PART I
Overview
We are an oil and gas exploration, development and production company. Our oil and gas property interests are located in Western Canada (in Berwyn, Medicine River, Boundary Lake, and Wildmere in Alberta, and Clarke Lake and Inga in British Columbia) and in the United States (in the Piqua region of the State of Kansas). Our business focus is to acquire producing and non-producing oil and gas right interests and develop oil and gas properties that we own or in which we have a leasehold interest. We also anticipate pursuing the acquisition of leaseholds and sites within other geographic areas that meet our general investment guidelines and targets. The majority of our operational duties are outsourced to consultants and independent contractors, including for drilling, maintaining and operating our wells, and we maintain a limited in-house employee base.
We are a publicly traded company and our shares of common stock (“
Common Shares
”) are quoted for trading on the Over-the-Counter Bulletin Board (“
OTCBB
”), a regulated electronic trading service offered by the National Association of Securities Dealers (United States). We were incorporated under the laws of the State of Colorado on November 27, 2000 under the name “SIN Holdings, Inc.” On November 29, 2010, we changed our name to Legend Oil and Gas, Ltd. Our only subsidiary is Legend Energy Canada, Ltd. (“Legend Canada”), which was formed in Alberta, Canada on July 28, 2011. Legend Canada was formed to acquire, own and manage certain oil and gas properties and assets located in Canada held by International Sovereign Energy Corp. (the “
Sovereign Assets
”). Legend Canada completed the acquisition of the Sovereign Assets on October 20, 2011. Neither we nor Legend Canada are reporting issuers in any province of Canada.
Our principal offices are located at 1218 Third Avenue, Suite 505, Seattle, Washington, 98101, USA, and our registered office is located at 36 South 18th Avenue, Suite D, Brighton, Colorado 80601, USA. The registered office of Legend Canada is located at 230 840 - 6
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Avenue SW, Calgary, Alberta T2P 3E5, Canada.
Background
From our inception until June 2010, we pursued our original business plan of developing a web portal listing senior resources across the United States through our then wholly-owned subsidiary, Senior-Inet, Inc. On May 18, 2010, Desert Bloom Investments, Inc., a company wholly-owned by Mr. Steve Sinohui, divested its majority interest in us, which consisted of 6,000,000 Common Shares, representing 82.4% of our issued and outstanding Common Shares, and 100,000 shares of our preferred stock, $0.001 par value per share (“
Preferred Shares
”), representing 100% of our issued and outstanding Preferred Shares. This transfer of ownership was accomplished by a private transaction between Desert Bloom Investments, Inc. and Mr. James Vandeberg, whereby Mr. Vandeberg acquired a total of 5,849,000 Common Shares from Desert Bloom Investments, of which he voluntarily surrendered and cancelled 4,250,000 Common Shares. The 151,000 remaining Common Shares originally owned by Desert Bloom Investments were granted to another party. The 100,000 Preferred Shares relinquished by Desert Bloom Investments were also surrendered and cancelled. Prior to this change of control, our Board of Directors and our majority shareholder, Desert Bloom Investments, Inc., approved the transaction by written consent. An information statement was sent to all of our shareholders of record informing them of the change of control.
Prior to the change of control, Mr. Sinohui served as our sole executive officer and director. Immediately after the change of control, Mr. Vandeberg became our sole executive officer and director. In September 2010, Mr. Marshall Diamond-Goldberg was appointed as our President and was also appointed to our Board to serve as a director. Mr. Vandeberg became our Vice President and remained our Chief Financial Officer, Secretary and a director. With the change of control, our Board of Directors decided to explore new business opportunities that it believed would be more beneficial to our shareholders than the Senior-Inet web portal business plan. Accordingly, we dissolved Senior-Inet, Inc., our former subsidiary, on July 29, 2010.
On September 1, 2010, we entered into a Consulting Services Agreement with Marlin Consulting Corp., a company wholly-owned by Marshall Diamond-Goldberg. Pursuant to this Consulting Agreement, Mr. Diamond-Goldberg serves as our President. Under the Consulting Agreement, we were obligated to issue 20% of our outstanding Common Shares to Marlin Consulting. On October 1, 2010, in lieu of us issuing equity and causing dilution to our shareholders, and in order to attract investment capital to fund our new business plan, Mr. Vandeberg transferred 605,600 Common Shares held by him to Marlin Consulting Corp., representing 20% of the then-outstanding shares. Mr. Vandeberg also gifted a total of 397,800 Common Shares to two other persons. As a result of these transactions, Mr. Vandeberg’s ownership decreased to 595,600 Common Shares, an approximate 19.7% interest.
Also to accommodate additional investment capital to fund our new business plan, and in furtherance of our change in business, on October 4, 2010, the Board of Directors approved a 20:1 stock split for each Common Share outstanding on October 5, 2010, and an amendment to our Articles of Incorporation to change our name from “SIN Holdings, Inc.” to “Legend Oil and Gas, Ltd.” These actions were approved by written consent of shareholders owning a majority of our issued and outstanding Common Shares.
Effective November 29, 2010, our name was changed to Legend Oil and Gas, Ltd. and we completed the 20:1 stock split, which resulted in a total of 60,560,000 Common Shares issued and outstanding. Our post-split authorized Common Shares remained at 400,000,000 Common Shares with a par value of $0.001 per share. All per share information presented in this Report is reflective of the forward stock split (except for the foregoing paragraphs). Additionally our post-split authorized Preferred Shares remained at 100,000,000 shares, par value $0.001 per share.
Purchase of Canadian Assets in 2011
On October 20, 2011, our wholly-owned subsidiary, Legend Canada completed the acquisition of petroleum and natural gas leases, lands and facilities held by International Sovereign Energy Corp. located in Canada.
The assets acquired consisted of substantially all of Sovereign’s assets, including interests in producing oil and gas leasehold properties in Western Canada that have been maintained through the drilling of internally generated low to medium risk exploration and development sites. The principal natural gas leasehold properties are located in Medicine River and Berwyn in Alberta, and Clarke Lake in British Columbia. The assets also include an interest in various light oil properties located in Red Earth and Swan Hills in Alberta, and in Inga in British Columbia. Schedule 1 of the Asset Purchase Agreement contains a detailed description of the Sovereign Assets sold to Legend Canada. In summary, the Sovereign Assets consist of the Petroleum and Natural Gas Rights, the Tangibles and Miscellaneous Interests, excluding the Excluded Assets, as those terms are defined in the Asset Purchase Agreement.
The purchase of the Sovereign Assets was pursuant to an Asset Purchase Agreement (the “
Asset Purchase Agreement
”) that we entered into on September 13, 2011, with Legend Canada and Sovereign. The Asset Purchase Agreement set a base purchase price of CA$9,500,000 in cash and 3,750,000 Common Shares. The sale of the Sovereign Assets was approved by Sovereign’s shareholders and the Toronto Stock Exchange. The Asset Purchase Agreement has an effective date of July 1, 2011 for purposes of adjustments. A copy of the Asset Purchase Agreement is attached as Exhibit 10.1 to our current report on Form 8-K dated September 12, 2011, filed with the SEC on September 16, 2011, and is incorporated herein by reference.
The net purchase price for the Sovereign Assets paid at closing was CA$8,905,031 in cash and 3,552,516 Common Shares. At closing, the purchase price was adjusted, on a pro-rata basis, for each Boepd (barrel of crude oil equivalent per day) that Sovereign’s monthly average Boepd production during the month of August 2011 was below the threshold production level of 300 Boepd, as provided in further detail in Article 4 of the Asset Purchase Agreement. This resulted in a downward adjustment to the purchase price at closing, reducing the cash portion to CA$9,105,031 and reducing the number of Common Shares to 3,552,516 shares. Also at closing, Sovereign made a working capital adjustment payment in the amount of CA$200,000 to Legend Canada in accordance with the Asset Purchase Agreement, which reduced the net cash portion of the purchase price to CA$8,905,031.
On October 20, 2011, Legend Canada borrowed CA$5.2 million through its CA$6.0 million revolving credit facility with National Bank of Canada to pay a portion of the purchase price. The remainder of the cash portion of the purchase price in the amount of CA$3,754,390 was paid using our cash on hand.
An additional working capital adjustment in the amount of approximately CA$220,000 was made within 45 days after the closing date. This working capital adjustment payment was based on the schedule of revenues generated and expenses incurred by Sovereign from production operations during the period from July 1, 2011, through the closing date.
Pursuant to the Asset Purchase Agreement, we filed a registration statement with the SEC for the resale of the Common Shares we issued to Sovereign on the closing date. The registration statement was declared effective by the SEC on March 15, 2012. We also agreed to use our reasonable best efforts to maintain the effectiveness of the registration statement until the earlier of (i) the date on which all of shares have been sold by Sovereign and (ii) November 23, 2012 (the date that is 12 months after the date that we filed our current report on Form 8-K with the SEC containing Form 10 information).
Under the Asset Purchase Agreement, we were required to issue additional Common Shares to Sovereign if the volume weighted average trading price (VWAP) of our Common Shares falls below threshold amounts during certain specified 10-day periods upon the registration statement being declared effective, as provided in further detail in Article 4 of the Asset Purchase Agreement, and as described below:
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(i)
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The first VWAP period was 10 days consisting of the five trading days prior to and the five trading days following the effectiveness of the registration statement. During this first VWAP period (March 8 through March 21, 2012), the volume weighted average trading price of our Common Shares was $0.8992.
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(ii)
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The second VWAP period was 10 days immediately following the end of the first VWAP period (March 22 through April 4, 2012).
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(iii)
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The third VWAP period was 10 days immediately following the end of the second VWAP period (April 5 through April 18, 2012). If the volume weighted average trading price of our Common Shares was less than the VWAP for either the first VWAP period or the second VWAP period, we would be required to issue additional Common Shares to Sovereign. We may be subject to two additional VWAP periods if the VWAP for our Common Shares is less than $1.00 per share during the 10 days following the expiration of the third VWAP period.
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Under the purchase agreement, Sovereign could not own more than 10% of the Company’s common stock, unless they chose to waive that condition. On May 17, 2012, in conjunction with the final VWAP calculations outlined above, Sovereign waived the 10% ownership limitation and we issued 21,350,247 shares of restricted common stock to Sovereign.
Under the Asset Purchase Agreement, we also granted to Sovereign a “put” option to require us to redeem the Common Shares if we fail to obtain listing for our Common Shares on the NYSE, Amex, NASDAQ, or any other stock market more senior than the OTCBB on or before March 31, 2012. The redemption price is $2.00 per share payable in cash. This put option existed on the original 3,552,516 common shares, of which Sovereign has disposed of 1,020,300, as well as the 21,350,247 shares of common stock issued to Sovereign on May 17, 2012. Any such equity issuance will dilute our existing shareholders.. We currently do not have sufficient cash assets available to pay the put rights in full in the event that they are exercised, in which case we will be in default of our obligations under our purchase asset agreement with Sovereign. The exercise of any of these put rights would have a material adverse effect on our business and financial condition.
The Asset Purchase Agreement with Sovereign concluded that we may have been at one time a “shell company” in the past. Accordingly, the Asset Purchase Agreement requires that we file “Form 10 information” with the SEC to accommodate the sale of restricted securities under Rule 144. We believe that we were never a shell company and that, even if we were deemed to have been a shell, we ceased to be a shell company in October 2010, when we acquired our first oil and gas producing properties, and that the filing of our Annual Report on Form 10-K for the year ended December 31, 2010 satisfied the Form 10 disclosure requirements. Nevertheless, we filed a Current Report on Form 8-K with the SEC on November 23, 2011 to include such “Form 10 information.”
Oil and Gas Properties
We have interests in oil and gas properties located in Western Canada (through our wholly-owned subsidiary, Legend Canada) and in the United States. Under the Asset Purchase Agreement discussed above, Legend Canada acquired a widespread and diverse property base within Western Canada from Sovereign. Some of the principal natural gas properties include Berwyn, Medicine River and Boundary Lake in Alberta, and Clarke Lake in British Columbia. Legend Canada also has an interest in a light oil property at Inga in British Columbia as well as heavy oil properties at Wildmere in Alberta. In the United States, we have property interests in Piqua, Kansas. For a description of our oil and gas properties in Canada and in the United States, see the section below in this Report entitled “DISCLOSURE RELATED TO OIL AND PROPERTIES.”
In 2012, we disposed of the Swan Hills and Red Earth assets in Canada, for net proceeds of CA$1,689,000. We also disposed of our Bakken assets in the United States for net proceeds of $397,000, as well retaining a 1.0% royalty interest on any future operations conducted on the lands.
We will continue to focus on acquiring producing and non-producing oil and gas right interests and developing oil and gas properties that we own or in which we have a leasehold interest. We also anticipate pursuing the acquisition of leaseholds and sites within other geographic areas that meet our general investment guidelines and targets.
Reserves
In March 2013, we obtained a report from an independent licensed petroleum engineering firm, KLH Consulting located in Wichita, Kansas (“
KLH
”), on the reserves and value of our Piqua, Kansas, leasehold properties as of December 31, 2012. These Piqua properties have been producing oil since our acquisition of the leasehold interests in October 2010. A copy of the KLH reserve report is attached as Exhibit 99.1 and is incorporated by reference.
In March 2013, we also obtained a reserve report from InSite Petroleum Consultants Ltd. (“
InSite
”), an independent expert engineering, geological, technical and advisory company, on our Canadian properties as of March 1, 2013. A copy of the InSite reserve report is attached as Exhibit 99.2 and is incorporated by reference.
For a more detailed discussion of the estimated reserves studies, see the section below in this Report entitled “DISCLOSURE RELATED TO OIL AND GAS PROPERTIES – Disclosure of Reserves.”
Operations
We have structured our operations in such a way as to mitigate operating expenses by maintaining a limited in-house employee base outside of our executive team. The majority of our operational duties have been, and are planned to be, outsourced to consultants and independent contractors, including drilling, maintaining and operating our wells.
We have a common management team with Legend Canada, including a small technical and executive staff, in order to minimize general and administrative expenses. Mr. Diamond-Goldberg is the President, Mr. Vandeberg is the Executive Vice President, and Mr. Kyle Severson is the Chief Financial Officer of both entities. In addition, Legend Canada employs an engineer and an accountant who will each be involved with both U.S. and Canadian operations. Other necessary technical and administrative functions are expected to be performed by contract personnel.
