UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2006
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
For the transition period from ____________ to ______________
Commission file number 333-118902
SIBERIAN ENERGY GROUP INC.
--------------------------
(Exact name of small business issuer as specified in its charter)
NEVADA 52-2207080
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
275 Madison Ave, 6th Floor, New York, NY 10016, USA
---------------------------------------------------
(Address of principal executive offices)
(212) 828-3011
--------------
(Registrant's telephone number)
Check whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
As of November 8, 2006, 12,125,496, shares of Common Stock of the issuer
were outstanding ("Common Stock").
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X].
Traditional Small Business Disclosure Format (Check One): Yes [ ] No [X].
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SIBERIAN ENERGY GROUP INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Siberian Energy Group Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
Siberian Energy Group Inc. (a development stage company) as of September 30,
2006, and the related condensed consolidated statements of operations,
stockholders' equity, and cash flows for the three and nine months ended
September 30, 2006 and 2005, and the cumulative period of development stage
activity (January 1, 2003 through September 30, 2006). These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with the auditing standards of the Public Company Accounting
Oversight Board, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying interim financial statements referred to above for
them to be in conformity with accounting principles generally accepted in the
United States of America.
We have previously audited, in accordance with auditing standards of the Public
Company Accounting Oversight Board, the consolidated balance sheet as of
December 31, 2005, and the related consolidated statements of operations,
stockholders' equity and cash flows for the year then ended (not presented
herein); and in our report dated March 27, 2006, we included an explanatory
paragraph describing conditions that raised substantial doubt about the
Company's ability to continue as a going concern. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 2005 is fairly stated, in all material respects, in relation
to the balance sheet from which it has been derived.
Lumsden & McCormick, LLP
Buffalo, New York
November 8, 2006
SIBERIAN ENERGY GROUP INC. (A Development Stage Company)
--------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, December 31,
2006 2005
----------- -----------
ASSETS
CURRENT ASSETS:
Cash $ 32,096 $ 11,551
Management fee receivable 25,000 50,000
Prepaid expenses and other 270 270
----------- -----------
57,366 61,821
----------- -----------
Investment in joint venture - -
Investment purchase option 177,000 -
Property and equipment, net 1,308 1,539
----------- -----------
$ 235,674 $ 63,360
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Demand loan from individual, interest at 6.5% $ - $ 62,500
Accounts payable:
Related party - stockholders 348,593 328,376
Related party - Baltic Petroleum 49,083 43,664
Others 100,725 117,230
Accrued payroll 327,539 304,341
----------- -----------
825,940 856,111
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock - authorized 100,000,000 shares, $.001 par value,
12,125,461 and 11,487,886 issued and outstanding 12,126 11,488
Additional paid-in capital 4,146,793 1,786,286
Accumulated deficit
Pre-development stage (449,785) (449,785)
Development stage (4,292,968) (2,138,234)
Accumulated other comprehensive income (loss) (6,432) (2,506)
----------- -----------
(590,266) (792,751)
----------- -----------
$ 235,674 $ 63,360
----------- -----------
See accompanying notes.
SIBERIAN ENERGY GROUP INC. (A Development Stage Company)
--------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the
cumulative
period of
Development
For the three For the nine Stage Activity-
months ended months ended January 1, 2003
-------------------------------------------------------------- through
SEPTEMBER 30, September 30, SEPTEMBER 30, September 30, September 30,
2006 2005 2006 2005 2006
------------ ------------ ------------ ------------ ---------------
Revenues and other income:
Management fees from joint venture $ 75,000 $ - $ 225,000 $ - $ 300,000
Gain from entrance into joint venture - - - - 364,479
Other - - - - 6,382
------------ ----------- ------------ ----------- -----------
Total revenues and other income 75,000 - 225,000 - 670,861
------------ ----------- ------------ ----------- -----------
Expenses:
Salaries 32,994 103,920 101,556 352,644 1,176,103
Professional and consulting fees 166,111 86,324 1,755,256 167,169 2,460,184
Rent and occupancy 9,912 28,162 29,658 70,792 166,203
Depreciation and amortization 86 9,385 253 28,153 102,633
Finance charges and interest 2,626 31,514 8,890 47,607 56,497
Marketing and other 130,903 77,304 484,121 213,785 1,002,209
------------ ----------- ------------ ----------- -----------
Total expenses 342,632 336,609 2,379,734 880,150 4,963,829
------------ ----------- ------------ ----------- -----------
Loss before income taxes 267,632 336,609 2,154,734 880,150 4,292,968
Provision for income taxes (benefit) - - - - -
------------ ----------- ------------ ----------- -----------
Net loss (development stage) $ 267,632 $ 336,609 $ 2,154,734 $ 880,150 $4,292,968
---------------------------------------- ------------ ----------- ------------ ----------- -----------
Basic and diluted loss per common share $ (0.02) $ (0.04) $ (0.19) $ (0.09) $ (0.51)
------------ ----------- ------------ ----------- -----------
Weighted average number of basic and
diluted common shares outstanding 11,671,174 9,477,886 11,582,245 9,441,008 8,485,816
---------------------------------------- ------------ ----------- ------------ ----------- -----------
See accompanying notes.
SIBERIAN ENERGY GROUP INC. (A Development Stage Company)
--------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the cumulative period of Development Stage Activity - January 1, 2003 through
---------------------------------------------------------------------------------
September 30, 2006
------------------
Common Stock
------------- Accumulated
Additional Other
Number of Paid-In Accumulated Comprehensive Comprehensive
Shares Par Value Capital Deficit Income (Loss) Total Loss
----------- ----------- ----------- ----------- ------------- --------- -------------
Balance, January 1, 2003
(pre-development stage) 4,902,886 $ 4,903 $ 430,195 $ (449,785) $ - $ (14,687)
Loss for the year - 2003 - - - (422,516) - $(422,516) $ (422,516)
----------- ------------- --------- -------------
Shares issued in acquisition 1,000,000 1,000 (1,000) - - -
----------- ----------- ----------- ----------- ------------- ---------
Balance, December 31, 2003 5,902,886 5,903 429,195 (872,301) - (437,203)
----------- ----------- ----------- ----------- ------------- ---------
Loss for the year - 2004 - - - (833,567) - (833,567)
Foreign currency translation adjustment - - - - (53,120) (53,120) $ (886,687)
----------- ------------- --------- -------------
Shares issued in acquisition 3,450,000 3,450 746,550 - - 750,000
Shares issued for professional services 50,000 50 9,950 - - 10,000
Other - - 34,426 - - 34,426
----------- ----------- ----------- ----------- ------------- ---------
Balance, December 31, 2004 9,402,886 9,403 1,220,121 (1,705,868) (53,120) (529,464)
----------- ----------- ----------- ----------- ------------- ---------
Loss for the year - 2005 - - - (882,151) (882,151)
Foreign currency translation adjustment - - - - 50,614 50,614 $ (831,537)
----------- ------------- --------- -------------
Shares issued for professional services 385,000 385 138,365 - - 138,750
Shares issued for accrued salaries 1,700,000 1,700 210,800 - - 212,500
Warrants granted for professional services - - 217,000 - - 217,000
----------- ----------- ----------- ----------- ------------- ---------
Balance, December 31, 2005 11,487,886 11,488 1,786,286 (2,588,019) (2,506) (792,751)
----------- ----------- -----------
Loss for nine months - 2006 - - - (2,154,734) - (2,154,734)
Foreign currency translation adjustment - - - - (3,926) (3,926) $ (2,158,660)
---------- ------------- --------- -------------
Shares issued for employee stock
option plan 142,500 143 13,857 - - 14,000
Shares issued for professional
services 1,104,499 1,105 1,635,243 - - 1,636,348
Warrants granted for professional
services - - 710,797 - - 710,797
Shares cancelled (609,424) (610) 610 - - -
----------- ----------- ----------- ---------- ------------- ---------
12,125,461 $ 12,126 $ 4,146,793 $(4,742,753) $ (6,432) $(590,266)
----------- ----------- ----------- ----------- ------------- ---------
See accompanying notes.
