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| SIBN.OB > SEC Filings for SIBN.OB > Form 10-Q on 19-May-2009 | All Recent SEC Filings |
19-May-2009
Quarterly Report
CERTAIN STATEMENTS IN THIS QUARTERLY REPORT ON FORM 10-Q (THIS "FORM 10-Q"), CONSTITUTE "FORWARD LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1934, AS AMENDED, AND THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 (COLLECTIVELY, THE "REFORM ACT"). CERTAIN, BUT NOT NECESSARILY ALL, OF SUCH FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "BELIEVES", "EXPECTS", "MAY", "SHOULD", OR "ANTICIPATES", OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY, OR BY DISCUSSIONS OF STRATEGY THAT INVOLVE RISKS AND UNCERTAINTIES. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF SIBERIAN ENERGY GROUP INC. ("THE COMPANY", "WE", "US" OR "OUR") TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. REFERENCES IN THIS FORM 10-Q, UNLESS ANOTHER DATE IS STATED, ARE TO MARCH 31, 2009.
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 and a further 1:2 reverse stock split was affected on May 2, 2005 (collectively the "Stock Splits"). All share amounts subsequently listed are retroactively adjusted to reflect these stock splits unless otherwise provided.
In the spring of 2003, a majority of the Company's shares were purchased by new shareholders who stepped into the management of the Company and defined its new business direction as an oil and gas exploration company.
On May 9, 2003, the Company entered into an Acquisition Agreement (the "Acquisition Agreement") by and among the Company, Zaural Neftegaz, a Russian corporation ("ZNG"), the shareholders of ZNG and Oleg Zhuravlev, President of ZNG. Pursuant to the Acquisition Agreement, the Company acquired a 51% interest in ZNG by issuing to ZNG 2,000,000 shares of the Company's common stock. In June 2004, the Company purchased the remaining 49% of ZNG in exchange for 6,900,000 shares of the Company's common stock, making ZNG a wholly owned subsidiary of the Company. The Company had no affiliation with ZNG prior to the acquisition in May 2003.
Currently, the operating activities of ZNG are carried out through the Joint
Venture Shareholders' Agreement ("Joint Venture") entered into on October 14,
2005 with Baltic Petroleum (E&P) Limited ("BP" or "Baltic") and Zauralneftegaz
Limited, the joint venture company ("ZNG, Ltd."), as contemplated by the Option
Agreement, as amended (the "Option"). The Company closed the Joint Venture and
transferred 100% of the outstanding stock of ZNG to ZNG, Ltd. in connection with
the terms and conditions of the Joint Venture. As a result of such transfer, the
Company holds 50% of the outstanding stock of ZNG, Ltd., which holds 100% of the
outstanding stock of the Company's former wholly owned subsidiary, ZNG. ZNG,
Ltd. operates through ZNG and is 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.
On or about September 30, 2008, we entered into an Agreement of Purchase and Sale with Limited Liability Company Neftebitum, a Russian limited liability company, and two Russian individuals, pursuant to which we sold fifty-six percent (56%) of the ownership interest of KNG, as described in greater detail below.
All dollar amounts used throughout this Report are in United States dollars, unless otherwise stated. All amounts in Canadian dollars used throughout this Report are preceded by CDN, for example CDN $500, is referring to $500 Canadian dollars.
BUSINESS OPERATIONS:
We are a development stage company, which is seeking opportunities for investment in and/or acquisition of small to medium companies in Russia, specifically in the oil and gas industry.
We currently hold investments in ZNG, Ltd. and KNG. Both companies are operating in the Western Siberia region of Russia and are involved in oil and gas exploration.
Moving forward the Company plans to focus on those assets that involve less exploration risk and is also actively seeking and negotiating the acquisition of production or close-to-production assets in Russia and countries of the former Soviet Union; however, the Company has not entered into any definitive agreements to date, and there can be no assurance that any such agreements will be entered into on favorable terms, if at all.
Description of KNG
KNG was created in 2004 for the purpose of oil and gas exploration in the Khanty-Mansiysk district of Western Siberia, Russia. In October 2007, KNG was awarded two oil and gas exploration licenses in Khanty-Mansiysk region in West Siberia, Russia for the Karabashsky-61 and Karabashsky-67 blocks located in the Khanty-Mansiysk Autonomous Region, Russian Federation. The license areas together cover 166,000 acres and are situated in the territory of the Urals oil and gas bearing area. KNG also has eight more outstanding applications for exploration licenses filed with the Russian authorities, which auctions have not occurred to date.
