UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



Commission file number: 333-99455

SKY PETROLEUM, INC.
(Exact name of registrant as specified in its charter)
Nevada
 
32-0027992
(State of other jurisdiction of incorporation or
organization)
 
(I.R.S. Employer Identification No.)
 
 
 
15950 N. Dallas Parkway, Suite 400
Dallas, Texas
 
75248
(Address of principal executive offices)
 
(Zip Code)
(214) 299-7660
(Registrant’s Telephone Number, including area code)
 
 
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer” and “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
Smaller Reporting Company x

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) ¨ Yes x No

Number of Shares outstanding at August 19, 2014: 76,133,709



INDEX
Insert Title Here
 
Page No.(s)
PART I - FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II - OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 

2


PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements

NOTE: These condensed consolidated financial statements reflect the Company’s Condensed Consolidated Balance Sheets at June 30, 2014 and December 31, 2013, the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2014 and 2013, and Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013.

Sky Petroleum, Inc.
Condensed Consolidated Balance Sheets

 
June 30,
2014
 
December 31,
2013
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
69,076

 
$
277,995

Other current assets
1,240

 
—

Total Current Assets
70,316

 
277,995

 
 
 
 
Investment in oil and gas properties, net
—

 
—

Fixed assets, net
9,535

 
13,575

Deposits and other assets
11,929

 
11,929

Total Assets
$
91,780

 
$
303,499

 
 
 
 
Liabilities and Stockholders’ Deficit
 

 
 

Current liabilities:
 

 
 

Accounts payable and accrued liabilities
$
1,082,370

 
$
2,004,712

Accounts payable, related party
13,950

 
238,344

Current portion of long term note payable
176,989

 
—

Accrued interest
2,959

 
11,704

Note payable, related party
150,000

 
150,000

Total Current Liabilities
1,426,268

 
2,404,760

Long term note payable
125,210

 
—

Total Liabilities
$
1,551,478

 
$
2,404,760

 
 
 
 
Stockholders' deficit:
 

 
 

Preferred stock, $0.001 par value, 10,000,000 shares authorized, none outstanding
—

 
—

Series B Preferred stock, no par value, 5,000,000 shares authorized, 3,863,636 issued and outstanding
7,820,000

 
7,820,000

Common stock, $0.001 par value, 150,000,000 shares authorized, 76,133,709 and 68,133,709 shares issued and 76,383,704 and 68,383,709 outstanding, respectively
76,134

 
68,134

Additional paid-in capital
43,720,569

 
43,316,055

Obligations due from Shareholders, related party
(225,000
)
 
—

Accumulated deficit
(52,851,401
)
 
(53,305,450
)
Total Stockholders' deficit:
(1,459,698
)
 
(2,101,261
)
 
 
 
 
Total Liabilities and Stockholders’ Deficit
$
91,780

 
$
303,499


The accompanying Notes are an integral part of these condensed consolidated financial statements

3


Sky Petroleum, Inc.
Condensed Consolidated Statements of Operations

 
Three Months Ended
 
Six Months Ended
 
June 30,
2014
 
June 30,
2013
 
June 30,
2014
 
June 30,
2013
Oil revenues
$
—

 
$
—

 
$
—

 
$
—

Expenses:
 

 
 

 
 

 
 

Depreciation
1,489

 
2,550

 
4,040

 
5,100

Arbitration expense
—

 
(106,544
)
 
—

 
941,314

Legal and accounting
40,082

 
171,696

 
118,548

 
584,863

Travel
—

 
199,925

 
—

 
218,925

Consulting services
7,944

 
58,097

 
49,091

 
116,557

Impairment expense of oil & gas investment in Albania
—

 
—

 
—

 
10,205,220

Gain on settlement of accounts payable
(760,202
)
 
—

 
(760,202
)
 
—

Other general and administrative
44,217

 
141,470

 
127,574

 
240,868

Total expenses (income)
(666,470
)
 
467,194

 
(460,949
)

12,312,847

Net operating income (loss)
666,470

 
(467,194
)
 
460,949


(12,312,847
)
Interest expense
(3,974
)
 
—

 
(6,900
)
 
—

Net income (loss)
$
662,496

 
$
(467,194
)
 
$
454,049


$
(12,312,847
)
 
 
 
 
 
 
 
 
Basic earnings (loss) per share - net income
0.01

 
$
(0.01
)
 
$
0.01

 
$
(0.18
)
Diluted earnings (loss) per share - net income
0.01

 
$
(0.01
)
 
$
0.01

 
$
(0.18
)
Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
     Basic
71,196,896

 
68,383,709

 
69,790,302

 
68,383,709

     Diluted
71,796,896

 
68,383,709

 
69,790,302

 
68,383,709


The accompanying Notes are an integral part of these condensed consolidated financial statements.

