can delay or prevent drilling operations including: (i) unexpected
drilling conditions; (ii) pressure or irregularities in formation; (iii)
equipment failures or accidents; (iv) adverse weather conditions; and (iv)
shortages or delays in availability of drilling rigs and delivery of equipment.
Further, the coal beds in the Arkoma Basin in the State of Oklahoma from
which we produce methane gas frequently contain water, which may hamper our
ability to produce gas in commercial quantities. The amount of coal bed methane
that can be commercially produced depends upon the coal quality, the original
gas content of the coal seam, the thickness of the seam, the reservoir pressure,
the rate at which gas is released from the coal, and the existence of any
natural fractures through which the gas can flow to the well bore. However, coal
beds frequently contain water that must be removed in order for the gas to
detach from the coal and flow to the well bore. The average life of a coal bed
well is only five to six years. Our ability to remove and dispose of sufficient
quantities of water from the coal seam will determine whether or not we can
produce coal bed methane in commercial quantities.
There is no guarantee that the potential drilling locations that we have or
acquire in the future will ever produce natural gas or oil, which could have a
material adverse effect upon our results of operations.
A DECLINE IN THE PRICE OF OUR COMMON STOCK COULD AFFECT OUR ABILITY TO RAISE
FURTHER WORKING CAPITAL AND ADVERSELY IMPACT OUR OPERATIONS.
A decline in the price of our common stock could result in a reduction in
the liquidity of our common stock and a reduction in our ability to raise
additional capital for our operations. Because our operations to date have been
principally financed through the sale of equity securities, a decline in the
price of our common stock could have an adverse effect upon our liquidity and
our continued operations. A reduction in our ability to raise equity capital in
the future would have a material adverse effect upon our business plan and
operations, including our ability to continue our current operations. If our
stock price declines, we may not be able to raise additional capital or generate
funds from operations sufficient to meet our obligations.
WE ARE A NEW ENTRANT INTO THE OIL AND GAS INDUSTRY WITHOUT PROFITABLE OPERATING
HISTORY AND ONLY HAVE PROVED DEVELOPED PRODUCING FUTURE NET REVENUE OF
$3,446,997 AT A 10% DISCOUNTED PRESENT WORTH.
Since September 29, 2003 (inception), our activities have been limited to
organizational efforts, obtaining working capital and acquiring and developing a
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very limited number of properties. As a result, there is limited information
regarding production or revenue generation. Further, a Reserve and Economic
Evaluation dated September 9, 2004 prepared by Fletcher Lewis Engineering, Inc.
shows proved developed producing future net revenue of $3,446,997 at a 10%
discounted present worth. As a result, our future revenues may be limited.
The Wagnon Lease is the oil and gas property where most of our drilling
capital resources have been employed. This prospect is still in the development
stage, and estimates made at this time by our contracted independent reservoir
engineer as to proved or probable oil and natural gas reserves cannot be
guaranteed that sufficient reserves will be maintained or new reserves
discovered for production. Although three wells have been drilled on the Wagnon
Lease to date, the absence of a sustained production history provides risk
regarding independent reserve estimates. Property lease positions in other
locations that have been purchased by the Company are unproven, having little to
no production, which prevents our engineers from assigning any proved or
probable reserves to these other properties.
NO ASSURANCE OF THE ACCURACY OF THE ESTIMATES OF OIL AND GAS RESERVES.
We have obtained a report on the estimated reserves on our leases on the
Wagnon Lease. Reserve estimates are based upon various assumptions, including
assumptions relating to oil and gas prices, drilling and operating expenses,
production levels, capital expenditures, taxes and availability of funds. No one
can measure underground accumulations of oil and natural gas in an exact way. As
a result, estimated quantities of proved reserves, projections of future
production rates, and the timing of development expenditures may be incorrect.
Any significant variance from these assumptions to actual figures could greatly
affect our estimates of reserves, the economically recoverable quantities of oil
and natural gas attributable to any particular group of properties, the
classifications of reserves based on risk of recovery, and estimates of the
future net cash flows.
Further, the present value of future net cash flows from our proved
reserves is not necessarily the same as the current market value of our
estimated oil and natural gas reserves. Actual future net cash flows from our
oil and natural gas properties also will be affected by factors such as:
o actual prices we receive for oil and natural gas;
o the amount and timing of actual production;
o supply of and demand for oil and natural gas; and
o changes in governmental regulations or taxation.
The timing of both our production and our incurrence of expenses in
connection with the development and production of oil and natural gas properties
will affect the timing of actual future net cash flows from proved reserves, and
thus their actual present value. In addition, the 10% discount factor used when
calculating discounted future net cash flows may not be the most appropriate
discount factor based on interest rates in effect from time to time and risks
associated with us or the oil and natural gas industry in general. Actual future
production, oil and gas prices, revenues, taxes, development expenditures,
operating expenses and quantities of recoverable oil and gas reserves will most
9
likely vary from those estimates and any significant variance could have a
material adverse effect on our future results from operations.
UNLESS WE REPLACE OUR OIL AND NATURAL GAS RESERVES, OUR RESERVES AND PRODUCTION
WILL DECLINE, WHICH WOULD ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Producing oil and natural gas reservoirs generally are characterized by
declining production rates that vary depending upon reservoir characteristics
and other factors. Thus, our future oil and natural gas reserves and production
and, therefore, our cash flow and income are highly dependent on our success in
efficiently developing and exploiting our current reserves and economically
finding or acquiring additional recoverable reserves. We may not be able to
develop, find or acquire additional reserves to replace our current and future
production at acceptable costs.
PROSPECTS THAT WE DECIDE TO DRILL MAY NOT YIELD NATURAL GAS OR OIL IN
COMMERCIALLY VIABLE QUANTITIES.
We describe some of our current prospects in this prospectus. Our prospects
are in various stages of evaluation, ranging from a prospect that is ready to
drill to a prospect that will require substantial additional seismic data
processing and interpretation. However, the use of seismic data and other
technologies and the study of producing fields in the same area will not enable
us to know conclusively prior to drilling and testing whether natural gas or oil
will be present or, if present, whether natural gas or oil will be present in
sufficient quantities to recover drilling or completion costs or to be
economically viable. From inception through September 30, 2004, we participated
in drilling a total of 3 gross wells. If we drill additional wells that we
identify as dry holes in our current and future prospects, our drilling success
rate may decline and materially harm our business. In sum, the cost of drilling,
completing and operating any wells is often uncertain and new wells may not be
productive.
WE ARE SUBSTANTIALLY DEPENDENT UPON ONLY ONE PROPERTY LOCATED IN THE ARKOMA
BASIN, WHICH CAUSES OUR RISK TO BE CONCENTRATED.
Our three producing wells are located on one property and all of our other
leases are located in the Arkoma Basin in the State of Oklahoma. As a result, we
may be disproportionately exposed to the impact of delays or interruptions of
production from these wells caused by significant governmental regulation,
transportation capacity constraints, curtailment of production or interruption
of transportation of natural gas produced from the wells in this basin.
PROPERTIES THAT WE BUY MAY NOT PRODUCE AS PROJECTED AND WE MAY BE UNABLE TO
DETERMINE RESERVE POTENTIAL, IDENTIFY LIABILITIES ASSOCIATED WITH THE PROPERTIES
OR OBTAIN PROTECTION FROM SELLERS AGAINST THEM.
One of our growth strategies is to capitalize on opportunistic acquisitions
of oil and natural gas reserves. However, our reviews of acquired properties are
inherently incomplete because it generally is not feasible to review in depth
every individual property involved in each acquisition. A detailed review of
records and properties may not necessarily reveal existing or potential
problems, nor will it permit a buyer to become sufficiently familiar with the
properties to assess fully their deficiencies and potential. Further,
environmental problems, such as ground water contamination, are not necessarily
10
observable even when an inspection is undertaken. Acquiring properties with
liabilities would have a material adverse effect upon our results of operations.
THE POTENTIAL PROFITABILITY OF OIL AND GAS VENTURES DEPENDS UPON FACTORS BEYOND
THE CONTROL OF OUR COMPANY
The potential profitability of oil and gas properties is dependent upon
many factors beyond our control. For instance, world prices and markets for oil
and gas are unpredictable, highly volatile, potentially subject to governmental
fixing, pegging, controls, or any combination of these and other factors, and
respond to changes in domestic, international, political, social, and economic
environments. Additionally, due to worldwide economic uncertainty, the
availability and cost of funds for production and other expenses have become
increasingly difficult, if not impossible, to project. These and other changes
and events may materially affect our financial performance.
Adverse weather conditions can also hinder drilling operations. A
productive well may become uneconomic in the event water or other deleterious
substances are encountered which impair or prevent the production of oil and/or
gas from the well. In addition, production from any well may be unmarketable if
it is impregnated with water or other deleterious substances. The marketability
of oil and gas, which may be acquired or discovered will be affected by numerous
factors beyond our control. These factors include, but are not limited to, the
proximity and capacity of oil and gas pipelines and processing equipment, market
fluctuations of prices, taxes, royalties, land tenure, allowable production and
environmental protection. These factors cannot be accurately predicted and the
combination of these factors may result in us not receiving an adequate return
on our invested capital.
WE ARE DEPENDENT UPON TRANSPORTATION AND STORAGE SERVICES PROVIDED BY THIRD
PARTIES.
We will be dependent on the transportation and storage services offered by
various interstate and intrastate pipeline companies for the delivery and sale
of our gas supplies. Both the performance of transportation and storage services
by interstate pipelines and the rates charged for such services are subject to
the jurisdiction of the Federal Energy Regulatory Commission or state regulatory
agencies. An inability to obtain transportation and/or storage services at
competitive rates could hinder our processing and marketing operations and/or
affect our sales margins.
OUR RESULTS OF OPERATIONS ARE DEPENDENT UPON MARKET PRICES FOR OIL AND NATURAL
GAS, WHICH FLUCTUATE WIDELY AND ARE BEYOND OUR CONTROL.
Our revenue, profitability, and cash flow depend upon the prices and demand
for oil and natural gas. The markets for these commodities are very volatile and
even relatively modest drops in prices can significantly affect our financial
results and impede our growth. Prices received also will affect the amount of
future cash flow available for capital expenditures and may affect our ability
to raise additional capital. Lower prices may also affect the amount of natural
gas and oil that can be economically produced from reserves either discovered or
acquired.
Factors that can cause price fluctuations include:
11
o The level of consumer product demand;
o Weather conditions;
o Domestic and foreign governmental regulations;
o The price and availability of alternative fuels;
o Technical advances affecting energy consumption;
o Proximity and capacity of oil and gas pipelines and other
transportation facilities;
o Political conditions in natural gas and oil producing regions;
o The domestic and foreign supply of natural gas and oil;
o The ability of members of Organization of Petroleum Exporting
Countries to agree to and maintain oil price and production controls;
o The price of foreign imports; and
o Overall domestic and global economic conditions.
The availability of a ready market for our oil and gas depends upon
numerous factors beyond our control, including the extent of domestic production
and importation of oil and gas, the relative status of the domestic and
international economies, the proximity of our properties to gas gathering
systems, the capacity of those systems, the marketing of other competitive
fuels, fluctuations in seasonal demand and governmental regulation of
production, refining, transportation and pricing of oil, natural gas and other
fuels.
THE OIL AND GAS INDUSTRY IN WHICH WE OPERATE INVOLVES MANY OPERATING RISKS THAT
CAN CAUSE SUBSTANTIAL LOSSES.
Our drilling activities are subject to many risks, including the risk that
we will not discover commercially productive reservoirs. Drilling for oil and
natural gas can be unprofitable, not only from dry holes, but from productive
wells that do not produce sufficient revenues to return a profit. In addition,
our drilling and producing operations may be curtailed, delayed or canceled as a
result of other factors, including:
o Fires;
o Explosions;
o Blow-outs and surface cratering;
o Uncontrollable flows of underground natural gas, oil, or formation
water;
o Natural disasters;
o Facility and equipment failures;
o Title problems;
o Shortages or delivery delays of equipment and services;
o Abnormal pressure formations; and
o Environmental hazards such as natural gas leaks, oil spills, pipeline
ruptures and discharges of toxic gases.
If any of these events occur, we could incur substantial losses as a result
of:
o Injury or loss of life;
o Severe damage to and destruction of property, natural resources or
equipment;
o Pollution and other environmental damage;
o Clean-up responsibilities;
o Regulatory investigation and penalties;
12
o Suspension of our operations; or
o Repairs necessary to resume operations.
If we were to experience any of these problems, it could affect well bores,
gathering systems and processing facilities, any one of which could adversely
affect our ability to conduct operations. We may be affected by any of these
events more than larger companies, since we have limited working capital. We
currently maintain $2 million of liability insurance on bodily injury per year,
for up to 25 wells, which includes coverage for pollution, environmental damage
and chemical spills. However, for some risks, we may elect not to obtain
insurance if we believe the cost of available insurance is excessive relative to
the risks presented. In addition, pollution and environmental risks generally
are not fully insurable. If a significant accident or other event occurs and is
not fully covered by insurance, it could adversely affect operations. Moreover,
we cannot provide assurance that we will be able to maintain adequate insurance
in the future at rates considered reasonable.
THE OIL AND GAS INDUSTRY IS HIGHLY COMPETITIVE AND THERE IS NO ASSURANCE THAT WE
WILL BE SUCCESSFUL IN ACQUIRING THE LEASES.
The oil and natural gas industry is intensely competitive, and we compete
with other companies that have greater resources. Many of these companies not
only explore for and produce oil and natural gas, but also carry on refining
operations and market petroleum and other products on a regional, national or
worldwide basis. These companies may be able to pay more for productive oil and
natural gas properties and exploratory prospects or define, evaluate, bid for
and purchase a greater number of properties and prospects than our financial or
human resources permit. In addition, these companies may have a greater ability
to continue exploration activities during periods of low oil and natural gas
market prices. Our larger competitors may be able to absorb the burden of
present and future federal, state, local and other laws and regulations more
easily than we can, which would adversely affect our competitive position. Our
ability to acquire additional properties and to discover reserves in the future
will be dependent upon our ability to evaluate and select suitable properties
and to consummate transactions in a highly competitive environment. In addition,
because we have fewer financial and human resources than many companies in our
industry, we may be at a disadvantage in bidding for exploratory prospects and
producing oil and natural gas properties.
THERE CAN BE NO ASSURANCE WE WILL BE ABLE TO OBTAIN DRILLING EQUIPMENT TO MEET
OUR DRILLING REQUIREMENTS.
There is currently a high demand for drilling equipment in the Arkoma Basin
in the State of Oklahoma. We have experienced delays in the past in obtaining
drilling rigs due to the high drilling demand in the Arkoma Basin where we have
been concentrating our coal bed methane and other gas targeted production and
leasing programs. While we have entered into a drilling agreement with Oak Hills
Drilling and Operating, LLC, to drill a ten well program, there can be no
assurance that we will be able to obtain the requisite drilling equipment to
meet our planned drilling initiatives according to our timetable. In the event
that we are unable to obtain drilling equipment to conduct our exploration
operations, it could have a material adverse effect upon our business and our
results of operations.
13
THE MARKETABILITY OF NATURAL RESOURCES WILL BE AFFECTED BY NUMEROUS FACTORS
BEYOND OUR CONTROL WHICH MAY RESULT IN US NOT RECEIVING AN ADEQUATE RETURN ON
INVESTED CAPITAL TO BE PROFITABLE OR VIABLE.
The marketability of natural resources which may be acquired or discovered
by us will be affected by numerous factors beyond our control. These factors
include market fluctuations in oil and gas pricing and demand, the proximity and
capacity of natural resource markets and processing equipment, governmental
regulations, land tenure, land use, regulation concerning the importing and
exporting of oil and gas and environmental protection regulations. The exact
effect of these factors cannot be accurately predicted, but the combination of
these factors may result in us not receiving an adequate return on invested
capital to be profitable or viable.
OIL AND GAS OPERATIONS ARE SUBJECT TO COMPREHENSIVE REGULATION WHICH MAY CAUSE
SUBSTANTIAL DELAYS OR REQUIRE CAPITAL OUTLAYS IN EXCESS OF THOSE ANTICIPATED
CAUSING AN ADVERSE EFFECT ON OUR COMPANY.