Production
In areas where we have a minority or non-operational working interest, we primarily engage in crude oil and natural gas exploration and production by participating on a “heads-up” basis alongside third-party interests in wells drilled and completed in spacing units that include our acreage. We typically depend on drilling partners to propose, permit and initiate the drilling of wells. Prior to commencing drilling, our partners are required to provide all interest owners within the designated spacing unit the opportunity to participate in the drilling costs and revenues of the well to the extent of their pro-rata share of such interest within the spacing unit. We assess each drilling opportunity on a case-by-case basis and may participate in wells that we expect to meet our return thresholds based upon our estimates of ultimate recoverable crude oil and natural gas, expertise of the operator and completed well cost from each project, as well as other factors. At the present time we expect to participate pursuant to our working interest in substantially all, if not all, of the wells proposed to us.
In areas where we have a majority or operational working interest, we will review the lands technically and propose the drilling of new exploratory or development wells as we see fit. These wells are internally approved by us for producing an Authority for Expenditures (AFE) as an estimate of full drilling, completion, and equipping costs for the particular drilling program. If we have working interest partners in these properties, the AFE for the work to be performed would be circulated for approval and a “cash call” would be issued to the approving parties. Non-participants would be subject to the penalty provisions of the appropriate joint venture agreement which is in effect for each particular property.
Markets for Oil and Gas
We utilize third-party marketers to sell our oil and gas production in the open market. As of the date of this Report, approximately 91.5% of our U.S. and Canadian production is sold through third party marketers. The remaining approximately 8.5% of our production is marketed through our joint venture partners, who hold working interests in properties with us. From time to time, we also enter into purchase contracts for the sale and marketing of our crude oil and natural gas. These contracts are generally evergreen contracts with termination rights by written notice of 30 days, which we believe to be standard to the industry.
The market for crude oil and natural gas that we will produce depends on factors beyond our control, including the extent of domestic production and imports of crude oil and natural gas, the proximity and capacity of natural gas pipelines and other transportation facilities, demand for crude oil and natural gas, the marketing of competitive fuels and the effects of state and federal regulation. The crude oil and natural gas industry also competes with other industries in supplying the energy and fuel requirements of industrial, commercial and individual consumers.
Our crude oil production is expected to be sold at prices tied to the spot crude oil markets. Our natural gas production is expected to be sold under short-term contracts and priced based on first of the month index prices or on daily spot market prices. We rely on our operating partners to market and sell our production. Our operating partners involve a variety of exploration and production companies, from large publicly-traded companies to small, privately-owned companies. We do not believe the loss of any single operator would have a material adverse effect on our company as a whole.
Historically, the prices received for oil and natural gas have fluctuated widely. Among the factors that can cause these fluctuations are:
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changes in global supply and demand for oil and natural gas;
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the actions of the Organization of Petroleum Exporting Countries, or OPEC;
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the price and quantity of imports of foreign oil and natural gas;
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acts of war or terrorism;
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political conditions and events, including embargoes, affecting oil-producing activity;
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the level of global oil and natural gas exploration and production activity;
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the level of global oil and natural gas inventories;
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technological advances affecting energy consumption; and
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the price and availability of alternative fuels.
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We have not entered into any derivative contracts; however, in the future we may enter into derivative contracts from time to time. These contracts are intended to hedge economic exposure to decreases in the prices of oil and natural gas. Hedging arrangements may expose us to risk of significant financial loss in some circumstances including circumstances where:
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our production or sales of natural gas are less than expected;
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payments owed under derivative hedging contracts come due prior to receipt of the hedged month’s production revenue; or
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the counter party to the hedging contract defaults on its contract obligations.
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In addition, hedging arrangements may limit the benefit we would receive from increases in the prices for oil and natural gas. We cannot assure you that any hedging transactions we may enter into will adequately protect us from declines in the prices of oil and natural gas. On the other hand, where we choose not to engage in hedging transactions in the future, we may be more adversely affected by changes in oil and natural gas prices than our competitors who engage in hedging transactions.
Seasonality
Generally, but not always, the demand and price levels for natural gas increase during colder winter months and decrease during warmer summer months. To lessen seasonal demand fluctuations, pipelines, utilities, local distribution companies, and industrial users utilize natural gas storage facilities and forward purchase some of their anticipated winter requirements during the summer. However, increased summertime demand for electricity has placed increased demand on storage volumes. Demand for crude oil and heating oil is also generally higher in the winter and the summer driving season — although oil prices are much more driven by global supply and demand. Seasonal anomalies, such as mild winters, sometimes lessen these fluctuations. The impact of seasonality on crude oil has been somewhat magnified by overall supply and demand economics attributable to the narrow margin of production capacity in excess of existing worldwide demand for crude oil.
Competition
Competition in the oil and natural gas industry is intense and most of our competitors have greater financial, technological and other resources than we have. We operate in the highly competitive areas of oil and natural gas exploitation, exploration, development and production. The oil and natural gas industry is characterized by rapid and significant technological advancements and introductions of new products and services using new technologies. We face intense competition from independent, technology-driven companies as well as from both major and independent oil and natural gas companies in each of the following areas:
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seeking to acquire desirable producing properties of new leases for future exploration;
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marketing our oil and natural gas production;
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integrating new technologies; and
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seeking to acquire the equipment and expertise necessary to develop and operate our properties.
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Some of our competitors are fully integrated oil companies and may be able to pay more for development, prospects and productive oil and natural gas properties and may be able to define, evaluate, bid for and purchase a greater number of properties and prospects than our financial or human resources permit. Further, our competitors may enjoy technological advantages and may be able to implement new technologies more rapidly than we can. Our ability to acquire, develop and exploit oil and natural gas properties will depend on our and our operators’ ability to successfully conduct operations, implement advanced technologies, evaluate and select suitable properties and consummate transactions in this highly competitive environment.
If we prove unable to secure additional capital sufficient to fund current exploration, and possible future production capacity, we will be at a competitive disadvantage in the marketplace, which would have a material adverse effect on our operations and potential profitability. We believe that the acquisition of the Sovereign Assets will assist in our efforts to compete in the oil and gas market place, but does not ensure that our endeavors to compete will be successful.
Governmental Regulation
Our oil and gas exploration and future production operations are subject to various federal, state, provincial and local laws and regulations governing prospecting, exploration, development, production, labor standards, occupational health and safety, control of toxic substances and emissions into the environment, storage and disposition of hazardous wastes and other matters involving environmental protection and employment. Environmental protection laws in the United States and Canada address the maintenance of air and water quality standards, the preservation of threatened and endangered species of wildlife and vegetation, the preservation of certain archaeological sites, reclamation, and limitations on the generation, transportation, storage, and disposal of solid and hazardous wastes, among other things. Such laws and regulations increase the costs of these activities and may prevent or delay the commencement or continuation of a given operation. There can be no assurance that all the required permits and governmental approvals necessary for any oil and gas exploration project with which we may be associated can be obtained on a timely basis, or maintained. Delays in obtaining or failure to obtain government permits and approvals may adversely impact our operations. The regulatory environment in which we operate could change in ways that would substantially increase costs to achieve compliance. In addition, significant changes in regulation could have a material adverse effect on our operations or financial position.
We do not believe that our environmental risks are or will be materially different from those of comparable companies in our industry. We believe our present activities substantially comply, in all material respects, with existing environmental, health and safety laws and regulations. However, our relative size compared to our competitors may make the impact of any environmental risk more significant to us than it would to our competitors. Compliance with environmental laws and our exposure to environmental risks could adversely affect our financial condition and results of operations, including by curtailment of production or material increases in the cost of production, development or exploration or otherwise.
In addition, because we have acquired and may acquire interests in properties that have been operated in the past by others, we may be liable for environmental damage, including historical contamination, caused by such former operators. Additional liabilities could also arise from continuing violations or contamination not discovered during our assessment of the acquired properties.
Regulation of Production
The production of oil and natural gas is subject to regulation under a wide range of federal, state, provincial and local statutes, rules, orders and regulations. Federal, state, provincial and local statutes and regulations require permits for drilling operations, drilling bonds and reports concerning operations. Such regulations govern conservation matters, including provisions for the unitization or pooling of oil and natural gas properties, the establishment of maximum allowable rates of production from oil and natural gas wells, the regulation of well spacing, and plugging and abandonment of wells. The effect of these regulations is to limit the amount of oil and natural gas that we can produce from our wells and to limit the number of wells or the locations at which we can drill, although we can apply for exceptions to such regulations or to have reductions in well spacing. Moreover, we may be subject to state, provincial or local production or severance taxes with respect to the production and sale of oil, natural gas and natural gas liquids within its jurisdiction.
The failure to comply with these laws and regulations can result in substantial penalties. Our competitors in the oil and natural gas industry are subject to the same regulatory requirements and restrictions that affect our operations.
Environmental, Health and Safety Regulation
There are numerous federal, state, provincial and local laws and regulations in the states and provinces in which we operate governing environmental protection, health and safety, including the discharge of materials into the environment. These laws and regulations generally relate to requirements to remediate spills of deleterious substances associated with oil and gas activities, the conduct of salt water disposal operations, and the methods of plugging and abandonment of oil and gas wells which have been unproductive, as well as to air and water quality.
These laws and regulations may, among other things:
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require the acquisition of various permits before drilling commences;
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restrict the types, quantities and concentration of various substances that can be released into the environment in connection with oil and natural gas drilling, production and transportation activities;
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limit or prohibit drilling activities on certain lands lying within wilderness, wetlands and other protected areas; and
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require remedial measures to mitigate pollution from former and ongoing operations, such as requirements to close pits and plug abandoned wells.
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These laws and regulations may also restrict the rate of oil and natural gas production below the rate that would otherwise be possible. This regulatory burden increases the cost of doing business in our industry and consequently affects profitability.
Laws and Regulations in the United States
The following is a summary of some of the material existing environmental, health and safety laws and regulations in the United States to which our business operations are subject.
Waste handling
. The Resource Conservation and Recovery Act, or “RCRA”, and comparable state statutes, regulate the generation, transportation, treatment, storage, disposal and cleanup of hazardous and non-hazardous wastes. Under the auspices of the federal Environmental Protection Agency, or “EPA”, the individual states administer some or all of the provisions of RCRA, sometimes in conjunction with their own, more stringent requirements. Drilling fluids, produced waters and most of the other wastes associated with the exploration, development and production of crude oil or natural gas are currently regulated under RCRA’s non-hazardous waste provisions. However, it is possible that certain oil and natural gas exploration and production wastes now classified as non-hazardous could be classified as hazardous wastes in the future. Any such change could result in an increase in our costs to manage and dispose of wastes, which could have a material adverse effect on our results of operations and financial position.
Comprehensive Environmental Response, Compensation and Liability Act
. The Comprehensive Environmental Response, Compensation and Liability Act, or “CERCLA”, also known as the Superfund law, imposes joint and several liability, without regard to fault or legality of conduct, in connection with the release of a hazardous substance into the environment. Persons potentially liable under CERCLA include the current or former owner or operator of the site where the release occurred and anyone who disposed or arranged for the disposal of a hazardous substance to the site where the release occurred. Under CERCLA, such persons may be subject to joint and several liabilities for the costs of cleaning up the hazardous substances that have been released into the environment, damages to natural resources and the costs of certain health studies. In addition, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment.
We lease and operate numerous properties that have been used for oil and natural gas exploration and production for many years. Hazardous substances may have previously been released on, at or under the properties owned, leased or operated by us, or on, at or under other locations, including off-site locations, where such substances have been taken for disposal. In addition, some of our properties have been or are operated by third parties or by previous owners or operators whose handling, treatment and disposal of hazardous substances were not under our control. These properties and the substances disposed or released on, at or under them may be subject to CERCLA, RCRA and analogous state laws. In certain circumstances, we could be responsible for the removal of previously disposed substances and wastes, to remediate contaminated property or to perform remedial plugging or pit closure operations to prevent future contamination. In addition, federal and state trustees can also seek substantial compensation for damages to natural resources resulting from spills or releases.
Water Discharges
. The Federal Water Pollution Control Act, or the “Clean Water Act”, and analogous state laws, impose restrictions and strict controls with respect to the discharge of pollutants, including oil and other substances generated by our operations, into waters of the United States or state waters. Under these laws, the discharge of pollutants into regulated waters is prohibited except in accordance with the terms of a permit issued by EPA or an analogous state agency. Federal and state regulatory agencies can impose administrative, civil and criminal penalties for non-compliance with discharge permits or other requirements of the Clean Water Act and analogous state laws and regulations.
The Safe Drinking Water Act, or “SDWA”, and analogous state laws impose requirements relating to underground injection activities. Under these laws, the EPA and state environmental agencies have adopted regulations relating to permitting, testing, monitoring, record keeping and reporting of injection well activities, as well as prohibitions against the migration of injected fluids into underground sources of drinking water.
Air Emission
. The Federal Clean Air Act and comparable state laws regulate emissions of various air pollutants through air emissions permitting programs and the imposition of other requirements. In addition, EPA and certain states have developed and continue to develop stringent regulations governing emissions of toxic air pollutants at specified sources. Federal and state regulatory agencies can impose administrative, civil and criminal penalties for non-compliance with air permits or other requirements of the Federal Clean Air Act and analogous state laws and regulations.
The Kyoto Protocol to the United Nations Framework Convention on Climate Change became effective in February 2005. Under the Protocol, participating nations are required to implement programs to reduce emissions of certain gases, generally referred to as greenhouse gases that are suspected of contributing to global warming. The United States is not currently a participant in the Protocol, and Congress has not acted upon recent proposed legislation directed at reducing greenhouse gas emissions. However, there has been support in various regions of the country for legislation that requires reductions in greenhouse gas emissions, and some states have already adopted legislation addressing greenhouse gas emissions from various sources, primarily power plants. The oil and natural gas industry is a direct source of certain greenhouse gas emissions, namely carbon dioxide and methane, and future restrictions on such emissions could impact our future operations.
Health Safety and Disclosure Regulation
. We are subject to the requirements of the federal Occupational Safety and Health Act, or “OSHA” and comparable state statutes. The OSHA hazard communication standard, the Emergency Planning and Community Right to Know Act and similar state statutes require that we organize and disclose information about hazardous materials stored, used or produced in our operations.
