U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 0-25455
LEXINGTON RESOURCES, INC.
(Exact name of small business issuer as specified in its charter)
NEVADA 88-0365453
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
7473 West Lake Mead Road
Las Vegas, Nevada 89128
(Address of Principal Executive Offices)
(702) 382-5139 (Issuer's telephone number)
n/a
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
------- -------
Applicable only to issuers involved in bankruptcy
proceedings during the preceding five years.
N/A
Check whether the Registrant filed all documents required to be filed
by Section 12, 13 and 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes No
------- -------
Applicable only to corporate issuers
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Class Outstanding as of May 12, 2005
17,303,405
Common Stock, $.00025 par value
Transitional Small Business Disclosure Format (check one)
Yes No X
PART I. FINANCIAL INFORMATION
ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 2
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS 3
INTERMIN CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS 4
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION OR PLAN OF OPERATION
ITEM 3. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 16
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 21
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 22
ITEM 5. OTHER INFORMATION 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 22
SIGNATURES 23
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
LEXINGTON RESOURCES, INC.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(Unaudited)
CONSOLIDATED BALANCE SHEETS
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
F-1
- -------------------------------------------------------------------------------------------------------------------------------
LEXINGTON RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2005 2004
- --------------------------------------------------------------------------------------------- ---------------- ----------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash $ 63,007 $ 326,293
Accounts receivable 97,648 136,573
Prepaid expenses - -
- --------------------------------------------------------------------------------------------- ---------------- ----------------
160,655 462,866
- --------------------------------------------------------------------------------------------- ---------------- ----------------
PROPERTY AND EQUIPMENT (Note 4)
Oil and gas properties, full cost method of accounting
Proved, net of accumulated depletion of $216,236 1,447,212 1,209,938
Unproved 2,056,010 1,419,447
- --------------------------------------------------------------------------------------------- ---------------- ----------------
3,503,222 2,629,385
Other property and equipment, net of accumulated depreciation 2,831 2,997
- --------------------------------------------------------------------------------------------- ---------------- ----------------
3,506,053 2,632,382
- --------------------------------------------------------------------------------------------- ---------------- ----------------
$ 3,666,708 $ 3,095,248
============================================================================================= ================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 1,314,336 $ 228,819
Current portion of drilling advances (Note 5) 708,000 617,000
Due to related parties (Note 8) - -
- --------------------------------------------------------------------------------------------- ---------------- ----------------
2,022,336 845,819
DRILLING ADVANCES (Note 5) 378,609 563,915
- --------------------------------------------------------------------------------------------- ---------------- ----------------
2,400,945 1,409,734
- --------------------------------------------------------------------------------------------- ---------------- ----------------
CONTINGENCIES AND COMMITMENTS (Notes 1, 5 & 11)
STOCKHOLDERS' EQUITY (DEFICIENCY) (Note 6)
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:
17,277,052 common shares (2004 -16,999,038) 4,319 4,250
Additional paid-in capital 10,177,918 8,947,604
Common stock purchase warrants 301,815 301,815
Accumulated Deficit (9,218,289) (7,568,155)
- --------------------------------------------------------------------------------------------- ---------------- ----------------
1,265,763 1,685,514
- --------------------------------------------------------------------------------------------- ---------------- ----------------
$ 3,666,708 $ 3,095,428
============================================================================================= ================ ================
The accompanying notes are an integral part of these interim
consolidated financial statements.
F-2
LEXINGTON RESOURCES, INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three months Three months
Ended March 31, Ended March 31,
2005 2004
- ----------------------------------------------------------------- ------------------------- -------------------------
OIL AND GAS REVENUE $ 130,060 $ 40,690
- ----------------------------------------------------------------- ------------------------- -------------------------
EXPENSES
Depletion 54,907 2,679
Operating costs and taxes 58,065 -
- ----------------------------------------------------------------- ------------------------- -------------------------
112,972 38,011
- ----------------------------------------------------------------- ------------------------- -------------------------
OPERATING INCOME 17,088 38,011
- ----------------------------------------------------------------- ------------------------- -------------------------
OTHER EXPENSES
Consulting - stock based (Note 7) 775,753 2,989,221
General and administrative 891,469 138,126
Interest expense - 14,393
- ----------------------------------------------------------------- ------------------------- -------------------------
1,667,222 3,141,740
- ----------------------------------------------------------------- ------------------------- -------------------------
NET LOSS FOR THE PERIOD $(1,650,134) $ (3,103,729)
================================================================= ========================= =========================
BASIC NET LOSS PER SHARE $ (0.09) $ (0.23)
================================================================= ========================= =========================
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 17,049,854 13,766,629
================================================================= ========================= =========================
The accompanying notes are an integral part of these interim
consolidated financial statements.
F-3
LEXINGTON RESOURCES, INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the Three For the Three
Months Ended Months Ended
March 31, March 31,
2005 2004
- ------------------------------------------------------------------------------------ -------------------- --------------------
(Note 1)
Net loss for the period $ (1,650,134) $ (3,103,729)
Adjustments to reconcile net loss to net cash from operating activities:
Stock-based consulting fees 775,753 2,989,221
Non-cash compensation 81,354 -
Finance fees (12,434) -
Oil and gas depletion 54,907 2,679
Accrued interest - 14,393
Depreciation 166 -
Changes in working capital assets and liabilities
Prepaid expenses - 450
Accounts receivable 38,925 (58,190)
Accounts payable 90,729 55,592
- ------------------------------------------------------------------------------------ -------------------- --------------------
NET CASH FLOWS USED IN OPERATING ACTIVITIES (620,734) (99,584)
- ------------------------------------------------------------------------------------ -------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Oil and gas properties (15,310) (385,300)
- ------------------------------------------------------------------------------------ -------------------- --------------------
NET CASH FLOWS USED IN INVESTING ACTIVITIES (15,310) (385,300)
- ------------------------------------------------------------------------------------ -------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Drilling advances (94,306) -
Advances payable - 279,500
Net proceeds on sale of common stock 467,064 -
- ------------------------------------------------------------------------------------ -------------------- --------------------
NET CASH FLOWS FROM FINANCING ACTIVITIES 372,758 279,500
- ------------------------------------------------------------------------------------ -------------------- --------------------
INCREASE (DECREASE) IN CASH (263,286) (205,384)
CASH, BEGINNING OF PERIOD 326,293 351,420
- ------------------------------------------------------------------------------------ -------------------- --------------------
CASH, END OF PERIOD $ 63,007 $ 146,036
==================================================================================== ==================== ====================
SUPPLEMENTAL CASH FLOW INFORMATION (Refer to Note 10)
The accompanying notes are an integral part of these interim
consolidated financial statements.
