Notes to Consolidated Financial Statements
As used herein, the terms, “Sky Petroleum,” “Sky,” “Company,” “we,” “us,” and “our” refer to Sky Petroleum, Inc. and related subsidiaries.
Note 1 - Organization and Basis of Presentation
The Company was organized on
August 22, 2002
under the laws of the State of Nevada, as The Flower Valet. On
December 20, 2004
the Company amended its articles of incorporation to change its name to Seaside Explorations, Inc. Subsequently, on
March 28, 2005
the Company changed its name to Sky Petroleum, Inc ("Sky", "Sky Petroleum", or "Company").
The Company has three wholly-owned subsidiaries, two incorporated in Cyprus: Sastaro Limited (“Sastaro”) and Bekata Limited (Bekata”) which owns 100% of Sastaro, of which the companies relate to our Mubarek field operations, and a third Sky Petroleum (Albania) Inc., ("Sky Petroleum Albania") a Cayman Islands corporation and qualified branch in Albania, incorporated for the purposes of holding and operating our interests in the Concession Area (as defined below) in Albania.
The Company is engaged in the exploration and development of oil and natural gas properties of others under arrangements in which we finance the costs in exchange for interests in the oil or natural gas revenue generated by the properties. Such arrangements are commonly referred to as farm-ins to us, or farm-outs by the property owners farming out to us.
On
June 24, 2010
, Sky entered into a Production Sharing Contract (“PSC”) with the Ministry of Economy, Trade and Energy of Albania, acting through the National Agency of Natural Resources of Albania (“AKBN”). The PSC grants Sky Petroleum exclusive rights to
three
exploration blocks (Block Four, Block Five and Block Dumre) in the Republic of Albania (the “Concession Area”). The Concession Area covers approximately
1.2 million
acres, representing approximately
20%
of the landmass of Albania. The PSC had a
seven
-year term with
three
exploration periods.
On
December 23, 2011
, Sky Petroleum delivered Notice of Arbitration under the Arbitration Rules of the United Nations Commission on Internal Trade Law to National Agency of Natural Resources and to the Ministry of Economy, Trade and Energy of Albania to institute an arbitration proceeding against the Ministry of Economy, Trade and Energy of Albania, acting by and through AKBN, for breach of the PSC in accordance with Article XXI of the PSC. The arbitration proceeding arose out of the alleged termination of the PSC. On May 7, 2013, the Arbitration Tribunal ruled that (i) AKBN provided proper notice of the termination of the PSC to Sky Petroleum on July 22, 2011, for Sky Petroleum's failure to deliver a conforming bank guarantee to AKBN by July 22, 2011, and (ii) the PSC was properly terminated on November 17, 2011. The Arbitration Tribunal ruled Sky Petroleum to reimburse AKBN for total fees and expenses in connection with the Arbitration proceeding in the amount of EUR
382,774
($
501,511
). As a result of the ruling, Sky Petroleum impaired its Investment in Oil and Gas Properties, net, related to acquisition and development costs for oil and gas projects in Albania by
$10,205,220
to $
0
. See "Investment in Oil and Gas Properties" in the Notes to Consolidate Financial Statements for further details.
On
May 18, 2005
, our wholly owned subsidiary Sastaro entered into a Participation Agreement with Buttes Gas and Oil Co. International Inc. (which we refer to as “Buttes”), a wholly-owned subsidiary of Crescent Petroleum Company International Limited (which we refer to as “Crescent”) for the financing of a drilling program in the Mubarek field. The field is an offshore region in a concession area surrounding Abu Musa Island in the Arabian Gulf. Under the terms of the Participation Agreement, the Company participated in a share of the future production revenue by contributing
25 million
in drilling and completion costs related to two wells in an off-shore oil and gas project in the United Arab Emirates. The operator of the drilling program, Crescent completed the first well in
2006
and the second well in
2007
. As of
December 31, 2009
, the first well produced a total of
150,413
gross barrels, and the second well produced a total of
149,471
gross barrels. Both wells terminated production in
2009
.
On
December 31, 2009
, Sastaro received written notice from Buttes that Buttes unilaterally and solely determined that the Mubarek Field had reached the end of its economic life. Buttes also notified Sastaro that the Concession Agreement, dated
December 29, 1969
, between the His Highness Sheikh Sultan bin Mohamed Al-Qassimi III, The Ruler of Sharjah, UAE and Buttes with respect to the Mubarek Field was terminated. Buttes stated it handed over the Mubarek Field operations and facilities to representatives of His Highness Sheikh Sultan bin Mohamed Al-Qassimi III on
December 28, 2009
. Management is exercising its rights under the Participation Agreement and intends to protect our interests and our investment in the Mubarek Field. Sky continues to seek discussions with Crescent regarding the Participation Agreement.