The right to use the subsurface resources of the Karabashsky-61 and
Karabashky-67 Fields is granted for the term of validity of the license (five
(5) years), from the date of its state registration (October 22, 2007), subject
to the completion of certain exploration activities on the license blocks. The
term of use of the subsurface resources can be extended to finish exploration
and estimation of deposit or for liquidation work, if the terms of usage of the
subsurface resources are not breached.
o to begin 2D seismic works during the 2009-2010 fieldwork season and to perform not less than 176.26 linear kilometers of seismic profiles on Karabashky-61 and 158 linear km on Karabashky-67 (minimal density of the profile not less than 1 linear kilometer per 1 square kilometer of license area), and
o No later than 2011, to start drilling an exploratory well and to complete not less than 2 exploratory wells by April 1, 2012.
KNG is currently re-interpreting the existing seismic data from prior studies and is evaluating the possibility of using this data in the current program of seismic studies.
On or about September 30, 2008, we entered into an Agreement of Purchase and Sale with Limited Liability Company Neftebitum, a Russian limited liability company ("Neftebitum"), Sergey V. Prokopiev, an individual and Russian citizen, and Oleg G. Shelepov, an individual and Russian citizen (collectively, the "Purchasers" and the "Sale Agreement"). The Company's Board of Directors approved and ratified the Company's entry into the Sale Agreement and the transactions contemplated therein on our about October 30, 2008. Pursuant to the Sale Agreement, the Company agreed to sell to the Purchasers an aggregate of fifty-six percent (56%) of the registered capital of KNG for aggregate consideration of 5,600 Russian Rubles (approximately $223). Neftebitum agreed to purchase a 51% interest for total consideration of 5,100 Russian Rubles (approximately $203) and Mr. Prokopiev and Mr. Shelepov agreed to each purchase a 2.5% interest for consideration of 250 Russian Rubles each (approximately $10).
Pursuant to the Sale Agreement, the Sellers are obligated to maintain KNG's main priority of performing geological studies and exploring for hydrocarbon deposits in the Karabashsky-61 and Karabashsky-67 blocks (the "Blocks"). Further, the Purchasers are obligated to provide financing, by way of direct financing or third-party loans, in the amounts necessary to comply with the licensing agreements for the Blocks. The Company's and the Purchasers' relationship is to be regulated by the Operating Agreement (as described below), which was entered into in connection with the Sale Agreement. Lastly, the Sale Agreement provides that in connection with Neftebitum obtaining a majority interest in KNG, it is obligated to be a guarantor and accept joint responsibility with KNG for repayment of any financing the Purchasers obtain for KNG.
On or about November 5, 2008, and in connection with their entry into the Sale Agreement, Neftebitum, the Company and KNG entered into an Operating Agreement that defines the rights and responsibilities of the parties (the "Operating Agreement"). Pursuant to the Operating Agreement, Neftebitum is designated the exclusive Operator of KNG and all of its current and future mineral claims and has the right to appoint all members of KNG's management. As Operator, Neftebitum has exclusive control of all technical, management, operational and associated matters involving KNG and the Blocks and any potential hydrocarbon exploration and production licenses (the "Operations"). Neftebitum must manage and conduct the Operations by itself, its agents, independent contractors and/or servants in general accordance with standard oil and gas field practices. Neftebitum must use all reasonable endeavors to:
· Prepare annual programs and budgets pursuant to the Operating Agreement and the licensing agreements for the Blocks;
· Begin 2D seismic works on the Blocks during the 2009-2010 fieldwork season and perform not less than 176.26 linear kilometers of seismic profiles on the Karabashky-61 Block and not less than 158 linear kilometers of seismic works on the Karabashky-67 Block;
· Start drilling an exploratory well no later than 2011, and complete no less than 2 exploratory wells by April 1, 2012;
· Supervise implementation of all programs and budgets and provide written progress reports on a quarterly basis relating to KNG's activities and programs.
Further, as Operator, Neftebitum may enter into and negotiate contracts on behalf of KNG and the Company and represent KNG or the Company in all dealings with governmental and regulatory bodies. Neftebitum must guarantee any financial obligations entered into on KNG's behalf. Neftebitum may be reimbursed for expenses incurred in its role as Operator, and if KNG has inadequate resources to reimburse such expenses, these unreimbursed expenses may be accounted for at the time of the distribution of profits from KNG's operations, if any. Neftebitum, however, will not charge operator's management fees in connection with its role as Operator. Additionally, the Company made available all geological data to the Operator to be used in the program of geological studies in the region and will not charge fees for the use of geological data it provides. Neftebitum must also use its best efforts to maintain insurance for the Company. Lastly, Neftebitum's responsibilities as Operator under the Operating Agreement may not be assigned or transferred.
As of March 31, 2009, the Company owned a 44% interest in KNG. Operating results of KNG were included in the consolidated financial statements contained herein for the three months ended March 31, 2008. After September 30, 2008, the Company's investment in KNG is accounted for on the equity method of accounting. Accordingly, the assets, liabilities and equity of KNG are no longer presented on the Company's balance sheet.
