siberian10ksba123106.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-KSB/A
Amendment
No. 1
(Mark
One)
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[X]
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ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
fiscal year ended December 31, 2006
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[
]
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TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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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)
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NEVADA
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52-2207080
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(State
or other jurisdiction of
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(IRS
Employer Identification No.)
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incorporation
or organization)
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275 Madison Ave, 6th Floor,
New York, NY 10016
(Address
of principal executive offices)
(212)
828-3011
(Registrant's
telephone number)
Securities
registered under Section 12(b) of the Exchange Act:
NONE
Securities
registered under Section 12(g) of the Exchange Act:
NONE
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
[ ]
Subsequent
to the issuance of the Registrant’s 2006 and 2005 consolidated financial
statements, it was determined that the Registrant improperly discounted by 30%
the value of certain restricted common stock and common stock warrants issued
for professional services, accrued salaries, and the acquisition of geological
data during fiscal 2006 and 2005. This Amended Report on Form
10-KSB/A is being filed by the Registrant to remove the discount
factor. The accompanying financial statements, as described in
greater detail in footnote 13 to such financial statements, have been restated
to take into account the removal of such discount factor and the affect of the
removal of the discount factor has been affected throughout this amended report
where appropriate. Additionally, the Amended Report on Form 10-KSB/A
has been revised to correct a limited number of grammatical errors from the
original filing. All of the other sections of this Amended Report on
Form 10-KSB/A which were not impacted by the removal of such discount factor
remain the same as originally filed by the Registrant, and investors should
review the Registrant's most recent filings for updated information on the
operations and financial condition of the Registrant.
Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B not contained in this form, and no disclosure will be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes [ ] No [X].
The
issuer's revenues for the most recent fiscal year ended December 31, 2006 were
$360,000.
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the closing value of the Registrant's
common stock on March 22, 2007 was approximately $18,991,994.
As of
March 22, 2007, the issuer had 15,034,961 shares of common stock, $.001 par
value per share outstanding.
Documents
Incorporated by Reference: NONE
Transitional
Small Business Disclosure Format: Yes [ ] No [X]
SIBERIAN
ENERGY GROUP INC.
FORM
10-KSB/A
YEAR
ENDED DECEMBER 31, 2006
INDEX
Part
I
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Item
1. Description of Business
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4
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Item
2. Description of Property
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21 |
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Item
3. Legal Proceedings
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22
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Item
4. Submission of Matters to a Vote of Security Holders
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22
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Part
II
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Item
5. Market for Common Equity and Related Stockholder
Matters
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23
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Item
6. Management's Discussion and Analysis or Plan of
Operation
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26 |
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Item
7. Financial Statements F-1
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38
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Item
8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
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39
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Item
8A. Controls and Procedures
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39
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Item
8B. Other Information
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39
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Part
III
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Item
9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
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40
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Item
10. Executive Compensation
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48
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Item
11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
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56
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Item
12. Certain Relationships and Related Transactions
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60
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Item
13. Exhibits and Reports on Form 8-K 48 (a) Exhibits (b) Reports on Form
8-K
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63
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Item
14. Principal Accountant Fees and Services
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69
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PART
I
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
CERTAIN
STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-KSB/A (THIS "FORM
10-KSB/A "), INCLUDING STATEMENTS UNDER "ITEM 1. DESCRIPTION OF BUSINESS,"
AND "ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS", 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. AND KONDANEFTEGAZ, LLC, A RUSSIAN LIMITED LIABILITY, THE
REGISTRANT’S WHOLLY OWNED SUBSIDIARY, AND ZAURALNEFTEGAZ LIMITED, A COMPANY
ORGANIZED UNDER THE LAWS OF THE COUNTRY OF ENGLAND, WHICH THE REGISTRANT OWNS
50% OF (COLLECTIVELY "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-KSB/A , UNLESS ANOTHER DATE IS STATED, ARE TO DECEMBER 31,
2006.
Investors
should also take note of the fact that some of the more technical terms relating
to the Company's operations as described below are explained in greater detail
under exhibit 99.1, incorporated by reference hereto.
BUSINESS
DEVELOPMENT
Siberian
Energy Group Inc. was formed as a Nevada corporation on August 13, 1997, as
Advanced Rehab Technology Corporation. Subsequently, on March 9, 2001, the
Company changed its name to Talking Cards, Inc.; on February 12, 2002, the
Company changed its name to Oysterking Incorporated; on December 3, 2002, the
Company changed its name to 17388 Corporation Inc., at which point the
controlling interest of the Company was sold and a new board of directors was
appointed; on May 5, 2003, the Company changed its name to Trans Energy Group
Inc.; and on December 3, 2003, the Company changed its name to Siberian Energy
Group Inc.
On
September 17, 1999, the Company affected a 1-for-30 reverse stock split. A
subsequent 3-for-1 forward split was consummated on October 2, 2000. All share
amounts subsequently listed are retroactively adjusted to reflect these stock
splits unless otherwise provided. All activities related to the Company's
business were discontinued prior to January 1, 2000 and the Company began
looking for opportunities to acquire an operating business.
In the
spring of 2003, the balance of the Company's shares was purchased by new
shareholders who stepped into the management of the Company and defined its new
business direction as an oil and gas exploration company. In contemplation of
the Company's acquisition of a Russian oil and gas exploration company, the
Company changed its name to Trans Energy Group, Inc.
On May 9,
2003, the Company entered into an Acquisition Agreement (the "Acquisition
Agreement") by and among the Company, Zaural Neftegaz, a Russian corporation
("ZNG"), the shareholders of ZNG and Oleg Zhuravlev, President of ZNG. Pursuant
to the Acquisition Agreement, the Company acquired a 51% interest in ZNG by
issuing to ZNG 2,000,000 shares of the Company's common stock. In June 2004, the
Company purchased the remaining 49% of ZNG in exchange for 6,900,000 shares of
the Company's common stock, making ZNG a wholly owned subsidiary of the Company.
ZNG holds seven (7) oil and gas licenses (see "Patents, Trademarks and Licenses"
below) for the rights to prospect, explore, drill and remove oil and gas (the
"Exploration Rights") in the eastern parts of Kurgan Province in Russia. The
Company had no affiliation with ZNG prior to the acquisition in May
2003.
On May 2,
2005, the Company affected a 1:2 reverse stock split and all share amounts
listed throughout this report on Form 10-KSB/A reflect such split unless
otherwise stated.
In April
2005, the Company’s Board of Directors adopted Amended Bylaws of the Company,
which Amended Bylaws are attached hereto as Exhibit 3.9.
All
dollar amounts used throughout this Report are in United States dollars, unless
otherwise stated. All amounts in Canadian dollars used throughout this Report
are proceeded by CDN, for example CDN $500, is referring to $500 Canadian
dollars.
On
December 13, 2006, we entered into an Interest Purchase Agreement with Key
Brokerage LLC (“Key Brokerage”), pursuant to which we purchased 100% of the
issued and outstanding common stock of Kondaneftegaz LLC, a Russian limited
liability company (“KNG”), which Interest Purchase Agreement is described in
greater detail below under “Description of KNG.”
BUSINESS
OPERATIONS
We are a
development stage company, which is seeking opportunities for investment in
and/or acquisition of small to medium companies in Russia, specifically in the
oil and gas industry. We are currently evaluating investment and joint venture
opportunities throughout Russia.
Until
October 14, 2005, the Company's operations were conducted solely through its
then wholly owned subsidiary, Zaural Neftegaz ("ZNG") a development stage oil
and gas exploration company located in the Western Siberian Region of Russia.
However, on October 14, 2005, the Company entered into a Joint Venture
agreement, whereby the Company transferred 100% of the ownership of ZNG to a
newly formed Joint Venture company, Zauralneftegaz Limited ("ZNG, Ltd."), of
which the Company owns 50% pursuant to the Joint Venture agreement entered into
on October 14, 2005 (as described in greater detail below under Joint Venture
Agreement). 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 second or third quarter 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 are receiving 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.
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 consideration for the purchase of the Geological Data and stock of KNG,
the Company paid the following consideration consisting of restricted common
shares and stock warrants:
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Restricted
common shares issued to Seller
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1,900,000
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Restricted
common shares issued to an adviser
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(value
included in accounts payable at
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December
31, 2006; shares issued in early 2007)
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200,000
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Total
restricted common shares issued
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2,100,000
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Stock
warrants issued to Seller September 14, 2006 for purchase
option
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250,000
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As a
result of the purchase, a calculated acquisition value of $3,928,000 was
assigned to the Geological Data that was considered the approximate market value
of the stock issued ($1.75) on the transaction date. The total
value of purchased assets consisted of $3,675,000 assigned to the shares issued
and $253,000 assigned to stock warrants issued. Additionally, to
facilitate the transactions, the Company’s management and KNG considered the
results of a good faith valuation of assets prepared by a Russian consultant,
who attempted to determine an “arms length fair value” price of such
assets. However, management did not rely on this valuation, and
assumes full responsibility for the value assigned in the
acquisition.
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
second quarter of 2007. We also believe four other license areas will be
auctioned off during the third or fourth quarter of 2007; however, the remaining
other auction/tender dates are currently undetermined.
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.
Brief
characteristics of the three new blocks are given below:
Yuzhno-Voskresensky
Block
Total
area approximately 130,000 acres (520 square kilometers)
The
Yuzhno-Voskresensky block is located in the
Kurgan region of Russia, 10-40 kilometers (“km”) to the west of the center of
the administrative region Chastoozerye.
The
territory of the block has significant prior exploration data. The area is
covered by a geological survey (1:200,000 scale), a gravimetric survey
(1:100,000 scale), and an aeromagnetic survey (1:50,000 scale). From 1979 to
1980, seismic surveys were carried out on the block implementing refraction
sounding and deep seismic sounding methods, which partially covered the block
area. Regional seismic profiling and 2D seismic surveys and seismic reflection
method were also performed here. Additionally, three parametric wells along the
Kurgan regional geological and geophysical profile have been drilled during the
prior initial exploration works. ZNG has obtained the source geological data
from these wells.
Through
these studies, two structures were identified and the placement of wildcat wells
with the purpose of uncovering and testing of oil-source rocks was
determined.
Petukhovsky
Block
Total
area approximately 208,000 acres (840 square kilometers)
The
Petukhovsky block is located between the towns of Makushino and Petukhovo,
Russia, further to the south of the Kurgan Region boundary.
Prior
exploration works on the block are represented by a general geological survey
(1:200,000 scale). From 1979 to 1980, seismic surveys were carried out by
refraction sounding and deep seismic sounding methods, which partially covered
the block area. The Kurgan regional seismic profile crosses the block and to the
Southwest of the block is Sukhmensky regional seismic profile acquired by
seismic reflection and correlation refraction methods.
Four deep
cored wells drilled both in the territory of the block and in the adjacent areas
provide an idea of the geological structure of the block.
Lebyazhevsky
Block
Total
area 42,000 acres (170 square kilometers)
The
Lebyazhevsky block, with a total area of 170 square kilometers (approximately
43,990 acres), is located in the Kurgan Region, of Siberia, Russia, 13-22 km to
the South-East of the center of administrative region of Lebyazhye.
The block
is covered by a general geological survey (1:200,000 scale), gravimetric survey
(1:100,000 scale), aeromagnetic survey (1:50,000 scale) and partially by seismic
surveys by common-midpoint (CMP) and seismic reflection method.
------------------------------------------------
The
acquisition of the three new licenses increased the total area covered by the
licenses held by ZNG from 643,000 acres to over 1 million acres. All seven
licensed areas are located in the Eastern part of Kurgan region, have
well-developed infrastructure, including close proximity to the major oil
pipeline, and have available existing prior geological data.
ZNG also
has outstanding applications for two more parcels in the same area -
Zapadno-Petukhovsky and Orlovo-Pashkovsky-2. Auctions for these licenses are
expected to take place in the second quarter of 2007; however, there can
be no assurance that ZNG will be awarded the licenses to the parcels at
auction.
Following
detailed data collection, survey and seismic testing, ZNG will proceed with
development of the most promising licenses first. As of March 2007, ZNG has
performed the following research and exploration works on its licensed
areas:
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Obtained core samples from parametric wells drilled in prior years on the
licensed areas and adjacent territories in the Eastern part of Kurgan region
during the initial search for oil and gas in the region, and performed analysis
of the data provided by the samples.
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Completed a 2D seismic survey on the West-Suersky block (approximately 320
linear kilometers), the Privolny block (approximately 140 linear kilometers),
and the Mokrousovky block (approximately 340 linear kilometers) using
Bazneftgeophisica.
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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-Pashkovky, South-Voskresensky, Petukhovsky and Lebyazhevsky blocks, which
surveys are currently continuing on the other 5 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, two robust drilling prospects have been identified in the
northern part of the Privolny block.
-Drilling
of the first prospect on the Privolny block has commenced as of the date of this
filing. The “Privolny-1” well is intended to provide physical data to enable the
seismic survey to be correlated to the geology and to better determine the
subsurface structures in the licensed block. We believe that this will give ZNG
the ability to further analyze the block and eventually drill at least two more
exploration wells. We expect to see a geological update in approximately 45 to
60 days, which period of time is needed to drill and process data of the
approximately 2,000 meter deep well.
JOINT
VENTURE
On
October 14, 2005, the Company entered into a Joint Venture Shareholders'
Agreement ("Joint Venture") with Baltic Petroleum (E&P) Limited ("BP" or
"Baltic") and Zauralneftegaz Limited, the joint venture company ("ZNG, Ltd."),
as contemplated by the Option Agreement, as amended (the "Option"). The Company
closed the Joint Venture and transferred 100% of the outstanding stock of ZNG to
ZNG, Ltd. in connection with the terms and conditions of the Joint Venture. As a
result of such transfer, the Company holds 50% of the outstanding stock of ZNG,
Ltd., which holds 100% of the outstanding stock of the Company's former wholly
owned subsidiary, ZNG. ZNG, Ltd., will, operate through ZNG and be engaged in
the exploration and development of, production and sale of, oil and gas assets
in the Western Siberian region of the Russian Federation and the former Soviet
Union and as a result of such transfer, the Company no longer has any separate
oil and gas exploration activities in Kurgan, Russia, other than through its
ownership of ZNG, Ltd.
On
November 9, 2005, ZNG entered into a New Loan with Caspian (the "New Loan").
Under the loan agreement, Caspian Finance Limited ("Caspian") agreed to provide
a loan of up to $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 entered into an
“Addition to the Loan Agreement of November 9, 2005,” with Caspian,
whereby ZNG agreed to increase the amount of the New Loan from $6,874,325
to $8,874,325 under the same terms and conditions as the New Loan. The New Loan
had a total outstanding balance, including principal and accrued interest of
$8,178,303 as of March 20, 2007.
Interest
on any amounts loaned under the New Loan bears interest at the following rates,
calculated and accrued on a daily basis, 14% per annum during the first two
years of the Term, 13% per annum during the third year of the Term; and 12%
thereafter until the end of the Term. In the event that ZNG does not make the
Interest Payments when due, interest on the unpaid amounts shall be payable from
the due date to the date paid at the rate of 6% per annum, calculated and
accrued on a daily basis. The New Loan is unsecured by ZNG, but Caspian reserved
the right to request security over all or some of the assets and/or undertaking
of ZNG at any time prior to any drawdown of the New Loan, or while any money is
outstanding under the New Loan.
Pursuant
to the New Loan, ZNG is responsible for satisfying all requirements of Russian
Federation law and regulations in connection with each advance made under the
New Loan, and ZNG shall indemnify Caspian for any loss or damage it may suffer
as a result of the New Loan.
The New
Loan provided for the payment of certain debts of ZNG, which were incurred
before the Joint Venture. Payments under the New Loan will include:
1) $352,665 which was paid upon the
Company signing the loan agreement, which was used for:
|
o
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payment
of salaries of ZNG for August and September ($32,000);
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o
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payment
of 50% of the amount of directors’ and shareholders’ loans
($170,000);
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o
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50%
of outstanding rent payments ($44,000);
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o
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mineral
tax for the second quarter of 2005 ($3,865); and
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o
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$102,800
for gathering and coordination of data in respect to the new licenses ZNG
has recently applied for.
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2) $882,699 which was paid upon the
Company receiving licenses to the two additional license blocks which were
received during the year ended December 31, 2006, which was spent as
follows:
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o
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further
payment for gathering and coordination of data in connection with the new
licenses (up to $340,000);
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o
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final
payments for seismic and gravimetric works performed on the West-Suerski
field (up to $324,834);
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o
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to
repay the remaining amounts owed by ZNG to directors and shareholders
($170,000);
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o
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to
pay the remaining amount of outstanding rent payments ($44,000);
and
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o
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to
pay mineral tax for the third quarter of 2005
($3,865).
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In
addition to the amounts agreed to be loaned pursuant to the New Loan, ZNG Ltd.
agreed to lend $78,000 to the Company to pay for legal and consulting services
in connection with establishing of the Joint Venture. The Company received
$29,000 of this amount in November 2005; and the additional $49,000 will be paid
after ZNG submits a letter from the relevant license authority of the Ministry
of Natural resources of the Russian Federation confirming that five new licenses
were awarded to ZNG, of which three have been awarded to date. There is no
assurance the additional two licenses will be awarded to ZNG.
On
November 9, 2005, ZNG, Ltd. and Caspian entered into a Debenture, whereby ZNG,
Ltd. granted Caspian a security interest in substantially all of its assets,
including its 100% ownership of ZNG, to secure the repayment of the New Loan
Agreement. Pursuant to the Debenture, ZNG, Ltd. granted Caspian a continuing
security interest for the payment, performance and discharge of all 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.
AGREEMENT
WITH ALTERNATIVE ENERGY FINANCE, LTD.
We
previously agreed to issue Alternative Energy Finance Ltd. ("AEF"), of which Tim
Peara is the Managing Director as well as a Director of the Company, certain
warrants in connection with Mr. Peara introducing the parties who formed the
joint venture. Pursuant to an agreement between AEF and the Company, AEF will
receive compensation based on the total investment made by Baltic Petroleum Ltd.
in the Joint Venture. This compensation included a commission of approximately
$18,024 (1% of Baltic's first $1,802,441 investment in the Joint Venture), which
amount has not been paid as of the date of this filing, and 50,068 options to
purchase shares of our common stock at $0.63 per share which were granted to Mr.
Peara on March 6, 2006 and a commission of $6,673 (1% of Baltic's $667,313
investment in the Joint Venture in the first quarter of 2006), which amount has
not been paid to AEF to date and 17,561 options to purchase shares of our common
stock at $0.67 per share for the first quarter of 2006, which were granted to
Mr. Peara on March 31, 2006, which options contain a cashless exercise
provision.
On June
30, 2006, in connection with our agreement with AEF, we agreed to grant AEF a
warrant to purchase 20,412 shares of our common stock at an exercise price of
$2.02, which warrants contained a cashless exercise feature. The warrants expire
three years from the grant date. We were also obligated to pay AEF $23,562
during the quarter ended June 30, 2006 (equal to 1% of Baltic's $2,356,153
investment in the Joint Venture in the second quarter 2006), which amount has
not been paid to AEF to date.
On
September 30, 2006, in connection with our agreement with AEF, we agreed to
grant AEF a warrant to purchase 20,952 shares of our common stock at an exercise
price of $1.53 per share, which warrants contained a cashless exercise feature.
The warrants expire three years from the grant date. We were also obligated to
pay AEF $18,303 during the quarter ended September 30, 2006 (equal to 1% of
Baltic's $1,830,292 investment in the Joint Venture in the third quarter of
2006), which amount has not been paid to AEF to date.
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 obliged 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); which amount has not been paid to date.