Certain information, accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted in this Form 10-
Q Quarterly Report pursuant to certain rules and regulations of the Securities and Exchange Commission (“SEC”). These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended
December 31, 2012
.
In the opinion of management, the interim unaudited consolidated financial statements include all normal recurring adjustments necessary to present fairly the financial position and results of operations for each interim period shown in conformity with accounting principles generally accepted in the United States of America. Operating results for the
three months ended March 31, 2013
are not necessarily indicative of the results that may be expected for the year ending
December 31, 2013
.
The Company cannot be certain that its existing sources of cash will be adequate to meet our liquidity requirements including cash requirements that may be due under the PSC and arbitration. However, management has implemented plans to improve liquidity through slowing or stopping certain planned expenditures and improvements to results from operations. Management plans to obtain funding through equity, debt or other securities offerings. There can be no assurance that the capital raising efforts will be successful or that our results of operations will materially improve in either the short-term or long-term and accordingly, we may be unable to meet our obligations as they become due.
A fundamental principle of the preparation of financial statements in accordance with generally accepted accounting principles is the assumption that an entity will continue in existence as a going concern, which contemplates continuity of operations and the realization of assets and settlement of liabilities occurring in the ordinary course of business. However, this principle is applicable to all entities except for entities in liquidation or entities for which liquidation appears imminent. In accordance with this requirement, our policy is to prepare our consolidated financial statements on a going concern basis unless we intend to liquidate or have no other alternative but to liquidate. The Company's consolidated financial statements have been prepared on a going concern basis and do not reflect any adjustments that might specifically result from the outcome of this uncertainty.
Note 2 - Summary of Significant Accounting Policies
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the
United States of America pursuant to the rules and regulations of the SEC and stated in US dollars.
Basis of Consolidation
The financial statements present the consolidated accounts of the Company and its wholly owned subsidiaries, Bekata, Sastaro
and Sky Petroleum (Albania). All intercompany account balances and transactions have been eliminated.
Nature of Operations
The Company's focus is on the acquisition, development and exploitation of long-lived oil and natural gas reserves and, to a lesser extent, exploration for new oil and natural gas reserves. The Company's business activities are currently carried out in off-shore Sharjah, UAE, and in concession areas in Albania.
Investments
Investments in non-affiliated companies with a less than
20%
ownership interest, no significant influence, and market prices are not readily available, are accounted for under the cost method.
Property and Equipment
Oil and natural gas properties:
The Company uses the full cost method of accounting for its oil and natural gas producing activities. Accordingly, all costs associated with acquisition, exploration, and development of oil and natural gas reserves, including directly related overhead costs, are capitalized. Management and service fees received under contractual arrangements, if any, are treated as reimbursement of costs, offsetting the costs incurred to provide those services.
Depletion is provided using the units-of-production method based upon estimates of proved oil and natural gas reserves with oil and natural gas production being converted to a common unit of measure based upon their relative energy content. 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. If the results of an assessment indicate that the properties are impaired, the carrying
value of the assets is reduced accordingly. Once the assessment of unproved properties is complete and when major development projects are evaluated, the costs previously excluded from amortization are transferred to the full cost pool and amortization begins.
Under the full cost method of accounting, the net book value of oil and natural gas properties, less related deferred income taxes, may not exceed a calculated “ceiling”. The ceiling limitation is the discounted estimated after-tax future net cash flows from proved oil and natural gas properties. In calculating future net cash flows, current prices and costs are generally held constant indefinitely. The net book value of oil and natural gas properties, less related deferred income taxes is compared to the ceiling on a quarterly and annual basis. Any excess of the net book value, less related deferred income taxes, is generally written off as an expense. Under rules and regulations of the SEC, all or a portion of the excess above the ceiling may not be written off if, subsequent to the end of the quarter or year but prior to the release of the financial results, prices have increased sufficiently that all or a portion of such excess above the ceiling would not have existed if the increased prices were used in the calculations.
As of
March 31, 2013
, the net carrying value of the Company's investment in the Mubarek wells was $
0
.
As a result of the Arbitration ruling, Sky Petroleum impaired its Investment in Oil and Gas Properties, net, related to acquisition and development costs for oil and gas projects in Albania by
$10,205,220
to $
0
. See Note 3 - Investment in Oil and Gas Properties - Arbitration Proceedings. As of
March 31, 2013
, the Company incurred $
0
in acquisition and development costs for oil and gas projects in Albania.
Sales of proved and unproved properties are accounted for as an adjustment of capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved oil and natural gas reserves, in which case the gain or loss is recognized.
Other Property and Equipment:
Maintenance and repairs are charged to operations. Renewals and betterments are capitalized to the appropriate property and equipment accounts.
