siberian10qsb073007.htm
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 June 30, 2007
[
]
|
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
(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
August 1, 2007, 16,218,065 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
June
30, 2007
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 June 30, 2007, and the
related condensed consolidated statements of operations, stockholders' equity,
and cash flows for the six months ended June 30, 2007 and 2006, and the
cumulative period of development stage activity (January 1, 2003 through June
30, 2007). 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,
2006, 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 28, 2007, 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, 2006 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
August
1,
2007
SIBERIAN
ENERGY GROUP INC. (A Development Stage Company)
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Condensed
Consolidated Balance Sheets
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|
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|
(Unaudited)
|
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|
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|
June
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
|
|
$ |
2,791
|
|
|
$ |
1,435
|
|
Management
fee
receivable
|
|
|
85,000
|
|
|
|
110,000
|
|
Prepaid
expenses and other
|
|
|
112,100
|
|
|
|
5,272
|
|
|
|
|
199,891
|
|
|
|
116,707
|
|
|
|
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|
|
|
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|
Investment
in joint venture
|
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|
-
|
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|
-
|
|
|
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|
|
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|
|
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|
Oil
and gas properties, unproved
|
|
|
2,700,000
|
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|
2,700,000
|
|
|
|
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|
|
|
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Property
and equipment, net
|
|
|
3,953
|
|
|
|
2,565
|
|
|
|
|
|
|
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|
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|
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|
$ |
2,903,844
|
|
|
$ |
2,819,272
|
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|
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Liabilities
and Stockholders' Equity
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Current
liabilities:
|
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|
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Accounts
payable:
|
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|
|
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|
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|
Related party - stockholders
|
|
$ |
365,814
|
|
|
$ |
362,166
|
|
Related party - Baltic Petroleum, interest at
14%
|
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|
53,628
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|
50,615
|
|
Others
|
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|
532,348
|
|
|
|
459,561
|
|
Accrued
payroll
|
|
|
698,784
|
|
|
|
1,011,788
|
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|
1,650,574
|
|
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1,884,130
|
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Stockholders'
equity:
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Common
stock - authorized 100,000,000 shares, $.001 par value,
|
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15,708,030 and 14,112,961 issued and outstanding
|
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15,708
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14,113
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Additional
paid-in capital
|
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|
8,053,318
|
|
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6,593,829
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|
Accumulated
deficit
|
|
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|
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|
Pre-development stage
|
|
|
(449,785 |
) |
|
|
(449,785 |
) |
Development stage
|
|
|
(6,355,701 |
) |
|
|
(5,218,570 |
) |
Accumulated
other comprehensive income (loss)
|
|
|
(10,270 |
) |
|
|
(4,445 |
) |
|
|
|
1,253,270
|
|
|
|
935,142
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,903,844
|
|
|
$ |
2,819,272
|
|
|
|
|
|
|
|
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|
|
|
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|
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See
accompanying notes.
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SIBERIAN
ENERGY GROUP INC. (A Development Stage Company)
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For
the
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Condensed
Consolidated Statements of Operations
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cumulative
|
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period
of
|
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Development
|
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Stage
Activity-
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For
the three
|
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|
For
the six
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|
January
1, 2003
|
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|
|
months
ended
|
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|
months
ended
|
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|
through
|
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|
June
30,
|
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|
June
30,
|
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|
June
30,
|
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|
June
30,
|
|
|
June
30,
|
|
|
|
2007
|
|
|
2006
|
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|
2007
|
|
|
2006
|
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2007
|
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Revenues
and other income:
|
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Management fees from joint venture
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|
$ |
195,000
|
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|
$ |
75,000
|
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|
$ |
360,000
|
|
|
$ |
150,000
|
|
|
$ |
795,000
|
|
Gain from entrance into joint venture
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
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|
-
|
|
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|
364,479
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,382
|
|
Total
revenues and other income
|
|
|
195,000
|
|
|
|
75,000
|
|
|
|
360,000
|
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|
150,000
|
|
|
|
1,165,861
|
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Expenses:
|
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|
|
|
|
|
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Salaries
|
|
|
384,426
|
|
|
|
35,251
|
|
|
|
468,069
|
|
|
|
68,562
|
|
|
|
2,346,136
|
|
Professional and consulting fees
|
|
|
461,866
|
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|
|
1,433,429
|
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|
|
664,254
|
|
|
|
1,589,145
|
|
|
|
3,313,900
|
|
Rent and occupancy
|
|
|
10,184
|
|
|
|
10,009
|
|
|
|
22,569
|
|
|
|
19,746
|
|
|
|
198,812
|
|
Depreciation and amortization
|
|
|
133
|
|
|
|
81
|
|
|
|
215
|
|
|
|
167
|
|
|
|
102,932
|
|
Finance charges and interest
|
|
|
1,515
|
|
|
|
2,416
|
|
|
|
3,014
|
|
|
|
6,264
|
|
|
|
61,390
|
|
Marketing and other
|
|
|
164,914
|
|
|
|
161,727
|
|
|
|
339,010
|
|
|
|
353,218
|
|
|
|
1,498,392
|
|
Total
expenses
|
|
|
1,023,038
|
|
|
|
1,642,913
|
|
|
|
1,497,131
|
|
|
|
2,037,102
|
|
|
|
7,521,562
|
|
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|
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|
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|
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|
|
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Loss
before income taxes
|
|
|
828,038
|
|
|
|
1,567,913
|
|
|
|
1,137,131
|
|
|
|
1,887,102
|
|
|
|
6,355,701
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|
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|
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Provision
for income taxes (benefit)
|
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|
-
|
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|
-
|
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-
|
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-
|
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-
|
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Net loss (development stage)
|
|
$ |
828,038
|
|
|
$ |
1,567,913
|
|
|
$ |
1,137,131
|
|
|
$ |
1,887,102
|
|
|
$ |
6,355,701
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Basic
and diluted loss per common share
|
|
$ |
(0.05 |
) |
|
$ |
(0.14 |
) |
|
$ |
(0.08 |
) |
|
$ |
(0.16 |
) |
|
$ |
(0.67 |
) |
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Weighted
average number of basic and
|
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|
|
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|
diluted
common shares outstanding
|
|
|
15,173,503
|
|
|
|
11,453,792
|
|
|
|
14,905,185
|
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|
11,487,319
|
|
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|
9,405,277
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See
accompanying notes.
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SIBERIAN
ENERGY GROUP INC. (A Development Stage Company)
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Condensed
Consolidated Statements of Stockholders' Equity
|
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For
the cumulative period of Development Stage Activity - January 1,
2003
through June 30, 2007
|
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Common
Stock
|
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|
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|
Additional
|
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|
Number
of
|
|
|
Paid-In
|
|
|
|
Shares
|
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|
Par
Value
|
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|
Capital
|
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|
|
|
|
|
|
|
|
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|
Balance,
January 1, 2003 (pre-development stage)
|
|
|
4,902,886
|
|
|
$ |
4,903
|
|
|
$ |
430,195
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Loss
for the year - 2003
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
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|
Shares
issued in acquisition (ZNG)
|
|
|
1,000,000
|
|
|
|
1,000
|
|
|
|
(1,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003
|
|
|
5,902,886
|
|
|
$ |
5,903
|
|
|
$ |
429,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
for the year - 2004
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued in acquisition (ZNG)
|
|
|
3,450,000
|
|
|
|
3,450
|
|
|
|
746,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued for professional services
|
|
|
50,000
|
|
|
|
50
|
|
|
|
9,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
34,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2004
|
|
|
9,402,886
|
|
|
$ |
9,403
|
|
|
$ |
1,220,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
for the year - 2005
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued for professional services
|
|
|
385,000
|
|
|
|
385
|
|
|
|
138,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued for accrued salaries
|
|
|
1,700,000
|
|
|
|
1,700
|
|
|
|
210,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
granted for professional services
|
|
|
-
|
|
|
|
-
|
|
|
|
217,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
11,487,886
|
|
|
$ |
11,488
|
|
|
$ |
1,786,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
for the year - 2006
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued for employee stock option plan and warrants
|
|
|
195,000
|
|
|
|
195
|
|
|
|
45,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued for geological data
|
|
|
1,900,000
|
|
|
|
1,900
|
|
|
|
2,235,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued for professional services
|
|
|
1,139,499
|
|
|
|
1,140
|
|
|
|
1,685,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
granted for professional services
|
|
|
-
|
|
|
|
-
|
|
|
|
841,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
cancelled
|
|
|
(609,424 |
) |
|
|
(610 |
) |
|
|
610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
14,112,961
|
|
|
$ |
14,113
|
|
|
$ |
6,593,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
for six months - 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued for employee stock option plan and warrants
|
|
|
566,935
|
|
|
|
567
|
|
|
|
67,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued for geological data
|
|
|
200,000
|
|
|
|
200
|
|
|
|
285,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued for accrued salaries
|
|
|
465,000
|
|
|
|
465
|
|
|
|
669,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued for professional services
|
|
|
363,134
|
|
|
|
363
|
|
|
|
437,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2007
|
|
|
15,708,030
|
|
|
$ |
15,708
|
|
|
$ |
8,053,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Comprehensive
|
|
Deficit
|
|
|
Income
(Loss)
|
|
|
Total
|
|
|
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(449,785 |
) |
|
$ |
-
|
|
|
$ |
(14,687 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(422,516 |
) |
|
|
-
|
|
|
|
(422,516 |
) |
|
$ |