As of
December 31, 2006, we owed approximately $98,066 to AEF in connection with AEF's
introduction of the parties of the Joint Venture, as described above, $60,209 to
Mr. Peara in accrued Directors fees and approximately $4,703 to Mr. Peara in
various travel related expenses.
RECENT
EVENTS
SEISMIC INTERPRETATION ON
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:
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One
structural prospect has been 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.
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A
drilling location has been recommended by RPS for the prospect,
based
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on
the strong structure and geochemical coincidence, which drilling has not
begun to date.
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DRILLING ON THE PRIVOLNY
BLOCK
Drilling
of the first prospect located in the Privolny block had commenced as of
the original filing date of this report. 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. ZNG believes that this will provide an improved analysis
to create a work program including the drilling of at least two more exploration
wells. ZNG expects to provide a geological update in 45 to 60 days, which period
of time is needed to drill and process data from the 2,000 meter deep
well.
ZNG's
Board of Directors decided to drill up to four exploration wells in connection
with the recent Seismotomographic surveys and high definition 2D seismic shot
over geochemical anomalies in Privolny and Mokrousovsky blocks. At least two of
these wells are proposed to be drilled in northern locations in the Privolny
block and the other two wells are proposed to be drilled on the Mokrousovsky
block.
In the
event that the wells prove successful in establishing the presence of
hydrocarbons, of which there can be no assurance, the Board of Directors of ZNG
intends that production testing will be supervised by a leading firm of
reservoir evaluation consultants and the Board will then determine the most
appropriate means of commercializing the license blocks.
The total
budget for the exploration program and further seismic studies, which the Board
has proposed to shoot on ZNG's Lebyazhevsky licensed block, totals approximately
8 million British pounds or $15 million US dollars. The funds were raised by
BP's parent via a placement of shares. ZNG is currently entering into new loan
agreements covering such funds. 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.”
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:
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$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;
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$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
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$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.
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The Deed
of Agreement also contemplated ZNG's entry into a further loan agreement with
Caspian (assuming Caspian is able to raise such financing on terms acceptable to
BP), substantially with the same terms as the New Loan (other than due dates and
interest amounts), whereby Caspian would provide ZNG funds for seismic drilling
and work programs of approximately $12,000,000 (the "Additional
Loan").
The Deed
of Agreement also provided that upon the entry into the Additional Loan, we, BP
and ZNG will enter into a gross override royalty agreement, whereby ZNG will
grant a gross override royalty ("GOR") to BP equal to 3% of the gross turnover
on all production of oil and gas at the wellhead in Kurgan by ZNG until BP has
received in aggregate $20,000,000 from such GOR (the "GOR Sum"). In December
2006, ZNG entered into a Gross Overriding Royalty Agreement with Baltic, which
is described in greater detail below.
On
January 16, 2007, ZNG entered into an “Addition to the Loan Agreement of
November 9, 2005,” with Caspian, whereby Caspian agreed to increase the amount
of the New Loan from $6,874,325 to $8,874,325 under the same terms and
conditions as the New Loan. The increase in the new loan was intended to allow
continuous cash flow to ZNG for its operating needs during the first two
quarters of 2007 until the companies enter into the anticipated loan agreements
to finance the current program of seismic studies and drilling of the first four
(4) planned wells in ZNG's license blocks, two of which are planned for
2007.
Baltic
agreed to pay additional fees of $300,000 in connection with consulting services
rendered in connection with the acquisition of the licenses by ZNG during the
year ended December 31, 2006. The $300,000 expense was added to the total
amounts loaned by Baltic to the Joint Venture.
CONSULTING
AGREEMENT WITH BUSINESS STANDARD
On
January 25, 2007, our Board of Directors took action to ratify the Company’s
entry into a Consulting Agreement with Business Standard, a Russian company (the
“Consulting Agreement”), which Consulting Agreement provides for Business
Standard to provide us certain consulting services in connection with
investigating financing opportunities, assisting in the Company's day to day
business management, assisting in negotiations with potential investment
partners, as well as assisting in the application for oil and gas exploration
and production licenses by our wholly owned subsidiary KNG or current and
potential investee companies in the Western Siberia region of Russia. We
agreed to pay Business Standard $15,000 per month pursuant to the Consulting
Agreement and also agreed to issue Business Standard 200,000 shares of our
restricted common stock as a signing bonus in connection with its entry into the
Consulting Agreement and 200,000 restricted shares of common stock in connection
with the acquisition of KNG. The Consulting Agreement ends on December 31, 2007,
but is automatically extended for additional one (1) year terms unless either
party communicates its desire to terminate the agreement to the other party
fifteen (15) days prior to the end of the then current term.
Also 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.
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 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 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.
Estimate
of Amount of Time Spent On Research and Development
An
initial business plan was developed over the course of three months in 2003.
During that time period, market research was conducted. Research and development
activities on the licensed blocks in the Kurgan Region were directly borne by
the Company up to the time the Joint Venture was closed in October 2005. As a
result of the closing of the Joint Venture, these research and development costs
are now paid by both by ZNG, Ltd. (as described above) and ZNG. Research
activities include gravimetric, seismic works and seismotomography studies on
the licensed areas. Costs incurred by ZNG and ZNG Ltd. in connection with these
studies as of December 31, 2006 totaled approximately $4,145,000. Furthermore,
moving forward we expect additional research and development costs will be paid
by us in connection with our exploration of any of the blocks that KNG may
obtain at auction in the future, of which there can be no
assurance.
Employees
Siberian
Energy Group Inc. currently employs two (2) employees in management. Zaural
Neftegaz ("ZNG"), which is 50% owned by the Company through its joint venture
ZNG, Ltd., employs nineteen (19) full-time employees and one (1) part-time
employee. KNG, which we purchased in December 2006 has two (2) part-time
employees.
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. For the cumulative period ended
December 31, 2006, 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. 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.
Competition
Given the
recent boom in the Russian oil industry, there has been an increase in interest
and activity in the Western Siberian basin. In September 2003, a competitive bid
process for eleven newly-opened exploration blocks was held in the Tyumen
region, immediately north of Kurgan. Ten of the blocks were awarded to seven
companies. The total value of the purchases was over $2,400,000. The closest of
these blocks lies within 60 miles of the licensed areas covered by ZNG’s blocks,
with the majority of the blocks lying within 120 miles of these areas. While
additional blocks have recently sold in areas surrounding ZNG's blocks, this
does not imply that ZNG or KNG (assuming it is awarded the licenses for which it
has applied) are anymore likely to find hydrocarbon reserves and it has no
bearing on the future success of the Company's development or exploration
efforts in Western Siberia.
Competition
among Russian producers occurs in two distinct tiers. The first tier includes
large corporations such as Surgutneftegaz, LUKoil, Sibneft, Tatneft, Slaveft,
YUKOS, TNK, Bashneft, Rosneft and Sidanco which together control more than 90%
of the Russian oil and gas market. These companies operate large-scale fields
and are primarily oriented towards exportation. The second tier, so called
junior players, includes a large number of smaller companies that operate small
and medium sized oil and gas fields. These companies enjoy a limited but stable
range of customers within Russia's domestic market, and their customers include
the larger companies which purchase this product for export. Like other junior
players, the Company believes it has potential to succeed given that demand for
oil continues to exceed supply both domestically and
internationally.
A healthy
level of competition currently exists among local oil service companies and
recent reductions in demand for their services are leading to a surplus of
supply. The Company believes that having the wide range of service companies
within such close proximity creates an opportunity for ZNG (and KNG, if it is
granted exploration licenses at auction, of which there can be no assurance) to
choose the best combination of price and quality while signing the service
contract, due to the fact that service companies may compete with each other for
providing exploration, drilling and other services to ZNG and/or
KNG.
Additionally,
the Company believes ZNG's geographic location presents a significant
competitive advantage that should provide for cost reductions in the development
of its fields and the necessary support infrastructure. The specific factors
contributing to this competitive advantage include:
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The
relatively flat topography which is dry and bog free;
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Non
permafrost lands which reduce drilling costs;
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Significantly
short distances to major pipelines which reduce the time and cost of
installing the collector infrastructure from the wells to the main
pipelines; and
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Proximity
to main railroads and highways which allow for greater and easier access
to the producing site as well as for initial delivery of
product.
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We
believe that KNG’s license areas, which KNG has applied for, have the following
advantages:
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the
licenses are within existing oil deposits;
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the
licenses are close to a previously developed river transportation system
on the Ob river and the North Sosva river, close to the river port of
Igrim, through which KNG will be able to deliver equipment for the
wells,
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the
licensed blocks for which KNG applied are close to other developed
deposits; and
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the
blocks are close to major oil and gas
pipelines.
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Another
type of competition, which ZNG and KNG expect to face is competition in the
process of acquisition of new licenses. The Company expects that competitive
pressures will further increase if hydrocarbon reservoirs are found in the
Kurgan province and/or Khanty-Mansiysk district of Western Siberia, Russia.
However, the Company believes that by the time new parcels become available for
distribution in this region, the Company will have an advantage over companies
with less experience in the region. The Company believes this will be due to its
acquired experience and through the expertise of its employees, of which there
can be no assurance. Many of the Company’s directors and officers have many
years of experience in the oil and gas industry, specifically in the
West-Siberian Basin. Additionally, the Company feels that it will have a
competitive advantage because many of its Directors and employees reside in the
West-Siberian Basin and are dedicated to developing the local
infrastructure.
Dependence
on One or A Few Major Customers
The
nature of the oil industry is not based on individual customers. Crude and
refined products are sold to local and international brokers as well as to
refineries.
Patents,
Trademarks and Licenses
ZNG holds
seven licenses to explore seven individual properties in the Kurgan province of
Russia. These licenses require ZNG to conduct seismic surveys on the properties
and to report any discoveries to the regional government. The licenses are
currently classified as 5-year exploration licenses and are convertible to
25-year production licenses upon discovery of hydrocarbon reserves. ZNG also has
pending applications for two additional licenses, which we believe will be
auctioned off in 2007.
KNG has
applied for 15 licenses in Western Siberia, Russia, four of which we
believe will be auctioned off during the second quarter of 2007, with no
date currently planned for the remaining auctions as of the date of this
filing.
Need
For Government Approval
Federal
and local government approval will not be required for conversion of exploration
licenses to production licenses and for extension of licenses beyond their
initial term. The Company has already received approval for its exploration
licenses, however, additional approval is required if the Company is to deliver
its crude or refined products on the national pipeline system. These approvals
can only be guaranteed once the Company has proved reserves. Alternatively, the
Company has also developed plans to deliver crude and product by truck and via
rail transport for the early years if there are any delays in gaining pipeline
approval, and the Company finds hydrocarbon reserves, of which there can be no
assurance.
Additionally,
under new federal laws the Company does not require the approval of state and/or
federal agencies for conversion of the Company's exploration licenses to
production licenses and extension of production licenses beyond their initial
term as they automatically convert to 25 year production licenses upon the
discovery of oil and gas, of which the Company provides no
assurance.
Costs and Effects of Compliance with
Environmental Laws
According
to the laws and regulations of the Russian Federation, organizations are
permitted to carry out seismic and other development activities on licensed
fields, provided the companies conform to ecological standards. Accordingly, ZNG
and KNG have encountered two costs associated with environmental law compliance:
costs associated with obtaining licenses and costs associated with obtaining
permission from the Russian Ministry of Natural Resources (the "Ministry").
These costs have totaled approximately $183,000, which includes $2,000 relating
to the ecological review by the Ministry and $181,000 in legal costs and fees to
obtain the Company's licenses. ZNG has successfully passed a review by the
Ministry.
The
Company will face additional costs to comply with environmental laws, which may
be significant. In addition, the Ministry imposes certain environmental
obligations on the Company, such as clean-up procedures.
ITEM 2. DESCRIPTION OF
PROPERTY
The
Company's United States office is located at 275 Madison Avenue, 6th Floor, New
York, New York 10016, USA. The lease is at a monthly rate of $250 and is on a
year to year basis and is renewable on March 30, 2007, which lease we currently
plan to renew. This space is leased from Office Escape, an operator of business
centers in New York and other United States cities. The Company is not the sole
occupant of the space and consequently the cost of the rental is shared with
other occupants. The Company does not use the office for any purposes falling
outside of its business needs.
The
Company rents office space in Toronto, Ontario, Canada. The term of the lease on
the Canadian office space was from January 1, 2005 until December 31, 2005, and
the Company had an option to renew the lease for an additional five (5) years on
a year to year basis. The Company renewed the office space for the period from
January 1, 2007 until December 31, 2007. The monthly rental fee under the
Canadian office space lease is currently $1,240. The rental amounts under years
four through five of the lease are approximately $1,423.10 per month for year
four, and $1,476.60 per month for year five. The office space encompasses
approximately 370 square feet of office space.
KNG
currently rents office space in Khanty-Mansiysk City, Russia, under a one year
lease expiring in December 2007, at a monthly rental cost of approximately $80
per month.
ITEM 3. 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 4. SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS
The
Company had no matters submitted to a vote of security holders during the fiscal
quarter ended December 31, 2006.
PART
II
ITEM 5. MARKET FOR COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
On March
22, 2005, the Company's common stock began trading on the OTC Bulletin Board
under the symbol "SIBE." Effective May 2, 2005, in connection with the Company's
1:2 reverse stock split, the Company's common stock began trading under the
symbol "SIBN." We had 1,526,500 shares of common stock subject to outstanding
options and warrants to purchase, or securities convertible into, the Company's
common stock as of December 31, 2006. We have no outstanding shares of preferred
stock. As of March 22, 2007 there were 15,034,996 shares of common stock
outstanding, held by approximately 125 shareholders of record.
The
following table sets forth the high and low bid prices for the Company's common
stock for the periods indicated as reported by the NASDAQ OTC-Bulletin Board.
The quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
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Bid
Prices*
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Quarter
Ended(1)
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High
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Low
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December
31, 2006
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$2.40
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$1.15
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September
30, 2006
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$3.65
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$1.80
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June
30, 2006
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$9.00
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$1.00
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March
31, 2006
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$1.30
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$0.65
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December
31, 2005
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$2.70
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$0.80
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September
30, 2005
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$2.10
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$0.30
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June
30, 2005(2)
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$5.00
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$0.10
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(1) The
earliest available bid and ask prices for the Company's common stock on the
Over-The-Counter Bulletin Board as of the filing of this annual report on Form
10-KSB/A was for the period ending June 30, 2005.
(2) The
Company affected a 1 for 2 reverse stock split effective May 2, 2005, which
reverse split is retroactively affected for the bid and ask prices for the
quarter ended June 30, 2005.
RECENT
SALES OF UNREGISTERED SECURITIES
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), which amount has not been paid to AEF to 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.
On
November 17, 2006, we issued 35,000 shares of our restricted common stock to
Investor Relations Group Inc., in consideration for investor relations services
rendered. 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.
On
December 26, 2006, we issued 1,900,000 restricted shares of common stock to Key
Brokerage in consideration for the purchase of KNG (as described above). 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.
On
December 29, 2006, we issued 52,500 shares of common stock to our Chief
Executive Officer, David Zaikin, in consideration for and in connection with Mr.
Zaikin’s exercise of 52,500 of his 2006 stock options to purchase shares of our
common stock at an exercise price of $0.60 per share. 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.
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 obliged 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); which amount has not been paid to 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.
On
January 25, 2007, our Board of Directors approved the issuance of an aggregate
of 465,000 shares of our restricted common stock to our current officers and
Directors in consideration for services rendered to the Company during the year
ended December 31, 2006, as follows:
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350,000
shares of our restricted common stock to David Zaikin, our Chief Executive
Officer and Director 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;
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50,000
shares of our restricted common stock to Elena Pochapski, our Chief
Financial Officer and Director as a bonus for her services rendered during
the year ended December 31, 2006;
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20,000
shares of our restricted common stock to Timothy Peara, our Director, as a
bonus for his services rendered during the year ended December 31,
2006;
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25,000
shares of our restricted common stock to Oleg Zhuravlev, our Director, as
a bonus for his services rendered during the year ended December 31,
2006;
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10,000
shares of our restricted common stock to Vladimir Eret, our Director, as a
bonus for his services rendered during the year ended December 31, 2006;
and
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10,000
shares of our restricted common stock to Sergei Potapov, our Director, as
a bonus for his services rendered during the year ended December 31,
2006.
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We claim
an exemption from registration afforded by Section 4(2) of the Securities Act of
1933 since the foregoing issuances of shares did not involve a public offering,
the recipients 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
issuances and no underwriting discounts or commissions were paid by
us.
On
January 25, 2007, in connection with our ratification of the Business Standard
Consulting Agreement, we approved the issuance of an aggregate of 400,000 shares
of our restricted common stock to Business Standard in consideration for
Business Standard’s entry into the Consulting Agreement and in consideration for
Business Standard’s services rendered to us in connection with our acquisition
of Kondaneftegaz. 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.
Also on
January 25, 2007, we approved the issuance of 20,000 shares of our restricted
common stock to Lyudmila Shirko, in consideration for services rendered to us in
connection with our operations during the year ended December 31, 2006. 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.
On
January 31, 2007, we issued 20,000 share of our restricted common stock to
Investor Relations Group Inc., in consideration for investor relations services
rendered. 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.
On
February 15, 2007, the Board of Directors agreed to issue 4,000 restricted
shares of the Company's common stock to Ann L. Stephenson Group, in
consideration of investor relations services rendered to the Company in January
2007, and 3,000 restricted shares of common stock to Friedland Capital, in
connection with the Company's participation at Friedland's New York investment
conference in 2007. We claim an exemption from registration afforded by
Section 4(2) of the Securities Act of 1933 since the foregoing issuances of
shares did not involve a public offering, the recipients 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 issuances and no
underwriting discounts or commissions were paid by us.
ITEM 6. MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THIS
REPORT CONTAINS FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF
THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF
1934. THESE FORWARD LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
HISTORICAL RESULTS OR ANTICIPATED RESULTS, INCLUDING THOSE SET FORTH UNDER "RISK
FACTORS" IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" AND ELSEWHERE IN THIS REPORT. THE FOLLOWING DISCUSSION
AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH "SELECTED FINANCIAL DATA" AND
THE COMPANY'S FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS
REPORT.
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
original filing date of this report on Form 10-KSB, 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. The Company, however, can make no assurance that $55,000 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 $362,166 and $328,376 were
payable to the stockholders as of December 31, 2006 and December 31, 2005,
respectively. However, there can be no certainty as to the availability of
continued financing in the future. Failure to obtain sufficient financing may
require us to reduce our operating activities. A failure to continue as a going
concern would then require stated amounts of assets and liabilities to be
reflected on a liquidation basis which could differ from the going concern
basis.
COMPARISON
OF OPERATING RESULTS
RESULTS
OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2006, COMPARED TO THE YEAR ENDED
DECEMBER 31, 2005
We had
revenues and other income of $360,000 for the year ended December 31, 2006,
which was solely due to $25,000 of monthly management fees received from ZNG,
Ltd. from January 2006 to November 2006, at which time the management fees
increased to $55,000 per month. We had $445,861 of revenue and other income for
the year ended December 31, 2005, due to $75,000 of management fees, $364,479 in
gain from entry into the Joint Venture with ZNG, Ltd. which Joint Venture
adjusted our negative investment in ZNG to zero as of the effective date of the
Joint Venture, and $6,382 of other revenues. Revenues decreased $85,861 or 19.3%
for the year ended December 31, 2006, compared to the year ended December 31,
2005, which decrease was mainly due to the $364,479 gain on our entry into the
Joint Venture with ZNG, Ltd. during the year ended December 31, 2005, which
revenues were not present during the year ended December 31, 2006.
We have
not generated any revenues to date through the sale of oil and/or
gas.