F-4
LEXINGTON RESOURCES INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
- --------------------------------------------------------------------------------
(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 formed for the purposes 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. As planned principal operations
commenced in 2004 the Company is no longer considered to be an exploration stage
company.
GOING CONCERN
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 $1,861,681 has incurred losses since inception of $9,218,289 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. The Company will continue
to fund operations with advances, other debt sources, further equity placements
and the expected exercise of outstanding warrants.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying unaudited interim consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB of Regulation
S-B. They do not include all information and footnotes required by generally
accepted accounting principles for complete financial statements. However,
except as disclosed herein, there have been no material changes in the
information disclosed in the notes to the financial statements for the year
ended December 31, 2004 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 three
months ended March 31, 2005 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2005.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
(A) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, Lexington. Lexington was acquired by reverse
acquisition on November 19, 2003. All significant inter-company transactions and
account balances have been eliminated.
(B) 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. Under this method, all productive and
nonproductive costs incurred in connection with the exploration for and
development of oil and gas reserves 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.
F-5
LEXINGTON RESOURCES INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
- --------------------------------------------------------------------------------
(UNAUDITED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
- --------------------------------------------------------------------------------
Depletion of proved oil and gas properties is computed on the
units-of-production method based upon estimates of proved reserves, as
determined by independent consultants, with oil and gas being converted to a
common unit of measure based on their relative energy content.
The costs of acquisition and exploration of unproved oil and gas properties,
including any related capitalized interest expense, are not subject to
depletion, but are assessed for impairment either individually or on an
aggregated basis. The costs of certain unevaluated leasehold acreage are also
not subject to depletion. Costs not subject to depletion are periodically
assessed for possible impairment or reductions in value. If a reduction in value
has occurred, costs subject to depletion are increased or a charge is made
against earnings for those operations where a reserve base is not yet
established.
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 which limits such costs
to the aggregate of the estimated present value, using a ten percent discount
rate of the estimated future net revenues from production of proven reserves at
year end at 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.
(C) ASSET RETIREMENT OBLIGATIONS
The Company has adopted the provisions of SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires the fair value of a liability for
an asset retirement obligation to be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
related oil and gas properties. As of March 31, 2005 management has determined
that there are no material asset retirement obligations.
(D) 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. 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 (loss) per share. Loss per share, as presented, has been restated to
reflect the forward stock split described in Note 6. The weighted average number
of shares outstanding prior to the reverse acquisition is deemed to be the
number of shares issued in connection with the reverse acquisition being
9,000,000 shares (3,000,000 pre January 26, 2004 3:1 forward split).
(E) REVENUE RECOGNITION
Oil and natural gas revenues are recorded using the sales method, whereby the
Company recognizes oil and natural gas revenue based on the amount of oil and
gas sold to purchasers, when title passes, the amount is determinable and
collection is reasonably assured.
(F) FINANCIAL INSTRUMENTS
The fair values of cash, accounts receivable, accounts payable, accrued
liabilities, drilling advances and advances due to related parties were
estimated to approximate their carrying values due to the immediate or
short-term maturity of these financial instruments. The Company's operations are
currently in the State of Oklahoma, in the United States, and as a result the
Company is not subject to significant exposure to market risks from changes in
foreign currency rates.
The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash and accounts receivable. The Company's cash is
held at a major financial institution. The Company manages and controls market
and credit risk through established formal internal control procedures, which
are reviewed on an ongoing basis.
F-6
LEXINGTON RESOURCES INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
- --------------------------------------------------------------------------------
(UNAUDITED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
- --------------------------------------------------------------------------------
The Company sells its gas to only one customer as there is currently
insufficient production for multiple purchasers. The Company manages and
controls this situation by ensuring it only deals with gas purchasers that are
reputable and are well established.
(G) CONCENTRATION OF CREDIT RISK
Substantially all of the Company's sales are to one party. Consequently the
Company is exposed to a concentration of credit risk.
(H) USE OF ESTIMATES
The preparation of these consolidated financial statements requires the use of
certain estimates by management in determining the Company's assets,
liabilities, revenues and expenses. Actual results could differ from such
estimates. Depreciation, depletion and amortization of oil and gas properties
and the impairment of oil and gas properties are determined using estimates of
oil and gas reserves. There are numerous uncertainties in estimating the
quantity of reserves and in projecting the future rates of production and timing
of development expenditures, including future costs to dismantle, dispose, plug,
and restore the Company's properties. Oil and gas reserve engineering must be
recognized as a subjective process of estimating underground accumulations of
oil and gas that cannot be measured in an exact way. Proved reserves of oil and
natural gas are estimated quantities that geological and engineering data
demonstrate with reasonable certainty to be recoverable in the future from known
reservoirs under existing conditions.
(I) STOCK-BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board ("FASB") 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 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 7:
Three months ended March Year ended
31, 2005 December 31, 2004
----------------------------- ----------------------------
Net loss for the period As reported $ (1,667,222) $ (6,092,689)
SFAS 123 compensation expense Pro-forma - (692,051)
----------------------------- ----------------------------
Net loss for the period Pro-forma $ (1,667,222) $ (6,784,740)
============================= ============================
Pro-forma basic net loss per share Pro-forma $ (0.09) $ (0.43)
============================= ============================
F-7
LEXINGTON RESOURCES INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
- --------------------------------------------------------------------------------
(UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
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 FASB 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.
(J) 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.
(K) CASH AND CASH EQUIVALENTS
The company considers all highly liquid instruments with an original maturity of
three months or less at the time of issuance to be cash equivalents.
NOTE 3 - ACQUISITION OF LEXINGTON OIL & GAS LTD. CO. LLC ("LEXINGTON")
- --------------------------------------------------------------------------------
By Share Exchange Agreement dated November 19, 2003, the Company acquired 100%
of the issued and outstanding shares of Lexington (an exploration stage
company), in exchange for 9,000,000 (3,000,000 pre January 26, 2004 3:1 forward
split) restricted shares of common stock of the Company. As a result of this
transaction the former stockholders of Lexington acquired approximately 85% of
the total issued and outstanding shares of the Company as at November 19, 2003,
resulting in a change in control of the Company.
During January, 2004, the parties to the Share Exchange Agreement, Orient
Exploration Ltd. ("Orient"), Douglas Humphreys ("Humphreys"), the Company,
Lexington, and Paluca Petroleum Inc. ("Paluca") 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.
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.
F-8
LEXINGTON RESOURCES INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
- --------------------------------------------------------------------------------
(UNAUDITED)
NOTE 3 - ACQUISITION OF LEXINGTON OIL & GAS LTD. CO. LLC ("LEXINGTON") -(CONT'D)
- --------------------------------------------------------------------------------
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.
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 Humphreys, a director of the Company, 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 Lexington 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 up to 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 up to 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 7.)