SIBERIAN ENERGY GROUP INC. (A Development Stage Company)
--------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the
cumulative
period of
Development
FOR THE NINE Stage Activity-
MONTHS ENDED January 1, 2003
--------------------------- through
SEPTEMBER 30, September 30, September 30,
2006 2005 2006
------------ ------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss (development stage) $ (2,154,734) $ (880,150) $ (4,292,968)
Depreciation and amortization 253 28,153 102,633
Common stock and warrants issued
for professional services and salaries 2,107,645 15,000 2,748,395
Gain from entrance into joint venture - - (364,479)
Changes in other current assets and
current liabilities:
Prepaid expenses and other assets 25,000 (23,914) (178,662)
Accounts payable and accrued expenses 32,307 47,263 3,102,756
------------ ----------- -------------
NET CASH FLOWS FROM (FOR) OPERATING ACTIVITIES 10,471 (813,648) 1,117,675
------------ ----------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for licenses and related - (348,137) (528,961)
Expenditures for oil and gas properties - (36,532) (770,750)
Expenditures for property and equipment - (1,710) (2,868)
Cash received in acquisition - - 6
Cash received from entrance into joint venture - - 175,000
------------ ----------- -------------
NET CASH FLOWS FOR INVESTING ACTIVITIES - (386,379) (1,127,573)
------------ ----------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from loans - 1,171,149 -
Common stock issued for employee stock option plan 14,000 - 14,000
Additional paid-in capital - 1,631 34,426
------------ ----------- -------------
NET CASH FLOWS FROM FINANCING ACTIVITIES 14,000 1,172,780 48,426
------------ ----------- -------------
Effect of exchange rates on cash (3,926) 29,224 (6,432)
------------ ----------- -------------
Net increase in cash 20,545 1,977 32,096
Cash - beginning 11,551 - -
------------ ----------- -------------
Cash - ending $ 32,096 $ 1,977 $ 32,096
------------------------------------------------------- ------------ ----------- -------------
See accompanying notes.
SIBERIAN ENERGY GROUP INC. (A Development Stage Company)
--------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
1. BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements of Siberian Energy
Group Inc. (the Company) include the accounts of the Company and its 100% owned
subsidiaries. These financial statements have been prepared pursuant to the
rules of the Securities and Exchange Commission (SEC) interim reporting, and do
not include all of the information and note disclosures required by generally
accepted accounting principles. These consolidated financial statements and
notes herein are unaudited, but in the opinion of management, include all the
adjustments (consisting of only normal recurring adjustments) necessary for a
fair presentation of the Company's financial positions, results of operations,
and cash flows for the periods presented. Accounting policies used in fiscal
2006 are consistent with those used in the cumulative period of Development
Stage Activity - January 1, 2003 through December 31, 2005. These financial
statements should be read in conjunction with the Company's audited consolidated
financial statements and notes thereto. Interim operating results are not
necessarily indicative of operating results for any future interim period or the
full year.
2. THE COMPANY AND DESCRIPTION OF BUSINESS:
Through October 14, 2005, the Company operated through its wholly owned
subsidiary, Zaural Neftegaz (ZNG). ZNG is engaged in the business of exploiting
and developing certain oil and gas and other petroleum products licenses issued
by Russia's Kurgan Provincial Government for the Eastern part of Kurgan
Province. ZNG has its principal place of business in Kurgan City, Kurgan
Province, Russia, and is the sole and exclusive owner of the exploration
licenses.
On October 14, 2005, the Company entered into a joint venture agreement with a
third party, Baltic Petroleum Limited (Baltic). The Company transferred 100% of
its ownership interest in ZNG to the Joint Venture and transferred 50% of the
Joint Venture interest to Baltic for $175,000 and the agreement by Baltic to
provide future funding to the Joint Venture as detailed in a Joint Venture
Shareholder's Agreement. Joint Venture will be engaged in the exploration for,
development, production and sale of oil and gas assets in the Western Siberian
region of the Russian Federation and the former Soviet Union.
Upon signing of the Joint Venture agreement, Baltic, ZNG, and a financing
company wholly owned by Baltic, entered into a deed of novation regarding a
previous loan made to ZNG by Baltic and immediately thereafter the financing
company entered into a loan agreement with ZNG. Under the loan agreement, the
lender agreed to provide a loan of $6,874,325 for the purpose of research
activities in the Kurgan region.
Baltic released the Company from its obligations under a guarantee and security
interest given by the Company to Baltic regarding an initial loan to ZNG.
In connection with the current program of seismic studies and drilling of the
first four (4) wells in ZNG's license blocks, additional funds of $15 million
were raised by Baltic's parent through a placement of shares. It is anticipated
that ZNG will enter into a new loan agreement covering such funds as well as a
gross override royalty agreement with Baltic. The new loan will not be dilutive
to the Company's ownership in ZNG.
Additional details surrounding the Company's involvement in the Joint Venture
follow:
- During the arrangement, the Company will receive a monthly
management fee of $25,000 from ZNG;
- Profits from the Joint Venture are allocated 50% to the Company
only after all financing of ZNG are settled with Baltic and Baltic's
financing subsidiaries;
- Although the Company and Baltic each own 50% of the Joint
Venture's shares and each appoint 50% of the Directors to the Joint
Venture, Baltic always has an additional casting vote on Board of
Director related issues;
- The Company has essentially no liability to guarantee the debts
of the Joint Venture;
- The Company recognized a settlement gain of $364,479 as a result
of the initial joint venture transaction. This resulted primarily to
adjust the Company's negative investment to zero as of the agreement
date. All activity of ZNG before the agreement date is otherwise
included in these financial statements.
Effective October 14, 2005, the Company's investment in Joint Venture is
recorded on the equity method of accounting. Since cumulative losses of Joint
Venture exceed the Company's investment, the investment asset is carried at zero
value as of September 30, 2006 and December 31, 2005. Loan financing balances
outstanding of Joint Venture to Baltic and Baltic's financing subsidiaries at
September 30, 2006 total approximately $7,800,000. Activities of ZNG prior to
October 14, 2005 are otherwise included in the consolidated accounts of the
Company in the accompanying financial statements.
In June 2006, ZNG won auctions and was awarded three new oil and gas exploration
and production licenses, bringing the total number of licenses to seven and the
total area covered by the licenses to 1 million acres. In connection with the
license acquisitions, the Company issued 600,000 shares to a consulting company
in consideration for its assistance in the application process as well as
obtaining existing geological information (seismic, gravimetric) relevant to
potential licensed areas. The value of these shares totaled $1,113,000 and are
included in professional and consulting fees in the accompanying condensed
consolidated statements of operations.
On September 14, 2006, the Company entered into an Option Agreement with Key
Brokerage, Inc., a Delaware Corporation, the sole owner of Kondaneftegaz, LLC, a
Russian limited liability company. Under the terms of the agreement, the
Company has the exclusive right for up to sixty days to purchase seventy-five
percent (75%) of the shares of Kondaneftegaz. The purchase is expected to be
completed in the fourth quarter of 2006. Value of the options granted are
included in the financial statements under investment purchase option.