Upon retirement or disposition of assets other than oil and natural gas properties, the cost and related accumulated depreciation are removed from the accounts with the resulting gains or losses, if any, recognized in income. Depreciation of other property and equipment is computed using the straight-line method based on the estimated useful lives of the property and equipment.
Income Taxes
We follow the guidance issued within Topic No.740,
Income Taxes
, for recording the provision for income taxes. Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change. Deferred income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. Deferred taxes are classified as current or non-current, depending on the classification of assets and liabilities to which they relate. Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse.
Undistributed earnings of the Company's foreign subsidiaries are considered to be indefinitely reinvested and, accordingly, no provision for U.S. federal income taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company may be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the foreign countries.
The Company's wholly owned subsidiaries have prepared required foreign tax returns that were due for the years ended
December 31, 2005 through 2012
totaling approximately $
33,000
has been included for potential tax liabilities, penalties and interest which will be due upon filing the returns with the appropriate countries.
Stock-Based Compensation
The Company measures all share-based payments, including grants of employee stock options, using a fair-value based method in accordance with the FASB ASC Topic No. 505,
Equity,
and Topic No. 718 (formerly SFAS No. 123R),
Share-Based Payments
. The cost of services received in exchange for awards of equity instruments is recognized in the consolidated statement of operations based on the grant date fair value of those awards amortized over the requisite service period.
Basic and Diluted Net Loss Per Share
Net loss per share is presented in accordance FASB ASC Topic No. 260, Earnings Per Share. Basic net loss per share is computed based on the weighted average shares of common stock outstanding for the period. Common stock equivalents which represent stock options (approximately
2,100,000
stock options) and warrants (approximately
4,000,000
warrants), have been excluded from the computation of diluted net loss per share at as their effect is anti-dilutive. There were
4,000,000
remaining warrants that are outstanding as of March 31, 2013,
8,000,000
warrants expired on January 20, 2013.
Use of Estimates in the Preparation of Consolidated Financial Statements
Preparation of the accompanying consolidated 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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company calculates the fair value of its assets and liabilities which qualify as financial instruments and includes this additional information in the notes to consolidated financial statements when the fair value is different than the carrying value of these financial instruments. The estimated fair value of accounts payable and accrued liabilities approximate their carrying amounts due to the relatively short maturity of these instruments. None of these instruments are held for trading purposes.
FASB ASC Topic 820,
Fair Value Measurements
defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and requires certain disclosures about fair value measurements. In general, fair values of financial instruments are based upon quoted market prices, where available (Level
1
). If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters (Level
2
). Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the customer's creditworthiness, among other things, as well as unobservable parameters (Level
3
). Any such valuation adjustments are applied consistently over time.
Cash Equivalents and Restricted Cash
For purposes of the consolidated statements of cash flows, the Company considers all demand deposits, money market accounts
and certificates of deposit purchased with an original maturity of three months or less to be cash equivalents.
On August 10, 2011, the Company delivered a bank guarantee in the form of a letter of credit under the terms of the PSC with
AKBN. In connection with the bank guarantee, Sky Petroleum deposited the principal balance of the
$1,500,000
promissory note with Texas Citizens Bank N.A. to secure payment under the letter of credit. Subsequently,
$1,500,000
was transferred to a certificate of deposit (“CD”) with the issuing bank. The issuing bank has the right of offset with the CD for any amounts used under the letter of credit. As of March 31, 2013 the Letter of Credit had matured and the proceeds were moved to unrestricted cash.
Revenue Recognition
Oil and natural gas revenues are recorded using the sales method, whereby the Company recognizes oil and natural gas revenue based on the amount of oil and natural gas sold to purchasers. As of
March 31, 2013
, the Company did not have any oil or natural gas imbalances recorded. The Company does not recognize revenues until they are realized or realizable and earned. Revenues are considered realized or realizable and earned when: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the seller's price to the buyer is fixed or determinable; and (iv) collectability is reasonably assured.
Note 3 - Investment in Oil and Gas Properties
Blocks Four, Five and Dumre in Albania:
On June 24, 2010, Sky Petroleum executed a PSC, covering
three
exploration blocks, Four, Five, and Dumre in the Republic of Albania totaling approximately
1.2 million
acres representing approximately
20%
of the landmass of Albania. Under the terms of the PSC, Sky Petroleum has agreed to undertake exploration work of a minimum of
$3,150,000
on the blocks during
three
exploration periods over the next
seven
years commencing on the effective date of the PSC (January 3, 2011).
The PSC provided for a number of Sky Petroleum obligations, including, among other things, (a) establishing an office in Albania, (b) paying a signing bonus of
$50,000
(c) preparing an exploration work program and budget, (c) designating
three
members to a
nine
member Exploration Advisory Committee: (d) providing AKBN with a bank guarantee for
$1,500,000
to guarantee expenditures during the first exploration period within
90
days of the Effective Date (the “AKBN Bank Guarantee”), and (e) commencing performance of a minimum work program.