Oil and gas operations are subject to federal, state, and local laws
relating to the protection of the environment, including laws regulating removal
of natural resources from the ground and the discharge of materials into the
environment. Oil and gas operations are also subject to federal, state, and
local laws and regulations which seek to maintain health and safety standards by
regulating the design and use of drilling methods and equipment. Various permits
from government bodies are required for drilling operations to be conducted; no
assurance can be given that such permits will be received. Environmental
standards imposed by federal, provincial, or local authorities may be changed
and any such changes may have material adverse effects on our activities.
Moreover, compliance with such laws may cause substantial delays or require
capital outlays in excess of those anticipated, thus causing an adverse effect
on us. Additionally, we may be subject to liability for pollution or other
environmental damages which we may elect not to insure against due to
prohibitive premium costs and other reasons. To date we have not been required
to spend material amounts on compliance with environmental regulations. However,
we may be required to do so in future and this may affect our ability to expand
or maintain our operations.
EXPLORATION AND PRODUCTION ACTIVITIES ARE SUBJECT TO CERTAIN ENVIRONMENTAL
REGULATIONS WHICH MAY PREVENT OR DELAY THE COMMENCEMENT OR CONTINUANCE OF OUR
OPERATIONS.
In general, our exploration and production activities are subject to
certain federal, state and local laws and regulations relating to environmental
quality and pollution control. Such laws and regulations increase the costs of
these activities and may prevent or delay the commencement or continuance of a
given operation. Compliance with these laws and regulations has not had a
material effect on our operations or financial condition to date. Specifically,
we are subject to legislation regarding emissions into the environment, water
discharges and storage and disposition of hazardous wastes. In addition,
legislation has been enacted which requires well and facility sites to be
abandoned and reclaimed to the satisfaction of state authorities. However, such
laws and regulations are frequently changed and we are unable to predict the
ultimate cost of compliance. Generally, environmental requirements do not appear
to affect us any differently or to any greater or lesser extent than other
companies in the industry.
We believe that our operations comply, in all material respects, with all
applicable environmental regulations. However, we are not fully insured against
all possible environmental risks.
14
ANY CHANGE TO GOVERNMENT REGULATION/ADMINISTRATIVE PRACTICES MAY HAVE A NEGATIVE
IMPACT ON OUR ABILITY TO OPERATE AND OUR PROFITABILITY.
The laws, regulations, policies or current administrative practices of any
government body, organization or regulatory agency in the United States or any
other jurisdiction, may be changed, applied or interpreted in a manner which
will fundamentally alter our ability to carry on business. The actions, policies
or regulations, or changes thereto, of any government body or regulatory agency,
or other special interest groups, may have a detrimental effect on us. Any or
all of these situations may have a negative impact on our ability to operate
and/or our profitably.
WE MAY BE UNABLE TO RETAIN KEY EMPLOYEES OR CONSULTANTS OR RECRUIT ADDITIONAL
QUALIFIED PERSONNEL.
Our extremely limited personnel means that we would be required to spend
significant sums of money to locate and train new employees in the event any of
our employees resign or terminate their employment with us for any reason. Due
to our limited operating history and financial resources, we are entirely
dependent on the continued service of Grant Atkins, Chief Executive Officer and
Douglas Humphreys, Drilling Operations Manager of Lexington Oil & Gas. Further,
we do not have key man life insurance on either of these individuals. We may not
have the financial resources to hire a replacement if one or both of our
officers were to die. The loss of service of either of these employees could
therefore significantly and adversely affect our operations.
OUR OFFICERS AND DIRECTORS MAY BE SUBJECT TO CONFLICTS OF INTEREST.
Our officers and directors serve only part time and are subject to
conflicts of interest. Each of our executive officers and directors serves only
on a part time basis. Each devotes part of his working time to other business
endeavors, including consulting relationships with other oil and gas entities,
and has responsibilities to these other entities. Such conflicts include
deciding how much time to devote to our affairs, as well as what business
opportunities should be presented to the company. Because of these
relationships, our officers and directors will be subject to conflicts of
interest.
ONE OF OUR SHAREHOLDERS MAY EXERCISE VOTING POWER OF MORE THAN 50% OF OUR COMMON
STOCK.
Orient Exploration, Inc. ("Orient Exploration") owns 9,000,000 shares of
our common stock, or 52.9% of our outstanding common stock as of November 25,
2004. Due to its stock ownership, Orient Exploration may be in a position to
elect the board of directors and, therefore, to control our business and affairs
including certain significant corporate actions such as acquisitions, the sale
or purchase of assets, and the issuance and sale of our securities. Further,
Orient Exploration may be able to prevent or cause a change in control. We also
may be prevented from entering into transactions that could be beneficial to us
without Orient Exploration's consent. The interest of our largest shareholder
may differ from the interests of other shareholders.
15
ADDITIONAL ISSUANCES OF EQUITY SECURITIES MAY RESULT IN DILUTION TO OUR EXISTING
STOCKHOLDERS.
Our Articles of Incorporation authorize the issuance of 200,000,000 shares
of common stock and 75,000,000 shares of preferred stock. The board of directors
has the authority to issue additional shares of our capital stock to provide
additional financing in the future and the issuance of any such shares may
result in a reduction of the book value or market price of the outstanding
shares of our common stock. If we do issue any such additional shares, such
issuance also will cause a reduction in the proportionate ownership and voting
power of all other stockholders. As a result of such dilution, if you acquire
shares of our common stock from the Selling Shareholders, your proportionate
ownership interest and voting power will be decreased accordingly. Further, any
such issuance could result in a change of control.
POSSIBLE ISSUANCE OF PREFERRED STOCK.
We are authorized to issue up to 75,000,000 shares of preferred stock. The
preferred stock may be issued in one or more series, the terms of which may be
determined at the time of issuance by the Board of Directors, without further
action by shareholders, and may include voting rights, preferences as to
dividends and liquidation, conversion and redemption rights and sinking fund
provisions as determined by the Board of Directors. Although we have no present
plans to issue any shares of preferred stock, the issuance of preferred stock in
the future could adversely affect the rights of the holders of Common Stock and
reduce the value of the Common Stock.
OUR COMMON STOCK IS CLASSIFIED AS A "PENNY STOCK" UNDER SEC RULES WHICH LIMITS
THE MARKET FOR OUR COMMON STOCK.
Because our stock is not traded on a stock exchange or on the NASDAQ
National Market or the NASDAQ Small Cap Market, and because the market price of
the common stock is less than $5 per share, the common stock is classified as a
"penny stock." Our stock has not traded above $5 per share since June 28, 2004.
SEC Rule 15g-9 under the Exchange Act imposes additional sales practice
requirements on broker-dealers that recommend the purchase or sale of penny
stocks to persons other than those who qualify as an "established customer" or
an "accredited investor." This includes the requirement that a broker-dealer
must make a determination that investments in penny stocks are suitable for the
customer and must make special disclosures to the customers concerning the risk
of penny stocks. Many broker-dealers decline to participate in penny stock
transactions because of the extra requirements imposed on penny stock
transactions. Application of the penny stock rules to our common stock reduces
the market liquidity of our shares, which in turn affects the ability of holders
of our common stock to resell the shares they purchase, and they may not be able
to resell at prices at or above the prices they paid.
A MAJORITY OF OUR DIRECTORS AND OFFICERS ARE OUTSIDE THE UNITED STATES, WITH THE
RESULT THAT IT MAY BE DIFFICULT FOR INVESTORS TO ENFORCE WITHIN THE UNITED
STATES ANY JUDGMENTS OBTAINED AGAINST US OR ANY OF OUR DIRECTORS OR OFFICERS.
A majority of our directors and officers are nationals and/or residents of
countries other than the United States, and all or a substantial portion of such
persons' assets are located outside the United States. As a result, it may be
difficult for investors to effect service of process on our directors or
officers, or enforce within the United States or Canada any judgments obtained
against us or our officers or directors, including judgments predicated upon the
civil liability provisions of the securities laws of the United States or any
16
state thereof. Consequently, you may be effectively prevented from pursuing
remedies under U.S. federal securities laws against them. In addition, investors
may not be able to commence an action in a Canadian court predicated upon the
civil liability provisions of the securities laws of the United States. The
foregoing risks also apply to those experts identified in this prospectus that
are not residents of the United States.
NEVADA LAW AND OUR ARTICLES OF INCORPORATION MAY PROTECT OUR DIRECTORS FROM
CERTAIN TYPES OF LAWSUITS.
Nevada law provides that our officers and directors will not be liable to
us or our stockholders for monetary damages for all but certain types of conduct
as officers and directors. Our Bylaws permit us broad indemnification powers to
all persons against all damages incurred in connection with our business to the
fullest extent provided or allowed by law. The exculpation provisions may have
the effect of preventing stockholders from recovering damages against our
officers and directors caused by their negligence, poor judgment or other
circumstances. The indemnification provisions may require us to use our limited
assets to defend our officers and directors against claims, including claims
arising out of their negligence, poor judgment, or other circumstances.
FORWARD-LOOKING STATEMENTS
This prospectus contains "forward-looking statements," as that term is used
in federal securities laws, about our financial condition, results of operations
and business. These statements include, among others:
o statements concerning the benefits that we expect will result from our
business activities and certain transactions that we have completed,
such as increased revenues, decreased expenses and avoided expenses
and expenditures; and
o statements of our expectations, beliefs, future plans and strategies,
anticipated developments and other matters that are not historical
facts.
These statements may be made expressly in this document or may be
incorporated by reference to documents that we will file with the SEC. You can
find many of these statements by looking for words such as "believes,"
"expects," "anticipates," "estimates" or similar expressions used in this
prospectus. These statements are only predictions and involve known and unknown
risks, uncertainties and other factors, including the risks in the section
entitled "Risk Factors", that may cause our or our industry's actual results,
levels of activity, performance or achievements to be materially different from
any future results, levels of activity, performance or achievements expressed or
implied by these forward-looking statements. We caution you not to put undue
reliance on these statements, which speak only as of the date of this
Prospectus. Further, the information contained in this prospectus or
incorporated herein by reference is a statement of our present intention and is
based on present facts and assumptions, and may change at any time and without
notice, based on changes in such facts or assumptions.
While these forward-looking statements, and any assumptions upon which they
are based, are made in good faith and reflect our current judgment regarding the
direction of our business, actual results will almost always vary, sometimes
materially, from any estimates, predictions, projections, assumptions or other
17
future performance suggested herein. Except as required by applicable law,
including the securities laws of the United States, we do not intend to update
any of the forward-looking statements to conform these statements to actual
results. The safe harbor for forward-looking statements provided in the Private
Securities Litigation Reform Act of 1995 does not apply to the offering made in
this prospectus.
USE OF PROCEEDS
The shares of common stock offered hereby are being registered for the
account of the Selling Shareholders named in this prospectus. As a result, all
proceeds from the sales of the common stock will go to the Selling Shareholders
and we will not receive any proceeds from the resale of the common stock by the
selling stockholders. . We will, however, incur all costs associated with this
prospectus and related registration statement. We may, however, receive cash
consideration in connection with the exercise of the warrants for cash. If the
warrants are exercised in full for cash, we would realize proceeds, before
expenses, in the amount of $3,935,025.52, subject to any adjustment to the
exercise price and the number of shares due to the anti-dilution provisions of
the warrants. Any proceeds realized upon the exercise of the warrants will first
be allocated to general and administrative expenses and to the extent that
proceeds exceed the amounts that management believes are necessary to be
reserved for general and administrative expenses then the excess will be
allocated to oil and gas exploration and development activities.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Shares of our common stock are traded on the OTC Bulletin Board under the
symbol "LXRS.OB" and on the Frankfurt and Berlin stock exchanges under the
symbol "LXR"; WKN: AOBKLP. The market for our common stock is limited, volatile
and sporadic. The following table sets forth the high and low sales prices
relating to our common stock on a quarterly basis for the last two fiscal years
as quoted by the NASDAQ. These quotations reflect inter-dealer prices without
retail mark-up, mark-down, or commissions, and may not reflect actual
transactions.
QUARTER ENDED HIGH BID LOW BID
September 30, 2004 $5.40 $1.40
June 30, 2004 $7.46 $2.30
March 31, 2004 $4.95 $2.95
December 31, 2003 $4.25 $0.17
September 30, 2003 $2.50 $0.17
June 30, 2003 $2.00 $1.00
March 31, 2003 $3.50 $0.70
December 31, 2002 $3.50 $0.50
As of November 25, 2004, we had 150 shareholders of record, which does not
include shareholders whose shares are held in street or nominee names. We
believe that there are approximately 2,485 beneficial owners of our common
stock.
DIVIDEND POLICY
No dividends have ever been declared by the Board of Directors on our
common stock. Our losses do not currently indicate the ability to pay any cash
dividends, and we do not indicate the intention of paying cash dividends either
on our common stock in the foreseeable future.
18
SECURITIES AUTHORIZED FOR ISSUANCE UNDER COMPENSATION PLANS
We have one equity compensation plan, the Lexington Resources Inc. Stock
Option Plan. The table set forth below presents the securities authorized for
issuance with respect to the Stock Option Plan under which equity securities are
authorized for issuance as of December 31, 2003:
EQUITY COMPENSATION PLAN INFORMATION
Number of Weighted- Number of securities
securities to average exercise remaining available for
be issued upon price of future issuance under equity
exercise outstanding compensation plans
of outstanding options, (excluding securities
options, warrants and reflected in the
Plan Category warrants and rights rights 1st column)
_____________________ ___________________ _________________ ____________________________
Equity Compensation 0 0 0
Plans approved by
security holders
Equity Compensation 50,000 $5.00 450,000
Plans not approved by
security holders
Total 50,000 $5.00 450,000
Lexington Resources, Inc. Stock Option Plan
On August 7, 2003, the Board of Directors of the Company unanimously
approved and adopted a stock option plan (the "Stock Option Plan"). The purpose
of the Stock Option Plan is to advance the interests of the Company and its
shareholders by affording key personnel of the Company an opportunity for
investment in the Company and the incentive advantages inherent in stock
ownership in the Company. Pursuant to the provisions of the Stock Option Plan,
stock options (the "Stock Options") will be granted only to key personnel of the
Company, generally defined as a person designated by the Board of Directors upon
whose judgment, initiative and efforts the Company may rely including any
director, officer, employee or consultant of the Company.
The Stock Option Plan is administered by the Board of Directors of the
Company, which shall determine (i) the persons to be granted Stock Options under
the Stock Option Plan; (ii) the number of shares subject to each option, the
exercise price of each Stock Option; and (iii) whether the Stock Option shall be
exercisable at any time during the option period of ten (10) years or whether
the Stock Option shall be exercisable in installments or by vesting only. The
Stock Option Plan currently provides authorization to the Board of Directors to
grant Stock Options to purchase a total number of shares of Common Stock of the
Company, not to exceed 1,000,000 shares as at the date of adoption by the Board
of Directors of the Stock Option Plan. Effective December 31, 2003, the Board of
Directors of the Company amended the Stock Option Plan to increase the number of
shares under the Stock Option Plan to 4,000,000 shares.
19
At the time a Stock Option is granted under the Stock Option Plan, the
Board of Directors shall fix and determine the exercise price at which shares of
Common Stock of the Company may be acquired; provided, however, that any such
exercise price shall not be less than that permitted under the rules and
policies of any stock exchange or over-the-counter market which is applicable to
the Company.
In the event an optionee who is a director or officer of the Company ceases
to serve in that position, any Stock Option held by such optionee generally may
be exercisable within up to ninety (90) calendar days after the effective date
that his position ceases, and after such 90-day period any unexercised Stock
Option shall expire. In the event an optionee who is an employee or consultant
of the Company ceases to be employed by the Company, any Stock Option held by
such optionee generally may be exercisable within up to sixty (60) calendar days
(or up to thirty (30) calendar days where the optionee provided only investor
relations services to the Company) after the effective date that his employment
ceases, and after such 60- or 30-day period any unexercised Stock Option shall
expire.