On a moving forward basis, the Company anticipates further business expansion.
It is constantly evaluating new mineral resource assets, both explored and
unexplored, as part of its growth strategy.
The Company was incorporated in the State of Nevada on August 13, 1997, and
previously provided comprehensive outpatient rehabilitation services to patients
suffering from work, sports and accident related injuries. All activities
related to the Company's previous business ventures were essentially
discontinued prior to January 1, 2000. Predecessor names of the Company since
its inception include Trans Energy Group Inc., 17388 Corporation Inc., Talking
Cards Inc., Oyster King Incorporated and Advanced Rehab Technology Corporation.
3. INCOME TAXES:
At September 30, 2006, the Company has estimated U.S. tax net operating loss
carryforwards totaling approximately $3,936,000. These carryforwards may be
used to offset future taxable income, and expire in varying amounts through
2026. No tax benefit has been reported in the financial statements, however,
because the Company believes there is at least a 50% chance that the
carryforwards will expire unused. Accordingly, the $787,000 estimated
cumulative tax benefit of the loss carryforward has been offset by a valuation
allowance of the same amount.
4. LOSS PER COMMON SHARE:
Basic and diluted loss per common share is computed using the weighted average
number of common shares outstanding during the period. Shares issuable for
common stock options may have had a dilutive effect on earnings per share had
the Company generated income during the periods through September 30, 2006.
5. GOING CONCERN:
These financial statements have been prepared assuming the Company will continue
as a gong concern, however, since inception of its current endeavor in 2003, it
has not earned substantial revenues and is considered to be in the development
stage, which raises substantial doubt about its ability to continue as a going
concern.
Management is of the opinion that the Joint Venture arrangement established in
2005 will successfully generate allocable profits to the Company in the near
term.
For the cumulative period ended September 30, 2006, the Company has obtained
cash financing from organizing stockholders and employees in the form of loans,
advances, and deferred salaries. However, there can be no certainty as to
availability of continued financing in the future. Failure to obtain sufficient
financing may require the Company to reduce its operating activities. A failure
to continue as a going concern would then require stated amounts of assets and
liabilities be reflected on a liquidation basis which could differ from the
going concern basis.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
CERTAIN STATEMENTS IN THIS QUARTERLY REPORT ON FORM 10-QSB (THIS "FORM 10-QSB"),
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. ("SIBERIAN", 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-QSB, UNLESS ANOTHER DATE IS STATED, ARE TO SEPTEMBER
30, 2006.
Investors should also take note of the fact that some of the more technical
terms relating to the Company's operations as described below are explained in
greater detail under exhibit 99.1, incorporated by reference hereto.
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. 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. In contemplation of
the Company's acquisition of a Russian oil and gas exploration company, the
Company changed its name to Trans Energy Group, Inc.
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. ZNG holds seven (7) oil and gas licenses (see "Patents, Trademarks
and Licenses" below) for the rights to prospect, explore, drill and remove oil
and gas (the "Exploration Rights") in the eastern parts of Kurgan Province in
Russia. 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 on Form 10-QSB reflect such split unless
otherwise stated.
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 proceeded 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 ("ZNG, Ltd."), of
which the Company owns 50% of pursuant to the Joint Venture agreement entered
into on October 14, 2005 (as described in greater detail below under Joint
Venture Agreement). As a result of the Joint Venture and the transfer of 100% of
ZNG to the Joint Venture, the Company anticipates targeting other potential long
term investments in Russia, and working with its partner in the Joint Venture,
Baltic Petroleum (E&P) Limited ("BP" or "Baltic"), to continue the oil and gas
exploration activities through their co-ownership of the Joint Venture and ZNG.
DESCRIPTION OF ZNG
ZNG was created to explore and develop new hydrocarbon fields and oil and gas
properties in the Kurgan region of South-West 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, which licenses expire in March 2008, and which licenses are
for concessions covering a total territory of 643,000 acres. Upon expiration of
the licenses, ZNG will have, subject to the signing of the Subsoil Legislation,
preferential right to apply for the full production license for the term of 25
years.
The Mokrousovsky license is the largest of the four licenses, encompassing a
total of 240,000 acres, followed by the West Suersky, which covers 230,000
acres, the Privolny, which covers 123,000 acres, and the Orlovo-Pashkovsky
license, which covers 50,000 acres.
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-Voskresenski, Petuhovski, and Lebyashevsky 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.
Brief characteristics of the three new blocks are given below:
YUZHNO-VOSKRESENSKI BLOCK
Total area approximately 130,000 acres (520 square kilometers)
The Yuzhno-Voskrenski block is located in the Kurgan region of Russia,
10-40 km to the west of the center of the administrative region
Chastoozerye.
The territory of the block has significant prior exploration data. The
area is covered by a geological survey (1:200,000 scale), a gravimetric
survey (1:100,000 scale), and an aeromagnetic survey (1:50,000 scale). From
1979 to 1980, seismic surveys were carried out on the block implementing
refraction sounding and deep seismic sounding methods, which partially
covered the block area. Regional seismic profiling and 2D seismic surveys
and seismic reflection method were also performed here. Additionally, three
parametric wells along the Kurgan regional geological and geophysical
profile have been drilled during the prior initial exploration works. ZNG
has obtained the source geological data from these wells.
Through these studies, two structures were identified and the
placement of wildcat wells with the purpose of uncovering and testing of
oil-source rocks was determined.
PETUKHOVSKY BLOCK
Total area approximately 208,000 acres (840 square kilometers)
The Petukhovsky block is located between the towns of Makushino and
Petukhovo, Russia, further to the south of the Kurgan Region boundary.
Prior exploration works on the block are represented by a general
geological survey (1:200,000 scale). From 1979 to 1980, seismic surveys
were carried out by refraction sounding and deep seismic sounding methods,
which partially covered the block area. The Kurgan regional seismic profile
crosses the block and to the South-West of the block is Sukhmensky regional
seismic profile acquired by seismic reflection and correlation refraction
methods.
Four deep cored wells drilled both in the territory of the block and
in the adjacent areas provide an idea of the geological structure of the
block.
LEBYAZHEVSKY BLOCK Total area 42,000 acres (170 square kilometers)
The Lebyazhevsky block, with a total area of 170 square kilometers
(approximately 43,990 acres), is located in the Kurgan Region, of Siberia,
Russia, 13-22 km to the South-East of the center of administrative region
of Lebyazhye.
The block is covered by a general geological survey (1:200,000 scale),
gravimetric survey (1:100,000 scale), aeromagnetic survey (1:50,000 scale)
and partially by seismic surveys by common-midpoint (CMP) and seismic
reflection method.
------------------------------------------------
The acquisition of the three new licenses increased the total area covered by
the licenses held by ZNG from 643,000 acres to over 1 million acres. All seven
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.
ZNG also has outstanding applications for two more parcels in the same area -
Zapadno-Petukhovski and Orlovo-Pashkovsky-2. Auctions for these licenses are
expected to take place in the fourth quarter of 2006; however there can be no
assurance that ZNG will be awarded the licenses to the parcels at auction.
Following detailed data collection, survey and seismic testing ZNG will proceed
with development of the most prospective licenses first. As of November 1,
2006 ZNG has performed the following research and exploration works on its
licensed areas:
- 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.
- Completed a 2D seismic survey on West-Suersky block.
- Performed gravimetric surveys on the West-Suersky, Privolny and
Mokrousovsky blocks.
- Completed approximately 822 linear kilometers of gas
seismotomographic and geochemical surveys performed by Exotrad on the
Privolny and Mokrousovsky blocks, which surveys are currently
continuing on the other 5 blocks.