Other Laws and Regulations
. Various laws and regulations often require permits for drilling wells and also cover spacing of wells, the prevention of waste of natural gas and oil including maintenance of certain gas/oil ratios, rates of production and other matters. The effect of these laws and regulations, as well as other regulations that could be promulgated by the jurisdictions in which we have production, could be to limit the number of wells that could be drilled on our properties and to limit the allowable production from the successful wells completed on our properties, thereby limiting our revenues.
Canadian Laws and Regulations
Applicable Canadian federal and provincial environmental laws require that well and facility sites be abandoned and reclaimed, to the satisfaction of provincial authorities, in order to remediate these sites to near natural conditions. Also, environmental laws may impose upon “persons responsible” remediation obligations on contaminated sites. Persons responsible include persons responsible for the substance causing the contamination, persons who caused the release of the substance and any present or past owner, tenant or other person in possession of the site. Compliance with such legislation can require significant expenditures. A breach of environmental laws may result in the imposition of fines and penalties and suspension of production, in addition to the costs of abandonment and reclamation.
In December 2002, the Canadian government ratified the Kyoto Protocol. The Kyoto Protocol calls for Canada to reduce its emissions of greenhouse gases to 6% below 1990 “business as usual” levels between 2008 and 2012. It remains uncertain whether the Kyoto target of 6% below the 1990 emission levels will be enforced in Canada. On April 26, 2007, the Canadian government released “Turning the Corner: An Action Plan to Reduce Greenhouse Gases and Air Pollution”, which set forth a plan for regulations to address both greenhouse gases and air pollution. On March 10, 2008, the Canadian government released an update to this action plan, “Turning the Corner: Regulatory Framework for Industrial Greenhouse Gas Emissions”. Regulations for the implementation of the updated action plan were originally intended to be in force by January 1, 2010. However, Canada recently stated its intent to withdraw from the Kyoto Protocol. To date, no such regulations have been proposed.
Environmental legislation in the Province of Alberta involving oil and natural gas operations has been consolidated into the Environmental Protection and Enhancement Act (Alberta), the Water Act (Alberta) and the Oil and Gas Conservation Act (Alberta). These statutes impose environmental standards, require compliance, reporting and monitoring obligations and impose penalties. In addition, greenhouse gas emission reduction requirements are set out in the Climate Change and Emissions Management Act (Alberta) and came into effect on July 1, 2007. Under this legislation, Alberta facilities emitting more than 100,000 tons of greenhouse gases a year must reduce their emissions intensity by 12% from their respective baseline emissions. Companies have four options to choose from in order to meet the reduction requirements outlined in this legislation, including: (i) making improvements to operations that result in reductions; (ii) purchasing emission credits from other sectors or facilities that have reduced their emissions below the required emission intensity reduction levels; (iii) purchasing off-set credits from other sectors or facilities that have emissions below the 100,000 ton threshold and are voluntarily reducing their emissions in Alberta; or (iv) contributing to the Climate Change and Emissions Management Fund. Companies can choose one of these options or a combination thereof to meet their Alberta emissions reduction requirements.
Employees
As of December 31, 2012, we had 1 full-time employee in the U.S., Mr. Vandeberg, and Legend Canada had four full-time employees, consisting of Mr. Diamond-Goldberg, Mr. Kyle Severson, an engineer and an accountant who will each be involved with both U.S. and Canadian operations. We have a common management team with Legend Canada, sharing three executive officers who handle all day-to-day management responsibilities for the two entities. Our Chief Financial Officer, Mr. Severson, elected effective March 31, 2013, to convert to part-time contract status with the Company. We and Legend Canada retain engineers, geologists, landmen, pumpers, and other personnel on a contract or fee basis as necessary for our field and office operations.
Principal Offices
Our principal offices are located at 1218 Third Avenue, Suite 505, Seattle, WA, 98101, and are being subleased from The Apex Law Group, LLP, Mr. James Vandeberg’s law firm, on a month-to-month basis. The monthly lease amount beginning August 2013 was $1,500. From January 1, 2012, to July 31, 2012, the monthly lease amount was $2,500 per month. We plan to use space provided by Mr. Vandeberg until it is no longer suitable for our operations or circumstances demand otherwise.
Legend Canada’s principal offices are located at 840 – 6
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Avenue SW, Suite 230, Calgary, Alberta T2P 3E5. Effective November 1, 2011, Legend Canada entered into an office space lease for approximately 3,242 square feet.
The term of the lease is five years and provides for a base monthly rent of CA$4,322. Legend Canada paid a security deposit of $9,157 to the landlord under the lease.
You should carefully consider the risks described below together with all of the other information included in this Report. Many of the statements contained in or incorporated herein that are not historic facts constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by such statements. If any of the following risks actually occurs, our business, financial condition or results of operations could be harmed. In that case, you may lose a portion or all of your investment.
Risks Relating to Our Business
Our bank debt is payable on demand, and we may not have sufficient funds available to repay the loan if is called earlier than we anticipate. If we cannot obtain financing to pay the loan when called, we will be in default and may need to sell some or all of our properties, sell or merge our business, or file a petition in bankruptcy.
Our current credit facility with the Bank consists of a CA$3.5 million revolving demand loan and a CA$200,000 bridge loan. The Bank has the right to demand repayment of either of these loans at any time. We currently do not have sufficient cash assets to repay the loan in full if the Bank were to demand repayment. We may not have sufficient funds to repay the loan if it is called earlier than we plan. In such a case, we would be forced to sell assets or renegotiate with the Bank. The loan is secured by security interests in all of the assets of Legend Canada, including the Sovereign Assets. In addition, the borrowing base under this credit facility is subject to periodic review by the Bank, with the next review scheduled for June 1, 2013. There is no assurance that the available credit facility will continue to be available or whether it will be reduced. If the Bank reduces the amount available under the credit facility, we would be required to repay the Bank an amount to reduce our outstanding loan balance. Any such action by the Bank could have a material adverse effect on our financial condition and business. There is no assurance that any portion of this credit facility will be available to Legend Canada in the future. If we are unable to secure financing to pay off our credit facility on demand, whether from equity, debt or alternative funding sources, this would have a material adverse effect on our ability to continue as a going concern, and we may need to sell some or all of our properties, sell or merge our business, or file a petition in bankruptcy.
If Sovereign and holders of our Convertible Preferred Shares exercise their put option, our business and financial condition will be materially adversely affected.
Sovereign and the holders of our convertible preferred stock have “put” rights to require us to repurchase their shares at a price of $2.00 per share on demand. As of the date of this Report, we have received signed waivers from the holders of our convertible preferred stock of their put rights in consideration for our issuance to them of additional Common Shares; however, these waivers are contingent on Sovereign also agreeing to waive its rights. Sovereign has verbally indicated that it is willing to agree to a standstill agreement to not exercise the put rights while we continue in discussions. We cannot predict whether Sovereign will agree to waive their put rights, and they may not agree. We currently do not have sufficient cash assets available to repurchase the shares in the event that the put rights are exercised, in which case we will be in default of our obligations under our purchase agreement with Sovereign and the terms of the convertible preferred stock in our Articles of Incorporation. The exercise of any of these put rights would have a material adverse effect on our business and financial condition.
We are highly dependent on Marshall Diamond-Goldberg, our President, and James Vandeberg, our Vice President, and Kyle Severson, our Chief Financial Officer. The loss of either of them, upon whose knowledge, leadership and technical expertise we rely, would harm our ability to execute our business plan.
Our success depends heavily upon the continued contributions of Marshall Diamond-Goldberg and James Vandeberg, whose knowledge, leadership and technical expertise would be difficult to replace, and on our ability to retain and attract experienced engineers, geoscientists and other technical and professional contract staff. If we were to lose the services of either Messrs. Diamond-Goldberg or Vandeberg, our ability to execute our business plan would be harmed and we may be forced to cease or limit operations until such time as we are able to attract a suitable replacement. Mr. Diamond-Goldberg provides his services through a consulting agreement with Marlin Consulting Corp., a corporation solely owned and operated by Mr. Diamond-Goldberg; however, he and his consulting firm may terminate the services provided to us at any time. We do not have an employment agreement with Mr. Vandeberg. We do not maintain key person life insurance on either person.
We may be unable to obtain additional capital required to implement our business plan, which could restrict our ability to grow.
We will need additional capital to continue to grow our business via acquisitions and to further expand our exploration and development programs. We may be unable to obtain additional capital if and when required.
Future acquisitions and future exploration, development, production and marketing activities, as well as our administrative requirements (such as salaries, insurance expenses and general overhead expenses, as well as legal compliance costs and accounting expenses) will require a substantial amount of capital and cash flow.
We may pursue sources of additional capital through various financing transactions or arrangements, including joint venturing of projects, debt financing, equity financing or other means. We may not be successful in identifying suitable financing transactions in the time period required or at all, and we may not obtain the capital we require by other means. If we do not succeed in raising additional capital, our resources will not be sufficient to fund our planned expansion of operations in the future.
Any additional capital raised through the sale of equity may dilute the ownership percentage of our shareholders. Raising any such capital could also result in a decrease in the fair market value of our equity securities because our assets would be owned by a larger pool of outstanding equity. The terms of securities we issue in future capital transactions may be more favorable to our new investors, and may include preferences, superior voting rights and the issuance of other derivative securities. In addition, we have granted and will continue to grant equity incentive awards under our equity incentive plans, which may have a further dilutive effect.
Our ability to obtain financing, if and when necessary, may be impaired by such factors as the state of the capital markets (both generally and in the crude oil and natural gas industry in particular), our limited operating history, the location of our crude oil and natural gas properties and prices of crude oil and natural gas on the commodities markets (which will impact the amount of asset-based financing available to us), and the strength of our key employees. Further, if crude oil or natural gas prices on the commodities markets decline, our revenues will likely decrease and such decreased revenues may increase our requirements for capital. If the amount of capital we are able to raise from financing activities, together with our revenues from operations, is not sufficient to satisfy our capital needs (even to the extent that we reduce our operations), we may be required to cease or limit our operations, divest our assets at unattractive prices or obtain financing on unattractive terms.
We may incur substantial costs in pursuing future capital financing, including investment banking fees, legal fees, accounting fees, securities law compliance fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, which may adversely impact our financial condition.
Our estimates of crude oil and natural gas reserves may be inaccurate and our actual revenues may be lower than our financial projections.
Determining the amount of oil and gas recoverable from various formations where we have exploration and production activities involves great uncertainty. The process of estimating oil and natural gas reserves is complex and requires us to make significant decisions and assumptions in the evaluation of available geological, geophysical, engineering and economic data for each property. As a result, reserve estimates are inherently imprecise. Actual future production, oil and natural gas prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil and natural gas reserves may vary substantially from the estimates.
Projecting our expenditures on developing newly discovered oil or natural gas reserves in commercially viable quantities is difficult due to the inherent uncertainties of drilling in less known formations, the costs associated with encountering various drilling conditions, such as over-pressured zones and lost equipment, and changes in drilling plans and locations as a result of prior exploratory wells or additional seismic data and interpretations thereof.
If actual production results vary substantially from reserve estimates or our costs of development are significantly higher than projected, we will not meet our projections, which could result in a net loss and the impairment of our oil and natural gas properties.
We have a limited operating history, and may not be successful in achieving or sustaining profitable business operations.
We have a limited operating history and have not generated a sustained profit. Our business operations must be considered in light of the risks, expenses and difficulties frequently encountered in establishing a business in the crude oil and natural gas industry. We first generated revenues from operations in the quarter ended December 31, 2010. There can be no assurance that our business operations will prove to be successful in the long-term. Our future operating results will depend on many factors, including:
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our ability to raise adequate working capital;
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success of our development and exploration;
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demand for and pricing of natural gas and crude oil;
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the level of our competition;
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our ability to attract and maintain key management and employees; and
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our ability to efficiently explore, develop and produce sufficient quantities of marketable natural gas or crude oil in a highly competitive and speculative environment while maintaining quality and controlling costs.
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To achieve and sustain profitability in the future, we must, alone or with others, successfully manage the factors stated above, as well as continue to develop ways to enhance our production efforts. Despite our best efforts, we may not be successful in our exploration or development efforts, or obtain required regulatory approvals. There is a possibility that some of our wells may never produce natural gas or crude oil. Our failure to successfully address the obstacles that may arise, including those discussed above, could have a material adverse effect on our business.
We rely on third-party contractors in performing the majority of our operations.
The majority of our operational duties are outsourced to consultants and independent contractors, including for drilling, maintaining and operating our wells, and we maintain a limited in-house employee base. We may not be able to hire or retain the services of qualified third-parties as and when needed, or on commercially acceptable terms. In such a case, we may be required to curtail or significantly reduce operations, or expand our personnel to perform operations. In addition, we may not be able to properly control the timing and quality of work conducted by these third parties with respect to our projects. Our operating expenses may significantly increase. Any of these actions would have a material adverse effect on our results of operations, financial condition and business.
Strategic relationships upon which we may rely are subject to change, which may diminish our ability to conduct our operations.
Our ability to successfully acquire additional properties, to increase our oil and natural gas reserves, to participate in drilling opportunities and to identify and enter into commercial arrangements with customers will depend on developing and maintaining close working relationships with strategic partners, vendors, distributors and other industry participants. To continue to develop our business, we will endeavor to use the business relationships of our management to enter into strategic relationships, which may take the form of joint ventures or contractual arrangements with other oil and gas companies, including those that supply equipment and other resources which we may use in our business. We may not be able to establish these strategic relationships, or if established, we may not be able to adequately maintain them. In addition, the dynamics of our relationships with strategic partners may require us to incur expenses or undertake activities we would not otherwise be inclined to in order to fulfill our obligations to these partners or maintain relationships. If our strategic relationships are not established or maintained, our business, prospects, financial condition and results of operations may be materially adversely affected.
We have short-term leases on our undeveloped properties.
Our leases on certain undeveloped leasehold acreage may expire over the next one to eight years. A portion of our acreage is not currently held by production. Unless production in paying quantities is established on units within these leases during their primary terms or we obtain extensions of the leases, these leases will expire. If our leases expire, we will lose our right to develop the leased properties.
Challenges to title to our properties may impact our financial condition.