During the period ended March 31, 2005 the Company recorded additional
compensation expense to Humphreys of $81,354 (2004 - $NIL) being the estimated
value of his 10% carried interest in the Company's wells that were successfully
developed in the period end March 31, 2005. (Refer to Note 4.)
Humphreys is a director of the Company and is the Drilling Operations Manager of
Lexington, and also consults to Oak Hills Drilling and Operating, LLC ("Oak
Hills"), an oil and gas drilling and operating company based in Holdenville,
Oklahoma that acts as designated "operator" to Lexington since January 1, 2005.
Humphreys is in charge of oil and gas operations in Oklahoma. (Refer to Note 8.)
The previous operator in charge of drilling and operating of wells for Lexington
was Oakhills Energy, Inc.
F-9
LEXINGTON RESOURCES INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 4 - PROPERTY AND EQUIPMENT
- --------------------------------------------------------------------------------
Paluca is a private Oklahoma based oil and gas services company owned by
Humphreys and his immediate family. Some of the services provided by Humphreys
to the Company are provided through this business entity. Mr. Humphreys is also
the President of Paluca Inc.
Property and equipment include the following:
MARCH 31, DECEMBER 31,
2005 2004
------------------ -----------------
OIL AND GAS PROPERTIES: $ $
Proved, subject to depletion 1,663,448 1,371,266
Unproved, not subject to depletion 2,056,010 1,419,447
Accumulated depletion (216,236) (161,328)
------------------ -----------------
Net oil and gas properties 3,503,222 2,629,385
------------------ -----------------
Other equipment 3,495 3,495
Accumulated depreciation (664) (498)
------------------ -----------------
Net other property and equipment 2,831 2,997
------------------ -----------------
Property and equipment, net of
accumulated depreciation and depletion 3,506,053 2,632,382
================== =================
The Company's oil and gas activities are currently conducted in the United
States.
During the current period the Company incurred development costs of $1,010,100
on its 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 an 80% working interest and
a 60.56% net revenue interest in approximately 590 gross 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 a total 20% working interest between Paluca,
Oakhills Energy, Inc. and the lessee of the Wagnon Property.
A director and an officer of LRI were minority owners in Oakhills Energy, Inc.
in 2003. Their interest in Oakhills Energy, Inc. was purchased by the majority
shareholder on January 26, 2004.
During the year ended December 31, 2004 three gas wells (the Kellster 1-5,
Kyndal 2-2 and Bryce 3-2) have been put into production.
On March 15, 2005 the Company began drilling a fourth well on the Wagnon
Property (Caleigh 4-2). The well began producing on April 2, 2005. During the
period ended March 31, 2005 the Company has spent $1,663,166 on drilling
expenditures on the Wagnon lease. (Refer to Note 5.)
F-10
LEXINGTON RESOURCES INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
- --------------------------------------------------------------------------------
(UNAUDITED)
NOTE 4 - PROPERTY AND EQUIPMENT - (CONT'D)
- --------------------------------------------------------------------------------
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 year ended December 31, 2004 the Company acquired 1,932 net
leasehold acres under the option. The Company does not expect to acquire any
additional acreage under this 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.
On March 31, 2005 the Company began drilling the first well on the Coal Creek
Prospect (Lex 1-34). The well is currently in the completion stage and
production is expected to begin by the end of April 2005. The Company has
approximately a 50% working interest in the well and has accrued $316, 987 in
costs associated with the well for the period.
On April 15, 2005 the Company began drilling the second well on its Coal Creek
Prospect (Braumbaugh 1-10 ). The Company has a 22% working interest in the
Braumbaugh 1-10 well (contingent liability of $125,000 for a completed well
based on Oak Hills Drilling & Operating Authority For Expenditure "AFE").
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. Part of the acreage in this
lease has been subject to three division pooling orders by Newfield Exploration
Mid-Continent, Inc. ("Newfield"), for three wells to be drilled and operated by
Newfield in which Lexington has elected to participate. Lexington's working
interests in the three wells are proportionate to Lexington's Panther Creek
lease ownership in areas pooled by Newfield. Lexington working interests in the
three wells are estimated to be as follows; 25.78% (contingent liability of
$419,801 for a completed well based on Newfield Authority For Expenditure
"AFE"), 10.94% (contingent liability of $159,655 for a completed well based on
Newfield AFE if drilled), and 4.06% (contingent liability of $58,521 for a
completed well based on Newfield AFE if drilled). Newfield has up to
approximately the end of 2005 to drill such wells and may or may not proceed
with any individual well project at their election. Contingent liability exists
to Lexington for any well drilled by Newfield that Lexington has elected to
participate. Newfield has proceeded with the drilling of one of the wells in
which Lexington has leased acreage.
The first of the three wells, the POE 1-29, commenced drilling on February 9,
2005 and began producing on March 21, 2005. The company has accrued $333,205 on
the POE 1-29 as of March 31, 2005.
SOUTH LAMAR PROSPECT
By agreement dated April 21, 2004, Lexington acquired a 100% working interest,
78.5% net revenue interest, in 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.
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.
F-11
LEXINGTON RESOURCES INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
- --------------------------------------------------------------------------------
(UNAUDITED)
NOTE 4 - PROPERTY AND EQUIPMENT - (CONT'D)
- --------------------------------------------------------------------------------
MIDDLE CREEK PROSPECT
By agreement dated October 28, 2004, Lexington has purchased an undivided 100%
leasehold interest, 70% net revenue interest, in 320 net leasehold acres in two
sections of the Middle Creek Prospect located in Hughes County, in the State of
Oklahoma. Drilling targets are the Caney Shale and Hartshorne zones. The
leasehold interest acquired is held by production.
NOTE 5: DRILLING ADVANCES
- --------------------------------------------------------------------------------
During the period ended December 31, 2003 Lexington, the Company, and Oakhills
Energy, Inc. 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 March 31, 2005, the Company had received the total
required funding of $1,080,000 ( 2004 - $720,000) for the drilling and
completion of the first three Wagnon Lease wells and has successfully drilled
and completed the Kellster 1-5, the Kyndal 2-2 well and the Bryce 3-2 wells. 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 Energy, Inc. entered into drilling
agreements with the Funding Investors for the drilling and completion of a
fourth Wagnon Lease well, the Caleigh 4-2. The Company began drilling the
Caleigh 4-2 on March 15, 2005. As of March 31, 2005, $405,000 had been received
for the drilling of the Caleigh 4-2. The Caleigh 4-2 began production on April
2, 2005.
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). 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, 60.56% 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. Oakhills Energy, Inc., the previous operator responsible for drilling the
wells, 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 advances will be written off when such determination is made.
Management has estimated that the non-current portion of the drilling advances
as at March 31, 2005 is $563,915 (2004 - nil).
