ITEM 2. MANAGEMENT'S
DISCUSSION AND ANALYSIS
CERTAIN
STATEMENTS IN THIS QUARTERLY REPORT ON FORM 10-Q (THIS "FORM 10-Q"), CONSTITUTE
"FORWARD LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1934, AS AMENDED, AND THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995 (COLLECTIVELY, THE "REFORM ACT"). CERTAIN, BUT NOT NECESSARILY ALL, OF SUCH
FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING
TERMINOLOGY SUCH AS "BELIEVES", "EXPECTS", "MAY", "SHOULD", OR "ANTICIPATES", OR
THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY, OR
BY DISCUSSIONS OF STRATEGY THAT INVOLVE RISKS AND UNCERTAINTIES. SUCH
FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND
OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF
SIBERIAN ENERGY GROUP INC. ("THE COMPANY", "WE", "US" OR "OUR") TO BE MATERIALLY
DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR
IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. REFERENCES IN THIS FORM 10-Q, UNLESS
ANOTHER DATE IS STATED, ARE TO MARCH 31, 2008.
BUSINESS
DEVELOPMENT:
Siberian
Energy Group Inc. was formed as a Nevada corporation on August 13, 1997, as
Advanced Rehab Technology Corporation. Subsequently, on March 9, 2001, the
Company changed its name to Talking Cards, Inc.; on February 12, 2002, the
Company changed its name to Oysterking Incorporated; on December 3, 2002, the
Company changed its name to 17388 Corporation Inc., at which point the
controlling interest of the Company was sold and a new board of directors was
appointed; on May 5, 2003, the Company changed its name to Trans Energy Group
Inc.; and on December 3, 2003, the Company changed its name to Siberian Energy
Group Inc.
On
September 17, 1999, the Company affected a 1-for-30 reverse stock split. A
subsequent 3-for-1 forward split was consummated on October 2, 2000
(collectively the “Stock Splits”). All share amounts subsequently listed are
retroactively adjusted to reflect these stock splits unless otherwise provided.
All activities related to the Company's business were discontinued prior to
January 1, 2000 and the Company began looking for opportunities to acquire an
operating business.
In the
spring of 2003, the balance of the Company's shares was purchased by new
shareholders who stepped into the management of the Company and defined its new
business direction as an oil and gas exploration company.
On May 9,
2003, the Company entered into an Acquisition Agreement (the "Acquisition
Agreement") by and among the Company, Zaural Neftegaz, a Russian corporation
("ZNG"), the shareholders of ZNG and Oleg Zhuravlev, President of ZNG. Pursuant
to the Acquisition Agreement, the Company acquired a 51% interest in ZNG by
issuing to ZNG 2,000,000 shares of the Company's common stock. In June 2004, the
Company purchased the remaining 49% of ZNG in exchange for 6,900,000 shares of
the Company's common stock, making ZNG a wholly owned subsidiary of the Company.
The Company had no affiliation with ZNG prior to the acquisition in May
2003.
On May 2,
2005, the Company affected a 1:2 reverse stock split and all share amounts
listed throughout this Report retroactively reflect such split and the Stock
Splits described above.
All
dollar amounts used throughout this Report are in United States dollars, unless
otherwise stated. All amounts in Canadian dollars used throughout this Report
are preceded by CDN, for example CDN $500, is referring to $500 Canadian
dollars.
BUSINESS
OPERATIONS:
We are a
development stage company, which is seeking opportunities for investment in
and/or acquisition of small to medium companies in Russia, specifically in the
oil and gas industry. We are currently evaluating investment and joint venture
opportunities throughout Russia.
Until
October 14, 2005, the Company's operations were conducted solely through its
then wholly owned subsidiary, Zaural Neftegaz ("ZNG") a development stage oil
and gas exploration company located in the Western Siberian Region of Russia.
However, on October 14, 2005, the Company entered into a Joint Venture
agreement, whereby the Company transferred 100% of the ownership of ZNG to a
newly formed Joint Venture company, Zauralneftegaz Limited, a company organized
under the laws of the United Kingdom ("ZNG, Ltd."), of which the Company owns
50% pursuant to the Joint Venture agreement entered into on October 14, 2005 (as
described in greater detail below under “Joint Venture”). From October 14, 2005
to December 13, 2006, the Company had no oil and gas operations except through
its ownership of 50% of ZNG, Ltd. On December 13, 2006, the Company entered into
an Interest Purchase Agreement with Key Brokerage, whereby the Company purchased
100% of the issued and outstanding common stock of Kondaneftegaz, LLC (“KNG”), a
Russian limited liability company, which was created in 2004 for the purpose of
oil and gas exploration in the Khanty-Mansiysk district of Western Siberia,
Russia. On October 22, 2007, KNG was awarded two oil and gas exploration
licenses for the Karabashsky-61 and Karabashsky-67 blocks located in the
Khanty-Mansiysk Autonomous Region. KNG also has eight more
outstanding applications for exploration licenses filed with the Russian
authorities, which auctions have not occurred to date.
Moving
forward the Company plans to focus on the exploration and potential development
of licenses acquired by KNG and to continue the oil and gas exploration
activities in Kurgan and to work towards generating production activities from
ZNG’s licenses by possibly attracting interest from external parties, of which
there can be no assurance. Additionally, the Company is currently contemplating
entering into additional partnership agreements in connection with advanced
stage exploration or production projects in Western Siberia, of which there can
be no assurance.
Description of
KNG
On
December 13, 2006, we entered into an Interest Purchase Agreement (the "Purchase
Agreement") with Key Brokerage LLC ("Key Brokerage"), pursuant to which we
purchased 100% of the stock of Kondaneftegaz LLC ("KNG"), a Russian limited
liability company, which was created in 2004 for the purpose of oil and gas
exploration in the Khanty-Mansiysk district of Western Siberia, Russia. In
addition to acquiring 100% of the stock of KNG, we received the geological
information package on the Karabashski zone of Khanty-Mansiysk Autonomous
district (Tuymen region of Russian Federation) ("Geological Data"). The
Geological Data is included in the total purchase price discussed
below.
In
October 2007, KNG was awarded two oil and gas exploration licenses in
Khanty-Mansiysk region in West Siberia, Russia for the Karabashsky-61 and
Karabashsky-67 blocks located in the Khanty-Mansiysk Autonomous Region, Russian
Federation. The license areas together cover 166,000 acres and are
situated in the territory of the Urals oil and gas bearing area.
The right
to use the subsurface resources of the Karabashsky-61 and Karabashky-67 Fields
is granted for the term of validity of the license (five (5) years), from the
date of its state registration (October 22, 2007).
The term
of use of the subsurface resources can be extended to finish exploration and
estimation of deposit or for liquidation work, if the terms of usage of the
subsurface resources are not breached.
The right
to use the subsurface resources can be cancelled by the Subsurface Resources
Administrator based on the Russian Federation Law “On Subsurface Resources” in
the event the owner of the license:
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1)
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fails
to pay the payments and duties;
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2)
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does
not start the seismic work 2D in 2008; or
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3)
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does
not start exploration drilling in
2011.
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The owner
of the license is obliged to perform the following geological work on subsurface
of the lease:
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·
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to
prepare and coordinate, and get approval in the prescribed manner of the
“Program of exploration works on the Karabashsky-61 and Karabashsky-67
license areas” within 12 months from the date of the state registration of
the license (October 22, 2007);
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·
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to
begin 2D seismic works during the 2008-2010 fieldwork season and to
perform not less than 176.26 linear kilometers of seismic profiles on
Karabashky-61 and 158 linear km on Karabashky-67 (minimal density of the
profile not less than 1 linear kilometer per 1 square kilometer of license
area); and
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·
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No
later than 2011, to start drilling an exploratory well and to complete not
less than 2 exploratory wells by April 1,
2012.
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Regular
payments are due for the total area of the licenses according to the following
rates (starting with the date of state registration of the
license):
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-
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120
rubles (approximately $5.25) for each 1 square kilometer –
during the first three calendar years after the license is
granted;
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-
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240
rubles (approximately $10.50) for each 1 square kilometer – during the
fourth calendar year after the license is granted; and
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-
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360
rubles (approximately $15.75) for each 1 square kilometer – during the
fifth calendar year after the license is
granted.
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The rates
currently yield total annual payments for the two blocks of approximately $3,300
in the first three years, $6,600 in the fourth year and $10,000 in the fifth
year. Currently the Company is negotiating a joint venture with a local partner
to perform prescribed geological research works on the two blocks, which
agreement is anticipated to be finalized in June of 2008, of which there can be
no assurance
Description of
ZNG
ZNG was
created to explore and develop new hydrocarbon fields and oil and gas properties
in the Kurgan region of Southwest Siberia, Russia. ZNG has compiled data in the
Eastern part of the Kurgan region by analyzing prior geological, geophysical and
lithographic exploration works in the region, data, maps, and reports from 12
test wells drilled between 1979-1986, profile sections, correlation schemes, and
geographic maps of the region. ZNG has also obtained core samples from
parametric wells drilled in prior years on the licensed areas and adjacent
territories in the Eastern part of Kurgan region during the initial search for
oil and gas in the region, and performed analysis of the data provided by the
samples.