Title to oil and gas properties, including those purchased from Sovereign, is often not capable of conclusive determination without incurring substantial expense. Although we perform title work on all properties and other development rights we acquire, title defects may exist. In addition, we may be unable to obtain adequate insurance for title defects, on a commercially reasonable basis or at all. If title defects do exist, it is possible that we may lose all or a portion of our right, title and interests in and to the properties to which the title defects relate. To mitigate title problems, common industry practice is to obtain a “title opinion” from a qualified oil and gas attorney prior to the drilling operations of a well. Although we intend to follow industry practice, if our property rights are reduced, our ability to conduct our exploration, development and production activities may be impaired, which would have a material adverse effect on our business.
The possibility of a global financial crisis may significantly impact our business and financial condition for the foreseeable future.
The credit crisis and related turmoil in the global financial system may adversely impact our business and our financial condition, and we may face challenges if conditions in the financial markets do not improve. Our ability to access the capital markets may be restricted at a time when we would like, or need, to raise financing, which could have a material negative impact on our flexibility to react to changing economic and business conditions. The economic situation could have a material negative impact on contracted operators upon whom we are dependent for drilling our wells, our lenders or customers, causing them to fail to meet their obligations to us. Additional capital will be required in the event that we accelerate our drilling program or that crude oil prices decline substantially resulting in significantly lower revenues. Additionally, market conditions could have a material negative impact on any crude oil hedging arrangements we may employ in the future if our counterparties are unable to perform their obligations or seek bankruptcy protection.
Drilling for and producing oil and natural gas are high risk activities with many uncertainties that could impact the economic viability of our leasehold interests and properties.
Our future success will depend on the success of our exploration, development, and production activities, all of which are subject to numerous risks beyond our control, including the risk that drilling will not result in commercially viable oil or natural gas production. Our decision to purchase, explore, develop or otherwise exploit prospects or properties will depend in part on the evaluation of data obtained through geophysical and geological analyses, production data and engineering studies, the results of which are often inconclusive or subject to varying interpretations. The cost of drilling, completing and operating wells is often uncertain before drilling commences. Overruns in budgeted expenditures are common risks that can make a particular project uneconomical. Further, many factors may curtail, delay or cancel drilling, including the following:
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delays imposed by or resulting from compliance with regulatory requirements;
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pressure or irregularities in geological formations;
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shortages of or delays in obtaining qualified personnel, equipment or supplies, including drilling rigs and CO2;
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equipment failures or accidents; and
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adverse weather conditions, such as freezing temperatures and storms.
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The presence of one or a combination of these factors at our properties could adversely affect our business, financial condition and results of operations.
Drilling new wells could result in new liabilities, which could endanger our interests in our properties and assets.
There are risks associated with the drilling of oil and natural gas wells, including encountering unexpected formations or pressures, premature declines of reservoirs, blow-outs, craterings, sour gas releases, fires and spills, among others. The occurrence of any of these events could significantly reduce our revenues or cause substantial losses, impairing our future operating results. We may become subject to liability for pollution, blow-outs or other hazards. We do our best to insure against these hazards; however, such insurance has limitations on liability that may not be sufficient to cover the full extent of such liabilities. The payment of such liabilities could reduce the funds available to us or could, in an extreme case, result in a total loss of our properties and assets. Moreover, we may not be able to maintain adequate insurance in the future at rates that are considered reasonable. Oil and natural gas production operations are also subject to all the risks typically associated with such operations, including premature decline of reservoirs and the invasion of water into producing formations.
Decommissioning costs are unknown, may be substantial and could divert resources from other projects.
We may become responsible for costs associated with abandoning and reclaiming wells, facilities and pipelines which we use for production of oil and natural gas reserves. Abandonment and reclamation of these facilities and the associated costs are often referred to as “decommissioning”. We have not established any cash reserve account for these potential costs in respect of any of our properties. If decommissioning is required before economic depletion of our properties or if our estimates of the costs of decommissioning exceed the value of the reserves remaining at any particular time to cover such decommissioning costs, we may have to draw on funds from other sources to satisfy such costs. The use of other funds to satisfy such decommissioning costs could impair our ability to focus capital investment in other areas of our business and may dilute the ownership interests of our shareholders.
We may be prevented from conducting our business if we cannot obtain or maintain necessary licenses.
Our operations require licenses, permits and in some cases renewals of licenses and permits from various governmental authorities. Our ability to obtain, sustain or renew such licenses and permits on acceptable terms is subject to changes in regulations and policies and to the discretion of the applicable governments, among other factors. Our inability to obtain, or the loss of or denial of extension of, any of these licenses or permits could hamper or prevent us from operating our business.
We may have difficulty distributing our production, which could harm our financial condition.
In order to sell oil and natural gas that we are able to produce, we will have to make arrangements for storage and distribution to the market. We rely on local infrastructure and the availability of transportation for storage and shipment of our products, but infrastructure development and storage and transportation facilities may be insufficient for our needs at commercially acceptable terms in the localities in which we operate. This situation could be particularly problematic to the extent that our operations are conducted in remote areas that are difficult to access, such as areas that are distant from shipping or pipeline facilities. These factors may affect our ability to explore and develop properties and to store and transport our oil and natural gas production and may increase our operating expenses.
Fluctuations in exchange rates could adversely affect our business.
With our acquisition of the Sovereign Assets, consisting of producing properties in Alberta and British Columbia, Canada, most of our operations will be in Canada and most of our sales will be in Canadian dollars. Our cash flows will be impacted by the foreign exchange rate between the U.S. dollar and the Canadian dollar. Appreciation or depreciation in the value of the Canadian dollar relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. We have not entered into any currency hedging transactions to protect us against this risk, and while we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to satisfactorily hedge our exposure.
Risks Related to Our Industry
Environmental risks may adversely affect our business.
All phases of the oil and gas business present environmental risks and hazards and are subject to environmental regulation pursuant to a variety of federal, state, provincial and municipal laws and regulations. Environmental legislation provides for, among other things, restrictions and prohibitions on spills, releases or emissions of various substances produced in association with oil and gas operations. The legislation also requires that wells and facility sites be operated, maintained, abandoned and reclaimed to the satisfaction of applicable regulatory authorities. Compliance with such legislation can require significant expenditures, and a breach may result in the imposition of fines and penalties, some of which may be material. Environmental legislation is evolving in a manner that we expect may result in stricter standards and enforcement, larger fines and liability and potentially increased capital expenditures and operating costs. The discharge of oil, natural gas or other pollutants into the air, soil or water may give rise to liabilities to governments and third parties and may require us to incur costs to remedy such discharge. Compliance with environmental laws applicable to our business may cause us to curtail our future production or increase the costs of our production, development or exploration activities. If substantial enough, the costs could cause us to cease operations.
Government regulations and legal uncertainties could affect our ability to profitably explore and develop oil or gas resources.
Legislative and regulatory actions by governments may lead to changes in laws or regulations that negatively affect various aspects of oil and natural gas exploration and production, including within the primary geographic areas in which we have interests in oil and gas properties. The adoption of new laws or regulations, or the application of existing laws may decrease the growth in the demand or alter the cost of exploring for and developing natural resources which could in turn decrease the usage and demand for our production or increase our costs of doing business. Any of these restrictions could have a material adverse effect on our financial position.
Companies operating in the oil and gas industry are subject to substantial competition.
The oil and gas industry is highly competitive. Other oil and gas companies may seek to acquire oil and gas leases and other properties and services that we require to operate our business in the planned areas. This competition is increasingly intense as prices of oil and natural gas have risen in recent years. Additionally, other companies engaged in our line of business may compete with us in obtaining capital from investors. Competitors include larger companies that may have access to greater resources, may be more successful in the recruitment and retention of qualified employees and may conduct their own refining and petroleum marketing operations, which may give them a competitive advantage in the industry. If we are unable to compete effectively or respond adequately to competitive pressures, our results of operation and financial condition may be materially adversely affected.
The domestic prices at which oil and natural gas trade in the open market have experienced significant volatility, which can significantly negatively impact our business, revenues and reserve valuations.
The prices we will receive for our oil and natural gas production heavily influences our revenue, profitability, access to capital and future rate of growth. For example, due to recent decreases in the market prices of natural gas and the resulting decrease in the value of our reserves securing our credit facility with National Bank of Canada, the Bank reduced the maximum borrowing base under our credit facility. Future declines in market prices will adversely affect our revenues, forecasting and valuation. Especially in recent years, the domestic prices at which oil and natural gas trade in the open market have experienced significant volatility, and we believe will likely continue to fluctuate in the foreseeable future due to a variety of influences beyond our reasonable control, including without limitation the following:
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the price and quantity of imports of foreign oil and gas;
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political and economic conditions, including embargoes, in oil-producing countries or affecting other oil-producing activity;
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the level of global and domestic oil and gas exploration and production activity and inventories;
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technological advances affecting the level of oil and gas consumption;
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domestic and foreign governmental regulations;
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proximity and capacity of oil and gas pipelines and other transportation facilities;
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the price and availability of competitors’ supplies of oil and gas in captive market areas;
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the introduction, price and availability of alternative forms of fuel to replace or compete with oil and natural gas;
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domestic and foreign demand for oil and natural gas by both refineries and end users;
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competitive measures implemented by competitors in the oil and gas industry;
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political climates in nations that traditionally produce and export significant quantities of oil and natural gas and regulations and tariffs imposed by exporting and importing nations, including actions taken by the Organization of Petroleum Exporting Countries; and
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adverse weather conditions, including freezing temperatures and severe storms.
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Advanced technologies available in the industry cannot eliminate exploration risks.
Even when used and properly interpreted, three-dimensional (3-D) seismic data and visualization techniques only assist geoscientists in identifying subsurface structures and hydrocarbon indicators. Such data and techniques do not allow the interpreter to know conclusively if hydrocarbons are present or economically producible. In addition, three-dimensional (3-D) seismic data becomes less reliable when used at increasing depths. We could incur losses as a result of expenditures on unsuccessful wells. If exploration costs exceed our estimates, or if exploration efforts do not produce results which meet our expectations, our exploration efforts may not be commercially successful, which could adversely impact our ability to generate revenues from operations.
Risks Associated with Our Securities
Our Board of Directors’ ability to issue undesignated Preferred Shares and the existence of anti-takeover provisions may depress the value of our Common Shares.
Our authorized capital includes 100,000,000 Preferred Shares, of which 2,300,000 shares have been designated as Convertible Preferred Shares and the remaining 97,700,000 shares are undesignated, blank check Preferred Shares available for issuance. Our Board of Directors has the power to issue any or all of the Preferred Shares, including the authority to establish one or more series and to fix the powers, preferences, rights and limitations of such class or series, without shareholder approval. Our Board may, in the future, consider adopting additional anti-takeover measures. The authority of our Board to issue undesignated stock and the anti-takeover provisions of Colorado law, as well as any future anti-takeover measures adopted by us, may, in certain circumstances, delay, deter or prevent takeover attempts and other changes in control of us that are not approved by our Board. As a result, our shareholders may lose opportunities to dispose of their Common Shares at favorable prices generally available in takeover attempts or that may be available under a merger proposal and the market price, voting and other rights of the holders of Common Shares may also be affected.
Our Common Shares are quoted on the Over-the-Counter Bulletin Board, which may have an unfavorable impact on our stock price and liquidity.
Our Common Shares are quoted on the Over-the-Counter Bulletin Board. The OTCBB is a significantly more limited market than the New York Stock Exchange, the American Stock Exchange or NASDAQ system. The OTCBB market is an inter-dealer market much less regulated than the major exchanges and the Common Shares are subject to abuses, volatility and shorting. There is currently no broadly followed and established trading market for our Common Shares. An established trading market may never develop or be maintained. Active trading markets generally result in lower price volatility and more efficient execution of buy and sell orders. Absence of an active trading market reduces the level of liquidity available to the holders of our Common Shares.
It may not be possible for a shareholder to sell its Common Shares within any particular time period, for an acceptable price, or at all. There is no certainty that a holder of Common Shares will be able to identify a buyer for Common Shares or realize any monetary value whatsoever from a sale thereof.
Our Common Shares are considered highly speculative and there is no certainty that Common Shares will continue to be quoted for trading on the OTCBB or on any other form of quotation system or stock exchange, and even if the Common Shares were to be listed on a quotation system or stock exchange senior to the OTCBB, the Common Shares would continue to be subject to the resale restrictions and other limitations described above.
Our Common Shares are thinly traded, so you may be unable to sell at or near asking prices or at all.
Currently, our Common Shares are quoted in the OTCBB and the trading volume in our Common Shares may be limited by the fact that many major institutional investment funds, including mutual funds, as well as individual investors follow a policy of not investing in OTCBB stocks and certain major brokerage firms restrict their brokers from recommending OTCBB stocks because they are considered speculative, volatile and thinly traded. The market price of our Common Shares could fluctuate substantially due to a variety of factors, including market perception of its ability to achieve its planned growth, quarterly operating results of other companies in the same industry, trading volume in the Common Shares, changes in general conditions in the economy and the financial markets or other developments affecting us or our competitors. In addition, the stock market is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons unrelated to their operating performance and could have the same effect on our Common Shares.
The trading volume of our Common Shares has been and may continue to be limited and sporadic. As a result of such trading activity, the quoted price for our Common Shares on the OTCBB may not necessarily be a reliable indicator of its fair market value. When fewer shares of a security are being traded on the OTCBB, volatility of prices may increase and price movement may outpace the ability to deliver accurate quote information. Due to lower trading volumes in the Common Shares, there may be a lower likelihood of one’s orders for Common Shares being executed, and current prices may differ significantly from the price one was quoted at the time of one’s order entry.
Further, if our Common Shares cease to be quoted, holders would find it more difficult to dispose of their Common Shares or to obtain accurate quotations as to the market value of the Common Shares and as a result, the market value of the Common Shares likely would decline.
Our Common Shares may not become listed or quoted on stock market senior to the OTCBB.
In the first quarter of 2012, we applied for quotation of our Common Shares on the OTCQX but due to circumstances beyond our control we were unable to obtain approval. In the future, we may seek to apply for listing on another market or exchange, such as the American Stock Exchange, Nasdaq or the Toronto Stock Exchange. Currently, we do not meet all of the initial listing standards for the American Stock Exchange or Nasdaq, particularly the corporate governance requirements and director independence. There are no assurances that we will satisfy the applicable listing standards of any such market that we apply to, or that we will be able to obtain or maintain a more senior listing for our Common Shares.