As of March 31, 2005, the Funding Investors have been repaid $398,391 (2004 -
nil) of their $1,080,000 investment in the Kellster 1-5, Kyndal 2-2 and Bryce
3-2 wells. The amount paid in the period ended March 31, 2005 was $94,306. (2004
- - nil)
NOTE 6: 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.
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.
F-12
LEXINGTON RESOURCES INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
- --------------------------------------------------------------------------------
(UNAUDITED)
NOTE 6: STOCKHOLDERS' EQUITY (CONT'D)
- --------------------------------------------------------------------------------
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 dates of the reverse and forward stock splits have been restated to
reflect the one-for-three hundred reverse split and the one-for-three forward
split on a retroactive basis.
STOCK OPTION EXERCISE - 2004
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 ICI which was assigned by Investor Communications
International, Inc. ("ICI") to International Market Trend AG ("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 an IMT designated option holder, as described in
Note 8.
On June 25, 2004 the Company issued 320,000 shares of its common stock, upon the
exercise of 320,000 stock options at $3.00 per share for proceeds of $960,000.
PRIVATE PLACEMENTS
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 exercisable 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 was up to
$6,100,500. Brokers' fees payable on the September Units were: 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. On November 1, 2004 LRI completed the
sale of an aggregate of 1,700,686 Units. The Company filed a registration
statement (form SB-2) with the Securities and Exchange Commission ("SEC") on
December 15, 2004, 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; the registration statement went effective on January 24,
2005 and the warrants under this filing expire July 23, 2005.
As of December 31, 2004, 1,700,686 September Units had been sold for proceeds of
$2,319,264, net of an $180,746 agent fee which was charged to additional paid in
capital. Of the 1,700,686 units sold 376,318 were non-brokered and 1,324,368
were brokered. The fair value of the warrants was estimated to be $0.147 each
and $250,001 has been recorded as a separate component of stockholders' equity.
The fair value of the 46,353 broker warrants issued to date has been estimated
to be $0.147 per warrant and as a result, $6,814 has been 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 as
described in Note 6; and (2) pursuant to a non-brokered placee that paid $40,550
for 27,585 units. The Company does not intend to sell any further securities
under this offering.
F-13
LEXINGTON RESOURCES INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 6: STOCKHOLDERS' EQUITY (CONT'D)
- --------------------------------------------------------------------------------
SHARE PURCHASE WARRANTS
Share purchase warrants outstanding at March 31, 2005 are:
Weighted average
Range of Weighted Number (remaining contractual)
exercise prices average price of shares life (in years)
- -------------------------------------------------------------------------------
$1.68 - $5.00 $2.078 1,669,025 .37
===============================================================================
In the period ended March 31, 2005, 278,014 share purchase warrants were
exercised at $1.68 per purchase warrant providing $454,630 in proceeds to the
Company, net of brokers' fees of $12,434.
In April 2005, 26,353 share purchase warrants were exercised at $1.68 per
purchase warrant providing $44,273 in proceeds to the Company.
NOTE 7: STOCK OPTION PLAN
- --------------------------------------------------------------------------------
By Directors' Resolution dated July 2, 2004 the Company (1) increased the
authorized number of options under its Stock Option Plan ("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 March 31, 2005, 4,700,000 options under the Company's current SOP have
been granted and 3,665,000 have been exercised.
A summary of the Company's stock options as of March 31, 2005, and changes
during the period ended is presented below:
--------------------- ----------------------- -----------------------
Weighted average Weighted average
Number of exercise price remaining contractual
options per share life (in years)
--------------------- ----------------------- -----------------------
$
Outstanding at December 31, 2003 1,350,000 0.50 3.64
Exercised January 22, 2004 (1,200,000)
Granted February 2, 2004 1,000,000
--------------------- ----------------------- -----------------------
Exercisable at March 31, 2004 1,150,000 1.76 4.11
Exercised May 18, 2004 (495,000)
Exercised June, 2004 (320,000)
Granted July 26, 2004 200,000
Cancellation, February 1, 2005 (100,000)
Granted February 1, 2005 600,000
--------------------- ----------------------- -----------------------
Exercisable at March 31, 2005 1,035,000 2.02 3.44
===================== ======================= =======================
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 to
consultants 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. Of these options, 100,000 were granted to
an officer of the Company.
F-14
LEXINGTON RESOURCES INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
- --------------------------------------------------------------------------------
(UNAUDITED)
NOTE 7: STOCK OPTION PLAN (CONT'D)
- --------------------------------------------------------------------------------
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.
On February 1, 2005, 500,000 options were granted at $1.00 per share to IMT. The
term of these options is five years. The fair value of these options at the date
of grant of $646,054 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 239.25%.
On February 1, 2005, 100,000 existing S-8 options were granted at $0.16667 per
share to IMT. The term of these options is five years. The fair value of these
options at the date of grant of $129,699 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 239.25%.
NOTE 8: RELATED PARTY TRANSACTIONS
- --------------------------------------------------------------------------------
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2005
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 period
ended March 31, 2005 (2004 - $NIL).
On February 1, 2005 IMT was granted 600,000 stock options (refer to Note 7).
On November 9, 2004, the Company reached an agreement with Oak Hills to drill a
ten well program. Humphreys is a director of the Company and is the Drilling
Operations Manager of Lexington, and also consults to and is a 25% shareholder
of Oakhills Drilling and Operating, LLC., 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.
Humphreys has been assigned a 10% carried Working Interest in each well
successfully 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. The estimated value of
the 10% carried Working Interest of $81,354 (2004 - $NIL) has been recorded as
additional compensation expense during the period ended March 31, 2005. Total
additional compensation expense to Humphreys since inception of the Company to
March 31, 2005 is $198,384. Humphreys also has the right to purchase an
additional 5% working interest in each well to be located on the Wagnon Lease
and has elected to do so for the first four wells drilled on this lease. The
original 5% cost to participate in the wells by Humphreys was $60,000. As of
March 31, 2005 the Company was still owed $22,500 (2004 - $17,500) and has
recorded the amount as a receivable from Humphreys as full payment for an
additional 5% working interest in each of the Kellster 1-5, the Kyndal 2-2, and
the Bryce 3-2. Refer to Notes 3, 5, and 7.
During the period ended March 31, 2005 the Company incurred $58,500 to its
officers for management fees (2004 - $17,500).
F-15
LEXINGTON RESOURCES INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
- --------------------------------------------------------------------------------
(UNAUDITED)
NOTE 8: RELATED PARTY TRANSACTIONS (CONT'D)
- --------------------------------------------------------------------------------
On January 1, 2005, the Company appointed Oak Hills Drilling and Operating, LLC
of Oklahoma as its elected operator for wells on its Wagnon Lease, and for
further drilling to be conducted by Lexington. Oak Hills Drilling and Operating,
LLC replaces Oakhills Energy, Inc. as its designated operator.