4


Sky Petroleum, Inc.
Condensed Consolidated Statements of Cash Flows

 
Six Months Ended
  
June 30,
2014
 
June 30,
2013
Cash flows from operating activities:
 
 
 
Net loss
$
454,049

 
$
(12,312,847
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 

Depreciation
4,040

 
5,100

Share based compensation
12,514

 
29,182

Amortization of debt discount
1,015

 
—

Impairment of oil & gas investment in Albania
—

 
10,205,220

Gain on settlement of accounts payable
(760,202
)
 
—

Changes in operating assets and liabilities:
 
 
 

Other current assets
(1,240
)
 
95,218

Accounts payable and accrued liabilities
(66,595
)
 
622,813

Net cash used in operating activities
(356,419
)
 
(1,355,314
)
Cash flows from financing activities:
 

 
 

Proceeds from convertible debt issuance
—

 
150,000

Proceeds from issuance of shares
175,000

 
 
Payments on debt
(27,500
)
 
—

Net cash provided by financing activities
147,500

 
150,000

Net decrease in cash and cash equivalents
(208,919
)
 
(1,205,314
)
Cash and cash equivalents at the beginning of period
277,995

 
1,546,058

Cash and cash equivalents at the end of period
$
69,076

 
$
340,744

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
    Total non-cash exchange of accounts payable for debt
$
350,000

 
$
—

    Total cash paid for interest - related party
$
14,630

 
$
—

 
 
 
 
 
 
 
 


The accompanying Notes are an integral part of these condensed consolidated financial statements.

5


Sky Petroleum, Inc.
Notes to Condensed 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 four 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, incorporated for the purposes of holding and operating interests in Albania. The company owns 100% of Sky Petroleum UK Limited (the "JV Sub"), incorporated in England and Wales which owns 75% of Hyde Resources Ltd. (the "JV Corporation"). The purpose of the JV Corporation is to obtain licenses and to conduct technical, environmental and exploration due diligence; raise capital and enter into one or more joint venture projects (each a “JVC Project”) for the purposes of conducting, exploration, development and commercialization of oil and gas project in an Area of Interest. 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.

The Company cannot be certain that its existing sources of cash will be adequate to meet our liquidity requirements. However,
management has implemented plans to improve liquidity through slowing or stopping certain planned expenditures and
negotiations with creditors to reduce its debt obligations. 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.

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, 2013.


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 ("U.S. GAAP") 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 and Sky Petroleum UK Limited (which owns 75% of Hyde Resources Ltd. All intercompany account balances and transactions have been eliminated.




6


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.

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 Securities Exchange Commission ("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 June 30, 2014, the net carrying value of the Company's acquisition and development costs for oil and gas projects in
Albania was $0.

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

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.

7



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. The Company has accrued approximately $33,000. This amount includes 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 U.S. GAAP. 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.

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

Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management for each period presented herein. Fair values were assumed to approximate carrying values for cash and cash equivalents, and accounts payable and accrued expenses because they are short term in nature and their carrying amounts approximate fair values.

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.

U.S. GAAP establishes a framework for measuring fair value 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

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.


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 June 30, 2014 and December 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.

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance in this update supersedes the revenue recognition requirements in Topic 605, Revenue Recognition.

8


Under the new guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in ASU No, 2014-09 are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. We are currently evaluating the impact of adopting the guidance on our consolidated financial statements.


Note 3 - Investment in Oil and Gas Properties

As of June 30, 2014, the Company's investment in oil and gas properties was zero.

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 covered approximately 1.2 million acres, representing approximately 20% of the landmass of Albania.

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 in breach of the expressed termination provisions in the PSC. The Arbitration Tribunal ruled that the PSC was properly terminated. See "Commitments & Contingencies" in Note 7 to the condensed Consolidated Financial Statements for further details.

The Company's expenditures related to the Albania exploration blocks consisted of acquisition costs totaling $50,000, and
$700,000 for fees to consultants for locating and negotiating the Company's investment in the Albania exploration blocks,
$415,220 for fees related to evaluations and assessments of the concession area, and $50,000 towards the $100,000 allocation
for training and education for the first year exploration period. In addition, 3 million shares of common stock with a fair value
of $1,170,000, plus 3,863,636 Preferred Shares Series B with a value of $7,820,000, were issued to a Consultant for expertise
provided to the Company in acquiring and negotiating the acquisition of oil and gas properties.

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 year ended December 31, 2013, Sky Petroleum had an
impairment charge of $10,205,220; and accrued a liability of $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. As of June 30, 2014, the obligation to pay AKBN remains outstanding.

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 natural 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.


Note 4 – Bank Guarantee


9


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. The cash deposit was considered restricted cash.