We had
total expenses of $4,432,788 for the year ended December 31, 2006, compared to
total expenses for the year ended December 31, 2005, of $1,599,547, which
represented an increase in total expenses from the prior period of $2,833,241 or
177%.
Total
expenses for the year ended December 31, 2006, included $1,091,820 of salaries;
$2,431,841 of professional and consulting fees, including amounts paid to our
legal counsel and accountant in connection with the preparation and filing of
our annual report on Form 10-KSB and 10-QSB, and certain warrants and shares
granted for professional services during the year ended December 31, 2006;
$39,698 in rent and occupancy; $337 of depreciation and amortization; $49,369 of
finance charges and interest, attributable to interest paid on the advances we
received from BP and other loans; and $819,723 of other expenses, including
marketing and advertising in connection with road shows, various general and
administration expenses relating to the day to day operations of the Company,
travel and hotel expenses in connection with the research on potential business
acquisitions, and the value of shares of common stock issued for investor
relations services rendered.
The
$1,091,820 of salaries for the year ended December 31, 2006, included
approximately $177,920 which was attributable to our Chief Financial Officer,
Elena Pochapski, which included 50,000 restricted shares of common stock valued
at $103,000 which were issued to her in February 2007, as a bonus for services
rendered to us during fiscal 2006; $721,000 attributable to funds paid to our
Chief Executive Officer, David Zaikin in the form of 350,000 shares of common
stock, which were issued to Mr. Zaikin in February 2007, in consideration for
his services to us in fiscal 2006; and certain other amounts which were paid to
various other officers, Directors, employees and consultants.
The
main items leading to the increase in total expenses for the year ended December
31, 2006, compared to the year ended December 31, 2005, were an increase of
$1,765,157 or 265% in professional and consulting fees to $2,431,841, and an
increase in salaries of $694,370 or 175% to $1,091,820 for the year ended
December 31, 2006, compared to $397,450 for the year ended December 31, 2005.
The increase in other expenses is attributable to increased marketing and
advisory services in connection with our operations. The professional and
consulting fees for the year ended December 31, 2006 included the following
expenses: $59,375 in monthly consulting fees payable to Business Standard, as
well as 600,000 restricted shares of common stock issued to Business Standard
valued at $1,310,000 for services rendered in connection with the acquisition of
various oil and gas exploration licenses by ZNG; approximately $89,552 of legal
and accounting fees in connection with the drafting and review our public
filings and periodic reports and the financial statements contained therein, and
various other fees paid to consultants in connection with the acquisition by us
of KNG, and the licenses which are held by ZNG during the fiscal year ended
December 31, 2006.
Salaries
increased for the year ended December 31, 2006, compared to the year ended
December 31, 2005, due to salaries and bonus granted to our officers and
Directors in February 2007, for the 2006 fiscal year which totaled approximately
465,000 shares of restricted common, which had a value in salaries of
approximately $957,900, which issuances are described in greater detail herein
under “Certain Relationships and Related Transactions.”
Certain
other expenses were less during the year ended December 31, 2006, compared to
the year ended December 31, 2005, including depreciation and amortization, which
declined by $27,997 or 98.8% from the prior period and rent and occupancy, which
declined by $40,833 or 50.7% from the prior period, which decreases were due to
the fact that the expenses of ZNG, our former wholly owned subsidiary, which is
currently solely owned by ZNG, Ltd., which we own 50% of, are no longer included
in our consolidated statement of operations due to the fact that ZNG is no
longer our wholly owned subsidiary, but which expenses were included in our
consolidated statement of operations during the year ended December 31, 2005. We
also had finance charges and interest expense of $49,369 for the year ended
December 31, 2006.
We had
a net loss of $4,072,788 for the year ended December 31, 2006, compared to a net
loss of $1,153,686 for the year ended December 31, 2005, an increase in net loss
of $2,919,102 or 253% from the prior period. The increase in net loss was mainly
attributable to increases in total expenses, namely the increases in
professional and consulting fees and salaries, described above, as well as the
decrease in gain from entrance into joint venture which was $364,479 for the
year ended December 31, 2005 compared to $0 for the year ended December 31,
2006, which were not sufficiently offset by the $285,000 increase in management
fees for the year ended December 31, 2006.
LIQUIDITY
AND CAPITAL RESOURCES
We had
current assets of $116,707 as of December 31, 2006, which included cash of
$1,435; management fee receivable of $110,000, 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 $5,272.
We had
total assets of $4,047,272 as of December 31, 2006, which included current
assets of $116,707 and non-current assets of $3,930,565. Non-current assets
included $3,928,000 of oil and gas properties, unproved, representing geological
studies and data, which we received in connection with the purchase of KNG and
$2,565 of property and equipment, net.
We had
total liabilities of $2,248,830 as of December 31, 2006, which were solely
current liabilities and which included $362,166 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 December 31, 2006; $50,615
of accounts payable to Baltic in connection with the $29,000 loan advanced to
the Company from Baltic, as described above under "Description of Business" and
certain other expenses owed to Baltic; $535,961 of accounts payable to others
for advisory and professional services rendered; and $1,300,088 of accrued
payroll, which included $112,500 payable to our Chief Executive Officer, David
Zaikin which amount was owed to Mr. Zaikin prior to September 2005, at which
time he agreed to stop accruing salary until 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, $91,177 payable to our Chief
Financial Officer, Elena Pochapski of which $6,470, which was due for services
rendered from November to December 2006, has been paid to date, and $69,241.97
of accrued salary payable to our former Chief Executive Officer, Shakeel Adam.
Also included in the total accrued payroll figure is $957,900 representing the
value of 465,000 shares issued to directors of the Company in early 2007 for
services in 2006, discussed in more details in Item 10 “Executive
compensation”.
We had
negative working capital of $2,132,123 and a total pre development and
development stage accumulated deficit of $6,932,342 as of December 31,
2006.
Because
our cumulative losses associated with the operations of ZNG exceeded our
investment as of the date of the Joint Venture, ZNG is carried on our balance
sheet at $-0- as of December 31, 2006. Our investment in ZNG will exceed $-0- at
such time as ZNG has cumulative earnings sufficient to repay all loans to Baltic
as provided in the Joint Venture, if ever.
We had
$52,314 of net cash flows for operating activities for the year ended December
31, 2006, which included $3,295,733 of common stock and warrants issued for
professional services and salaries, $789,406 of accounts payable and accrued
expenses, $337 of depreciation and amortization, which was offset by $4,072,788
of net loss and $65,002 of prepaid expenses and other assets.
We had
$1,363 of net cash flows for investing activities for the year ended December
31, 2006, due solely to expenditures for property and equipment.
We had
$45,500 of net cash flows from financing activities for the year ended December
31, 2006, which was solely due to $45,500 of net proceeds from common stock
issued to employees, which was in connection with the exercise of all 100,000 of
our Chief Financial Officer Elena Pochapski's 2003 stock options at an exercise
price of $0.14 per share in February 2006 and the exercise of 52,500 stock
options granted to David Zaikin, our Chief Executive Officer pursuant to his
2006 stock option plan, for aggregate consideration of $31,500, which amount he
agreed to forgive of debt previously owed to him.
As of
December 31, 2006, ZNG had received $6,148,142 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 December 31, 2006 was $540,153,
including accrued interest on the previous loan.
Additionally,
in July 2006, we entered into a Deed of Agreement, whereby Baltic agreed
(funding permitting) to loan ZNG approximately $12,000,000 to be used on seismic
studies, drilling and a work program, which funds have not been loaned to
date.
Under the
Joint Venture, we will receive $55,000 per month as a management fee from ZNG,
Ltd. In addition to the monthly management fee, ZNG Ltd. agreed to lend $78,000
to us to pay for legal and consulting services in connection with establishing
the Joint Venture. We received $29,000 of this amount in November 2005; and will
receive the additional $49,000 if all five of the new licenses are awarded to
ZNG, of which three have been awarded to date, and ZNG submits a letter from the
relevant license authority of the Ministry of Natural Resources of the Russian
Federation confirming such awards, of which there can be no
assurance.
Since our
transfer of ZNG to the Joint Venture, we have no oil and gas operations separate
from the Joint Venture, which has not started production and is not currently
generating any cash from production, which makes it difficult for us to pay our
maturing obligations. However, during the three months ended December 31, 2006,
we did purchase KNG, and 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 $55,000 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
$7,067,679 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 March 20, 2007, of $8,178,303, 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 $55,000 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.
WE WILL NEED SUBSTANTIAL FINANCING
PRIOR TO ENTERING INTO ANY ADDITIONAL JOINT VENTURES OR
ACQUISITIONS.
The
Company anticipates the need for approximately $10,000,000 to $25,000,000 to
enter into additional joint ventures and/or acquisitions in the future.
Currently the Company has not raised any of this financing and the Company can
make no assurances that this financing will ever be raised. Even if the Company
does raise this money and enter into other joint ventures or acquisitions in the
future, it could still be years before the Company generates any revenue, if
ever. If the Company does not raise the $10,000,000 to $25,000,000 which it
anticipates needing to enter into additional joint ventures or acquisitions, the
Company may be forced to abandon or curtail its current business plan.
Additionally, the raising of this money may include issuing securities with
greater rights than our common stock shareholders and/or may result in
substantial dilution to our existing shareholders.
OUR AUDITORS HAVE EXPRESSED
SUBSTANTIAL DOUBT AS TO WHETHER OUR COMPANY CAN CONTINUE AS A GOING
CONCERN.
Our
Company is in its early development stage, as planned principal activities have
not begun. We have generated only minimal revenues since inception and have
incurred substantial losses including a net loss of $4,072,788 for the year
ended December 31, 2006 and a total accumulated deficit of $6,932,342 as of
December 31, 2006. These factors among others indicate that the Company may be
unable to continue as a going concern, particularly in the event that it cannot
generate sufficient cash flow to conduct its operations and/or obtain additional
sources of capital and financing.
WE LACK AN OPERATING HISTORY WHICH
YOU CAN USE TO EVALUATE US, MAKING ANY INVESTMENT IN OUR
COMPANY RISKY.
Our
Company lacks a long standing operating history which investors can use to
evaluate our Company's previous earnings. Therefore, an investment in our
Company is risky because we have no business history and it is hard to predict
what the outcome of our business operations will be in the future.
WE MAY CONTINUE TO BE UNPROFITABLE
AND MAY NOT GENERATE PROFITS TO CONTINUE OUR BUSINESS
PLAN.
As a
development stage company, we have no revenues or profits to date and our net
cumulative deficit attributable to our development stage as of December 31,
2006, was $6,482,557, and our total cumulative deficit was $6,932,342 which
included $449,785 of pre-development stage deficit. We had $1,300,088 in accrued
and unpaid salaries and a working capital deficit of $2,132,123 as of December
31, 2006. The Company is currently being funded by existing shareholders and the
$55,000 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, nor have we 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.
Risks
from these factors are intertwined with the risky nature inherent in the oil and
gas industry. Projections on future revenues as well as costs and required
capital expenditures are based on estimates. Business statistical analysis is
used in projection of drilling success ratios, average production costs, world
oil price fluctuations and their correspondence to Russian domestic market. 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.
IF
WE ARE LATE IN FILING OUR QUARTERLY OR ANNUAL REPORTS WITH THE SEC, WE MAY BE
DE-LISTED FROM THE OVER-THE-COUNTER BULLETIN BOARD.
Under new
Over-The-Counter Bulletin Board ("OTCBB") rules relating to the timely filing of
periodic reports with the SEC, any OTCBB issuer who fails to file a periodic
report (Form 10-QSB's or 10-KSB's) by the due date of such report (not
withstanding any extension granted to the issuer by the filing of a Form
12b-25), three (3) times during any twenty-four (24) month period are de-listed
from the OTCBB. Such removed issuer would not be re-eligible to be listed on the
OTCBB for a period of one-year, during which time any subsequent late filing
would reset the one-year period of de-listing. Therefore, if we are late in
filing a periodic report three times in any twenty-four (24) month period and
are de-listed from the OTCBB, our securities may become worthless and we may be
forced to curtail or abandon our business plan.
AS
THERE IS CURRENTLY ONLY A LIMITED MARKET FOR OUR COMMON STOCK, THE MARKET FOR
OUR COMMON STOCK PRICE MAY 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 $5.00 per share. Under such rule, broker-dealers who recommend
low-priced securities to persons other than established customers and accredited
investors must satisfy special sales practice requirements, including a
requirement that they make an individualized written suitability determination
for the purchaser and receive the purchaser's consent prior to the transaction.
The Securities Enforcement Remedies and Penny Stock Reform Act of 1990, also
requires additional disclosure in connection with any trades involving a stock
defined as a penny stock. Generally, the Commission defines a penny stock as any
equity security not traded on an exchange or quoted on NASDAQ that has a market
price of less than $5.00 per share. The required penny stock disclosures
include the delivery, prior to any transaction, of a disclosure schedule
explaining the penny stock market and the risks associated with it. Such
requirements could severely limit the market liquidity of the securities and the
ability of purchasers to sell their securities in the secondary
market.
In
addition, various state securities laws impose restrictions on transferring
"penny stocks" and as a result, investors in the common stock may have their
ability to sell their shares of the common stock impaired.
CRITICAL
ACCOUNTING POLICIES
Our
discussion and analysis of our financial condition and results of operations is
based upon our audited financial statements, which have been prepared in
accordance with accounting principals generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of any contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to
uncollectible receivables, investment values, income taxes, recapitalization and
contingencies. We base our estimates on various assumptions that we believe to
be reasonable under the circumstances, the results of which form the basis for
making judgments about carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
ITEM 7. FINANCIAL
STATEMENTS
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
|
The Board
of Directors and Stockholders
Siberian
Energy Group Inc.
We have
audited the accompanying consolidated balance sheets of Siberian Energy Group
Inc. (a development stage company) as of December 31, 2006 and 2005 and the
related consolidated statements of operations, stockholders’ equity and cash
flows for the years then ended, and the cumulative period of Development Stage
Activity – January 1, 2003 through December 31, 2006. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Siberian Energy Group Inc.
as of December 31, 2006 and 2005 and the results of its operations and its cash
flows for the years then ended and the cumulative period of Development Stage
Activity – January 1, 2003 through December 31, 2006, in conformity with
accounting principles generally accepted in the United States of
America.
As
described in Note 13 to the financial statements, these financial statements
have been restated to remove the effect of discounting the value of
issued restricted common stock.