In March
2003, ZNG acquired four 5-year exploration licenses through a government tender.
In June 2006, through participation in governmental auctions, ZNG successfully
obtained three more oil and gas licenses in the Kurgan region of Siberia,
Russia: the Yuzhno-Voskresensky, Petukhovsky and Lebyazhevsky parcels. The new
licenses are for the period of 25 years and allow both exploration and
production on the licensed areas. The total cost paid at the auctions for the
three new licenses by ZNG was approximately $425,000. All of the licensed
areas are located in the Eastern part of Kurgan region, have well-developed
infrastructure, including close proximity to the major oil pipeline, and have
available existing prior geological data.
As of May
2008, ZNG had performed the following research and exploration works on its
licensed areas:
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|
·
|
Obtained
core samples from parametric wells drilled in prior years on the licensed
areas and adjacent territories in the Eastern part of Kurgan region during
the initial search for oil and gas in the region, and performed analysis
of the data provided by the
samples;
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|
|
·
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Completed
a 2D seismic survey over 1,000 linear kilometers on the first license
areas obtained in 2003, through an agreement with a Russian company,
Bashneftegeofizika;
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|
|
·
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Completed
approximately 2,106 linear kilometers of gas seismotomographic and
geochemical surveys performed by Exotrad. Gas seismotomography is an
advanced technique of combining active gas geochemistry, passive seismic
and electromagnetic methods. The surveys were performed by Exotrad, a
world leader in this field. Exotrad has used this technology in more than
260 projects as well as “Caspian Pipeline Consortium”; “Sakhalin-2”; and
“Blue Stream” in diverse locations across Asia, Eastern Europe and the
Americas;
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|
|
·
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Scientific
and technical analysis was performed by the team of geologists, which
included experts from Exploration Consultants Limited ("ECL"), a leading
international oil and gas consulting firm (part of RPS
Group);
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|
|
·
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Following
interpretation of seismic, geochemical and geophysical data the first well
location was chosen in the northern part of the Privolny license, which
well was spudded in the Spring of 2007. Having drilled to 2,400 meters,
the well was suspended, pending analysis and interpretation of the data,
with a possible view to re-entry at a future date, of which there can be
no assurance. Results of the seismic interpretation also showed that two
of the licenses – West-Suersky and Orlovo-Pashkovsky did not
have high potential and ZNG has voluntarily surrendered these licenses to
the relevant authorities;
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|
|
·
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The
Privolny-1 well provided crucial data to the determination of a second
well location in the southern section of the Mokrousovsky block, a short
distance to the north. The Mokrousovsky-1 well was spudded in September
2007 and also drilled to 2,400 meters. A modern, light-weight rig was
contracted to drill this well, which proved to be extremely challenging
from an engineering prospective. The drilling timeframe was
extended, and hydrocarbons were identified with some being tested using
Schlumberger’s MDTTM tool. RPS Energy has evaluated all of this data and,
as of the date of this report, ZNG awaits their report and is considering
options for further potential exploitation. Upon expiration of the license
terms on the Mokrousovsky and Privolny parcels in March 2008, ZNG has the
preferential right to re-apply for the licenses to continue exploration
works. Should the results of the RPS report be affirmative and the Company
and its current or prospective partners decide to commit to the advanced
exploration, ZNG will re-apply for the licenses.
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|
Additionally,
the Company plans to focus on investigating the potential of its current
25-year licenses: Yuzhno-Voskresensky, Petukhovsky and Lebyazhevsky
licenses.
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Joint
Venture
Currently,
the operating activities of ZNG described above are carried out through the
Joint Venture Shareholders' Agreement ("Joint Venture") entered into on October
14, 2005 with Baltic Petroleum (E&P) Limited ("BP" or "Baltic") and
Zauralneftegaz Limited, the joint venture company ("ZNG, Ltd."), as contemplated
by the Option Agreement, as amended (the "Option"). The Company closed the Joint
Venture and transferred 100% of the outstanding stock of ZNG to ZNG, Ltd. in
connection with the terms and conditions of the Joint Venture. As a result of
such transfer, the Company holds 50% of the outstanding stock of ZNG, Ltd.,
which holds 100% of the outstanding stock of the Company's former wholly owned
subsidiary, ZNG. ZNG, Ltd., will, operate through ZNG and be engaged
in the exploration and development of, production and sale of, oil and gas
assets in the Western Siberian region of the Russian Federation and the former
Soviet Union and as a result of such transfer, the Company no longer has any
separate oil and gas exploration activities in Kurgan, Russia, other than
through its ownership of ZNG, Ltd.
The
operations of the Joint Venture are funded via loans provided to ZNG, Ltd. and
ZNG by Caspian Finance Limited ("Caspian"), a financing company wholly owned by
Baltic. Loans are guaranteed by ZNG, Ltd.’s holdings in
ZNG. As of March 31, 2008 the total funding provided to ZNG, Ltd. and
ZNG by Baltic was equal to approximately $23.5 million plus accrued interest of
approximately $3.9 million.
To date,
Caspian has provided ZNG various loans from 2005 through 2007, as described
below:
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|
·
|
On
November 9, 2005, ZNG entered into a New Loan with Caspian (the "New
Loan"). Under the loan agreement, Caspian agreed to provide a loan of up
to $6,874,325 representing the assumed commitment under a prior loan equal
to $1,739,658, of which ZNG had received $1,110,624 as of November 9,
2005, and a new commitment of up to $5,134,667, to be used for operations
in the Kurgan region in 2005 and through the first half of 2006. The New
Loan is available to ZNG until the sixth anniversary of the date of the
New Loan, or November 9, 2011 (the
"Term");
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|
|
·
|
On
January 16, 2007, ZNG and Caspian entered into a Deed of Variation of the
Loan Agreement, whereby, inter alia, the Lender agreed to make available
to ZNG an additional loan facility of
US$2,000,000;
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|
|
·
|
On
April 23, 2007, ZNG and Caspian further entered into a Deed of Variation
of the Loan Agreement whereby, inter alia, the Lender agreed to make
available to ZNG an additional loan facility of US$300,000;
and
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|
|
·
|
On
June 18, 2007, ZNG and Caspian entered into another Deed of Variation to
the Loan Agreement, whereby Caspian agreed to make available to ZNG an
additional loan facility of US$7,359,190 (the “June 2007 Deed of
Variation”).
|
The total
outstanding balance of the New Loan provided up to March 31, 2008, was
$15,239,000, including $12,790,000 of principal and $2,449,000 of interest
accrued as of March 31, 2008.
Funding
to ZNG, Ltd. is provided by Caspian on the same terms as to ZNG, through the
mechanism of intercompany billing within Baltic and certain companies affiliated
with Baltic. As of March 31, 2008, the total loan to ZNG, Ltd. from Caspian
totaled $10,566,000, including $9,380,000 of principal and accrued interest of
$1,186,000. In addition, ZNG, Ltd. owes $1,530,000 directly to Baltic for unpaid
management fees and accrued interest through March 31, 2008.
The loans
are not dilutive to the Company's ownership in ZNG. In connection with the
funding provided by Baltic, ZNG entered into a gross override royalty agreement
with Baltic, as described below under "Deed of Agreement," and “Gross Override
Royalty Agreement.”
Joint
Venture activities are currently in the “transition period”. The first stage of
drilling has been completed and both wells confirmed the presence of
hydrocarbons. As of the date of this filing, the Joint Venture is awaiting
reports from RPS Energy regarding the potential for future exploitation. In the
event the Joint Venture decides to explore further, the Joint Venture will seek
to “farm out” its interest in the acreage. At that time, the new funding budget
will be determined.
Terms of loans to ZNG, Ltd.
and ZNG:
Interest
on any amounts loaned under the New Loan bears interest at the following rates,
calculated and compounded on a daily basis, 14% per annum during the first two
years of the Term, 13% per annum during the third year of the Term; and 12%
thereafter until the end of the Term.
Additionally,
under the terms of the June 2007 Deed of Variation, interest on the loans made
by Baltic to ZNG is payable on:
|
|
a)
|
the
earlier of (i) the date on which ZNG’s monthly turnover as shown by its
monthly management accounts exceeds US $200,000 and (ii) the fifth
anniversary of the Deed of Variation dated June 18, 2007;
and
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|
|
b)
|
thereafter,
on a monthly basis on the final day of each calendar month using all
available turnover, provided that in the event the interest due thereafter
exceeds the monthly turnover of ZNG then all of the turnover except for
the direct budgeted operating expenses of ZNG and management fees agreed
to be paid to Siberian Energy Group Inc. under the Joint Venture Agreement
will be allocated prior to the payment of such interest and any interest
not able to be paid will accrue and be payable as soon as the level of
turnover (less the fees payable to us) permits (collectively the
“Interest Payments”).