The Board of Directors shall determine the acceptable form of consideration
for exercising a Stock Option, including the method of payment. Such
consideration may consist entirely of : (i) cash; (ii) check, (iii) promissory
note; (iv) other shares which (A) in the case of shares acquired upon exercise
of a Stock Option, have been owned by the optionee for more than six months on
the date of surrender, and (B) have a fair market value on the date of surrender
equal to the aggregate exercise price of the shares as to which said Stock
Option shall be exercised; (v) consideration received by the Company under a
cashless exercise program implemented by the Company in connection with the
Stock Option Plan; (vi) a reduction in the amount of any Company liability to
the optionee; (vii) such other consideration and method of payment for the
issuance of shares to the extent permitted by applicable laws; or (viii) any
combination of the foregoing methods of payment. Notwithstanding the foregoing,
any method of payment other than in case may be used only with the consent of
the Board of Directors or if and to the extent so provided in an agreement.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with our
consolidated audited financial statements and the related notes that appear
elsewhere in this registration statement. The following discussion contains
forward-looking statements that reflect our plans, estimates and beliefs. Our
actual results could differ materially from those discussed in the forward
looking statements. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed below and elsewhere in this
registration statement, particularly in the section entitled "Risk Factors"
beginning on page 9 of this registration statement. Our consolidated audited
financial statements are stated in United States Dollars and are prepared in
accordance with United States Generally Accepted Accounting Principles.
PLAN OF OPERATION
We are a natural resource exploration and production company engaged in the
exploration, acquisition and development of oil and gas properties in the United
States. We currently have an aggregate of approximately 590 gross developed
acres and 8,858 gross undeveloped acres pursuant to leases and/or concessions.
20
Our strategy is to complete the further acquisition of additional coal bed
methane prospects that fall within the criteria of providing a geological basis
for development of drilling initiatives that can provide near term revenue
potential and fast drilling capital repatriation from production cash flows
while expanding reserves. We anticipate that our 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 and other gas producing domains, and to implement the drilling of new
wells to develop reserves and to provide revenues. We plan to continue building
and increasing a strategic base of proven reserves and production base within
Oklahoma's Arkoma Basin.
Our ability to continue to expand land acquisitions and drilling
opportunities during the next 6 months is dependent on adequate capital
resources being available. Our plans currently include the drilling of our
fourth coal bed methane gas well on our Wagnon Lease, the Caleigh #4-2 coal bed
methane gas well in the near term, and to raise additional capital to allow
further drilling and land acquisitions. Assuming adequate funding is available
to us, we intend to continue to drill on our existing leases and acquire further
drillable lands.
We will require additional funding to implement our plan of operations. We
anticipate that these funds primarily will be raised through equity and debt
financing or from other available sources of financing. If we raise additional
funds through the issuance of equity or convertible debt securities, it may
result in the dilution in the equity ownership of investors in our common stock.
Further, such securities might have rights, preferences or privileges senior to
our common stock. There can be no assurance that additional financing will be
available upon acceptable terms, if at all. If adequate funds are not available
or are not available on acceptable terms, we may be unable to take advantage of
prospective new opportunities or acquisitions, which could significantly and
materially restrict our operations.
We do not expect to purchase any significant equipment or increase
significantly the number of our employees during the next 12 months. Our current
business strategy is to obtain resources under contract where possible because
management believes that this strategy, at its current level of development,
provides the best services available in the circumstances, leads to lower
overall costs, and provides the best flexibility for our business operations.
SUMMARY OF FINANCIAL DATA
The summarized consolidated financial data set forth in the table below is
derived from and should be read in conjunction with our audited consolidated
financial statements for the period from inception to the year ended December
31, 2003 and the interim consolidated financial statements for the nine-month
period ended September 30, 2004, including the notes to those financial
statements which are included elsewhere in this prospectus.
The acquisition of Lexington by Lexington Resources, Inc. on November 19,
2003, has been accounted for as a reverse acquisition with Lexington being
treated as the accounting parent and Lexington Resources, Inc., 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 Lexington
Resources, Inc. since the date of the reverse acquisition. There are no
comparative financial statements presented as Lexington had no operations in
2002, and only began operations on September 29, 2003. The acquisition of
Lexington has been accounted for using the purchase method of accounting. All
significant intercompany transactions and account balances have been eliminated.
There are no comparative financial statements presented as Lexington Oil & Gas
had no operations in 2002, and only began operations on September 29, 2003.
21
FOR THE PERIOD FROM INCEPTION
(SEPTEMBER 29, 2003) TO
DECEMBER 31, 2003
Revenues $0
Net Loss $42,149
FOR THE NINE-MONTH PERIOD
ENDED SEPTEMBER 30, 2004
(UNAUDITED)
Oil and Gas Revenue $305,756
Depletion 112,186
Operating costs and taxes 21,641
Operating Income 171,929
Consulting Expenses- Stock Based 2,989,221
General and Administrative 2,307,567
Interest Expense 50,309
____________
Net Loss for the Period $(5,175,168)
AS OF SEPTEMBER 30, 2004
(UNAUDITED)
Working Capital $(891,206)
Total Assets 3,966,486
Total Number of Shares of Common Stock
Outstanding 16,282,584
Deficit (6,650,634)
Total Stockholders Equity $1,142,310
22
RESULTS OF OPERATIONS
FOR THE NINE-MONTH PERIOD AT SEPTEMBER 30, 2004
During the nine-month period ended September 30, 2004, we generated
$305,756 in gross revenue from the sale of gas produced from coal bed methane
gas wells on the Wagnon Lease, which as a result of depletion and operating
costs and taxes was reduced by $133,827 resulting in operating income of
$171,929.
During the nine-month period ended September 30, 2004, we 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 in stock-based compensation relating to the fair
valuation of stock options granted to consultants; (ii) $2,329,208 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, our net loss for the nine-month period ended
September 30, 2004 was $5,175,168.
FOR THE PERIOD FROM SEPTEMBER 29, 2003 (INCEPTION) TO DECEMBER 31, 2003
Our net loss for fiscal year ended December 31, 2003 was approximately
($42,149). During fiscal year ended December 31, 2003, we recorded no income.
During the fiscal year ended December 31, 2003, we recorded operating
expenses of $42,149, consisting primarily of: (I) $23,578 in general and
administrative expenses; (ii) $9,410 in interest expense; and (iii) $9,161 in
professional fees. General and administrative expenses generally include
corporate overhead, financial and administrative contracted services and
consulting costs.
LIQUIDITY AND CAPITAL RESOURCES
We have not generated positive cash flows from operating activities. For
the nine-month period ended September 30, 2004, net cash flow 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 our oil and gas properties.
During the nine-month period ended September 30, 2004, net cash flow from
financing activities was $4,798,368 pertaining primarily to $3,281,075 received
from proceeds on the sale of our common stock, $500,000 received pursuant to the
issue of convertible promissory notes, and $737,984 in proceeds for drilling
from private third parties.
23
As at September 30, 2004, our current assets were $1,707,970, 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.
On November 1, 2004, we completed the sale of an aggregate of 1,351,953
units (the "Units") in the Company at a purchase price of $1.47 per Unit for
gross proceeds of approximately $1,987,371. Further, the holder of two of our
outstanding promissory notes 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 our common stock
and one warrant to purchase a share of our 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 us for the resale of the common stock
and the shares of common stock underlying the Warrants has been declared
effective by the SEC.
Existing working capital and anticipated cash flow are expected to be
adequate to fund our operations over the next six months. We have no lines of
credit or other bank financing arrangements. Generally, we have financed
operations to date through the proceeds of the private placement of equity and
debt securities. In connection with our 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. We intend to finance these expenses with further
issuances of securities and revenues from operations. Thereafter, we expect we
will need to raise additional capital and increase its revenues to meet
long-term operating requirements.
Additional issuances of equity or convertible debt securities will result
in dilution to our current shareholders. Further, such securities might have
rights, preferences or privileges senior to our 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, we may not be
able to take advantage of prospective new business endeavors or opportunities,
which could significantly and materially restrict our business operations.
The independent auditors' report accompanying our December 31, 2003
consolidated financial statements contains 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.
MATERIAL COMMITMENTS
At this time we are committed to drilling one additional well on the Wagnon
Lease, the Caleigh #4-2 well. Subsequent to September 30, 2004, we received an
additional $270,000, which provides all the capital required for intended
drilling and completion of the Caleigh #4-2 well. The estimated cost to drill
and complete the Caleigh #4-2 well is $405,000.
On June 24, 2004, we entered into an agreement with Jack Wynn & Co. to
place feature news stories about Lexington Resources, Inc. in national, regional
and local business investment and trade media outlets and provide other investor
relation services (the "Wynn Agreement"). Pursuant to the Wynn Agreement, we are
24
obligated to pay Jack Wynn & Co. $7,000 per month to place feature news stories
about Lexington Resources, Inc. in national, regional and local business
investment and trade media outlets and provide other public relations services.
The Wynn Agreement expires on June 30, 2005.
PURCHASE OF SIGNIFICANT EQUIPMENT
We do not intend to purchase any significant equipment during the next
twelve months.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which 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.
25
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.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our financial
statements.
ACCOUNTING FOR NATURAL GAS AND OIL PRODUCING ACTIVITIES.
We use the full cost method to account for our natural gas and oil
producing activities. Under this accounting method, we capitalize substantially
all of the costs incurred in connection with the acquisition, development, and
exploration of natural gas and oil reserves in full cost pools maintained by
geographic areas, regardless of whether reserves are actually discovered and
apply a quarterly full cost ceiling test. Adverse changes in conditions
(primarily gas price declines) could result in permanent write-downs in the
carrying value of oil and gas properties as well as non-cash charges to
operations, but would not affect cash flows.
RESERVE ESTIMATES
Our estimates of oil and natural gas reserves, by necessity, are
projections based on geological and engineering data, and there are
uncertainties inherent in the interpretation of such data as well as the
projection of future rates of production and the timing of development
expenditures. Reserve engineering is a subjective process of estimating
underground accumulations of oil and natural gas that are difficult to measure.
The accuracy of any reserve estimate is a function of the quality of available
data, engineering and geological interpretation and judgment. Estimates of
economically recoverable oil and natural gas reserves and future net cash flows
necessarily depend upon a number of variable factors and assumptions, such as
historical production from the area compared with production from other
producing areas, the assumed effects of regulations by governmental agencies and
assumptions governing future oil and natural gas prices, future operating costs,
severance and excise taxes, development costs and work-over and remedial costs,
all of which may in fact vary considerably from actual results. For these
reasons, estimates of the economically recoverable quantities of oil and natural
gas attributable to any particular group of properties, classifications of such
reserves based on risk of recovery, and estimates of the future net cash flows
expected there from may vary substantially. Any significant variance in the
assumptions could materially affect the estimated quantity and value of the
reserves, which could affect the carrying value of our oil and gas properties
and/or the rate of depletion of the oil and gas properties. Actual production,
revenues and expenditures with respect to our reserves will likely vary from
estimates, and such variances may be material.
26
Many factors will affect actual net cash flows, including:
o the amount and timing of actual production;
o supply and demand for natural gas;
o curtailments or increases in consumptions by natural gas purchasers;
o changes in governmental regulation or taxation; and
o oil and gas comodity price changes.
PROPERTY, EQUIPMENT AND DEPRECIATION
We follow the successful efforts method of accounting for oil and gas
properties. Under this method all production costs incurred in connection with
the exploration for and development of oil and gas reserves are capitalized.
These capitalized costs include lease acquisition, geological and geophysical
work, delay rentals, drilling, completing and equipping oil and gas wells,
including salaries, benefits and other internal salary related costs directly
attributable to these activities.
Costs associated with production and general corporate activities are
expensed in the period incurred. Interest costs related to unproved properties
and properties under development also are capitalized to oil and gas properties.
If the net investment in oil and gas properties exceeds an amount equal to the
sum of (1) the standardized measure of discounted future net cash flows from
proved reserves, and (2) the lower of cost or fair market value of properties in
process of development and unexplored acreage, the excess is charged to expense
as additional depletion. Normal dispositions of oil and gas properties are
accounted for as adjustments of capitalized costs, with no gain or loss
recognized. As a result, we are required to estimate our proved reserves at the
end of each quarter, which is subject to the uncertainties described in the
previous section.
DESCRIPTION OF BUSINESS
CORPORATE HISTORY
Lexington Resources, Inc. was incorporated under the laws of the State of
Nevada in 1996 under the name "All Wrapped Up, Inc." During 1997, the Company
changed it name to Intergold Corporation and was engaged in the exploration of
gold and precious metals in the United States. On November 20, 2003, subsequent
to the acquisition of our wholly-owned subsidiary, Lexington Oil & Gas Ltd. Co.,
an Oklahoma limited liability company ("Lexington Oil & Gas"), the Company filed
an amendment to its articles of incorporation changing its name to "Lexington
Resources, Inc."
On November 19, 2003, Intergold Corporation, Lexington Oil & Gas, and the
shareholders of Lexington Oil & Gas (the "Lexington Oil & Gas Shareholders")
entered into a share exchange agreement (the "Share Exchange Agreement").
Pursuant to the terms of the Share Exchange Agreement: (i) we acquired from the
Lexington Oil & Gas Shareholders one hundred percent (100%) of the issued and
outstanding shares of common stock of Lexington Oil & Gas; and (ii) we issued
3,000,000 pre-stock split shares of our common stock to the Lexington Oil & Gas
Shareholders in proportion to their respective holdings in Lexington Oil & Gas.
27
This acquisition has been accounted for as a reverse acquisition with
Lexington Oil & Gas being treated as the accounting parent and Lexington
Resources, Inc., the legal parent, being treated as the accounting subsidiary.
Accordingly, the consolidated results of operations of the Company include those
of Lexington Oil & Gas for the period from its inception on September 29, 2003
and those of Lexington Resources, Inc. since the date of the reverse
acquisition. There are no comparative financial statements presented as
Lexington had no operations in 2002, and only began operations on September 29,
2003.
Please note that throughout this report, and unless otherwise noted, the
words "we," "our," "us," the "Company," or "Lexington," refers to Lexington
Resources, Inc. and our wholly owned subsidiary, Lexington Oil & Gas.
CURRENT BUSINESS OPERATIONS
We are a natural resource exploration and production company currently
engaged in the exploration, acquisition and development of oil and gas
properties in the United States. Our wholly-owned subsidiary, Lexington Oil &
Gas previously acquired a 590 gross acre section of farm-out acreage in
Pittsburg County, Oklahoma for the development and production of coal bed
methane gas (the "Wagnon Lease"). Further, during fiscal 2004 we consummated the
acquisition of 1,932 gross leasehold acres in the Coal Creek Prospect, 292 gross
acres in the Panther Creek Prospect, 320 gross acres in the Middlecreek
Prospect, 960 gross acres in the South Lamar Prospect, a further 184 gross acres
in the South Lamar Prospect, 4,850 gross acres in the in the H-9 Prospect, and a
further 320 gross acres in the area of the H-9 Prospect. We currently have an
aggregate of approximately 590 gross developed and 8,858 gross undeveloped acres
pursuant to leases and/or concessions.
We have experienced delays in obtaining drilling rigs in the past due to
the high drilling demand in the Arkoma Basin where we have been concentrating
our coal bed methane and other gas targeted production and leasing programs. On
November 9, 2004, we announced that we had reached an agreement with Oak Hills
Drilling and Operating, LLC, ("Oak Hills Drilling") to drill a ten well program.
Oak Hills Drilling is an Oklahoma based private drilling contractor that will
provide drill rig and drilling expertise for us to execute our planned drilling
initiatives. Douglas Humphreys and Vaughn Barbon are officers and directors and
Alexander Cox, James Dow, Brent Pierce and Douglas Humphreys are 25%
shareholders of Oak Hills Drilling. Management believes that this agreement
helps eliminate wait times for proceeding with planned drilling initiatives due
to limited rig availability and helps ensure the continuous availability of a
dedicated drilling rig and crew. Oak Hills Drilling's "Wilson" model drill rig
is undergoing final outfitting. We anticipate using Oak Hills Drilling to drill
our fourth horizontal gas well on Lexington's Wagnon Lease located in Pittsburg
County, Oklahoma. The terms and conditions obtained from Oak Hills Drilling will
be no less favorable than those we could obtain from an independent third party.