- Completed high definition 2D seismic surveys across the grids
made by the gas seismotomography surveys, using Bashneftegeofizika,
which has been completed on the northern part of Privolny block, and
is currently underway on the Mokrousovsky block, which surveys are
planned to follow on other 5 licensed blocks.
- Scientific and technical analysis is being performed by the team
of geologists, which includes experts from Exploration Consultants
Limited ("ECL"), a leading international oil and gas consulting firm
(part of RPS Group). Initial analysis was completed by June 30, 2006
and such data will be combined with the results of seismic studies,
which are described in greater detail below under "Results of Seismic
Studies."
JOINT VENTURE
--------------
On October 14, 2005, the Company entered into a Joint Venture Shareholders'
Agreement ("Joint Venture") 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.
On November 9, 2005, ZNG entered into a New Loan with Caspian (the "New Loan").
Under the loan agreement, Caspian Finance Limited ("Caspian") agreed to provide
a loan of up to approximately $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"). The New Loan had a total outstanding
balance, including principal and accrued interest of $5,471,288 as of November
1, 2006.
Interest on any amounts loaned under the New Loan bear interest at the following
rates, calculated and accrued 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. 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.
The New Loan provided for the payment of certain debts of ZNG, which were
incurred before the Joint Venture. Payments under the New Loan will included:
1) $352,665 which was paid upon the Company signing the loan agreement,
which was used for:
o payment of salaries of ZNG for August and September ($32,000); o
payment of 50% of the amount of director's and shareholder's loans
($170,000);
o 50% of outstanding rent payments ($44,000);
o mineral tax for the second quarter of 2005 ($3,865); and
o $102,800 for gathering and coordination of data in respect to the
new licenses ZNG has recently applied for.
2) $882,699 which was paid upon the Company receiving licenses to the
two additional license blocks which were received during the nine months ended
September 30, 2006, which was spent as follows:
o further payment for gathering and coordination of data in
connection with the new licenses (up to $340,000);
o final payments for seismic and gravimetric works performed on the
West-Suerski field (up to $324,834);
o to repay the remaining amounts owed by ZNG to directors and
shareholders ($170,000);
o to pay the remaining amount of outstanding rent payments ($44,000);
and
o to pay mineral tax for the third quarter of 2005 ($3,865).
In addition to the amounts agreed to be loaned pursuant to the New Loan, ZNG
Ltd. agreed to lend $78,000 to the Company to pay for legal and consulting
services in connection with establishing of the Joint Venture. The Company
received $29,000 of this amount in November 2005; and the additional $49,000
will be paid after ZNG submits a letter from the relevant license authority of
the Ministry of Natural resources of the Russian Federation confirming that five
new licenses were awarded to ZNG, of which three have been awarded to date.
There is no assurance the additional two licenses will be awarded to ZNG.
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
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.
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), which
amount has not been paid as of the date of this filing, 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 2006), which amount has not
been paid to AEF to date 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), which
amount has not been paid to AEF to date.
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 2006),
which amount has not been paid to AEF to date.
As of August 1, 2006, we owed approximately $66,273 to AEF in connection with
AEF's introduction of the parties of the Joint Venture, as described above. We
are currently in discussions with AEF to pay all or a portion of the amount owed
to AEF in the form of shares of common stock, however we can make no assurance
that such discussions will result in the consummation of a debt conversion
agreement.
RECENT EVENTS
-------------
OPTION AGREEMENT
-----------------
On September 14, 2006, Siberian Energy Group Inc. ("we," and "us") entered into
an Option Agreement with Key Brokerage, Inc., a Delaware corporation ("Key
Brokerage" and the "Option Agreement"). Key Brokerage is the sole owner of
Kondaneftegaz, LLC, a Russian limited liability company ("Kondaneftegaz").
Kondaneftegaz has applied for ten (10) oil and gas licenses in the
Khanty-Mansiysk district of Western Siberia, Russia, which will be proposed for
distribution by the Russian government through a tender auction in 2006 and
2007.
The Option Agreement provided us the exclusive right for up to sixty (60) days
from the date of the Option Agreement, subject to us conducting due diligence,
to enter into a transaction with Key Brokerage whereby we would purchase
seventy-five percent (75%) of the shares of Kondaneftegaz (the "Option").
In consideration for agreeing to the Option, we granted Key Brokerage 250,000
warrants to purchase shares of our common stock at an exercise price of $2.20
per share, exercisable for up to two (2) years from the date of the Option
Agreement (the "Warrants"). In the event we choose to extend the Option, we have
agreed to grant Key Brokerage additional warrants on identical terms as the
Warrants, with the exception that such additional warrants will be exercisable
until the second anniversary of the date the Option is extended. We hope to
consummate the Option by an entry into a final agreement with Key Bank during
the fourth quarter of 2006 or the first quarter of 2007, and purchase an
interest in Konaneftegaz for shares of our common stock, of which there can be
no assurance.
RESULTS OF SEISMIC STUDIES
In October 2006, ZNG received the results of its 822 linear kilometers of
seismotomographic and geochemical survey of the Privolny and Morkrousovsky
blocks, which study included high definition 2D seismic studies conducted on
the north portion of its licensed Privolny block. The results of the study
included the identification of two drilling prospects with a combined area of
approximately 29 square kilometers in ZNG's northern Privolny license area.
The survey was conducted by Exotrad Limited, a gas seismotomography specialist
with more than 16 years of experience, including work for international
companies such as Victoria Oil & Gas. Actual data values, sample layout
geometry, data density and processing limitations were used to evaluate
potential subsurface hydrocarbon prospective accumulations, and sophisticated
multivariate statistical models were used to identify four sites for detailed
seismic studies and drilling.
ZNG's Board of Directors subsequently decided to drill up to four exploration
wells in ZNG's Kurgan Region license blocks in connection with such surveys. At
least two of these wells are proposed to be drilled in northern locations in the
Privolny block and the other two wells are proposed to potentially be drilled on
the Mokrousovsky block, following the completion of 2D studies on that block
which is expected to be completed in the fourth quarter of 2006. It is
anticipated that the first well will be drilled on the Privolny block to a
maximum depth of 2000 meters, with logging and coring undertaken in accordance
with a program designed by RPS Energy and the Tyumen State Oil and Gas Institute
in Russia, which will be used as the basis for a drilling license application.
In the event that the wells prove successful in establishing the presence of
hydrocarbons, of which there can be no assurance, the Board of Directors of ZNG
intends that production testing will be supervised by a leading firm of
reservoir evaluation consultants and the Board will then determine the most
appropriate means of commercializing the license blocks.
The total budget for the exploration program and further seismic studies, which
the Board has proposed to shoot on ZNG's Lebyazhevsky licensed block, totals
approximately 8 million British pounds or $15 million US dollars. The funds were
raised by BP's parent via a placement of shares and it is anticipated that ZNG
will enter into a new loan agreement covering such funds as well as a gross
override royalty agreement with BP, which loan is not dilutive to our ownership
of ZNG, subsequent to the filing of this report as described below under "Deed
of Agreement," of which there can be no assurance.
DEED OF AGREEMENT
On July 26, 2006, we entered into a Deed of Agreement with Baltic Petroleum
(E&P) Limited ("BP" or "Baltic") and ZNG. Pursuant to the Deed of Agreement, BP
agreed to allow the drawdown by ZNG, within 10 days of the date of the Deed of
Agreement, of certain funds from Caspian under the New Loan, including:
o $185,000 to be paid to Business Standard, which was owed to
Business Standard from ZNG in consideration for Business Standard
assisting ZNG with the process of the granting of the three oil and
gas licenses awarded to ZNG in June 2006;
o $170,000 to be paid to Mr. Victor Repin (a significant
shareholder of the Company) and Sergey Potapov (a Director of the
Company) in final settlement of amounts due to them by ZNG; and
o $44,000 to ZNG's landlord in full settlement of all sums due in
connection with the rent on ZNG's offices in Kurgan, Russia.