The letter of credit was effective through February 22, 2013. The principal under the letter of credit would be reduced every month or three months, as agreed between AKBN and the Company during the First Exploration Period, as defined under the PSC, by an amount equal to the sum spent by the Company on its Work Program obligations, as defined under the PSC, during such month or three months, such reductions to be effected in accordance with monthly or quarterly written statements issued by AKBN to the Company. As of March 29, 2013 the letter of credit had matured and the proceeds were moved to unrestricted cash.


Note 5 - Stockholders' Equity

Preferred Stock

We have authorized 10 million shares of $0.001 par value Preferred Stock. There were no shares of Preferred Stock outstanding as of June 30, 2014 and December 31, 2013, respectively.

On October 8, 2010, pursuant to the terms of a consulting agreement ("the Consulting Agreement"), dated May 18, 2010, as amended September 29, 2010 and October 3, 2010, by and between the Company and consultant, 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 June 30, 2014 and December 31, 2014, 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 Shares; not to effect or facilitate the transfer, assignment, conveyance or sale of any of the Series B Preferred Shares; and not to effect the conversion of the Series B Preferred Stock into shares of common stock of the Company, unless the transfer agent receives the expressed written instructions of the Secretary of the Registrant. The Company has determined that consultant breached numerous terms of the Consulting Agreement and committed other actions that resulted in substantial harm and damage to the Company and its 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 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 stock options fair value was determined using the following attributes and assumptions for each separate issuance: share prices ranging from $0.05 to $0.18, 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.

10



For the three and six months ended June 30, 2014, the Company recorded $6,174 and 12,514, respectively 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 granted or exercised for the three and six months ended June 30, 2014. 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 U.S. GAAP, 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 June 30, 2014, there was approximately $37,049 unrecognized compensation expenses related to non-vested stock option agreements.

A summary of stock options outstanding as of June 30, 2014, is as follows:

Shares Underlying Options Outstanding
 
Shares Underlying Options Exercisable
Range of
Exercise Prices
 
Shares
Underlying
Options
Outstanding
 
Weighted
Average
Remaining
Contractual
Life (Years)
 
Weighted
Average
Exercise
Price
 
Shares
Underlying
Options
Exercisable
 
Weighted
Average
Exercise
Price
$
0.18

 
 
750,000

 
 
3.95

 
 
$
0.18

 
 
716,667

 
 
$
0.18

$
0.25

 
 
550,000

 
 
4.33

 
 
$
0.25

 
 
350,000

 
 
$
0.25

$
0.50

 
 
200,000

 
 
2.35

 
 
$
0.50

 
 
200,000

 
 
$
0.50

$
1.29
 
 
600,000

 
 
1.25

 
 
$
1.29

 
 
600,000

 
 
$
1.29


The aggregate intrinsic value of exercisable options as of June 30, 2014 is $0.  The aggregate intrinsic value of options outstanding as of June 30, 2014 is $0.

The following is a summary of stock option activity for the six months ended June 30, 2014:
 
Number
Of Shares
 
Weighted
Average
Exercise Price
 
Weighted Average
Remaining Contract Life (Years)
Balance, December 31, 2013
2,100,000

 
0.55

 
3.36
Options canceled
—

 
 
 
 
Options granted
—

 
 
 
 
Balance, June 30, 2014
2,100,000

 
0.55

 
3.11
 
 
 
 
 
 
Exercisable, June 30, 2014
1,866,667

 
$
0.58

 
2.98

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 issued 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 was 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, which expired. 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 was 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, which expired. The Company received $860,000 in proceeds prior to the year ended December 31, 2011 for the offering, and received $140,000 in 2012. The Company had received all $1,000,000 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:



11


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. The
Company issued 2,000,000 Class A Units at $0.25 per unit to an investor in May 2012. 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 was 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, which expired. 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, which expired. 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)
4,000,000
2,400,000
Total
6,000,000
3,100,000

Class D Units

In May 2014, the Company initiated subscriptions agreements for a non-brokered private placement to raise $400,000. Upon
receipt of proceeds the Company will issue up to 8,000,000 Class D Units at $0.05 per unit to investors. Each Class D Unit consists of one share of common stock of the Company, par value US$0.001 (a “Common Share”) and one Class D Warrant (each, a “Class D Warrant”). Each Class D Warrant is exercisable to acquire one common share of the Company, par value US$0.001 at an exercise price of US$0.10 per Class D Warrant Share until May 29, 2016 (the two (2) year anniversary of the Closing Date) a related party invested $325,000 in units and paid in multiple transactions. The first payment was on June 23, 2014 for $55,000. The second payment was on June 25, 2014 for $45,000. A receivable of $225,000 is due as of June 30, 2014, see Note 9, Related Party Transactions. A third payment was received on July 7, 2014 for $69,000 leaving a balance of $156,000 receivable from shareholder as of the date of this filing. Another accredited investor invested $75,000 in units and paid on June 12, 2014. As of June 30, 2014, the 8,000,000 common shares were granted to the investors.