The
accompanying financial statements have been prepared assuming that Siberian
Energy Group Inc. will continue as a going concern. As discussed in
Note 11 to the financial statements, Siberian Energy Group Inc. has not earned
significant revenue since inception of its current endeavor, and is considered
to be in the development stage which raises substantial doubt about its ability
to continue as a going concern. Management’s plans relative to these
matters are also described in Note 11 and throughout the financial
statements. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Lumsden
& McCormick, LLP
Buffalo,
New York
March 28,
2007, except for Note 13 as to which the date is March 21, 2008
|
SIBERIAN
ENERGY GROUP INC. (A Development Stage Company)
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheets
|
|
|
|
|
|
|
Restated
|
|
Restated
|
|
|
December
31,
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
|
$ |
1,435 |
|
$ |
11,551 |
|
|
Management
fee receivable
|
|
110,000 |
|
|
50,000 |
|
|
Prepaid
expenses and other
|
|
5,272 |
|
|
270 |
|
|
|
|
116,707 |
|
|
61,821 |
|
|
|
|
|
|
|
|
|
|
Investment
in joint venture
|
|
- |
|
|
- |
|
|
|
|
|
|
|
|
|
|
Oil
and gas properties, unproved
|
|
3,928,000 |
|
|
- |
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
2,565 |
|
|
1,539 |
|
|
|
|
|
|
|
|
|
|
|
$ |
4,047,272 |
|
$ |
63,360 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Demand
loan from individual, interest at 6.5%
|
$ |
- |
|
$ |
62,500 |
|
|
Accounts
payable:
|
|
|
|
|
|
|
|
Related
party - stockholders
|
|
362,166 |
|
|
328,376 |
|
|
Related
party - Baltic Petroleum, interest at 14%
|
|
50,615 |
|
|
43,664 |
|
|
Others
|
|
535,961 |
|
|
145,230 |
|
|
Accrued
payroll
|
|
1,300,088 |
|
|
304,341 |
|
|
|
|
2,248,830 |
|
|
884,111 |
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Common
stock - authorized 100,000,000 shares, $.001 par value,
|
|
|
|
|
|
|
|
14,112,961
and 11,487,886 issued and outstanding
|
|
14,113 |
|
|
11,488 |
|
|
Additional
paid-in capital
|
|
8,721,116 |
|
|
2,029,821 |
|
|
Accumulated
deficit
|
|
|
|
|
|
|
|
Pre-development
stage
|
|
(449,785 |
) |
|
(449,785 |
) |
|
Development
stage
|
|
(6,482,557 |
) |
|
(2,409,769 |
) |
|
Accumulated
other comprehensive income (loss)
|
|
(4,445 |
) |
|
(2,506 |
) |
|
|
|
1,798,442 |
|
|
(820,751 |
) |
|
|
|
|
|
|
|
|
|
|
$ |
4,047,272 |
|
$ |
63,360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
|
|
|
|
|
|
|
|
SIBERIAN
ENERGY GROUP INC. (A Development Stage Company)
|
|
|
|
|
|
|
|
|
|
|
|
Restated
|
|
|
Consolidated
Statements of Operations
|
|
|
|
|
For
the
|
|
|
|
|
|
|
|
cumulative
|
|
|
|
|
|
|
|
period
of
|
|
|
|
|
|
|
|
Development
|
|
|
|
|
|
|
|
Stage
Activity-
|
|
|
|
|
|
|
|
January
1, 2003
|
|
|
|
|
|
|
|
through
|
|
|
|
Restated
|
|
Restated
|
|
December
31,
|
|
|
For
the years ended December 31,
|
2006
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
and other income:
|
|
|
|
|
|
|
|
Management
fees
|
$ |
360,000 |
|
$ |
75,000 |
|
$ |
435,000 |
|
|
Gain
from entrance into joint venture
|
|
- |
|
|
364,479 |
|
|
364,479 |
|
|
Other
|
|
- |
|
|
6,382 |
|
|
6,382 |
|
|
|
|
360,000 |
|
|
445,861 |
|
|
805,861 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
Salaries
|
|
1,091,820 |
|
|
397,450 |
|
|
2,257,438 |
|
|
Professional
and consulting fees
|
|
2,431,841 |
|
|
666,684 |
|
|
3,317,233 |
|
|
Rent
and occupancy
|
|
39,698 |
|
|
80,531 |
|
|
176,243 |
|
|
Depreciation
and amortization
|
|
337 |
|
|
28,334 |
|
|
102,717 |
|
|
Finance
charges and interest
|
|
49,369 |
|
|
47,607 |
|
|
96,976 |
|
|
Other
|
|
819,723 |
|
|
378,941 |
|
|
1,337,811 |
|
|
Total
expenses
|
|
4,432,788 |
|
|
1,599,547 |
|
|
7,288,418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes
|
|
4,072,788 |
|
|
1,153,686 |
|
|
6,482,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes (benefit)
|
|
- |
|
|
- |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss (development stage)
|
$ |
4,072,788 |
|
$ |
1,153,686 |
|
$ |
6,482,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per common share
|
$ |
(0.35 |
) |
$ |
(0.12 |
) |
$ |
(0.74 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of basic and diluted
|
|
|
|
|
|
|
|
|
|
|
common
shares outstanding
|
|
11,749,699 |
|
|
9,935,900 |
|
|
8,723,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
|
|
|
|
|
|
|
|
|
|
|
SIBERIAN
ENERGY GROUP INC. (A Development Stage Company)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the cumulative period of Development Stage Activity - January 1, 2003
through December 31, 2006 (Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
Number
of
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
Comprehensive
|
|
|
|
|
Shares
|
|
|
Par
Value
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income
(Loss)
|
|
|
Total
|
|
|
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2003 (pre-development stage)
|
|
|
4,902,886 |
|
|
$ |
4,903 |
|
|
$ |
430,195 |
|
|
$ |
(449,785 |
) |
|
$ |
- |
|
|
$ |
(14,687 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
for the year - 2003
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(422,516 |
) |
|
|
- |
|
|
|
(422,516 |
) |
|
$ |
(422,516 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued in acquisition (ZNG)
|
|
|
1,000,000 |
|
|
|
1,000 |
|
|
|
(1,000 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2003
|
|
|
5,902,886 |
|
|
|
5,903 |
|
|
|
429,195 |
|
|
|
(872,301 |
) |
|
|
- |
|
|
|
(437,203 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
for the year - 2004
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(833,567 |
) |
|
|
- |
|
|
|
(833,567 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(53,120 |
) |
|
|
(53,120 |
) |
|
$ |
(886,687 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued in acquisition (ZNG)
|
|
|
3,450,000 |
|
|
|
3,450 |
|
|
|
746,550 |
|
|
|
- |
|
|
|
- |
|
|
|
750,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued for professional services
|
|
|
50,000 |
|
|
|
50 |
|
|
|
9,950 |
|
|
|
- |
|
|
|
- |
|
|
|
10,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
- |
|
|
|
- |
|
|
|
34,426 |
|
|
|
- |
|
|
|
- |
|
|
|
34,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2004
|
|
|
9,402,886 |
|
|
|
9,403 |
|
|
|
1,220,121 |
|
|
|
(1,705,868 |
) |
|
|
(53,120 |
) |
|
|
(529,464 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
for the year - 2005
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,153,686 |
) |
|
|
- |
|
|
|
(1,153,686 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
50,614 |
|
|
|
50,614 |
|
|
$ |
(1,103,072 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued for professional services
|
|
|
385,000 |
|
|
|
385 |
|
|
|
197,829 |
|
|
|
- |
|
|
|
- |
|
|
|
198,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued for accrued salaries
|
|
|
1,700,000 |
|
|
|
1,700 |
|
|
|
301,871 |
|
|
|
- |
|
|
|
- |
|
|
|
303,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
granted for professional services
|
|
|
- |
|
|
|
- |
|
|
|
310,000 |
|
|
|
- |
|
|
|
- |
|
|
|
310,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2005 (Restated)
|
|
|
11,487,886 |
|
|
$ |
11,488 |
|
|
$ |
2,029,821 |
|
|
$ |
(2,859,554 |
) |
|
$ |
(2,506 |
) |
|
$ |
(820,751 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
for the year - 2006
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(4,072,788 |
) |
|
|
- |
|
|
|
(4,072,788 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,939 |
) |
|
|
(1,939 |
) |
|
$ |
(4,074,727 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued for employee stock option plan and warrants
|
|
|
195,000 |
|
|
|
195 |
|
|
|
45,305 |
|
|
|
- |
|
|
|
- |
|
|
|
45,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued for geological data
|
|
|
1,900,000 |
|
|
|
1,900 |
|
|
|
3,323,100 |
|
|
|
- |
|
|
|
- |
|
|
|
3,325,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued for professional services
|
|
|
1,139,499 |
|
|
|
1,140 |
|
|
|
2,120,320 |
|
|
|
- |
|
|
|
- |
|
|
|
2,121,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
granted for professional services
|
|
|
- |
|
|
|
- |
|
|
|
1,201,960 |
|
|
|
- |
|
|
|
- |
|
|
|
1,201,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
cancelled
|
|
|
(609,424 |
) |
|
|
(610 |
) |
|
|
610 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2006 (Restated)
|
|
|
14,112,961 |
|
|
$ |
14,113 |
|
|
$ |
8,721,116 |
|
|
$ |
(6,932,342 |
) |
|
$ |
(4,445 |
) |
|
$ |
1,798,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SIBERIAN
ENERGY GROUP INC. (A Development Stage Company)
|
|
|
|
|
|
|
|
|
|
|
|
Restated
|
|
|
Consolidated
Statements of Cash Flows
|
|
|
|
|
For
the
|
|
|
|
|
|
|
|
cumulative
|
|
|
|
|
|
|
|
period
of
|
|
|
|
|
|
|
|
Development
|
|
|
|
|
|
|
|
Stage
Activity-
|
|
|
|
|
|
|
|
January
1, 2003
|
|
|
|
|
|
|
|
through
|
|
|
|
Restated
|
|
Restated
|
|
December
31,
|
|
|
For
the years ended December 31,
|
2006
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
loss (development stage)
|
$ |
(4,072,788 |
) |
$ |
(1,153,686 |
) |
$ |
(6,482,557 |
) |
|
Depreciation
and amortization
|
|
337 |
|
|
28,334 |
|
|
102,717 |
|
|
Common
stock and warrants issued
|
|
|
|
|
|
|
|
|
|
|
for
professional services and salaries
|
|
3,295,733 |
|
|
811,785 |
|
|
4,117,518 |
|
|
Gain
from entrance into joint venture
|
|
- |
|
|
(364,479 |
) |
|
(364,479 |
) |
|
Changes
in other current assets and
|
|
|
|
|
|
|
|
|
|
|
current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
Prepaid
expenses and other assets
|
|
(65,002 |
) |
|
(73,914 |
) |
|
(268,664 |
) |
|
Accounts
payable and accrued expenses
|
|
789,406 |
|
|
861,776 |
|
|
3,887,855 |
|
|
Net
cash flows from (for) operating activities
|
|
(52,314 |
) |
|
109,816 |
|
|
992,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Expenditures
for licenses and related
|
|
- |
|
|
(348,137 |
) |
|
(528,961 |
) |
|
Expenditures
for oil and gas properties
|
|
- |
|
|
(36,532 |
) |
|
(770,750 |
) |
|
Expenditures
for property and equipment
|
|
(1,363 |
) |
|
(1,710 |
) |
|
(4,231 |
) |
|
Cash
received in acquisition
|
|
- |
|
|
- |
|
|
6 |
|
|
Cash
received from entrance into joint venture
|
|
- |
|
|
175,000 |
|
|
175,000 |
|
|
Net
cash flows for investing activities
|
|
(1,363 |
) |
|
(211,379 |
) |
|
(1,128,936 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Net
proceeds from demand loan
|
|
- |
|
|
62,500 |
|
|
62,500 |
|
|
Common
stock issued for employee stock option plan
|
|
45,500 |
|
|
- |
|
|
45,500 |
|
|
Additional
paid-in capital
|
|
- |
|
|
- |
|
|
34,426 |
|
|
Net
cash flows from financing activities
|
|
45,500 |
|
|
62,500 |
|
|
142,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rates on cash
|
|
(1,939 |
) |
|
50,614 |
|
|
(4,445 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash
|
|
(10,116 |
) |
|
11,551 |
|
|
1,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
- beginning
|
|
11,551 |
|
|
- |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
- ending
|
$ |
1,435 |
|
$ |
11,551 |
|
$ |
1,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
|
|
|
|
|
|
|
|
|
|
|
SIBERIAN
ENERGY GROUP INC. (A Development Stage Company)
|
|
Notes
to Consolidated Financial Statements
|
|
|
|
|
1. Summary
of Significant Accounting Policies:
The
Company and Description of Business:
Through
October 14, 2005, Siberian Energy Group Inc. (the Company) operated through its
wholly owned Russian 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 and
transferred 50% of the Joint Venture interest to Baltic for $175,000 and the
agreement by Baltic to provide future funding to the Joint Venture as detailed
in a Joint Venture Shareholder’s Agreement. Joint Venture will be
engaged in the exploration for, development, production and sale of oil and gas
assets in the Western Siberian region of the Russian Federation and the former
Soviet Union.
Upon
signing of the Joint Venture agreement, Baltic, ZNG and a financing company
wholly owned by Baltic, entered into a deed of novation regarding a previous
loan made to ZNG by Baltic and immediately thereafter the financing company
entered into a loan agreement with ZNG for the purpose of funding of research
activities in the Kurgan region. Baltic released the Company from its
obligations under a guarantee and security interest given by the Company to
Baltic regarding an initial loan to ZNG.
As of
December 31, 2006 the total amount of funds committed by Baltic to be provided
through loan agreements in 2007 was $14,659,880. Funds will be used
for the current program of seismic studies and drilling of the first four (4)
wells in ZNG’s license blocks, two of which are planned for 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 receives 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 and through December 31, 2006. Loan financing balances
outstanding of Joint Venture to Baltic and Baltic’s financing subsidiaries at
December 31, 2006 totals approximately $11,975,000. Activities of ZNG
prior to October 14, 2005 are otherwise included in the consolidated accounts of
the Company in the accompanying financial statements.
In June
2006, ZNG won auctions and was awarded three new oil and gas exploration and
production licenses, bringing the total number of licenses to seven and the
total area covered by the licenses to 1 million acres. In connection
with the license acquisitions, the Company issued 600,000 shares to a consulting
company in consideration for its assistance in the application process as well
as obtaining existing geological information (seismic, gravimetric) relevant to
potential licensed areas. The value of these shares totaled
$1,310,000 and are included in professional and consulting fees in the
accompanying consolidated statements of operations.
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 Karabashski zone of
Khanty-Mansiysk Autonomous district (Tuymen region of the Russian Federation)
from Key Brokerage, LLC (“Seller”), a Delaware limited liability company, for
the following negotiated consideration consisting of restricted common shares
and stock warrants:
|
Restricted
common shares issued to Seller
|
1,900,000
|
|
Restricted
common shares issued to an adviser
|
|
|
(value
included in accounts payable at
|
|
|
December
31, 2006; shares issued in early 2007)
|
200,000
|
|
Total
restricted common shares issued
|
2,100,000
|
|
|
|
|
Stock
warrants issued to Seller September 14, 2006
|
|
|
for
purchase option (see Note 8)
|
250,000
|
As a
result of the purchase, a calculated acquisition value of $3,928,000 was
assigned to the geological data assets that considered the approximate market
value of the stock issued ($1.75) on the transaction date. The
total value of purchased assets consisted of $3,675,000 assigned to the shares
issued and $253,000 assigned to stock warrants issued. The valuation
method of the stock warrants is described in Note 8
herein. Additionally, to facilitate the transactions, management and
the Seller considered the results of a good faith valuation of assets prepared
by a Russian consultant, who attempted to determine an “arms length fair value”
price of such assets. However, management did not rely on this
valuation, and assumes full responsibility for the value assigned in the
acquisition.
In
conjunction with the asset purchase, the Company was also assigned ownership of
Kondaneftegaz, LLC (“Konda”), a Russian limited liability company wholly-owned
by Seller. 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 in connection with the 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.
Use
of Estimates:
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Principles of
Consolidation:
The
accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, ZNG (through October 14, 2005),
Siberian Energy Group (Canada) and Konda (effective December 31,
2006). All intercompany transactions and balances have been
eliminated. After October 14, 2005, the Company’s investment in ZNG
is accounted for on the equity method of accounting (see “the Company and
Description of Business” above). Accordingly, the assets, liabilities
and equity are no longer presented on the Company’s balance sheet.
Foreign
Currency Translation:
The
Russian subsidiaries ZNG and Konda use the Ruble as their functional currency;
Siberian Energy Group (Canada) uses the Canadian dollar as its functional
currency. The books and records of ZNG, Konda and Siberian Energy
Group (Canada) are kept in their functional currencies. The Company
translates to U.S. dollars the assets and liabilities of ZNG, Konda, and
Siberian Energy Group (Canada) at the year-end exchange rates; income statement
amounts are converted at the average rates of exchange for the
year. Translation gains and losses are included within other
comprehensive income (loss).
Cash:
Cash in
financial institutions may exceed insured limits at various times throughout the
year, and subject the Company to concentrations of credit risk.
Oil
and Gas Properties:
The
Company follows the full cost method of accounting for oil and gas
properties. Accordingly, all costs associated with acquisition,
exploration, and development of oil and gas reserves, including directly related
overhead costs, are capitalized.
All
capitalized costs of oil and gas properties, including the estimated future
costs to develop proved reserves, will be amortized on the unit-of-production
method using estimates of proved reserves. Investments in unproved
properties and major development projects are not amortized until proved
reserves associated with the projects can be determined or until impairment
occurs. When applicable, if the results of an assessment indicate
that the properties are impaired, the amount of the impairment is added to the
capitalized costs to be amortized.
In
addition, the capitalized costs are subject to a “ceiling test,” which basically
limits such costs to the aggregate of the “estimated present value,” discounted
at a 10-percent interest rate of future net revenues from proved reserves, based
on current economic and operating conditions, plus the lower of cost or fair
market value of unproved properties.
Sales of
proved and unproved properties are accounted for as adjustments of capitalized
costs with no gain or loss recognized, unless such adjustments would
significantly alter the relationship between capitalized costs and proved
reserves of oil and gas, in which case the gain or loss is recognized in
income. Abandonments of properties are accounted for as adjustments
of capitalized costs with no loss recognized.
At
December 31, 2006, the only oil and gas properties the Company has are the
capitalized geological data assets acquired on December 31, 2006, totaling
$3,928,000, which assets are more fully described herein under the caption “The
Company and Description of Business.” Because proved reserves associated with
these assets have not yet been determined, they are considered unproved
properties not yet subject to amortization. As a result of the Joint
Venture, also described earlier, all oil and gas properties associated with ZNG
are otherwise the responsibility of the Joint Venture effective October 14,
2005.
Licenses:
Costs
incurred during 2003 to register and formalize ZNG’s exploration licenses with
the Russian Ministry of Natural Resources were amortized over the terms of the
licenses. Amortization expense for 2005 and 2004 was $27,124 and
$36,160. All license assets became the responsibility of the
Joint Venture effective October 14, 2005.
Property
and Equipment:
Property
and equipment is stated at cost, net of accumulated
depreciation. Depreciation is provided using the straight-line
method.
Long-Lived
Assets:
Long
lived assets to be held and used or disposed of other than by sale are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. When required, impairment
losses on assets to be held and used or disposed of other than by sale are
recognized based on the fair value of the asset. Long-lived assets to
be disposed of by sale are reported at the lower of its carrying amount or fair
value less cost to sell.
Income
Taxes:
The
provision for income taxes is based on pretax financial accounting
income. There are no significant differences between financial and
tax accounting that would otherwise give rise to deferred income taxes on the
accompanying financial statements. The Company, however, recognizes
future tax benefits of net operating loss carryforwards to the extent that
realization of such benefits is more likely than not.
2. Investment
in Joint Venture:
Following
is a summary of the Joint Venture’s unaudited financial position at December 31,
2006 and 2005 and results of development stage activity during the period
October 14, 2005 (date of Joint Venture inception) through December 31,
2005 and for the year ended December 31, 2006 ($000’s
omitted):
|
|
2006
|
|
2005
|
|
|
Current
assts
|
$ |
113 |
|
$ |
508 |
|
|
Intangibles
and
|
|
|
|
|
|
|
|
other
noncurrent assets
|
|
5,421 |
|
|
2,901 |
|
|
|
$ |
5,534 |
|
$ |
3,409 |
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
$ |
729 |
|
$ |
1,203 |
|
|
Long-term
debt and other
|
|
|
|
|
|
|
|
noncurrent
liabilities
|
|
12,468 |
|
|
2,448 |
|
|
|
$ |
13,197 |
|
|
3,651 |
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity (deficit)
|
|
(7,663 |
) |
|
(242 |
) |
|
|
$ |
5,534 |
|
$ |
3,409 |
|
|
|
|
|
|
|
|
|
|
Revenues
|
$ |
- |
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
Net
loss (development stage)
|
$ |
(7,421 |
) |
$ |
(1,065 |
) |
The
Company’s investment asset will begin to exceed zero once the Joint Venture has
cumulative earnings sufficient to repay all loans to Baltic and Baltic’s
financing subsidiaries, as agreed.
There is
no market for the common stock of the Joint Venture and accordingly, no quoted
market price is available.
3. Income
Taxes:
At
December 31, 2006, the Company effectively has U.S. tax net operating loss
carryforwards totaling approximately $5,200,000. These carryforwards
may be used to offset future taxable income, and expire in varying amounts
through 2026. No tax benefit has been reported in the financial
statements, however, because the Company believes there is at least a 50% chance
that the carryforwards will expire unused. Accordingly, the
$1,040,000 estimated cumulative tax benefit of the loss carryforwards have been
offset by a valuation allowance of the same amount.
4. Leases:
Office
rent expense for the years ended December 31, 2006 and 2005 was $39,698 and
$80,531. There currently are no long-term lease arrangements that the
Company is committed to, however, it may negotiate with selected landlord
prospects for space commitments.
5. Related
Party Transactions:
During
the development stage period from January 1, 2003 through December 31, 2006, a
variety of expenses were paid for by organizing stockholders. As a
result, amounts totaling $362,166 and $328,376 are payable to stockholders from
the Company as of December 31, 2006 and 2005.
6. Employment
Contracts:
The
Company has entered into employment contracts with certain senior management
employees through 2008 that provide for minimum annual salary, adjusted for
capital levels raised by the Company. If terminated without cause, an
employee is paid, as severance, the greater of twelve months salary or one-half
the remaining amount owed under the contract. At December 31, 2006,
the minimum total future additional commitment due is approximately
$255,000.
At
December 31, 2006, accrued and unpaid salaries for all employees totaled
$1,300,088 of which $957,900 was paid after December 31, 2006 to employees and
directors through issue of the Company’s restricted common stock. The
remaining $342,188 is expected to be paid when sufficient cash flows are
generated by the Company or by issue of restricted stock of the
Company.
7. Stock
Option Plan:
In 2003,
the Company granted stock options under a plan for the benefit of employees and
directors of the Company. All granted stock options are for
acquisition of restricted shares, which means there are substantial restrictions
on the transferability and sale of such shares. Pursuant to plan
terms and related employment agreements, shares of common stock granted vest as
follows:
|
|
Shares
Reserved
|
|
|
Vest
|
December
31,
|
December
31,
|
Exercise
|
|
Year
|
2006
|
2005
|
Price
|
|
2003
|
200,000
|
200,000
|
$0.14
|
|
2004
|
468,000
|
468,000
|
$0.20
|
|
2004
|
75,000
|
75,000
|
$0.32
|
|
2005
|
468,000
|
468,000
|
$0.60
|
|
2006
|
468,000
|
468,000
|
$0.60
|
|
2007
|
468,000
|
468,000
|
110%
of the average
|
|
|
|
|
closing
stock price
|
|
|
|
|
for
the three months
|
|
|
|
|
prior
to grant date
|
The
options generally expire four years from the date of vesting.