COAL BED METHANE GAS
Natural gas consists primarily of methane, which is produced when organic
material is physically turned into coal under extreme geologic conditions. When
the coal and methane conversion process occurs such that the resultant coal is
saturated with water and methane is trapped within the coal, the result is "coal
bed methane." Water permeates coal beds and the water pressure traps the gas
within the coal. Because coal has a large and complex internal surface area, it
can store volumes of gas six or seven time as much as a conventional nature gas
reservoir of equal rock volume. Coal bed methane is kept in place usually by the
28
presence of water. Thus the production of coal bed methane in many cases
requires the dewatering of the coal gas to be extracted. Therefore, in a coal
bed gas well, water is produced in large volumes especially in the early stages
of production. As the amount of water in the coal decreases, gas production
increases.
The United States Geological Survey has estimated coal bed gas resources of
at least 700 trillion cubic feet. About 100 trillion cubic feet of that appears
to be economically recoverable with existing technology. Coal bed gas currently
accounts for about 7.5% of total natural gas production in the United States.
COMPETITION
We operate in a highly competitive industry, competing with major oil and
gas companies, independent producers and institutional and individual investors,
which are actively seeking oil and gas properties throughout the world together
with the equipment, labor and materials required to operate properties. Most of
our competitors have financial resources, staffs and facilities substantially
greater than ours. The principal area of competition is encountered in the
financial ability to acquire good acreage positions and drill wells to explore
for oil and gas, then, if warranted, drill production wells and install
production equipment. Competition for the acquisition of oil and gas wells is
intense with many oil and gas properties and or leases or concessions available
in a competitive bidding process in which we may lack technological information
or expertise available to other bidders. Therefore, we may not be successful in
acquiring and developing profitable properties in the face of this competition.
No assurance can be given that a sufficient number of suitable oil and gas wells
will be available for acquisition and development.
GOVERNMENT REGULATION
GENERAL
The production and sale of oil and gas are subject to various federal,
state and local governmental regulations, which may be changed from time to time
in response to economic or political conditions and can have a significant
impact upon overall operations. Matters subject to regulation include discharge
permits for drilling operations, drilling bonds, reports concerning operations,
the spacing of wells, unitization and pooling of properties, taxation,
abandonment and restoration and environmental protection. These laws and
regulations are under constant review for amendment or expansion. From time to
time, regulatory agencies have imposed price controls and limitations on
production by restricting the rate of flow of oil and gas wells below actual
production capacity in order to conserve supplies of oil and gas. Changes in
these regulations could require us to expend significant resources to comply
with new laws or regulations or changes to current requirements and could have a
material adverse effect on the company.
OIL & Gas Regulation
The governmental laws and regulations which could have a material impact on
the oil and gas exploration and production industry are as follows:
DRILLING AND PRODUCTION
Our operations are subject to various types of regulation at federal,
state, local and Native American tribal levels. These types of regulation
include requiring permits for the drilling of wells, drilling bonds and reports
29
concerning operations. Most states, and some counties, municipalities and Native
American tribes, in which we operate also regulate one or more of the following:
o the location of wells;
o the method of drilling and casing wells;
o the rates of production or "allowables";
o the surface use and restoration of properties upon which wells are
drilled and other third parties;
o the plugging and abandoning of wells; and
o notice to surface owners and other third parties.
State laws regulate the size and shape of drilling and spacing units or
proration units governing the pooling of oil and natural gas properties. Some
states allow forced pooling or integration of tracts to facilitate exploration
while other states rely on voluntary pooling of lands and leases. In some
instances, forced pooling or unitization may be implemented by third parties and
may reduce our interest in the unitized properties. In addition, state
conservation laws establish maximum rates of production from oil and natural gas
wells, generally prohibit the venting or flaring of natural gas and impose
requirements regarding the ratability of production. These laws and regulations
may limit the amount of natural gas and oil we can produce from our wells or
limit the number of wells or the locations at which we can drill. Moreover, each
state generally imposes a production or severance tax with respect to the
production and sale of oil, natural gas and natural gas liquids within its
jurisdiction.
NATURAL GAS SALES TRANSPORTATION
Historically, federal legislation and regulatory controls have affected the
price of the natural gas we produce and the manner in which we market our
production. The Federal Energy Regulatory Commission ("FERC") has jurisdiction
over the transportation and sale for resale of natural gas in interstate
commerce by natural gas companies under the Natural Gas Act of 1938 and the
Natural Gas Policy Act of 1978.
FERC also regulates interstate natural gas transportation rates and service
conditions, which affects the marketing of natural gas that we produce, as well
as the revenues we receive for sales of our natural gas. Commencing in 1985,
FERC promulgated a series of orders, regulations and rule makings that
significantly fostered competition in the business of transporting and marketing
gas. Today, interstate pipeline companies are required to provide
nondiscriminatory transportation services to producers, marketers and other
shippers, regardless of whether such shippers are affiliated with an interstate
pipeline company. Under FERC's current regulatory regime, transmission services
must be provided on an open-access, non-discriminatory basis at cost-based rates
or at market-based rates if the transportation market at issue is sufficiently
competitive.
30
MINERAL ACT
The Mineral Leasing Act of 1920 ("Mineral Act") prohibits direct or
indirect ownership of any interest in federal onshore oil and gas leases by a
foreign citizen of a country that denies "similar or like privileges" to
citizens of the United States. Such restrictions on citizens of a
"non-reciprocal" country include ownership or holding or controlling stock in a
corporation that holds a federal onshore oil and gas lease. If this restriction
is violated, the corporation's lease can be canceled in a proceeding instituted
by the United States Attorney General. Although the regulations of the Bureau of
Land Management (which administers the Mineral Act) provide for agency
designations of non-reciprocal countries, there are presently no such
designations in effect.
ENVIRONMENTAL REGULATION
Our activities will be subject to existing federal, state and local laws
and regulations governing environmental quality and pollution control. Our
operations will be subject to stringent environmental regulation by state and
federal authorities including the Environmental Protection Agency ("EPA"). Such
regulation can increase the cost of such activities. In most instances, the
regulatory requirements relate to water and air pollution control measures.
WASTE DISPOSAL
The Resource Conservation and Recovery Act ("RCRA"), and comparable state
statutes, affect oil and gas exploration and production activities by imposing
regulations on the generation, transportation, treatment, storage, disposal and
cleanup of "hazardous wastes" and on the disposal of non-hazardous wastes. Under
the auspices of the EPA, the individual states administer some or all of the
provisions of RCRA, sometimes in conjunction with their own, more stringent
requirements. Drilling fluids, produced waters, and most of the other wastes
associated with the exploration, development, and production of crude oil,
natural gas, or geothermal energy constitute "solid wastes", which are regulated
under the less stringent non-hazardous waste provisions, but there is no
guarantee that the EPA or the individual states will not adopt more stringent
requirements for the handling of non-hazardous wastes or categorize some
non-hazardous wastes as hazardous for future regulation.
CERCLA
The federal Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA") imposes joint and several liability for costs of
investigation and remediation and for natural resource damages, without regard
to fault or the legality of the original conduct, on certain classes of persons
with respect to the release into the environment of substances designated under
CERCLA as hazardous substances ("Hazardous Substances"). These classes of
persons or potentially responsible parties include the current and certain past
owners and operators of a facility or property where there is or has been a
release or threat of release of a Hazardous Substance and persons who disposed
of or arranged for the disposal of the Hazardous Substances found at such a
facility. CERCLA also authorizes the EPA and, in some cases, third parties to
take actions in response to threats to the public health or the environment and
to seek to recover the costs of such action. Although CERCLA generally exempts
petroleum from the definition of Hazardous Substances in the course operations,
we may in the future generate wastes that fall within CERCLA's definition of
Hazardous Substances. We may also in the future become an owner of facilities on
which Hazardous Substances have been released by previous owners or operators.
31
We may in the future be responsible under CERCLA for all or part of the costs to
clean up facilities or property at which such substances have been released and
for natural resource damages.
AIR EMISSIONS.
Our operations are subject to local, state and federal regulations for the
control of emissions of air pollution. Major sources of air pollutants are
subject to more stringent, federally imposed permitting requirements.
Administrative enforcement actions for failure to comply strictly with air
pollution regulations or permits are generally resolved by payment of monetary
fines and correction of any identified deficiencies. Alternatively, regulatory
agencies could require us to forego construction, modification or operation of
certain air emission sources.
CLEAN WATER ACT.
The Clean Water Act ("CWA") imposes restrictions and strict controls
regarding the discharge of wastes, including produced waters and other oil and
natural gas wastes, into waters of the United States, a term broadly defined.
Permits must be obtained to discharge pollutants into federal waters. The CWA
provides for civil, criminal and administrative penalties for unauthorized
discharges of oil, hazardous substances and other pollutants. It imposes
substantial potential liability for the costs of removal or remediation
associated with discharges of oil or hazardous substances. State laws governing
discharges to water also provide varying civil, criminal and administrative
penalties and impose liabilities in the case of a discharge of petroleum or it
derivatives, or other hazardous substances, into state waters. In addition, the
EPA has promulgated regulations that may require us to obtain permits to
discharge storm water runoff. In the event of an unauthorized discharge of
wastes, we may be liable for penalties and costs.
Management believes that we are in substantial compliance with current
applicable environmental laws and regulations.
RESEARCH AND DEVELOPMENT ACTIVITIES
No research and development expenditures have been incurred, either on our
account or sponsored by customers, during the past three years.
EMPLOYEES
We do not employ any persons on a full-time or on a part-time basis. Grant
Atkins is our President and Chief Executive Officer, Vaughn Barbon, is our Chief
Financial Officer and Douglas Humphreys, is the Drilling Operations Manager of
Lexington Oil & Gas. All of these individuals are primarily responsible for all
day-to-day operations of the Company. Other services are provided by outsourcing
and consultant and special purpose contracts.
OIL AND GAS PROPERTIES
We maintain an aggregate of approximately 590 gross developed acres and
8,858 gross undeveloped acres pursuant to leases and/or concessions in the
Arkoma Basin in the State of Oklahoma as described below.
32
WAGNON LEASE
We hold a 100% working interest and a 75% net revenue interest in
approximately 590 gross acres of a gas lease located on the Wagnon Lease in
Pittsburg County, Oklahoma (the "Wagnon Lease"). The gas lease was acquired from
Oak Hills Energy, Inc. ("Oak Hills Energy"), which acquired the lease pursuant
to a farm-out agreement with Quinton Rental & Repair Services, Inc. (the "Wagnon
Farm-Out Agreement"). As of November 30, 2004, we have drilled, completed, and
put three wells into production.
The Kellster #1-5 coal bed methane gas well ("Kellster #1-5") was drilled
to a depth of approximately 2,400 feet vertically and 2,200 feet horizontally
and has been producing since the middle of February 2004 and continues through
dewatering stages.
The Kyndal #2-2 coal bed methane gas well ("Kyndal #2-2") was completed in
June 2004 to a depth of approximately 2,400 feet vertically and 2,200 feet
horizontally and is located in close proximity to the Kellster #1-5 well. The
Kyndal #2-2 well feeds directly into the existing pipeline infrastructure
located on the Wagnon Lease.
The Bryce #3-2 coal bed methane gas well ("Bryce #3-2") was completed in
August 2004 and is also located in close proximity to the Kellster #1-5 well.
Completion of 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. The Bryce #3-2 well has been completed and the well is in
production.
We intend to commence drilling our fourth well in the Wagnon Prospect, the
Caleigh #4-2 coal bed methane gas well prior to the end of December 2004.
We have entered into Funding Agreements for the Kellster #1-5, Kyndal #2-2,
Bryce #3-2 and the Caleigh #4-2 wells. Pursuant to the Funding Agreements,
private investors were provided with an 80% working interest and a 60% net
revenue interest in the wells until their respective invested capital in each
well is repaid, after which time the private investors will revert to an
aggregate 20.1% working interest and a 15.075% net revenue interest. Oak Hills
Energy, the operator of the wells, will "back-in" to a reversionary 6.7% working
interest after the working interest capital is repaid and Lexington Oil & Gas,
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 Lease will carry royalty interests totaling 25% to landowners and
property interest holders, and a carried working interest of 5% to a landowner,
and a 10% carried working interest to a company related to Douglas Humphreys, a
director of the Company who also owns a non-carried working interest of 5%.
COAL CREEK PROSPECT
On March 12, 2004 we entered into a lease for approximately 1,536 gross
acres in the Coal Creek Gas Prospect, located in Hughes County, Oklahoma (the
"Coal Creek Lease"). Under the terms and provisions of the Coal Creek Lease, we
have an undivided 95% working interest in the subject lands and a 79% net
33
revenue interest. On May 20, 2004, we acquired an additional 372 acres of the
Coal Creek Prospect with a minimum 95% working interest in the subject lands and
a 78% net revenue interest. On August 20, 2004, we acquired an additional
approximate 23 acres of the Coal Creek Prospect with a minimum 95% working
interest in the subject lands and a 79% net revenue interest.
PANTHER CREEK PROSPECT
On March 12, 2004, we entered into a lease for approximately 292 gross
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"). We have a 100% working interest and an approximate 81% net revenue
interest in the subject property.
SOUTH LAMAR PROSPECT
On April 22, 2004, we acquired 960 gross undeveloped acres in three
sections of farm-out acreage to develop coal bed methane gas wells in Hughes
County, State of Oklahoma (the "South Lamar Farm-out"). Pursuant to the terms
and provisions of the South Lamar Farm-out, we hold a 100% working interest and
a 78.5% net revenue interest in 960 gross undeveloped acres to develop gas
producing wells. The acreage was purchased originally by Paluca Petroleum, Inc.
an affiliate of Doug Humphreys, for approximately $100,000, and the exchange of
certain other equipment. On July 26, 2004, we acquired an additional 184 acres
in the South Lamar Prospect with a 100% working interest and a 79% net revenue
interest.
MIDDLECREEK PROSPECT
On May 24, 2004, we acquired a 320 gross acres in the Middlecreek Gas
Prospect located in Hughes County, State of Oklahoma (the "Middlecreek
Prospect"). The Middlecreek Prospect includes existing 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 Middlecreek Prospect includes a 2,000 foot gas pipeline and
pipeline right of way.
H-9 PROSPECT
On June 29, 2004, we acquired approximately 4,850 gross 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"). We acquired a 100%
working interest and a 79.25% net revenue interest in the H-9 Prospect. We
subsequently acquired an additional 320 gross acres of leases in the H-9 area of
interest with a 100% working interest and a 78.25% net revenue interest.
DRILLING ACTIVITY
The Following table sets forth the results of our coal bed methane gas
drilling activity as of September 30, 2004:
Gross Wells Net Wells
Total Producing Dry Total Producing Dry
3 3 0 1.60 1.60 0
34
PRODUCTION INFORMATION
During the prior three fiscal years, we had no oil and gas production.
PRODUCING WELLS AND ACREAGE
GROSS AND NET PRODUCTIVE GAS WELLS, DEVELOPED ACREAGE AND OVERRIDING ROYALTY
INTERESTS.
Productive wells and developed acres.
The tables below set forth our leasehold interest in productive and shut-in
gas wells, and in developed acres, at September 30, 2004:
Prospect Gross(1) Net (2)
Wagnon 3 1.60
(1) A gross well is a well in which a working interest is owned. The
number of gross wells is the total number of wells in which a working
interest is owned.
(2) A net well is deemed to exist when the sum of fractional ownership
working interest in gross wells equals one. The number of net wells is
the sum of the fractional working interests owned in gross wells
expressed as whole numbers and fractions thereof.
Developed Acreage Table(1)
Prospect Gross (2) Net (3)
Wagnon 590 443
(1) Consists of acres spaced or assignable to productive wells.
(2) A gross acre is an acre in which a working interest is owned. The
number of gross acres is the total number of acres in which a working
interest is owned.