In connection with the offering of the Class D Units, the Company 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 D Warrants
(US$0.10)
8,000,000
$800,000
Total
8,000,000
$800,000

12




Restricted Stock

Restricted stock awards are awards of common stock that are subject to the restrictions on transfer and to a risk of forfeiture if the awardee terminates with the Company prior to the lapse of the restrictions. During the six months ended June 30, 2014, the Company issued 100,000 shares of restricted stock. The shares vest 50,000 over 90 days and 50,000 over one year. The fair value of such stock was determined using the closing price on the grant date and compensation expense is recorded over the applicable vesting periods. For the three months ended June 30, 2014 we recognized $166 of stock-based compensation expense related to restricted stock awards. As of June 30, 2014 there was approximately $5,804 of unrecognized compensation expense related to restricted stock awards.

The following table summarizes the restricted stock activity for the six months ended June 30, 2014 :

 
Number
Of Shares
 
Weighted
Average
Grant Date Fair Value Per Share
 
Nonvested, March 31, 2014
—

 
—

 
Granted
100,000

 
0.06

 
Vested
—

 
 
 
Canceled/Forfeited
—

 
 
 
Nonvested, June 30, 2014
100,000

 
0.06

 
 
 
 
 
 




Note 6 - Income Taxes

For the three months ended June 30, 2014, the Company had net operating loss carryforwards, 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 June 30, 2014, the Company has accumulated operating losses totaling approximately $60 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 June 30, 2014. 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 June 30, 2014.

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 have been estimated at approximately $33,000 for tax years 2005 through 2008. Management has engaged qualified firms to identify and prepare foreign tax returns for filing for the years ended December 31, 2005 through 2012. 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 7 - Contingencies

Commitments and Contingencies

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

13


and development costs for oil and gas projects in Albania to $0, and for the period ended September 30, 2013, Sky Petroleum had an impairment charge of $10,205,220; and accrued a liability of $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. We have not had sufficient funds to pay this award and have received demands for payment from the Tribunal.

The Company has guaranteed to, the due and punctual performance of all obligations of the JV Sub under or in connection with the JV Agreement if and when they become performable in accordance with the terms of the joint venture agreement (the "Guaranteed Obligations"). The Company further agreed to indemnify in full and on demand from and against all and any losses, costs and expenses suffered or incurred arising out of, or in connection with: (a) any failure of the JV Sub to perform or discharge the Guaranteed Obligations; or (b) any of the Guaranteed Obligations being or becoming totally or partially unenforceable by reason of illegality, incapacity, lack or exceeding of powers, ineffectiveness or execution or any other matters; but the Company's obligations or liability under the indemnity shall be no greater than the JV Sub's obligations or liability under the JV Agreement. As of June 30, 2014 no obligation have risen and no activity has occurred within the JV Sub.



Note 8 - Note Payable, Related Party Transactions

On January 8, 2013, Mark Rachovides, Director of the Company, gave proceeds in the amount of $150,000 for a convertible
promissory note at 8% to mature on January 8, 2014. The note converts to 600,000 shares of Common Stock of the Company.
Subsequent to the period-end, the note was extended to May 8, 2015.


Note 9 - Related Party Transactions

In May 2014, OceanRidge Investments S.A., a company controlled by Karim Jobanputra, the Company's Chairman and Interim Principal Executive Officer, was issued share certificates representing 6,500,000 Class D Units representing shares of common stock at US$0.05 per unit for aggregate consideration of US$325,000 in proceeds and one Class D Warrant (each, a “Class D Warrant”). Each Class D Warrant is exercisable to acquire one common share of the Company, par value US$0.001 (a “Class D Warrant Share”) at an exercise price of US$0.10 per Class D Warrant Share until May 29, 2016 (the two (2) year anniversary of the Closing Date).

As of June 30, 2014, OceanRidge, paid the subscription price as follows: $100,000 in cash ($55,000 on June 23, 2014; $45,000 on June 25, 2014) and $225,000 was considered a receivable from shareholder.