The
following summarizes stock option activity:
|
|
Number
|
|
Exercise
|
|
|
|
of
Shares
|
|
Price
|
|
|
Outstanding
and exercisable at
|
|
|
|
|
|
January
1, 2003
|
|
- |
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
Vested
- 2003
|
|
300,000 |
|
|
0.14 |
|
|
|
|
|
|
|
|
|
|
Outstanding
and exercisable at
|
|
|
|
|
|
|
|
December
31, 2003
|
|
300,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
- 2004
|
|
518,000 |
|
|
0.20 |
|
|
Vested
- 2004
|
|
75,000 |
|
|
0.32 |
|
|
Expired
- 2004
|
|
(100,000 |
) |
|
0.14 |
|
|
Expired
- 2004
|
|
(50,000 |
) |
|
0.20 |
|
|
|
|
|
|
|
|
|
|
Outstanding
and exercisable at
|
|
|
|
|
|
|
|
December
31, 2004
|
|
743,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
- 2005
|
|
468,000 |
|
|
0.60 |
|
|
|
|
|
|
|
|
|
|
Outstanding
and exercisable at
|
|
|
|
|
|
|
|
December
31, 2005
|
|
1,211,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
- 2006
|
|
468,000 |
|
|
0.60 |
|
|
|
|
|
|
|
|
|
|
Exercised
- 2006
|
|
(152,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
and exercisable
|
|
|
|
|
|
|
|
at
December 31, 2006
|
|
1,526,500 |
|
|
|
|
The
following table summarizes information about stock options outstanding and
exercisable:
|
December 31,
2006
|
|
|
|
|
|
Weighted
Average
|
|
Exercise
|
|
Number
of
|
|
Remaining
Years of
|
|
Price
|
|
Options
|
|
Contractual
Life
|
|
$ 0.14
|
|
100,000
|
|
1
|
|
0.20
|
|
468,000
|
|
2
|
|
0.32
|
|
75,000
|
|
2
|
|
0.60
|
|
415,500
|
|
3
|
|
0.60
|
|
468,000
|
|
4
|
|
|
|
1,526,500
|
|
|
|
|
|
|
|
|
|
December
31, 2005
|
|
|
|
|
|
Weighted
Average
|
|
Exercise
|
|
Number
of
|
|
Remaining
Years of
|
|
Price
|
|
Options
|
|
Contractual
Life
|
|
$ 0.14
|
|
200,000
|
|
2
|
|
0.20
|
|
468,000
|
|
3
|
|
0.32
|
|
75,000
|
|
3
|
|
0.60
|
|
468,000
|
|
4
|
|
|
|
1,211,000
|
|
|
The
Company recognizes compensation based on the fair value method prescribed by
Financial Accounting Standards Board Statement No. 123R, “Accounting for Stock
Based Compensation.” No compensation expense has been recognized
through December 31, 2006 because management had determined the initial fair
value of its stock options granted were minimal in light of the startup nature
of the organization.
8. Stock
Warrants:
In 2005
and 2006, the Company granted warrants to purchase restricted common shares to
certain consultants and non-employees for services rendered to the Company as
follows:
|
2006
|
|
|
|
|
Original
|
|
Grant
|
Number
of
|
Exercise
|
Exercise
|
|
Date
|
Shares
|
Price
|
Term
|
|
March
31, 2006
|
800,000
|
$ 1.05
|
4
years
|
|
April
1, 2006
|
400,000
|
1.05
|
4
years
|
|
March
31, 2006
|
17,561
|
0.67
|
3
years
|
|
June
30, 2006
|
20,412
|
2.02
|
3
years
|
|
September
14, 2006
|
250,000
|
2.20
|
4
years
|
|
September
30, 2006
|
20,952
|
1.53
|
3
years
|
|
December
31, 2006
|
38,648
|
1.44
|
3
years
|
|
December
31, 2006
|
100,000
|
0.60
|
4
years
|
|
|
1,647,573
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
Original
|
|
Grant
|
Number
of
|
Exercise
|
Exercise
|
|
Date
|
Shares
|
Price
|
Term
|
|
April
1, 2005
|
* 100,000
|
$ 0.30
|
2
years
|
|
September
13, 2005
|
15,000
|
0.30
|
3
years
|
|
December
22, 2005
|
100,000
|
1.00
|
3
years
|
|
December
22, 2005
|
300,000
|
1.00
|
3
years
|
|
December
22, 2005
|
150,000
|
2.00
|
3
years
|
|
December
22, 2005
|
150,000
|
2.50
|
3
years
|
|
December
31, 2005
|
50,068
|
0.63
|
3
years
|
|
December
31, 2005
|
100,000
|
0.60
|
4
years
|
|
|
965,068
|
|
|
* 50,000
of these warrants were exercised May 2006.
The fair
values of each warrant granted is estimated on the grant date using the
Black-Scholes option valuation model. The following general
assumptions were made in estimating fair value:
|
|
2006
|
2005
|
|
Dividend
yield
|
0%
|
0%
|
|
Risk
free interest rate
|
2.88%
- 4.90%
|
3.17%
- 4.38%
|
|
Expected
volatility
|
97%
- 131%
|
48.13%
- 70.12%
|
Amounts
charged to expense in 2006 and 2005 totaled $1,201,960 and
$310,000.
9. Fair
Value of Financial Instruments:
The
carrying values of cash, accounts payable, accrued expenses and demand loan
approximates fair value due to their short-term maturity.
10. 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 and warrants may have had a dilutive effect on earnings per
share had the Company generated income during the periods through December 31,
2006.
11. Going
Concern:
These
financial statements have been prepared assuming the Company will continue as a
gong concern, however, since inception of its current endeavor in 2003, it has
not earned substantial revenues and is considered to be in the development
stage, which raises substantial doubt about its ability to continue as a going
concern.
Management
is of the opinion that its current and proposed oil and gas ventures will
successfully generate allocable profits to the Company in the near
term.
For the
cumulative period ended December 31, 2006, the Company has obtained cash
financing from organizing stockholders and employees in the form of loans,
advances, and deferred salaries. However, there can be no certainty
as to availability of continued financing in the future. Failure to
obtain sufficient financing may require the Company to reduce its operating
activities. A failure to continue as a going concern would then
require stated amounts of assets and liabilities be reflected on a liquidation
basis which could differ form the going concern basis.
12. Cash
Flows Information:
Net cash
flows from operating activities includes cash payments for interest and income
taxes as follows:
|
|
2006
|
2005
|
|
Interest
paid
|
$ -
|
$ -
|
|
|
|
|
|
Income
taxes paid
|
$ -
|
$ -
|
Noncash
investing and financing activities excluded from the 2006 statement of cash
flows includes:
|
|
2006
|
|
Demand
loan payable settled through the
|
|
|
issuance
of common stock and warrants
|
$ 62,500
|
|
|
|
|
Geological
data acquired through the
|
|
|
issuance
of common stock and warrants
|
$ 3,928,000
|
13. Restatement
of Financial Statements:
Subsequent
to the issuance of the Company’s 2006 and 2005 consolidated financial
statements, it was determined that the Company improperly discounted by 30% the
value of restricted common stock and common stock warrants issued for
professional services, accrued salaries, and the acquisition of geological
data. The discount factor has been removed, and the accompanying
financial statements have been restated based on 100% of market prices as
follows:
|
|
As
previously
|
|
Impact
of
|
|
2006
|
reported
|
Restated
|
Restatement
|
|
Shares
issued for geological data (asset)
|
$ |
2,523,000 |
$ |
3,675,000 |
$ |
1,152,000 |
|
Warrants
granted for geological data (asset)
|
|
177,000 |
|
253,000 |
|
76,000 |
|
total
impact on assets
|
|
2,700,000 |
|
3,928,000 |
|
1,228,000 |
|
|
|
|
|
|
|
|
|
Shares
issued for professional services (expense)
|
|
1,686,491 |
|
2,121,460 |
|
708,269 |
|
Warrants
granted for professional services (expense)
|
|
841,177 |
|
1,201,960 |
|
284,183 |
|
total
impact on expenses
|
|
2,527,668 |
|
3,323,420 |
|
992,452 |
|
|
|
|
|
|
|
|
|
|
As
previously
|
|
|
Impact
of
|
|
2005
|
reported
|
Restated
|
Restatement
|
|
Shares
issued for professional services (expense)
|
$ |
138,750 |
$ |
198,214 |
$ |
87,464 |
|
Shares
issued for accrued salaries (expense)
|
|
212,500 |
|
303,571 |
|
91,071 |
|
Warrants
granted for professional services (expense)
|
|
217,000 |
|
310,000 |
|
93,000 |
|
total
impact on expenses
|
$ |
568,250 |
$ |
811,785 |
$ |
271,535 |
The
following table sets forth the effects of the Restatement on the Consolidated
Statements of Operations for the years ended December 31, 2006 and
2005.
|
|
As
previously
|
|
|
|
Impact
of
|
|
|
|
reported
|
|
Restated
|
|
Restatement
|
|
|
2006
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
Salaries
|
|
803,520 |
|
|
1,091,820 |
|
|
288,300 |
|
|
Professional
and consulting services
|
|
1,944,718 |
|
|
2,431,841 |
|
|
487,123 |
|
|
Finance
charges and interest
|
|
10,769 |
|
|
49,369 |
|
|
38,600 |
|
|
Other
|
|
641,294 |
|
|
819,723 |
|
|
178,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
$ |
3,080,336 |
|
$ |
4,072,788 |
|
$ |
992,452 |
|
|
Basic
and diluted earnings per share
|
|
(.26)
|
|
|
(.35)
|
|
|
(.09)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
Salaries
|
|
306,379 |
|
|
397,450 |
|
|
91,071 |
|
|
Professional
and consulting services
|
|
486,220 |
|
|
666,684 |
|
|
180,464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
$ |
882,151 |
|
$ |
1,153,686 |
|
$ |
271,535 |
|
|
Basic
and diluted earnings per share
|
|
(.09)
|
|
|
(.12)
|
|
|
(.03)
|
|
The
following sets forth the effects of the Restatement on the Consolidated Balance
Sheets for December 31, 2006 and 2005:
|
|
|
As
previously
|
|
|
|
Impact
of
|
|
|
2006
|
|
reported
|
|
Restated
|
|
Restatement
|
|
|
Total
assets
|
|
$ |
2,819,272 |
|
$ |
4,047,272 |
|
$ |
1,228,000 |
|
|
Total
liabilities
|
|
$ |
1,884,130 |
|
$ |
2,248,830 |
|
$ |
364,700 |
|
|
Additional
paid in capital
|
|
|
6,593,829 |
|
|
8,721,116 |
|
|
2,127,287 |
|
|
Accumulated
deficit - development stage
|
|
|
(5,218,570 |
) |
|
(6,482,557 |
) |
|
(1,263,987 |
) |
|
Net
stockholders' equity
|
|
|
935,142 |
|
|
1,798,442 |
|
|
863,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
previously
|
|
|
|
|
Impact
of
|
|
|
2005
|
|
reported
|
|
Restated
|
|
Restatement
|
|
|
Total
liabilities
|
|
$ |
856,111 |
|
$ |
884,111 |
|
$ |
28,000 |
|
|
Additional
paid in capital
|
|
|
1,786,286 |
|
|
2,029,821 |
|
|
243,535 |
|
|
Accumulated
deficit - development stage
|
|
|
(2,138,234 |
) |
|
(2,409,769 |
) |
|
(271,535 |
) |
|
Net
stockholders' equity
|
|
|
(792,751 |
) |
|
(820,751 |
) |
|
(28,000 |
) |
ITEM 8. CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 8A. 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 Annual Report on Form 10-KSB/A (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 Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure.
(b)
Changes in internal control over financial reporting. There were no changes in
the Company's internal control over financial reporting during the fourth fiscal
quarter that materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting.
ITEM 8B. OTHER
INFORMATION
None.
PART
III
ITEM 9. DIRECTORS, EXECUTIVE
OFFICERS, PROMOTERS AND CONTROL PERSONS COMPLIANCE WITH SECTION 16(A) OF THE
EXCHANGE ACT
DIRECTORS
AND OFFICERS
The
following table sets forth the name, age and position of each director and
executive officer of the Company. There are no other persons who can be
classified as a promoter or controlling person of the Company. The officers and
directors of the Company are as follows:
|
Name
|
Age
|
Position
|
|
|
|
|
|
David
Zaikin
|
40
|
Chairman
of the Board of
|
|
|
|
Directors
and Chief Executive
|
|
|
|
Officer
|
|
|
|
|
|
Elena
Pochapski
|
41
|
Chief
Financial Officer and
|
|
|
|
Director
|
|
|
|
|
|
Oleg
V. Zhuravlev
|
46
|
Director
|
|
|
|
|
|
Sergey
Potapov
|
43
|
Director
|
|
|
|
|
|
Vladimir
V. Eret
|
62
|
Director
|
|
|
|
|
|
|
|
|
|
Timothy
Peara
|
46
|
Director
|
TERM
OF OFFICE
David
Zaikin
Chairman
of the Board of Directors and Chief Executive Officer
David
Zaikin has served as Chairman of the Board of Directors since December 2002 and
as Chief Executive Officer of the Company since August 2004. Since September
1998, Mr. Zaikin has worked as Vice President of Harvey Kalles R.E. LTD, a Real
Estate Company. Since August 2006, Mr. Zaikin as served as Chief Executive
Officer and Director of ECM Asset Management, Inc. In 2003, Mr. Zaikin was
recognized by "Who's Who" as one of the three Canadian businessmen for his
extraordinary achievements. Mr. Zaikin also has a diverse background that
includes experience in sales, marketing, channels, finance and operation. Mr.
Zaikin is currently a member of TREB (the Toronto Real Estate Board) and OREA
(the Ontario Real Estate Association). He specializes in both Financial Analysis
and Market Analysis for Commercial Real Estate.
Mr.
Zaikin also has a Bachelors Degree from Kharkov Government Pharmaceutical
Institute.
Elena
Pochapski
Chief
Financial Officer and Director
Elena
Pochapski has served as Chief Financial Officer and Director of the Company
since August 1, 2003. Before her employment at the Company, Mrs. Pochapski
served as a Senior Accountant at Silver Gold Glatt & Grosman, LLP., from
January 2002 to May 2004. Previous to that, Mrs. Pochapski was employed as an
accountant at Cunningham & Associates, LLP., from September 1999 to December
2001. Previous to that, Mrs. Pochapski worked as an accountant at Price
Waterhouse Coopers in Moscow Russia from 1997 to April 1999. Mrs. Pochapski has
extensive experience in public accounting, audits and corporate finance. She is
also familiar with Russian accounting procedures and has experience with
translating Russian financial statements into US GAAP and International
Accounting Standards (IAS). Ms. Pochapski received a Bachelor of Economics
degree from Moscow State University. She is also certified as a Certified
General Accountant (CGA) in Canada and as a Certified Public Accountant (CPA) in
the State of Maine, U.S. Additionally, Mrs. Pochapski is a member of the
Certified General Accountants Association of Ontario.
Sergey
Potapov
Director
Sergey
Potapov has served as Director of the Company since January 1, 2003, where he
works in management and acquisition of assets in the Russian oil and gas
industry. Additionally Mr. Potapov has worked as Vice President of ZNG, a
Russian oil and gas exploration company, which is owned by ZNG, Ltd., which we
currently own 50% of, since October 2002. From January 2000 through October
2002. Mr. Potapov worked as Vice General Director at Siburalresource Ltd., which
provides gas distribution throughout Kurgan Province, Russia. Previous to his
employ at Siburalresource, Mr. Potapov worked from May 1996 to January 2000, as
the Head of Sales Department of OAO Ikar. Mr. Potapov has an Engineering Degree
from The Engineering Institute of Kurgan.
Oleg V.
Zhuravlev
Director
Oleg V.
Zhuravlev has served as a Director of the Company since January 1, 2003. In
addition, since January 1, 2003, Mr. Zhuravlev has served as President and Chief
Executive Officer of ZNG, which is owned by ZNG, Ltd., which we currently own
50% of. Since October 15, 2002, Mr. Zhuravlev has worked as a general director
of ZNG. Prior to being employed by ZNG, Mr. Zhuravlev was employed as Vice
Director General in Finance in Kurganselectro Ltd, from May 31, 2002 to October
14, 2002. Before that, Mr. Zhuravlev was Vice Director General in finance and
economics at LLC Kurgan Neftegazodobivaushaya Company, from December 18, 2001
through May 30, 2002. From June 13, 2001 to December 17, 2001, Mr. Zhuravlev was
Chairman of the Board of Directors of NCO Gorodskoy Rashetny Centre. From August
1, 1998 to June 8, 2001, Mr. Zhuravlev was Director of the Kurgan branch of
Sibcontact Bank Ltd. In August 1997, Mr. Zhuravlev became Chief of the
Department of Investments and Securities Market for the Committee on Economic
Policy (Khanty-Mansysk Autonomous Area Administration), where he worked until
May 1998. From October 10, 1993 to March 11, 1997, Mr. Zhuravlev held various
positions at Sibcontact, a commercial bank, ultimately achieving the position of
Vice Chairman of the Board of Directors. Mr. Zhuravlev was professionally
trained as an engineer at the Kurgan Institute of Engineering, Motor Transport
Economics and Management Department in Kurgan, Russia.
Vladimir V.
Eret
Director
Vladimir
V. Eret has served as Technical Director and Chief Geologist of ZNG since
January 1, 2003 and as Director of the Company since July 5, 2004. Before that
time Mr. Eret was the Director General of Bentonite Inc. in Kurgan City, Russia,
from February 1, 1996 to January 31, 2002. Prior to his employment at Bentonite
Inc., Mr. Eret worked as the expert of geology at Regional Investment
Corporation, in Kurgan City, Russia, from December 1, 1994 to January 31, 1996.
From March 1985 to February 1993, Mr. Eret worked as a director of
Souzgiprovodxoz, in connection with their geological expedition of Kurgan. Prior
to that time Mr. Eret worked at various jobs as a geologist and from April 1976
to July 1978, as the chief geologist of the People's Democratic Republic of
Algeria. Mr. Eret obtained his Bachelors degree from Tomsk Government University
in Geology and Engineering in 1968. He obtained a Doctorate degree from Kurgan
University in 1990 in Economics.
Timothy
Peara
Director
Timothy
Peara has served as a Director of the Company since April 12, 2005. Since
October 2002, he has served as a Director of Emerging Markets Finance
International in London, England. From December 2001 to April 2003, he served as
Finance Director of TNG Energy AG, in Frankfurt, Germany. From August 2000 to
October 2001, he served as Vice President of UT Energy Holdings, in London,
England and Hartford, Connecticut. From December 1998 to June 2000, he served as
Vice President of PSG International, in London, England. From August 1997 to
June 1998 he served as a Senior Trader with Koch Supply & Trading, in
London, England. From June 1991 to July 1997, he served as a Director with
Lehman Brother, in London, England. From January 1989 to May 1991, he served as
Vice President of Prudential Securities, Inc. in London, England. Mr. Peara
obtained a Bachelors degree from Wesleyan University in Latin American Studies
in 1983 and a Masters degree in Business Administration from the University of
Chicago in 1988. Mr. Peara holds a Series 3 and Series 7 brokers license. Mr.
Peara is also a member of the Association of International Petroleum
Negotiators, and a member of the Oil Club in London, England.
-------------------------------------------------------
Directors
of the Company are elected annually and hold office until the annual meeting of
the shareholders of the Company and until their successors are elected and
qualified. Officers will hold their positions at the pleasure of the Board of
Directors, absent any employment agreement. There are no family relationships
among the Company's officers and directors. Officers and directors of the
Company may receive compensation as determined by the Company from time to time
by vote of the Board of Directors. Vacancies in the Board are filled by majority
vote of the remaining directors. Such compensation might be in the form of stock
options. Directors may be reimbursed by the Company for expenses incurred in
attending meetings of the Board of Directors.
EMPLOYMENT
AND OPTION AGREEMENTS
David Zaikin, Chief
Executive Officer and Director
David
Zaikin, the Company's Chief Executive Officer, signed an employment agreement
effective as of August 1, 2004. Under the agreement, Mr. Zaikin is obligated to
perform at least 40 hours per week of work on behalf of the Company. Unless
terminated earlier, Mr. Zaikin's employment agreement shall be effective until
December 31, 2008. Mr. Zaikin is to be paid an annual salary of US $180,000,
subject to periodic review by the Board. At the Board's discretion, it is
possible for Mr. Zaikin to receive a performance based bonus.
Mr.
Zaikin is provided eight (8) weeks of vacation leave per year. Additionally, Mr.