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In the
event that ZNG does not make the Interest Payments when due, interest on the
unpaid amounts shall be payable from the due date to the date paid at the rate
of 6% per annum, calculated and accrued on a daily basis. The New Loan is
unsecured by ZNG, but Caspian reserved the right to request security over all or
some of the assets and/or undertaking of ZNG at any time prior to any drawdown
of the New Loan, or while any money is outstanding under the New
Loan.
Pursuant
to the New Loan, ZNG is responsible for satisfying all requirements of Russian
Federation law and regulations in connection with each advance made under the
New Loan, and ZNG shall indemnify Caspian for any loss or damage it may suffer
as a result of the New Loan.
On
November 9, 2005, ZNG, Ltd. and Caspian entered into a Debenture, whereby ZNG,
Ltd. granted Caspian a security interest in substantially all of its assets,
including its 100% ownership of ZNG, to secure the repayment of the New Loan
Agreement. Pursuant to the Debenture, ZNG, Ltd. granted Caspian a continuing
security interest for the payment, performance and discharge of all of the
liabilities owing to Caspian by ZNG, Ltd., in the following assets, both present
and future, from time to time to the extent owned by ZNG, Ltd., or to the extent
in which it has an interest.
Additionally,
on November 9, 2005, ZNG, Ltd. and Caspian entered into an "Agreement for the
Pledge of the Participatory Interest in OOO Zauralneftegaz" (the "Pledge
Agreement"). Pursuant to the Pledge Agreement, ZNG, Ltd., pledged its 100%
ownership interest in ZNG to Caspian, which included any proceeds, dividends,
distributions or income deriving from ZNG and any compensation, whether monetary
or in-kind, deriving from ZNG, received due to the liquidation or reorganization
of ZNG. The Pledge Agreement shall remain in effect until all amounts owed to
Caspian by ZNG, Ltd. are repaid. Pursuant to the Pledge Agreement, ZNG, Ltd.,
agreed to hold all dividends, interest and other income deriving from and by it
for the account of Caspian, and agreed to pay such dividends, interest and other
income to Caspian upon Caspian's request.
If ZNG,
Ltd. fails to pay the amounts owed to Caspian pursuant to the Pledge Agreement,
Caspian can sell the 100% interest in ZNG at public auction, in one or several
sales, with an opening bid price of seventy five percent (75%) of the value set
forth for the value of ZNG in the Pledge Agreement ($7,705,079) at the first
public auction and fifty percent (50%) of the value set forth in the Pledge
Agreement at the second public auction. If the opening bid for ZNG is not met at
either the first or second public auction, Caspian shall have the right to
retain ZNG, with its value equal to 90% of the value set at the second auction,
and set-off its claims secured by ZNG, Ltd. by such value. If ZNG is sold at
public auction, any and all proceeds from such sale received by Caspian shall be
applied towards the discharge of the amounts owed by ZNG, Ltd. to
Caspian.
Gross Overriding Royalty
Agreement
In
December 2006, ZNG entered into a Gross Overriding Royalty Agreement (the
“Royalty Agreement”) with Baltic, which was contemplated by the Deed of
Agreement dated July 26, 2006, described above and entered into in connection
with the addition to the New Loan, described above. The Royalty Agreement
provided that ZNG would grant Baltic a gross overriding royalty interest equal
to 3% of ZNG’s interest in any and all of the hydrocarbons found in, produced,
marketed and/or extracted from ZNG’s licensed blocks (the “Royalty”). Pursuant
to the Royalty Agreement, the Royalty shall be paid free and clear of any
expenses associated with the exploration and/or production of any hydrocarbons
discovered on the licensed blocks. The Royalty will apply until ZNG has received
an aggregate of $20,000,000 from the gross sales of any hydrocarbon production
produced or occurring on any wells owned or operated by ZNG. The Royalty
Agreement also provides that Baltic may at any time, upon not less than one (1)
week prior notice, take the Royalty in oil and/or gas production, instead of in
cash. ZNG also granted Baltic a security interest on any and all of its future
hydrocarbon production to secure the payment of the Royalty.
Agreement With Alternative
Energy Finance, Ltd.
We
previously agreed to issue Alternative Energy Finance Ltd. ("AEF"), of which Tim
Peara is the Managing Director as well as a Director of the Company, certain
warrants in connection with Mr. Peara introducing the parties who formed the
joint venture. Pursuant to an agreement between AEF and the Company, AEF will
receive compensation based on the total investment made by Baltic Petroleum Ltd.
in the Joint Venture. This compensation included a commission of approximately
$18,024 (1% of Baltic's first $1,802,441 investment in the Joint Venture) and
50,068 options to purchase shares of our common stock at $0.63 per share which
were granted to Mr. Peara on March 6, 2006 and a commission of $6,673 (1% of
Baltic's $667,313 investment in the Joint Venture in the first quarter of 2006),
and 17,561 options to purchase shares of our common stock at $0.67 per share for
the first quarter of 2006, which were granted to Mr. Peara on March 31, 2006,
which options contain a cashless exercise provision.
On June
30, 2006, in connection with our agreement with AEF, we agreed to grant AEF a
warrant to purchase 20,412 shares of our common stock at an exercise price of
$2.02, which warrants contained a cashless exercise feature. The warrants expire
three years from the grant date. We were also obligated to pay AEF $23,562
during the quarter ended June 30, 2006 (equal to 1% of Baltic's $2,356,153
investment in the Joint Venture in the second quarter 2006).
On
September 30, 2006, in connection with our agreement with AEF, we agreed to
grant AEF a warrant to purchase 20,952 shares of our common stock at an exercise
price of $1.53 per share, which warrants contained a cashless exercise feature.
The warrants expire three years from the grant date. We were also obligated to
pay AEF $18,303 during the quarter ended September 30, 2006 (equal to 1% of
Baltic's $1,830,292 investment in the Joint Venture in the third quarter of
2006).
On
December 31, 2006, in connection with our agreement with AEF, we agreed to grant
AEF a warrant to purchase 38,648 shares of our common stock at an exercise price
of $1.44 per share, which warrants contained a cashless feature. The warrants
expire three years from the grant date. We were also obligated to pay AEF
$31,794 during the three months ended December 31, 2006 (equal to 1% of Baltic’s
approximately $3,197,400 investment in the Joint Venture in the fourth quarter
of 2006).
On March
13, 2007, Mr. Peara personally, and on behalf of AEF agreed to accept 58,134
shares of our restricted common stock in consideration for the forgiveness of
$45,626 owed personally to Mr. Peara in Directors fees and accrued expenses and
$47,969 owed to AEF in connection with our agreement with AEF, which shares have
been issued to date and which debt has been forgiven by Mr. Peara and
AEF.
On March
31, 2007, in connection with our agreement with AEF, we agreed to grant AEF a
warrant to purchase 48,925 shares of our common stock at an exercise price of
$1.10 per share, which warrants contained a cashless feature. The warrants
expire three years from the grant date. We were also obligated to pay AEF
approximately $30,695 during the three months ended March 31, 2007 (equal to 1%
of Baltic’s approximately $3,069,482 investment in the Joint Venture in the
first quarter of 2007); which amount has not been paid to date.
On June
30, 2007, in connection with our agreement with AEF, we agreed to grant AEF a
warrant to purchase 55,233 shares of our common stock at an exercise price of
$1.14 per share, which warrants contained a cashless feature. The warrants
expire three years from the grant date. We were also obliged to pay AEF
approximately $35,938.00 during the three months ended June 30, 2007 (equal to
1% of Baltic’s approximately $3,593,848 investment in the Joint Venture in the
second quarter of 2007); which amount has not been paid to date.
On
September 30, 2007, in connection with our agreement with AEF, we agreed to
grant AEF a warrant to purchase 51,352 shares of our common stock at an exercise
price of $0.74 per share, which warrants contained a cashless feature. The
warrants expire three years from the grant date. We were also obligated to pay
AEF approximately $21,568 during the three months ended September 30, 2007
(equal to 1% of Baltic’s approximately $2,156,790 investment in the Joint
Venture in the third quarter of 2007); which amount has not been paid to
date.
On
December 31, 2007, in connection with our agreement with AEF, we agreed to grant
AEF a warrant to purchase 78,130 shares of our common stock at an exercise price
of $0.46 per share, which warrants contained a cashless feature. The warrants
expire three years from the grant date. We were also obligated to pay AEF
approximately $20,626 during the three months ended December 31, 2007 (equal to
1% of Baltic’s approximately $2,062,635 investment in the Joint Venture in the
fourth quarter of 2007); which amount has not been paid to date.