After careful consideration of the current financial position of KNG, the Company has applied an impairment charge to the value of investment in KNG which resulted in carrying it at zero value.
Description of ZNG
ZNG has been involved in the oil and gas research activities in the Kurgan region of the Russian Federation. During 2003-2008 it has completed seismic studies and drilling program in the Kurgan region of Siberia, Russia. The Company believes ZNG, Ltd. has created value through the geological results of the two exploratory wells and other data gathered in the area and ZNG, Ltd. is considering its options with regard to realizing this value by either farming out or more likely, a direct sale of geophysical and seismic data to a third party operating in the area.
Between 2003 and 2007, ZNG carried out extensive seismic and gas
seismotomographic studies on its 4 licensed blocks acquired in 2003 through a
government tender: the Privolny, Mokrousovsky, West-Suersky and
Orlovo-Pashkovsky blocks, and drilled 2 exploratory wells on the Privolny and
Mokrousovsky blocks. Based on the interpretation of seismic and
seismotomographic surveys and analysis of samples from the wells, ZNG prepared a
comprehensive analysis of geological resources of the Kurgan region. Both the
Privolny-1 and Mokrousovsky-1 studies confirmed the presence of hydrocarbons and
contributed greatly to the understanding of geological resources in the region.
However, a substantial amount of further exploration studies and work is
required before a conclusion on the future potential of the blocks can be drawn.
Decision on potential further exploration on these blocks has not been reached
yet, as this decision has to take into account general market conditions and
specifically the trend of oil prices. Upon the expiration of the license terms
of these blocks in March 2008, ZNG kept the preferential right to re-apply for
the licenses to continue exploration works on these blocks in the event it
decides to continue exploration. In the case of further exploration on ZNG's
licensed areas, the Joint Venture will seek to "farm out" its interest in the
acreage.
Joint Venture
The operations of the Joint Venture are funded via loans provided to ZNG, Ltd. and ZNG by Caspian Finance Limited ("Caspian"), a financing company wholly-owned by Baltic. Loans are guaranteed by ZNG, Ltd.'s holdings in ZNG. As of March 31, 2009, the total funding provided to ZNG, Ltd. and ZNG by Baltic was equal to approximately $23.5 million plus accrued interest of approximately $5 million. The loans are not dilutive to the Company's ownership in ZNG.
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.
In connection with that agreement, the following warrants were granted to AEF:
warrants to purchase 17,561 shares of our common stock at $0.67 per share, which
were granted to Mr. Peara on March 31, 2006, and which expired unexercised on
March 31, 2009; warrants to purchase 20,412 shares of our common stock at an
exercise price of $2.02 per share, granted effective June 30, 2006; warrants to
purchase 20,952 shares of our common stock at an exercise price of $1.53 per
share effective September 30, 2006; and warrants to purchase 38,648 shares of
our common stock at an exercise price of $1.44 per share effective December 31,
2006. All of the warrants are exercisable for three years from the date of
issuance and contain a cashless exercise provision.
From January 1, 2007 to December 31, 2007, we accrued approximately $108,827 in fees payable to AEF in connection with the AEF agreement, which funds have not been paid to date, and we also issued AEF the following securities pursuant to the agreement: warrants to purchase 48,925 shares of our common stock at an exercise price of $1.10 per share effective March 31, 2007; warrants to purchase 55,233 shares of our common stock at an exercise price of $1.14 per share, effective June 30, 2007; warrants to purchase 51,352 shares of our common stock at an exercise price of $0.74 per share, effective September 30, 2007; and warrants to purchase 78,130 shares of our common stock at an exercise price of $0.46 per share, effective December 31, 2007. All of the warrants are exercisable for three years from the date of issuance and contain a cashless exercise provision.
On March 13, 2007, Mr. Peara personally, and on behalf of AEF agreed to accept 58,134 shares of our restricted common stock in consideration for the forgiveness of $45,626 owed personally to Mr. Peara in Director's fees and accrued expenses and $47,969 owed to AEF in connection with our agreement with AEF for fees due from the period from March 31, 2006 to December 31, 2006, which shares have been issued to date and which debt has been forgiven by Mr. Peara and AEF.
We have not been required to pay AEF any additional consideration and/or grant AEF any additional warrants since December 31, 2007, as Baltic has not invested any additional funds into the Joint Venture since the end of that period.
Recent Events:
On or around April 30, 2009, the Company entered into a "One Year Term Extension
To The Employment Agreement of August 1, 2004" with David Zaikin, the Company's
Chief Executive Officer and Elena Pochapski, the Company's Chief Financial
Officer (the "Executives" and the "Employment Extension Agreements"). The
Employment Extension Agreements extended the term of the Executives previous
employment agreements entered into on August 1, 2004 and September 1, 2003,
respectively, for an additional year, such that the employment agreements now
expire on December 31, 2009. The Executives salaries for the year ended December
31, 2009 will be $180,000 and $75,000 for Mr. Zaikin and Ms. Pochapski,
respectively. Additionally, both of the Executives were granted additional stock
options in the Company as described below.