(422,516 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(872,301 |
) |
|
|
-
|
|
|
$ |
437,203 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(833,567 |
) |
|
|
-
|
|
|
|
(833,567 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
(53,120 |
) |
|
|
(53,120 |
) |
|
$ |
(886,687 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
750,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
34,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1,705,868 |
) |
|
$ |
(53,120 |
) |
|
$ |
529,464 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(882,151 |
) |
|
|
|
|
|
|
(882,151 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
50,614
|
|
|
|
50,614
|
|
|
$ |
(831,537 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
138,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
212,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
217,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(2,588,019 |
) |
|
$ |
(2,506 |
) |
|
$ |
(792,751 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,080,336 |
) |
|
|
-
|
|
|
|
(3,080,336 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
(1,939 |
) |
|
|
(1,939 |
) |
|
$ |
(3,082,275 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
45,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,237,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,686,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
841,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(5,668,355 |
) |
|
$ |
(4,445 |
) |
|
$ |
935,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,137,131 |
) |
|
|
|
|
|
|
(1,137,131 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,825 |
) |
|
|
(5,825 |
) |
|
$ |
(1,142,956 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
286,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
669,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
437,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(6,805,486 |
) |
|
$ |
(10,270 |
) |
|
$ |
1,253,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SIBERIAN
ENERGY GROUP INC. (A Development Stage Company)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the
|
Condensed
Consolidated Statements of Cash Flows
|
|
|
|
|
cumulative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
period
of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stage
Activity-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
1, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
through
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30,
|
For
the six months ended June 30,
|
|
|
|
|
2007
|
2006
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
Net
loss (development stage)
|
|
|
|
$ |
(1,137,131)
|
$(1,887,102)
|
$ (6,355,701)
|
|
Depreciation
and amortization
|
|
|
|
|
215
|
167
|
102,932
|
|
Common
stock and warrants issued
|
|
|
|
1,461,084
|
1,039,980
|
4,327,502
|
|
Gain
from entrance into joint venture
|
|
|
|
-
|
-
|
(364,479)
|
|
Changes
in other current assets and current liabilities:
|
|
|
|
|
|
|
|
Prepaid
expenses and other assets
|
|
|
|
(81,828)
|
25,000
|
(350,492)
|
|
|
|
Accounts
payable and accrued expenses
|
|
|
(233,556)
|
845,999
|
3,641,412
|
|
|
|
|
Net
cash flows from operating activities
|
|
|
8,784
|
24,044
|
1,001,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Expenditures
for licenses and related
|
|
|
|
-
|
-
|
(528,961)
|
|
Expenditures
for oil and gas properties
|
|
|
|
-
|
-
|
(770,750)
|
|
Expenditures
for property and equipment
|
|
|
(1,603)
|
-
|
(5,834)
|
|
Cash
received in acquisition
|
|
|
|
|
-
|
-
|
6
|
|
Cash
received from entrance into joint venture
|
|
|
-
|
-
|
175,000
|
|
|
|
|
Net
cash flows for investing activities
|
|
|
(1,603)
|
-
|
(1,130,539)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Net
proceeds from demand loan
|
|
|
|
|
-
|
-
|
62,500
|
|
Common
stock issued for employee stock option plan
|
|
-
|
14,000
|
45,500
|
|
Additional
paid-in capital
|
|
|
|
|
-
|
-
|
34,426
|
|
|
|
|
Net
cash flows from financing activities
|
|
|
-
|
14,000
|
142,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rates on cash
|
|
|
|
|
(5,825)
|
(3,314)
|
(1,000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
|
|
|
|
1,356
|
34,730
|
2,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
- beginning
|
|
|
|
|
|
1,435
|
11,551
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
- ending
|
|
|
|
|
$ |
2,791
|
$ 46,281
|
$ 2,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 2007 are consistent
with those used in the cumulative period of Development Stage Activity – January
1, 2003 through June 30, 2007. 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 the 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
Zauralneftagaz Limited, UK (ZL) 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 Shareholders’
Agreement. ZL is currently preparing to drill its second well
based on the recommendations from the analysis of the first Privolny-1 well
and
continues geological exploration works throughout the territory of its seven
licenses covering in total 1 million acres. These operations are
funded via loans provided to ZL and ZNG by a financing company wholly owned
by
Baltic. Loans are guaranteed by ZL’s holdings in ZNG. As of June 30, 2007 the
total amounts provided through such loans to ZL and ZNG were equal to $17.2
million plus accrued interest of approximately $1.9 million.
In
connection with the current program of seismic studies and drilling of the
first
four wells in the ZNG’s license blocks, additional funds were raised by Baltic’s
parent through a placement of shares. On June 18, 2007 ZNG entered
into an new loan agreement for $7.4 million, and it is anticipated that ZL
will
enter into an additional loan agreement for approximately $5.3 million covering
drilling and geological works through the end of 2007. The loans will
not be dilutive to the Company’s ownership in ZNG. In connection with
the funding provided by Baltic, ZNG entered into a gross override royalty
agreement with Baltic.
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 ($55,000 effective November
2006);
|
|
·
|
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 June 30, 2007 and December 31, 2006. Activities of
ZNG prior to October 14, 2005 are otherwise included in the consolidated
accounts of the Company in the accompanying financial statements.
As
part
of a planned separate oil and gas venture, on December 31, 2006, the Company
acquired oil and gas related geological information on the Karabashki zone
of
Khanty-Mansiysk Autonomous district (Tuymen region of the Russian Federation)
from Key Brokerage, LLC, a Delaware limited liability company, for 1,900,000
shares of restricted common stock. In conjunction with this asset
purchase, the Company was also assigned ownership of Kondaneftegaz, LLC (Konda),
a Russian limited liability company wholly-owned by Key Brokerage,
LLC.
As
a
result of the purchase, the Company assigned an acquisition value of $2,700,000
to the geological data assets based on both the approximate share value of
the
Company’s stock issued at the purchase date and the assets’ estimated value as
determined by an independent appraisal prior to the
acquisition. Since Konda had essentially no assets or liabilities at
the purchase date, had no previous operating history, and was transferred only
to facilitate the Company’s potential future operations in Russia, no value was
otherwise assigned to it at acquisition.
In
2007,
the Company plans to participate in two or three auctions for development and
production licenses for the parcels belonging to the existing oil deposits
of
Khanty-Mansiysk district.
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
June
30, 2007, the Company has estimated U.S. tax net operating loss carryforwards
totaling approximately $5,075,000. These carryforwards may be used to
offset future taxable income, and expire in varying amounts through
2027. No tax benefit has been reported in the financial statements
since the Company believes there is at least a 50% chance that the carryforwards
will expire unused. Accordingly, the $1,015,000 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 June 30,
2007.
5. Going
Concern:
These
financial statements have been prepared assuming the Company will continue
as a
going 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 June 30, 2007, 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 form 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 JUNE
30,
2007.
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.
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 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 preceded by CDN, for example CDN $500, is referring to $500 Canadian
dollars.
BUSINESS
OPERATIONS:
We
are a
development stage company, which is seeking opportunities for investment in
and/or acquisition of small to medium companies in Russia, specifically in
the
oil and gas industry. We are currently evaluating investment and joint venture
opportunities throughout Russia.
Until
October 14, 2005, the Company's operations were conducted solely through its
then wholly owned subsidiary, Zaural Neftegaz ("ZNG") a development stage oil
and gas exploration company located in the Western Siberian Region of Russia.
However, on October 14, 2005, the Company entered into a Joint Venture
agreement, whereby the Company transferred 100% of the ownership of ZNG to
a
newly formed Joint Venture company, Zauralneftegaz Limited, a company organized
under the laws of the United Kingdom ("ZNG, Ltd."), of which the Company owns
50% pursuant to the Joint Venture agreement entered into on October 14, 2005
(as
described in greater detail below under “Joint Venture”). From October 14, 2005
to December 13, 2006, the Company had no oil and gas operations except through
its ownership of 50% of ZNG, Ltd. On December 13, 2006, the Company entered
into
an Interest Purchase Agreement with Key Brokerage, whereby the Company purchased
100% of the issued and outstanding common stock of Kondaneftegaz, LLC (“KNG”), a
Russian limited liability company, which was created in 2004 for the purpose
of
oil and gas exploration in the Khanty-Mansiysk district of Western Siberia,
Russia. KNG has previously applied for 10 exploration and production licenses
for parcels located within the existing oil deposits of the Khanty-Mansiysk
district, in Russia, four of which are expected to be auctioned off during
the
third or fourth quarters of 2007.
Moving
forward the Company plans to focus on the exploration and potential development
of any licenses acquired by KNG through government auctions in fiscal 2007
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 KNG
On
December 13, 2006, we entered into an Interest Purchase Agreement (the "Purchase
Agreement") with Key Brokerage LLC ("Key Brokerage"), pursuant to which we
purchased 100% of the stock of Kondaneftegaz LLC ("KNG"), a Russian limited
liability company, which was created in 2004 for the purpose of oil and gas
exploration in the Khanty-Mansiysk district of Western Siberia, Russia. In
addition to acquiring 100% of the stock of KNG, we received the geological
information package on the Karabashski zone of Khanty-Mansiysk Autonomous
district (Tuymen region of Russian Federation) ("Geological Data"). The
Geological Data is included in the total purchase price discussed
below.
From
2005
through 2007 KNG applied for a total of 15 exploration and production licenses
in the Khanty-Mansiysk district of Russia. We believe that through auctions
and/or tenders, KNG may obtain licenses to four of the licensed areas during
the
third or fourth quarters of 2007; however, the remaining other auction/tender
dates are currently undetermined.
The
Purchase Agreement consummated the transactions contemplated by the Option
Agreement (the "Key Brokerage Option"), which we entered into with Key Brokerage
in September 2006. In consideration for agreeing to the Key Brokerage 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 Key Brokerage Option (the "Key Brokerage Warrants") in September
2006.
In
connection with the purchase of KNG, we received certain geological information,
including well logs, surveys and structural maps regarding the Karabashsky
zone
of the Khanty-Mansiysk district, which an independent appraisal valued at
approximately $2,700,000.
In
consideration for the transfer of 100% of the stock of KNG, we issued Key
Brokerage an aggregate of 1,900,000 restricted shares of our common stock valued
at approximately $2,700,000, which value approximated the value of geological
information relevant to the license blocks applied for by KNG.
Description
of ZNG
ZNG
was
created to explore and develop new hydrocarbon fields and oil and gas properties
in the Kurgan region of Southwest Siberia, Russia. ZNG has compiled data in
the
Eastern part of the Kurgan region by analyzing prior geological, geophysical
and
lithographic exploration works in the region, data, maps, and reports from
12
test wells drilled between 1979-1986, profile sections, correlation schemes,
and
geographic maps of the region. ZNG has also obtained core samples from
parametric wells drilled in prior years on the licensed areas and adjacent
territories in the Eastern part of Kurgan region during the initial search
for
oil and gas in the region, and performed analysis of the data provided by the
samples.
In
March
2003, ZNG acquired four 5-year exploration licenses through a government tender,
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-Voskresensky, Petuhovsky and Lebyazhevsky parcels. The new licenses
are
for the period of 25 years and allow both exploration and production on the
licensed areas. The total cost paid at the auctions for the three new licenses
by ZNG was approximately $425,000. 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-Petukhovsky and Orlovo-Pashkovsky-2. The anticipated auction dates
for
these licenses are currently unknown and there can be no assurance that ZNG
will
be awarded the licenses to the parcels at auction.