Note 10 - Long-Term Note Payable

Effective May 15, 2014, the Company and Dorsey & Whitney LLP , ("Dorsey") entered into a Fee Settlement Arrangement to
settle an obligation for professional fees for services rendered and for expenses and other disbursement through April 30, 2014 in an amount of $1,088,886. On the terms and subject to the conditions of this Agreement, the Company agreed to pay Dorsey an aggregate of $350,000 (the "Settlement Payment") in full satisfaction of these obligations. The Settlement Payment will be paid as follows: (a) $50,000 on or before May 30, 2014 (paid), and (b) $300,000 paid in eighteen (18) monthly installments of $16,667 beginning on September 1, 2014: provided, however, the Company will pay the balance of the settlement payment on the earlier of (i) the date the Company raises financing in the aggregate of $5,000,000 or more in one or more transactions or (ii) the date the Company closes an Acquisition Transaction. "Acquisition Transaction" means (i) any sale of equity securities or securities convertible into equity securities of the Company; (ii) any merger, consolidation, statutory share exchange or acquisition transaction involving the Company or any material subsidiary of the Company; (iii) any sale of substantially all of the assets of the Company or any material subsidiary of the Company; (iv) any similar transaction involving the issuance, cancellation or restructuring of equity securities of the Company unless, following the completion of such transaction, the then existing shareholder of Company own or control, directly or indirectly, at least 50% of the voting power or liquidation rights of Company or the successor of such merger, consolidation or statutory share exchange. This settlement resulted in the Company having a gain of $760,202 for the three and six months ended June 30, 2014.

The debt obligation is at a 0% interest rate, management calculated the imputed interest rates at 8% which is the rate the Company is currently paying for other debt obligations. Unamortized debt discount in the amount of $20,301 is netted against the note payable and is displayed net of discount.

Note 11 - Earnings Per Share

14



U.S. GAAP provides for the calculation of basic and diluted earnings per share. Basic earnings per share includes no dilution and is computed by dividing income available to common shareholders by the weighted average number of shares outstanding for the period. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of the Company.

Potential common stock shares consist of shares that may arise from outstanding dilutive common stock warrants and options (the number of which is computed using the "treasury stock method" and from outstanding convertible debentures (the number of which is computed using the "if converted method".

Diluted EPS considers the potential dilution that could occur if the Company's outstanding common stock options, warrants, and convertible debentures were converted into common stock that then shared in the Company's earnings (as adjusted for interest expense) that would longer occur if the debentures were converted.

 
 
Three Months Ended June 30, 2014
 
Three Months Ended June 30, 2013
 
Six Months Ended June 30, 2014
 
Six Months Ended June 30, 2013
Basic earnings per share:
 
 
 
 
 
 
 
 
Net Income
 
$
662,496

 
$
(467,194
)
 
$
454,049

 
$
(12,312,847
)
Average number of common shares outstanding
 
71,196,896

 
68,383,709

 
69,790,302

 
68,383,709

Basic earnings per share - net income
 
$0.01
 
-$0.01
 
$0.01
 
-$0.18
 
 
 
 
 
 
 
 
 
Net Income
 
662,496

 
(467,194
)
 
454,049

 
(12,312,847
)
Adjustment to net earnings from assumed conversion of debentures (1)
 
2,992

 
—

 
—

 
—

Adjusted Net Income
 
664,932

 
(467,194
)
 
454,049

 
(12,312,847
)
 
 
 
 
 
 
 
 
 
Average number of common share outstanding:
 

 
 
 
 
 
 
Common shares outstanding
 
71,196,896

 
68,383,709

 
69,790,302

 
68,383,709

Potential dilutive shares resulting from exercise of warrant and options (2)
 
—

 
—

 
—

 
—

Potential dilutive shares resulting from conversion of debentures (3)
 
600,000

 
—

 
—

 
—

Total average number of common shares outstanding used for dilution
 
71,796,896

 
68,383,709

 
69,790,302

 
68,383,709

Diluted earnings per share - net income
 
$0.01
 
-$0.01
 
$0.01
 
-$0.18
 
 
 
 
 
 
 
 
 
(1) Represents interest expense on dilutive convertible debentures that would not occurred if they were assumed converted.
 
 
(2) All outstanding warrants and options were not considered for the EPS computation as upside down on price per share. these totaled 2,100,000 outstanding options, 8,000,000 outstanding warrants, and 100,000 in restricted stock.
 
 
(3) Convertible debentures (principal) outstanding at the three and six months ended June 30, 2014 totaling $150,000 were convertible into common stock at a price of $0.25 per share in 2014. No potential dilutive share for each of the three and six month periods ended June 30, 2013 have been excluded from earnings per share due to being anti-dilutive
 
 








15



Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q and the exhibits attached hereto contain certain statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements concern our anticipated results and developments in our operations in future periods, planned exploration and development of our properties, plans related to our business and matters that may occur in the future. These statements relate to analysis and other information that are based on forecasts of future results, estimates of amounts not yet determinable and assumptions of management.