We are subject to the penny stock rules adopted by the SEC that require brokers to provide extensive disclosure to its customers prior to executing trades in penny stocks. These disclosure requirements may make it difficult for our shareholders to sell their shares.
Our common stock is subject to the SEC regulations for “penny stock.” Penny stock includes any non-NASDAQ or other exchange listed equity security that has a market price of less than $5.00 per share, subject to certain exceptions. The regulations require that prior to any non-exempt buy/sell transaction in a penny stock, a disclosure schedule set forth by the SEC relating to the penny stock market must be delivered to the purchaser of such penny stock. This disclosure must include the amount of commissions payable to both the broker-dealer and the registered representative and current price quotations for the common stock. The regulations also require that monthly statements be sent to holders of penny stock which disclose recent price information for the penny stock and information of the limited market for penny stocks. These requirements adversely affect the market liquidity of our common stock.
In addition, our common stock is subject to Rule 15g-1 through 15g-9 under the Exchange Act, which imposes certain sales practice requirements on broker-dealers who sell our common stock to persons other than established customers and “accredited investors” (generally, individuals with a net worth in excess of $1,000,000 (exclusive of the value of their primary residence) or annual incomes exceeding $200,000 individually, or $300,000 together with their spouse)). For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to the sale. This rule adversely affects the ability of broker-dealers to sell our common stock and purchasers of our common stock to sell their shares of such common stock.
If we raise capital through the sale of equity securities, existing shareholders will be diluted.
Any additional capital we raise through the sale of our equity securities will dilute the ownership percentage of our shareholders. Raising any such capital could also result in a decrease in the nominal fair market value of our equity securities because our assets would be owned by a larger pool of outstanding equity. The terms of securities that we issue in future capital transactions may be more favorable to new investors, and may include preferences, superior voting rights and the issuance of other derivative securities, and issuances of incentive awards under equity employee incentive plans, all of which may have a dilutive effect to existing investors.
The elimination of monetary liability against our directors, officers and employees under Colorado law and the existence of indemnification rights to our directors, officers and employees may result in substantial expenditures by us and may discourage lawsuits against our directors, officers and employees.
Our organizational documents contain provisions that limit the liability of our directors for monetary damages and provide for indemnification of our executive officers and directors. These provisions may discourage shareholders from bringing a lawsuit against our officers and directors for breaches of fiduciary duty and may also reduce the likelihood of derivative litigation against its officers and directors even though such action, if successful, might otherwise have benefited the shareholders. We may also have contractual indemnification obligations under our agreements with our officers. In addition, to the extent that costs of settlement and damage awards against our officers or directors are paid by us pursuant to the indemnification provisions in our governing documents, this actually may have the effect of deterring the shareholder from bringing suit against our officers or directors. We have been advised that the SEC takes the position that these types of indemnification provisions are unenforceable under applicable federal and state securities laws.
Restricted securities may not be resold outside of a registered offer and sale
Securities that we sell and issue and that have not been registered under the Securities Act are “restricted securities” within the meaning of Rule 144. As a result, such restricted securities may not be offered, sold, pledged or otherwise transferred by the holders of such shares, directly or indirectly, unless the shares are registered under the Act and all applicable states securities laws, or unless there is an available exemption or exclusion from such registration requirements.
Unless certain conditions are met, Rule 144 is not available for the resale of securities of issuers that are, or have ever previously been, issuers with (i) no or nominal operations and (ii) no or nominal assets other than cash and cash equivalents (a “shell company”). The Asset Purchase Agreement with Sovereign concluded that we may have been at one time a “shell company” in the past. We believe that we were never a shell company and that, even if we were deemed to have been a shell, we ceased to be a shell company in October 2010, when we acquired our first oil and gas producing properties, and that the filing of our Annual Report on Form 10-K for the year ended December 31, 2010 satisfied the Form 10 disclosure requirements. However, if it is deemed that we did not satisfy the conditions for use of Rule 144, our shareholders would not be able to use Rule 144 for resales of restricted securities.
|
|
UNRESOLVED STAFF COMMENTS
|
Not applicable.
Oil and Gas Properties
We have built our asset base through leasehold interest acquisitions that are geographically focused in Canada (Peace River, Berwyn and Medicine River, Alberta and Inga, British Columbia) and in the United States (Piqua, Kansas ).
Canadian Oil and Gas Properties
On October 20, 2011, Legend Canada completed the acquisition of the majority of the petroleum and natural gas leases, lands and facilities held by International Sovereign Energy Corp. The acquisition of the Sovereign Assets is discussed in more detail in Item 1 of this Report entitled “BUSINESS – Purchase of Canadian Assets.” The purchase price was CA$8,905,031 in cash and 3,552,516 Common Shares. The Sovereign Assets included producing oil and gas leasehold properties in Western Canada that have been maintained through the drilling of internally generated low to medium risk exploration and development sites. The principal natural gas leasehold properties are located in Medicine River and Berwyn in Alberta, and Clarke Lake in British Columbia. The Sovereign Assets also included an interest in various light oil properties consisting of Red Earth and Swan Hills in Alberta, both of which were sold in 2012, and Inga in British Columbia. Schedule 1 of the Asset Purchase Agreement contains a detailed description of the Sovereign Assets sold to Legend Canada.
We are evaluating the producing and non-producing acreage, for further drilling potential of these Canadian properties.
A summary discussion of the oil and gas leasehold properties held by Legend Canada follows.
Medicine River, Alberta
The Medicine River property contains a number of working interests in west central Alberta. Mineral rights vary on the acreage and production is taken from several productive zones within the acreage. Most of the gas production is taken from the shallow Edmonton sands, with oil produced from the Viking sandstone and Pekisko carbonate sections. The Medicine River area is emerging as a resource play area in the Viking sandstone with a number of wells drilled by other companies in close proximity to Legend Canada properties. We are monitoring the activity on these lands in order to determine the timing and strategy relating to horizontal resource drilling potential on Legend Canada properties in the area.
Berwyn, Alberta
The Berwyn property is located in northwestern Alberta. It is comprised of 2,560 acres of land with mineral royalty subject only to Crown, upon which three gas wells have been drilled to test the localized structural features defined by seismic. The stacked nature of the productive gas sands and the significant rates of gas production are expected to facilitate development of additional gas reserves in the area.
Joarcam, Alberta
Legend Canada recently acquired an interest in over 5,760 gross mineral acres in the Joarcam area of central Alberta as part of a joint venture with a third party, and has jointly drilled two test wells into the Viking sandstone formation. Legend Canada has a 40% working interest in the land and wells subject to Alberta Crown royalty. As of the date of this Report, currently one well is producing light oil at a rate of 5 BOPD with 2 BOPD net to Legend Canada. Additional mineral lands were acquired in a land sale during July 2011 which increased Legend Canada’s interest in the properties to seven sections. Additional vertical wells are being contemplated to more fully develop the acreage, while a horizontal drilling program is being considered in the lowermost Viking “C” sandstone formation, which has been successfully developed by other companies to the northwest at Redwater, Alberta.
Clarke Lake, British Columbia
Clarke Lake is a non-operated gas property in northeastern British Columbia. As of the date of this Report, the property currently produces almost 350 MCF/d, approximately 58 Boepd, net to Legend Canada’s interest. There is little additional development potential expected on the Clarke Lake property.
Other Properties in Alberta and British Columbia
Legend Canada owns a number of minor working interest properties in both Alberta and British Columbia. In total these properties produce a little over 20 Boepd, mostly in oil. Minor development potential is anticipated on these properties. Inga, British Columbia is the major producing property in this group with net production of 9.0 BOPD.
Undeveloped Properties
In addition to the producing properties mentioned above, Legend Canada also owns leases of undeveloped acreage with varying lease terms remaining. The total number of undeveloped acres is currently 29,296 gross acres (22,265 net).
U.S. Oil and Gas Properties
Our oil and gas property interests in the United States are located in the Piqua region of the State of Kansas. A summary discussion of these U.S. properties follows:
Piqua, Kansas
On October 29, 2010, we completed our first acquisition of an oil and gas property with the purchase of the entire working interest, representing 87.5% of the revenue interest, of certain oil and gas leases held by Piqua Petro Inc., a Kansas corporation, located in Piqua, Kansas (“
Piqua
”). The acquired leases contain 1,040 net acres with 33 active oil and water injection wells in Woodson County, Kansas. The property is located in the Humboldt-Chanute field producing in the Bartlesville-Squirrel formation at a depth of 740 to 850 feet. The purchase price was approximately $625,000.
Some of the development options for the Piqua properties include infill drilling, water flooding, well bore cleanout, and other drilling on lightly developed producing leases. No significant development had taken place on the leased sites since 2006, so our initial activities focused on maintaining the existing wells and the tie-in of shut in locations.
The main production fairway is contained within the Ellis, Bennett and Orth-Gillespie leases, where additional development locations can be drilled in an effort to more fully develop the Squirrel sand reservoir. Neither the Ellis nor the Orth-Gillespie leases have adequate water injection to provide the necessary pressure support. We intend to either convert existing wells or drill new locations in an effort to improve the pressure support provided by these injectors.
Beginning in June 2011, we drilled three additional wells on the Orth-Gillespie leased property with the objective of increasing the number of development wells and related production from the Squirrel sand reservoir. In addition, the wells were drilled in order to more fully delineate the producing pool and to increase our understanding of the distribution of the Squirrel reservoir. The results of two of the wells suggested similar thickness in reservoir on the eastern side of the Piqua property with measurable oil shows in both wells. The third well, which was drilled on the west side of the property, presented a thicker overall squirrel zone with additional oil. In addition to the drilling of these wells, we also re-completed a standing well located on an adjacent lease in the Squirrel reservoir zone. All four wells are currently producing oil.
Three additional wells commenced drilling during December 2011 and were put online during January 2012.
Four wells were drilled in Piqua in 2012. Two were drilled on the Gillespie South lease and two on the Cress lease to the east. Each of these resulted in successful oil wells and were put on line in September 2012. The Cress locations further delineated the eastern extent of the Squirrel sand and helped to identify the potential for 8 new well locations on the lease.
Assuming financing to fund development, we plan to resume the twenty well program which was begun in 2012. Drilling, completion and equipment costs for wells at the Piqua properties are expected to be approximately $30,000 per well.
Divide County, North Dakota
On February 25, 2011, after evaluating and studying various opportunities, we completed the acquisition of seven leaseholds on land in Divide County, North Dakota totaling 3,840 gross acres (net 167.11 acres) with all mineral rights including the Bakken and Three Forks formations. The term of each of the seven leases is five years. The acquisition price was $58,489. On March 23, 2011, we completed a second acquisition of eight leaseholds within this same area in Divide County, North Dakota, adding an additional 201.88 net acres. The term of each of the eight leases is five years. The acquisition price was $70,658. On March 30, 2011, we completed a third acquisition of one leasehold interest within the same area in Divide County, North Dakota, adding an additional 27.54 net acres. The term of the lease is five years. The acquisition price was $9,638. Total acquired leases in Divide County North Dakota consist of 3,840 gross acres (net 396.53 acres) with all mineral rights including the Bakken and Three Forks formations. During 2012, we disposed of our working interest in this property for net proceeds of $397,000 and retained a 1% royalty interest over all of the Bakken lands for the duration of the lease term.
The leases are contiguous in nature and are in close proximity to the development of the Three Forks play, being actively drilled by SM Energy and Baytex Energy in the Ambrose field to the east of the property covered by the acquired leases. The Bakken Shale Formation stretches across portions of North Dakota and Montana.
Disclosure of Reserves
Our proved crude oil and natural gas reserves are located in Canada and the United States.
InSite Petroleum Consultants Ltd. evaluated the reserve estimates prepared by us for the Canadian properties as of March 1, 2013 and prepared a report with its conclusions. A copy of the InSite reserve report attached hereto as Exhibit 99.2. InSite is an independent expert engineering, geological, technical and advisory company providing services to the oil and gas industry throughout the world. Each of InSite’s professionals has over 25 years of experience in the oil and gas industry. InSite’s report is intended to be compliant with SEC Regulations S-X and S-K, for the purpose of disclosure requirements. InSite utilizes the latest available technology and engineering software that incorporates all current regulatory details.
The estimated reserves for our U.S. oil and gas properties as of March 1, 2013, are based upon a reserves report prepared by the independent licensed petroleum engineering firm of KLH Consulting, located in Wichita, Kansas. The KLH reserve report is attached hereto as Exhibit 99.1. KLH is a member of the Society of Petroleum Engineers and the Kansas Independent Oil and Gas Association, and its professionals have over 35 years of experience in the oil and gas industry. KLH has served companies with oil and gas properties located in several states throughout the south and midwest regions of the United States, including the Piqua, Kansas formations, and, as such, we believe KLH has sufficient experience to appropriately assess our reserves.
The reserve data set forth in the reports and in this Report represents only estimates, and should not be construed as being exact quantities. They may or may not be actually recovered, and if recovered, the actual revenues and costs could be more or less than the estimated amounts. Moreover, estimates of reserves may increase or decrease as a result of future operations.
KLH and InSite used all assumptions, data, methods and procedures they considered necessary and appropriate under the circumstances to prepare their estimates. The reserves set forth in their reports for the properties are estimated by performance methods or analogy. In general, reserves attributable to producing wells and reservoirs are estimated by performance methods such as decline curve analysis which utilizes extrapolations of historical production data. Reserves attributable to non-producing and undeveloped reserves included in the reports are estimated by analogy. The estimates of the reserves, future production, and income attributable to properties are prepared based on the reserve definitions set out in Rule 4-10(a) in SEC Regulation S-X and, in the case of KLH, using the economic software package Aries for Windows, a copyrighted program of Halliburton, and in the case of InSite, Mosaic software consistent with the COGE (Canadian Oil and Gas Evaluation) handbook.
The KLH and InSite reports summarize conclusions made by them with respect to the reserves estimates. To estimate economically recoverable crude oil and natural gas reserves, many factors and assumptions were considered, including the use of reservoir parameters derived from geological, geophysical and engineering data which cannot be measured directly, economic criteria based on current costs and SEC pricing requirements, and forecasts of future of production rates. Under applicable SEC regulations, proved reserves must be demonstrated to be economically producible based on existing economic conditions including the prices and costs at which economic production from a reservoir is to be determined as of the effective date of the report. With respect to the property interests we own, production and well tests from examined wells, normal direct costs of operating the wells or leases, other costs such as transportation and processing fees, production taxes, recompletion and development costs and product prices are based on SEC regulations, geological maps, well logs, core analyses, and pressure measurements.