In coordination with Neftebitum, the Company plans to focus on the exploration activities of KNG in the Khanty-Mansiysk region of Russia, to satisfy the requirements of the licensing agreements and to conduct preparatory work for the seismic surveys on these areas, funding permitting (which funding is the responsibility of Neftebitum), of which there can be no assurance.
The operations of ZNG in the Kurgan region of Russia, conducted through the Joint Venture, are currently in the "transition period" awaiting the decision on the feasibility of further exploration and potential steps moving forward for further exploration in the Kurgan region.
Moving forward, we anticipate targeting other potential long term investments in Russia and countries in the former Soviet Union, separate from our involvement in the Joint Venture and KNG, funding permitting, of which there can be no assurance. Additionally, the Company currently plans to change its business focus from targeting early stage exploration projects to acquiring assets in producing fields, funding permitting, of which there can be no assurance, in order to decrease its exploration risks.
Currently we are evaluating different business opportunities in the oil and gas industry, including advanced development stage and revenue-producing enterprises and are in preliminary discussions with a potential partner which owns several oil and gas producing properties in Western Siberia; however, as no definitive agreement has been reached, we can provide no assurances that the discussions will result in any definitive understandings or partnerships, and it is likely that any agreement would be conditioned on us raising substantial additional funding, which we can provide no assurances will be available on favorable terms, if at all.
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 of our common stock 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, the Company previously received monthly management fees, which varied from $25,000 to $85,000 per month. Due to the "transition period" of the Joint Venture's exploration activities, no management fees have been paid since October 2007, and there is no assurance that the Joint Venture will pay any management fees or that fees received will be adequate to pay its upcoming expenses and liabilities in the future. If the Company does not receive any management fees moving forward, the Company plans that its organizing stockholders will continue to provide financing for the Company, of which there can be no assurance.
In the past, we have obtained cash financing from organizing stockholders in the
form of loans and advances, as a result, amounts totaling $467,726 and $447,663
were payable to the stockholders as of March 31, 2009 and December 31, 2008,
respectively. However, there can be no certainty as to the availability of
continued financing in the future. Failure to obtain sufficient financing may
require us to reduce our operating activities. A failure to continue as a going
concern would then require stated amounts of assets and liabilities to be
reflected on a liquidation basis which could differ from the going concern
basis.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2009, COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2008
We had no revenues and other income for the three months ended March 31, 2009 or 2008. Until October 2007, the Company received monthly management fees of between $25,000 and $85,000 pursuant to terms of the Joint Venture. However, the Company has not received any management fees since October 2007, as a result of restructuring of the Company's Kurgan operations and the negotiating of potential farm outs and further research works on ZNG's licensed areas.
We have not generated any revenues to date through the sale of oil and/or gas.
We had total expenses of $143,651 for the three months ended March 31, 2009, compared to total expenses for the three months ended March 31, 2008, of $186,155, which represented a decrease in total expenses from the prior period of $42,504 or 22.8%.
The main reasons for the decrease in total expenses for the three months ended March 31, 2009, compared to the three months ended March 31, 2008, were a $22,074 or 29.3% decrease in professional and consulting fees to $53,351 for the three months ended March 31, 2009, compared to $75,425 for the three months ended March 31, 2008, which decrease is largely attributable to the fact that the Company used less third party consultants and advisors during the three months ended March 31, 2009, compared to the same period of 2008; a $10,780 or 58.8% decrease in other expenses, to $7,555 for the three months ended March 31, 2009, compared to $18,335 for the three months ended March 31, 2008; and a $9,716 decrease in rent and occupancy expenses to no rent and occupancy expenses for the three months ended March 31, 2009, compared to $9,716 for the three months ended March 31, 2008. The Company is currently taking steps to move its New York office space, and as such, the Chief Executive Officer has been personally paying the Company's office space rent and not billing the Company since approximately December 31, 2008, which resulted in the Company having no rent or occupancy expense for the three months ended March 31, 2009.
We had a net loss of $143,651 for the three months ended March 31, 2009, which represented a decrease in net loss of $42,504 or 22.8% from net loss of $186,155 for the three months ended March 31, 2008. The main reason for the decrease in net loss was the $42,504 or 22.8% decrease in expenses for the three months ended March 31, 2009, compared to the three months ended March 31, 2008.
LIQUIDITY AND CAPITAL RESOURCES
We had current assets of $1,838 as of March 31, 2009, which included cash of $1,322; and prepaid expenses and other current assets of $516.
We had total assets of $32,961 as of March 31, 2009, which included current . . .
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