Any statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions or future events or performance (often, but not always, using words or phrases such as “expects” or “does not expect”, “is expected”, “anticipates” or “does not anticipate”, “plans”, “estimates” or “intends”, or stating that certain actions, events or results “may”, “could”, “would”, “might” or “will” be taken, occur or be achieved) are not statements of historical fact and may be forward-looking statements. Forward-looking statements are subject to a variety of known and unknown risks, uncertainties and other factors, which could cause actual events or results to differ from those, expressed or implied by the forward-looking statements, including, without limitation:

- risks related to our limited operating history:

- risks related to our need to raise additional capital to fund working capital requirements;

- risks related to the historical losses and expected losses in the future and our ability to continue as a going
concern;

- risks related to our dependence on our executive officers;

- risks related to fluctuations in oil and natural gas prices;

- risks related to exploratory activities, drilling for and producing oil and natural gas;

- risks related to liability claims from oil and gas operations;

- risks related to legal compliance costs and litigation expenditures;

- risks related to the unavailability of drilling equipment and supplies;

- risks related to competition in the oil and natural gas industry;

- risks related to period to period comparison of our financial results;

- risks related to our securities, including trading activity, price fluctuation and volatility;

- risks related to our ability to raise capital or enter into joint venture or working interest arrangements to
complete exploration and development programs on acceptable terms, if at all; and

- political, social and cultural risks associated with operations and conducting business in foreign countries.

This list is not exhaustive of the factors that may affect our forward-looking statements. Some of the important risks and uncertainties that could affect forward-looking statements are described further under the sections titled “Risk Factors”, “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the Securities and Exchange Commission (the “SEC”) on April 15, 2014. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, believed, estimated or expected. Our management has included projections and estimates in this Quarterly Report, which are based primarily on management’s experience in the industry, assessments of our results of operations, discussions and negotiations with third parties and a review of information filed by our competitors with the SEC or otherwise publicly available. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. We disclaim any obligation subsequently to revise any forward-looking statements to reflect events or

16


circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events, except as required by law.

We qualify all the forward-looking statements contained in this Quarterly Report by the foregoing cautionary statements.

Management’s Discussion and Analysis

You should read the following discussion and analysis of our financial condition and results of operations together with our
consolidated financial statements and related notes appearing elsewhere in this Annual Report. This discussion and analysis
contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially
from those anticipated in these forward-looking statements as a result of many factors, including, but not limited to, those set forth under “Risk Factors” above and elsewhere in this Annual Report. See section” Cautionary Note Regarding Forward-Looking Statements” above.

This discussion and analysis should be read in conjunction with the accompanying consolidated financial statements of the
Company and related notes. The discussion and analysis of the financial condition and results of operations are based upon the
consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of any contingent liabilities at the financial statement date and reported amounts of revenue and expenses during the reporting period. On an on-going basis the Company reviews its estimates and assumptions. The estimates were based on historical experience and other assumptions that the Company believes to be reasonable under the circumstances. Actual results are likely to differ from those estimates under different assumptions or conditions, but the Company does not believe such differences will materially affect our financial position or results of operations. Critical accounting policies, the policies the Company believes are most important to the presentation of its financial statements and require the most difficult, subjective and complex judgments, are outlined below in the sub-section "Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies,” and have not changed significantly.

Overview and Plan of Operation

Our primary business is to identify opportunities to either make direct property acquisitions or to fund exploration or development of oil and natural gas properties of others under arrangements in which we will 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. There can be no assurance that we will successfully implement our business strategy or meet our goals during the next twelve months.


Comparison of the Statement of Operations for the three and six months ended June 30, 2014 and June 30, 2013

Net Losses:

We had no revenues from operations for the three and six months ended June 30, 2014 and June 30, 2013, respectively. Revenue from operations, if any, will be dependent on our ability to obtain properties and successfully develop such properties. The Company currently has no material Oil and Gas properties.

We had a net income of $662,496 for the three months ended June 30, 2014, and a net loss of $467,194 for the three months ended June 30, 2013. We had a net income of $454,049 for the six months ended June 30, 2014, and a net loss of $12,312,847 for the six months ended June 30, 2013.



Operating expenses:

For the three months ended June 30, 2014, operating income was $666,470 compared to an operating loss of $467,194 for the three months ended June 30, 2013, a change of $1,133,664. The operating income was primarily due to the settlement agreement with Dorsey Whitney reducing expenses $760,202 and no further Arbitration costs as compared to prior year.


17


During the three months ended June 30, 2014, we had a reduction in legal and accounting expenses to $40,082 ($171,696, Q2 2013); consulting services expenses to $7,944 ($58,097, Q2 2013); and general and administrative expenses to $44,217 ($141,470 Q2 2013). These decreases relate to the AKBN arbitration costs incurred in 2013. We had interest expense of $3,974 for the three months ended June 30, 2014, compared to none for the three months ended June 30, 2013.

For the six months ended June 30, 2014, operating income was $$460,949 compared to an operating loss of $12,312,847 for the six months ended June 30, 2013, a change of $12,773,796, The operating income was primarily due to the Company negotiating a settlement reducing legal costs owed of $760,202 and a one time impairment cost in 2013 for Albania oil and gas property of $10,205,220 and related arbitration expense of $941,314.