Reservoir engineering is a subjective process of estimating underground accumulations of crude oil and natural gas that cannot be measured in an exact manner. There are numerous uncertainties inherent in estimating crude oil and natural gas reserves and their estimated values, including many factors beyond our control. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geologic interpretation and judgment. As a result, estimates of different engineers, including those used by us, may vary. In addition, estimates of reserves are subject to revision based upon actual production, results of future development and exploration activities, prevailing crude oil and natural gas prices, operating costs and other factors. The revisions may be material. Accordingly, reserve estimates are often different from the quantities of crude oil and natural gas that are ultimately recovered and are highly dependent upon the accuracy of the assumptions upon which they are based. Our estimated net proved reserves, included in our SEC filings, have not been filed with or included in reports to any other federal agency. See Item 1A of this Report above entitled “RISK FACTORS – estimates of crude oil and natural gas reserves may be inaccurate and our actual revenues may be lower than our financial projections.”
Federal, state and provincial regulations governing protection of the environment may prevent the Company from recovering the estimated reserves disclosed in this section of the Report. For a discussion of the main federal laws and regulations in the United States and Canada in place to protect the environment, see the subsection of this Annual Report above entitled “DESCRIPTION OF BUSINESS – Governmental Regulation,” which disclosure is incorporated herein by reference.
Summary of Oil and Gas Reserves as of December 31, 2012
The following table sets forth certain information relating to our U.S. and Canadian estimated net reserves as of December 31, 2012. The information with respect to our U.S. properties is based on the KLH reserve report as of March 1, 2013, and the information with respect to our Canadian properties is based on the InSite reserve report as of March 1, 2013.
|
|
|
Oil
|
|
|
Natural Gas
|
|
|
NGLs
+ Cond
|
|
|
Proved Reserves
|
|
(Mbbls)
|
|
|
(Mmcf)
|
|
|
(Mbbls)
|
|
|
Proved Developed Reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
|
150.8
|
|
|
|
1,218.8
|
|
|
|
1.9
|
|
|
U.S.
|
|
|
32.7
|
|
|
|
—
|
|
|
|
—
|
|
|
Proved Undeveloped Reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
|
14.0
|
|
|
|
4.1
|
|
|
|
—
|
|
|
U.S.
|
|
|
64.5
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Proved Reserves
|
|
|
262.0
|
|
|
|
1,222.9
|
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Probable Reserves
|
|
|
|
|
|
|
|
|
|
|
Probable Developed Reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
|
82.8
|
|
|
|
434.5
|
|
|
|
0.8
|
|
|
U.S.
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Probable Undeveloped Reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
|
34.5
|
|
|
|
588.8
|
|
|
|
23.9
|
|
|
U.S.
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Probable Reserves
|
|
|
117.3
|
|
|
|
1,023.3
|
|
|
|
24.7
|
|
Probable Reserves
Estimates of probable reserves are inherently imprecise. When producing an estimate of the amount of oil and gas that is recoverable from a particular reservoir, an estimated quantity of probable reserves is an estimate of those additional reserves that are less certain to be recovered than proved reserves but which, together with proved reserves, are as likely as not to be recovered. Estimates of probable reserves are also continually subject to revisions based on production history, results of additional exploration and development, price changes and other factors.
When deterministic methods are used, it is as likely as not that actual remaining quantities recovered will exceed the sum of estimated proved plus probable reserves. When probabilistic methods are used, there should be at least a 50% probability that the actual quantities recovered will equal or exceed the proved plus probable reserves estimates. Probable reserves may be assigned to areas of a reservoir adjacent to proved reserves where data control or interpretations of available data are less certain, even if the interpreted reservoir continuity of structure or productivity does not meet the reasonable certainty criterion. Probable reserves may be assigned to areas that are structurally higher than the proved area if these areas are in communication with the proved reservoir. Probable reserves estimates also include potential incremental quantities associated with a greater percentage recovery of the hydrocarbons in place than assumed for proved reserves.
Controls Over Reserve Estimates
Compliance as it relates to reporting both our Canadian reserves and our U.S. reserves is the responsibility of Mr. Diamond-Goldberg, our President and principal technical representative, who has over 30 years of industry experience. In addition to his years of experience, Mr. Diamond-Goldberg holds a degree in petroleum geology with a strong background in asset evaluation and management.
With respect to our U.S. properties, our control over reserves estimates included retaining KLH as our independent petroleum and geological firm. The engineer responsible for overseeing the reserve study at KLH is a licensed petroleum engineer in both Kansas and Missouri. Further professional qualifications include a degree in petroleum engineering and being a member of the Society of Petroleum Engineers and Kansas Independent Oil and Gas Association. We provided KLH with information about our oil and gas properties, including production profiles, prices and costs, and KLH prepared its own estimates of the reserves attributable to the Piqua properties. All of the information regarding reserves on our Piqua properties in this Report is derived from KLH’s report.
With respect to our Canadian properties, our control over reserves estimates included retaining InSite as our independent petroleum and geological auditing firm. We provided InSite with information about our oil and gas properties, including production profiles, prices and costs, and InSite reviewed our estimates of the reserves attributable to the oil and gas properties. InSite is an independent expert engineering, geological, technical and advisory company providing services to the oil and gas industry throughout the world. Each of InSite’s professionals has over 25 years of experience in the oil and gas industry. Prior to our acquisition of the Canadian properties in October 2011, InSite served as the management independent petroleum and geological firm for Sovereign and had prepared a prior report on the properties for the prior year ended December 31, 2010. We retained InSite for reporting on our Canadian reserves at December 31, 2011 and 2012, because of their familiarity with the properties and their expertise in our industry. All of the information on Canadian oil and gas reserves in this Report is derived from InSite’s report.
Proved Undeveloped Reserves
U.S. Properties
At December 31, 2012, we estimated that we had proved undeveloped reserves (PUDs) of 64.5 MBOE for our U.S. properties, which accounted for 66% of our total estimated U.S. proved oil and gas reserves. The following table discloses our PUDs during 2012.
|
|
|
Oil and Natural Gas
|
|
|
U.S. Properties
|
|
Reserves (MBOE)
|
|
|
PUDs beginning of year 2011
|
|
|
73.8
|
|
|
Revisions of previous estimates
|
|
|
—
|
|
|
Conversions to proved developed reserves
|
|
|
(9.3
|
)
|
|
Additional PUDs added
|
|
|
—
|
|
|
|
|
|
|
|
|
PUDs end of year 2012
|
|
|
64.5
|
|
Beginning late in June 2011, we drilled three wells consecutively on the Orth-Gillespie leased property with the objective of increasing the number of development wells drilled into the Squirrel sand reservoir. In addition, we wanted to see if the pool could be more fully delineated and increase our understanding of the thickest part of the Squirrel reservoir. The results of the drilling the wells suggested similar thickness in reservoir on the eastern side of the leased property with measurable oil shows in both wells. The third well, which was drilled on the west side of the leased property, presented a thicker overall Squirrel zone with additional oil. As this well is further south than the previously drilled wells, production information from the well will determine the development potential to the south, where only a few wells had been drilled prior to our acquisition of the leaseholds. All three wells were hydraulically fractured at the beginning of August 2011, and were placed on production in mid-August. In addition to the drilling of these wells, we also re-completed a standing well located on an adjacent lease in the Squirrel reservoir zone. All four wells are currently producing oil.
Three additional wells commenced drilling during December 2011 and were put online during January 2012.
Four wells were drilled in Piqua in 2012, each of which were successful and were put on line in September 2012.
Assuming financing to fund development, we plan to resume the twenty well program that commenced in 2012. Drilling, completion and equipment costs for wells at the Piqua properties are expected to be approximately $30,000 per well.
Canadian Properties
At December 31, 2012, we estimated that we had proved undeveloped reserves (PUDs) of 13.8 MBoe for our Canadian properties, which accounted for approximately 14% of the total estimated Canadian proved oil and gas reserves. Legend Canada is currently evaluating the potential to begin to capture these reserves. None of these PUD wells would have been on our books in excess of five years at the time of their scheduled drilling. The following table discloses our progress toward the conversion of PUDs during 2012.
|
|
|
Oil and Natural Gas
|
|
|
Canadian Properties
|
|
Reserves (MBOE)
|
|
|
PUDs beginning of year 2011
|
|
|
66.0
|
|
|
Revisions of previous estimates
|
|
|
(52.2
|
)
|
|
Conversions to proved developed reserves
|
|
|
—
|
|
|
Additional PUDs added
|
|
|
—
|
|
|
|
|
|
|
|
|
PUDs end of year 2012
|
|
|
13.8
|
|
Production Volumes
The following tables set forth certain information regarding the production volumes of oil and natural gas for the periods indicated for the Canadian properties that we acquired from Sovereign on October 20, 2011. We initially acquired our Canadian oil and gas properties in October 2011, and we had no production to report relative to our Canadian properties for our fiscal years ended December 31, 2010 or 2009.
The table below sets forth our production volumes following our acquisition of the Canadian properties subsequent to October 20, 2011.
|
Canadian Properties
|
|
Years Ended December 31,
|
|
|
|
|
2012
|
|
2011
(1)
|
|
|
2010
|
|
|
Production volumes:
|
|
|
|
|
|
|
|
|
|
|
|
Crude oil (MBbls)
|
|
15.8
|
|
|
4.3
|
|
|
|
N/A
|
|
|
Natural gas (Mmcfs)
|
|
312.9
|
|
|
79.3
|
|
|
|
N/A
|
|
|
NGLs (MBbls)
|
|
1.8
|
|
|
0.5
|
|
|
|
N/A
|
|
|
Total production (MBOE)
|
|
69.7
|
|
|
18.0
|
|
|
|
N/A
|
|
|
Average daily production(BOED)
|
|
191.0
|
|
|
249.8
|
|
|
|
N/A
|
|
|
(1)
|
For the period from October 20, 2011 through December 31, 2011
|
The table below sets forth Sovereign’s production volumes for the Canadian properties prior to our acquisition of those properties in October 2011.
|
Canadian Properties
|
|
Years Ended December 31,
|
|
|
|
|
2011
(1)
|
|
|
2010
|
|
|
2009
|
|
|
Production volumes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude oil (MBbls)
|
|
|
20.1
|
|
|
|
27.2
|
|
|
|
23.4
|
|
|
Natural gas (Mmcfs)
|
|
|
508.9
|
|
|
|
1,036.5
|
|
|
|
1,663.0
|
|
|
NGLs (MBbls)
|
|
|
2.5
|
|
|
|
4.0
|
|
|
|
5.0
|
|
|
Total production (MBOE)
|
|
|
107.4
|
|
|
|
204.0
|
|
|
|
306.1
|
|
|
Average daily production
|
|
|
294.3
|
|
|
|
558.8
|
|
|
|
838.6
|
|
|
(1)
|
For the period from January 1, 2011 through October 20, 2011
|
The following table sets forth certain information regarding our United States production volumes of oil and natural gas for the periods indicated. We initially acquired our U.S. oil and gas properties in October 2010, and we have no production information available for prior years.
|
U.S. Properties
|
|
Years Ended December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
Production volumes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil production (MBbls)
|
|
|
5.21
|
|
|
|
2.98
|
|
|
|
0.202
|
|
|
Average daily production (BOED)
|
|
|
14.23
|
|
|
|
8.16
|
|
|
|
3.02
|
|
Drilling and Development Activity
The following table sets forth wells drilled and completed during the periods indicated on our U.S. oil and gas properties.
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
2011
|
|
|
2010
|
|
|
|
Gross
|
|
|
Net
|
|
Gross
|
|
|
Net
|
|
|
Gross
|
|
|
Net
|
|
|
Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil wells
|
4.00
|
|
|
3.50
|
|
|
|
7.00
|
|
|
|
6.13
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
Natural gas wells
|
0.00
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
Dry wells
|
0.00
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
4.00
|
|
|
3.50
|
|
|
|
7.00
|
|
|
|
6.13
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exploration
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil wells
|
0.00
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
Natural gas wells
|
0.00
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
Dry wells
|
0.00
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
0.00
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We initially acquired our Canadian oil and gas properties in October 2011, and we had no drilling activity to report relative to our Canadian properties for our fiscal year ended December 31, 2011.
Productive Wells and Acreage
The following tables summarize our total oil wells by type and gross and net productive oil wells by country as of December 31, 2011. A net well represents our percentage ownership of a gross well. The following table does not include wells which were awaiting completion, in the process of completion or awaiting flowback subsequent to fracture stimulation
|
|
|
Producing Wells
|
|
|
Non-Producing Wells
|
|
|
|
|
Gross
|
|
|
Net
|
|
|
Gross
|
|
|
Net
|
|
|
United States
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
|
|
|
56.00
|
|
|
|
49.00
|
|
|
|
3.00
|
|
|
|
2.63
|
|
|
Gas
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
56.00
|
|
|
|
49.00
|
|
|
|
3.00
|
|
|
|
2.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
|
|
|
111.00
|
|
|
|
4.63
|
|
|
|
4.00
|
|
|
|
1.90
|
|
|
Gas
|
|
|
10.00
|
|
|
|
3.93
|
|
|
|
36.00
|
|
|
|
15.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
121.00
|
|
|
|
8.56
|
|
|
|
40.00
|
|
|
|
17.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth our undeveloped and developed gross and net leasehold acreage at December 31, 2012. Undeveloped acreage includes leased acres on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and gas, regardless of whether or not such acreage contains proved reserves.
|
|
|
Developed
|
|
|
Undeveloped
|
|
|
|
|
Gross
|
|
|
Net
|
|
|
Gross
|
|
|
Net
|
|
|
United States (acres)
|
|
|
5,029
|
|
|
|
1,207
|
|
|
|
17,609
|
|
|
|
766
|
|
|
Canada (acres)
|
|
|
34,960
|
|
|
|
10,692
|
|
|
|
34,341
|
|
|
|
20,822
|
|
Title to Properties
We believe that we have satisfactory title to all of our U.S. and Canadian properties in accordance with standards generally accepted in the oil and gas industry. Our properties are subject to customary royalty interests, liens for current taxes and other burdens, which we believe do not materially interfere with the use of or affect the value of such properties. Prior to acquiring undeveloped properties, we perform a title investigation that is thorough but less vigorous than that conducted prior to drilling, which is consistent with standard practice in the oil and gas industry. Before we commence drilling operations, we conduct a thorough title examination and perform curative work with respect to significant defects before proceeding with operations. We have performed a thorough title examination with respect to substantially all of our active properties.