In addition, to the work program undertakings, Sky Petroleum also agreed to allocate
$100,000
for training and education during each year of the Exploration period. On
April 5, 2011
, Sky paid
$50,000
towards the
$100,000
allocation for training and education for the first year exploration period related to the Albania concession area. Sky also paid a signing bonus of
$50,000
in
2010
.
Arbitration Proceedings
On
December 23, 2011
, Sky Petroleum delivered Notice of Arbitration under the Arbitration Rules of the United Nations Commission on Internal Trade Law to National Agency of Natural Resources and to the Ministry of Economy, Trade and Energy of Albania to institute an arbitration proceeding against the Ministry of Economy, Trade and Energy of Albania, acting by and through AKBN, for breach of the PSC in accordance with Article XXI of the PSC. The arbitration proceeding arose out of the termination of the PSC. On May 7, 2013, the Arbitration Tribunal ruled that the PSC was properly terminated on November 17, 2011, and ruled Sky Petroleum to reimburse AKBN for total fees and expenses in connection with the Arbitration proceeding in the amount of EUR
382,774
(
$501,511
). This amount has been accrued for as of March 31, 2013 and included in accounts payable and accrued liabilities on the balance sheet.
Consulting Agreement
On
May 18, 2010
, Sky Petroleum entered into a Consultant Agreement for Business Development in the Republic of Albania (the “Orsett Agreement”) with Orsett Ventures Inc., a British Virgin Islands company (“Orsett”). The Orsett Agreement was amended on
September 29, 2010
(“Amendment #
1
”) and on
October 8, 2010
(“Amendment #
2
”). Under the terms of the Orsett Agreement, Sky Petroleum retained Orsett as an independent consultant to use Orsett's experience, expertise, qualifications and expertise to acquire and negotiate the acquisition of oil and gas properties and projects in the Republic of Albania. The Orsett Agreement terminated under its term on
April 30, 2011
.
Pursuant to the Amendment #
1
, Sky Petroleum agreed to pay Orsett in connection with the execution and delivery of the PSC
$700,000
and
1.5 million
shares of common stock, all of which was paid and tendered, respectively as of
December 31, 2010
.
Pursuant to Amendment #
2
, Sky agreed to pay Orsett for additional services, $
150,000
, an additional
1.5 million
shares of common stock; and
3,863,636
shares of newly designated Series B Preferred Stock. Following notification of approval by the Council of Ministers for the Republic of Albania of the PSC, the Company issued the Series B Preferred Stock. As of
December 31, 2010
, all fees and common and preferred shares were paid and tendered.
The fair market value of the total
3 million
common shares issued to Orsett was approximately
$1,170,000
, and the fair market value of the
3,863,636
shares issued for Preferred Series B Stock of
$7,820,000
. The fair value of the preferred stock was determined using quoted market prices along with internally developed models that primarily use, as inputs, observable market-based parameters, and other valuation adjustments made to ensure that financial instruments are recorded at fair value.
Orsett and its affiliates, agents and representatives, are subject to ongoing obligations of confidentiality and covenants of non-compete and non-interference under the terms of the Orsett Agreement between Sky Petroleum and Orsett dated
May 18, 2010
, as amended. Notwithstanding the expiration of the Orsett Agreement on
April 30, 2011
, Orsett and its affiliates, agents and representatives, are subject to confidentiality undertakings for a period of three years following the expiration of the term. In addition, Orsett and its affiliates, agents and representatives have agreed not to circumvent any opportunities of Sky Petroleum.
Total Orsett Agreement costs of
$9,840,000
along with other payments related to the investment totaling
$365,220
were impaired to $
0
as of
March 31, 2013
. On June 25, 2012, the Company issued a stop order notice to its transfer agent under which the transfer agent was instructed to: not to remove the restrictive legends from the share certificates representing the Orsett Shares; not to effect or facilitate the transfer, assignment, conveyance or sale of any of the Orsett Shares; and not to effect the conversion of the Series B Preferred Stock into shares of common stock of the Corporation, unless the transfer agent receives the expressed written instructions of the Secretary of the Registrant.
Mubarek Field Operations:
On
May 18, 2005
, the Company entered into a Participation Agreement with Buttes, whereby the Company provided cash in the amount of
$25,000,000
, to be used for drilling costs associated with two oil wells located in the Arabian Gulf in exchange for a variable percentage of future production revenue. Pursuant to the Participation Agreement, the Company provided capital to Buttes in developmental increments. Upon commencement of production, which occurred in
May 2006
, the Company was to receive a preferred
75%
of combined production revenue until such time as the Company recouped its total investment, and thereafter an incremental decrease of production revenue to
40%
, until the Company has recouped two times its initial investment, and thereafter at
9.2%
.