(3) A net acre is deemed to exist when the sum of fractional ownership
working interests in gross acres equals one. The number of net acres
is the sum of the fractional working interests owned in gross acres
expressed as whole numbers and fractions thereof.
UNDEVELOPED ACREAGE
Leasehold Interests
The table below sets forth our leasehold interest in undeveloped acreage at
September 30, 2004:
Prospect Gross Net
Coal Creek 1,932 1,835
Panther Creek 292 292
South Lamar 1,144 1,144
H-9 5,170 5,170
35
GAS DELIVERY COMMITMENTS
We have no gas delivery commitments. Lexington Oil & Gas contracts with Oak
Hills Energy that contracts for pipeline with Williams Arkoma Gathering Company,
LLC. Lexington Oil & Gas contracts with Unimark LLC to sell gas produced.
DRILLING COMMITMENTS
At this time we are committed to drilling one additional well on Wagnon
Lease, the Caleigh #4-2 well.
RESERVE INFORMATION
We have obtained a reserve and economic evaluation report regarding the
Wagnon Lease which was conducted by Fletcher Lewis Engineering, Inc. of Oklahoma
dated September 9, 2004 (the "Reserve and Economic Evaluation Report"). The
Reserve and Economic Evaluation Report estimates recoverable reserves from the
Wagnon Lease, the present value and a discounted present value of 10% of future
cash flow therefrom. The Reserve and Economic Evaluation Report indicates that
as of September 1, 2004, there is approximately 1,531,026 MCF, with future net
revenue of $5,274,000 in net gas reserve from proven producing wells and proven
undeveloped sites on the Wagnon Lease when using a gas price of $4.57 MCF and a
present value 10% discounted cash flow on net production of approximately
$4,073,000.
NET GAS MCF FUTURE NET PRESENT WORTH
CASHFLOW DISCOUNTED 10%
PROVED DEVELOPED
PRODUCING 1,176,008 4,353,737 3,446,997
SUMMARY UNDEVELOPED 355,018 920,224 626,324
TOTAL 1,531,026 5,273,961 4,073,322
We have not filed any estimates of total proved net oil or gas reserves
with, or included such information in reports to, any federal authority or
agency.
EXECUTIVE OFFICES
We lease our principal office space located at 7473 West Lake Mead Road,
Las Vegas, Nevada 89128. We currently use office space located at 225 Kingsberry
Road, Holdenville, Oklahoma 74848. We intend to lease this space in the future
from Douglas Humphreys or an affiliated entity on terms no less favorable than
those that may be obtained from third parties.
LEGAL PROCEEDINGS
We know of no material, existing or pending legal proceedings against our
company, nor are we involved as a plaintiff in any material proceeding or
pending litigation. There are no proceedings in which any of our directors,
officers or affiliates, or any registered or beneficial shareholder, is an
adverse party or has a material interest adverse to our interest.
36
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
All of our directors hold office until the next annual general meeting of
the shareholders or until their successors are elected and qualified. Our
officers are appointed by our board of directors and hold office until their
earlier death, retirement, resignation or removal.
Our directors and executive officers, their ages, positions held are as
follows:
NAME AGE POSITION WITH THE COMPANY
Grant Atkins 44 President/Chief Executive
Officer and Director
Vaughn Barbon 47 Treasurer/Chief Financial
Officer
Douglas Humphreys 52 Director
Norman MacKinnon 68 Director
Steve Jewett 66 Director
BUSINESS EXPERIENCE
The following is a brief account of the education and business experience
of each director, executive officer and key employee during at least the past
five years, indicating each person's principal occupation during the period, and
the name and principal business of the organization by which he or she was
employed.
Grant Atkins has been the Chief Executive Officer since July 2003,
President of the Company since 2001 and the secretary and a director of the
Company since September 1998. For the past ten years, Mr. Atkins has been
self-employed and has acted as a financial and project coordination consultant
to clients in government and private industry. He has extensive multi-industry
experience in the fields of finance, administration and business development.
From 1998 to March 31, 2004, Mr. Atkins provided consulting services through
Investor Communications International, Inc. to a number of private and public
companies, including the Company. Mr. Atkins received a Bachelor of Commerce
degree from the University of British Columbia.
Vaughn Barbon has been the Treasurer and the Chief Financial Officer of the
Company since April 1, 2003. Mr. Barbon is also a manager of Lexington Oil &
Gas. Since 1997, Mr. Barbon has provided consulting and accounting services for
V. Barbon Consulting. Mr. Barbon received a Bachelor of Arts from the University
of Victoria.
37
Douglas Humphreys has been a director of the Company since April 30, 2004
and is a member of our audit committee. Mr. Humphreys is also a manager Oak
Hills Energy, an oil and gas operating company based in Holdenville, Oklahoma
that acts as "operator" to Lexington. Mr. Humphreys has been Operations Manager
of Lexington Oil & Gas since November 2003 and an oil and gas consultant to
Paluca Petroleum, Inc. since 1995. Mr. Humphreys is also an officer, director
and sole shareholder of Paluca Petroleum, Inc. and has been a director of GHB
Farms, Inc. Mr. Humphreys received his Bachelor of Science degree in Business
and Geology from Southwest Oklahoma State University.
He has been active in the industry for over 30 years, mostly in his home
state of Oklahoma and in the surrounding oil and gas rich regions of the mid
continent. His industry knowledge comes from hands-on experience helping to
build several oil and gas producing companies to prominence, as well as playing
a personal role in the development of over 1,100 wells.
Norman J.R. MacKinnon has been a director of the Company since April 30,
2004 and is a member of our audit committee. Mr. MacKinnon is a Chartered
Accountant and has been the principal of NJR MacKinnon, CA since 1984. Mr.
MacKinnon is also a director of CYOP and Gaming Transactions, Inc. Mr. MacKinnon
received his degree as a Chartered Accountant from the Institute of Chartered
Accountants of British Columbia.
Steve Jewett has been a director of the Company since April 30, 2004. Since
1978, Mr. Jewett has been the owner of Stephen Jewett - Chartered Accountants.
During his career, Mr. Jewett was auditor of several public companies. Mr.
Jewett received his degree as a Chartered Accountant from the Institute of
Chartered Accountants of British Columbia and is the audit committee's financial
expert.
Grant Atkins, Vaughn Barbon, Doug Humphreys, Orient Explorations Ltd. and
Paluca Petroleum, Inc. may be deemed to be organizers of the Company based upon
their activities in founding and organizing the business of the Company.
FAMILY RELATIONSHIPS
There are no family relationships among our directors or officers.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
During the past five years, none of our directors, executive officers or
persons that may be deemed promoters is or have been involved in any legal
proceeding concerning (i) any bankruptcy petition filed by or against any
business of which such person was a general partner or executive officer either
at the time of the bankruptcy or within two years prior to that time; (ii) any
conviction in a criminal proceeding or being subject to a pending criminal
proceeding (excluding traffic violations and other minor offenses); (iii) being
subject to any order, judgment or decree, not subsequently reversed, suspended
or vacated, of any court of competent jurisdiction permanently or temporarily
enjoining, barring, suspending or otherwise limiting involvement in any type of
business, securities or banking activity; or (iv) being found by a court, the
Securities and Exchange Commission or the Commodity Futures Trading Commission
to have violated a federal or state securities or commodities law (and the
judgment has not been reversed, suspended or vacated).
38
EXECUTIVE COMPENSATION
During the last fiscal year, none of the directors or officers of the
Company were compensated for their roles as directors or executive officers.
Officers and directors of the Company may be reimbursed for any out-of-pocket
expenses incurred by them on behalf of the Company. The Company presently has no
pension, health, annuity, insurance, profit sharing or similar benefit plans.
Mr. Atkins and Mr. Barbon previously derived remuneration from the Company
directly and through Investor Communications International, Inc. ("ICI"), which
provided a wide range of management, financial and administrative services to
the Company. See "Summary Compensation Table" below.
Executive compensation is subject to change concurrent with the Company's
requirements. None of the officers and directors of the Company are officers or
directors of ICI, nor does the Company own any equity interest in ICI.
Currently, Mr. Atkins, receives compensation in the amount of $10,000 per
month and Mr. Barbon receives compensation in the amount of $7,500 per month. We
do not have employment agreements with Mr. Atkins or Mr. Barbon.
SUMMARY COMPENSATION TABLE
None of our executive officers received an annual salary and bonus that
exceeded $100,000 during the fiscal years ending December 31, 2003, 2002 and
2001. The following table sets forth the compensation received by Grant Atkins
and Vaughn Barbon.
ANNUAL COMPENSATION LONG TERM
COMPENSATION
NAME AND FISCAL SALARY OTHER SECURITIES
PRINCIPAL POSITION YEAR UNDERLYING
OPTIONS
Grant Atkins(1) 2003 0 $19,625(2) 100,000
President and Chief 2002 0 $ 3,300(2) 0
Executive Officer 2001 0 $12,500(2) 0
Vaughn Barbon 2003(3) 0 $15,000(2) 0
Chief Financial
Officer
<FN>
(1) Mr. Atkins was appointed the Chief Executive Officer in July, 2003.
(2) Received pursuant to respective contractual arrangements between the
Company and ICI.
</FN>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Name Number of Securities Percent of Total Options Exercise Price Date of
Underlying Options Granted Expiration
Grant Atkins 100,000 5.00% $3.00 12/31/2008
Douglas Humphreys 150,000 2.50% $0.50 2/12/2013
Norman MacKinnon 2,500 0.01% $1.00 12/31/2008
Stephen Jewett 2,500 0.01% $1.00 12/31/2008
International Market Trend AG 2,850,000 $0.50 2/12/2013
495,000 92.25% $1.00 12/31/2008
400,000 $3.00 12/31/2008
39
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND
CHANGE IN CONTROL ARRANGEMENTS
CONSULTATION AGREEMENT.
On July 12, 2004, we entered into a Consultation Agreement (the
"Consultation Agreement") with Lexington Oil & Gas and Douglas Humphreys.
Pursuant to the Consultation Agreement, Mr. Humphreys will assist in overseeing
the drilling operations and the completion and management of our wells. Mr.
Humphreys compensation pursuant to the Consultation Agreement will be: (i)
$7,500 per month effective April 1, 2004, (ii) the assignment of a 10% carried
working interest in every well drilled on all properties held by us, including
the Wagnon Lease (during the third quarter of 2004 we recorded additional
compensation expense to Humphreys of $100,000 being the estimated value of his
10% carried interest in our wells developed as at September 30, 2004); (iii) the
right to purchase an additional 5% working interest in all wells drilled by us
on our properties provided that funds for this participation are paid prior to
the commencement of drilling of said wells; and (iv) 200,000 options to purchase
shares of our common stock options at price of $3.00 per share. The Consultation
Agreement can be terminated at any time with ninety days written notice by
either party.
COMPENSATION OF DIRECTORS
Generally, our Directors do not receive salaries or fees for serving as
directors, nor do they receive any compensation for attending meetings of the
Board of Directors. Directors are entitled to reimbursement of expenses incurred
in attending meetings. In addition, our directors are entitled to participate in
our stock option plan. During the nine months ended September 30, 2004, we paid
Steve Jewett $10,000 in connection with his service as the chairman of the audit
committee.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As they relate to the certain relationships and related transactions
discussed below, Douglas Humphreys is the sole officer, director and shareholder
of Paluca Petroleum, Inc., Douglas Humphreys and Vaughn Barbon are the officers
and directors of Oak Hills Drilling, Douglas Humphreys, is a 25% shareholder in
Oak Hills Drilling and until January 21, 2004, Douglas Humphreys and Vaughn
Barbon were minority shareholders of Oak Hills Energy. Orient Explorations Ltd.
may be deemed to be an organizer of the Company.
On November 9, 2004, we entered into an agreement with Oak Hills Drilling,
to drill a ten well program. For a complete description of the Oak Hills
Drilling Agreement, see "Current Business Operations."
Saddlebag Oilfield Services ("Saddlebag") has provided completion services
to Oak Hills Energy on the Kellster #1-5, Kyndal #2-2, and Bryce #3-2 wells.
Doug Humphreys is a director of Saddlebag and Pam Humphreys, Doug Humphrey's
wife, is the President of Saddlebag. As of December 12, 2004, Oak Hills Energy
has paid Saddlebag at total of $44,567 for completion work on the three wells.
The work included setting up the surface equipment, swabbing the well to
initiate production, laying pipeline, setting up fences, compressor hookups and
other related services.
40
During the nine-months ended September 30, 2004, we paid Steve Jewett,
$10,000 in connection with his service as the chairman of the audit committee.
On July 19, 2004, we were assigned 320 gross acres of leases in the H-9
Prospect from Paluca Petroleum, Inc. who had entered into a farm-out agreement
with Faith Production, LLC dated July 19, 2004 for the acquisition of this
property. Paluca Petroleum, Inc. served only as an intermediary and received no
consideration in connection with this transaction.
On July 12, 2004, we entered into the Consultation Agreement with Lexington
Oil & Gas and Douglas Humphreys. For a complete description of the Humphreys
Consulting Agreement, see "Employment Contracts and Termination of Employment
and Change in Control Arrangements."
On May 18, 2004, we exchanged $495,000 in debt owed to ICI that had been
assigned to a consultant for IMT in exchange for the exercise price of 495,000
options to acquire shares of our common stock that had been assigned to him by
IMT at a price of $1.00 per share.
On April 22, 2004, we acquired from Paluca Petroleum, Inc. three sections
of farm-out acreage to develop coal bed methane gas wells in Hughes County,
State of Oklahoma (the "South Lamar Farm-out") for $120,000 and on July 14,
2004, we acquired an additional 184 gross acres in this Prospect from Paluca
Petroleum, Inc. for approximately $13,800. The acreage was purchased originally
by Paluca Petroleum, Inc. for approximately $100,000, and the exchange of
certain other equipment.
During the period ended March 31, 2004 we exchanged $200,000 in debt owed
to ICI that had been assigned to consultants for ICI in exchange for the
exercise price of 1,200,000 options to acquire shares of our common stock that
had been assigned to them by ICI at a price of $0.167 per share.
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.
On January 21, 2004, we entered into the Paluca Agreement with Lexington
Oil & Gas, Paluca Petroleum, Inc. and Douglas Humphreys. Pursuant to the terms
and provisions of the Paluca Agreement: (i) we assigned Humphreys a 5% carried
working interest in every well drilled us on the Wagnon Lease; (ii) we agreed to
allow Humphreys to participate up to an additional 5% working interest in every
well drilled by us on the Wagnon Lease; (iii) Humphreys agreed to waive any and
all other claims, debts or obligations owed to him by us or Lexington Oil & Gas,
(iv) we agreed to transfer to Paluca certain assets previously acquired by us
(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).
On January 21, 2004, Orient Explorations, Inc. and Douglas 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 shares of restricted Common Stock of the Company held of record
by Humphreys to Orient for $10.
41
Effective December 5, 2003, we acquired the Wagnon Lease from Oak Hills
Energy for $120,000. Oak Hills Energy acquired the Wagnon Farm-Out Agreement
from Quinton Rental and Repair Service, Inc. on December 5, 2003 for $44,325.
During the period ended November 19, 2003 we exchanged $1,260,027 in loans,
notes and accrued interest due to related parties in exchange for the issuance
of 630,276 shares of our common stock.
On November 10, 2003, we entered into a Financial Consulting Services
Agreement with IMT, whereby IMT performed a wide range of management,
administrative, financial, business development, and consulting services for us
(the "IMT Consulting Agreement"). The contract was for a term of twelve months
and expired on November 10, 2004. Pursuant to the terms of the IMT Consulting
Agreement, we granted IMT and/or its designates or employees 950,000 options to
purchase shares of our common stock at a price of $0.50 per share and agreed to
a contracted rate of $10,000 per month. We incurred $30,000 in fees to IMT for
the three month period ended September 30, 2004 and have 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.
On October 15, 2003, Intergold Corporation entered into a Settlement
Agreement with ICI to issue 100,000 shares of our common stock to ICI in
satisfaction of $250,000 that was owed to ICI.