In connection Legend Canada’s acquisition of the Sovereign Assets, we performed thorough due diligence with respect to the properties. In particular, we engaged a third-party firm to perform title review of the properties. We also reviewed all lease documents, including lease operating statements identifying production, royalties, operating expense and net revenues. We further performed site inspections as we determined necessary.
Delivery Commitments
We currently have no delivery commitments for product obtained from our wells in Canada or the U.S.
Dry Holes
We have not experienced any dry holes.
As of the date of this Report, there are no claims, proceedings, actions or lawsuits in existence, or to our knowledge threatened or asserted, against us or with respect to any of our assets that would materially adversely affect our business, property or financial condition, including environmental actions or claims. In addition, there are no outstanding judgments against us or any consent decrees or injunctions to which we are subject or by which our assets are bound. However, from time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.
We do not know of any proceedings to which any of our directors, executive officers, or affiliates, any owner of record of the beneficially or more than five percent of its common stock, or any associate of any such director, officer, affiliate, or security holder is a party adverse or has a material interest adverse to us.
Not applicable
PART III
|
|
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
Directors and Executive Officers
As of March 21, 2013, our Board of Directors consists of two directors and we have three executive officers. The term of office of each director expires at the next annual meeting of our shareholders. Directors serve until their respective successors have been elected and qualified. Executive officers are appointed by and serve at the pleasure of the Board of Directors.
Set forth below is biographical information for each of our current directors.
|
Name
|
|
Age
|
|
Position
|
|
Director Tenure
|
|
Marshall Diamond-Goldberg
|
|
59
|
|
President and Director
|
|
September 2010 – Current
|
|
James Vandeberg
|
|
69
|
|
Secretary and Director
|
|
May 2010 - Current
|
|
Kyle Severson
|
|
42
|
|
Chief Financial Officer
|
|
July 2012 - Current
|
Marshall Diamond-Goldberg
Mr. Diamond-Goldberg has served as our President and a director since September 1, 2010. He also serves as President and a director of Legend Canada. Mr. Diamond-Goldberg is a professional geologist with over 30 years’ experience in the oil and gas sector. From August 2010 until his resignation on July 1, 2011, he held the position of director of International Sovereign Energy Corp., an oil and gas exploration and production company. Since 1997, Mr. Diamond-Goldberg has been the President of Marlin Consulting Corporation providing services to oil and gas companies. From July 2008 until April 2011, he served as President, a director and chairman of reserve reporting for JayHawk Energy Inc., a publicly traded oil and gas company. He was the President, co-founder and director of Manhattan Resources Ltd., a TSX listed and publicly traded junior oil and gas production and exploration company, between 1997 and 2001 and subsequently held the same post at Trend Energy Inc. and Strand Resources Ltd., both private oil and gas producers until their sales in May 2004 and in 2008, respectively. Mr. Diamond-Goldberg is a member of the American Societies of Professional Geologists, as well as the Association of Professional Engineers, Geologists and Geophysicists of Alberta. We believe Mr. Diamond-Goldberg is qualified to serve on our Board of Directors because of his extensive knowledge and experience in the oil and gas industry, and his prior service as an executive officer and director with other public companies.
James Vandeberg
Mr. Vandeberg has served as a director and executive officer since May 18, 2010. He served as the Company’s Chief Financial Officer until June 30, 2012. He has been an attorney practicing in Seattle, Washington since 1996. He specializes in corporate finance with an emphasis on securities and acquisitions. Prior to practicing in Seattle, he was corporate counsel and secretary to Denny’s Inc. and Carter Hawley Hales Stores, Inc., each listed on the NYSE. He graduated from NYU Law School in 1969 where he was a Root-Tilden Scholar and holds a BA degree in accounting from the University of Washington. Mr. Vandeberg is a director of American Sierra Gold Corp., REGI US, Inc., IAS Energy, Inc. and ASAP Holdings, Inc., all of which are publicly reporting companies with capital stock traded on the OTCBB. We believe Mr. Vandeberg is qualified to serve on our Board of Directors because of his prior service on other public company boards of directors and his legal background contributes legal expertise in matters of business and securities law.
Kyle Severson
Mr. Severson was appointed as Chief Financial Officer in July 2012. Prior to Legend Oil and Gas, Kyle was Controller for Argosy Energy Inc. from 2008-2011, and Accrete Energy Inc. from 2004-2008. Both Argosy and Accrete were listed on the TSX in Canada. He received his Bachelor of Commerce degree from Athabasca University in 1995, his Certified Management Accounting designation in 1997, and his Masters of Business Administration from the Haskayne School of Business in 2003.
Mr. Vandeberg and Mr. Diamond-Goldberg devote their full-time efforts to our business activities. Mr. Severson is serving in a part-time consulting role effective March 1, 2013.
Mr. Diamond-Goldberg serves as our President pursuant to the terms of a consulting services agreement between us and Marlin Consulting Corp. Marlin Consulting Corp. is an Alberta, Canada corporation that is wholly-owned by Mr. Diamond-Goldberg. The term of the consulting services agreement is for one year and renews automatically on the anniversary of its effective date, September 1, 2010, unless otherwise terminated by the parties as provided therein. Under the consulting services agreement, Mr. Diamond-Goldberg is also entitled a gross-up to cover applicable taxes and expense reimbursement for approved expenses incurred on our behalf or Legend Canada.
Unless otherwise stated above, none of our directors or executive officers is a director of any other public company, nor are they related to any officer, director or affiliate of the Company. Additionally, none of our directors or executive officers is a party to any pending legal proceeding, is subject to a bankruptcy petition filed against them or have been convicted in, or is subject to, any criminal proceeding.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors and executive officers, and persons who own more than 10% of our common stock (collectively, “Reporting Persons”) to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of our common stock. Reporting Persons are also required by SEC regulations to furnish us with copies of all such ownership reports they file. SEC regulations also require us to identify in this Report any Reporting Person who failed to file any such report on a timely basis.
Except as set forth below, we believe that all Reporting Persons complied with all applicable Section 16(a) filing requirements for fiscal year 2012, based solely on our review of the copies of such reports received or written communications from certain Reporting Persons:
|
·
|
Marshall Diamond-Goldberg had two Form 4 filings, reporting two transactions (each regarding the sale of stock);
|
|
·
|
James Vandeberg had three Form 4 filings, reporting transactions included 3 sales of stock and 2 acquisitions of stock;
|
|
·
|
International Sovereign Energy Corp. had one Form 3 filings regarding the acquisition of stock totaling over 10% of the issued and outstanding common stock of the Company; and
|
|
·
|
Kyle Severson had one Form 3 filing that reported no ownership of common stock of the Company.
|
Code of Ethics
We have a Code of Ethics that applies to our President, Chief Financial Officer principal accounting officer, controller, and all other persons performing accounting, finance or similar functions for us. A copy of the Code of Ethics is included as Exhibit 14.1 to this Report and is available on our corporate website at
http://legendoilandgas.com
in the section “About Legend”.
Audit Committee
As of December 31, 2012, our entire Board of Directors served the role of the audit committee.
Summary Compensation Table
The following table shows all compensation awarded, earned by or paid to Mr. Marshall Diamond-Goldberg, our President, Mr. James Vandeberg, our Secretary and Mr. Kyle Severson, our Chief Financial Officer (our “
NEOs
”) for each of the fiscal years ended December 31, 2012 and 2011:
|
Name and
Principal Position
|
|
Year
|
|
|
Salary
|
|
|
Bonus
|
|
|
Option
Awards
|
|
|
All Other
Compensation
|
|
|
Total
Compensation
|
|
|
|
|
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
Marshall Diamond- Goldberg
|
|
|
2012
|
|
|
$
|
300,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15,000
|
(5)
|
|
$
|
315.000
|
|
|
President
|
|
|
2011
|
|
|
|
206,313
|
(1)
|
|
|
60,000
|
(2)
|
|
|
1,451,805
|
(3)
|
|
|
9,650
|
(5)
|
|
|
1,727,768
|
|
|
|
|
|
|
|
|
|
|
James Vandeberg
|
|
|
2012
|
|
|
|
133,332
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
133,332
|
|
|
Secretary
|
|
|
2011
|
|
|
|
154,999
|
(4)
|
|
|
50,000
|
(2)
|
|
|
1,306,624
|
(3)
|
|
|
—
|
|
|
|
1,511,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kyle Severson
|
|
|
2012
|
|
|
|
90,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
90,000
|
|
|
Chief Financial Officer
|
|
|
2011
|
(6)
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
(1)
|
Marlin Consulting Corp., of which Mr. Diamond-Goldberg is the sole beneficial owner, was paid $8,000 per month in fees from us in accordance with the consulting services agreement entered into by and between us and Marlin Consulting Corp. effective September 1, 2010. Effective July 1, 2011, Mr. Diamond-Goldberg’s compensation was increased to $25,000 per month.
|
|
(2)
|
On October 24, 2011, we awarded bonuses to management in recognition of the completion of the acquisition of the Sovereign Assets. Those bonuses were in the following amounts: $60,000 to Mr. Diamond-Goldberg and $50,000 to Mr. Vandeberg.
|
|
(3)
|
The amounts reported in the Option Awards column represent the grant date fair value of such awards, computed in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718. See Note 6 to the Notes to Consolidated Financial Statements in this Report regarding the assumptions underlying the valuation of equity awards.
|
|
(4)
|
Mr. Vandeberg’s salary was $5,000 per month from June 2010 to July 2011. Effective July 1, 2011, Mr. Vandeberg’s compensation was increased to $20,833 per month. Effective May 1, 2012, Mr. Vandeberg’s compensation was decreased to $10,000 per month. Effective July 1, 2012, Mr. Vandeberg’s compensation was decreased to $5,000 per month.
|
|
(5)
|
Represents tax gross-up payments paid to Mr. Diamond-Goldberg to cover applicable taxes as a Canadian citizen.
|
|
(6)
|
Mr. Severson began serving as our Chief Financial Officer in July 2012.
|
Compensation Philosophy and Objectives
Our executive compensation program that we apply to our NEOs will be designed to attract and retain qualified and experienced executives who will contribute to our success. The executive compensation program is designed to attract, motivate and retain individuals with the skills and qualities necessary to support and develop our business within the framework of our small size and available resources. The Board of Directors has sole and unfettered discretion with respect to decisions regarding the compensation of the NEOs.
Elements of Compensation
Our executive compensation program is anticipated to consist of two components: (i) base compensation, and (ii) a long-term compensation component in the form of stock options and stock awards. Both components are determined and administered by the Board of Directors. The stock incentive component is expected to form an essential part of the NEOs’ compensation.
Base Compensation
Base compensation for the NEOs is reviewed from time to time and set by the Board of Directors, and is based on the individual’s job responsibilities, contribution, experience and proven or expected performance, as well as to market conditions. In setting base compensation levels, consideration will be given to such factors as level of responsibility, experience and expertise. Subjective factors such as leadership, commitment and attitude will also be considered.
Stock Options and Awards
To provide a long-term component to the executive compensation program, our executive officers, directors, employees and consultants may be granted Options and Awards (as those terms are defined below) under our 2011 Stock Incentive Plan. The maximization of shareholder value is encouraged by granting equity incentive awards. The President will make recommendations to the Board of Directors for the other executive officers and key employees. These recommendations take into account factors such as equity compensation given in previous years, the number of Options and Awards outstanding per individual and the level of responsibility.
Narrative Disclosure to Summary Compensation Table
We have a consulting services agreement with Marlin Consulting Corp., of which Mr. Diamond-Goldberg is the sole owner, effective September 1, 2010. Pursuant to this agreement, Mr. Diamond-Goldberg serves as our President and as a consulting expert to us due to his specialized skills and extensive knowledge in the oil and gas industry, corporate finance and management. The agreement provides that Marlin Consulting Corp. is to be compensated at $6,000 per month during 2010 and $8,000 per month beginning in January 2011 and thereafter until the agreement terminates, plus a gross-up to cover applicable taxes and expense reimbursement for approved expenses. Effective July 1, 2011, the base compensation amount was increased by the Board of Directors to $25,000 per month. The term of the agreement is for one year and renews automatically on the anniversary of its effective date unless otherwise terminated by the parties. Mr. Diamond-Goldberg is to be reimbursed for out-of-pocket expenses reasonably incurred by him on our behalf or on behalf of Legend Canada.
Mr. Diamond-Goldberg is eligible to participate in our 2011 Stock Incentive Plan or any bonus plan approved by the Board of Directors as provided in his agreement with us. During 2011, Mr. Diamond-Goldberg was granted two stock option awards, each for 500,000 Common Shares, pursuant to our 2011 Stock Incentive Plan, with an exercise price equal to the closing price of our Common Shares on the date of the grant. Each option vests at the following schedule: one-third is fully vested upon grant, one-third vests on the one-year anniversary of the date of grant, and the final one-third vests on the two-year anniversary of the date of grant, in each case subject to his continued employment. These options were terminated by mutual agreement in February 2013.
We do not have an employment or consulting agreement with Mr. James Vandeberg and his employment is at will. In 2010 the Board of Directors committed to paying Mr. Vandeberg $5,000 per month for his services as an executive officer. Effective July 1, 2011, the Board of Directors increased that amount to $20,833 per month. Effective July 1, 2012 his compensation was reduced to $5,000 when he ceased to be Chief Financial Officer. Mr. Vandeberg is to be reimbursed for out-of-pocket expenses reasonably incurred by him on our behalf or on behalf of Legend Canada.
Mr. Vandeberg is eligible to participate in our 2011 Stock Incentive Plan or any bonus plan approved by the Board of Directors. During 2011, Mr. Vandeberg was granted two stock option awards, each for 450,000 Common Shares, pursuant to our 2011 Stock Incentive Plan, with an exercise price equal to the closing price of our Common Shares on the date of the grant. Each option vests at the following schedule: one-third is fully vested upon grant, one-third vests on the one-year anniversary of the date of grant, and the final one-third vests on the two-year anniversary of the date of grant, in each case subject to his continued employment. These options were terminated by mutual agreement in February 2013.