As
of
June 2007, ZNG had 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 the West-Suersky block (approximately 320
linear
kilometers), the Privolny block (approximately 140 linear kilometers),
and
the Mokrousovsky block (approximately 340 linear kilometers) using
Bazneftgeophisica;
|
|
·
|
Performed
gravimetric surveys on the West-Suersky
block;
|
|
·
|
Completed
approximately 2,106 linear kilometers of gas seismotomographic and
geochemical surveys performed by Exotrad on the Privolny, Mokrousovsky,
West-Suersky, Orlovo- Pashkovsky, South-Voskresensky, Petukhovsky
and
Lebyazhevsky blocks. Gas seismotomography is an advanced technique
of
combining active gas geochemistry, passive seismic and electromagnetic
methods. The surveys were performed by Exotrad, a world leader in
this
field. Exotrad has used this technology in more than 260 projects
as well
as “Caspian Pipeline Consortium”; “Sakhalin-2”; and “Blue Stream” in
diverse locations across Asia, Eastern Europe and the
Americas;
|
|
·
|
Scientific
and technical analysis was performed by the team of geologists, which
included experts from Exploration Consultants Limited ("ECL"), a
leading
international oil and gas consulting firm (part of RPS
Group);
|
|
·
|
Based
on the results of the gas seismotomographic surveys and high definition
2D
seismic survey shot over the geochemical anomalies found in the Privolny
and Mokrousovsky blocks, ZNG's Board of Directors decided to drill
up to
four exploration wells. At least two of these wells are proposed
to be
drilled in northern locations in the Privolny block (one of which
has
previously been drilled, the Privolny-1 Well) and the other two wells
are
proposed to be drilled on the Mokrousovsky block; and
|
|
·
|
Preliminary
Drilling Results of the first well drilled on the Privolny block,
the
Privolny-1 Well, have
been obtained to substantiate
the interpretation of seismic data obtained in 2006, together with
other
geophysical and geochemical work conducted over the last two
years. ZNG believes that the Privolny-1 Well will help provide an
improved analysis which will allow it to create a work program including
the drilling of at least two more exploration
wells.
|
Following
detailed data collection, survey and seismic testing, ZNG will proceed with
development of the most promising licenses first, which will allow it to
concentrate its resources on the most prospective areas. Based on research
performed to date the areas of most interest are the Privolny and Mokrousovsky
blocks. The West Suersky and Orlovo-Pashkovsky-1 blocks currently have the
least
potential in the assessment of ZNG and ZNG has decided not to proceed with
its
commitments in respect to those licenses. The Yuzhno-Voskresensky,
Petuhovsky and Lebyazhevsky parcels will require further exploration before
the
decision on their potential can be reached.
The
following survey and exploration activities have taken place on the first two
blocks designated by ZNG for exploration, the Privolny and the Mokrousovsky
blocks to date:
Privolny
Block
·
|
Based
on the results of the gas seismotomographic surveys and high definition
2D
seismic survey shot over the geochemical anomalies found in the
Privolny
and Mokrousovsky blocks, two drilling prospects were identified
in the
northern part of the Privolny block;
|
·
|
A
drilling of the first prospect
located in the Privolny block was performed. The “Privolny-1” well is
intended to provide physical data to enable the seismic survey
to be
correlated to the geology of the block and to better determine
the
subsurface structures which are present in the block;
|
·
|
A
drilling depth of 2402.5 meters has been reached to date on the
Privolny-1
well, and sufficient data has been gathered to enable a tie in
to the
adjoining Mokrousovsky license block; and
|
·
|
The
core samples from the Privolny-1 well were obtained in the Middle
Carboniferous-Moscovian and Upper and Middle Devonian sections, including
lean source rocks lying within the oil maturation window. The
cores and electric logs obtained from the Privolny-1 well will be
analyzed
and the results will determine whether the well is to be further
deepened
to prospective geological horizons. As such, further drilling on
the
Privolny-1 well has been temporarily put on hold, pending further
analysis
of the data.
|
Mokrousovsky
Block
ZNG
has
completed an interim Seismic Interpretation and received a Mapping Report
created by RPS Energy (“RPS”), relating to the 2D seismic studies conducted on
the Mokrousovsky block to date. The Mokrousovsky block is the second licensed
area surveyed using conventional 2D seismic surveys, over which 339 kilometers
(“km”) of seismic surveys have been shot. The following results have been
obtained through those surveys:
·
|
One
structural prospect was identified in the south west of the Mokrousovsky
license area. The structure has a maximum area of approximately 72
square
km, of which approximately 52 square km lie within the licensed area.
The
surface geochemical anomaly discovered in the area lies over the
north
eastern flank of the structure within the license area;
|
·
|
A
drilling location has been recommended by RPS for the prospect, based
on
the strong structure and geochemical coincidence, which drilling
has not
begun to date; and
|
·
|
ZNG
believes that the data gathered by drilling of the Privolny-1 well
will
enable it to determine the location for its second well, the
Mokrousovsky-1, with a greater degree of confidence, of which there
can be
no assurance. As of the date of this filing, ZNG has signed the
contract for drilling of the Mokrousovsky-1 well. Actual
drilling is expected to begin in late September or early
October 2007, of which there can be no
assurance.
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Joint
Venture
Operating
activities of ZNG described above are carried out through the Joint Venture
Shareholders' Agreement ("Joint Venture") entered into on October 14, 2005
with
Baltic Petroleum (E&P) Limited ("BP" or "Baltic") and Zauralneftegaz
Limited, the joint venture company ("ZNG, Ltd."), as contemplated by the Option
Agreement, as amended (the "Option"). The Company closed the Joint Venture
and
transferred 100% of the outstanding stock of ZNG to ZNG, Ltd. in connection
with
the terms and conditions of the Joint Venture. As a result of such transfer,
the
Company holds 50% of the outstanding stock of ZNG, Ltd., which holds 100% of
the
outstanding stock of the Company's former wholly owned subsidiary, ZNG. ZNG,
Ltd., will, operate through ZNG and be engaged in the exploration and
development of, production and sale of, oil and gas assets in the Western
Siberian region of the Russian Federation and the former Soviet Union and as
a
result of such transfer, the Company no longer has any separate oil and gas
exploration activities in Kurgan, Russia, other than through its ownership
of
ZNG, Ltd.
The
operations of the Joint Venture are funded via loans provided to ZNG, Ltd.
and
ZNG by Caspian Finance Limited ("Caspian"), a financing company wholly owned
by
Baltic. Loans are guaranteed by ZNG, Ltd.’s holdings in
ZNG. As of June 30, 2007 the total funding provided to ZL and ZNG by
Baltic was equal to $17.2 million plus accrued interest of approximately $1.9
million.
To
date,
Caspian has provided ZNG various loans from 2005 through 2007, as described
below:
|
·
|
On
November 9, 2005, ZNG entered into a New Loan with Caspian (the "New
Loan"). Under the loan agreement, Caspian agreed to provide a loan
of up
to $6,874,325 representing the assumed
commitment
under a prior loan equal to $1,739,658, of which ZNG had received
$1,110,624 as of November 9, 2005, and a new commitment of up to
$5,134,667, to be used for operations in the Kurgan region in 2005
and
through the first half of 2006. The New Loan is available to ZNG
until the
sixth anniversary of the date of the New Loan, or November 9, 2011
(the
"Term");
|
|
·
|
On
January 16, 2007 ZNG and Caspian entered into a Deed of Variation
of the
Loan Agreement, whereby, inter alia, the Lender agreed to make available
to ZNG an additional loan facility of
US$2,000,000;
|
|
·
|
On
April 23, 2007, ZNG and Caspian further entered into a Deed of Variation
of the Loan Agreement whereby, inter alia, the Lender agreed to make
available to ZNG an additional loan facility of US$300,000;
and
|
|
·
|
On
June 18, 2007, ZNG and Caspian entered into another Deed of Variation
to
the Loan Agreement, whereby Caspian agreed to make available to ZNG
an
additional loan facility of US$7,359,190 (the “June 2007 Deed of
Variation”).
|
The
total
outstanding balance of the New Loan provided up to June 30, 2007, is
$10,107,000, including $8,992,000 principal and $1,115,000 of interest accrued
as of June 30, 2007.
Funding
to ZNG, Ltd. is provided by Caspian on the same terms as to ZNG, through the
mechanism of intercompany billing within Baltic and certain companies affiliated
with Baltic. As of June 30, 2007, the total loan to ZNG, Ltd. from Caspian
comprised $7,956,000 including $7,128,000 of principal and accrued interest
of
$828,000. In addition, ZNG, Ltd. owes $1,135,000 directly to Baltic for unpaid
management fees and accrued interest through June 30, 2007.
The
total
budget for the current program
of seismic
studies and drilling of the first four wells on ZNG’s licenses which the
Board has proposed to undertake on ZNG's licensed blocks in 2007, is
approximately US $14,998,000, or approximately $8 million British pounds. These
funds were raised
by
Baltic’s parent company through a placement of shares. Of the total
budgeted amount of $14,998,000, the sum of $9,659,000 is being provided through
the ZNG loans described earlier and the sum of $5,339,000 is committed to be
provided to ZNG, Ltd. The loans will not be dilutive to the Company's ownership
in ZNG. In connection with the funding provided by Baltic, ZNG entered into
a
gross override royalty agreement with Baltic, as described below under "Deed
of
Agreement," and “Gross Override Royalty Agreement.”
Terms
of loans to ZL and ZNG:
Interest
on any amounts loaned under the New Loan bears interest at the following rates,
calculated and compounded on a daily basis, 14% per annum during the first
two
years of the Term, 13% per annum during the third year of the Term; and 12%
thereafter until the end of the Term.