Global Consulting Group
Agreement
With an
effective date of April 10, 2007, we entered into an agreement with The Global
Consulting Group (“Global”), whereby Global agreed to perform investor relations
and medial communications services for us for the period of one (1) year, which
agreement is automatically renewable for additional one (1) year periods if not
terminated prior as described below. Pursuant to the Global agreement, we agreed
to pay Global $12,000 per month during the term of the agreement (subject to 3%
yearly increases, if such agreement is not terminated prior to the one (1) year
anniversary of the agreement), and pay Global one time bonuses of $5,000 upon
the achievement of any of the following goals: our common stock being listed on
the AMEX; a valuation of our common stock of at least $40 million for more than
30 days; and/or any feature story in a top tier media outlet (The Wall Street
Journal, The New York Times or similar publication). We also agreed to pay
Global’s reasonable out of pocket expenses, subject to prior approval for any
expense over $300 and to indemnify Global against any losses they may incur as a
result of the Global agreement up to a maximum of $10,000. In
November 2007, we terminated the Global agreement and entered into a Settlement
Agreement (the “Global Settlement”) with Global, pursuant to which we agreed to
pay Global $20,000 (payable in four installments of $5,000, due December 5,
2007, January 5, 2008, February 5, 2008 and March 5, 2008) and 20,000 restricted
shares in settlement of the termination of the Global agreement. In
May 2008, we entered into a First Amendment to the Settlement Agreement (the
“First Amendment”) with Global. Pursuant to the First Amendment, we
agreed to pay Global $5,000 and 25,000 shares of common stock, along with the
cash and stock consideration previously paid by us to Global pursuant to the
Settlement Agreement, in full satisfaction of the Global
Agreement. We agreed to pay Global the cash consideration on or prior
to May 29, 2008, which amount of cash and stock as required by the First
Amendment has not been paid to Global to date.
PLAN
OF OPERATIONS FOR THE NEXT TWELVE MONTHS
The
Company plans to focus on the exploration and potential development of licenses
acquired by KNG in the Khanty-Mansiysk region and to continue oil and gas
exploration activities in the Kurgan region to take ZNG’s licenses into
production either with its partner in the Joint Venture, Baltic Petroleum,
or by attracting a third party interest, of which there can be no assurance. The
Joint Venture is currently carrying on negotiations with potential farm-in
partners regarding funding and further development of ZNG’s
licenses.
The
Company also plans to put a large part of its resources into KNG, and the
licenses which KNG has applied for. On October 22, 2007, KNG received 2 licenses
of ten for which it had applied for between 2005 and 2006. If KNG is
granted any or all of the 8 additional licenses it applied for in November 2005
and May 2006, the Company anticipates conducting oil and gas exploration surveys
and studies on those licenses, as well as the two licenses granted in October
2007, funding permitting, of which there can be no assurance.
Moving
forward, we anticipate targeting other potential long term investments in
Russia, separate from our involvement in the Joint Venture and KNG. Currently we
are evaluating different business opportunities in the oil and gas industry,
including advanced development stage and revenue-producing enterprises. As of
the filing of this report, the Company is researching certain other projects
which involve the potential purchase of oil and gas interests in Western
Siberia, Russia; however no formal agreements or understandings have been
entered into as of the filing date of this report.
Historically,
we have obtained cash financing from organizing stockholders in the form of
loans and advances. Additionally, during the fourth quarter of 2005, we
restructured much of our debt through the issuance of shares to our creditors
and obtained waiver letters, postponing certain of our liabilities until such
time as we have generated sufficient profits to pay such debts. These waiver
letters related to the payment of certain trade debts as well as shareholder
loans and accrued salaries.
In
connection with the Joint Venture (described under "Joint Venture Agreement,"
above), the Company generally received management fees in connection with the
Joint Venture, which varied from $25,000 to $85,000 per month. Due to the
“transition period” of the Joint Venture’s exploration activities no management
fees were paid in the first quarter of 2008 and there is no assurance that the
Joint Venture will pay any management fees or that fees received will be
adequate to pay its upcoming expenses and liabilities in the
future. If the Company does not receive any management fees moving
forward, the Company plans that its organizing stockholders will continue to
provide financing for the Company, of which there can be no
assurance.
In the
past, we have obtained cash financing from organizing stockholders in the form
of loans and advances, as a result, amounts totaling $425,184 and $370,500 were
payable to the stockholders as of March 31, 2008 and December 31, 2007,
respectively. However, there can be no certainty as to the availability of
continued financing in the future. Failure to obtain sufficient financing may
require us to reduce our operating activities. A failure to continue as a going
concern would then require stated amounts of assets and liabilities to be
reflected on a liquidation basis which could differ from the going concern
basis.
COMPARISON
OF OPERATING RESULTS
RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2008, COMPARED TO THE THREE
MONTHS ENDED MARCH 31, 2007
We had no
revenues and other income for the three months ended March 31, 2008, compared
with $165,000 of revenue and other income for the three months ended March 31,
2007, due solely to $165,000 of management fees received. During the
three months ended March 31, 2007, the Company received monthly management fees
of $55,000 pursuant to our Joint Venture. However, the Company did
not receive any management fees for the three months ended March 31, 2008, as a
result of restructuring of Kurgan operations and negotiating of farming out
further research works on ZNG’s licensed areas..
We have
not generated any revenues to date through the sale of oil and/or
gas.
We had
total expenses of $186,155 for the three months ended March 31, 2008, compared
to total expenses for the three months ended March 31, 2007, of $474,093, which
represented a decrease in total expenses from the prior period of $287,938 or
60.7%.
The main
reason for the decrease in total expenses for the three months ended March 31,
2008, compared to the three months ended March 31, 2007, was a $126,963 or 62.7%
decrease in professional and consulting fees, to $75,425 for the three months
ended March 31, 2008, compared to $202,388 for the three months ended March 31,
2007, which decrease is largely attributable to the fact that the Company used
less third party consultants and advisors during the three months ended March
31, 2008, compared to the same period of 2007. Total expenses also decreased
because of a $155,761 or 89.5% decrease in other expenses, mainly attributable
to the discontinuance of certain marketing contracts and less travel performed
by management for marketing purposes for the three months ended March
31, 2008, compared to the three months ended March 31, 2007.
We had a
net loss of $186,155 for the three months ended March 31, 2008, compared to a
net loss of $309,093 for the three months ended March 31, 2007, a decrease in
net loss of $122,938 or 39.8% from the prior period. The decrease in net loss
was mainly attributable to the $287,938 or 60.7% decrease in total expenses,
offset by the $165,000 decrease in revenues and other income for the three
months ended March 31, 2008, compared to the three months ended March 31,
2007.
LIQUIDITY
AND CAPITAL RESOURCES
We had
current assets of $4,999 as of March 31, 2008, which included cash of $550; and
prepaid expenses and other of $4,449.
We had
total assets of $5,256,662 as of March 31, 2008, which included current assets
of $4,999 and non-current assets of $5,251,663. Non-current assets included
$5,248,000 of oil and gas properties, unproved, representing two exploration
licenses of KNG and also geological studies and data, which we received in
connection with the purchase of KNG, and $3,663 of property and equipment,
net.
We had
total liabilities of $1,377,139 as of March 31, 2008, which were solely current
liabilities and which included $425,184 of accounts payable to related party
stockholders in connection with those shareholders paying certain of our
expenses from the period between January 1, 2003 to March 31, 2008; $58,208 of
accounts payable to Baltic in connection with a $29,000 loan advanced to the
Company from Baltic and certain other expenses owed to Baltic; $268,861 of
accounts payable to others for advisory and professional services rendered; and
$614,886 of accrued payroll, which included $337,500 payable to our Chief
Executive Officer, David Zaikin, of which $225,000 was accrued in 2007 and 2008,
and $112,500 was owed to Mr. Zaikin for services rendered prior to September
2005, at which time he agreed to stop accruing salary until January 2007, when
he provided us notice of his intent to once again begin accruing salary until
such time as we have sufficient funds to pay such accrued salary,
$108,332 payable to our Chief Financial Officer, Elena Pochapski, and
$69,242 of accrued salary payable to our former Chief Executive Officer, Shakeel
Adam.
We had
negative working capital of $1,372,140 and a total pre-development and
development stage accumulated deficit of $9,178,984 as of March 31,
2008.
Because
our cumulative losses associated with the operations of ZNG exceeded our
investment as of the date of the Joint Venture, ZNG, Ltd. is carried on our
balance sheet at $-0- as of March 31, 2008. Our investment in ZNG,
Ltd. will exceed $-0- at such time as ZNG, Ltd. has cumulative
earnings sufficient to repay all loans to Baltic as provided in the Joint
Venture, if ever.
We had
$435 of net cash flows from operating activities for the three months ended
March 31, 2008, which is attributable to $184,724 of increase in accounts
payable and accrued expenses, $1,750 of warrants granted for professional
services and $231 of depreciation and amortization, offset by $186,155 of net
loss and $115 of prepaid expense and other assets.