As of
June 30, 2008
, Buttes incurred drilling costs totaling approximately
$53,219,000
, exceeding the original cost estimates and funding by the Company of
$25,000,000
, and thus reducing the Company's preferred share of combined production revenue from
75%
to
35.25%
until such time as the Company has recouped its total investment, and thereafter an incremental decrease of production revenue to
18.84%
until the Company has recouped two times its initial investment, and thereafter at
4.33%
.
The Company's operating costs are capped at
$3.00
per barrel and royalty fees are
14.5%
of gross production revenues under the Participation Agreement.
On
December 31, 2009
, Sastaro received written notice from Buttes that Buttes had unilaterally and solely determined that the Mubarek Field had reached the end of its economic life. Buttes also notified Sastaro that the Concession Agreement, dated
December 29, 1969
, between the His Highness Sheikh Sultan bin Mohamed Al-Qassimi III, The Ruler of Sharjah, UAE and Buttes with respect to the Mubarek Field was terminated. Buttes stated that it handed over the Mubarek Field operations and facilities to representatives of His Highness Sheikh Sultan bin Mohamed Al-Qassimi III on
December 28, 2009
.
Buttes notified Sastaro that the Participation Agreement between Sastaro and Buttes is terminated. Under the terms of the Participation Agreement, the Registrant, through Sastaro, contributed
$25 million
in drilling and completion costs related to two in-fill wells for the right for the Registrant to participate in a share of their future production revenue.
As a result of these events, and as of
December 31, 2009
, the investment in the wells was impaired to
zero
.
As of
March 31, 2013
and December 31, 2012, the Company's investment in the Mubarek field oil and gas properties was
zero
.
Note 4 – Restricted Cash and Bank Guarantee
On
August 10, 2011
, the Company delivered a bank guarantee in the form of a letter of credit under the terms of the PSC with AKBN. In connection with the bank guarantee, Sky Petroleum made a cash deposit of
$1,500,000
with Texas Citizens Bank N.A. in 2011. On February 22, 2013 the Letter of Credit expired and restricted cash relieved.
Note 5 - Stockholders' Equity
Preferred Stock
We have authorized
10 million
shares of
$0.001
par value Series A Preferred Stock. There were no shares of Series A Preferred Stock outstanding as of
March 31, 2013
, respectively.
On
October 8, 2010
, pursuant to the terms of the Orsett Agreement, dated
May 18, 2010
, as amended
September 29, 2010
and
October 3, 2010
, by and between the Company and Orsett, the Company filed a Certificate of Designation with the Secretary of State for the State of Nevada to designate
5,000,000
shares of the Company's preferred stock as shares of Series B Preferred Stock (the "Series B Preferred Shares").
The Series B Preferred Shares are participating with no preferences or voting rights, and shall not be converted by any holder, in whole or in part for a period of twelve months from the date of initial issuance. Each Series B Preferred Share is convertible into
4.4
shares of common stock of the Company, however, the shares may not be converted into more than
4.99%
of beneficial ownership unless the holder waives the beneficial ownership limitation with
61
days notice.
In connection with the Series B designation and the Consultant Agreement, the Company issued
3,863,636
shares, with a fair value of
$7,820,000
. These shares were issued to the Consultant for expertise provided to the Company in acquiring and negotiating the acquisition of oil and gas properties in Albania. As of
March 31, 2013
,
3,863,636
shares of Series B Preferred Stock were outstanding.
On June 25, 2012, the Company issued a stop order notice to its transfer agent under which the transfer agent was instructed to: not to remove the restrictive legends from the share certificates representing the Orsett Shares; not to effect or facilitate the transfer, assignment, conveyance or sale of any of the Orsett Shares; and not to effect the conversion of the Series B Preferred Stock into shares of common stock of the Corporation, unless the transfer agent receives the expressed written instructions of the Secretary of the Registrant. The Company has determined that Orsett breached numerous terms of the Consulting Agreement and committed other actions that resulted in substantial harm and damage to the Company and it's shareholders.
Common Stock and Stock Options
On
July 26, 2005
, the Company adopted the Sky Petroleum, Inc. Non-U.S. Stock Option Plan (the “Non-U.S. Plan”), effective as of
April 1, 2005
. The Non-U.S. Plan authorizes the issuance of stock options to acquire up to
10%
of the Company's issued and outstanding shares of common stock.
On
August 25, 2005
, the Company adopted the Sky Petroleum, Inc.