Additionally,
under the terms of the June 2007 Deed of Variation, interest on the loans made
by Baltic to ZNG is payable on:
|
a)
|
the
earlier of (i) the date on which ZNG’s monthly turnover as shown by its
monthly management accounts exceeds US $200,000 and (ii) the fifth
anniversary of the Deed of Variation dated June 18, 2007;
and
|
|
b)
|
thereafter,
on a monthly basis on the final day of each calendar month using
all
available turnover, provided that in the event the interest due thereafter
exceeds the monthly turnover of ZNG then all of the turnover except
for
the direct budgeted operating expenses of ZNG and management fees
agreed
to be paid to Siberian Energy Group Inc. under the Joint Venture
Agreement
will be allocated prior to the payment of such interest and any interest
not able to be paid will accrue and be payable as soon as the level
of
turnover (less the fees payable to us) permits
(collectively the “Interest
Payments”).
|
In
the
event that ZNG does not make the Interest Payments when due, interest on the
unpaid amounts shall be payable from the due date to the date paid at the rate
of 6% per annum, calculated and accrued on a daily basis. The New Loan is
unsecured by ZNG, but Caspian reserved the right to request security over all
or
some of the assets and/or undertaking of ZNG at any time prior to any drawdown
of the New Loan, or while any money is outstanding under the New
Loan.
Pursuant
to the New Loan, ZNG is responsible for satisfying all requirements of Russian
Federation law and regulations in connection with each advance made under the
New Loan, and ZNG shall indemnify Caspian for any loss or damage it may suffer
as a result of the New Loan.
On
November 9, 2005, ZNG, Ltd. and Caspian entered into a Debenture, whereby ZNG,
Ltd. granted Caspian a security interest in substantially all of its assets,
including its 100% ownership of ZNG, to secure the repayment of the New Loan
Agreement. Pursuant to the Debenture, ZNG, Ltd. granted Caspian a continuing
security interest for the payment, performance and discharge of all of the
liabilities owing to Caspian by ZNG, Ltd., in the following assets, both present
and future, from time to time to the extent owned by ZNG, Ltd., or to the extent
in which it has an interest.
Additionally,
on November 9, 2005, ZNG, Ltd. and Caspian entered into an "Agreement for the
Pledge of the Participatory Interest in OOO Zauralneftegaz" (the "Pledge
Agreement"). Pursuant to the Pledge Agreement, ZNG, Ltd., pledged its 100%
ownership interest in ZNG to Caspian, which included any proceeds, dividends,
distributions or income deriving from ZNG and any compensation, whether monetary
or in-kind, deriving from ZNG, received due to the liquidation or reorganization
of ZNG. The Pledge Agreement shall remain in effect until all amounts owed
to
Caspian by ZNG, Ltd. are repaid. Pursuant to the Pledge Agreement, ZNG, Ltd.,
agreed to hold all dividends, interest and other income deriving from and by
it
for the account of Caspian, and agreed to pay such dividends, interest and
other
income to Caspian upon Caspian's request.
If
ZNG,
Ltd. fails to pay the amounts owed to Caspian pursuant to the Pledge Agreement,
Caspian can sell the 100% interest in ZNG at public auction, in one or several
sales, with an opening bid price of seventy-five percent (75%) of the value
set
forth for the value of ZNG in the Pledge Agreement ($7,705,079) at the first
public auction and fifty percent (50%) of the value set forth in the Pledge
Agreement at the second public auction. If the opening bid for ZNG is not met
at
either the first or second public auction, Caspian shall have the right to
retain ZNG, with its value equal to 90% of the value set at the second auction,
and set-off its claims secured by ZNG, Ltd. by such value. If ZNG is sold at
public auction, any and all proceeds from such sale received by Caspian shall
be
applied towards the discharge of the amounts owed by ZNG, Ltd. to
Caspian.
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.
|
Gross
Overriding Royalty Agreement
In
December 2006, ZNG entered into a Gross Overriding Royalty Agreement (the
“Royalty Agreement”) with Baltic, which was contemplated by the Deed of
Agreement dated July 26, 2006, described above and entered into in connection
with the addition to the New Loan, described above. The Royalty Agreement
provided that ZNG would grant Baltic a gross overriding royalty interest equal
to 3% of ZNG’s interest in any and all of the hydrocarbons found in, produced,
marketed and/or extracted from ZNG’s licensed blocks (the “Royalty”). Pursuant
to the Royalty Agreement, the Royalty shall be paid free and clear of any
expenses associated with the exploration and/or production of any hydrocarbons
discovered on the licensed blocks. The Royalty will apply until ZNG has received
an aggregate of $20,000,000 from the gross sales of any hydrocarbon production
produced or occurring on any wells owned or operated by ZNG. The Royalty
Agreement also provides that Baltic may at any time, upon not less than one
(1)
week prior notice, take the Royalty in oil and/or gas production, instead of
in
cash. ZNG also granted Baltic a security interest on any and all of its future
hydrocarbon production to secure the payment of the Royalty.
Agreement
With Alternative Energy Finance, Ltd.
We
previously agreed to issue Alternative Energy Finance Ltd. ("AEF"), of which
Tim
Peara is the Managing Director as well as a Director of the Company, certain
warrants in connection with Mr. Peara introducing the parties who formed the
joint venture. Pursuant to an agreement between AEF and the Company, AEF will
receive compensation based on the total investment made by Baltic Petroleum
Ltd.
in the Joint Venture. This compensation included a commission of approximately
$18,024 (1% of Baltic's first $1,802,441 investment in the Joint Venture) and
50,068 options to purchase shares of our common stock at $0.63 per share which
were granted to Mr. Peara on March 6, 2006 and a commission of $6,673 (1% of
Baltic's $667,313 investment in the Joint Venture in the first quarter of 2006),
and 17,561 options to purchase shares of our common stock at $0.67 per share
for
the first quarter of 2006, which were granted to Mr. Peara on March 31, 2006,
which options contain a cashless exercise provision.
On
June
30, 2006, in connection with our agreement with AEF, we agreed to grant AEF
a
warrant to purchase 20,412 shares of our common stock at an exercise price
of
$2.02, which warrants contained a cashless exercise feature. The warrants expire
three years from the grant date. We were also obligated to pay AEF $23,562
during the quarter ended June 30, 2006 (equal to 1% of Baltic's $2,356,153
investment in the Joint Venture in the second quarter 2006).
On
September 30, 2006, in connection with our agreement with AEF, we agreed to
grant AEF a warrant to purchase 20,952 shares of our common stock at an exercise
price of $1.53 per share, which warrants contained a cashless exercise feature.
The warrants expire three years from the grant date. We were also obligated
to
pay AEF $18,303 during the quarter ended September 30, 2006 (equal to 1% of
Baltic's $1,830,292 investment in the Joint Venture in the third quarter of
2006).
On
December 31, 2006, in connection with our agreement with AEF, we agreed to
grant
AEF a warrant to purchase 38,648 shares of our common stock at an exercise
price
of $1.44 per share, which warrants contained a cashless feature. The warrants
expire three years from the grant date. We were also obligated to pay AEF
$31,794 during the three months ended December 31, 2006 (equal to 1% of Baltic’s
approximately $3,197,400 investment in the Joint Venture in the fourth quarter
of 2006).
On
March
13, 2007, Mr. Peara personally, and on behalf of AEF agreed to accept 58,134
shares of our restricted common stock in consideration for the forgiveness
of
$45,626 owed personally to Mr. Peara in Directors fees and accrued expenses
and
$47,969 owed to AEF in connection with our agreement with AEF, which shares
have
been issued to date and which debt has been forgiven by Mr. Peara and
AEF.
On
March
31, 2007, in connection with our agreement with AEF, we agreed to grant AEF
a
warrant to purchase 48,925 shares of our common stock at an exercise price
of
$1.10 per share, which warrants contained a cashless feature. The warrants
expire three years from the grant date. We were also obligated to pay AEF
approximately $30,695 during the three months ended March 31, 2007 (equal to
1%
of Baltic’s approximately $3,069,482 investment in the Joint Venture in the
first quarter of 2007); which amount has not been paid to date.
On
June
30, 2007, in connection with our agreement with AEF, we agreed to grant AEF
a
warrant to purchase 55,233 shares of our common stock at an exercise price
of
$1.14 per share, which warrants contained a cashless feature. The warrants
expire three years from the grant date. We were also obliged to pay AEF
approximately $35,938.00 during the three months ended June 30, 2007 (equal
to
1% of Baltic’s approximately $ 3,593,848 investment in the Joint Venture in the
second quarter of 2007); which amount has not been paid to date.
Recent
Officer and Director Transactions:
On
January 25, 2007, we approved an annual salary of $180,000 (plus a performance
based bonus to be determined by the Board of Directors at the end of the 2007
fiscal year) for our Chief Executive Officer and Director, David Zaikin for
the
2007 fiscal year. On January 31, 2007, Mr. Zaikin notified us that effective
February 1, 2007, he was withdrawing his previous request to not accrue any
salary until we had sufficient funds to pay such salary, and instead requested
that we pay him his 2007 salary if funds were available for such payments and/or
that we accrue such salary until we have sufficient funds to repay him any
accrued amounts. In February 2007, our Board of Directors approved the issuance
of 350,000 shares of our restricted common stock to Mr. Zaikin, in consideration
for compensation for the year ended December 31, 2006, which compensation was
granted by our Board of Directors in its sole discretion, even though Mr. Zaikin
had previously agreed not to be paid or accrue any salary for fiscal
2006. In July 2007, we issued an aggregate of 190,000 restricted
shares of common stock to Mr. Zaikin, and certain of his assigns, in
consideration for services rendered during the first two quarters of
2007.
In
June
2007, we issued 70,000 shares of restricted common stock to our President,
Helen
Teplitskaia, of which 50,000 shares was a sign-on bonus in connection with
her
agreeing to be an officer of the Company in May 2007, and 20,000 shares were
part of her compensation package with the Company, whereby she is to be paid
10,000 shares per month for her service to the Company, which shares were issued
for services rendered in May and June 2007.
In
July
2007, Mr. Zaikin agreed to transfer 40,000 shares of the Company's restricted
common stock which he held to the Toronto Jewish Russian Academy Ohr Menahem
(the "TJRA”). The shares were transferred to the TJRA as a charitable donation
from Mr. Zaikin personally.
Uptick
Capital Agreement
On
January 31, 2007, we entered into an agreement with Uptick Capital Ltd.
(“Uptick”), whereby Uptick agreed to assist us in developing market links and
strategic initiatives as well as financing introductions for us as requested
from time to time. The initial agreement was for a period of three (3) months,
but was extended for two months, and has since been terminated. We
agreed to issue Uptick 10,000 shares of our restricted common stock for each
month that the agreement with Uptick is in place. We also agreed to indemnify
Uptick for certain costs and damages in connection with its performance of
its
duties under the Uptick agreement, as described in greater detail in the
agreement.