Zaikin also has the right under his employment agreement to purchase stock
options in the Company. Under the 2003 plan, Mr. Zaikin has the right to
purchase 100,000 shares of the authorized and unissued $0.001 par value
restricted stock, at an exercise price of $0.14 per share. Under the 2004 plan,
Mr. Zaikin has the right to purchase 100,000 shares of the Company's common
stock, at an exercise price of $0.20 per share. Under the 2005 plan, Mr. Zaikin
has the right to purchase 100,000 shares of the Company's common stock, at an
exercise price of $0.60 per share. Under the 2005 plan, Mr. Zaikin has the right
to purchase 100,000 shares of the Company's common stock, at an exercise price
of $0.60 per share. Mr. Zaikin's stock option plan continues until his
employment contract ends, giving him the right to purchase 10,000 shares of
common stock as of January 1, of each year, and 7,500 shares on the first date
of each month thereafter, up to a maximum of 100,000 shares per year, with the
exercise prices as follows: for the year beginning January 1, 2007 and any
subsequent year, the exercise price will be 110% of the average closing prices
for the three months prior to each grant date. All stock options received by Mr.
Zaikin will terminate at 5:00 p.m. (Eastern Standard Time) on the fourth
anniversary of December 31st of each year in which the options were granted. All
options received by Mr. Zaikin are non-transferable, except by will or the laws
of decent and distribution, and any attempt to do so shall void the
option.
Under Mr.
Zaikin's employment agreement, if he is terminated without cause by the Company
or if Mr. Zaikin himself terminates his employment for a reasonable basis,
defined as: (A) a material breach of the agreement by the Company, provided that
he gives written notice of such default to the Company and if within thirty days
after receipt of such notice, the Company has not cured such default; or (B)
termination of his employment by the Company without cause during the term of
the agreement; or (C) a reduction in his salary, except to the extent that a
majority of the other executive officers of the Company incur reductions of
salary that average no less than the percentage reduction incurred by him; or
(E) his termination of the his employment within 12 months after a "Change in
Control," of the Company, as defined in the employment agreement; the Company
shall, in exchange for an execution and general release and waiver of claims
against the Company by Mr. Zaikin, continue to pay as severance Mr. Zaikin's
salary for twelve (12) months or one half (1/2) of the remaining term of the
agreement whichever is greater.
Elena Pochapski, Chief
Financial Officer And Director
Elena
Pochapski is employed as the Company's Chief Financial Officer. She signed an
employment contract with the Company on August 1, 2003, which is effective until
December 31, 2008. Ms. Pochapski is to be paid an annual salary of US $75,000
subject to periodic review by the Board. Ms. Pochapski is entitled to six (6)
weeks of vacation time per year.
Additionally,
Ms. Pochapski has the right under her employment agreement to receive stock
options in the Company. Under the 2003 plan, Ms. Pochapski had the right to
purchase 100,000 shares of the authorized and unissued $0.001 par value
restricted stock of the Company for an exercise price of $0.14, which options
were exercised by Ms. Pochapski in February 2006. Under the 2004 plan Ms.
Pochapski has the right to purchase 100,000 shares at an exercise price of $0.20
per share, under the 2005 plan, Ms. Pochapski has the right to purchase 100,000
shares at an exercise price of $0.60 per share and under the 2006 plan, Ms.
Pochapski has the right to purchase 100,000 shares at an exercise price of $0.60
per share. Ms. Pochapski's stock option plan continues until her employment
contract ends, giving her the right to purchase 10,000 shares of common stock as
of January 1, of each year, and 7,500 shares on the first date of each month
thereafter, up to a maximum of 100,000 shares per year, with exercise prices as
follows: for 2007 and each subsequent year the exercise price is 110% of the
average closing prices for the three months prior to the grant date. All stock
options received by Ms. Pochapski will terminate at 5:00 p.m. (Eastern Standard
Time) on the fourth anniversary of December 31st of each year in which the
options were granted. All options received by Ms. Pochapski are non-transferable
except by will or the laws of decent and distribution and any attempt to do so
shall void the option.
Under Ms. Pochapski's employment
agreement, if she is terminated without cause by the Company or if Ms. Pochapski
herself terminates her employment for a reasonable basis, defined as: (A) a
material breach of the agreement by the Company, provided that she gives written
notice of such default to the Company and if within thirty days after receipt of
such notice, the Company has not cured such default; or (B) termination of her
employment by the Company without cause during the term of the agreement; or (C)
a reduction in her salary, except to the extent that a majority of the other
executive officers of the Company incur reductions of salary that average
no less than the percentage reduction incurred by her; or (E) her termination of
the her employment within 12 months after a "Change in Control," of the Company,
as defined in the employment agreement; the Company shall, in exchange for an
execution and general release and waiver of claims against the Company by Ms.
Pochapski, continue to pay as severance Ms. Pochapski's salary for twelve (12)
months or one half (1/2) of the remaining term of the agreement whichever is
greater.
On
September 1, 2005, the Company entered into an "Amendment to the Employment
Agreement Dated August 1, 2003" ("Amended Employment Agreement") with Elena
Pochapski. Pursuant to the terms of the Amended Employment Agreement, Ms.
Pochapski agreed to forgive $50,000 of salary which she was owed for services
rendered under her employment agreement, in return for the Company issuing her
400,000 shares of the Company's restricted common stock. Additionally, Ms.
Pochapski agreed to postpone the payment of the remaining $84,707 which she was
owed in connection with her employment agreement from the period from August 1,
2003 to August 30, 2005, until such time as the Company has sufficient profits
to pay the amount in cash either partially or in full. The Amended Employment
Agreement also set Ms. Pochapski's annual salary for the period from September
1, 2005 until August 30, 2006 at CDN $75,000, after which time her salary will
return to the amounts listed in her August 1, 2003 employment agreement,
depending on the financial condition of the Company. The Amended Employment
Agreement also provided for the Company to pay Ms. Pochapski a monthly allowance
of CDN $500 in consideration for her using her personal automobile for Company
related services.
Oleg V. Zhuravlev,
Director
Oleg V.
Zhuravlev, the President and Chief Executive Officer of ZNG, the Company's
subsidiary, and a Director of the Company has the right to receive stock options
in the Company pursuant to a Stock Option Agreement, which grants him options to
purchase shares of the Company's common stock under stock plans relating to
various years of his employment. Under the 2003 stock option plan, Mr. Zhuravlev
has the right to purchase all or any part of 200,000 shares of the authorized
and unissued $.001 par value restricted common stock of the Company at an
exercise price of $0.14 per share. Additionally under the 2004 and 2005 plans,
Mr. Zhuravlev has the right to purchase 200,000 shares of the Company's common
stock at the exercise prices of $0.20 per share and $0.60 per share,
respectively. Under the 2006 plan, Mr. Zhuravlev has the right to
purchase 200,000 shares of common stock at an exercise price of $0.60 per share.
Mr. Zhuravlev's stock option plan continues until his employment with the
Company ends, giving him the right to purchase 20,000 shares of common stock as
of January 1, of each year, and 15,000 shares on the first date of each month
thereafter, up to a maximum of 200,000 shares, with exercise prices as follows:
for 2007 and every subsequent year the exercise price is 110% of the average
closing prices for the three months prior to each grant. All stock options
received by Mr. Zhuravlev will terminate at 5:00 p.m. (Eastern Standard Time) on
the fourth anniversary of December 31st of each year in which the options were
granted. All options received by Mr. Zhuravlev are non-transferable except by
will or the laws of decent and distribution and any attempt to do so shall void
the option.
Vladimir V. Eret,
Director
Vladimir
V. Eret is employed as the Chief Operating Officer of ZNG, and a Director of the
Company. Mr. Eret has the right to receive stock options in the Company pursuant
to a Stock Option Agreement, which grants him options to purchase shares of the
Company's common stock under stock plans relating to various years of his
employment. Under the 2004 plan, Mr. Eret has the right to purchase 84,000
shares of common stock at $0.60 per share and under the 2005 plan, Mr.
Eret has the right to purchase 84,000 shares of common stock at $0.60 per
share. Under the 2006 plan, Mr. Eret has the right to purchase 84,000
shares of common stock at an exercise price of $0.60 per share. Mr. Eret's stock
option plan continues until his employment with the Company ends, giving him the
right to purchase 7,000 shares of common stock as of January 1, of each year,
and 7,000 shares on the first date of each month thereafter, up to a maximum of
84,000 options per year, with exercise prices as follows: for 2007 and every
subsequent year the exercise price is 110% of the average closing prices for the
three months prior to each grant. All stock options received by Mr. Eret will
terminate at 5:00 p.m. (Eastern Standard Time) on the fourth anniversary of
December 31st of each year in which the options were granted. All options
received by Mr. Eret are non-transferable except by will or the laws of decent
and distribution and any attempt to do so shall void the option.
Sergey Potapov,
Director
Sergey
Potapov, the Vice President of ZNG and a Director of the Company has the right
to purchase stock options in the Company pursuant to a Stock Option Agreement,
which grants him options to purchase shares of the Company's common stock under
stock plans relating to various years of his employment. Under the 2004 plan,
Mr. Potapov has the right to purchase 84,000 shares of common stock at $0.60 per
share and under the 2005 plan, Mr. Potapov has the right to purchase 84,000
shares of common stock at $0.60 per share. Under the 2006 plan, Mr. Potapov has
the right to purchase 84,000 shares of common stock at an exercise price of
$0.60 per share. Mr. Potapov's stock option plan continues until his employment
ends, giving him the right to purchase 7,000 shares of common stock as of
January 1, of each year, and 7,000 shares on the first date of each month
thereafter, up to a maximum of 84,000 options per year, with exercise prices as
follows: for 2007 and every subsequent year the exercise price is 110% of the
average closing prices for the three months prior to each grant. All stock
options received by Mr. Potapov will terminate at 5:00 p.m. (Eastern Standard
Time) on the fourth anniversary of December 31st of each year in which the
options were granted. All options received by Mr. Potapov are non-transferable
except by will or the laws of decent and distribution and any attempt to do so
shall void the option.
Tim Peara,
Director
Tim
Peara, a Director of the Company has the right to purchase stock options in the
Company pursuant to a Stock Option Agreement. Under his Stock Option Agreement,
Mr. Peara has the right to purchase 100,000 shares of the Company's common stock
at an exercise price of $0.60 per share during the year ended December 31, 2005.
Mr. Peara has the right to purchase 100,000 shares of the Company's common stock
at an exercise price of $0.60 per share during the year ended December 31, 2006.
Mr. Peara's stock option plan continues until his employment is terminated or
ends, giving him the right to purchase 10,000 shares of common stock as of
January 1, of each year, and 7,500 shares on the first date of each month
thereafter, up to a maximum of 100,000 shares per year, with exercise prices as
follows: for 2007 and each subsequent year the exercise price is 110% of the
average closing prices for the three months prior to the grant date. All stock
options received by Mr. Peara according to the above will terminate at 5:00 p.m.
(Eastern Standard Time) on the fourth anniversary of December 31st of each year
in which the options were granted. All options received by Mr. Peara are
non-transferable except by will or the laws of decent and distribution and any
attempt to do so shall void the option.
Additionally,
Mr. Peara was granted 100,000 options to purchase shares of the Company's common
stock at $0.30 per share in consideration for consulting services provided to
the Company prior to his election as a Director of the Company (the "Consulting
Options"). One half or 50,000 shares of the Consulting Options were to expire at
5:00 p.m. (Eastern Standard Time) on May 1, 2006, however those options were
exercised by Mr. Peara prior to expiring, and one half or 50,000 of the
Consulting Options expire at 5:00 p.m. (Eastern Standard Time) on May 1, 2007,
if not exercised prior to those dates.
Additionally,
pursuant to an agreement between Alternative Energy Finance and the Company,
Timothy Peara, our Director and the managing Director of Alternative Energy
Finance, receives compensation based on the total investment made by Baltic in
the Joint Venture described in greater detail below under “Certain Relationships
and Related Transactions.”
[Remainder
of page left intentionally blank.]
ITEM 10. EXECUTIVE
COMPENSATION
Compensation
paid to Officers and Directors is set forth in the Summary Compensation Table
below. The Company may reimburse its Officers and Directors for any and all
out-of-pocket expenses incurred relating to the business of the
Company.
|
Name
And
|
|
|
|
|
|
|
|
Other
Annual
|
|
Restricted
|
|
|
|
|
|
|
|
Principal
|
|
Fiscal
|
|
|
|
|
|
Compen-
|
|
Stock
|
|
Options/
|
|
Total
|
|
|
|
Position
(1)
|
|
Year
|
|
Salary
|
|
Bonus
($)
|
|
sation
|
|
Awards
|
|
Sars
|
|
Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
Zaikin
|
|
2006
|
|
$
|
0(2
|
)
|
|
--
|
|
|
--
|
|
$
|
721,000(3
|
)
|
|
(4)
|
|
$
|
721,000
|
|
|
|
|
CEO
and
|
|
2005
|
|
$
|
50,000(2
|
)
|
|
--
|
|
|
--
|
|
|
(2
|
)
|
|
(4)
|
|
$
|
50,000
|
|
|
|
|
Chairman
|
|
2004
|
|
$
|
75,000
|
|
|
|
|
|
|
|
|
|
|
|
(4)
|
|
$
|
75,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shakeel
Adam
|
|
2004(5)
|
|
$
|
37,500
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
$
|
37,500
|
|
|
|
|
CEO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Sept.
1, 2003-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July
31, 2004)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Elena
Pochapski
|
|
2006
|
|
$
|
74,920
|
|
|
(6)
|
|
|
--
|
|
$
|
103,000(6
|
)
|
|
(7)
|
|
$
|
177,920
|
|
|
|
|
CFO
and
|
|
2005
|
|
$
|
71,083(8
|
)
|
|
--
|
|
|
--
|
|
|
(8
|
)
|
|
(7)
|
|
$
|
71,083
|
|
|
|
|
Director
|
|
2004
|
|
$
|
75,000
|
|
|
--
|
|
|
--
|
|
|
|
|
|
(7)
|
|
$
|
75,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oleg
V.
|
|
2006
|
|
$
|
0
|
|
|
(9)
|
|
|
--
|
|
$
|
51,500(9
|
)
|
|
(10)
|
|
$
|
51,500
|
|
|
|
|
Zhuravlev
|
|
2005(11)
|
|
$
|
30,587
|
|
|
|
|
|
|
|
|
|
|
|
(10)
|
|
$
|
30,587
|
|
|
|
|
Director
|
|
2004(11)
|
|
$
|
285
|
|
|
|
|
|
|
|
|
|
|
|
(10)
|
|
$
|
285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vladimir
|
|
2006
|
|
$
|
0
|
|
|
(12)
|
|
|
--
|
|
$
|
20,600(12
|
)
|
|
(13)
|
|
$
|
20,600
|
|
|
|
|
Eret
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sergei
|
|
2006
|
|
$
|
0
|
|
|
(14)
|
|
|
--
|
|
$
|
20,600(14
|
)
|
|
(15)
|
|
$
|
20,600
|
|
|
|
|
Potapov
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timothy
|
|
2006
|
|
$
|
35,000(16
|
)
|
|
(17)
|
|
|
--
|
|
$
|
41,200(17
|
)
|
$
|
4,454
|
|
$
|
76,200
|
|
|
|
|
Peara
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18)(16)
|
|
|
|
|
|
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
above do not include perquisites and other personal benefits in amounts less
than an aggregate of 10% of the individuals salaries listed above.
(1) Other
than the individuals listed above, the Company has no other executive employees
who have received more than $100,000 in compensation, including bonuses and
options, during each of the last three (3) fiscal years. No executive employee
listed above received any LTIP payouts over the past three (3)
years.
(2) On
August 16, 2005, David Zaikin, the Company's Chief Executive Officer agreed to
forgive $62,500, which represented a part of his accrued salary to date, in
return for the issuance of 500,000 restricted shares of the Company's common
stock, which shares are not included in the table above, because they were
issued in consideration for previous debts owed to Mr. Zaikin. Mr. Zaikin also
agreed to stop accruing salary until such time as the Company has sufficient
monies to pay such salary, beginning in September 2005. Mr. Zaikin accrued
$50,000 of salary for the year ended December 31, 2005 and $0 of salary for the
year ended December 31, 2006. In January 2007, Mr. Zaikin informed us of his
request to withdraw his previous request to not accrue salary and to once again
accrue salary moving forward until such time as we have sufficient funds to
repay such accrued salary. 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.
(3)
Represents 350,000 restricted shares of common stock issued to Mr. Zaikin in
February 2007, in consideration for services rendered to the Company during the
2006 fiscal year, which shares were valued at $721,000.
(4) Mr.
Zaikin was granted 100,000 options to purchase shares of our common during each
of the fiscal years ended 2006, 2005 and 2004, pursuant to a Stock Option
Agreement he entered into with us in 2003. The exercise price of those options
for the years ended December 31, 2006, 2005 and 2004, were $0.60, $0.20 and
$0.14 per share, respectively. All unexercised options expire on December
31st
of the fourth year after they were granted. We previously determined the initial
fair value of our stock options was minimal at the time of our entry into the
Stock Option Agreement with Mr. Zaikin, as we were only a start-up company,
which did not publicly trade its stock, and as such, the options granted to Mr.
Zaikin during the periods disclosed above did not represent any expense on the
Company’s financial statements and therefore have no value in the table above.
In December 2006, Mr. Zaikin exercised 52,500 options of his 2006 options to
purchase shares of our common stock for aggregate consideration of $31,500,
which amount was previously owed to Mr. Zaikin in accrued salary and which
amount was forgiven by Mr. Zaikin in consideration for the exercise of the
options.
(5)
Shakeel Adam was no longer employed by the Company as of July 31, 2004. Mr.
Adam's salary accrued for 2004 is listed as the total for the period January 1,
2004 to July 31, 2004. All of Mr. Adam's options terminated on October 31,
2004.
(6)
Represents the value of 50,000 restricted shares of common stock issued to Ms.
Pochapski in February 2007, as a bonus for services rendered to the Company
during the 2006 fiscal year, which shares were valued at
$103,000 .
(7) Ms.
Pochapski was granted 100,000 options to purchase shares of our common during
each of the fiscal years ended 2006, 2005 and 2004, pursuant to a Stock Option
Agreement she entered into with us in 2003. The exercise price of those options
for the years ended December 31, 2006, 2005 and 2004, were $0.60, $0.20 and
$0.14 per share, respectively. All unexercised options expire on December
31st
of the fourth year after they were granted. We previously determined the initial
fair value of our stock options was minimal at the time of our entry into the
Stock Option Agreement with Ms. Pochapski, as we were only a start-up company,
which did not publicly trade its stock, and as such, the options granted to Ms.
Pochapski during the periods disclosed above did not represent any expense on
the Company’s financial statements and therefore have no value in the table
above. In February 2006, Ms. Pochapski exercised 100,000 options to purchase
shares of our common stock for aggregate consideration of $14,000.
(8) On
September 1, 2005, the Company entered into an "Amendment to the Employment
Agreement Dated August 1, 2003" ("Amended Employment Agreement") with its
Director and Chief Financial Officer, Elena Pochapski. Pursuant to the terms of
the Amended Employment Agreement, Ms. Pochapski agreed to forgive $50,000 of
salary which she was owed for services rendered under her employment agreement,
in return for the Company issuing her 400,000 shares of the Company's restricted
common stock. The value of the 400,000 shares issued to Ms. Pochapski is not
included in the table above, because those shares were issued in consideration
for debts previously owed to Ms. Pochapski. Additionally, Ms. Pochapski agreed
to postpone the payment of the remaining $84,707 which she is owed in connection
with her employment agreement from the period from August 1, 2003 to August 30,
2005, until such time as the Company has sufficient profits to pay the amount in
cash either partially or in full. The Amended Employment Agreement also set Ms.