2005
U.S. Stock Incentive Plan (the “U.S. Plan”). The U.S. Plan authorizes the issuance of stock options and other awards to acquire up to a maximum of
3,321,600
shares of the Company's common stock (less the number of shares issuable upon exercise of options granted by the Company under all other stock incentive plans on the date of any grant under the U.S. Plan). The U.S. Plan provides for the grant of incentive stock options (within the meaning of Section
422
of the Internal Revenue Code of
1986
, as amended), options that are not incentive stock options, stock appreciation rights and various other stock-based grants.
On June 1, 2012, the Company granted
150,000
shares to an employee. These common shares were valued at
$22,500
based on the quoted market price at that date.
On August 19, 2012, the Company granted
150,000
common shares valued at
$24,000
to a new Advisory board member. Additionally, on October 11, 2012, the Company granted
100,000
common shares valued at
$17,000
to a second Advisory board member. The common shares were all valued based on the quoted market price at date the shares were approved by the Board. The share certificates have been issued. On August 7, 2012, the Company granted
300,000
stock options under the Non-US Plan. The options are exercisable at
$0.25
per share with vesting over the next
three
years and were valued at
$56,767
.
The
2012
and 2011 stock options fair value was determined using the following attributes and assumptions for each separate issuance: share prices ranging from
$0.18
to
$0.25
, risk-free interest rates of approximately
1.55%
, expected dividend yields of
0%
, expected life of
4
years, and expected volatility of
207%
to
291%
. The Company estimates forfeitures based on historical experience.
For the three months ended
March 31, 2013
, the Company recorded
$14,591
of compensation expense based on its use of the Black Scholes model to estimate the grant-date fair value of these stock option awards. No options were exercised for the three months ended
March 31, 2013
. Compensation expense is based upon straight-line amortization of the grant-date fair value over the vesting period of the underlying stock option. In accordance with FASB ASC Topic No. 718 and No. 505, the fair value of each stock option grant was estimated on the date of the grant, using the Black-Scholes option-pricing model. As of
March 31, 2013
, there was approximately
$76,055
of unrecognized compensation expenses related to non-vested stock option agreements.
A summary of stock options outstanding as of
March 31, 2013
, is as follows:
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Shares Underlying Options Outstanding
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Shares Underlying Options Exercisable
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Range of
Exercise Prices
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Shares
Underlying
Options
Outstanding
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Weighted
Average
Remaining
Contractual
Life (Years)
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Weighted
Average
Exercise
Price
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Shares
Underlying
Options
Exercisable
|
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Weighted
Average
Exercise
Price
|
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$
|
0.18
|
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750,000
|
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5.22
|
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|
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$
|
0.18
|
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500,000
|
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|
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$
|
0.18
|
|
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$
|
0.25
|
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550,000
|
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5.63
|
|
|
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$
|
0.25
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250,000
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$
|
0.25
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$
|
0.50
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200,000
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3.60
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|
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$
|
0.50
|
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200,000
|
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$
|
0.50
|
|
|
$
|
1.29
|
|
|
600,000
|
|
|
|
2.50
|
|
|
|
$
|
1.29
|
|
|
|
600,000
|
|
|
|
$
|
1.29
|
|
The aggregate intrinsic value of exercisable options as of
March 31, 2013
is
$0
. The aggregate intrinsic value of options outstanding as of
March 31, 2013
is
$0
.
The following is a summary of stock option activity for the nine months ended
March 31, 2013
and for the year ended
December 31, 2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
Of Shares
|
|
Weighted
Average
Exercise Price
|
|
Weighted Average
Remaining Contract Life (Years)
|
|
Balance, December 31, 2011
|
2,500,000
|
|
|
$
|
0.76
|
|
|
4.35
|
|
|
Options canceled
|
(700,000
|
)
|
|
(1.18
|
)
|
|
|
|
Options granted
|
300,000
|
|
|
0.25
|
|
|
|
|
Balance, December 31, 2012
|
2,100,000
|
|
|
0.55
|
|
|
4.61
|
|
|
Options canceled
|
—
|
|
|
|
|
|
|
Options granted
|
—
|
|
|
|
|
|
|
Balance, March 31, 2013
|
2,100,000
|
|
|
0.55
|
|
|
4.39
|
|
|
|
|
|
|
|
|
|
Exercisable, March 31, 2013
|
1,550,000
|
|
|
$
|
0.66
|
|
|
4.03
|
|
Class A Units and Class A Warrants and Class B Units and Class B Warrants
In
October 2011
, the Company initiated subscriptions agreements for a non-brokered private placement to raise
$1,000,000
. Upon receipt of proceeds the Company will issue up to
4,000,000
Class A Units at
$0.25
per unit to investors. Each Class A Unit consisted of one share of common stock of the Company, par value
$0.001
and one Class A Warrant. Each Class A Warrant is exercisable to acquire one Class B Unit of the Company at an exercise price of
$0.35
per Class B Unit until
January 20, 2013
. Each Class B Unit consists of one share of common stock of the Company, par value
$0.001
and one Class B Warrant. Each Class B Warrant is exercisable to acquire one common share of the Company, par value
$0.001
at an exercise price of
$0.60
per Class B Warrant Share until January 20, 2014. The Company received
$860,000
in proceeds prior to the year ended December 31, 2011 for the offering, and received
$140,000
after December, 31, 2011.The Company had received all
$1,000,000
in proceeds as of
March 31, 2013
. As of
March 31, 2013
,
4,000,000
common shares were issued and
4,000,000
Class A Warrants and Class B Warrants had expired.