Outstanding Equity Awards at 2012 Fiscal Year-End
The following table presents information about unexercised stock options held by each of the NEOs as of December 31, 2012. On February 8, 2013, the Board of Directors and the below named officers and another employee, agreed to cancel their existing stock grants under the Company’s equity awards plan.
|
|
|
Option Awards
|
|
|
|
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
|
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
|
|
|
Option Exercise
Price
($)
|
|
|
Option Expiration
Date
|
|
|
Marshall Diamond-Goldberg
|
|
|
333,333
|
|
|
|
166,667
|
|
|
$
|
2.17
|
|
|
|
11-01-2021
|
|
|
|
|
|
333,333
|
|
|
|
166,667
|
|
|
|
0.99
|
|
|
|
12-14-2021
|
|
|
James Vandeberg
|
|
|
300,000
|
|
|
|
150,000
|
|
|
$
|
2.17
|
|
|
|
11-01-2021
|
|
|
|
|
|
300,000
|
|
|
|
150,000
|
|
|
|
0.99
|
|
|
|
12-14-2021
|
|
|
Kyle Severson
|
|
|
166,667
|
|
|
|
83,333
|
|
|
$
|
2.17
|
|
|
|
11-01-2021
|
|
|
|
|
|
166,667
|
|
|
|
83,333
|
|
|
|
0.99
|
|
|
|
12-14-2021
|
|
Director Compensation
We did not pay any additional compensation to these directors for their service as a director during 2012, and their compensation was solely for their service as executive officers.
2011 Stock Incentive Plan
On May 3, 2011, our Board of Directors adopted the Legend Oil and Gas, Ltd. 2011 Stock Incentive Plan (the “
Plan
”). The 2011 Stock Incentive Plan provides for the grant of options (“
Options
”) to purchase Common Shares, and stock awards (“
Awards
”) consisting of Common Shares, to eligible participants, including our directors, executive officers, employees and consultants. The terms and conditions of the 2011 Stock Incentive Plan apply equally to all participants. We have reserved a total of 4,500,000 Common Shares for issuance under the Plan. As of _December 31, 2012, there are outstanding Options for a total of 2,800,000 Common Shares, none of which have been exercised, and no Awards have been granted.
On February 8, 2013, the Board of Directors and Mr. Goldberg-Diamond, Mr. Vandeberg and Mr. Severson agreed to cancel their existing stock grants under the Company’s equity awards plan.
The Plan Administrator, which is currently the Board of Directors, may designate which of our directors, officers, employees and consultants are to be granted Options and Awards. The Plan Administrator has the authority, in its sole discretion, to determine the type or types of awards to be granted under the Plan. Awards may be granted singly or in combination.
Options
The 2011 Stock Incentive Plan allows for the award of “incentive stock options” and “non-qualified stock options”. Options may be granted by the Plan Administrator, in compliance with the requirements of the stock exchange on which the Common Shares may be listed or quoted. The Plan Administrator further determines the exercise price and other terms associated with any Options granted under the Plan, subject to the rules of the applicable stock exchange. The Options vest and expire on dates set by the Plan Administrator, being not more than ten years from the date of grant, provided that any outstanding Options will expire on a date not exceeding 90 days following the date that the holder ceases to be an officer, director, employee or consultant, for any reason other than retirement, death, permanent disability or termination for cause (as defined in the Plan). Options granted under the Plan are non-assignable.
Awards
The Plan Administrator is authorized to make Awards of Common Shares on such terms and conditions and subject to such repurchase or forfeiture restrictions, if any (which may be based on continuous service with us or the achievement of performance goals related to profits, profit growth, profit related return ratios, cash flow or total shareholder return, where such goals may be stated in absolute terms or relative to comparison companies), as the Plan Administrator shall determine, in its sole discretion, which terms, conditions and restrictions shall be set forth in the instrument evidencing the Award. The terms, conditions and restrictions that the Plan Administrator shall have the power to determine shall include, without limitation, the manner in which Common Shares subject to Awards are held during the periods they are subject to restrictions and the circumstances under which repurchase or forfeiture of the Award shall occur by reason of a participant’s termination of service.
Upon the satisfaction of any terms, conditions and restrictions prescribed in respect to an Award, or upon a participant’s release from any terms, conditions and restrictions of an Award, as determined by the Plan Administrator, we shall release, as soon as practicable, to a participant or, in the case of a participant’s death, to the personal representative of a participant’s estate or as the appropriate court directs, the appropriate number of Common Shares. Notwithstanding any other provisions of the 2011 Stock Incentive Plan, the Plan Administrator may, in its sole discretion, waive the repurchase or forfeiture period and any other terms, conditions or restrictions on any Award under such circumstances and subject to such terms and conditions as the Plan Administrator shall deem appropriate.
To the extent not previously exercised or settled, and unless otherwise determined by the Plan Administrator in its sole discretion, Options and Awards shall terminate immediately prior to our corporate dissolution or liquidation. To the extent a forfeiture provision or repurchase right applicable to an Award has not been waived by the Plan Administrator, the Award shall be forfeited immediately prior to the consummation of the dissolution or liquidation.
Potential Payments upon Resignation, Retirement, or Change of Control
We do not have any plans or agreements that are specific and unique to executive officers regarding termination of employment or a change of control of the Company.
Our 2011 Stock Incentive Plan provides for accelerated vesting of all unvested stock options and unvested restricted stock awards upon a “company transaction” (as defined in the Plan), irrespective of the scheduled vesting date for these awards.
|
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|
The following tables set forth information with respect to the beneficial ownership of our Common Shares as of February 13, 2013 by our directors, named executive officers, and directors and executive officers as a group, as well as each person (or group of affiliated persons) who is known by us to beneficially own 5% or more of our Common Shares. As of the latest practical date before filing this annual report, there were 78,220,271 Common Shares issued and outstanding.
The percentages of Common Shares beneficially owned are reported on the basis of regulations of the Securities and Exchange Commission governing the determination of beneficial ownership of securities. Under the rules of the Securities and Exchange Commission, a person is deemed to be a beneficial owner of a security if that person has or shares voting power, which includes the power to vote or to direct the voting of the security, or investment power, which includes the power to dispose of or to direct the disposition of the security. To our knowledge, unless indicated in the footnotes to the table, each beneficial owner named in the tables below has sole voting and sole investment power with respect to all shares beneficially owned.
|
Title of Class
|
|
Name of Beneficial Owner
|
|
Amount and Nature
of Beneficial Ownership
|
|
|
Percent of Class
|
|
|
Common stock, par value $0.001
|
|
Marshall Diamond-Goldberg, Director and Officer
(1)
1218 Third Avenue, Suite 505
Seattle, WA 98101
|
|
|
6,018,200
|
|
|
|
7.8
|
%
|
|
Common stock, par value $0.001
|
|
James Vandeberg, Director and Officer
(2)
1218 Third Avenue, Suite 505
Seattle, WA 98101
|
|
|
5,811,207
|
|
|
|
7.5
|
%
|
|
Common stock, par value $0.001
|
|
Kyle Severson, Officer
1218 Third Avenue, Suite 505
Seattle, WA 98101
|
|
|
0
|
|
|
|
0
|
|
|
Common stock, par value $0.001
|
|
Wayne Gruden, Former Director and Officer
(3)
1218 Third Avenue, Suite 505
Seattle, WA 98101
|
|
|
3,878,000
|
|
|
|
5
|
%
|
|
Common stock, par value $0.001
|
|
International Sovereign Energy Corp.
1750 – 801 6th Avenue SW
Calgary, Alberta
|
|
|
23,883,463
|
|
|
|
27.6
|
%
|
|
|
|
|
Total:
|
|
|
|
|
37,057,654
|
|
|
|
48
|
%
|
|
(1)
|
Mr. Diamond-Goldberg beneficially owns these shares through Marlin Consulting Corp., of which he is the sole shareholder.
|
|
(2)
|
In 2010, Mr. Vandeberg gifted Common Shares to two other persons; Mr. Vandeberg retains no voting or dispositive power over such shares and disclaims beneficial ownership over the shares held by such persons. See “DESCRIPTION OF BUSINESS – Background.”
|
|
(3)
|
The information for such 5% shareholder is based on the list of record holders maintained by our stock transfer agent. Such shareholder has not filed a Schedule 13D with the SEC disclosing its greater than five percent ownership.
|
We know of no arrangements, including pledges, by or among any of the forgoing persons, the operation of which could result in a change of control.
Securities Authorized for Issuance Under Equity Compensation Plans
On May 3, 2011, our Board of Directors adopted the Legend Oil and Gas, Ltd. 2011 Stock Incentive Plan, which is our only equity compensation plan. We have reserved a total of 4,500,000 Common Shares for issuance under the Plan. This Plan was approved by shareholders in August 2012. No options are currently outstanding under the Plan.
|
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
|
Related Party Transactions
Except as set forth below, we are not aware of any material interest, direct or indirect, of any of our directors or executive officers, any person beneficially owning, directly or indirectly, 10% or more of our voting securities, or any associate or affiliate of such person in any transaction since the beginning of the last fiscal year or in any proposed transaction which in either case has materially affected or will materially affect us.
We lease office space for our principal executive offices from the law offices of Mr. Vandeberg, our director and executive officer. Our lease arrangement began in May 2010, at a rate of $500 per month for the 2010 fiscal year. The monthly rent was increased to $575 per month from January 1, 2011 to May 30, 2011. On June 1, 2011, Mr. Vandeberg moved office locations and our monthly rent increased to $1,000 per month. On October 1, 2011 the monthly rent was increased to $1,900. On August 1, 2012, Mr. Vandeberg joined the Apex Law Group, LLP and we began subleasing from them at a rate of $1500 per month. We plan to use space provided by Mr. Vandeberg until it is no longer suitable for our operations or circumstances demand otherwise.
During fiscal 2011, we retained a law firm of which Mr. Vandeberg is the sole member for legal services. We paid $116,346 to Mr. Vandeberg’s law firm for services rendered in fiscal 2011 and approximately 0 in fiscal 2012 and approximately $4,500 to the Apex Law Group, LLP in fiscal 2012.
Mr. Diamond-Goldberg previously served as a director of International Sovereign Energy Corp. from August 2010 until his resignation on July 1, 2011. As described in this Report, we entered into an Asset Purchase Agreement with International Sovereign Energy Corp. and acquired the Sovereign Assets on October 20, 2011. The terms of our acquisition of the Sovereign Assets was determined through independent negotiation between James Vandeberg, our Vice President and Chief Financial Officer, and Sharad Mistry, Sovereign’s Chief Executive Officer and Chief Financial Officer. Mr. Diamond-Goldberg recused himself from all negotiations with respect to the transaction.
We have a consulting services agreement with Marlin Consulting Corp., of which Mr. Diamond-Goldberg is the sole owner, which was made effective September 1, 2010. Pursuant to this agreement, Mr. Diamond-Goldberg serves as our President and as a consulting expert to us due to his specialized skills and extensive knowledge in the oil and gas industry, corporate finance and management. The agreement provides that Marlin Consulting Corp. is to be compensated at $6,000 per month during 2010 and $8,000 per month beginning in January 2011 and thereafter until the agreement terminates, plus a gross-up to cover applicable taxes and expense reimbursement for approved expenses. Effective July 1, 2011, the base compensation amount was increased by the Board of Directors to $26,250 per month. The term of the agreement is for one year and renews automatically on the anniversary of its effective date unless otherwise terminated by the parties. Mr. Diamond-Goldberg is to be reimbursed for out-of-pocket expenses reasonably incurred by him on our behalf or on behalf of Legend Canada. Mr. Diamond-Goldberg is eligible to participate in our 2011 Stock Incentive Plan or any bonus plan approved by the Board of Directors as provided in his agreement with us.
Conflicts of Interest
Our business raises potential conflicts of interest between certain with our officers and directors. Certain of our directors are directors of other natural resource companies and, to the extent that such other companies may participate in ventures in which we may participate, our directors may have a conflict of interest in negotiating and concluding terms regarding the extent of such participation. In the event that such a conflict of interest arises at a meeting of the Board of Directors, a director who has such a conflict will abstain from voting for or against the approval of such participation or such terms. In appropriate cases, we will establish a special committee of independent directors to review a matter in which several directors, or management, may have a conflict.
Mr. Marshall Diamond-Goldberg is our executive officer, director and shareholder, and he is also a former director of Sovereign. We have not found any reason to be concerned with this potential conflict of interest since Mr. Diamond-Goldberg resigned as a member of the board of directors of Sovereign effective as of July 1, 2011, and he was not involved on Sovereign’s behalf in negotiating the terms of the Asset Purchase Agreement.
|
|
PRINCIPAL ACCOUNTING FEES AND SERVICES
|
Peterson Sullivan LLP audited our financial statements for the years ended December 31, 2012 and 2011.
Policy for Approval of Audit and Permitted Non-Audit Services
The Board of Directors, in its discretion, may direct the appointment of different public accountants at any time during the year, if the Board believes that a change would be in the best interests of the shareholders. During 2012 and 2011, the Board of Directors considered the audit fees, audit-related fees, tax fees and other fees paid to our accountants, as disclosed below, and determined that the provision of such services by our independent registered public accounting firm was compatible with the maintenance of that firm’s independence in the conduct of its auditing functions.
Audit and Related Fees
The following table sets forth the aggregate fees billed by Peterson Sullivan for professional services rendered in fiscal years ended December 31, 2012 and 2011.
|
|
|
2012
|
|
|
2011
|
|
|
Audit Fees (1)
|
|
$
|
117,268
|
|
|
$
|
48,398
|
|
|
Audit-Related Fees (2)
|
|
|
—
|
|
|
|
—
|
|
|
Tax Fees (3)
|
|
|
3,260
|
|
|
|
4,359
|
|
|
All Other Fees
|
|
|
—
|
|
|
|
—
|
|
|
(1)
|
“Audit Fees” represent fees for professional services provided in connection with the audit of our annual financial statements and review of our quarterly financial statements included in our reports on Form 10-Q, and audit services provided in connection with other statutory or regulatory filings.
|
|
(2)
|
“Audit-Related Fees” generally represent fees for assurance and related services reasonably related to the performance of the audit or review of our financial statements.
|
|
(3)
|
“Tax Fees” generally represent fees for tax advice.
|