During the six months ended June 30, 2014, we had a reduction in legal and accounting expenses to $118,548 ($584,863, Q2 2013); a reduction in consulting services to $49,091 ($116,557, Q2 2013); general and administrative expenses to $127,574 ($240,868 Q2 2013) and in 2013 we incurred impairment expense in Albania Oil and Gas of $10,205,220. We had interest expense of $6,900 for the six months ended June 30, 2013, compared to none for the six months ended June 30, 2013.


Liquidity and Capital Resources

A component of our operating plan is the ability to obtain additional capital through additional equity and/or debt financing to
fund new projects. We had cash on hand of approximately $69,076 at June 30, 2014.

The current market conditions could make it difficult or impossible for us to raise necessary funds to meet our capital requirements. If we are unable to obtain financing through equity investments, we will seek alternative financing solutions including, but not limited to, credit facilities, debenture issuances or third party funding of our arbitration.

Net cash used in operating activities during the six months ended June 30, 2014 was $356,419 as compared to net cash used in operating activities of $1,355,314 for the comparable period in 2013, an decrease of $998,895. This decrease in cash used in operations is a result of reduction in legal expenses and prior year write-off of the Albania Oil & Gas property. Cash from financing activities was $150,000 for the six months ended June 30, 2013 from the private placement proceeds compared to $147,500 for issuance of shares in 2014 reduced by debt payments.

Total assets as of June 30, 2014, were $91,780 compared to total assets of $303,499 as of December 31, 2013. Stockholders' deficit as of June 30, 2014 was $1,459,698 compared to stockholders’ deficit of $2,101,261 as of December 31, 2013. The decrease in assets was related to cash outflows for operating expenses.

As of June 30, 2014, we had current assets of $70,316, including cash and cash equivalents of $69,076.  We had current liabilities of $1,426,268, resulting in a working capital deficit of $1,355,952 at June 30, 2014 as compared to $2,126,765 in working capital deficit at December 31, 2013.

Over the next six months, we anticipate we will be required to raise additional capital to fund our working capital requirements.

In May 2014, the Company initiated subscriptions agreements for a non-brokered private placement to raise $400,000. Upon receipt of proceeds the Company will issue up to 8,000,000 Class D Units at $0.05 per unit to investors. Each Class D Unit consists of one share of common stock of the Company, par value US$0.001 (a “Common Share”) and one Class D Warrant (each, a “Class D Warrant”). Each Class D Warrant is exercisable to acquire one Common Share of the Company, par value US$0.001 at an exercise price of US$0.10 per Class D Warrant Share until May 29, 2016 (the two (2) year anniversary of the Closing Date). There were to parties that participated in the subscription agreement. A related party entity invested $325,000 in units and paid in multiple transactions. The first payment was on June 23, 2014 for $55,000. The second payment was on June 25, 2014 for $45,000. A receivable of $225,000 is due as of June 30, 014, see Note 9, Related Party Transactions. Athird payment was received on July 7, 2014 for $69,000 leaving a balance of $156,000 receivable from shareholder as of the date of this filing. Another accredited investor invested $75,000 worth in units and paid on June 12, 2014. As of June 30, 2014, the 8,000,000 common shares were granted to the investors.

Our lack of operating history makes predictions of future operating results difficult to ascertain. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development, particularly companies searching for opportunities in the oil and natural gas industry. Such risks include, but are not limited to, our ability to secure a drilling rig, our ability to successfully drill for hydrocarbons, commodity price fluctuations, delays in drilling or bringing production, if any, on line, an evolving business model and unpredictable availability of qualified oil and gas exploration prospects and the management of growth. To address these risks we must, among other things, implement and successfully execute our

18


business and development plan, successfully identify future drilling locations, continue to rely on qualified independent consultants, respond to competitive developments, and attract, retain and motivate qualified personnel. There can be no assurance that we will be successful in addressing such risks, and the failure to do so can have a material adverse effect on our business prospects, financial condition and results of operations.


Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Contractual Obligations

Leases

The Company had one lease on office facilities under operating lease agreements that expired on October 31, 2013. A second
lease that terminated June 30, 2013 with the Company resulting from the resignation of the former Interim Chief Financial
Officer. The Tirana, Albania lease is on a month to month cancelable basis and was terminated on March 31, 2014. The Dallas lease is on a month to month cancelable basis. Total rent expense was $27,652 and $43,346 for the six months ended June 30, 2014 and 2013 respectively.

Oil and Gas Properties Commitments and Contingencies

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 September 30, 2013, Sky
Petroleum had an impairment charge of $10,205,220; and accrued a liability of $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. We
have not had sufficient funds to pay this award and have received demands for payment from the Tribunal.