The Deed of Agreement also contemplated ZNG's entry into a further loan
agreement with Caspian (assuming Caspian is able to raise such financing on
terms acceptable to BP), substantially with the same terms as the New Loan
(other than due dates and interest amounts), whereby Caspian would provide ZNG
funds for seismic drilling and work programs of approximately $12,000,000 (the
"Additional Loan").
The Deed of Agreement also provided that upon the entry into the Additional
Loan, we, BP and ZNG will enter into a gross override royalty agreement, whereby
ZNG will grant a gross override royalty ("GOR") to BP equal to 3% of the gross
turnover on all production of oil and gas at the wellhead in Kurgan by ZNG until
BP has received in aggregate $20,000,000 from such GOR (the "GOR Sum"); however
in the event the actual amount loaned to ZNG is less than or greater than
$12,000,000, the GOR Sum shall be decreased or increased proportionately. We
hope to enter into a final Additional Loan in the fourth quarter of 2006 or the
first quarter of 2007, of which there can be no assurance.
ESTIMATE OF AMOUNT OF TIME SPENT ON RESEARCH AND DEVELOPMENT
Initial business plan was developed over the course of three months in 2003.
During that time period, market research was conducted. Research and development
activities on the licensed blocks in the Kurgan Region were directly borne by
the Company up to the time the Joint Venture was closed in October 2005. As a
result of the closing of the Joint Venture, these research and development costs
are now borne both by ZNG, Ltd. (as described above) and ZNG. Research
activities include gravimetric, seismic works and seismotomography studies on
the licensed areas. Costs incurred by ZNG and ZNG Ltd. in connection with these
studies as of September 30, 2006 totaled approximately $4,100,000.
EMPLOYEES
Siberian Energy Group Inc. ("SEG"), currently employs two (2) employees in
management. Zaural Neftegaz ("ZNG"), which is 50% owned by the Company through
its joint venture ZNG, Ltd., employs six (6) employees in management and ten
(10) employees in support and technical functions.
PLAN OF OPERATIONS
As a result of the Joint Venture, the Company will work with its partner in the
Joint Venture, Baltic Petroleum (E&P) Limited ("BP" or "Baltic") to continue the
oil and gas exploration activities through their co-ownership of the Joint
Venture, ZNG, Ltd., which in turn owns ZNG. The Company believes that ZNG has
adopted an aggressive but sensible work program. In connection with the Joint
Venture, BP will supply ZNG with both the technical and financial support that
is required to fulfill the work program. If circumstances permit and ZNG is
awarded additional blocks in the Kurgan Region, we believe that BP will be able
to ensure that adequate funding is available to support the Work Programs on
these blocks.
Moving forward, we anticipate targeting other potential long term investments in
Russia, separate from our involvement in the Joint Venture. Currently we are
evaluating different business opportunities in the oil and gas industry,
including both development stage and revenue-producing enterprises. As of the
filing of this report on Form 10-QSB, 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, other than the Option
with Key Brokerage described above.
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 will receive $25,000 per month in management fees in
connection with the Joint Venture. The Company, however, can make no assurance
that $25,000 per month will be adequate to pay its upcoming expenses and
liabilities, in which case 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 $348,593 and $328,376
were payable to the stockholders as of September 30, 2006 and December 31, 2005,
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.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006, COMPARED TO
THE THREE MONTHS ENDED SEPTEMBER 30, 2005
We had revenues and other income of $75,000 for the three months ended September
30, 2006, which was solely due to $25,000 of monthly management fees received
from ZNG, Ltd. We had $-0- of revenue and other income for the three months
ended September 30, 2005. We have not generated any revenues to date through the
sale of oil and/or gas.
We had total expenses of $342,632 for the three months ended September 30, 2006,
compared to total expenses for the three months ended September 30, 2005, of
$336,609, which represented an increase in total expenses from the prior period
of $6,023 or 2%.
Total expenses for the three months ended September 30, 2006, included $32,994
of salaries, which included $18,243 which was paid to our Chief Financial
Officer, Elena Pochapski; $166,111 of professional and consulting fees,
including amounts paid to our legal counsel and accountant in connection with
the preparation and filing of our quarterly report on Form 10-QSB and warrants
granted for consulting services rendered during the three months ended September
30, 2006, as described herein; $9,912 in rent and occupancy; $86 of depreciation
and amortization; $2,626 of finance charges and interest, attributable to
interest paid on the advances we received from BP; and $130,903 of marketing and
other expenses, in connection with marketing and advertising in connection with
road shows, various general and administration expenses relating to the Company,
and travel and hotel expenses in connection with research on potential business
acquisitions. Our Chief Executive Officer, David Zaikin has agreed to waive his
salary and any accrual of his salary until such time as we have sufficient funds
to pay such salary to Mr. Zaikin.
The main items leading to the increase in total expenses for the three months
ended September 30, 2006, compared to the three months ended September 30, 2005,
were an increase of $79,787 or 92% in professional and consulting fees, to
$166,111 for the three months ended September 30, 2006, compared to $86,324 for
the three months ended September 30, 2005, and an increase in marketing and
other expenses of $53,599 or 69% to $130,903 for the three months ended
September 30, 2006, compared to $77,304 for the three months ended September 30,
2005. The increase in professional and consulting fees during the three months
ended September 30, 2006, compared to the three months ended September 30, 2005,
is largely attributable to $18,750 of advisory services in connection with the
Company's business development activities, $17,561 of legal and accounting fees
and the grant of warrants valued at $129,800 for consulting services during the
three months ended September 30, 2006, as described herein. Certain other of
our expenses during the three months ended September 30, 2006 decreased,
including salaries, which declined by $70,927 or 68% to $32,993 for the three
months ended September 30, 2006 compared to $103,920 for the three months ended
September 30, 2005, and rent and occupancy, which declined by $18,250 or 65%
during the same period, which decreases were due to the fact that the expenses
of ZNG, our former wholly owned subsidiary, which is currently solely owned by
ZNG, Ltd., which we own 50% of, are no longer included in our consolidated
statement of operations due to the fact that ZNG is no longer our wholly owned
subsidiary, but which expenses were included in our consolidated statement of
operations during the three months ended September 30, 2005.
We had a net loss of $267,632 for the three months ended September 30, 2006,
compared to a net loss of $336,609 for the three months ended September 30,
2005, a decrease in net loss of $68,977 or 20% from the prior year. The decrease
in net loss was mainly attributable to an increase of $75,000 in revenue for the
three months ended September 30, 2006, compared to $-0- of revenue for the three
months ended September 30, 2005.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006, COMPARED TO
THE NINE MONTHS ENDED SEPTEMBER 30, 2005
We had revenues and other income of $225,000 for the nine months ended September
30, 2006, which was solely due to $25,000 of monthly management fees received
from ZNG, Ltd. We had $-0- of revenue and other income for the nine months ended
September 30, 2005. We have not generated any revenues to date through the sale
of oil and/or gas.
We had total expenses of $2,379,734 for the nine months ended September 30,
2006, compared to total expenses for the nine months ended September 30, 2005,
of $880,150, which represented an increase in total expenses from the prior
period of $1,499,584 or 170%.