On January 1, 1999, Intergold Corporation and ICI entered into a Consulting
Services and Management Agreement (the "ICI Consulting Agreement"). The ICI
Consulting Agreement allowed for monthly fees not to exceed $75,000. During the
period ended November 19, 2003, a total of $110,000 was incurred to ICI. During
the period ended November 19, 2003 ICI paid a total of $25,875 to Mr. Atkins for
services provided to us. ICI also paid Vaughn Barbon $13,750 for his services
for the period ended November 19, 2003. In addition, during the period ended
November 19, 2003, ICI and other shareholders paid expenses on behalf of us
totaled $47,000 (2002 - $24,592). During the period November 19, 2003 through
December 31, 2003 a total of $10,000 was incurred to ICI. As of December 31,
2003, we owed ICI a total of $448,370 in management fees which have accruing as
described above, loans of $59,498, and interest of $282,477 accrued at 10% per
annum on outstanding balances and unpaid management fees payable, for a total of
$790,345. On December 31, 2003, we entered into a month to month arrangement
with ICI as a transitional measure until March 31, 2004. During the quarter
ended March 31, 2004, a total of $30,000 was incurred to ICI for administrative
and investor relations services provided to us. No fees were incurred to ICI for
the balance of the period ended September 30, 2004. As of September 30, 2004, we
owed ICI a total in loans of $71,196 and interest 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 we repaid ICI $72,761 in loans and accrued
interest leaving a total of $3,033 in accrued interest still owing to ICI.
42
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of November 25, 2004, certain
information with respect to the beneficial ownership of our common stock by each
stockholder known by us to be the beneficial owner of more than 5% of our common
stock and by each of our current directors and executive officers. Each person
has sole voting and investment power with respect to the shares of common stock,
except as otherwise indicated. Beneficial ownership consists of a direct
interest in the shares of common stock, except as otherwise indicated.
NAME AND ADDRESS OF BENEFICIAL OWNER AMOUNT AND NATURE OF PERCENT OF
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
Grant Atkins 100,0000 (1) 0.58%
7473 West Lake Mead Road
Las Vegas, Nevada 89128
Vaughn Barbon 0 0%
7473 West Lake Mead Road
Las Vegas, Nevada 89128
Douglas Humphreys 250,000 (2) 1.45%
7473 West Lake Mead Road
Las Vegas, Nevada 89128
Norman MacKinnon 2,500 (3) 0.01%
7473 West Lake Mead Road
Las Vegas, Nevada 89128
Steve Jewett 2,500 (3) 0.01%
7473 West Lake Mead Road
Las Vegas, Nevada 89128
Orient Explorations Ltd. 9,000,000 (4) 52.94%
P.O. Box 97 Leeward
Highway, Provinciales
Turks & Caicos Islands
All Officers and Directors (5 total) 355,000 2.05%
<FN>
(1) Includes 100,000 options to purchase shares of our common stock at an
exercise price of $3.00 per share.
(2) Includes 200,000 options to purchase shares of our common stock at an
exercise price of $3.00 per share and 50,000 options to purchase shares of
our common stock at an exercise price of $0.50 per share.
(3) Includes 2,500 options to purchase shares of our common stock at an
exercise price of $1.00 per share.
(4) The sole shareholder of Orient Explorations Ltd. is Canopus Limited for
Meridan Trust. The sole director of Orient Explorations Ltd. is Cockburn
Directors, Ltd. Mr. Dempsey has the sole exclusive voting and disposition
rights regarding shares of common stock.
</FN>
CHANGES IN CONTROL
We are unaware of any contract or other arrangement the operation of which
may at a subsequent date result in a change in control of our company.
DESCRIPTION OF COMMON STOCK
We are authorized to issue 200,000,000 common shares with a par value of
$0.00025. As at November 25, 2004 we had 16,999,038 common shares outstanding.
Upon liquidation, dissolution or winding up of the corporation, the holders of
common stock are entitled to share ratably in all net assets available for
distribution to common stockholders after payment to creditors. The common stock
is not convertible or redeemable and has no preemptive, subscription or
conversion rights. Each outstanding share of common stock is entitled to one
vote on all matters submitted to a vote of stockholders. There are no cumulative
voting rights.
43
The holders of outstanding shares of common stock are entitled to receive
dividends out of assets legally available therefore at such times and in such
amounts as our board of directors may from time to time determine. Holders of
common stock will share equally on a per share basis in any dividend declared by
the board of directors. We have not paid any dividends on our common stock and
do not anticipate paying any cash dividends on such stock in the foreseeable
future.
In the event of a merger or consolidation, all holders of common stock will
be entitled to receive the same per share consideration.
We are authorized to issue up to 75,000,000 shares of preferred stock, par
value $0.01 per share. The preferred stock may be issued in one or more series,
the terms of which may be determined at the time of issuance by the Board of
Directors, without further action by shareholders, and may include voting rights
(including the right to vote as a series on particular matters), preferences as
to dividends and liquidation, conversion and redemption rights, and sinking fund
provisions.
No shares of preferred stock are outstanding as of the closing of this
offering, and we have no present plans to issue any such shares. The issuance of
preferred stock could adversely affect the rights of the holders of the Common
Stock and therefore, reduce the value of the Common Stock.
PLAN OF DISTRIBUTION
The Selling Shareholders of the common stock of Lexington Resources, Inc.,
and any of their pledgees, assignees and successors-in-interest may, from time
to time, sell any or all of their shares of Common Stock on any stock exchange,
market or trading facility on which the shares are traded or in private
transactions. These sales may be at fixed or negotiated prices. The Selling
Shareholders may use any one or more of the following methods when selling
shares:
- ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
- block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
- purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
- an exchange distribution in accordance with the rules of the
applicable exchange;
- privately negotiated transactions;
- settlement of short sales entered into after the date of this
prospectus;
44
- broker-dealers may agree with the Selling Shareholders to sell a
specified number of such shares at a stipulated price per share;
- a combination of any such methods of sale;
- through the writing or settlement of options or other hedging
transactions, whether through an options exchange or otherwise; or
- any other method permitted pursuant to applicable law.
The Selling Shareholders may also sell shares under Rule 144 under the
Securities Act of 1933, as amended (the "Securities Act"), if available, rather
than under this prospectus.
Broker-dealers engaged by the Selling Shareholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the Selling Shareholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. Each Selling Shareholders does not expect these commissions and
discounts relating to its sales of shares to exceed what is customary in the
types of transactions involved.
In connection with the sale of our common stock or interests therein, the
Selling Shareholders may enter into hedging transactions with broker-dealers or
other financial institutions, which may in turn engage in short sales of the
common stock in the course of hedging the positions they assume. The Selling
Shareholders may also sell shares of our common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The Selling
Shareholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction).
The Selling Shareholders and any broker-dealers or agents that are involved
in selling the shares may be deemed to be "underwriters" within the meaning of
the Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Each Selling Shareholder has informed us
that it does not have any agreement or understanding, directly or indirectly,
with any person to distribute the common stock.
We are required to pay certain fees and expenses incurred by us incident to
the registration of the shares. We have agreed to indemnify the Selling
Shareholders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
Because the Selling Shareholders may be deemed to be "underwriters" within
the meaning of the Securities Act, they will be subject to the prospectus
delivery requirements of the Securities Act. In addition, any securities covered
by this prospectus which qualify for sale pursuant to Rule 144 under the
Securities Act may be sold under Rule 144 rather than under this prospectus.
Each Selling Shareholders has advised us that they have not entered into any
agreements, understandings or arrangements with any underwriter or broker-dealer
regarding the sale of the resale shares. There is no underwriter or coordinating
broker acting in connection with the proposed sale of the resale shares by the
Selling Shareholders.
45
We have agreed to keep this prospectus effective until the earlier of (i)
the latest date upon which we are obligated to cause to be effective the
registration statement for resale of the shares by the Selling Shareholders,
(ii) the date on which the shares may be resold by the Selling Shareholders
without registration and without regard to any volume limitations by reason of
Rule 144(k) under the Securities Act or any other rule of similar effect or
(iii) all of the shares have been sold pursuant to the prospectus or Rule 144
under the Securities Act or any other rule of similar effect. The resale shares
will be sold only through registered or licensed brokers or dealers if required
under applicable state securities laws. In addition, in certain states, the
resale shares may not be sold unless they have been registered or qualified for
sale in the applicable state or an exemption from the registration or
qualification requirement is available and is complied with.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the resale shares may not simultaneously engage
in market making activities with respect to our common stock for a period of two
business days prior to the commencement of the distribution. In addition, the
Selling Shareholders will be subject to applicable provisions of the Exchange
Act and the rules and regulations thereunder, including Regulation M, which may
limit the timing of purchases and sales of shares of our common stock by the
Selling Shareholders or any other person. We will make copies of this prospectus
available to the Selling Shareholders and have informed them of the need to
deliver a copy of this prospectus to each purchaser at or prior to the time of
the sale.
SELLING SHAREHOLDERS
The Selling Shareholders may offer and sell, from time to time, any or all
of the common stock issued and the common stock issuable to them upon exercise
of the common stock purchase warrants. Because the Selling Shareholders may
offer all or only some portion of the 4,087,525 shares of common stock and
underlying common stock purchase warrants to be registered, no estimate can be
given as to the amount or percentage of these shares of common stock that will
be held by the selling stockholders upon termination of the offering.
The following table sets forth certain information regarding the beneficial
ownership of shares of common stock by the Selling Shareholders as of November
25, 2004, and the number of shares of common stock covered by this prospectus.
The number of shares in the table represents an estimate of the number of shares
of common stock to be offered by the selling stockholder. None of the Selling
Shareholders is a broker-dealer, or an affiliate of a broker-dealer to our
knowledge.
46
Name of Selling Shareholder Shares Shares to be Offered Number of Shares Owned After
Beneficially Offering and Percentage Total of the
Owned Prior to Issued and Outstanding
Offering
Shares Owned Percentage
of Issued
and
Outstanding
Crescent International, Ltd.(1) 400,000 400,000 Nil Nil
Cranshire Capital LP(2) 340,136 340,136 Nil Nil
Brennglass Gary(3) 68,028 62,028 Nil Nil
Platinum Partners Value Arbitrage 408,164 408,164 Nil Nil
Fund, L.P. (4)
B&E Apartments, L.P.(5) 272,000 272,000 Nil Nil
Enable Growth Partners, LP(6) 340,136 340,136 Nil Nil
Double U Master Fund LP(7) 340,136 340,136 Nil Nil
F. Berdon Co. LP (8) 70,000 70,000 Nil Nil
SRG Capital, LLC (9) 340,136 340,136 Nil Nil
David Garnett (10) 3,000 3,000 Nil Nil
Paul Masters IRA(11) 70,000 70,000 Nil Nil
Everett L. Roley(12) 3,000 3,000 Nil Nil
Phillipe Mast(13) 15,000 15,000 Nil Nil
Arnold and Lynne Kellner(14) 36,000 36,000 Nil Nil
Victor Miera(15) 145,000 45,000 100,000 0.58%
Richard Ialungo(16) 15,000 15,000 Nil Nil
Newport Capital Corp. (17) 588,431 485,970 102,461 0.59%
Eiger East Finance Ltd. (18) 39,800 39,800 Nil Nil
Fairmont East Finance Ltd. (19) 25,200 25,200 Nil Nil
John Cervi(20) 27,000 27,000 Nil Nil
Vincenzo Aballini(21) 697,466 697,466 Nil Nil
<FN>
(1) Represents 200,000 shares of common stock and 200,000 warrants to purchase
shares of our common stock. Mel Craw and Maxi Breezi, as Managers of
Greenlight (Switzerland) SA, the investment advisor to Crescent
International Ltd. exercise dispositive and voting power with respect to
the shares of common stock owned by Crescent International Ltd. Messrs.
Craw and Brezzi disclaim beneficial ownership of such shares.
(2) Represents 170,068 shares of common stock and 170,068 warrants to purchase
shares of our common stock. Mitchell P. Kopin, President of Downsview
Capital Inc., the General Partner of Cranshire Capital, LP exercises
dispositive and voting power with respect to the shares of common stock
that Cranshire Capital owns.
(3) Represents 34,014 shares of common stock and 34,014 warrants to purchase
shares of our common stock owned by Mr. Brennglass.
(4) Represents 208,082 shares of common stock and 208,082 warrants to purchase
shares of our common stock. Platinum Partners Value Arbitrage Fund LP is a
private investment fund that is owned by all its investors and managed by
Mr. Mark Nordlicht. Mr. Nordlicht may be deemed the control person of the
shares owned by such entity, with final voting power and investment control
over such shares.
(5) Represents 136,000 shares of common stock and 136,000 warrants to purchase
shares of our common stock. Howard Einberg exercises dispositive and voting
power with respect to the shares of common stock owned by B&E Apartments,
LP.
(6) Represents 170,068 shares of common stock and 170,068 warrants to purchase
shares of our common stock. Mitch Levine exercises dispositive and voting
power with respect to the shares of common stock that Enable Growth
Partners L.P. own.
(7) Represents 170,068 shares of common stock and 170,068 warrants to purchase
shares of our common stock. Itzchak Winehouse exercises dispositive and
voting power with respect to the shares of common stock that the Double U
Master Fund LP owns.
(8) Represents 70,000 shares of common stock and 70,000 warrants to purchase
shares of our common stock. Federick Berdon exercises dispositive and
voting power with respect to the shares of common stock that the F. Berdon
Co. LP owns.
47
(9) Represents 170,068 shares of common stock and 170,068 warrants to purchase
shares of our common stock. Edwin Macabe and Tai May Lee are employees of
SRG Capital, LLC and jointly have dispositive and voting power with respect
to these securities.
(10) Represents 2,000 shares of common stock and 1,000 warrants to purchase
shares of our common stock.
(11) Represents 70,000 shares of common stock and 70,000 warrants to purchase
shares of our common stock.
(12) Represents 2,000 shares of common stock and 1,000 warrants to purchase
shares of our common stock.
(13) Represents 10,000 shares of common stock and 5,000 warrants to purchase
shares of our common stock.
(14) Represents 24,000 shares of common stock and 12,000 warrants to purchase
shares of our common stock.
(15) Represents 130,000 share of common stock, 30,000 of which are being
registered on this registration statement and 15,000 warrants to purchase
shares of our common stock.
(16) Represents 10,000 shares of common stock and 5,000 warrants to purchase
shares of our common stock.
(17) Represents 417,246 shares of common stock, 314,785 of which are being
registered on this registration statement and 171,185 warrants to purchase
shares of our common stock. Brent Pierce is an officer of Newport Capital
Corp. and exercises dispositive and voting power with respect to the shares
of common stock owned by Newport Capital Corp.
(18) Represents 39,800 shares of common stock earned by Eiger East Finance Ltd
as a finders fee for the April 2004 Offering. Phil Mast exercises
dispositive and voting power with respect to the shares of common stock
owned by Eiger East Finance Ltd.
(19) Represents 16,800 shares of common stock and 8,400 warrants to purchase
shares of our common stock. Phil Mast exercises dispositive and voting
power with respect to the shares of common stock owned by Fairmont East
Finance Ltd.
(20) Represents 18,000 shares of common stock and 9,000 warrants to purchase
shares of our common stock.
(21) Represents 348,733 shares of common stock and 348,733 warrants to purchase
shares of our common stock.
</FN>
We may require the Selling Shareholders to suspend the sales of the
securities offered by this prospectus upon the occurrence of any event that
makes any statement in this prospectus or the related registration statement
untrue in any material respect or that requires the changing of statements in
these documents in order to make statements in those documents not misleading.
LEGAL MATERS
The validity of the common stock offered by this prospectus is being passed
upon by Diane D. Dalmy.
EXPERTS
The consolidated financial statements of Lexington Resources, Inc. included
in this registration statement have been audited by Dale Matheson Carr-Hilton
LaBonte Chartered Accountants, to the extent and for the period set forth in
their reports appearing elsewhere in the registration statement, and are
included in reliance upon such reports given upon the authority of said firms as
experts in auditing and accounting.