Global
Consulting Group Agreement
With
an
effective date of April 10, 2007, we entered into an agreement with The Global
Consulting Group (“Global”), whereby Global agreed to perform investor relations
and medial communications services for us for the period of one (1) year, which
agreement is automatically renewable for additional one (1) year periods if
not
terminated prior as described below. Pursuant to the Global agreement, we agreed
to pay Global $12,000 per month during the term of the agreement (subject to
3%
yearly increases, if such agreement is not terminated prior to the one (1)
year
anniversary of the agreement), and pay Global one time bonuses of $5,000 upon
the achievement of any of the following goals: our common stock being listed
on
the AMEX; a valuation of our common stock of at least $40 million for more
than
30 days; and/or any feature story in a top tier media outlet (The Wall Street
Journal, The New York Times or similar publication). We also agreed to pay
Global’s reasonable out of pocket expenses, subject to prior approval for any
expense over $300 and to indemnify Global against any losses they may incur
as a
result of the Global agreement up to a maximum of $10,000.
The
Global agreement can be terminated by either party after six (6) months upon
thirty (30) days prior written notice, and can be terminated immediately at
any
time due to a material breach of the agreement by either party, which breach
is
not cured within 15 days of notice thereof from the non-breaching party, and/or
if any party becomes bankrupt or ceases to carry on business.
Exercise
of Stock Options
On
May 1,
2007 at 9:00 a.m., Tim Peara, our Director, exercised 50,000 of the options
he
held to purchase restricted shares of our common stock at an exercise price
of
$0.30 per share, which options would have expired on May 1, 2007 at 5:00 p.m.
if
not previously exercised by Mr. Peara. Mr. Peara used the cashless exercise
provision of the options and received 41,935 shares of our common stock in
connection with the exercise of the options, based on the fair market value
of
the common stock on the date he exercised of $1.86.
In
June
2007, Mr. Viktor Repin exercised 700,000 of the options he held to purchase
112,500 shares of our restricted common stock at an exercise price of $1.00
per
share and 137,000 shares at an exercise price of $1.05 per share. Mr. Repin
used
the cashless exercise provision of the options and received 250,000 shares
of
our common stock in the name of his nominee in connection with the exercise
of
the options, based on the fair market value of the common stock on the date
he
exercised of $1.60.
In
June
2007, LLC Business Standard exercised 800,000 of the options it held to purchase
shares of our restricted common stock at an exercise price of $1.05 per share.
Business Standard used the cashless exercise provision of the options and
received 275,000 shares of our common stock for it and its nominees in
connection with the exercise of the options, based on the fair market value
of
the common stock on the date he exercised of $1.60.
Amendment
to Employment Agreement with Elena Pochapski
On
or
about April 2, 2007, with an effective date of April 1, 2007, we entered into
“Amendment 2 to the Employment Agreement Dated August 1, 2003” with Elena
Pochapski, our Chief Financial Officer and Director, which amended the terms
of
the first amendment to Ms. Pochapski’s Employment Agreement, in September 2005,
to provide that Ms. Pochapski’s annual salary shall thereafter be $75,000 per
year.
Appointment
of New Officer and Director
Effective
May 1, 2007, Helen Teplitskaia was appointed as the Company’s President and as a
Director of the Company.
Helen
Teplitskaia is Executive Vice President and Head of Eurasia Practice at Imnex
International, Inc. She also serves as President of the American-Russian Chamber
of Commerce & Industry, President of the American-Eurasian Chamber of
Commerce, Director of the International Energy Advisory Council and Adjunct
Associate Professor of International Business and Markets - Global Initiatives
in Management at Northwestern University Kellogg School of
Management.
Throughout
her career, Ms. Teplitskaia has successfully assisted a variety of government
agencies and private sector companies, including the United States Agency for
International Development, US State Department, Ministry of Foreign Affairs
of
the Republic of Uzbekistan, AT&T, Baker & McKenzie, Case New Holland,
Gazprom, Gillette, HeidelbergCement, Ingersoll-Rand, Maytag, Motorola,
Pepsi-Cola and Morgan Stanley with start-up operations in markets, direct
investment, mergers and acquisitions, joint ventures and licensing, marketing
research, political interfacing and media relations.
Helen
Teplitskaia received her BA/MIS from the St. Petersburg University of Culture
and MBA degree from Northwestern University Kellogg School of
Management.
Subsequent
to her appointment as President of the Company, we agreed to provide Ms.
Teplitskaia a compensation package consisting of 10,000 shares per month for
her
service to the Company and a sign-on bonus of 50,000 shares of common
stock.
Critical
Accounting Policies and Estimates
Our
discussion and analysis of our financial condition and results of operations
is
based upon our unaudited financial statements, which have been prepared in
accordance with accounting principals generally accepted in the United States.
The preparation of these financial statements requires us to make estimates
and
judgments that affect the reported amounts of assets, liabilities, revenues
and
expenses, and related disclosure of any contingent assets and liabilities.
On an
on-going basis, we evaluate our estimates. 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.
We
believe the following critical accounting policy affects our more significant
judgments and estimates used in the preparation of our financial
statements:
Going
Concern
The
Company's financial statements have been prepared assuming that the Company
will
continue as a going concern; however, since inception of its current endeavors
in 2003, the Company has not earned any revenues from production of hydrocarbons
and is considered to be in the development stage, which raises substantial
doubt
about its ability to continue as a going concern. The Company is of the opinion
that sufficient financing will be obtained from external sources to provide
the
Company with the ability to continue the process of development to achieve
commercial production and sales of products. Since inception, the Company has
obtained cash financing from organizing stockholders and employees in the form
of loans, advances and deferred salaries, as well as through debt financing
and
more recently has received $85,000 per month in management fees from its Joint
Venture. 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
require stated amounts of assets and liabilities to be reflected on a
liquidation basis which could differ from the going concern basis.
PLAN
OF OPERATIONS FOR THE NEXT TWELVE MONTHS
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.
The
Company also plans to put a large part of its resources into KNG, and the
licenses which KNG has applied for. If KNG is granted any or all of the 10
licenses it applied for in November 2005 and May 2006, or the 5 additional
licenses which it submitted applications for during the first quarter of 2007,
the Company anticipates conducting oil and gas exploration surveys and studies
on those licenses.
Moving
forward, we anticipate targeting other potential long term investments in
Russia, separate from our involvement in the Joint Venture and KNG. Currently
we
are evaluating different business opportunities in the oil and gas industry,
including 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 purchase
of KNG as 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 received $25,000 per month in management fees in connection
with the Joint Venture from the date the Joint Venture was entered into until
November 2006, at which time the management fees were increased to $55,000
per
month until June 2007 when they increased again to $85,000. The Company,
however, can make no assurance that $85,000 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 $365,814 and $421,343
were
payable to the stockholders as of June 30, 2007 and June 30, 2006, respectively.
However, there can be no certainty as to the availability of continued financing
in the future. Failure to obtain sufficient financing may require us to reduce
our operating activities. A failure to continue as a going concern would then
require stated amounts of assets and liabilities to be reflected on a
liquidation basis which could differ from the going concern basis.
COMPARISON
OF OPERATING RESULTS
RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2007, COMPARED TO THE THREE
MONTHS ENDED JUNE 30, 2006
We
had
revenues and other income of $195,000 for the three months ended June 30, 2007,
which was primarily due to $55,000 of monthly management fees received from
ZNG,
Ltd for the months of April and May 2007 and monthly management fees of $85,000
for the month of June 2007. We had $75,000 of revenue and other income for
the three months ended June 30, 2006, due solely to $75,000 of management fees
received. In November 2006, the management fees we received pursuant to our
Joint Venture increased from $25,000 per month to $55,000 per month and in
June
2007 the monthly management fees increased again to $85,000 per month. Revenues
increased $120,000 or 160% for the three months ended June 30, 2007, compared
to
the three months ended June 30, 2006, which increase was due to the increases
in
management fees received in connection with the Joint Venture.
We
have
not generated any revenues to date through the sale of oil and/or
gas.
We
had
total expenses of $1,023,038 for the three months ended June 30, 2007, compared
to total expenses for the three months ended June 30, 2006, of $1,642,913,
which
represented a decrease in total expenses from the prior period of $619,875
or
37.7%.
The
main
reason for the decrease in total expenses for the three months ended June 30,
2007, compared to the three months ended June 30, 2006, was a $971,563 decrease
in professional and consulting fees, to $461,866 for the three months ended
June
30, 2007, compared to $1,433,429 for the three months ended June 30, 2006,
which
decrease is largely attributable to 600,000 shares of common
stock issued to a consulting firm Business Standard, which
had a value of $1,113,000 in connection with the acquisition of three additional
licenses by ZNG in June 2006 and to $276,000 of stock options granted to certain
of our consultants during the three months ended June 30, 2006,,which were
not
represented during the three months ended June 30, 2007; which was offset by
a
$349,175 increase in salaries to $384,426 for the three months ended June 30,
2007, compared to $35,251 for the three months ended June 30, 2006, mainly
attributable to the salary of David Zaikin, who previously agreed during the
2006 fiscal year, including the three months ended June 30, 2006, to not accrue
salary, but who since decided as of January 30, 2007, to once again accrue
salary from the Company, the 190,000 shares of common stock issued to Mr. Zaikin
during the three months ended June 30, 2007, in consideration for services
rendered and to the salary of our new President Helen Teplitskaia, which was
paid through the issuance of shares of common stock during the three months
ended June 30, 2007, as described below, which expenses were not present during
the three months ended June 30, 2006.
The
$384,426 of salaries for the three months ended June 30, 2007, included $22,358
which was attributable to the our Chief Financial Officer, Elena Pochapski,
of
which $6,104 was accrued; $45,000 attributable to the salary of our Chief
Executive Officer, David Zaikin, of which such $45,000 amount was accrued and
$216,600 value of the 190,000 shares issued to David Zaikin (as described below
under “Unregistered Sales of Equity Securities”); $79,800 attributable to the
salary of our President Helen Teplitskaia, which was paid through the issuance
of 70,000 shares (described below under “Unregistered Sales of Equity
Securities”) and certain other amounts which were paid to various other
officers, Directors, employees and consultants.
We
had a
net loss of $828,038 for the three months ended June 30, 2007, compared to
a net
loss of $1,567,913 for the three months ended June 30, 2006, a decrease in
net
loss of $739,875 or 47.2% from the prior period. The decrease in net
loss was mainly attributable to the $120,000 or 160% increase in management
fees
and by the $619,875 or 39.5% decrease in total expenses, namely the increase
in
salaries offset by the decrease in professional and consulting fees, for the
three months ended June 30, 2007, compared to the three months ended June 30,
2006.