We had $0
of net cash flows for investing activities for the three months ended March 31,
2008.
We had $0
of net cash flows from financing activities for the three months ended March 31,
2008.
Pursuant
to the Deed of Agreement, whereby Baltic agreed to loan ZNG approximately
$12,000,000 to be used on seismic studies, the budget for the current program of
seismic studies and drilling of the first four wells on ZNG’s licenses in 2007
was adopted by ZNG, Ltd.’s Board. This budget amounted to US $14,998,000, or
approximately $8 million British pounds. These funds were raised by Baltic’s
parent company through a placement of shares. Of the total budgeted amount of
$14,998,000, the sum of $9,659,000 is being provided through the ZNG loans
described earlier and the sum of $5,339,000 is committed to be provided to ZNG,
Ltd. The loans are not dilutive to the Company's ownership in
ZNG. ZNG currently has approximately $3,000,000 remaining from its
2007 budget, however funding of additional exploration works on the Mokrousovsky
and Privolny areas and the 2008 exploration budget are not yet approved, pending
on the report of RPS Energy regarding further potential exploitation of these
areas. In the event ZNG decides to undertake further exploration of these areas,
the Joint Venture will seek to “farm out” its interest in the
acreage.
As of
March 31, 2008, ZNG had received $12,790,000 pursuant to the New Loan, which
amount includes $6,874,325 assumed by ZNG in connection with a previous loan
made to ZNG. Total interest accrued as of March 31, 2008 was $2,558,000,
including accrued interest on the previous loan. The total funding provided to
ZNG, Ltd. and ZNG by Baltic including the delayed payment of Baltic management
fees as of March 31, 2008 was equal to $23,465,000 plus accrued interest of
approximately $3,979,000.
Under the
terms of the Joint Venture Agreement, we received $25,000 per month as a
management fee from ZNG, Ltd. This amount was increased to $55,000 as per the
2007 operating budget and further increased to $85,000 for the months of June
through October 2007, after which date no management fees were paid in
connection with the ‘transition period” of Kurgan activities (described above
under “Joint Venture”). Should Baltic decide not to further pursue the
Kurgan project, the Joint Venture will be restructured and the management fees
from Baltic will be discontinued and we will have to renegotiate management fees
with the new partner or raise additional funding to support our operations,
which may be on unfavorable terms, if at all.
Since our
transfer of ZNG to the Joint Venture, our only oil and gas operations separate
from our ownership of 50% of ZNG, Ltd. has been through KNG which was awarded
two oil and gas exploration licenses in October 2007. Moving forward, we believe
that in the long run a number of trends will favorably affect our liquidity.
These trends include the steady trend of economic growth in Russia in the recent
years which is improving the liquidity of our potential customers, and may
favorably impact our debt management and the increasing overall credit rating in
Russia, which we hope will lead to increased foreign investment in Russian
companies and which will benefit us as well.
We are
taking steps in an attempt to raise equity capital and/or to borrow additional
funds. There can be no assurance that any new capital will be available to us or
that adequate funds for our operations, whether from our financial markets, or
other arrangements will be available when needed or on terms satisfactory to us,
if at all. We have no commitments from officers, directors or affiliates to
provide funding. Our failure to obtain adequate financing may require us to
delay, curtail or scale back some or all of our operations. Additionally, any
additional financing may involve dilution to our then-existing
shareholders.
Additionally,
we are currently reviewing our status as a U.S. reporting Company, and our
management may decide it is more advantageous for us to go private, cease our
public reporting in the future, and/or trade our common stock on alternative
markets or exchanges in Europe in the future (or to dual list our stock on
multiple exchanges), which could cause any investment in the Company to become
illiquid or worthless if such transaction were to occur (see also “Risk Factors”
below”).
Critical
Accounting Policies
Our
discussion and analysis of our financial condition and results of operations is
based upon our unaudited financial statements, which have been prepared in
accordance with accounting principals generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of any contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to
uncollectible receivable, investment values, income taxes, the recapitalization
and contingencies. We base our estimates on various assumptions that we believe
to be reasonable under the circumstances, the results of which form the basis
for making judgments about carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Recently issued accounting
pronouncements. The Company does not expect the adoption of any recently
issued accounting pronouncements to have a significant impact on the Company’s
results of operations, financial position or cash flows.
ITEM 3. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pursuant
to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to
provide the information required by this Item as it is a “smaller reporting
company,” as defined by Rule 229.10(f)(1).
ITEM 4T. CONTROLS AND
PROCEDURES
Evaluation
of Disclosure Control and Procedures
We
conducted an evaluation of the effectiveness of our disclosure controls and
procedures as such term is defined in Rule 13a-15(e) of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”) as of March 31,
2008. This evaluation was carried out under the supervision and with
participation of our Chief Executive Officer and Chief Financial Officer. Based
upon this evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that as of March 31, 2008, our disclosure controls and procedures are
not effective as a result of the material weakness in internal control over
financial reporting discussed below.
Notwithstanding
the assessment that our internal control over financial reporting was not
effective and that there were material weaknesses as identified in this report,
we believe that our consolidated financial statements contained in this Report
fairly present our financial position, results of operations and cash flows for
the periods covered herein in all material respects.
As of
December 31, 2007, management assessed the effectiveness of the Company's
internal control over financial reporting based on the criteria for effective
internal control over financial reporting established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO") and SEC guidance on conducting
such assessments.
Based on
that evaluation, management concluded that, during the period covered by our
Annual Report on Form 10-KSB, such internal controls and procedures were not
effective to detect the inappropriate application of US GAAP rules as more fully
described below. This was due to deficiencies that existed in the design or
operation of our internal control over financial reporting that adversely
affected our internal controls and that taken together may be considered to be a
material weakness.
We are
committed to improving our financial organization. As part of this commitment,
we will, as soon as funds are available to the Company (1) appoint one or more
outside directors to our board of directors who shall be appointed to the audit
committee of the Company resulting in a fully functioning audit committee who
will undertake the oversight in the establishment and monitoring of required
internal controls and procedures; (2) create a position to segregate duties
consistent with control objectives and will increase our personnel resources;
and (3) hire independent third parties to perform expert advice.
We will
continue to monitor and evaluate the effectiveness of our internal controls and
procedures and our internal controls over financial reporting on an ongoing
basis and are committed to taking further action and implementing additional
enhancements or improvements, as necessary and as funds allow. This annual
report does not include an attestation report of the Company's independent
registered public accounting firm regarding internal control over financial
reporting. Management's report is not subject to attestation by the Company's
independent registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit us to provide only management’s
report in this annual report.
Changes
in internal control over financial reporting
There
were no changes in our internal control over financial reporting during our most
recent fiscal quarter that materially affected, or were reasonably likely to
materially affect, our internal control over financial reporting.
PART II - OTHER
INFORMATION
ITEM 1. LEGAL
PROCEEDINGS
In
January 2007, we learned that certain of our former officers, Directors and
shareholders, had attempted to transfer shares of our common stock, which those
individuals had agreed to cancel in connection with the purchase of a majority
of the Company’s outstanding shares from those individuals by our current
officers, Directors and majority shareholders in April 2003. In February 2007,
we filed for a Temporary Restraining Order and Motion for Preliminary Injunction
against those individuals in the District Court of Clark County,
Nevada.
On
February 20, 2007, our Temporary Restraining Order and Motion for Preliminary
Injunction was heard by the District Court of Clark County, Nevada, and we were
granted an indefinite injunction without a hearing by the court. As such, those
individuals who previously attempted to transfer and sell the shares which they
held will be prevented from transferring or selling such shares until they can
show good cause with the court why such indefinite injunction should be
lifted.
From time
to time, we may become party to other litigation or other legal proceedings that
we consider to be a part of the ordinary course of our business. We are not
currently involved in legal proceedings that could reasonably be expected to
have a material adverse effect on our business, prospects, financial condition
or results of operations, other than the proceeding described above. We may
become involved in material legal proceedings in the future.
ITEM 1A. RISK
FACTORS
Our
securities are highly speculative and should only be purchased by persons who
can afford to lose their entire investment in our Company. If any of the
following risks actually occur, our business and financial results could be
negatively affected to a significant extent. The Company's business is subject
to many risk factors, including the following:
RISK OF CONTINUING OUR BUSINESS PLAN
WITHOUT ADDITIONAL FINANCING.