Total expenses for the nine months ended September 30, 2006, included $101,556
of salaries, of which $57,305 was attributable to the salaries and payroll taxes
paid to the Company's Chief Financial Officer, Elena Pochapski, and $44,250
which was paid to various other employees and consultants; $1,755,256 of
professional and consulting fees, including amounts paid to our legal counsel
and accountant in connection with the preparation and filing of our annual
report on Form 10-KSB and 10-QSB, and certain warrants and shares granted for
professional services during the nine months ended September 30, 2006; $29,658
in rent and occupancy; $253 of depreciation and amortization; $8,890 of finance
charges and interest, attributable to interest paid on the advances we received
from BP and other loans; and $484,121 of marketing and other expenses, including
marketing and advertising in connection with road shows, various general and
administration expenses relating to the day to day operations of the Company,
and travel and hotel expenses in connection with the research on potential
business acquisitions. Our Chief Executive Officer, David Zaikin has agreed to
waive his salary and any accrual of his salary until such time as we have
sufficient funds to pay such salary to Mr. Zaikin, if at all.
The main items leading to the increase in total expenses for the nine months
ended September 30, 2006, compared to the nine months ended September 30, 2005,
were an increase of $1,588,087 or 949% in professional and consulting fees, to
$1,755,256, an increase in marketing and other expenses of $270,336 or 126% to
$484,121 for the nine months ended September 30, 2006, compared to $213,785 for
the nine months ended September 30, 2005. The professional and consulting fees
for the nine months ended September 30, 2006 included the following expenses:
$40,625 of advisory services in connection with the Company's business
development, $1,113,000, representing the value of 600,000 shares of common
stock issued to a consulting company in consideration for its assistance to ZNG
in obtaining geological information relevant to new potential licensed areas and
its assistance in the application process for such licenses (see "Description Of
ZNG," above for information on these new licenses), and the grant of certain
warrants valued at $618,300 for consulting services rendered during the nine
months ended September 30, 2006. The increase in marketing and other expenses is
attributable to increased marketing and advisory services in connection with our
operations. Certain other expenses were less during the nine months ended
September 30, 2006, compared to the nine months ended September 30, 2005,
including salaries, which declined by $251,088 or 71% from the prior period, and
rent and occupancy, which declined by $41,134 or 58% from the prior period,
which decreases were due to the fact that the expenses of ZNG, our former wholly
owned subsidiary, which is currently solely owned by ZNG, Ltd., which we own 50%
of, are no longer included in our consolidated statement of operations due to
the fact that ZNG is no longer our wholly owned subsidiary, but which expenses
were included in our consolidated statement of operations during the nine months
ended September 30, 2005. Additionally, the fact that David Zaikin agreed to
not receive or accrue a salary from the Company until such time as the Company
had sufficient capital to pay such salary, if at all in September 2005, led to a
decrease in our salary expense for the nine months ended September 30, 2006,
compared to the nine months ended September 30, 2005, and as a result our total
expenses for such periods.
We had a net loss of $2,154,734 for the nine months ended September 30, 2006,
compared to a net loss of $880,150 for the nine months ended September 30, 2005,
an increase in net loss of $1,274,584 or 145% from the prior period. The
increase in net loss was mainly attributable to increases in total expenses,
namely the increases in professional and consulting fees and other expenses,
described above, which were not sufficiently offset by the $225,000 increase in
revenue for the nine months ended September 30, 2006, compared to $-0- of
revenue for the nine months ended September 30, 2005.
LIQUIDITY AND CAPITAL RESOURCES
We had current assets of $57,366 as of September 30, 2006, which included cash
of $32,096; management fee receivable of $25,000, which represented amounts owed
to us by ZNG, Ltd. in management fees, which amount has been paid to date; and
prepaid expenses and other of $270. This represented a decrease in current
assets of $4,455 or 7.2%, from $61,821 of current assets as of December 31,
2005, which decrease was mainly due to a decrease in management fees receivable
of $25,000 and an increase of $20,545 in cash, which cash was received from ZNG,
Ltd., in connection with our $25,000 monthly management fees, which ZNG, Ltd. is
obligated to pay to us.
We had total assets of $235,674 as of September 30, 2006, which included current
assets of $57,366 and non-current assets of $178,308. Non-current assets
included $1,308 relating to net property and equipment and $177,000 relating to
the value of the warrants granted to Key Brokerage for our option for the right
to purchase 75% of Kondaneftegaz as described above. This represented an
increase of $172,314 or 271% in total assets of $63,360 as of December 31, 2005,
versus total assets of $235,674 as of September 30, 2006, which increase was
mainly attributable to the above mentioned investment in the Kondaneftegaz
purchase option.
We had total liabilities of $825,940 as of September 30, 2006, which were solely
current liabilities and which included $348,593 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 September 30, 2006; $49,083
of accounts payable to Baltic in connection with the $29,000 loan advanced to
the Company from Baltic, as described above under "Description of Business" and
certain other expenses owed to Baltic; $100,725 of accounts payable to others
for advisory and professional services rendered; and $327,539 of accrued
payroll, which included $112,500 payable to our Chief Executive Officer, David
Zaikin which amount was owed to Mr. Zaikin prior to September 2005, at which
time he agreed to stop accruing salary until such time as we have sufficient
monies to pay such salary, $90,338 payable to our Chief Financial Officer, Elena
Pochapski, and $69,241.97 of accrued salary payable to our former Chief
Executive Officer, Shakeel Adam. Current liabilities of $825,940 as of September
30, 2006, represented a decrease in current liabilities of $30,171 or 3.5% from
total current liabilities of $856,111 as of December 31, 2005. The main reasons
for this decrease was the repayment of a $62,500 loan to an individual through
the issuance of Company shares, the payment of current amounts owed for
professional and advisory services, which was partially offset by an increase in
accrued payroll of $23,198 and an increase in net amount owed to related party
stockholders by $20,217 which was due to certain expenses paid on the Company's
behalf by the Company's Chief Executive Officer, David Zaikin, as well as
certain unpaid commissions payable to AEF (as described herein).
We had negative working capital of $768,574 and a total pre development and
development stage accumulated deficit of $4,742,753 as of September 30, 2006.
Because our cumulative losses associated with the operations of ZNG exceeded our
investment as of the date of the Joint Venture, ZNG is carried on our balance
sheet at $-0- as of September 30, 2006. Our investment in ZNG will exceed $-0-
at such time as ZNG has cumulative earnings sufficient to repay all loans to
Baltic as provided in the Joint Venture, if ever.
We had $10,471 of net cash flows from operating activities for the nine months
ended September 30, 2006, which included $2,107,645 of common stock and warrants
issued for professional services and salaries, $32,307 of accounts payable and
accrued expenses, $25,000 of prepaid expenses and other assets and $253 of
depreciation and amortization, which was offset by $2,154,734 of net loss.
We had $-0- of net cash flows for investing activities for the nine months ended
September 30, 2006.
We had $14,000 of net cash flows from financing activities for the nine months
ended September 30, 2006, which was solely due to $14,000 of net proceeds from
common stock issued to an employee, which was in connection with the exercise of
all 100,000 of our Chief Financial Officer Elena Pochapski's, 2003 stock
options, at an exercise price of $0.14 per share in February 2006.
As of November 1, 2006, ZNG had received $5,070,015 pursuant to the New Loan,
which amount includes $1,110,624 assumed by ZNG in connection with a previous
loan made to ZNG.Total interest accrued as of November 1, 2006 is $401,273,
including $189,520 of interest on the New Loan and $211,753 of interest on the
previous loan.