In connection with the offering of the Class A Units, the Corporation issued a reservation order reserving Common Shares for issuance as follows:
|
|
|
|
|
|
|
Warrant Class/
Exercise Price
|
Number of Shares
Common Stock
(Reserved)
|
Aggregate Exercise
Price
|
|
Class A Warrants
(US$0.35)
|
4,000,000
|
$1,400,000
|
|
Class B Warrants
(US$0.60)
|
4,000,000
|
$2,400,000
|
|
Total
|
8,000,000
|
$3,800,000
|
In
May 2012
, the Company initiated subscriptions agreements for a non-brokered private placement to raise
$500,000
. Upon receipt of proceeds in
May 2012
, the Company issued
2,000,000
Class A Units at
$0.25
per unit to an investor. Each Class A Unit consisted of one share of common stock of the Company, par value
$0.001
and one Class A Warrant. Each Class A Warrant is exercisable to acquire one Class B Unit of the Company at an exercise price of
$0.35
per Class B Unit until
May 14, 2013
. Each Class B Unit consists of one share of common stock of the Company, par value
$0.001
and one Class B Warrant. Each Class B Warrant is exercisable to acquire one common share of the Company, par value
$0.001
at an exercise price of
$0.60
per Class B Warrant Share until
May 14, 2014
. The Company received
$500,000
in proceeds as of December 31, 2012.
In connection with the offering of the Class A Units, the Corporation issued a reservation order reserving Common Shares for issuance as follows:
|
|
|
|
|
|
|
|
|
|
Warrant Class/
Exercise Price
|
Number of Shares
Common Stock
(Reserved)
|
Aggregate Exercise
Price
|
|
Class A Warrants
(US$0.35)
|
2,000,000
|
|
$
|
700,000
|
|
|
Class B Warrants
(US$0.60)
|
2,000,000
|
|
$
|
1,200,000
|
|
|
Total
|
4,000,000
|
|
$
|
1,900,000
|
|
Note 6 - Note Payable
The Company unanimously approved to obtain loans through the offer of
8%
Promissory Notes due January 8, 2014 (the "Notes") in the aggregate amount of up to
$1,000,000
(the "Offering") for the purpose of raising working capital. The Notes are convertible into shares of common stock of the Company ("Common Shares") at a conversion price of
$0.25
per share (the "Conversion Price") and interest on the Notes is payable in cash or, at the option of the Company, in-kind in Common Shares at the Conversion Price. On January 18, 2018, Mark Rachovides (a "Board Member") loaned the Company
$150,000
related to the Offering, a total of
600,000
shares can be exercised up to January 8, 2014. The note payable principal and interest is due in full January 9, 2014.
Note 7 - Income Taxes
For the
three months ended March 31, 2013
, the Company had net operating losses and, accordingly, no provision for income taxes has been recorded. In addition, no benefit for income taxes has been recorded due to the uncertainty of the realization of any tax assets. At
March 31, 2013
, the Company has accumulated operating losses totaling approximately $
45.2 million
. The net operating loss carry forwards will begin to expire in
2020
if not utilized. The Company has recorded net operating losses in each year since its inception through
March 31, 2013
. Based upon all available objective evidence, including the Company’s loss history, management believes it is more likely than not that, the net deferred assets will not be fully realized. Therefore, the Company has provided a valuation allowance against its deferred tax assets at
March 31, 2013
.
Undistributed earnings of the Company’s foreign subsidiaries are considered to be indefinitely reinvested and, accordingly, no provision for U.S. federal income taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company may be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the foreign countries.
The Company’s wholly owned subsidiaries have prepared the required foreign tax returns for the years ended
December 31, 2005
through
December 31, 2008
. Foreign taxes of approximately $
33,000
have been recorded for tax years
2005
through
2008
, and are included in accrued expenses. Management has engaged qualified firms to identify and prepare foreign tax returns for filing
for the years ended December 31, 2005 through 2011. The Company believes amounts due, if any, would not be material due to changes in Cyprus tax laws during those periods, and due to net operating losses from foreign operations carried forward
.