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2004
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 quarter
ended March 31, 2004 a total of $30,000 was incurred to ICI, a significant
shareholder, for managerial, administrative and investor relations services
provided to the Company and its subsidiary. As of March 31, 2004 the Company
owed ICI a total of $483,370 in management fees payable which have accrued as
described above, loans of $65,998, and interest of $95,778 accrued at 10% per
annum on outstanding loans and unpaid management fees payable, for a total of
$645,146.
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.
Of the 1,000,000 stock options granted on February 2, 2004, 100,000 were granted
to an officer and director and 895,000 stock options were granted to IMT. IMT is
a services consultant to the Company engaged since November, 2003 for an initial
12 month period to provide corporate planning, strategy and negotiations,
internet based consulting, and general business consulting services as required
by the Company. (Refer to Note 7.)
NOTE 9: INCOME TAXES
- --------------------------------------------------------------------------------
The Company has adopted FASB No. 109 for reporting purposes. As of December 31,
2004, the Company had net operating loss carry forwards of approximately
$3,000,000 that may be available to reduce future years' taxable income and will
expire between the years 2006 - 2025. 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 carry forwards.
The Company evaluates its valuation allowance requirements on an annual basis
based on projected future operations. When circumstances change and this causes
a change in management's judgment about the recoverability of future tax assets,
the impact of the change on the valuation allowance is generally reflected in
current income.
NOTE 10: SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS
- --------------------------------------------------------------------------------
Period ended Period ended
March 31, 2005 March 31, 2004
--------------------------------- ---------------- -----------------
Cash paid during the year for:
Interest $ - $ -
Income taxes $ - $ -
--------------------------------- ---------------- -----------------
F-16
Statements made in this Form 10-QSB that are not historical or current
facts are "forward-looking statements" made pursuant to the safe harbor
provisions of Section 27A of the Securities Act of 1933 (the "Act") and Section
21E of the Securities Exchange Act of 1934. These statements often can be
identified by the use of terms such as "may," "will," "expect," "believe,"
"anticipate," "estimate," "approximate" or "continue," or the negative thereof.
We intend that such forward-looking statements be subject to the safe harbors
for such statements. We wish to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made. Any
forward-looking statements represent management's best judgment as to what may
occur in the future. However, forward-looking statements are subject to risks,
uncertainties and important factors beyond our control that could cause actual
results and events to differ materially from historical results of operations
and events and those presently anticipated or projected. We disclaim any
obligation subsequently to revise any forward-looking statements to reflect
events or circumstances after the date of such statement or to reflect the
occurrence of anticipated or unanticipated events.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATION
GENERAL
Lexington Resources, Inc. is a corporation organized under the laws of
the State of Nevada (herein known as "we" or the "Company"). We currently trade
on the OTC Bulletin Board under the symbol "LXRS" and on the Frankfurt and
Berlin Stock Exchanges under the symbol "LXR"; WKN: A0BKLP.
CURRENT BUSINESS OPERATIONS
We are a natural resource exploration and production company currently
engaged in the acquisition and development of oil and gas properties in the
United States. We expect to weight our future development initiatives towards
gas production. We are committed to developing into a profitable independent oil
and gas producer through the systematical expansion of operations and the
acquisition of new drilling targets while organizing drilling and production
initiatives on leased properties.
Our wholly owned subsidiary, Lexington Oil & Gas Ltd. Co., an Oklahoma
limited liability company ("Lexington"), 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 Property"). We hold an 80%
working interest and a 60.56% net revenue interest in the Wagnon Property. We
have drilled, completed and are producing gas from four wells drilled on the
Wagnon Property.
We have also successfully drilled, completed, and are producing from
two further CBM gas wells located on our Coal Creek Project. In addition, we
have a 25% working interest in a third gas well drilled, completed, and
producing by Newfield Exploration Mid-Continent, Inc. In total, we have
interests in 6 CBM gas wells and 1 non-CBM gas well, and estimated acreage
suitable for the drilling of a further 70-100 CBM gas wells. All wells drilled
to date have reached the completion stage and have been productive with
immediate gas sales to market.
We have also consummated the acquisition of certain additional coal bed
methane gas 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 4,925 gross acres in the H-9 Prospect. We
currently have an aggregate of approximately 590 gross developed and 8,613 gross
undeveloped acres pursuant to leases and/or concessions as more fully described
below. It is anticipated 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 and oil producing domains, and to implement additional development
initiatives by drilling new wells to developed reserves and to provide revenues.
We plan to continue building and increasing a strategic base of proven reserves
and production opportunities first targeted within Oklahoma's Arkoma Basin, and
diversifying alternative development initiatives in the State of Texas.
OIL AND GAS PROPERTIES
As of the date of this Quarterly Report, we have not reported nor filed
any reserve estimates with any Federal agencies, but have commenced production
from certain properties as more fully described below. We obtained an
independent reserve and economic evaluation report regarding the Wagnon Property
that was conducted by Fletcher Lewis Engineering, Inc. of Oklahoma. The
following is a description of our oil and gas properties.
WAGNON PROPERTY
We hold an 80% working interest and a 60.56% net revenue interest in
approximately 590.2 gross acres of a gas lease located in Pittsburg County,
Oklahoma (the "Wagnon Property"). 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"). Our interest relating to the Wagnon Property is subject to
farm-out agreements equating to a total 20% working interest between Paluca
Petroleum Inc. ("Paluca"), an affiliate of one of our directors, Douglas
Humphreys, Oak Hills Energy, and the lessee of the Wagnon Property.
As of March 31, 2005, we have drilled, completed and put four wells
into production on this prospect, the Kellster #1-5, the Kyndal #2-2, the Bryce
#3-2, and the Caleigh #4-2. On April 2, 2005, the Caleigh #4-2 coal bed methane
gas well commenced production. It is estimated that up to a total of 5 wells may
drilled on this the Wagnon Property.
We previously entered into funding agreements for the Kellster #1-5,
Kyndal #2-2, Bryce #3-2, and Caleigh #4-2 wells (collectively, the "Funding
Agreements"). Pursuant to the Funding Agreements, private investors were
provided with an 80% working interest and a 60.56% 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 original
driller and operator of the wells, will "back-in" to a reversionary 6.7% working
interest after invested capital is repaid to the private investors and we will
"back-in" to a reversionary 53.2% working interest. Pursuant to the further
terms and provisions of the Funding Agreements, all wells to be drilled on the
Wagnon property carry royalty interests totaling 25% to landowners and property
interest holders and carried working interests of 5% to a landowner, as well as
a 10% carried working interest to Paluca. Paluca also owns a non-carried working
interest of 5% as part of capital participation funding provided by Paluca. As
of March 31, 2005, the private investors have been repaid an aggregate of
$398,391 of their $1,080,000 investment under the Funding Agreements, of which
$94,306 was paid during the three-month period ended March 31, 2005.