Additionally, in July 2006, we entered into a Deed of Agreement, whereby Baltic
agreed (funding permitting) to loan ZNG approximately $12,000,000 to be used on
seismic studies, drilling and a work program, which funds have not been loaned
to date.
Under the Joint Venture, we will receive $25,000 per month as a management fee
from ZNG, Ltd. In addition to the monthly management fee, ZNG Ltd. agreed to
lend $78,000 to us to pay for legal and consulting services in connection with
establishing the Joint Venture. We received $29,000 of this amount in November
2005; and will receive the additional $49,000 if all five of the new licenses
are awarded to ZNG, of which three have been awarded to date, and ZNG submits a
letter from the relevant license authority of the Ministry of Natural Resources
of the Russian Federation confirming such awards, of which there can be no
assurance.
Since our transfer of ZNG to the Joint Venture, we have no oil and gas
operations separate from the Joint Venture, which has not started production and
is not currently generating any cash from production, which makes it difficult
for us to pay our maturing obligations. However, 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.
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 with amounts received from
the Joint Venture (described above), including $25,000 a month which the Company
is to receive from ZNG, Ltd., pursuant to the Joint Venture. Additionally, ZNG
has received approximately $1,110,624 from BP pursuant to a prior loan and
another $3,959,391 pursuant to the New Loan, which had a total outstanding
balance, including the assumed balance of the prior loan and accrued and unpaid
interest on the prior loan and the New Loan as of November 1, 2006, of
$5,471,288, which has been spent on various purposes, including paying
consultants for services performed in connection with surveys previously
performed on the licensed area. As the Joint Venture is now responsible for the
funding of the operations of ZNG, we believe our expenditures in connection with
ZNG will decrease in the upcoming periods. If we are unable to raise the
additional funds required for the planned activities of the Joint Venture and
for additional activities, separate than 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.
ADDITIONAL LOANS UNDER THE NEW LOAN ARE CONTINGENT UPON ZNG OBTAINING RIGHTS TO
TWO ADDITIONAL LICENSES IN THE KURGAN REGION, WHICH ZNG APPLIED FOR IN AUGUST
AND SEPTEMBER 2005.
Approximately $654,000 in loans, which ZNG is to receive in connection with the
New Loan are contingent upon ZNG obtaining rights to the two new licenses
applied for in August and September 2005. The Russian government and Ministry of
Natural Resources together with Rosnedra Federal Agency set the dates for the
auctions on the two blocks, the Pichuginski and Mihailovski parcels, which
auctions we anticipate occurring in the fourth quarter of 2006. The licenses may
be bid on by companies with resources much greater than ZNG, and as a result,
ZNG may not win the rights to the licenses applied for. If this were to happen,
the approximately $654,000 in loans which are contingent upon ZNG obtaining such
licenses may not be granted. As a result, ZNG may be forced to curtail or
abandon its business operations and consequently, our investment in ZNG and the
value of our securities may become worthless.
WE WILL NEED SUBSTANTIAL FINANCING AND SUBSTANTIAL TIME BEFORE WE ANTICIPATE
GENERATING REVENUES, IF ANY.
The Company anticipates the need for approximately $15,000,000 prior to ZNG'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 ZNG, other than the $25,000 a month that it will
receive from ZNG, Ltd., until 2007, of which there can be no assurance.
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. If ZNG 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 ZNG if no revenues
are generated and hydrocarbon reserves are located, ZNG may be forced to abandon
or curtail its current business plan. As the Company's only current operations
are through its 50% ownership of ZNG, Ltd., which in turn owns 100% of ZNG, if
ZNG 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 PRIOR TO ENTERING INTO ANY ADDITIONAL JOINT
VENTURES OR ACQUISITIONS.
The Company anticipates the need for approximately $10,000,000 to $25,000,000 to
enter into additional joint ventures and/or acquisitions in the future.
Currently the Company has not raised any of this financing and the Company can
make no assurances that this financing will ever be raised. Even if the Company
does raise this money and enter into other joint ventures or acquisitions in the
future, it could still be years before the Company generates any revenue, if
ever. If the Company does not raise the $10,000,000 to $25,000,000 which it
anticipates needing to enter into additional joint ventures or acquisitions, the
Company may be forced to abandon or curtail its current business plan.
Additionally, the raising of this money may include issuing securities with
greater rights than our common stock shareholders and/or may result in
substantial dilution to our existing shareholders.
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 not generated any revenues since inception and have
incurred substantial losses including a net loss of $267,632 for the three
months ended September 30, 2006, a net loss of $2,154,734 for the nine months
ended September 30, 2006 and a total accumulated deficit of $4,742,753 as of
September 30, 2006. 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 September 30,
2006, was $4,292,968, and our total cumulative deficit was $4,742,753 which
included $449,785 of pre-development stage deficit. We had $327,539 in accrued
and unpaid salaries and a working capital deficit of $825,940 as of September
30, 2006. The Company is currently being funded by existing shareholders and the
$25,000 monthly payments, which the Company receives from the Joint Venture in
connection with management fees, 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 oil exploration, it finds no viable
wells, and consequently, we generate only minimal revenues through ZNG, Ltd., 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 not generated any
revenues, 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 DOES NOT FIND HYDROCARBON
RESERVES, WE MAY BE FORCED TO CURTAIL OUR BUSINESS PLAN.
There is a risk that ZNG will not find any hydrocarbon reserves and the cost of
exploration will become too high for ZNG, Ltd. to continue ZNG's business plan.
As our only current operations are through our 50% ownership of ZNG, Ltd., which
in turn owns 100% of ZNG, if ZNG or ZNG, Ltd. 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. 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. 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, 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 PROJECTIONS, ESTIMATES AND STATISTICAL ANALYSIS MAY BE INACCURATE OR
SUBSTANTIALLY WRONG, WHICH MAY PREVENT ZNG FROM EXECUTING ITS BUSINESS PLAN.
Risks from these factors are intertwined with the risky nature inherent in the
oil and gas industry. 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, etc. If ZNG projections or estimates are wrong or our statistical
analysis faulty, ZNG's revenues may be adversely affected which could ZNG from
executing its 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.
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 new 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-QSB's or 10-KSB'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.
IF THERE IS A MARKET FOR OUR COMMON STOCK, OUR STOCK PRICE MAY BE VOLATILE.
If there is a market for our common stock, we anticipate that such market will
be subject to wide fluctuations in response to several factors, including, but
not limited to:
(1) 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;
(5) the political atmosphere in Russia; and
(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, asked 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 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 $4.00 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 $4.00 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.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of Operations
is based upon our audited 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.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Our Chief Executive
Officer and Principal Financial Officer, after evaluating the effectiveness of
our "disclosure controls and procedures" (as defined in the Securities Exchange
Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered
by this Quarterly Report on Form 10-QSB (the "Evaluation Date"), have concluded
that as of the Evaluation Date, our disclosure controls and procedures are
effective to provide reasonable assurance that information we are required to
disclose in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission rules and forms, and that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and Principal Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.
(b) Changes in internal control over financial reporting. There were no
significant 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
From time to time, we may become party to 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. We may become involved in material legal proceedings
in the future.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
In July 2006, the Company issued 10,000 shares of restricted common stock to IRG
in connection with the IRG Agreement, for investor relations services rendered
to the Company for the month ended July 2006. The Company claims an exemption
from registration afforded by Section 4(2) of the Act since the foregoing
issuance 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.