RESULTS
OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2007, COMPARED TO THE SIX MONTHS
ENDED JUNE 30, 2006
We
had
revenues and other income of $360,000 for the six months ended June 30, 2007,
which was primarily due to $55,000 of monthly management fees received from
ZNG, Ltd for the months of April and May 2007 and monthly management fees of
$85,000 for the month of June 2007. We had $150,000 of revenue and other income
for the six months ended June 30, 2006, due solely to $150,000 of management
fees received. In November 2006, the management fees we received pursuant to
our
Joint Venture increased from $25,000 per month to $55,000 per month and in
June
2007, the management fees increased again to $85,000 per month. Revenues
increased $210,000 or 140% for the six months ended June 30, 2007, compared
to
the six months ended June 30, 2006, which increase was due solely to the
increases in monthly management fees we receive in connection with the
Joint Venture
We
have
not generated any revenues to date through the sale of oil and/or
gas.
We
had
total expenses of $1,497,131 for the six months ended June 30, 2007, compared
to
total expenses for the six months ended June 30, 2006, of $2,037,102, which
represented a decrease in total expenses from the prior period of $539,971
or
26.5%.
The
main
reason for the decrease in total expenses for the six months ended June 30,
2007, compared to the six months ended June 30, 2006, was a $924,891 decrease
in
professional and consulting fees, to $664,254 for the six months ended June
30,
2007, compared to $1,589,145 for the six months ended June 30, 2006, which
decrease is largely attributable to 600,000 shares of common
stock issued to a consulting firm Business Standard, which had a
value of $1,113,000 in connection with the acquisition of three additional
licenses by ZNG in June 2006 and to $276,000 value of stock options granted
to
certain of our consultants during the six months ended June 30, 2006, which
were
not represented during the six months ended June 30, 2007, partially offset
by
increased fees of Business Standard, accrued on a monthly basis starting in
January 2007. The decrease in professional and consulting fees was offset by
a
$399,507 increase in salaries to $468,069 for the six months ended June 30,
2007, compared to $68,562 for the six months ended June 30, 2006, mainly
attributable to the salary of David Zaikin, who previously agreed during the
2006 fiscal year, including the six months ended June 30, 2006, to not accrue
salary, but who since decided as of January 30, 2007, to once again accrue
salary from the Company, and the 190,000 shares of common stock
issued to Mr. Zaikin during the three months ended June 30, 2007, in
consideration for services rendered and to the salary of our new President
Helen
Teplitskaia, which was paid through the issuance of shares of common stock
during the six months ended June 30, 2007, as described below, which expenses
were not present during the six months ended June 30, 2006.
The
$468,069 of salaries for the six months ended June 30, 2007, included $40,418
which was attributable to the our Chief Financial Officer, Elena Pochapski,
of
which $6,104 was accrued; $90,000 attributable to the salary of our Chief
Executive Officer, David Zaikin, of which such $90,000 amount was accrued and
$216,600 value of the 190,000 shares issued to David Zaikin (as described below
under “Unregistered Sales of Equity Securities”); $79,800 attributable to the
salary of our President Helen Teplitskaia, which was paid through the issuance
of 70,000 shares (described below under “Unregistered Sales of Equity
Securities”); and certain other amounts which were paid to various other
officers, Directors, employees and consultants.
We
had a
net loss of $1,137,131 for the six months ended June 30, 2007, compared to
a net
loss of $1,887,102 for the six months ended June 30, 2006, a decrease in net
loss of $749,971 or 39.7% from the prior period. The decrease in net loss was
mainly attributable to the $210,000 or 140% increase in management fees and
by
the $539,971 or 26.5% decrease in total expenses, namely the decrease in
professional and consulting fees, described above, offset by the increase in
salaries for the six months ended June 30, 2007, compared to the six months
ended June 30, 2006.
LIQUIDITY
AND CAPITAL RESOURCES
We
had
current assets of $199,891 as of June 30, 2007, which included cash of $2,791;
management fee receivable of $85,000, 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 $112,100.
We
had
total assets of $2,903,844 as of June 30, 2007, which included current assets
of
$199,891 and non-current assets of $2,703,953. Non-current assets included
$2,700,000 of oil and gas properties, unproved, representing geological studies
and data, which we received in connection with the purchase of KNG and $3,953
of
property and equipment, net.
We
had
total liabilities of $1,650,574 as of June 30, 2007, which were solely current
liabilities and which included $365,814 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 June 30, 2007; $53,628
of
accounts payable to Baltic in connection with a $29,000 loan advanced to the
Company from Baltic and certain other expenses owed to Baltic; $532,348 of
accounts payable to others for advisory and professional services rendered;
and
$698,784 of accrued payroll, which included $419,100 payable to our Chief
Executive Officer, David Zaikin of which $216,600 was paid to Mr. Zaikin in
July
2007, through the issuance of190,000 shares (described below under “Unregistered
Sales of Equity Securities”), $90,000 relating to Mr. Zaikin’s salary for the
six months ended June 30, 2007, which amount has been accrued, and $112,500
which was owed to Mr. Zaikin for services rendered prior to September 2005,
at
which time he agreed to stop accruing salary until January 2007, when he
provided us notice of his intent to once again begin accruing salary until
such
time as we have sufficient funds to pay such accrued salary, $90,811 payable
to
our Chief Financial Officer, Elena Pochapski, and $69,242 of accrued salary
payable to our former Chief Executive Officer, Shakeel Adam.
We
had
negative working capital of $1,450,683 and a total pre development and
development stage accumulated deficit of $6,805,486 as of June 30,
2007.
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 June 30, 2007. 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
$8,784 of net cash flows for operating activities for the six months ended
June
30, 2007, which resulted from payment of current liabilities through
the issuance of common stock, particularly common stock and warrants
worth $1,461,084 were issued for professional services and salaries offset
by a
$233,556 increase in accounts payable and accrued expenses, and $1,137,131
of
net loss.
Pursuant
to the Deed of Agreement, whereby Baltic agreed to loan ZNG approximately
$12,000,000 to be used on seismic studies, the budget for the current program
of seismic
studies and drilling of the first four wells on ZNG’s licenses in 2007
was adopted by ZL’s Board. This budget amounted to US $14,998,000, or
approximately $8 million British pounds. These funds were raised
by
Baltic’s parent company through a placement of shares. Of the total
budgeted amount of $14,998,000, the sum of $9,659,000 is being provided through
the ZNG loans described earlier and the sum of $5,339,000 is committed to be
provided to ZNG, Ltd. The loans will not be dilutive to the Company's ownership
in ZNG.
As
of
June 30, 2007, ZNG had received $10,107,000 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 June 30, 2007 was $1,115,000,
including accrued interest on the previous loan. The total funding provided
to
ZNG, Ltd. and ZNG by Baltic as of June 30, 2007 was equal to $17.2 million
plus
accrued interest of approximately $1.9 million.
Under
the
Joint Venture, we currently receive $85,000 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, our only oil and gas operations separate
from our ownership of 50% of ZNG, Ltd. has been through KNG, and we hope to
be
awarded oil and gas exploration licenses in connection with KNG during 2007.
Moving forward, we believe that in the long run a number of trends will
favorably affect our liquidity. These trends include the steady trend of
economic growth in Russia in the recent years which is improving the liquidity
of our potential customers, and may favorably impact our debt management and
the
increasing overall credit rating in Russia, which we hope will lead to increased
foreign investment in Russian companies and which will benefit us as
well.
We
are
taking steps in an attempt to raise equity capital and/or to borrow additional
funds. There can be no assurance that any new capital will be available to
us or
that adequate funds for our operations, whether from our financial markets,
or
other arrangements will be available when needed or on terms satisfactory to
us,
if at all. We have no commitments from officers, directors or affiliates to
provide funding. Our failure to obtain adequate financing may require us to
delay, curtail or scale back some or all of our operations. Additionally, any
additional financing may involve dilution to our then-existing
shareholders.
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 $85,000 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
$8,996,376 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 June 30, 2007, of $10,107,000, 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 from the Joint Venture, our Company may be forced to abandon its
current business plan. If you invest in our Company and we are unable to raise
the required funds, your investment could become worthless.
WE
WILL NEED SUBSTANTIAL FINANCING AND SUBSTANTIAL
TIME BEFORE WE ANTICIPATE GENERATING REVENUES THROUGH OUR
OWNERSHIP OF ZNG, LTD., IF ANY.
The
Company does not expect to generate any revenues through the operations of
ZNG,
other than the $85,000 a month that it will receive from ZNG, Ltd., 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. Even if generated such revenues will likely not be great enough to sustain
ZNG. If no revenues are generated and hydrocarbon reserves are not located,
we
may be forced to abandon or curtail our current business plan. If ZNG, which
is
100% owned by the Company 50/50 joint venture ownership of ZNG, Ltd., were
forced to abandon its business plan, the Company could be forced to abandon
or
curtail its business plan as well, which could cause the value of the Company's
common stock to become worthless.
WE
WILL NEED SUBSTANTIAL FINANCING AND SUBSTANTIAL TIME BEFORE WE ANTICIPATE
GENERATING REVENUES THROUGH KNG, IF ANY.
The
Company anticipates the need for approximately $15,000,000 prior to KNG's
expected generation of any revenues. Currently the Company has not raised any
of
this financing and the Company can make no assurances that this financing will
ever be raised. The Company also does not expect to generate any revenues
through the operations of KNG, until such financing can be raised, of which
there can be no assurance. Therefore, investors should keep in mind that even
if
KNG is able to raise the substantial amounts of additional financing it requires
for its operations, it could still be years before KNG generates any revenue,
if
ever. If KNG does not raise the $15,000,000 which it anticipates needing to
generate revenues, which, even if generated, will likely not be great enough
to
sustain KNG if no revenues are generated and hydrocarbon reserves are not
discovered, KNG may be forced to abandon its business plan, and the Company
could be forced to abandon or curtail its business plan as well, which could
cause the value of the Company's common stock to become worthless.
OUR
AUDITORS HAVE EXPRESSED SUBSTANTIAL DOUBT AS TO
WHETHER OUR COMPANY CAN CONTINUE AS A GOING
CONCERN.