We depend
to a great degree on the ability to attract external financing in order to
conduct future exploratory and development activities. The Company believes it
can satisfy its cash requirements during the next twelve months through funding
provided by existing stockholders and the requirements of the Joint Venture’s
Kurgan operations, if any, with amounts provided by the Joint Venture
(described above). As of March 31, 2008, the total funding provided
to ZNG, Ltd. and ZNG by Baltic was equal to $23.5 million plus accrued interest
of approximately $3.9 million, which has been spent on various purposes,
including seismic and gas seismotomography surveys, drilling of two exploratory
wells, and paying consultants for services performed in connection with surveys
performed on the licensed area. The Joint Venture is responsible for the funding
of the operations of ZNG. However, if the Joint Venture is unable to
raise the additional funds required for the planned activities of ZNG or attract
interest from external parties and we are unable to raise financing for
additional activities, separate from the Joint Venture, our Company may be
forced to abandon its current business plan. If you invest in our Company and we
are unable to raise the required funds, your investment could become
worthless.
RISK
OF FUNDING PARTNER NOT MOVING FORWARD WITH JOINT VENTURE
Our
revenues have been generated from a monthly management fee received from
ZNG. In the event that our funding partner does not move
forward with the joint venture and/or does not pay us management fees, this
will hurt our financial condition and the Company may be forced to abandon or
curtail its business plan which could cause the value of the Company’s common
stock to decline in value or become worthless.
WE WILL NEED SUBSTANTIAL FINANCING
AND SUBSTANTIAL TIME BEFORE WE ANTICIPATE GENERATING
REVENUES THROUGH OUR OWNERSHIP OF ZNG, LTD., IF ANY.
The
Company does not expect to generate any revenues through the operations of
ZNG. Therefore, investors should keep in mind that even if ZNG
is able to raise the substantial amounts of additional financing it requires for
its operations, it could still be years before ZNG generates any revenue, if
ever. Even if generated, such revenues will likely not be great enough to
sustain ZNG. If no revenues are generated and hydrocarbon reserves are not
located, we may be forced to abandon or curtail our current business plan. If
ZNG, which is 100% owned by the Company 50/50 joint venture ownership of ZNG,
Ltd., were forced to abandon its business plan, the Company could be forced to
abandon or curtail its business plan as well, which could cause the value of the
Company's common stock to become worthless.
WE
WILL NEED SUBSTANTIAL FINANCING AND SUBSTANTIAL TIME BEFORE WE ANTICIPATE
GENERATING REVENUES THROUGH KNG, IF ANY.
The
Company anticipates the need for approximately $15,000,000 prior to KNG's
expected generation of any revenues. Currently the Company has not raised any of
this financing and the Company can make no assurances that this financing will
ever be raised. The Company also does not expect to generate any revenues
through the operations of KNG, until such financing can be raised, of which
there can be no assurance. Therefore, investors should keep in mind that even if
KNG is able to raise the substantial amounts of additional financing it requires
for its operations, it could still be years before KNG generates any revenue, if
ever. If KNG does not raise the $15,000,000 which it anticipates needing to
generate revenues, which, even if generated, will likely not be great enough to
sustain KNG if no revenues are generated and hydrocarbon reserves are not
discovered, KNG may be forced to abandon its business plan, and the Company
could be forced to abandon or curtail its business plan as well, which could
cause the value of the Company's common stock to become worthless.
OUR AUDITORS HAVE EXPRESSED
SUBSTANTIAL DOUBT AS TO WHETHER OUR COMPANY CAN CONTINUE AS A GOING
CONCERN.
Our
Company is in its early development stage, as planned principal activities have
not begun. We have generated only minimal revenues since inception and have
incurred substantial losses including a net loss of $186,155 for the three
months ended March 31, 2008 and had a total accumulated deficit of $9,178,984 as
of March 31, 2008. These factors among others indicate that the Company may be
unable to continue as a going concern, particularly in the event that it cannot
generate sufficient cash flow to conduct its operations and/or obtain additional
sources of capital and financing.
WE LACK AN OPERATING HISTORY WHICH
YOU CAN USE TO EVALUATE US, MAKING ANY INVESTMENT IN OUR
COMPANY RISKY.
Our
Company lacks a long standing operating history which investors can use to
evaluate our Company's previous earnings. Therefore, an investment in our
Company is risky because we have no business history and it is hard to predict
what the outcome of our business operations will be in the future.
WE MAY CONTINUE TO BE UNPROFITABLE
AND MAY NOT GENERATE PROFITS TO CONTINUE OUR BUSINESS
PLAN.
As a
development stage company, we have no revenues or profits to date and our net
cumulative deficit attributable to our development stage as of March 31, 2008,
was $8,729,199, and our total cumulative deficit was $9,178,984 which included
$449,785 of pre-development stage deficit. We had $614,886 in accrued and unpaid
salaries and a working capital deficit of $1,372,140 as of March 31, 2008. The
Company is currently being funded by existing shareholders, but there can be no
assurance this amount will be sufficient to continue our planned operations or
that we will have enough money to repay our outstanding debts. There is a risk
that ZNG will never begin production and our Company will never generate any
revenues through our ownership of ZNG, Ltd. If throughout ZNG's and KNG’s oil
exploration no viable wells are found, and consequently, we generate only
minimal revenues through ZNG, Ltd. (and/or through KNG), we will likely be
forced to curtail or abandon our business plan. If this happens, you could lose
your investment in our Company. If we are unable to generate profits, we will be
forced to rely on external financing, of which there is no guarantee, to
continue with our business plan.
WE HAVE A POOR FINANCIAL POSITION AND
IF WE DO NOT GENERATE REVENUES, WE MAY BE FORCED TO ABANDON
OUR BUSINESS PLAN.
Our
Company currently has a poor financial position. We have generated only minimal
revenues to date, and we have not discovered any hydrocarbon reserves or begun
production on any wells. There is a risk that we will not find enough, or even
any, viable wells which we require to generate enough profits for your
investment in our Company to appreciate. If we never generate any revenues, our
Company may be forced to curtail or abandon its business plan and your shares
may become worthless.
OUR BUSINESS IS SPECULATIVE AND RISKY
AND IF ZNG OR KNG DOES NOT FIND HYDROCARBON RESERVES, WE MAY BE
FORCED TO CURTAIL OUR BUSINESS PLAN.
There is
a risk that ZNG and KNG will not find any hydrocarbon reserves and the cost of
exploration will become too high for ZNG, Ltd. to continue ZNG's business plan
and/or us to continue KNG’s business plan. As our only current operations are
through our 50% ownership of ZNG, Ltd. which in turn owns 100% of ZNG, and
through KNG, if ZNG, ZNG, Ltd. or KNG were to cease operations, your investment
in our Company could become devalued or could become worthless.
OUR INDUSTRY IS COMPETITIVE AND AS
SUCH, COMPETITIVE PRESSURES COULD PREVENT US FROM OBTAINING
PROFITS.
The main
factor determining success in the oil exploration and extraction industry is
finding viable wells. If our Company, through ZNG, Ltd., KNG or other joint
ventures we may enter into in the future, are unable to find producing wells and
our competition is, it is likely that our Company will be driven out of
business. Additionally, our industry is subject to significant capital
requirements and as such, larger companies such as LUKoil, BP-TNK,
Surgutneftegaz and Sibneft may have an advantage should they compete with us for
exploration licenses, because they may have resources substantially greater than
ours. Investors should take into account the above factors and understand that
if we are unable to raise additional capital or generate the profits, the
Company may be forced to liquidate its assets and an investment in our Company
could become worthless.
OUR
GROWTH WILL PLACE SIGNIFICANT STRAINS ON OUR RESOURCES.
The
Company's growth is expected to place a significant strain on the Company's
managerial, operational and financial resources. Furthermore, as the Company
receives contracts, the Company will be required to manage multiple
relationships with various customers and other third parties. These requirements
will be exacerbated in the event of further growth of the Company or in the
number of its contracts. There can be no assurance that the Company's systems,
procedures or controls will be adequate to support the Company's operations or
that the Company will be able to achieve the rapid execution necessary to
succeed and implement its business plan. The Company's future operating results
will also depend on its ability to add additional personnel commensurate with
the growth of its business. If the Company is unable to manage growth
effectively, the Company's business, results of operations and financial
condition will be adversely affected.
WE
RELY ON KEY PERSONNEL AND IF THEY LEAVE OUR COMPANY OUR BUSINESS PLAN COULD BE
ADVERSELY AFFECTED.
We rely
on the Company's Chief Executive Officer and Chief Financial Officer, David
Zaikin and Elena Pochapski, for the success of our Company, both of whom are
employed under contracts. Their experience and input create the foundation for
our business and they are responsible for the directorship and control over the
Company's development activities. The Company does not hold "key man" insurance
on either member of management. Both Mr. Zaikin and Ms. Pochapski serve as
Directors for RAM Resources, Ltd., and as such, the amount of time they are able
to spend on Company matters may be limited. Moving forward, should
they be lost for any reason, the Company will incur costs associated with
recruiting replacement personnel and any potential delays in operations. If we
are unable to replace Mr. Zaikin and/or Ms. Pochapski, or if Mr. Zaikin or Ms.
Pochapski are unable to spend a sufficient amount of time on Company matters,
the Company may be forced to scale back or curtail its business plan. As a
result of this, any securities you hold in our Company could become
devalued.