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), which
amount has not been paid as of the date of this filing, and 50,068 options to
purchase shares of our common stock at $0.63 per share and a commission of
$6,673 (1% of Baltic's $667,313 investment in the Joint Venture in the first
quarter 2006), which amount has not been paid to AEF to date 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 6, 2006, and March 31, 2006
respectively, 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), which
amount has not been paid to AEF to date. The Company claims an exemption from
registration afforded by Section 4(2) of the Act since the foregoing did not
involve a public offering, the recipient took the securities for investment and
not resale and the Company took appropriate measures to restrict transfer. No
underwriters or agents were involved in the foregoing and no underwriting
discounts or commissions were paid by the Company.
In July 2006, the Company issued 13,500 shares of restricted common stock to
Harbinger Research, LLC ("Harbinger"), in connection with the Company's entry
into an Investment Report Services Agreement with Harbinger (the "Harbinger
Agreement"), whereby Harbinger agreed to prepare and distribute an investment
report for the Company to approximately 1,500,000 individual investors. The
consideration for the entry into the Harbinger Agreement and the preparation and
dissemination of the report was 13,500 restricted shares of common stock. The
Company claims an exemption from registration afforded by Section 4(2) of the
Act since the foregoing issuance 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.
In September 2006, in connection with our entry into the Option Agreement with
Key Brokerage (as described above) we granted Key Brokerage an aggregate of
250,000 warrants to purchase shares of our common stock at an exercise price of
$2.20 per share, exercisable until September 14, 2008. We claim an exemption
from registration afforded by Section 4(2) of the Securities Act of 1933 since
the foregoing grant of warrants did not involve a public offering, the recipient
took the shares for investment and not resale and any shares issuable in
connection with an exercise of the warrants will be restricted once issued. No
underwriters or agents were involved in the foregoing grant and no underwriting
discounts or commissions were paid by us.
In August 2006, we agreed to issue restricted shares of our common stock to
certain individuals and entities to which we owed money as of August 2006. The
shares were issued at a 30% discount to the then current market price of our
common stock, being the discount for the restrictive nature of the shares.
In August 2006, two individuals agreed to be issued an aggregate of 113,530
restricted shares of common stock in consideration for the forgiveness of
$182,783 in money which we owed the individuals in connection with loans they
provided us in December 2005 and in connection with such individuals
representing us in Moscow, Russia.
In September 2006, we issued an aggregate of 417,469 restricted shares of common
stock to Business Standard (and nominees thereof), of which 400,000 shares were
issued in consideration for consulting services rendered in connection with the
application for and subsequent grant of two (2) oil and gas exploration and
production licenses in the Kurgan region of Siberia, Russia (the "Licenses"), to
Zauralneftegaz, Ltd., a Russian company ("ZNG"), which is wholly owned by
Zauralneftegaz, Ltd., a United Kingdom company, which we own 50% of through a
joint venture in connection with our agreement with Business Standard, whereby
we agreed to issue Business Standard 200,000 restricted shares of our common
stock for each license ZNG receives. The remaining 17,469 shares of restricted
common stock were issued to Business Standard in connection with Business
Standard forgiving $28,125 in amounts owed for consulting services rendered.
We claim an exemption from registration afforded by Section 4(2) of the
Securities Act of 1933 since the foregoing issuances did not involve a public
offering, the recipients took the shares for investment and not resale and we
took appropriate measures to restrict transfer. No underwriters or agents were
involved in the foregoing issuances and no underwriting discounts or commissions
were paid by us.
In September 2006, we agreed to issue 10,000 shares of our restricted common
stock to the Investor Relations Group, Inc. ("IRG"), in accordance with a
contract entered into on March 16, 2006. Pursuant to the contract (the "IRG
Agreement"), IRG agreed to perform investor relations and public relations
services, including the overall management of a corporate communications
program, as well as agreeing to design a corporate fact sheet, and organizing
road shows for the Company. The Company's Board of Directors approved the
issuance of 150,000 restricted shares of the Company upon signing of the
agreement, which shares have previously been issued and agreed to issue IRG
10,000 restricted shares per month for the six (6) month duration of the
contract, of which 10,000 shares were issued in September 2006 for investor
relations services rendered in the month of August 2006. We claim an exemption
from registration afforded by Section 4(2) of the Act since the foregoing
issuance did not involve a public offering, the recipient took the shares for
investment and not resale and we 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 us.
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 2006),
which amount has not been paid to AEF to date. When such warrant is issued, we
will claim an exemption from registration afforded by Section 4(2) of the Act
since the foregoing issuance will not involve a public offering, the recipient
will take the shares for investment and not resale and we will take appropriate
measures to restrict transfer. No underwriters or agents will be involved in the
foregoing issuance and no underwriting discounts or commissions will be paid by
us.
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 AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit No. Description
--------------- -----------------
10.1(1) Option Agreement with Baltic Petroleum Limited dated
April 28, 2005
10.2(1) License Agreement between OOO Zauralneftegaz and Baltic
Petroleum Limited dated April 28, 2005
10.3(1) Loan Agreement between OOO Zauralneftegaz and Baltic
Petroleum Limited dated April 28, 2005
10.4(1) Guarantee by Siberian Energy Group, Inc. dated April
28, 2005
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
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
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
May 14, 2004
10.12(3) Agreement with Business - Standard (translated from
Russian version)
10.13(3) Supplementary Agreement to Business - Standard
Agreement (translated from Russian version)
10.14(3) Supplementary Agreement No. 2 to Business - Standard
Agreement (translated from Russian version)
10.15(3) Deed of Amendment between ZNG and BP
10.16(3) Deed of Amendment between the Company and BP
10.17(4) Joint Venture Shareholders' Agreement with Baltic
Petroleum (E&P)Limited and Zauralneftegaz Limited dated
October 14, 2005
10.18(5) Loan Agreement between OOO Zauralneftegaz and Caspian
Finance Limited
10.19(5) Deed of Novation between Baltic Petroleum Limited,
Caspian Finance Limited and OOO Zauralneftegaz
10.20(5) Deed of Release
10.21(5) Release of Pledge
10.22(5) Guarantee
10.23(5) Debenture
10.24(5) Agreement for the Pledge of the Participatory Interest
in OOO Zauralneftegaz (Russian translation removed)
10.25(5) Sale and Purchase Agreement
10.26(7) Option Agreement with Key Brokerage
10.27(7) Warrant Agreement with Key Brokerage
10.28* July 26, 2006 Deed of Agreement
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(6) Glossary
* Filed Herein.
(1) Filed as Exhibits 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 8-K, filed with the Commission
on December 2, 2005, an incorporated herein by reference.
(6) Filed as Exhibit 99.1 to our Report on Form 10-KSB for the year ended
December 31, 2005, and incorporated herein by reference.
(7) Filed as Exhibits to our Report on Form 8-K, filed with the Commission
on September 19, 2006, and incorporated herein by reference.
b) Reports on Form 8-K
We filed the following reports on Form 8-K during the three months covered by
this report:
September 14, 2006 - To report our entry into a preliminary extension
with Baltic regarding the terms of our Joint Venture
Agreement.
September 19, 2006 - To report our entry into an option agreement with
Key Brokerage, Inc.
September 22, 2006 - To report the issuance of various shares of common
stock in forgiveness of debt owed to various parties in
August and September 2006.
We filed the following reports on Form 8-K subsequent to the period covered by
this report:
October 23, 2006 - To report that ZNG had received results of the 2D
Seismic analysis conducted on its licensed blocks.
October 25, 2006 - To further report the results of ZNG's 2D Seismic
analysis conducted on its licensed blocks.
November 6, 2006 - To report ZNG's plans for drilling in its licensed
blocks.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SIBERIAN ENERGY GROUP INC.
DATED: November 14, 2006 By: /s/ David Zaikin
--------------------
David Zaikin
Chief Executive Officer