COAL CREEK PROSPECT
During fiscal year 2004, we obtained an option to purchase an undivided
95% interest in approximately 2,500 net leasehold acres in five sections located
in Hughes and Pittsburg Counties, State of Oklahoma (the "Coal Creek Prospect").
On March 12, 2004, we entered into a two-year lease for approximately 1,536
gross acres in the Coal Creek Prospect pursuant to which we have an undivided
95% working interest and a minimum 79% net revenue interest. On May 20, 2004, we
entered into a two-year lease pursuant to which we acquired an additional 372
acres of the Coal Creek Prospect with a minimum 95 working interest and a 78%
net revenue interest. On August 20, 2004, we entered into an additional two-year
lease pursuant to which we acquired an additional 23 acres of the Coal Creek
Prospect with a minimum 95% working interest and a 79% net revenue interest.
As of the date of this Quarterly Report, the total acreage acquired in
the Coal Creek Gas Prospect is approximately 1,932 gross leasehold acres. On
March 31, 2005, we began drilling the first well on the Coal Creek Prospect, the
Lex #1-34, of which we have a 50% working interest. The Lex #1-34 well has been
completed and is currently in production. On April 15, 2005, we began drilling
the second well on the Coal Creek Project, the Brumbaugh #1-10 well, of which we
have a 22% working interest. The Brumbaugh #1-10 well has been completed and is
currently in production. It is estimated that interests in 12-16 wells may be
drilled on lease acreage owned by the Company that form part of the its Coal
Creek Prospect.
PANTHER CREEK PROSPECT
During March 2004, we entered into a three-year lease for approximately
292 acres located in five separate sections in the Panther Creek coal bed
methane gas prospect located in Hughes County, State of Oklahoma (the "Panther
Creek Prospect"). We have a 100% working interest and an approximate 81% net
revenue interest in the Panther Creek Prospect.
A portion of the acreage in the Panther Creek Prospect is subject to
three division pooling orders by Newfield Exploration Mid-Continent Inc., a
subsidiary of Newfield Exploration Company ("Newfield"), for three wells to be
drilled and operated by Newfield in which we have elected to participate. On
January 25, 2005, we entered into the joint operating agreement with Newfield to
participate in the proposed wells to be drilled (the "Joint Operating
Agreement"). Pursuant to the terms and provisions of the Joint Operating
Agreement: (i) Newfield shall drill and operate the first well and explore other
zones up to 8500 feet in depth; (ii) we have an approximate 25% working interest
in the first completed well; (iii) we have an approximate 10.94% working
interest in the second completed well; (iv) we have an approximate 4.06% working
interest in the third completed well; and (v) Newfield has up to approximately
the end of fiscal year 2005 to drill such wells and may or may not proceed with
any individual well project at their discretion.
On February 9, 2005, Newfield commenced drilling on the first well, the
POE #1-29 and, as of March 21, 2005, the POE #1-29 well commenced production.
SOUTH LAMAR PROSPECT
On April 21, 2004, we entered into a two-year lease agreement to
acquire a 100% working interest and a 78.5% net revenue interest in 960 gross
undeveloped acres to develop coal bed methane gas wells in Hughes County, State
of Oklahoma (the "South Lamar Prospect"). On July 26, 2004, we acquired a
further 183.98 gross acres in the South Lamar Prospect pursuant to which we hold
a 100% working interest and a 79% net revenue interest. The Company is preparing
the drill site for the drilling of a first well on this site on this prospect,
the Goodson #1-24 well. The planned "Goodson #1-23" CBM Hartschorne Coal
targeted gas well is undergoing drilling site preparations, road work, and
pipeline planning.
MIDDLECREEK PROSPECT
On May 24, 2004, we entered into an agreement to acquire an undivided
100% leasehold interest and a 70% net revenue interest in 320 gross leasehold
acres located in two sections in the Middlecreek Prospect located in Hughes
County, State of Oklahoma (the "Middlecreek Prospect"). 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.
H-9 PROSPECT
On June 29, 2004, we entered into an option agreement to purchase a
leasehold interest and a net revenue interest in approximately 4,600 net
leasehold acres located in approximately 38 sections of the H-9 Prospect in
Hughes and McIntosh counties, State of Oklahoma (the "H-9 Prospect"). On July
29, 2004, we entered into three to four year lease agreements to acquire an
undivided 100% leasehold interest and a 79.25% net revenue interest in the 4,600
gross leasehold acres on the H-9 Prospect. On July 19, 2004, we entered into
another three-year lease to acquire a 100% leasehold interest and a 78.3% net
revenue interest in an additional 325 gross acres of gas target drillable
acreage on the H-9 Prospect.
WELLS DEVELOPED ON OIL AND GAS PROPERTIES
As of the date of this Quarterly Report, the following table summarizes
wells and working interests in wells under current development initiatives:
- -------------------------------- ----------------------------- ---------------------------- -----------------------------
COMPANY LEASE/PROSPECT WELL NAME INTEREST STATUS
- -------------------------------- ----------------------------- ---------------------------- -----------------------------
Wagnon Kellster #1-5 53.2% Back WI APO Producing
- -------------------------------- ----------------------------- ---------------------------- -----------------------------
Wagnon Kyndal #2-2 53.2% Back WI APO Producing
- -------------------------------- ----------------------------- ---------------------------- -----------------------------
Wagnon Bryce #3-2 53.2% Back WI APO Producing
- -------------------------------- ----------------------------- ---------------------------- -----------------------------
Wagnon Calleigh #4-2 53.2% Back WI APO Producing
- -------------------------------- ----------------------------- ---------------------------- -----------------------------
Panther Creek POE #1-29 25.7% WI Producing
- -------------------------------- ----------------------------- ---------------------------- -----------------------------
Coal Creek LEX #1 50.1% WI Producing
- -------------------------------- ----------------------------- ---------------------------- -----------------------------
Coal Creek Brumbaugh #1-10 22.2% WI Producing
- -------------------------------- ----------------------------- ---------------------------- -----------------------------
South Lamar Goodson #1-23 87.5% WI Drilling site prepared
- -------------------------------- ----------------------------- ---------------------------- -----------------------------
To date, we have committed to interests in 8 gas wells. All wells
drilled to date have reached the completion stage and have been productive with
immediate gas sales to market. We estimate that we have additional available
acreage suitable for the drilling of a further 70 to 100 coal bed methane gas
wells.