Our
Company is in its early development stage, as planned principal activities
have
not begun. We have generated only minimal revenues since inception and have
incurred substantial losses including a net loss of $3,080,336 for the year
ended December 31, 2006, a net loss of $1,137,131 for the six months ended
June
30, 2007 and a total accumulated deficit of $6,805,486 as of June 30, 2007.
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 June 30, 2007,
was $6,355,701, and our total cumulative deficit was $6,805,486 which included
$449,785 of pre-development stage deficit. We had $698,784 in accrued and unpaid
salaries and a working capital deficit of $1,450,683 as of June 30, 2007. The
Company is currently being funded by existing shareholders and the $85,000
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. There is also a risk that KNG will not be awarded the
licenses for which it has applied. If throughout ZNG's oil exploration (and
KNG’s, assuming it is awarded the licenses for which it has applied, of which
there can be no assurance), no viable wells are found, and consequently, we
generate only minimal revenues through ZNG, Ltd. (and/or through KNG), we will
likely be forced to curtail or abandon our business plan. If this happens,
you
could lose your investment in our Company. If we are unable to generate profits,
we will be forced to rely on external financing, of which there is no guarantee,
to continue with our business plan.
WE
HAVE A POOR FINANCIAL POSITION AND IF WE DO NOT
GENERATE REVENUES, WE MAY BE FORCED TO ABANDON OUR
BUSINESS PLAN.
Our
Company currently has a poor financial position. We have generated only minimal
revenues to date, and we have not discovered any hydrocarbon reserves or begun
production on any wells. There is a risk that we will not find enough, or even
any, viable wells which we require to generate enough profits for your
investment in our Company to appreciate. If we never generate any revenues,
our
Company may be forced to curtail or abandon its business plan and your shares
may become worthless.
OUR
BUSINESS IS SPECULATIVE AND RISKY AND IF ZNG OR KNG DOES
NOT FIND HYDROCARBON RESERVES, WE MAY BE FORCED TO CURTAIL
OUR BUSINESS PLAN.
There
is
a risk that ZNG and KNG, assuming it is awarded the licenses for which it has
applied, of which there can be no assurance, will not find any hydrocarbon
reserves and the cost of exploration will become too high for ZNG, Ltd. to
continue ZNG's business plan and/or us to continue KNG’s business plan. As our
only current operations are through our 50% ownership of ZNG, Ltd. which in
turn
owns 100% of ZNG, and through KNG, if ZNG, ZNG, Ltd. or KNG were to cease
operations, your investment in our Company could become devalued or could become
worthless.
OUR
INDUSTRY IS COMPETITIVE AND AS SUCH, COMPETITIVE
PRESSURES COULD PREVENT US FROM OBTAINING
PROFITS.
The
main
factor determining success in the oil exploration and extraction industry is
finding viable wells. If our Company, through ZNG, Ltd., KNG or other joint
ventures we may enter into in the future, are unable to find producing wells
and
our competition is, it is likely that our Company will be driven out of
business. Additionally, our industry is subject to significant capital
requirements and as such, larger companies such as LUKoil, BP-TNK,
Surgutneftegaz and Sibneft may have an advantage should they compete with us
for
exploration licenses, because they may have resources substantially greater
than
ours. Investors should take into account the above factors and understand that
if we are unable to raise additional capital or generate the profits, the
Company may be forced to liquidate its assets and an investment in our Company
could become worthless.
OUR
GROWTH WILL PLACE SIGNIFICANT STRAINS ON OUR RESOURCES.
The
Company's growth is expected to place a significant strain on the Company's
managerial, operational and financial resources. Furthermore, as the Company
receives contracts, the Company will be required to manage multiple
relationships with various customers and other third parties. These requirements
will be exacerbated in the event of further growth of the Company or in the
number of its contracts. There can be no assurance that the Company's systems,
procedures or controls will be adequate to support the Company's operations
or
that the Company will be able to achieve the rapid execution necessary to
succeed and implement its business plan. The Company's future operating results
will also depend on its ability to add additional personnel commensurate with
the growth of its business. If the Company is unable to manage growth
effectively, the Company's business, results of operations and financial
condition will be adversely affected.
WE
RELY ON KEY PERSONNEL AND IF THEY LEAVE OUR COMPANY OUR BUSINESS PLAN COULD
BE
ADVERSELY AFFECTED.
We
rely
on the Company's Chief Executive Officer and Chief Financial Officer, David
Zaikin and Elena Pochapski, for the success of our Company, both of whom are
employed under contracts. Their experience and input create the foundation
for
our business and they are responsible for the directorship and control over
the
Company's development activities. The Company does not hold "key man" insurance
on either member of management. 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’S
OR KNG’S PROJECTIONS, ESTIMATES AND STATISTICAL ANALYSIS MAY BE INACCURATE OR
SUBSTANTIALLY WRONG, WHICH MAY PREVENT ZNG AND/OR KNG FROM EXECUTING THEIR
BUSINESS PLANS.
Projections
on future revenues as well as costs and required capital expenditures are based
on estimates. Business statistical analysis is used in projection of drilling
success ratios, average production costs, world oil price fluctuations and
their
correspondence to Russian domestic market. If ZNG’s or KNG’s projections or
estimates are wrong or our statistical analysis faulty, ZNG's or KNG’s revenues
may be adversely affected which could prevent ZNG and/or KNG from executing
their business strategy. As an investor, if this happens your securities in
our
Company could be adversely affected and you could lose your investment in our
Company due to the fact that our only current oil and gas operations are through
our 50% ownership of ZNG, Ltd., which in turn owns 100% of ZNG and through
KNG,
which has applied for, but not been awarded any licenses to
date.
THERE
IS UNCERTAINTY AS TO OUR ABILITY TO ENFORCE CIVIL LIABILITIES BOTH IN AND
OUTSIDE OF THE UNITED STATES DUE TO THE FACT THAT OUR OFFICERS, DIRECTORS AND
ASSETS ARE NOT LOCATED IN THE UNITED STATES.
Our
officers and Directors, our properties and licenses, and the majority of our
assets are located in countries other than the United States, including Canada
and Russia. As a result, it may be difficult for shareholders to effect service
of process within the United States on our officer and Director. In addition,
investors may have difficulty enforcing judgments based upon the civil liability
provisions of the securities laws of the United States or any state thereof,
both in and outside of the United States.
WE
FACE RISKS ASSOCIATED WITH THE FACT THAT THE MAJORITY OF OUR OPERATIONS THROUGH
OUR JOINT VENTURE ARE CONDUCTED IN RUSSIA, AND THE LICENSES OWNED THROUGH OUR
JOINT VENTURE ARE IN RUSSIA.
Zauralneftegaz,
Ltd. which we own 50% of through our Joint Venture holds licenses to certain
oil
and gas properties in the Kurgan Region of Russia. As a result, we
are subject to various risks associated with doing business in Russia relating
to Russia's economic and political environment. As is typical of an emerging
market, Russia does not possess a well-developed business, legal and regulatory
infrastructure that would generally exist in a more mature free market economy
and, in recent years, Russia has undergone substantial political, economic
and
social change. Furthermore, in recent years the Russian government has
unilaterally annexed certain oil and gas properties and companies for the
government, and there can be no assurance that if commercially exploitable
oil
and gas reserves are found on our properties, that such properties will not
be
annexed or otherwise claimed by the Russian government. Our failure
to manage the risks associated with doing business in Russia could have a
material adverse effect upon our results of operations.
IF
WE ARE LATE IN FILING OUR QUARTERLY OR ANNUAL REPORTS WITH THE SEC, WE MAY
BE
DE-LISTED FROM THE OVER-THE-COUNTER BULLETIN BOARD.
Under
Over-The-Counter Bulletin Board ("OTCBB") rules relating to the timely filing
of
periodic reports with the SEC, any OTCBB issuer who fails to file a periodic
report (Form 10-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.
IN
THE FUTURE, WE WILL INCUR SIGNIFICANT INCREASED COSTS AS A RESULT OF OPERATING
AS A FULLY REPORTING COMPANY AND OUR MANAGEMENT WILL BE REQUIRED TO DEVOTE
SUBSTANTIAL TIME TO NEW COMPLIANCE INITIATIVES.
Moving
forward, we anticipate incurring significant legal, accounting and other
expenses in connection with our status as a fully reporting public company.
The
Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") and new rules subsequently
implemented by the SEC have imposed various new requirements on public
companies, including requiring changes in corporate governance practices. As
such, our management and other personnel will need to devote a
substantial amount of time to these new compliance initiatives. Moreover, these
rules and regulations will increase our legal and financial compliance costs
and
will make some activities more time-consuming and costly. For example, we expect
these new rules and regulations to make it more difficult and more expensive
for
us to obtain director and officer liability insurance, and we may be required
to
incur substantial costs to maintain the same or similar coverage. In addition,
the Sarbanes-Oxley Act requires, among other things, that we maintain effective
internal controls for financial reporting and disclosure of controls and
procedures. In particular, commencing in fiscal 2008, we must perform system
and
process evaluation and testing of our internal controls over financial reporting
to allow management and our independent registered public accounting firm to
report on the effectiveness of our internal controls over financial reporting,
as required by Section 404 of the Sarbanes-Oxley Act. Our testing, or the
subsequent testing by our independent registered public accounting firm, may
reveal deficiencies in our internal controls over financial reporting that
are
deemed to be material weaknesses. Our compliance with Section 404 will require
that we incur substantial accounting expense and expend significant management
efforts. We currently do not have an internal audit group, and we will need
to
hire additional accounting and financial staff with appropriate public company
experience and technical accounting knowledge. Moreover, if we are not able
to
comply with the requirements of Section 404 in a timely manner, or if we or
our
independent registered public accounting firm identifies deficiencies in our
internal controls over financial reporting that are deemed to be material
weaknesses, the market price of our stock could decline, and we could be subject
to sanctions or investigations by the SEC or other regulatory authorities,
which
would require additional financial and management resources.
AS
THERE IS CURRENTLY ONLY A LIMITED MARKET FOR OUR COMMON STOCK, THE MARKET FOR
OUR COMMON STOCK MAY CONTINUE TO BE ILLIQUID, SPORADIC AND
VOLATILE.