Information derived from the report of Fletcher Lewis Engineering, Inc.
with respect to Lexington Oil & Gas estimated reserves incorporated in this
prospectus have been so incorporated in reliance on the authority of said firm
as experts with respect to such matters contained in their report.
48
INTEREST OF NAMED EXPERTS AND COUNSEL
No expert or counsel named in this prospectus as having prepared or
certified any part of this prospectus or having given an opinion upon the
validity of the securities being registered or upon other legal matters in
connection with the registration or offering of the common stock was employed on
a contingency basis or had, or is to receive, in connection with the offering, a
substantial interest, directly or indirectly, in the registrant or any of its
parents or subsidiaries. Nor was any such person connected with the registrant
or any of its parents, subsidiaries as a promoter, managing or principal
underwriter, voting trustee, director, officer or employee.
DISCLOSURE OF SEC POSITION OF
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our Bylaws provide that directors and officers shall be indemnified by us
to the fullest extent authorized by the Nevada General Corporation Law, against
all expenses and liabilities reasonably incurred in connection with services for
us or on our behalf. The bylaws also authorize the board of directors to
indemnify any other person who we have the power to indemnify under the Nevada
General Corporation Law, and indemnification for such a person may be greater or
different from that provided in the bylaws.
Insofar as indemnification for liabilities arising under the Securities Act
might be permitted to directors, officers or persons controlling our company
under the provisions described above, we have been informed that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
WHERE YOU CAN FIND MORE INFORMATION
We are required to file annual, quarterly and current reports, proxy
statements and other information with the Securities and Exchange Commission.
You may read and copy any document we file at the Commission's Public Reference
Room 450 Fifth Street, N.W., Washington, D.C. You may obtain information on the
operation of the Public Reference Room by calling the Commission at
1-800-SEC-0330. You can also obtain copies of our Commission filings by going to
the Commission's website at http://www.sec.gov.
We have filed with the Securities and Exchange Commission a registration
statement on Form SB-2, under the Securities Act with respect to the securities
offered under this prospectus. This prospectus, which forms a part of that
registration statement, does not contain all information included in the
registration statement. Certain information is omitted and you should refer to
the registration statement and its exhibits. With respect to references made in
this prospectus to any contract or other document of Lexington Resources, Inc.,
the references are not necessarily complete and you should refer to the exhibits
attached to the registration statement for copies of the actual contract or
document.
No finder, dealer, sales person or other person has been authorized to give
any information or to make any representation in connection with this offering
other than those contained in this prospectus and, if given or made, such
information or representation must not be relied upon as having been authorized
by Lexington Resources, Inc. This prospectus does not constitute an offer to
sell or a solicitation of an offer to buy any of the securities offered hereby
by anyone in any jurisdiction in which such offer or solicitation is not
authorized or in which the person making such offer or solicitation is not
qualified to do so or to any person to whom it is unlawful to make such offer or
solicitation. Neither the delivery of this prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that the
information contained herein is correct as of any time subsequent to the date of
this prospectus.
49
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
LEXINGTON RESOURCES, INC.
(Formerly Intergold Corporation)
(an exploration stage company)
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
INDEPENDENT AUDITORS' REPORT
CONSOLIDATED BALANCE SHEET
CONSOLIDATED STATEMENT OF OPERATIONS
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
CONSOLIDATED STATEMENT OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of Lexington Resources, Inc.
(formerly Intergold Corporation).
We have audited the consolidated balance sheet of Lexington Resources, Inc.
(formerly Intergold Corporation), an exploration stage company, as at December
31, 2003 and the consolidated statement of operations, stockholders' equity and
cash flows for the period from September 29, 2003 (inception) to December 31,
2003 as described in Note 1 to the financial statements. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 2003
and the results of its operations and its cash flows and the changes in
stockholders' equity for the period from September 29, 2003 (inception) to
December 31, 2003.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, to date the Company has not generated any significant
revenues from operations and requires additional funds to meet its obligations
and the costs of its operations. These factors raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in this
regard are described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
"DALE MATHESON CARR-HILTON LABONTE"
CHARTERED ACCOUNTANTS
Vancouver, B.C.
February 19, 2004, except for Note 11 which is dated March 12, 2004.
F-2
LEXINGTON RESOURCES, INC.
(Formerly Intergold Corporation)
(an exploration stage company)
CONSOLIDATED BALANCE SHEET
December 31, 2003
- --------------------------------------------------------------------------------
CURRENT ASSETS
Cash $ 351,420
Prepaid expenses 450
- -------------------------------------------------------------------------------
351,870
OIL AND GAS PROPERTIES (Note 4) 120,000
- -------------------------------------------------------------------------------
$ 471,870
===============================================================================
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 23,221
Drilling obligations (Note 5) 350,000
Due to related parties (Note 8) 796,467
- -------------------------------------------------------------------------------
1,169,688
- -------------------------------------------------------------------------------
CONTINGENCIES AND COMMITMENTS (Notes 1, 4, 5 & 11)
STOCKHOLDERS' EQUITY (DEFICIENCY) (Note 6)
Common stock $.00025 par value; 200,000,000 shares authorized
Preferred stock, $.001 par value; 75,000,000 shares authorized
Issued and outstanding:
12,843,552 common shares 3,211
Additional paid-in capital 761,937
Common stock purchase warrants 12,500
Deficit accumulated during the exploration stage (1,475,466)
- -------------------------------------------------------------------------------
(697,818)
- -------------------------------------------------------------------------------
$ 471,870
===============================================================================
BASIS OF PRESENTATION (Note 1)
===============================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
LEXINGTON RESOURCES, INC.
(Formerly Intergold Corporation)
(an exploration stage company)
CONSOLIDATED STATEMENT OF OPERATIONS
For the period from
September 29, 2003 (inception) to
December 31, 2003
- --------------------------------------------------------------------------------
(Note 1)
EXPENSES
General and administrative $ 23,578
Interest expense 9,410
Professional fees 9,161
- --------------------------------------------------------------------------------
42,149
- --------------------------------------------------------------------------------
NET LOSS FOR THE PERIOD $ (42,149)
================================================================================
BASIC NET INCOME (LOSS) PER SHARE $(0.00)
================================================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 10,303,797
================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
LEXINGTON RESOURCES, INC.
(Formerly Intergold Corporation)
(an exploration stage company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM SEPTEMBER 29, 2003 (INCEPTION) TO DECEMBER 31, 2003
Deficit
Accumulated
Additional Common Stock During
Common stock Paid-In Purchase Exploration
Shares Amount Capital Warrants Stage Total
- ---------------------------------------------------------------------------------------------------------------------------------
Issued for cash at $.0001 per share 3,000,000 $ 300 $ - $ - $ - $ 300
- ---------------------------------------------------------------------------------------------------------------------------------
Lexington balance, November 19, 2003 3,000,000 300 - - - 300
LRI balance, November 19, 2003 (Note 6) 10,593,552 39,833 15,981,933 - (17,452,735) (1,430,969)
Reverse acquisition recapitalization
adjustment (3,000,000) (37,485) (15,981,933) - 16,019,418 -
- ---------------------------------------------------------------------------------------------------------------------------------
Balance post-reverse acquisition 10,593,552 2,648 - - (1,433,317) (1,430,669)
Private placement at $2.50 per unit 300,000 75 237,425 12,500 - 250,000
Issuance of common stock on exercise of
options 1,650,000 413 274,587 - - 275,000
Issuance of common stock on settlement
of debt at
$2.50 per share 300,000 75 249,925 - - 250,000
Net loss, period ended December 31, 2003 - - - - (42,149) (42,149)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 12,843,552 $ 3,211 $ 761,937 $ 12,500 $ (1,475,466) $ (697,818)
=================================================================================================================================
All share amounts have been restated to reflect the 300:1 reverse split in
November 2003 and the 3:1 forward split in January 2004. (Refer to Note 6.)
The Stockholders' Equity Statement above reflects Lexington prior to the reverse
acquisition and consolidated LRI post-reverse acquisition.
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
LEXINGTON RESOURCES, INC.
(Formerly Intergold Corporation)
(an exploration stage company)
CONSOLIDATED STATEMENT OF CASH FLOWS
For the period from
September 29, 2003
(inception) to
December 31, 2003
- ------------------------------------------------------------------------------
(Note 1)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) for the period $ (42,149)
Adjustments to reconcile net loss to net cash
from operating activities:
Changes in working capital assets and liabilities
Prepaid expenses (450)
Accounts payable (15,724)
- ------------------------------------------------------------------------------
NET CASH FLOWS USED IN OPERATING ACTIVITIES (58,323)
- ------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash acquired on acquisition of Lexington Oil &
Gas Ltd. Co. 900
Acquisition of oil and gas properties (120,000)
- ------------------------------------------------------------------------------
NET CASH FLOWS USED IN INVESTING ACTIVITIES (119,100)
- ------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances payable 278,543
Proceeds on sale of common stock 250,300
- ------------------------------------------------------------------------------
NET CASH FLOWS FROM FINANCING ACTIVITIES 528,843
- ------------------------------------------------------------------------------
INCREASE IN CASH 351,420
CASH, BEGINNING OF PERIOD -
- ------------------------------------------------------------------------------
CASH, END OF PERIOD $ 351,420
==============================================================================
SUPPLEMENTAL CASH FLOW INFORMATION (Refer to Note 10.)
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
LEXINGTON RESOURCES, INC. (FORMERLY INTERGOLD CORPORATION)
(an exploration stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
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 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. There are no comparative financial statements presented as
Lexington had no operations in 2002.
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.
GOING CONCERN
These financial statements have been prepared in accordance with generally
accepted accounting principles in the United States of America with the on-going
assumption applicable to a going concern which contemplates the realization of
assets and the satisfaction of liabilities and commitments in the normal course
of business. The Company is an exploration stage company and its general
business strategy is to acquire oil and gas properties either directly or
through the acquisition of operating entities. The continued operations of the
Company and the recoverability of the carrying value of oil and gas properties
is dependent upon the existence of economically recoverable reserves and the
ability of the Company to obtain necessary financing to complete the development
of those reserves, and upon future profitable production. To date, the Company
has not generated revenues from operations, has a working capital deficiency of
$817,818 and a stockholders' deficiency of $697,818, and will require additional
funds to meet its obligations and the costs of its operations. Additional
recurring operating losses are anticipated prior to the generation of operating
income and such losses may be significant. The Company is planning additional
ongoing equity financing by way of private placements to fund its obligations
and operations. (Refer to Notes 5 and 11).
The Company's future capital requirements will depend on many factors, including
costs of exploration of the properties, cash flow from operations, fluctuating
oil and gas commodity pricing, costs to complete well production, if warranted,
and competition and global market conditions. The Company's anticipated
recurring operating losses and growing working capital needs will require that
it obtain additional capital to operate its business. Further, the Company does
not have sufficient funds on hand to complete the exploration of the properties.
(Refer to Notes 4 and 5.)
The Company will depend almost exclusively on outside capital to complete the
exploration and development of the oil and gas properties. Such outside capital
will include the sale of additional stock and may include commercial borrowing
and other sources of debt and/or advances. There can be no assurance that
capital will be available as necessary to meet these continuing exploration and
development costs or, if the capital is available, that it will be on terms
acceptable to the Company. The issuances of additional equity securities by the
Company may result in a significant dilution in the equity interests of its
current stockholders. Obtaining commercial loans, assuming those loans would be
available, would increase the Company's liabilities and future cash commitments.
If the Company is unable to obtain financing in the amounts and on terms deemed
acceptable, the future success of the Company may be adversely affected.
Given the Company's limited operating history, lack of revenues, and recurring
operating losses, there can be no assurance that it will be able to achieve or
maintain profitability. Accordingly, these factors raise substantial doubt about
the Company's ability to continue as a going concern.
F-7
LEXINGTON RESOURCES, INC. (FORMERLY INTERGOLD CORPORATION)
(an exploration stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
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. 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.
Estimated future removal and site restoration costs are provided over the life
of proven reserves on a units-of-production basis. Costs, which include the
costs of production equipment removal and environmental remediation, are
estimated each period by management based on current regulations, costs,
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 splits 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
(3,000,000 pre January 2004 3:1 forward split).
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.
F-8
LEXINGTON RESOURCES, INC. (FORMERLY INTERGOLD CORPORATION)
(an exploration stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
- --------------------------------------------------------------------------------
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.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations" which establishes standards for the initial measurement and
subsequent accounting for obligations associated with the sale, abandonment, or
other disposal of long-lived tangible assets arising from the acquisition,
construction or development and for normal operations of such assets. SFAS 143
is effective for fiscal years beginning after June 15, 2002. The adoption of
SFAS 143 has not had any impact on the Company's financial position or results
of operations.
F-9
LEXINGTON RESOURCES, INC. (FORMERLY INTERGOLD CORPORATION)
(an exploration stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
- --------------------------------------------------------------------------------
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 and becomes determinable, whereas under
EITF Issue No. 94-3 a liability was recognized at the time of 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
has not had any impact on the Company's financial position or results of
operations.
On April 30, 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. The new guidance amends SFAS No. 133 for decisions made as part of the
Derivatives Implementation Group ("DIG") process that effectively fequired
amendments to SFAS No. 133, and decisions made in connection with other FASB
projects dealing with financial instruments and in connection with
implementation issues raised in relation to the application of the definition of
a derivative that contains financing components. In addition, it clarifies when
a derivative contains a financing component that warrants special reporting in
the statement of cash flows. SFAS No. 149 is effective for contracts entered
into or modified after June 30, 2003 and for hedging relationships designated
after June 30, 2003. The Company adopted SFAS 149, as required, on July 1, 2003
with no material impact on its financial statements.
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 does 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 have a material effect on the
Company's financial statements.
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 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-10
LEXINGTON RESOURCES, INC. (FORMERLY INTERGOLD CORPORATION)
(an exploration stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
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") 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 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 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. (See Note 11.)
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, concentrating on coal bed methane
gas acquisition and production initiatives.
This acquisition has been accounted for as a recapitalization using accounting
principles applicable to reverse acquisitions with Lexington being treated as
the accounting parent (acquirer) and LRI being treated as the accounting
subsidiary (acquiree). The value assigned to the capital stock of consolidated
LRI on acquisition of Lexington is equal to the book value of the capital stock
of Lexington plus the book value of the net assets (liabilities) of LRI as at
the date of the acquisition.
The book value of Lexington's capital stock subsequent to the reverse
acquisition is calculated and allocated as follows:
Lexington capital stock $ 300
LRI net assets (liabilities) (1,430,969)
-----------
(1,430,669)
Charge to deficit on reverse acquisition 1,433,317
------------
Consolidated stock accounts post reverse acquisition $ 2,648
===========
These consolidated financial statements include the results of operations of
Lexington since September 29, 2003 (inception) and the results of operations of
LRI since the date of the reverse acquisition effective November 19, 2003. LRI's
results of operations for the period from January 1, 2003 to September 30, 2003
have been reported in the Company's September 30, 2003 filing on Form 10-QSB.
LRI's operations for the period from January 1, 2003 to November 18, 2003 have
been disclosed in the table in Note 6.
The weighted average number of shares outstanding of LRI, for the period from
July 26, 1996 (inception) to November 18, 2003, is deemed to be 9,000,000 being
the number of shares issued by LRI to effect the reverse acquisition of
Lexington.
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 in consideration of $120,000. Lexington
holds a 100% working interest and a 75% revenue interest in approximately 590.2
gross undeveloped acreage of a potential gas producing property located in
Pittsburg County, Oklahoma (the "Wagnon Property"). The gas interest relating to
the Wagnon Property is pursuant to a farm-out agreement between Oak Hills Energy
and the lessee of the Wagnon Property.
F-11
LEXINGTON RESOURCES, INC. (FORMERLY INTERGOLD CORPORATION)
(an exploration stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 4 - OIL AND GAS PROPERTIES (CONT'D)
- --------------------------------------------------------------------------------
In February 2004 a well on the property (Kellster 1-5 Well) was put into
production. The Company plans to drill another two to three wells on the Wagnon
Property in the second quarter of 2004.
COAL CREEK PROSPECT
In March 2004 the Company agreed to conditional terms to lease approximately
2,500 acres to develop the Coal Creek Project in Hughes County, Oklahoma. (See
Note 11.)