Pochapski's annual salary for the period from September 1, 2005 until August 30,
2006 at CDN $75,000, after which time her salary will return to the amounts
listed in her August 1, 2003 employment agreement, depending on the financial
condition of the Company as of December 31, 2005, for the years ended December
31, 2005, 2004 and 2003.
(9)
Represents the value of 25,000 restricted shares of common stock issued to Mr.
Zhuravlev in February 2007, as a bonus for services rendered to the Company
during the 2006 fiscal year, which shares were valued at
$51,500 .
(10) Mr.
Zhuravlev was granted 100,000 options to purchase shares of our common during
each of the fiscal years ended 2006, 2005 and 2004, pursuant to a Stock Option
Agreement he entered into with us in 2004. The exercise price of those options
for the years ended December 31, 2006, 2005 and 2004, were $0.60, $0.20 and
$0.14 per share, respectively. All unexercised options expire on December
31st
of the fourth year after they were granted. We previously determined the initial
fair value of our stock options was minimal at the time of our entry into the
Stock Option Agreement with Mr. Zhuravlev, as we were only a start-up company,
which did not publicly trade its stock, and as such, the options granted to Mr.
Zhuravlev during the periods disclosed above did not represent any expense on
the Company’s financial statements and therefore have no value in the table
above.
(11) All
salary listed for Mr. Zhuravlev for the years ended December 31, 2005, 2004 and
2003 were paid in full. Mr. Zhuravlev forgave any unpaid amounts of his salary
for the years ended December 31, 2005, 2004 and 2003 in connection with the
Company's entry into the Joint Venture.
(12)
Represents the value of 10,000 restricted shares of common stock issued to Mr.
Eret in February 2007, as a bonus for services rendered to the Company during
the 2006 fiscal year, which shares were valued at $20,600 .
(13) Mr.
Eret was granted 84,000 options to purchase shares of our common stock during
each of the fiscal years ended 2006, 2005 and 2004, pursuant to a Stock Option
Agreement he entered into with us in 2004. The exercise price of those options
for the years ended December 31, 2006, 2005 and 2004, were $0.60, $0.20 and
$0.14 per share, respectively. All unexercised options expire on December
31st
of the fourth year after they were granted. We previously determined the initial
fair value of our stock options was minimal at the time of our entry into the
Stock Option Agreement with Mr. Eret, as we were only a start-up company, which
did not publicly trade its stock, and as such, the options granted to Mr. Eret
during the periods disclosed above did not represent any expense on the
Company’s financial statements and therefore have no value in the table
above.
(14)
Represents the value of 10,000 restricted shares of common stock issued to Mr.
Potapov in February 2007, as a bonus for services rendered to the Company during
the 2006 fiscal year, which shares were valued at $20,600 .
(15) Mr.
Potapov was granted 84,000 options to purchase shares of our common stock during
each of the fiscal years ended 2006, 2005 and 2004, pursuant to a Stock Option
Agreement he entered into with us in 2004. The exercise price of those options
for the years ended December 31, 2006, 2005 and 2004, were $0.60, $0.20 and
$0.14 per share, respectively. All unexercised options expire on December
31st
of the fourth year after they were granted. We previously determined the initial
fair value of our stock options was minimal at the time of our entry into the
Stock Option Agreement with Mr. Potapov, as we were only a start-up company,
which did not publicly trade its stock, and as such, the options granted to Mr.
Potapov during the periods disclosed above did not represent any expense on the
Company’s financial statements and therefore have no value in the table
above.
(16) Mr.
Peara’s salary and option awards in the table above, do not include amounts paid
by us to Alternative Energy Finance Ltd., which Mr. Peara is the Managing
Director of, which amounts are described in greater detail herein, as those fees
and options were not paid to Mr. Peara in consideration for his services to the
Company as a Director.
(17)
Represents the value of 20,000 restricted shares of common stock issued to Mr.
Peara in February 2007, as a bonus for services rendered to the Company during
the 2006 fiscal year, which shares were valued at $41,200 .
(18) Mr.
Peara was granted 100,000 options to purchase shares of our common stock during
each of the fiscal years ended 2006 and 2005, pursuant to a Stock Option
Agreement he entered into with us in 2004. The exercise price of those options
for the years ended December 31, 2006 and 2005, were $0.60 and $0.20 per share,
respectively.
The value
of the options granted during 2006 was approximately $4,454. All unexercised
options expire on December 31st of the
fourth year after they were granted.
COMPENSATION
DISCUSSION AND ANALYSIS
Director
Compensation
The
members of our Board of Directors each receive yearly option grants pursuant to
Option Agreements which they entered into with us when they were appointed
Directors of the Company. The Option Agreements and yearly option grants are
described in greater detail above under “Employment and Option Agreements.” The
Board of Directors reserves the right in the future to award the members of the
Board of Directors cash or stock based consideration for their services to the
Company, which awards, if granted shall be in the sole determination of the
Board of Directors.
Executive
Compensation Philosophy
Our Board
of Directors determines the compensation provided to our executive officers in
their sole determination. Our executive compensation program is designed to
attract and retain talented executives to meet our short-term and long-term
business objectives. In doing so, we attempt to align our executives’ interests
with the interests of our shareholders by providing an adequate compensation
package to such executives. This compensation package includes a base salary,
which we believe is competitive with other companies of our relative size. Our
Board of Directors reserves the right to award incentive bonuses which are
linked to our performance, as well as to the individual executive officer’s
performance in the future. This package may also include long-term, stock based
compensation to certain executives which is intended to align the performance of
our executives with our long-term business strategies, which may be similar to
the stock option grants which our Directors receive.
Base
Salary
The base
salary of our executive officers was established by our entry into Employment
Agreements with those individuals, as describe above. The salaries of those
individuals were established by evaluating the range of responsibilities of
their positions, as well as the anticipated impact that such individuals could
have in meeting our strategic objectives. The established base salary of each
individual was then benchmarked to comparable positions with that of our
industry and similarly sized companies. Base salaries are adjusted to reflect
the varying levels of position responsibilities and individual executive
performance.
Incentive
Bonus
Along
with our executives’ base salaries, the Board of Directors reserves the right to
give incentive bonuses to our executive officers and Directors, which bonuses
the Board of Directors may grant in its sole discretion, if the Board of
Directors believes such bonuses are in the Company’s best interest, after
analyzing our current business objectives and growth, if any, which growth is a
direct result of the actions and ability of such executives in the sole
discretion of the Board of Directors.
Long-term,
Stock Based Compensation
In order
to attract, retain and motivate executive talent necessary to support the
Company’s long-term business strategy we may award certain executives with
long-term, stock based compensation in the future, in the sole discretion of our
Board of Directors, which we do not currently have any immediate plans to
award.
Criteria
for Compensation Levels
The
Company has always sought to attract and retain qualified executives and
employees able to positively contribute to the success of the Company for the
benefit of its various stakeholders, the most important of which is its
shareholders, but also including its customers, its employees, and the
communities in which the Company operates.
The Board
of Directors (in establishing compensation levels for the Chief Executive
Officer and Chief Operating Officer, as well as other executive positions) and
the Company (in establishing compensation levels for all executives of the
Company) considers many factors, including, but not limited to, the individual’s
abilities and executed performance that results in: the advancement of corporate
goals of the Company, execution of the Company’s business strategies,
contributions to positive financial results, contributions to the Company’s
overall image and reputation in the Company’s industry, and contributions to the
development of the management team and other employees.
An
officer must demonstrate his or her ability to deliver results in his or her
areas of responsibility, which can include, among other things: business
development, efficient management of operations and systems, implementation of
appropriate changes and improvements to operations and systems, personnel
management, financial management, and strategic decision making. In determining
compensation levels, the Board of Directors may also consider: competitiveness
of compensation packages relative to other comparable companies, both inside and
outside of the oil and gas exploration and development industry, and the
experience level of each particular individual.
Compensation
levels for executive officers are generally reviewed upon the expiration of such
executive’s employment and/or consulting agreements (if any), or annually, but
may be reviewed more often as deemed appropriate.
Compensation
Philosophy and Strategy
In
addition to the “Criteria for Compensation Levels” set forth above, the Company
has a “Compensation Philosophy” for all employees of the Company (set forth
below), and a “Compensation Strategy for Key Management Personnel” (set forth
below), a substantial portion of which also applies to all employees of the
Company.
Compensation
Philosophy
The
Company’s compensation philosophy is as follows:
|
·
|
The
Company believes that compensation is an integral component of its overall
business and human resource strategies. The Company’s compensation plans
will strive to promote the hiring and retention of personnel necessary to
execute the Company’s business strategies and achieve its business
objectives.
|
|
|
|
|
·
|
The
Company’s compensation plans will be strategy-focused, competitive, and
recognize and reward individual and group contributions and results. The
Company’s compensation plans will strive to promote an alignment of the
interests of employees with the interests of the shareholders by having a
portion of compensation based on financial results and actions that will
generate future shareholder value.
|
|
|
|
|
·
|
In
order to reward financial performance over time, the Company’s
compensation programs generally will consist of: base compensation, and
may also consist of short-term variable incentives and long-term variable
incentives, as appropriate.
|
|
|
|
|
·
|
The
Company’s compensation plans will be administered consistently and fairly
to promote equal opportunities for the Company’s
employees.
|
Compensation Strategy for
Key Management Personnel
The
Company’s compensation strategy for its key management personnel is as
follows:
|
·
|
Total
compensation may include base salary and short-term and long-term variable
incentives based on annual and long term performance, and long-term
variable incentives, in each case, where appropriate.
|
|
|
|
|
·
|
Compensation
will be comparable to general and industry-specific compensation
practices.
|
|
|
|
|
·
|
Generally,
base compensation, and targeted short and long-term variable compensation,
if any, will be established within the range of compensation of similarly
situated companies in the Company’s industry. The Company’s organization,
size and complexity will be taken into account, and therefore similarly
situated companies include companies of similar size and complexity
whether or not such companies are in the Company’s industry or
not.
|
|
|
|
|
·
|
When
determining compensation for officers, managers and consultants, the
Company takes into account the employee’s (and/or consultant’s)
knowledge,
|
|
|
experience,
past employment history and connections in the industry, including
industry specific knowledge and experience, to the extent such knowledge
and experience contributes to the Company’s ability to achieve its
business objectives.
|
|
·
|
The
Company reserves the right to adjust annual base salaries of employees
and/or to award performance based bonuses if individual performance is at
or above pre-established performance
expectations.
|
[Remainder
of page left intentionally blank.]
ITEM 11. SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The
following table provides the names and addresses of each person known to own
directly or beneficially more than a 5% of the outstanding common stock (as
determined in accordance with Rule 13d-3 under the Exchange Act), based on
15,034,996 shares of common stock outstanding as of March 22, 2007 and by the
officers and directors, individually and as a group. Except as otherwise
indicated, all shares are owned directly.
|
Name
and Address of Beneficial Owner
|
|
Shares
of Common Stock Beneficially Owned (1)
|
|
Options
to purchase shares of Common Stock Exercisable within the next 60
days
|
|
Total
Shares of Common Stock Beneficially Owned (2)
|
|
Percent(1)
|
|
Victor
Repin
Kurgan
City,
Klimova
St. 41, Russia 640020
|
|
1,400,000
|
|
1,000,000
|
|
2,400,000
(5)
|
|
15.0%
(A)
|
|
David
Zaikin
CEO
and Chairman of the Board of Directors
275
Madison Ave., 6th Floor, New York, New York 10016 (3)
|
|
1,010,000
|
|
395,000
|
|
1,405,000
(6)
|
|
9.1%
(B)
|
|
Elena
Pochapski
CFO
and Director
275
Madison Ave., 6th Floor, New York, New York 10016
|
|
455,000
(7)
|
|
347,500
|
|
802,500
(8)
|
|
5.2%
(C)
|
|
Sergey
Potapov
Director
Kurgan
City Lenina St. 27/X Russia 640000
|
|
10,000
|
|
294,000
|
|
304,000
(9)
|
|
2.0%
(D)
|
|
Oleg
V. Zhuravlev
Director
Kurgan
City Lenina St. 27/X Russia 640000 (4)
|
|
25,000
|
|
347,500
|
|
372,500
(10)
|
|
2.4%
(E)
|
|
Vladimir
Eret
Director
Kurgan
City Lenina St. 27/X Russia 640000
|
|
10,000
|
|
294,000
|
|
304,000
(11)
|
|
2.0%
(F)
|
|
Tim
Peara
Director
275
Madison Ave., 6th Floor, New York, New York 10016
|
|
117,500
|
|
445,141
|
|
562,641
(12)
|
|
3.6%
(G)
|
|
|
|
|
|
|
|
|
|
|
|
All
the Officers and Directors as a group
(6
persons)
|
|
1,625,500
|
|
2,123,141
|
|
3,750,641
(4),(6),(7),(8,
(9),(10))
|
|
21.9%(H)
|
1) The
number of shares of common stock "beneficially owned" are determined under the
rules of the Securities and Exchange Commission, and include any shares of
common stock as to which a person has sole or shared voting or investment power
and any shares of common stock which the person has the right to acquire within
sixty (60) days through the exercise of any option, warrant or right. Shares of
common stock subject to an option or warrant currently exercisable or
exercisable within sixty (60) days are deemed outstanding for computing the
percentage of the person holding such option or warrant, but are not deemed
outstanding for computing the percentage of any other person.
3) David
Zaikin holds 400,000 of his shares in the name of WCM, Ltd, which is 100% owned
by Mr. Zaikin and 810,000 shares in his own name.
4)
Includes both the number of shares of common stock beneficially owned as of
March 22, 2007, but also any vested options which are exercisable within the
next sixty days.
5)
Includes warrants to purchase 300,000 shares of our common stock at $1.00 per
share, 150,000 shares of our common stock at $2.00 per share and 150,000 shares
of our common stock at $2.50 per share. The warrants expire if unexercised on
December 22, 2008.
6)
Includes 100,000 options to purchase shares of our common stock at $0.14 per
share, which vested throughout the fiscal year ended 2003, 100,000 options to
purchase shares of our common stock at $0.20 per share, which vested throughout
the fiscal year ended 2004, 100,000 options to purchase shares of our common
stock at $0.60 per share, which vested throughout the fiscal year ended 2005,
47,500 options to purchase shares of our common stock at $0.60 per share, which
vested throughout the fiscal year ended 2006 (Mr. Zaikin exercised 52,500
options in December 2006), and 47,500 options to purchase shares of our common
stock at an exercise price equal to 110% of the average closing prices for the
three months prior to each grant date, of which a portion had vested as of March
22, 2007, and a portion will vest over the subsequent sixty (60) day period. All
options are valid until 5 P.M. December 31, on the fourth anniversary of each
year that the options vest. The options are described in greater detail under
"Employment and Option Agreements" above.
7)
Includes 30,000 shares held in Mrs. Pochapski’s daughter’s name, which Mrs.
Pochapski is deemed to beneficially own.
8)
Includes 100,000 options to purchase shares of our common stock at $0.20 per
share, which vested throughout the fiscal year ended 2004, 100,000 options to
purchase shares of our common stock at $0.60 per share, which vested throughout
the fiscal year ended 2005, 100,000 options to purchase shares of our common
stock at $0.60 per share, which vested throughout the fiscal year ended 2006,
and 47,500 options to purchase shares of our common stock at an exercise price
equal to 110% of the average closing prices for the three months prior to each
grant date, of which a portion had vested as of March 22, 2007, and a portion
will vest over the subsequent sixty (60) day period. All options are valid until
5 P.M. December 31, on the fourth anniversary of each year that the options
vest. The options are described in greater detail under "Employment and Option
Agreements" above.
9)
Includes 84,000 options to purchase shares of our common stock at $0.20 per
share, which vested throughout the fiscal year ended 2004, 84,000 options to
purchase shares of our common stock at $0.60 per share, which vested throughout
the fiscal year ended 2005, 84,000 options to purchase shares of our common
stock at $0.60 per share, which vested throughout the fiscal year ended 2006,
and 42,000 options to purchase shares of our common stock at an exercise price
equal to 110% of the average closing prices for the three months prior to each
grant date, of which a portion had vested as of March 22, 2007, and a portion
will vest over the subsequent sixty (60) day period. All options are valid until
5 P.M. December 31, on the fourth anniversary of each year that the options
vest. The options are described in greater detail under "Employment and Option
Agreements" above.
10)
Includes 100,000 options to purchase shares of our common stock at $0.20 per
share, which vested throughout the fiscal year ended 2004, 100,000 options to
purchase shares of our common stock at $0.60 per share, which vested throughout
the fiscal year ended 2005, 100,000 options to purchase shares of our common
stock at $0.60 per share, which vested throughout the fiscal year ended 2006 and
47,500 options to purchase shares of our common stock at an exercise price equal
to 110% of the average closing prices for the three months prior to each grant
date, of which a portion had vested as of March 22, 2007, and a portion will
vest over the subsequent sixty (60) day period. All options are valid until 5
P.M. December 31, on the fourth anniversary of each year that the options vest.
The options are described in greater detail under "Employment and Option
Agreements" above.
11)
Includes 84,000 options to purchase shares of our common stock at $0.20 per
share, which vested throughout the fiscal year ended 2004, 84,000 options to
purchase shares of our common stock at $0.60 per share, which vested throughout
the fiscal year ended 2005, and 84,000 options to purchase shares of our common
stock at $0.60 per share, which vested throughout the fiscal year ended 2006,
and 42,000 options to purchase shares of our common stock at an exercise price
equal to 110% of the average closing prices for the three months prior to each
grant date, which had vested as of March 22, 2007, and will vest over the
subsequent sixty (60) day period. All options are valid until 5 P.M. December
31, on the fourth anniversary of each year that the options vest. The options
are described in greater detail under "Employment and Option Agreements"
above.
12)
Includes options to purchase 50,000 shares of our common stock at an exercise
price of $0.30 per share, which options expire if unexercised on May 1, 2007.
Also includes certain options issuable to AEF in connection with amounts loaned
to ZNG (as described in greater detail herein), including 50,068 options to
purchase shares of our common stock at an exercise price of $0.63 per share,
which vested on March 1, 2006 and represented options earned throughout the year
ended 2005; 17,561 options to purchase shares of our common stock at an exercise
price of $0.67 per share, which vested on March 31, 2006; 20,412 options to
purchase shares of our common stock at an exercise price of $2.02 per share,
which vested on June 30, 2006; 20,952 options to purchase shares of our common
stock at an exercise price of $1.53 per share, which vested on September 30,
2006; and 38,648 options to purchase shares of our common stock at an exercise
price of $1.44 per share, which vested on December 31, 2006, which options
expire if unexercised on the third anniversary of the date they were granted.
Finally, the amount listed above includes 100,000 options to purchase shares of
our common stock at $0.60 per share, which vested throughout the fiscal year
ended 2005, 100,000 options to purchase shares of our common stock at $0.60 per
share, which vested throughout the fiscal year ended 2006 and 47,500 options to
purchase shares of our common stock at an exercise price equal to 110% of the
average closing prices for the three months prior to each grant date of which a
portion had vested as of March 22, 2007, and a portion will vest over the
subsequent sixty (60) day period, which options were granted pursuant to his
Directors stock option plan. All Director options are valid until 5 P.M.
December 31, on the fourth anniversary of each year that the options vest. The
options are described in greater detail under "Employment and Option Agreements"
above.
A) Using
16,034,996 shares outstanding, assuming the exercise of all 1,000,000 options
held by Mr. Repin.
B) Using
15,429,996 shares outstanding, assuming the exercise of all 395,000 options held
by Mr. Zaikin.