There
is
currently only a limited market for our common stock, and as such, we anticipate
that such market will be illiquid, sporadic and subject to wide fluctuations
in
response to several factors moving forward, including, but not limited
to:
(1)
|
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, ask and closing prices) are entirely arbitrary, are
not
related to the actual value of the Company, and do not reflect the actual value
of our common stock (and in fact reflect a value that is much higher than the
actual value of our common stock). Shareholders and potential investors in
our
common stock should exercise caution before making an investment in the Company,
and should not rely on the publicly quoted or traded stock prices in determining
our common stock value, but should instead determine value of our common stock
based on the information contained in the Company's public reports, industry
information, and those business valuation methods commonly used to value private
companies.
INVESTORS
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.
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 changes
in
our internal control over financial reporting during our most recent fiscal
quarter that materially affected, or were reasonably likely to materially
affect, our internal control over financial reporting.
PART
II - OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
In
January 2007, we learned that certain of our former officers, Directors and
shareholders, had attempted to transfer shares of our common stock, which those
individuals had agreed to cancel in connection with the purchase of a majority
of the Company’s outstanding shares from those individuals by our current
officers, Directors and majority shareholders in April 2003. In February 2007,
we filed for a Temporary Restraining Order and Motion for Preliminary Injunction
against those individuals in the District Court of Clark County,
Nevada.
On
February 20, 2007, our Temporary Restraining Order and Motion for Preliminary
Injunction was heard by the District Court of Clark County, Nevada, and we
were
granted an indefinite injunction without a hearing by the court. As such, those
individuals who previously attempted to transfer and sell the shares which
they
held will be prevented from transferring or selling such shares until they
can
show good cause with the court why such indefinite injunction should be
lifted.
From
time
to time, we may become party to other litigation or other legal proceedings
that
we consider to be a part of the ordinary course of our business. We are not
currently involved in legal proceedings that could reasonably be expected to
have a material adverse effect on our business, prospects, financial condition
or results of operations, other than the proceeding described above. We may
become involved in material legal proceedings in the future.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES
In
April
2007, we issued 35,000 restricted shares of common stock to Uptick Capital
in
connection with the agreement with Uptick Capital entered into in January 2007
(as described above) for services rendered during the months of February, March,
April and half of May 2007. We claim an exemption from registration afforded
by
Section 4(2) of the Securities Act of 1933 since the foregoing issuance of
shares did not involve a public offering, the recipient took the shares for
investment and we took steps to restrict the transfer of the shares. No
underwriters or agents were involved in the foregoing issuance and no
underwriting discounts or commissions were paid by us.
In May
2007, Tim Peara, our Director, exercised 50,000 of the options he held to
purchase shares of our common stock at an exercise price of $0.30 per share.
Mr. Peara used the cashless exercise provision of the options and received
41,935 restricted shares of our common stock in connection with the
exercise of the options, based on the fair market value of the common stock
on
the date he exercised of $1.86. We claim an exemption from registration afforded
by Section 4(2) of the Securities Act of 1933 since the foregoing issuance
of
shares did not involve a public offering, the recipient took the
shares for investment and we took steps to restrict the transfer of the
shares. No underwriters or agents were involved in the foregoing issuance
and no underwriting discounts or commissions were paid by us.
In
May
2007, we issued 13,000 restricted shares of common stock to an individual,
Valdimir Orlov in partial payment of amounts owed to him in connection with
services rendered. 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
June
2007, we issued 70,000 shares of restricted common stock to our President,
Helen
Teplitskaia, of which 50,000 shares was a sign-on bonus in connection with
her
agreeing to be an officer of the Company in May 2007, and 20,000 shares were
part of her compensation package with the Company, whereby she is to be paid
10,000 shares per month for her service to the Company, which shares were issued
for services rendered in May and June 2007. 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
June
2007, Mr. Viktor Repin exercised 300,000 of the options he held to
purchase shares of our restricted common stock at an exercise price
of $1.00 per share and 400,000 of the options he held to
purchase shares of our restricted common stock at an
exercise price of $1.05 per share. Mr. Repin used the cashless exercise
provision of the options and received a total of 250,000 shares of our common
stock in the name of his nominee Sergei Tomnikov, in connection with the
exercise of the options, based on the fair market value of the common stock
on
the date he exercised of $1.60. 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
June
2007, LLC Business Standard exercised 800,000 of the options it held to purchase
shares of our restricted common stock at an exercise price of $1.05 per share.
Business Standard used the cashless exercise provision of the options and
received 275,000 shares of our common stock for it and its nominees in
connection with the exercise of the options, based on the fair market value
of
the common stock on the date he exercised of $1.60. 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 recipients 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.
On
June
30, 2007, in connection with our agreement with AEF, we agreed to grant AEF
a
warrant to purchase 55,233 shares of our common stock at an exercise price
of
$1.14 per share, which warrants contained a cashless feature. The warrants
expire three years from the grant date. We claim an exemption from registration
afforded by Section 4(2) of the Securities Act of 1933 since the foregoing
issuance of warrants did not involve a public offering, the recipient took
the
warrants for investment and we took steps to restrict the transfer of the
warrants. No underwriters or agents were involved in the foregoing grant and
no
underwriting discounts or commissions were paid by us.
In
July
2007, we issued an aggregate of 190,000 restricted shares of common stock to
David Zaikin, our Chief Executive Officer, and certain of his assigns, in
consideration for services rendered during the first two quarters of 2007.
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
July
2007, we issued an aggregate of 250,000 shares of restricted common stock to
Business Standard and its nominees in consideration as a six month bonus for
services rendered to the Company and its 50% owned Joint Venture,
Zauralneftegaz, Ltd., during the first two quarters of 2007. 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.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM
5. OTHER INFORMATION
On
or
around August 9, 2007, the Company’s Chief Executive Officer, David Zaikin,
entered into a Stock Purchase Agreement with LLC “Business Standard.” Pursuant
to the Stock Purchase Agreement, Mr. Zaikin agreed to purchase 400,000
restricted shares of the Company’s common stock from Business Standard, for
aggregate consideration of $500,000 or $1.25 per share. The closing date
of the
Stock Purchase Agreement is scheduled to occur on August 30, 2007, or at
such
other time as the parties agree.
Mr.
Zaikin entered into the Stock Purchase Agreement because he personally believes
that the Company’s common stock has significant value. None of the Company’s
officers and Directors are currently selling nor do they have any immediate
plans to sell any shares of the Company’s common stock.
ITEM
6. EXHIBITS AND REPORTS ON FORM 8-K
a)
Exhibits
Exhibit
No.
|
Description
of Exhibit
|
|
|
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 15 May 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)
|
Amendment
to the Employment Agreement Dated August 1, 2003, with Elena
Pochapski
|
|
|
10.19
(5)
|
Form
of Waiver Agreement
|
|
|
10.20(6)
|
Loan
Agreement between OOO Zauralneftegaz and Caspian Finance
Limited
|
|
|
10.21(6)
|
Deed
of Novation between Baltic Petroleum Limited, Caspian Finance Limited
and
OOO Zauralneftegaz
|
|
|
10.22(6)
|
Deed
of Release
|
|
|
10.23(6)
|
Release
of Pledge
|
|
|
10.24(6)
|
Guarantee
|
|
|
10.25(6)
|
Debenture
|
|
|
10.26(6)
|
Agreement
for the Pledge of the Participatory Interest in OOO Zauralneftegaz
(Russian translation removed)
|
|
|
10.27(6)
|
Sale
and Purchase Agreement
|
|
|
10.28(8)
|
Option
Agreement with Key Brokerage
|
|
|
10.29(8)
|
Warrant
Agreement with Key Brokerage
|
|
|
10.30(9)
|
July
26, 2006 Deed of Agreement
|
|
|
10.31(10)
|
Consulting
Agreement with Business Standard
|
|
|
10.32(11)
|
Addition
to the Loan Agreement of November 9, 2005
|
|
|
10.33(11)
|
Gross
Overriding Royalty Agreement
|
|
|
10.34(12)
|
Amendment
No. 2 to the Employment Agreement Dated August 1, 2003 with Elena
Pochapski
|
|
|
10.35*
|
Deed
of Variation to the Loan Agreement Dated 9th
of November
2005, Entered into in June 2007
|
|
|
31.1*
|
Certificate
of the Chief Executive Officer pursuant Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
|
31.2*
|
Certificate
of the Chief Financial Officer pursuant Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
|
32.1*
|
Certificate
of the Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
32.2*
|
Certificate
of the Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
99.1(7)
|
Glossary
|
*
Filed
herein.
(1)
Filed
as Exhibit 10.1, 10.2, 10.3, 10.4 and 10.5 to the Company's Form 8-K filed
with
the Commission on May 20, 2005, and incorporated herein by
reference.
(2)
Filed
as Exhibits to the Company's Form 8-K filed with the Commission on May 20,
2005,
and incorporated herein by reference.
(3)
Filed
as Exhibits to the Company's Report on Form 10-QSB, filed with the Commission
on
August 22, 2005, and incorporated herein by reference.
(4)
Filed
as Exhibits to the Company's Report on Form 8-K, filed with the Commission
on
October 28, 2005, and incorporated herein by reference.
(5)
Filed
as Exhibits to our Report on Form 10-QSB for the period ending September 31,
2005, which was filed with the Commission on November 21, 2005, and is
incorporated herein by reference.
(6)
Filed
as Exhibits to our Report on Form 8-K, filed with the Commission on December
2,
2005, and incorporated herein by reference.
(7)
Filed
as Exhibit 99.1 to our Report on Form 10-KSB for the year ended December 31,
2005, and incorporated herein by reference.
(8)
Filed
as Exhibits to our Report on Form 8-K, filed with the Commission on September
19, 2006, and incorporated herein by reference.
(9)
Filed
as an Exhibit to our Report on Form 10-QSB, filed with the Commission on
November 14, 2006, and incorporated herein by reference.
(10)
Filed as an Exhibit to our Form 8-K filed with the Commission on February 20,
2007, and incorporated herein by reference.
(11)
Filed as Exhibits to our Report on Form 10-KSB filed with the Commission on
February 2, 2007, and incorporated herein by reference.
(12)
Filed as an Exhibit to our Report on Form 10-QSB filed with the Commission
on
May 15, 2007, and incorporated herein by reference.
b)
Reports on Form 8-K:
We
filed
the following report on Form 8-K during the period covered by this
report:
o
|
On
July 31, 2007, we filed a Report on Form 8-K to report our filing
of a
press release regarding the status of the well drilled by ZNG on
the
Privolny license.
|
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:
August 14, 2007
|
By:
/s/ David Zaikin
|
|
David
Zaikin
|
|
Chief
Executive Officer
|