ZNG’S
OR KNG’S PROJECTIONS, ESTIMATES AND STATISTICAL ANALYSIS MAY BE INACCURATE OR
SUBSTANTIALLY WRONG, WHICH MAY PREVENT ZNG AND/OR KNG FROM EXECUTING THEIR
BUSINESS PLANS.
Projections
on future revenues as well as costs and required capital expenditures are based
on estimates. Business statistical analysis is used in projection of drilling
success ratios, average production costs, world oil price fluctuations and their
correspondence to Russian domestic market. If ZNG’s or KNG’s projections or
estimates are wrong or our statistical analysis faulty, ZNG's or KNG’s revenues
may be adversely affected which could prevent ZNG and/or KNG from executing
their business strategy. As an investor, if this happens your securities in our
Company could be adversely affected and you could lose your investment in our
Company due to the fact that our only current oil and gas operations are through
our 50% ownership of ZNG, Ltd., which in turn owns 100% of ZNG and through KNG,
which has been awarded two exploration oil & gas licenses to
date.
THERE
IS UNCERTAINTY AS TO OUR ABILITY TO ENFORCE CIVIL LIABILITIES BOTH IN AND
OUTSIDE OF THE UNITED STATES DUE TO THE FACT THAT OUR OFFICERS, DIRECTORS AND
ASSETS ARE NOT LOCATED IN THE UNITED STATES.
Our
officers and Directors, our properties and licenses, and the majority of our
assets are located in countries other than the United States, including Canada
and Russia. As a result, it may be difficult for shareholders to effect service
of process within the United States on our officer and Director. In addition,
investors may have difficulty enforcing judgments based upon the civil liability
provisions of the securities laws of the United States or any state thereof,
both in and outside of the United States.
WE
FACE RISKS ASSOCIATED WITH THE FACT THAT THE MAJORITY OF OUR OPERATIONS THROUGH
OUR JOINT VENTURE ARE CONDUCTED IN RUSSIA, AND THE LICENSES OWNED THROUGH OUR
JOINT VENTURE ARE IN RUSSIA.
Zauralneftegaz,
Ltd. which we own 50% of through our Joint Venture holds licenses to certain oil
and gas properties in the Kurgan Region of Russia. As a result, we
are subject to various risks associated with doing business in Russia relating
to Russia's economic and political environment. As is typical of an emerging
market, Russia does not possess a well-developed business, legal and regulatory
infrastructure that would generally exist in a more mature free market economy
and, in recent years, Russia has undergone substantial political, economic and
social change. Furthermore, in recent years the Russian government has
unilaterally annexed certain oil and gas properties and companies for the
government, and there can be no assurance that if commercially exploitable oil
and gas reserves are found on our properties, that such properties will not be
annexed or otherwise claimed by the Russian government. Our failure
to manage the risks associated with doing business in Russia could have a
material adverse effect upon our results of operations.
IF
WE ARE LATE IN FILING OUR QUARTERLY OR ANNUAL REPORTS WITH THE SEC, WE MAY BE
DE-LISTED FROM THE OVER-THE-COUNTER BULLETIN BOARD.
Under
Over-The-Counter Bulletin Board ("OTCBB") rules relating to the timely filing of
periodic reports with the SEC, any OTCBB issuer who fails to file a periodic
report (Form 10-Q's or 10-K's) by the due date of such report (not withstanding
any extension granted to the issuer by the filing of a Form 12b-25), three (3)
times during any twenty-four (24) month period are de-listed from the OTCBB.
Such removed issuer would not be re-eligible to be listed on the OTCBB for a
period of one-year, during which time any subsequent late filing would reset the
one-year period of de-listing. Therefore, if we are late in filing a periodic
report three times in any twenty-four (24) month period and are de-listed from
the OTCBB, our securities may become worthless and we may be forced to curtail
or abandon our business plan.
WE
INCUR SIGNIFICANT COSTS AS A RESULT OF OPERATING AS A FULLY REPORTING COMPANY IN
CONNECTION WITH SECTION 404 OF THE SARBANES OXLEY ACT, AND OUR MANAGEMENT IS
REQUIRED TO DEVOTE SUBSTANTIAL TIME TO NEW COMPLIANCE INITIATIVES.
Moving
forward, we anticipate incurring significant legal, accounting and other
expenses in connection with our status as a fully reporting public company. The
Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") and new rules subsequently
implemented by the SEC have imposed various new requirements on public
companies, including requiring changes in corporate governance practices. As
such, our management and other personnel will need to devote a substantial
amount of time to these new compliance initiatives. Moreover, these rules and
regulations will increase our legal and financial compliance costs and will make
some activities more time-consuming and costly. In addition, the Sarbanes-Oxley
Act requires, among other things, that we maintain effective internal controls
for financial reporting and disclosure of controls and procedures. In
particular, for fiscal year 2009, Section 404 will require us to obtain a report
from our independent registered public accounting firm attesting to the
assessment made by management. Our testing, or the subsequent testing
by our independent registered public accounting firm, may reveal deficiencies in
our internal controls over financial reporting that are deemed to be material
weaknesses. Our compliance with Section 404 will require that we incur
substantial accounting expense and expend significant management efforts. We
currently do not have an internal audit group, and we will need to hire
additional accounting and financial staff with appropriate public company
experience and technical accounting knowledge. Moreover, if we are not able to
comply with the requirements of Section 404 in a timely manner, or if we or our
independent registered public accounting firm identifies deficiencies in our
internal controls over financial reporting that are deemed to be material
weaknesses, the market price of our stock could decline, and we could be subject
to sanctions or investigations by the SEC or other regulatory authorities, which
would require additional financial and management resources.
AS
THERE IS CURRENTLY ONLY A LIMITED MARKET FOR OUR COMMON STOCK, THE MARKET FOR
OUR COMMON STOCK MAY CONTINUE TO BE ILLIQUID, SPORADIC AND
VOLATILE.
There is
currently only a limited market for our common stock, and as such, we anticipate
that such market will be illiquid, sporadic and subject to wide fluctuations in
response to several factors moving forward, including, but not limited
to:
|
(1)
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actual
or anticipated variations in our results of operations;
|
|
(2)
|
our
ability or inability to generate new revenues;
|
|
(3)
|
the
number of shares in our public float;
|
|
(4)
|
increased
competition;
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|
(5)
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the
political atmosphere in Russia; and
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|
(6)
|
conditions
and trends in the oil, gas, and energy industries in
general.
|
Furthermore,
because our common stock is traded on the NASD Over The Counter Bulletin Board,
our stock price may be impacted by factors that are unrelated or
disproportionate to our operating performance. These market fluctuations, as
well as general economic, political and market conditions, such as recessions,
interest rates or international currency fluctuations may adversely affect the
market price of our common stock. Additionally, at present, we have a limited
number of shares in our public float, and as a result, there could be extreme
fluctuations in the price of our common stock. Further, due to the limited
volume of our shares which trade and our limited public float, we believe that
our stock prices (bid, ask and closing prices) are entirely arbitrary, are not
related to the actual value of the Company, and do not reflect the actual value
of our common stock (and in fact reflect a value that is much higher than the
actual value of our common stock). Shareholders and potential investors in our
common stock should exercise caution before making an investment in the Company,
and should not rely on the publicly quoted or traded stock prices in determining
our common stock value, but should instead determine value of our common stock
based on the information contained in the Company's public reports, industry
information, and those business valuation methods commonly used to value private
companies.
INVESTORS
FACE A RISK THAT THE COMPANY WILL NOT BE SUBJECT TO THE REPORTING REQUIREMENTS
OR WILL ENTER INTO A TRANSACTION THAT RESULTS IN NEW MANAGEMENT AND A NEW
OPERATING BUSINESS OF THE COMPANY
Management
of the Company is analyzing steps to no longer be subject to the reporting
requirements of the SEC and/or considering entering into a reverse merger
transaction. In the event that the Company is no longer subject to
the reporting requirements of the SEC, the Company’s stock would likely trade on
the Pinksheets and would likely have less liquidity on such market and may trade
at a lower share price than it currently trades. In the event that
the Company enters into a reverse merger transaction, new management would run
the Company and would likely operate a new business which may result in a loss
on your investment.
INVESTORS
MAY FACE SIGNIFICANT RESTRICTIONS ON THE RESALE OF OUR COMMON STOCK DUE TO
FEDERAL REGULATIONS OF PENNY STOCKS.
Our
common stock will be subject to the requirements of Rule 15(g)9, promulgated
under the Securities Exchange Act as long as the price of our common stock is
below $5.00 per share. Under such rule, broker-dealers who recommend low-priced
securities to persons other than established customers and accredited investors
must satisfy special sales practice requirements, including a requirement that
they make an individualized written suitability determination for the purchaser
and receive the purchaser's consent prior to the transaction. The Securities
Enforcement Remedies and Penny Stock Reform Act of 1990, also requires
additional disclosure in connection with any trades involving a stock defined as
a penny stock.