C) Using
15,382,496 shares outstanding, assuming the exercise of all 347,500 options held
by Ms. Pochapski.
E) Using
15,328,996 shares outstanding, assuming the exercise of all 294,000 options held
by Mr. Potapov.
E) Using
15,382,496 shares outstanding, assuming the exercise of all 347,500 options held
by Mr. Zhuravlev.
F) Using
15,328,996 shares outstanding, assuming the exercise of all 294,000 options held
by Mr. Eret.
G) Using
15,480,137 shares outstanding, assuming the exercise of all 445,141 options held
by Mr. Peara.
H) Using
17,158,137 shares outstanding, assuming the exercise of all 2,123,141 options
held collectively by our officers and Directors.
ITEM 12. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
In April
2005, the Company’s Board of Directors adopted Amended Bylaws of the Company,
which Amended Bylaws are attached hereto as Exhibit 3.9.
On August
16, 2005, David Zaikin, the Company's Chief Executive Officer, President and a
Director of the Company agreed to forgive $62,500, which represented a part of
his salary, which he had accrued in return for the issuance of 500,000
restricted shares of the Company's common stock.
On
September 1, 2005, the Company entered into an "Amendment to the Employment
Agreement Dated August 1, 2003" ("Amended Employment Agreement") with its
Director and Chief Financial Officer, Elena Pochapski. Pursuant to the terms of
the Amended Employment Agreement, Ms. Pochapski agreed to forgive $50,000 of
salary which she was owed for services rendered under her employment agreement,
in return for the Company issuing her 400,000 shares of the Company's restricted
common stock. Additionally, Ms. Pochapski agreed to postpone the payment of the
remaining $84,707 which she is owed in connection with her employment agreement
from the period from August 1, 2003 to August 30, 2005, until such time as the
Company has sufficient profits to pay the amount in cash either partially or in
full. The Amended Employment Agreement also set Ms. Pochapski's annual salary
for the period from September 1, 2005 until April 2006 at CDN $75,000,
after which time her salary will return to the amounts listed in her August 1,
2003 employment agreement, depending on the financial condition of the Company.
The Amended Employment Agreement also provided for the Company to pay Ms.
Pochapski a monthly allowance of CDN $500 in consideration for her using her
personal automobile for Company related services.
On
December 12, 2005, the Company's Chief Executive Officer, President and
Director, David Zaikin agreed to transfer 250,000 shares of the Company's
restricted common stock which he held to the Jewish Russian Community Center of
Toronto, Ontario, Canada (the "JRCC"). The shares were transferred to the JRCC
as a charitable donation from Mr. Zaikin personally. The actual transfer of
shares was affected February 16, 2006.
On
December 12, 2005, the Company's Chief Financial Officer and Director, Elena
Pochapski, agreed to transfer 75,000 shares of the Company's restricted common
stock which she held to the Jewish Russian Community Center of Toronto, Ontario,
Canada (the "JRCC"). The shares were transferred to the JRCC as a charitable
donation from Ms. Pochapski personally. The actual transfer of shares was
affected February 16, 2006.
Effective
December 22, 2005, the Company entered into a Warrant Agreement with Victor
Repin, a greater than 5% shareholder of the Company, in consideration for his
help and assistance in successfully closing the Company's Joint Venture with
Baltic Petroleum (E&P) Limited in November 2005. Pursuant to Mr. Repin's
Warrant Agreement, he has the right to purchase 300,000 shares of the Company's
common stock at $1.00 per share, 150,000 shares of the Company's common stock at
$2.00 per share and 150,000 shares of the Company's common stock at $2.50 per
share.
On
February 13, 2006, Elena Pochapski, the Company's Chief Financial Officer and a
Director of the Company exercised all 100,000 of her 2003 stock options, and
purchased 100,000 restricted shares of the Company's common stock at an exercise
price of $0.14 per share, for aggregate consideration of $14,000, which was
received by the Company on February 13, 2006.
On May 1,
2006, our Director, Timothy Peara exercised his option to purchase 50,000 shares
of our common stock in accordance with the terms of his Option agreement entered
into in consideration for consulting services rendered in 2005. Mr. Peara
elected a cashless exercise of the options and he will therefore receive the
full number of shares exercised (50,000), less the number of shares that totaled
the aggregate exercise price of the 50,000 shares ($15,000 with each option
exercisable at $0.30 per share), based on the average market value of the common
stock on the five (5) trading days prior to Mr. Peara's exercise ($2.00), which
is equal to 7,500 shares. As a result, Mr. Peara was issued 42,500 shares in
connection with the exercise of his options.
We
previously agreed to issue Alternative Energy Finance Ltd. ("AEF"), of which Tim
Peara is the Managing Director as well as a Director of the Company, certain
warrants in connection with Mr. Peara introducing the parties who formed the
joint venture. Pursuant to an agreement between AEF and the Company, AEF will
receive compensation based on the total investment made by Baltic Petroleum Ltd.
in the Joint Venture. This compensation included a commission of approximately
$18,024 (1% of Baltic's first $1,802,441 investment in the Joint Venture), which
amount has not been paid as of the date of this filing, and 50,068 options to
purchase shares of our common stock at $0.63 per share which were granted to Mr.
Peara on March 6, 2006 and a commission of $6,673 (1% of Baltic's $667,313
investment in the Joint Venture in the first quarter of 2006), which amount has
not been paid to AEF to date and 17,561 options to purchase shares of our common
stock at $0.67 per share for the first quarter of 2006, which were granted to
Mr. Peara on March 31, 2006, which options contain a cashless exercise
provision.
On June
30, 2006, in connection with our agreement with AEF, we agreed to grant AEF a
warrant to purchase 20,412 shares of our common stock at an exercise price of
$2.02, which warrants contained a cashless exercise feature. The warrants expire
three years from the grant date. We were also obligated to pay AEF $23,562
during the quarter ended June 30, 2006 (equal to 1% of Baltic's $2,356,153
investment in the Joint Venture in the second quarter of 2006), which amount has
not been paid to AEF to date.
On
September 30, 2006, in connection with our agreement with AEF, we agreed to
grant AEF a warrant to purchase 20,952 shares of our common stock at an exercise
price of $1.53 per share, which warrants contained a cashless exercise feature.
The warrants expire three years from the grant date. We were also obligated to
pay AEF $18,303 during the quarter ended September 30, 2006 (equal to 1% of
Baltic's $1,830,292 investment in the Joint Venture in the third quarter of
2006), which amount has not been paid to AEF to date.
On
December 29, 2006, we issued 52,500 shares of common stock to our Chief
Executive Officer, David Zaikin, in consideration for and in connection with Mr.
Zaikin’s exercise of 52,500 of his 2006 stock options to purchase shares of our
common stock at an exercise price of $0.60 per share
On
December 22, 2006, the Company's Chief Executive Officer, President and
Director, David Zaikin transferred 25,000 shares of the Company's restricted
common stock which he held to the Jewish Russian Community Center of Toronto,
Ontario, Canada (the "JRCC"). The shares were transferred to the JRCC as a
charitable donation from Mr. Zaikin personally.
On
December 22, 2006, the Company's Chief Financial Officer and Director, Elena
Pochapski, transferred 20,000 shares of the Company's restricted common stock
which she held to the JRCC. The shares were transferred to the JRCC as a
charitable donation from Ms. Pochapski personally.
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 obliged 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); which amount has not been paid to date.
As of
December 31, 2006, we owed approximately $98,066 to AEF in connection with AEF's
introduction of the parties of the Joint Venture, as described above, $60,209 to
Mr. Peara in accrued Directors fees and approximately $4,703 to Mr. Peara in
various travel related expenses.
On
January 25, 2007, our Board of Directors approved the issuance of an aggregate
of 465,000 shares of our restricted common stock to our current officers and
Directors in consideration for services rendered to the Company during the year
ended December 31, 2006, as follows:
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o
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350,000
shares of our restricted common stock to David Zaikin, our Chief Executive
Officer and Director, 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;
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50,000
shares of our restricted common stock to Elena Pochapski, our Chief
Financial Officer and Director;
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o
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20,000
shares of our restricted common stock to Timothy Peara, our
Director;
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o
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25,000
shares of our restricted common stock to Oleg Zhuravlev, our
Director;
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10,000
shares of our restricted common stock to Vladimir Eret, our Director;
and
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10,000
shares of our restricted common stock to Sergei Potapov, our
Director.
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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 (September 2005), 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.
On
January 26, 2007, the Company's Chief Executive Officer, President and Director,
David Zaikin transferred 25,000 shares of the Company's restricted common stock
which he held to the Toronto Jewish Academy Ohr Menahem (“TJA”). The shares were
transferred to the TJA as a charitable donation from Mr. Zaikin
personally.
On
January 26, 2007, the Company's Chief Financial Officer and Director, Elena
Pochapski transferred 30,000 shares of the Company's restricted common stock
which she held to her daughter, which shares she is deemed to beneficially own,
and which shares have been included in her beneficial ownership listed
throughout this report.
ITEM 13.
EXHIBITS
(a)
EXHIBITS
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Exhibit
No.
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Description of
Exhibit
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3.1
(1)
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Original
Articles of Incorporation of the Company then called "Advanced Rehab
Technology Corporation."
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3.2
(2)
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Certificate
of Amendment to the Company's Articles of Incorporation filed March 9,
2001, changing the Company's name to "Talking Cards,
Inc."
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3.3
(2)
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Certificate
of Amendment to the Company's Articles of Incorporation filed February 12,
2002, changing the Company's name to "Osterking
Incorporated."
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3.4
(2)
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Certificate
of Amendment to the Company's Articles of Incorporation filed December 3,
2002, changing the Company's name to "17388 Corporation
Inc."
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3.5
(2)
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Certificate
of Amendment to the Company's Articles of Incorporation filed May 5, 2003,
changing the Company's name to "Trans Energy Group
Inc."
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3.6
(2)
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Certificate
of Amendment to the Company's Articles of Incorporation filed December 3,
2003, changing the Company's name to "Siberian Energy Group
Inc."
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3.7
(2)
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Certificate
of Amendment to the Company's Articles of Incorporation filed April 25,
2005, affecting a 1:2 reverse stock split, re-authorizing 100,000,000
shares of common stock, par value $0.001 per share, and authorizing
10,000,000 shares of preferred stock, par value $0.001 par value per
share
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3.8
(1)
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Bylaws
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3.9(15)
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Amended
and Restated Bylaws
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10.1(3)
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David
Zaikin Employment Agreement
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10.2(3)
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Elena
Pochapski Employment Agreement
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10.3(3)
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Oleg
V. Zhuravlev Employment Agreement
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10.4(3)
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Sergey
Potapov Employment Agreement
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10.5(3)
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Vladimir
Eret Employment Agreement
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10.6(3)
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David
Zaikin Stock Option Agreement
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10.7(3)
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Oleg
V. Zhuravlev Stock Option Agreement
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10.8(3)
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Oleg
V. Zhuravlev Employment Agreement ZNG
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10.9(3)
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Elena
Pochapski Stock Option Agreement
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10.10(3)
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Sergey
Potapov Stock Option Agreement
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10.11(3)
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Sergey
Potapov Employment Agreement ZNG
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10.12(3)
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Vladimir
Eret Stock Option Agreement
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10.13(3)
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Vladimir
Eret Employment Agreement ZNG
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10.14(3)
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Contract
to purchase 51% of ZNG
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10.15(3)
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Contract
to purchase 49% of ZNG
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10.16(3)
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Amendment
to contract to purchase 49% of ZNG
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10.17(3)
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Amendment
to David Zaikin Employment Agreement
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10.18(4)
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Exploratory
Contract with Bashneftegeofizika
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10.19(4)
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Exploratory
Contract with Bazhenov Geophysical Expedition
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10.20(4)
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Consulting
Contract with GeoData Consulting
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10.21(4)
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Exploration
License for West-Suersky Block
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10.22(4)
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Exploration
License for Mokrousovsky Block
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10.23(4)
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Exploration
License for Privolny Block
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10.24(4)
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Exploration
License for Orlovo-Pashkovsky Block
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10.25(5)
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Option
Agreement with Baltic Petroleum Limited dated April 28,
2005
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10.26(5)
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License
Agreement between OOO Zauralneftegaz and Baltic Petroleum Limited dated
April 28, 2005
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10.27(5)
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Loan
Agreement between OOO Zauralneftegaz and Baltic Petroleum Limited dated
April 28, 2005
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10.28(5)
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Guarantee
by Siberian Energy Group, Inc. dated April 28, 2005
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10.29(5)
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Pledge
and Security Agreement between Siberian Energy Group, Inc. and Baltic
Petroleum Limited dated April 28, 2005
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10.30(6)
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Option
Agreement with Baltic Petroleum Limited dated April 28,
2005
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10.31(6)
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License
Agreement between OOO Zauralneftegaz and Baltic Petroleum Limited dated
April 28, 2005
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10.32(6)
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Loan
Agreement between OOO Zauralneftegaz and Baltic Petroleum Limited dated
April 28, 2005
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10.33
(6)
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Guarantee
by Siberian Energy Group, Inc. dated April 28, 2005
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10.34
(6)
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Pledge
and Security Agreement between Siberian Energy Group, Inc. and Baltic
Petroleum Limited dated April 28, 2005
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10.35
(7)
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Clarification
to the Contract of Purchase and Sale of the Share in Charter Capital of
LLC "Zauralneftegaz" dated 15 May 2004
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10.36
(7)
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Agreement
with Business - Standard (translated from Russian
version)
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10.37
(7)
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Supplementary
Agreement to Business - Standard Agreement (translated from Russian
version)
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10.38
(7)
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Supplementary
Agreement No. 2 to Business - Standard Agreement (translated from Russian
version)
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10.39
(7)
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Deed
of Amendment between ZNG and BP
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10.40
(7)
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Deed
of Amendment between the Company and BP
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10.41
(8)
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Joint
Venture Shareholders' Agreement with Baltic Petroleum (E&P)Limited and
Zauralneftegaz Limited dated October 14, 2005
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10.42
(9)
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Amendment
to the Employment Agreement Dated August 1, 2003, with Elena
Pochapski
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10.43
(9)
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Form
of Waiver Agreement
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10.44(10)
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Loan
Agreement between OOO Zauralneftegaz and Caspian Finance
Limited
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10.45(10)
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Deed
of Novation between Baltic Petroleum Limited, Caspian Finance Limited and
OOO Zauralneftegaz
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10.46(10)
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Deed
of Release
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10.47(10)
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Release
of Pledge
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10.48(10)
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Guarantee
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10.49(10)
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Debenture
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10.50(10)
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Agreement
for the Pledge of the Participatory Interest in OOO Zauralneftegaz
(Russian translation removed)
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10.51(10)
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Sale
and Purchase Agreement
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10.52(12)
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Option
Agreement with Key Brokerage
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10.53(12)
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Warrant
Agreement with Key Brokerage
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10.54(13)
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July
26, 2006 Deed of Agreement
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10.55(14)
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Consulting
Agreement with Business Standard
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10.56(15)
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Addition
to the Loan Agreement of November 9, 2005
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10.57(15)
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Gross
Overriding Royalty Agreement
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21.1(15)
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Subsidiaries
of the Company
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31.1*
|
Certificate
of the Chief Executive Officer pursuant Section 302 of the Sarbanes-Oxley
Act of 2002
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31.2*
|
Certificate
of the Chief Financial Officer pursuant Section 302 of the Sarbanes-Oxley
Act of 2002
|
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32.1*
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Certificate
of the Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
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32.2*
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Certificate
of the Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
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99.1(11)
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Glossary
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* Filed
herein.
(1) Filed
as Exhibits to our Form SB-2 Registration Statement filed with the Commission on
September 10, 2004, and incorporated herein by reference.
(2) Filed
as Exhibits 3.2, 3.3, 3.4, 3.5, 3.6, 3.7, respectively, to the Company's Form
8-K filed with the Commission on May 2, 2005, and incorporated herein by
reference.
(3) Filed
as an exhibit to our Form SB-2 Registration Statement filed on September 10,
2004.
(4) Filed
as an exhibit to amendment number one to our Form SB-2/A Registration Statement
filed on November 23, 2004.
(5) 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.
(6) Filed
as Exhibits to the Company's Form 8-K filed with the Commission on May 20, 2005,
and incorporated herein by reference.
(7) 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.
(8) 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.
(9) 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.
(10)
Filed as Exhibits to our Report on Form 8-K, filed with the Commission on
December 2, 2005, and incorporated herein by reference.
(11)
Filed as Exhibit 99.1 to our Report on Form 10-KSB for the year ended December
31, 2005, and incorporated herein by reference.
(12)
Filed as Exhibits to our Report on Form 8-K, filed with the Commission on
September 19, 2006, and incorporated herein by reference.
(13)
Filed as an Exhibit to our Report on Form 10-QSB, filed with the Commission on
November 14, 2006, and incorporated herein by reference.
(14)
Filed as an Exhibit to our Form 8-K filed with the Commission on February 20,
2007, and incorporated herein by reference.
(15)
Filed as an Exhibit to our Form 10-KSB filed with the Commission on April 2,
2007, and incorporated herein by reference.
(b)
REPORTS ON FORM 8-K
We filed
the following reports on Form 8-K during the period covered by this
report:
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o
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October
23, 2006 - To report that ZNG had received results of the 2D Seismic
analysis conducted on its licensed blocks.
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o
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October
25, 2006 - To further report the results of ZNG's 2D Seismic analysis
conducted on its licensed blocks.
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o
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November
6, 2006 - To report ZNG's plans for drilling in its licensed
blocks.
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o
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December
21, 2006 - To report our entry into an Interest Purchase Agreement with
Key Brokerage, LLC, whereby we purchased 100% of the outstanding stock of
Kondaneftegaz LLC.
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ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit
Fees
The
aggregate fees billed for each of the fiscal years ended December 31, 2006 and
2005 for professional services rendered by the principal accountant for the
audit of the Company's annual financial statements and the review of the
Company's quarterly financial statements were $22,800 and $21,200,
respectively.
Audit
Related Fees
None.
Tax
Fees
The
aggregate fees billed for each of the fiscal years ended December 31, 2006 and
2005 for professional services rendered by the principal accountant for tax
compliance, tax advice, and tax planning was $2,100 and $7,000,
respectively.
All
Other Fees
Additionally,
our principal accountant billed us $1,150 during the year ended December 31,
2005, for the review of our Form SB-2 Registration Statement. There were no
other fees billed by our principal accountant other than those disclosed above
for the year ended December 31, 2006.
[Remainder
of page left intentionally blank.]
SIGNATURES
In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SIBERIAN ENERGY GROUP
INC.
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DATED:
July 16, 2008
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By: /s/ David
Zaikin
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David
Zaikin
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Chief
Executive Officer
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DATED:
July 16, 2008
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By: /s/ Elena
Pochapski
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Elena
Pochapski
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Chief
Financial Officer
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(Principal
Accounting Officer)
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In
accordance with the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated.
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NAME
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TITLE
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DATE
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/s/ David
Zaikin
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Chief
Executive Officer
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July
16, 2008
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David
Zaikin
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and
Chairman of the Board of Directors
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(Principal
Executive Officer)
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/s/ Elena Pochapski
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Chief
Financial Officer
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July
16, 2008
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Elena
Pochapski
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and
Director
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(Principal
Financial Officer)
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| /s/
Helen Teplitskaia |
President
and Director |
July
16, 2008
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| Helen
Teplitskaia |
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/s/ Oleg V. Zhuravlev
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Director
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July
16, 2008
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Oleg
V. Zhuravlev
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/s/ Sergey
Potapov
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Director
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July
16, 2008
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Sergey
Potapov
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| /s/
Timothy Peara |
Director |
July
16, 2008
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Timothy
Peara
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