Note 8 - Contingencies
Notice of Arbitration
On
November 4, 2011
, AKBN delivered a letter to Sky Petroleum that was untranslated. Sky Petroleum received an English translation on
November 9, 2011
. The AKBN letter alleged material breach of the PSC and providing notice of termination pursuant to Section
24.2(a)
of the PSC. AKBN alleged breaches for failures to commence its initial working program, deliver a bank guarantee, open an office in Albania and establish an Exploration Advisory Committee. Sky Petroleum responded to AKBN on
November 10, 2011
, and provided AKBN notice of its intent to institute an arbitration proceeding under the terms of the PSC against AKBN for breach of the PSC.
On
December 23, 2011
, Sky Petroleum delivered Notice of Arbitration under the Arbitration Rules of the United Nations Commission on Internal Trade Law to National Agency of Natural Resources and to the Ministry of Economy, Trade and Energy of Albania to institute an arbitration proceeding against the Ministry of Economy, Trade and Energy of Albania, acting by and through AKBN, for breach of the PSC in accordance with Article XXI of the PSC.
On January 10, 2012, Sky Petroleum filed a complaint (Case No.:
A-12-CA-023-S
S) with the United States District Court, Western District of Texas, Austin Division (the “Court”) for declaratory and injunctive relief against the Ministry of Economy, Trade, and Energy of Albania, acting by and through AKBN (collectively, the “Defendants”). The action for declaratory and injunctive relief under the Foreign Sovereign Immunities Act and the Albania-America Bilateral Investment Treaty sought to compel arbitration of the dispute between Sky Petroleum and the Defendants (collectively, the “Parties”) under the PSC and to preserve the status quo ante between the Parties pending completion of arbitration under the United Nations Commission on International Trade Law.
On January 20, 2012, the Court delivered an Order and Preliminary Injunction (i) granting Sky Petroleum's preliminary injunction to maintain the status quo between the Parties pending arbitration, (ii) enjoining the Defendants and all persons acting in concert with them from awarding, transferring, or otherwise disposing of any rights to explore, develop and/or produce petroleum on the Contract Area until a final arbitration award is issued, (iii) ordering the Defendants to remove from their website or other publicly available documents all references to the Contract Area being “free” or otherwise available for new contractors until a final arbitration award is issued, and (iv) ordering the Parties to arbitrate their dispute with the United Nations Commission on International Trade Law according to the terms of the PSC.
On February 28, 2012, Sky Petroleum petitioned the Albanian Appeal Court, Tirana, to seek to enforce the Order and Preliminary Injunction granted by the United States District Court, Western District of Texas, Austin Division. On March 1, 2012, the Appeal Court refused to recognize the Order in Albania.
On April 30, 2012, the Company paid approximately
$112,000
(CHF
100,000
) to the Tribunal for the first tranche of the provisional budget which are included in other current assets on the Consolidated Balance Sheets as of December 31, 2012. Both Sky and AKBN were required to pay the advances, however AKBN failed to deliver its portion of the advance. During the quarter ended March 31, 2013, AKBN again failed to deliver its portion of the balance of the provisional budget, therefore the Company paid
$238,000
(CHF
210,000
) to the Tribunal.
The Arbitration took place before the Tribunal, at the International Dispute Resolution Centre in London, UK between February 18th and February 22, 2013.
On May 7, 2013, the Arbitration Tribunal ruled that the PSC was properly terminated on November 17, 2011, and ruled Sky Petroleum to reimburse AKBN for total fees and expenses in connection with the Arbitration proceeding in the amount of EUR
382,774
(
$501,511
). As a result of the ruling Sky Petroleum impaired Investment in Oil and Gas Properties, net, related to acquisition and development costs for oil and gas projects in Albania to $
0
, and for the period ended March 31, 2013, Sky Petroleum had an impairment charge of
$10,205,220
; and recorded a liability by
$501,511
(EUR
382,774
) related to liability arising from the obligation to reimburse AKBN for total fees and expenses in connection with the Arbitration proceeding.
Note 9 - Subsequent Events
On May 7, 2013, the Arbitration Tribunal issued ruled that (i) AKBN provided proper notice of the termination of the PSC to Sky Petroleum on July 22, 2011, for Sky Petroleum's failure to deliver a conforming bank guarantee to AKBN by July 22, 2011, and (ii) the PSC was properly terminated on November 17, 2011. The Arbitration Tribunal ruled Sky Petroleum to reimburse AKBN for total fees and expenses in connection with the Arbitration proceeding in the amount of EUR
382,774
(
$501,511
). As a result of the ruling, Sky Petroleum impaired its Investment in Oil and Gas Properties, net, related to acquisition and development costs for oil and gas projects in Albania by
$10,205,220
to $
0
. See "Investment in Oil and Gas Properties - Arbitration Proceedings" in the Notes to Consolidate Financial Statements for further details.