Generally,
the Commission defines a penny stock as any equity security not traded on an
exchange or quoted on NASDAQ that has a market price of less than $5.00 per
share. The required penny stock disclosures include the delivery, prior to any
transaction, of a disclosure schedule explaining the penny stock market and the
risks associated with it. Such requirements could severely limit the market
liquidity of the securities and the ability of purchasers to sell their
securities in the secondary market.
In
addition, various state securities laws impose restrictions on transferring
"penny stocks" and as a result, investors in the common stock may have their
ability to sell their shares of the common stock impaired.
ITEM 2. UNREGISTERED SALES
OF EQUITY SECURITIES AND USE OF PROCEEDS
In June
2007, we issued 70,000 shares of restricted common stock to our President, Helen
Teplitskaia, of which 50,000 shares were a sign-on bonus in connection with her
agreeing to be an officer of the Company in May 2007, and 20,000 shares were
part of her compensation package with the Company, whereby she is to be paid
10,000 shares per month for her service to the Company, which shares were issued
for services rendered in May and June 2007. During the period July to December
2007 50,000 shares were issued for services rendered in July through November
2007. However, the 40,000 shares for four months from December 2007 to March 31,
2008 have not been issued as of the date of this report and the Company plans to
issue such shares shortly after the filing of this Report. The
Company claims an exemption from registration afforded by Section 4(2) of the
Act since the foregoing issuances did not involve a public offering, the
recipient took the shares for investment and not resale and the Company took
appropriate measures to restrict transfer. No underwriters or agents were
involved in the foregoing issuance and no underwriting discounts or commissions
were paid by the Company.
ITEM 3. DEFAULTS UPON SENIOR
SECURITIES.
None.
ITEM 4. SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER
INFORMATION
None.
ITEM 6.
EXHIBITS
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Exhibit
No.
|
Description
of Exhibit
|
|
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|
|
10.1(1)
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Option
Agreement with Baltic Petroleum Limited dated April 28,
2005
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|
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10.2(1)
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License
Agreement between OOO Zauralneftegaz and Baltic Petroleum Limited dated
April 28, 2005
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|
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10.3(1)
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Loan
Agreement between OOO Zauralneftegaz and Baltic Petroleum Limited dated
April 28, 2005
|
|
|
|
|
10.4(1)
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Guarantee
by Siberian Energy Group, Inc. dated April 28, 2005
|
|
|
|
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10.5(1)
|
Pledge
and Security Agreement between Siberian Energy Group, Inc. and Baltic
Petroleum Limited dated April 28, 2005
|
|
|
|
|
10.6(2)
|
Option
Agreement with Baltic Petroleum Limited dated April 28,
2005
|
|
|
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10.7(2)
|
License
Agreement between OOO Zauralneftegaz and Baltic Petroleum Limited dated
April 28, 2005
|
|
|
|
|
10.8(2)
|
Loan
Agreement between OOO Zauralneftegaz and Baltic Petroleum Limited dated
April 28, 2005
|
|
|
|
|
10.9
(2)
|
Guarantee
by Siberian Energy Group, Inc. dated April 28, 2005
|
|
|
|
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10.10
(2)
|
Pledge
and Security Agreement between Siberian Energy Group, Inc. and Baltic
Petroleum Limited dated April 28, 2005
|
|
|
|
|
10.11
(3)
|
Clarification
to the Contract of Purchase and Sale of the Share in Charter Capital of
LLC "Zauralneftegaz" dated 15 May 2004
|
|
|
|
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10.12
(3)
|
Agreement
with Business - Standard (translated from Russian version)
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10.13
(3)
|
Supplementary
Agreement to Business - Standard Agreement (translated from Russian
version)
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|
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10.14
(3)
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Supplementary
Agreement No. 2 to Business - Standard Agreement (translated from Russian
version)
|
|
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10.15
(3)
|
Deed
of Amendment between ZNG and BP
|
|
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10.16
(3)
|
Deed
of Amendment between the Company and BP
|
|
|
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10.17
(4)
|
Joint
Venture Shareholders' Agreement with Baltic Petroleum (E&P) Limited
and Zauralneftegaz Limited dated October 14,
2005
|
|
|
|
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10.18
(5)
|
Amendment
to the Employment Agreement Dated August 1, 2003, with Elena
Pochapski
|
|
|
|
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10.19
(5)
|
Form
of Waiver Agreement
|
|
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10.20(6)
|
Loan
Agreement between OOO Zauralneftegaz and Caspian Finance
Limited
|
|
|
|
|
10.21(6)
|
Deed
of Novation between Baltic Petroleum Limited, Caspian Finance Limited and
OOO Zauralneftegaz
|
|
|
|
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10.22(6)
|
Deed
of Release
|
|
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|
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10.23(6)
|
Release
of Pledge
|
|
|
|
|
10.24(6)
|
Guarantee
|
|
|
|
|
10.25(6)
|
Debenture
|
|
|
|
|
10.26(6)
|
Agreement
for the Pledge of the Participatory Interest in OOO Zauralneftegaz
(Russian translation removed)
|
|
|
|
|
10.27(6)
|
Sale
and Purchase Agreement
|
|
10.28(8)
|
Option
Agreement with Key Brokerage
|
|
|
|
|
10.29(8)
|
Warrant
Agreement with Key Brokerage
|
|
|
|
|
10.30(9)
|
July
26, 2006 Deed of Agreement
|
|
|
|
|
10.31(10)
|
Consulting
Agreement with Business Standard
|
|
|
|
|
10.32(11)
|
Addition
to the Loan Agreement of November 9, 2005
|
|
|
|
|
10.33(11)
|
Gross
Overriding Royalty Agreement
|
|
|
|
|
10.34(12)
|
Amendment
No. 2 to the Employment Agreement Dated August 1, 2003 with Elena
Pochapski
|
|
|
|
|
10.35(13)
|
Deed
of Variation to the Loan Agreement Dated 9th
of November 2005, Entered into in June 2007
|
|
|
|
|
21.1(14)
|
Subsidiaries
|
|
|
|
|
31.1*
|
Certificate
of the Chief Executive Officer pursuant Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
|
|
|
31.2*
|
Certificate
of the Chief Financial Officer pursuant Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
|
|
|
32.1*
|
Certificate
of the Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
32.2*
|
Certificate
of the Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
99.1(7)
|
Glossary
|
* Filed
herein.
(1) Filed
as Exhibit 10.1, 10.2, 10.3, 10.4 and 10.5 to the Company's Form 8-K filed with
the Commission on May 20, 2005, and incorporated herein by
reference.
(2) Filed
as Exhibits to the Company's Form 8-K filed with the Commission on May 20, 2005,
and incorporated herein by reference.
(3) Filed
as Exhibits to the Company's Report on Form 10-QSB, filed with the Commission on
August 22, 2005, and incorporated herein by reference.
(4) Filed
as Exhibits to the Company's Report on Form 8-K, filed with the Commission on
October 28, 2005, and incorporated herein by reference.
(5) Filed
as Exhibits to our Report on Form 10-QSB for the period ending September 31,
2005, which was filed with the Commission on November 21, 2005, and is
incorporated herein by reference.
(6) Filed
as Exhibits to our Report on Form 8-K, filed with the Commission on December 2,
2005, and incorporated herein by reference.
(7) Filed
as Exhibit 99.1 to our Report on Form 10-KSB for the year ended December 31,
2005, and incorporated herein by reference.
(8) Filed
as Exhibits to our Report on Form 8-K, filed with the Commission on September
19, 2006, and incorporated herein by reference.
(9) Filed
as an Exhibit to our Report on Form 10-QSB, filed with the Commission on
November 14, 2006, and incorporated herein by reference.
(10)
Filed as an Exhibit to our Form 8-K filed with the Commission on February 20,
2007, and incorporated herein by reference.
(11)
Filed as Exhibits to our Report on Form 10-KSB filed with the Commission on
February 2, 2007, and incorporated herein by reference.
(12)
Filed as an Exhibit to our Report on Form 10-QSB filed with the Commission on
May 15, 2007, and incorporated herein by reference.
(13)
Filed as an Exhibit to our Report on Form 10-QSB filed with the Commission on
August 14, 2007, and incorporated herein by reference.
(14)
Filed as an Exhibit to our Report on Form 10-KSB filed with the Commission on
April 15, 2008, and incorporated herein by reference.
SIGNATURES
In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SIBERIAN ENERGY GROUP
INC.
|
DATED:
May 20, 2008
|
By: /s/ David
Zaikin
|
|
|
David
Zaikin
|
|
|
Chief
Executive Officer
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
DATED:
May 20, 2008
|
By: /s/ Elena
Pochapski
|
|
|
Elena
Pochapski
|
|
|
Chief
Financial Officer
|
|
|
(Principal
Accounting Officer)
|