NOTE 5: DRILLING OBLIGATIONS
- --------------------------------------------------------------------------------
During the period ended December 31, 2003 the Company entered into equity
drilling agreements with 3 private investors (the "Funding Investors") for the
funding for its first well. The Funding Investors each provided one-third of the
Authorization For Expenditure ("AFE") capital estimated at $360,000 for the
Company's first well, named Kellster 5-1. As at December 31, 2003 $10,000 was
advanced and the balance of $350,000 has been recorded as a drilling obligation.
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 5% to a company related to a director of the Company. A company
related to a director of the Company also owns a non-carried working interest of
10%.
The Funding Investors were provided an 80% working interest, 60% net revenue
interest, in the well until their invested capital for the well is repaid, after
which time the Funding Investors will revert to a 20.1% working interest,
15.075% net revenue interest in the Kellster 5-1 well located on the Wagnon
Lease. Oakhills 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. Lexington will back-in to a reversionary 53.2% Working
Interest.
In February 2004 the Company advanced the balance of the drilling funds and
successfully completed its first well (Kellster 1-5) on the property. The
Company plans to drill an additional two to three wells on this property in the
second quarter of 2004.
NOTE 6: 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.
REVERSE STOCK SPLIT
Effective August 7, 2003 the Company completed a reverse stock split of
one-for-three hundred of the Company's outstanding common stock, resulting in a
reduction of the then outstanding common stock from 156,328,943 shares to
521,184 shares. 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 reverse stock
split.
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 reverse stock split have been restated to reflect the
one-for-three hundred reverse stock split and the three for one forward split on
a retroactive basis.
LEXINGTON CAPITAL STOCK TRANSACTIONS DURING THE PERIOD SEPTEMBER 29, 2003 TO
NOVEMBER 19, 2003: On September 29, 2003 Lexington issued 3,000,000 shares of
its $.0001 par value common shares for total proceeds of $300.
F-12
LEXINGTON RESOURCES, INC. (FORMERLY INTERGOLD CORPORATION)
(an exploration stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 6: STOCKHOLDERS' EQUITY (CONT'D)
- --------------------------------------------------------------------------------
LRI CAPITAL STOCK TRANSACTIONS DURING THE PERIOD JANUARY 1, 2003 THROUGH
NOVEMBER 19, 2003:
On March 15, 2003 the Company settled $1,260,027 in loans, notes and accrued
interest in exchange for the issuance of 210,004 post-reverse-split shares of
the Company's common stock.
On March 15, 2003 the holders of 6,200,000 Series A preferred shares elected to
convert their shares to common stock. As a result cumulative undeclared
dividends totaling $1,371,475 became payable on March 15, 2003. Accordingly, the
Company issued 38,953 post reverse-split shares of common stock in exchange for
the 6,200,000 Series A preferred shares and settlement of the dividend liability
of $1,371,475 in accordance with the terms of the Series A preferred stock
described below.
On March 15, 2003 the holders of 2,510,000 Series B preferred shares elected to
convert their shares to common stock. As a result cumulative undeclared
dividends totaling $995,550 became payable on March 15, 2003. Accordingly, the
Company issued 15,004 post reverse-split shares of common stock in exchange for
the 2,510,000 Series B preferred shares and settlement of the dividend liability
of $995,550 in accordance with the terms of the Series B preferred stock
described below.
In October 2003 the Company issued 30,000 common shares in settlement of $11,100
of accounts payable.
On November 19, 2003 the Company issued 9,000,000 restricted common shares to
the shareholders of Lexington for a 100% interest in Lexington.
LRI STOCK OPTION TRANSACTIONS DURING THE YEAR ENDED DECEMBER 31, 2003:
On November 18, 2003, the Company granted 3,000,000 common stock options under
the Company's Stock Option Plan to consultants to the Company, including
2,850,000 to International Market Trend AG ("IMT") and/or its designates. A
consulting expense of $1,997,581 was recorded representing the fair value of the
3,000,000 options. The fair value was estimated using the Black-Scholes option
pricing model assuming an expected live of 5 years, a risk free interest rate of
3%, a dividend yield of 0%, and an expected volatility of 251%.
During November 2003, the Company issued 1,650,000 shares of common stock on the
exercise of stock options at $0.167 per share for proceeds of $275,000 which was
paid by way of offset of $234,435 originally advanced to the Company by ICI
which was assigned by ICI to IMT designated option holders, and $40,565
originally advanced to the Company by an IMT designated option holder. (Refer to
Note 7.)
On November 21, 2003 the Company registered 1,000,000 common stock options under
an S-8.
LRI's changes in capital stock prior to and in connection with the reverse
acquisition were as follows:
Additional
Common Stock Preferred Stock Paid-in
Number Amount Number Amount Capital Deficit Total
------------- ---------- ----------- ---------- ------------ ------------- -----------
Balance December 31, 2002,
As previously reported by LRI 257,135 $ 19,284 8,710,000 $ 8,710 $10,298,039 $(12,822,928) $(2,496,895)
20% cumulative dividends payable on
Conversion of Series A Preferred - - - - - (1,371,475) (1,371,475)
stock
Expiry of Series A Preferred stock
Share Purchase Warrant - - - - 60,000 - 60,000
Issuance of common stock in
settlement
of Cumulative dividend on converted
Series A Preferred stock 18,286 1,371 - - 1,370,104 - 1,371,475
Issuance of common stock pursuant to
Conversion of Series A Preferred 20,667 1,550 (6,200,000) (6,200) 4,650 - -
stock
20% cumulative dividends payable on
Conversion of Series B Preferred - - - - - (995,550) (995,550)
stock
Issuance of common stock in
settlement
of Cumulative dividend on converted
Series B Preferred stock 6,637 498 - - 995,052 - 995,550
Issuance of common stock pursuant to
Conversion of Series B Preferred 8,367 628 (2,510,000) (2,510) 1,882 - -
stock
Issuance of common stock in
settlement
of debt 210,092 15,752 - - 1,244,277 - 1,260,027
------------- ---------- ----------- ---------- ------------ ------------- -----------
Balance post 300:1 reverse stock 521,184 $ 39,081 - $ - $13,974,004 $(15,189,953) $(11,768,868)
split
------------- ---------- ----------- ---------- ------------ ------------- -----------
F-13
LEXINGTON RESOURCES, INC. (FORMERLY INTERGOLD CORPORATION)
(an exploration stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 6: STOCKHOLDERS' EQUITY (CONT'D)
- --------------------------------------------------------------------------------
Additional
Common Stock Preferred Stock Paid-in
Number Amount Number Amount Capital Deficit Total
------------- ---------- ----------- ---------- ------------ ------------- -----------
Balance carried forward 521,184 $ 39,081 - $ - $13,974,004 $(15,189,953) $(11,768,868)
Debt settlement 10,000 2 - - 11,098 - 11,100
LRI net loss for the period from
January 1, 2003 to November 19, 2003 - - - - - (265,201) (265,201)
Fair value of stock options granted
Concurrent with reverse acquisition - - - - 1,997,581 (1,997,581) -
Issued to effect reverse acquisition 3,000,000 750 - - (750) -
------------- ---------- ----------- ---------- ------------ ------------- -----------
November 19, 2003 pre 3:1 split 3,531,184 39,833 - - 15,981,933 (17,452,735) (1,430,969)
3 to 1 forward split 7,062,368 - - - - - -
------------- ---------- ----------- ---------- ------------ ------------- -----------
LRI balance November 19, 2003 10,593,552 $ 39,833 - $ - $15,981,933 $(17,452,735) $ (1,430,969)
============= ========== =========== ========== ============ ============= ===========
LRI CAPITAL STOCK TRANSACTIONS POST NOVEMBER 19, 2003:
In November 2003, 1,650,000 stock options were exercised for $275,000, which was
offset against advances payable as described above.
In November 2003, $250,000 of the advances due to ICI were settled with 100,000
shares of common stock.
In November 2003, as part of a 3,000,000 unit offering, the Company issued
300,000 units comprised of one restricted share of common stock and one-half
share purchase warrant exercisable at $1.67 for total proceeds of $250,000. The
fair value of the warrants is estimated to be $12,500 and is recorded as a
separate component of stockholders' equity. The share purchase warrants expire
on December 31, 2004.
NOTE 7: EMPLOYEE STOCK OPTION PLAN
- --------------------------------------------------------------------------------
Concurrent with the acquisition of Lexington, all prior stock option plans of
LRI were cancelled. 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.
A summary of the Company's stock options as of December 31, 2003, and changes
during the period ended is presented below:
December 31, 2003
-----------------------------
Weighted
Number of average
options exercise price
Outstanding at beginning of period - $ -
Granted November 19, 2003 3,000,000 0.167/share
Exercised November 24, 2003 (1,650,000) (0.167)/share
-------------- --------------
Exercisable at end of period 1,350,000 $0.167/share
============== ==============
In January 2004, 1,200,000 stock options were exercised 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 ICI which was assigned by ICI to IMT designated
option holders.
F-14
LEXINGTON RESOURCES, INC. (FORMERLY INTERGOLD CORPORATION)
(an exploration stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 7: 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 1,000,000 to 4,000,000 in
anticipation of the Company's January 26, 2004 3 for 1 forward stock split. The
number of shares authorized under the SOP is not otherwise altered as a result
of the Company's forward and reverse stock splits.
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.
NOTE 8: RELATED PARTY TRANSACTIONS
- --------------------------------------------------------------------------------
LRI RELATED PARTY TRANSACTIONS DURING THE PERIOD JANUARY 1, 2003 TO NOVEMBER 19,
2003:
The Company, on January 1, 1999, entered into a management services agreement
with Investor Communications, Inc. ("ICI") to provide management of the
day-to-day operations of the Company for a two year term. The management
services agreement requires monthly payments not to exceed $75,000 for services
rendered. The Company's currently inactive subsidiary, International Gold
Corporation, entered into a similar agreement on January 1, 1999 with Amerocan
Marketing, Inc. ("Amerocan") with required monthly payments not to exceed
$25,000 for services rendered for a two year term. Both agreements were extended
for a further two year term to January 1, 2003. Subsequent to January 1, 2003,
the Agreements with ICI and Amerocan expired and were not renewed.
On November 10, 2003, the Company and International Market Trend AG ("IMT")
entered into a financial consulting services agreement (the "Consulting
Agreement") for a period of one year. Pursuant to the terms and provisions of
the Consulting Agreement: (i) IMT shall provide financial and general managerial
and business development services to the Company; and (ii) the Company granted
to IMT and/or its designees or employees, 2,850,000 stock options at the
exercise price of $0.167 per share.
An officer and director of the Company has been contracted by ICI as part of the
management team provided to the Company and its subsidiary. During the period
ended November 19, 2003 a total of $110,000 (2002 - $96,900) was incurred to ICI
which is also a significant shareholder, for managerial, administrative and
investor relations services provided to the Company and its subsidiary. During
the period ended November 19, 2003 ICI paid a total of $25,875 (2002 - $12,325)
to this officer and director for services provided to the Company and its
subsidiary. ICI also paid the Chief Financial Officer of the Company $13,750 for
his services for the period ended November 19, 2003. In addition, during the
period ended November 19, 2003, ICI and other shareholders paid expenses on
behalf of the Company totaling $47,000 (2002 - $24,592). As of November 19,
2003, the Company owed ICI a total of $672,805 in accrued management fees
payable, loans of $356,998 and interest of $282,477 accrued on outstanding loans
and management fees payable, for a total of $1,312,280 (2002 - $1,044,247).
During the period ended November 19, 2003 the Company settled $1,260,027 in
loans, notes and accrued interest due to related parties in exchange for the
issuance of 630,276 shares of the Company's common stock.
LRI RELATED PARTY TRANSACTIONS NOVEMBER 20, 2003 THROUGH DECEMBER 31, 2003:
An officer and director of the Company has been contracted by ICI as part of the
management team provided to the Company and its subsidiary. During the period
November 19, 2003 through December 31, 2003 a total of $10,000 was incurred to
ICI, a significant shareholder, for managerial, administrative and investor
relations services provided to the Company and its subsidiary. As of December
31, 2003 the Company owed ICI a total of $448,370 in management fees payable
which have accrued as described above, loans of $59,498, and interest of
$282,477 accrued at 10% per annum on outstanding loans and unpaid management
fees payable, for a total of $790,345. (Refer to Note 11)
A private company owned by a director of the Company has been assigned a 5%
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 his services relating to
operation and completion of wells to be located on the Wagnon Lease. In
addition, after all capital costs relating to drilling on wells relating to the
Wagnon Lease are repaid to the private Funding Investors, the director of the
Company will back-in to a further reversionary 5.0% Working Interest in each
well to be located on the Wagnon Lease. After well drilling capital is repaid,
the director will have a total 10.0% Working Interest in each well to be located
on the Wagnon Lease. (Refer to Notes 4 and 5.)
F-15
LEXINGTON RESOURCES, INC. (FORMERLY INTERGOLD CORPORATION)
(an exploration stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 9: INCOME TAXES
- --------------------------------------------------------------------------------
The Company has adopted FASB No. 109 for reporting purposes. As of December 31,
2003, 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 10 - SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS
- --------------------------------------------------------------------------------
Period ended December
31, 2003
------------------------------------------------------------------
Cash paid during the period for:
Interest $ -
Income taxes $ -
------------------------------------------------------------------
During the period November 19, 2003 through December 31, 2003 the Company
settled $250,000 of advances due to ICI for 300,000 shares of common stock. The
Company also issued 1,650,000 common shares on the exercise of stock options at
$0.167 per share for the offset of prior advances (refer to Note 6).
NOTE 11: SUBSEQUENT EVENTS
- --------------------------------------------------------------------------------
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 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 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/ORIENT AGREEMENT
On January 21, 2004, Orient and Douglas Humphreys, a director of the Company
("Humphreys") entered into an agreement (the "Humphreys/Orient Agreement").
Pursuant to the terms and provisions of the Humphreys/Orient 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.
F-16
LEXINGTON RESOURCES, INC. (FORMERLY INTERGOLD CORPORATION)
(an exploration stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 11: SUBSEQUENT EVENTS (CONT'D)
- --------------------------------------------------------------------------------
PALUCA AGREEMENT
On January 21, 2004, the Company, Lexington. ("Paluca Petroleum Inc. ("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.
WAGNON FARM OUT
Lexington completed the drilling of the Kellster 1-5 well on its Wagnon farm-out
prospect in February 2004. The well is currently in production.
COAL CREEK PROJECT
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 is valid until approximately April 11, 2004.
The Company paid a deposit of $50,000 towards the option in March 2004 and in
order to earn the option must pay a further acreage fee up to $637,500.
STOCK AND STOCK OPTION TRANSACTIONS SUBSEQUENT TO DECEMBER 31, 2003 Refer to
Notes 6 and 7.
F-17
The following table of contents has been designed to help you find
important information contained in this prospectus. We encourage you to read the
entire prospectus.
TABLE OF CONTENTS
PAGE NUMBER
PROSPECTUS SUMMARY 2
RISK FACTORS 5
RISKS RELATED TO THIS OFFERING AND OUR COMMON STOCK 5
RISKS RELATING TO OUR BUSINESS 6
FORWARD-LOOKING STATEMENTS 17
USE OF PROCEEDS 18
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 18
DIVIDEND POLICY 18
MANAGEMENT'S DISCUSSION AND ANALYSIS 20
DESCRIPTION OF BUSINESS 27
LEGAL PROCEEDINGS 36
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS 37
EXECUTIVE COMPENSATION 39
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 40
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 43
DESCRIPTION OF COMMON STOCK 43
PLAN OF DISTRIBUTION 44
SELLING SHAREHOLDERS 46
LEGAL MATTERS 48
EXPERTS 48
INTEREST OF NAMED EXPERTS 49
DISCLOSURE OF SEC POSITION OF INDEMNIFICATION FOR SECURITIES ACT LIABILITIES 49
WHERE YOU CAN FIND MORE INFORMATION 49
FINANCIAL STATEMENTS F-1