RESULTS OF OPERATION
THREE-MONTH PERIOD ENDED MARCH 31, 2005 COMPARED TO THREE-MONTH PERIOD ENDED
MARCH 31, 2004
Our net loss for the three-month period ended March 31, 2005 was
approximately ($1,650,134) compared to ($3,103,729) during the three-month
period ended March 31, 2004 (a decrease of $1,453,595). During the three-month
period ended March 31, 2005, we generated $130,060 in gross revenue compared to
$40,690 in gross revenue generated during the same period in 2004, resulting
primarily from the sale of gas produced from coal bed methane gas wells on the
Wagnon Property that started production in mid February 2004. The gross revenue
of $130,060 generated during the three-month period ended March 31, 2005 was
reduced by an aggregate of $112,972 ($54,907 in estimated depletion and $58,065
in operating costs and taxes, which resulted in operating income of $17,088. The
gross revenue of $40,690 generated during the three-month period ended March 31,
2004 was reduced by an aggregate of $2,679 in estimated depletion, which
resulted in operating income of $38,011. The increase in operating expenses
during the three-month period ended March 31, 2005 from the three-month period
ended March 31, 2004 was primarily the result of the increase in operating costs
and estimated depletion resulting from the increased number of operating wells.
During the three-month period ended March 31, 2005, we incurred other
expenses in the aggregate amount of $1,667,222 compared to $3,141,740 incurred
during the same period in 2004 (a decrease of $1,474,518), which consisted of:
(i) general and administrative expenses of $891,469 (2004: $138,126); (ii)
consulting fees - stock based compensation relating to the fair value of stock
options granted to consultants of $775,753 (2004: $2,989,221); and (iii)
interest expense of $-0- (2004: $14,393). The decrease in other expenses
incurred during the three-month period ended March 31, 2005 compared to the same
period during 2004 resulted primarily from the decrease in fair value of stock
options granted to consultants. General and administrative expenses increased
during the three-month period ended March 31, 2005 compared to the same period
during 2004 as a result of the increased drilling activity and overall business
operations. General and administrative expenses generally include corporate
overhead, financial and administrative contracted services, marketing, and
consulting costs.
Of the $1,667,222 incurred as other expenses during the three-month
period ended March 31, 2005, an aggregate of $30,000 was incurred payable to
International Market Trend AG ("IMT") for amounts due and owing for operational,
administrative and financial services rendered for the three-month period ended
March 31, 2005. On November 10, 2003, we entered into a consulting agreement
with IMT (the "Consulting Agreement"), whereby IMT performs a wide range of
management, administrative, financial, and business development services for us.
On February 1, 2005, we granted to IMT an aggregate of 500,000 stock options
exercisable at $1.00 per share for a period of five years. On February 1, 2005,
we also granted to IMT an aggregate of 100,000 stock options registered under an
S-8 Registration Statement exercisable at $0.16667 per share for a period of
five years.
Of the $1,667,222 incurred as other expenses during the three-month
period ended March 31, 2005, an aggregate of $58,500 to Douglas Humphreys
pursuant to managerial services performed, and $81,354 was recorded as
additional compensation expense to Mr. Humphreys relating to the estimated
valuation of his 10% carried working interest in our wells developed as at March
31, 2005. On July 12, 2004, we entered into a consultation agreement (the
"Humphreys Consultation Agreement") with Lexington Oil & Gas and Mr. Humphreys.
Pursuant to the Humphreys Consultation Agreement, Mr. Humphreys assists in
overseeing the drilling operations and the completion and management of our
wells. Mr. Humphreys compensation pursuant to the terms and provisions of the
Humphreys Consultation Agreement is: (i) $7,500 per month; (ii) the assignment
of up to 10% carried working interest in every well drilled on all properties
held by us, including the Wagnon Lease; (iii) the right to purchase up to 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) grant of 200,000 Stock Options to purchase
shares of our common stock at an exercise price of $3.00 per share (which were
granted July 2004). The Humphreys Consultation Agreement can be terminated at
any time with ninety days written notice by either party.
As discussed above, the decrease in net loss during the three-month
period ended March 31, 2005 compared to the three-month period ended March 31,
2004 is attributable primarily to the increase in oil and gas gross revenue and
the decrease in consulting fees - stock based compensation. Our net loss during
the three-month period ended March 31, 2005 was approximately ($1,650,134) or
($0.09) per share compared to a net loss of ($3,103,729) or ($0.23) during the
three-month period ended March 31, 2004. The weighted average number of shares
outstanding was 17,049,854 for the three-month period ended March 31, 2005
compared to 13,766,629 for the three-month period ended March 31, 2004 (which
had been restated in accordance with the forward stock split of three-for-one
shares of common stock effected January 26, 2004).
LIQUIDITY AND CAPITAL RESOURCES
Our financial statements have been prepared assuming that we will
continue as a going concern and, accordingly, do not include adjustments
relating to the recoverability and realization of assets and classification of
liabilities that might be necessary should we be unable to continue in
operation.
THREE-MONTH PERIOD ENDED MARCH 31, 2005
As of the three-month period ended March 31, 2005, our current assets
were $160,655 and our current liabilities were $2,022,336, which resulted in a
working capital deficit of $1,861,681. As of the three-month period ended March
31, 2005, our total assets were $3,666,708 consisting of: (i) $63,007 in cash;
(ii) $97,648 in accounts receivable; (iii) $1,447,212 carrying value of proved
oil and gas properties (net of depreciation); (iv) $2,056,010 in carrying value
of unproved oil and gas properties; and (v) $2,831 in other property and
equipment (net of accumulated depreciation). As of the three-month period ended
March 31, 2005, our total liabilities were $2,400,945 consisting of: (i)
$1,086,609 in current and non-current drilling obligations; and (ii) $1,314,336
in accounts payable and accrued liabilities.
Stockholders' equity decreased from $1,685,514 for fiscal year ended
December 31, 2004 to $1,265,763 for the three-month period ended March 31, 2005.
We have not generated positive cash flows from operating activities.
For the three-month period ended March 31, 2005, net cash flows used in
operating activities was ($620,734) compared to net cash flows used in operating
activities for the three-month period ended March 31, 2004 of ($99,584). Net
cash flows used in operating activities for the three-month period ended March
31, 2005 consisted primarily of a net loss of ($1,650,134). Net cash flows used
in operating activities was adjusted by $899,746 to reconcile net loss to net
cash from operating activities primarily relating to the non-cash expense of the
grant of stock options and non-cash compensation and oil and gas depletion.
Net cash flows from investing activities was ($15,310) for the
three-month period ended March 31, 2005 compared to net cash flows used in
investing activities for the three-month period ended March 31, 2004 of
($385,300), which primarily pertained to the acquisition of the oil and gas
properties.
Net cash flows from financing activities was $372,758 for the
three-month period ended March 31, 2005 compared to net cash flows from
financing activities for the three-month period ended March 31, 2004 of
$279,500. Net cash flows from financing activities for the three-month period
ended March 31, 2005 consisted of $467,064 (2004: $-0-) in net proceeds on sale
of stock, which was adjusted by ($94,306) in drilling advances, and $-0- in
advances (2004: $279,500).
PLAN OF OPERATION
During fiscal year 2004, we completed the sale of an aggregate of
1,351,953 Units 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 plus accrued
interest of $12,637 exchanged the promissory notes and accrued interest 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 1,351,953 warrants from the
offering (the "November Warrants") are exercisable for a term of 180 days after
the Registration Statement filed by us for the resale of the common stock and
the shares of common stock underlying the November Warrants (Registration
Statement declared effective on January 21, 2005 creating an expiry term of July
23, 2005). As of the date of this Quarterly Report, an aggregate of 304,367
November Warrants were exercised this year for aggregate proceeds of $498,903,
net of $12,434 in brokers' fees.
Existing working capital, further advances and possible debt
instruments, anticipated warrant exercises, further private placements, 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, debt and
or advances, 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, 2004 and
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
we 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.
MATERIAL COMMITMENTS
DRILLING OBLIGATIONS
As of the date of this Quarterly Report, we have committed to drilling
and operating four wells on the Wagnon Property and have elected to participate
in the drilling of a well on the Panther Creek Prospect with Newfield. We have
also drilled and are operating two further wells on our Coal Creek Prospect.
Pertaining to the private drilling capital obtained for the drilling of the four
wells on our Wagnon Property, as at March 31, 2005, we have received from the
funding investors the total funding requirement of $1,080,000 for the drilling
and completion of the Kellster #1-5, the Kyndal #2-2, and the Bryce #3-2 wells.
As at March 31, 2005, we have received from the funding investors an additional
$405,000 for the drilling and completion of the Caleigh #4-2 well. As at March
31, 2005, we have paid the funding investors approximately $398,391, of which
$94,306 was paid during the three-month period ended March 31, 2005.
OFF-BALANCE SHEET ARRANGEMENTS
As of the date of this Quarterly Report, we do not have any off-balance
sheet arrangements that have or are reasonably likely to have a current or
future effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources that are material to investors. The term "off-balance sheet
arrangement" generally means any transaction, agreement or other contractual
arrangement to which an entity unconsolidated with us is a party, under which we
have: (i) any obligation arising under a guaranteed contract, derivative
instrument or variable interest; or (ii) a retained or contingent interest in
assets transferred to such entity or similar arrangement that serves as credit,
liquidity or market risk support for such assets.
ITEM III. CONTROLS AND PROCEDURES
An evaluation was conducted under the supervision and with the
participation of our management, including Grant Atkins, our President and Chief
Executive Officer, and Vaughn Barbon, our Treasurer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures as at March 31, 2005. Based on that evaluation, Messrs. Atkins and
Barbon concluded that our disclosure controls and procedures were effective as
of such date to ensure that information required to be disclosed in the reports
that we file or submit under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), is recorded, processed, summarized and reported within the
time periods specified in Commission rules and forms. Such officers also confirm
that there was no change in our internal control over financial reporting during
the three-month period ended March 31, 2005 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
AUDIT COMMITTEE REPORT
The Board of Directors has established an audit committee. The members
of the audit committee are Mr. Steven Jewett, Mr. Doug Humphreys, and Mr. Norman
MacKinnon. Two of the three members of the audit committee are "independent"
within the meaning of Rule 10A-3 under the Exchange Act. The audit committee was
organized in April 2004 and operates under a written charter adopted by our
Board of Directors.
The audit committee has reviewed and discussed with management our
unaudited financial statements as of and for the three-month period ended March
31, 2005. The audit committee has also discussed with Dale Matheson Carr-Hilton
LaBonte the matters required to be discussed by Statement on Auditing Standards
No. 61, Communication with Audit Committees, as amended, by the Auditing
Standards Board of the American Institute of Certified Public Accountants. The
audit committee has received and reviewed the written disclosures and the letter
from Dale Matheson Carr-Hilton LaBonte required by Independence Standards Board
Standard No. 1, Independence Discussions with Audit Committees, as amended, and
has discussed with Dale Matheson Carr-Hilton LaBonte their independence.
Based on the reviews and discussions referred to above, the audit
committee has recommended to the Board of Directors that the unaudited financial
statements referred to above be included in our Quarterly Report on Form 10-QSB
for the three-month period ended March 31, 2005 filed with the Securities and
Exchange Commission.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Management is not aware of any legal proceedings contemplated by any
governmental authority or any other party involving us or our properties. As of
the date of this Quarterly Report, no director, officer or affiliate is (i) a
party adverse to us in any legal proceeding, or (ii) has an adverse interest to
us in any legal proceedings. Management is not aware of any other legal
proceedings pending or that have been threatened against us or our properties.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
EXERCISE OF SHARE PURCHASE WARRANTS
As of the date of this Quarterly Report, we have issued an aggregate of
304,367 shares of common stock to shareholders pursuant to the exercise of share
purchase warrants this year. During fiscal year 2004, we completed the sale of
an aggregate of 1,351,953 Units 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 plus
accrued interest of $12,637 exchanged the promissory notes and accrued interest
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 November Warrants are
exercisable until July 23, 2005 (Registration Statement declared effective on
January 21, 2005 creating an expiry term of July 23, 2005).
As of the date of this Quarterly Report, an aggregate of 304,367
November Warrants were exercised for aggregate proceeds of $498,903, net of
$12,434 in brokers' fees. The 304,367 shares of common stock were issued to the
shareholders in reliance on the registration provisions of the Securities Act of
1933, as amended, in accordance with the terms of the Registration Statement.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
No report required.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No report required.
ITEM 5. OTHER INFORMATION
No report required.
ITEM 5. OTHER INFORMATION
No report required.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
31.1 Certification of Chief Executive Officer pursuant to Securities
Exchange Act of 1934 Rule 13a-14(a) or 15d-14(a).
31.2 Certification of Chief Financial Officer pursuant to Securities
Exchange Act of 1934 Rule 13a-14(a) or 15d-14(a).
32.1 Certifications pursuant to Securities Exchange Act of 1934 Rule
13a- 14(b) or 15d-14(b) and 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Reports on Form 8-K:
Report on Form 8-K Item 5.01 filed on February 18, 2005.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
LEXINGTON RESOURCES, INC.
Dated: May 13, 2005 By: /s/ Grant Atkins
---------------------------
Grant Atkins, President and
Chief Executive Officer
Dated: May 13, 2005 By: /s/ Vaughn Barbon
---------------------------
Vaughn Barbon, Chief Financial
Officer