Item 3 - Quantitative and Qualitative Disclosures About Market Risk

Not Applicable.

Item 4 - Disclosure Controls and Procedures

Disclosure Controls and Procedures

At the end of the period covered by this Quarterly Report an evaluation was carried out under the supervision of and with the
participation of the Company’s management, including the Interim Principal Executive Officer and Interim Principal Accounting Officer, of the effectiveness of the design and operations of the Company’s disclosure controls and procedures (as defined in Rule 13a - 15(e) and Rule 15d - 15(e) under the Exchange Act). Based on that evaluation the Principal Executive and Accounting Officer concluded that the Company’s disclosure controls and procedures are adequately designed and effective in ensuring that: (i) information required to be disclosed by the Company in reports that it files or submits to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms and (ii) material information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our Principal Executive and Accounting Officer, as appropriate, to allow for accurate and timely decisions regarding required disclosure.



Management’s Report on Internal Control over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of financial statements for external purposes in accordance with generally accepted accounting principles.


19


Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness in future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Effective internal controls are necessary for us to provide reliable financial reports. If we cannot provide reliable financial reports, our operating results could be harmed. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Based on our evaluation, our management concluded that there is a material weakness in our internal control over financial reporting. The material weakness identified did not result in the restatement of any previously reported financial statements or any related financial disclosure, nor does management believe that it had any effect on the accuracy of the Company’s financial statements for the current reporting period. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness relates to the monitoring and review of work performed by our Chief Financial Officer and/or accounting consultant in the preparation of audit and financial statements, footnotes and financial data provided to the Company’s registered public accounting firm in connection with the annual audit. All of our financial reporting is carried out by our Interim Principal Accounting Officer and/or accounting consultant. This lack of accounting staff results in a lack of segregation of duties and accounting technical expertise necessary for an effective system of internal control. All unexpected results are investigated. At any time, if it appears that any control can be implemented to continue to mitigate such weaknesses, it is immediately implemented. As soon as our finances allow, we will hire sufficient accounting staff and implement appropriate procedures for monitoring and review of work performed by our Chief Financial Officer and accounting consultant. Because of the material weakness described above, management concluded that, as of December 31, 2013, our internal control over financial reporting was not effective based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO’).

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the three months ended June 30, 2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



PART II - OTHER INFORMATION

Item 1 - Legal Proceedings

We are not aware of any material pending or threatened litigation or of any proceedings known to be contemplated by governmental authorities which are, or would be, likely to have a material adverse effect upon us or our operations, taken as a whole. There are no material proceedings pursuant to which any of our directors, officers or affiliates or any owner of record or beneficial owner of more than 5% of our securities or any associate of any such director, officer or security holder is a party adverse to us or has a material interest adverse to us.

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors as previously disclosed in our Form 10-K, which was filed with the SEC on April 15, 2014.



20


Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds

Except for the issuance of 8,000,000 Class D units described above, there were no sales of unregistered securities during the quarter ended June 30, 2014. The Class D units were issued outside the United States to accredited investors in reliance upon exceptions from the registration requirement of the Securities Act of 1933, under Regulation S.

Item 3 - Defaults Upon Senior Securities

None

Item 4 – Mine Safety Disclosures

Not applicable.

Item 5 - Other Information

None.




Item 6 – Exhibits

 
 
31.1
Certification of Principal Executive Officer and Principal Accounting Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended
32.1
Certification of Principal Executive Officer and Principal Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act


21



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
SKY PETROLEUM, INC.
 
 
 
 
By:
/s/ Karim Jobanputra
 
Karim Jobanputra
 
Chairman
 
(Principal Executive Officer and Principal Accounting Officer)
 
 
 
 
 
August 19, 2014


22




EXHIBIT 31.1
CERTIFICATION
I, Karim Jobanputra, certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of Sky Petroleum, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
August 19, 2014
 
 
 
 
/s/Karim Jobanputra
 
Karim Jobanputra
 
Chairman
 
On behalf of the Registrant and as Principal Executive Officer and Principal Accounting Officer
 
 






EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. §1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Sky Petroleum, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Karim Jobanputra, acting on behalf of the Registrant and as Principal Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in this Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
August 19, 2014
By:
/s/ Karim Jobanputra
 
 
Karim Jobanputra
 
 
Chairman
 
 
On behalf of the Registrant and as Principal Executive Officer and Principal Accounting Officer
A signed original of this written statement required by Section 906 has been provided to Sky Petroleum, Inc. and will be retained by Sky Petroleum, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.


Sky Petroleum (CE) (USOTC:SKPI)
Historical Stock Chart
From Oct 2024 to Nov 2024 Click Here for more Sky Petroleum (CE) Charts.
Sky Petroleum (CE) (USOTC:SKPI)
Historical Stock Chart
From Nov 2023 to Nov 2024 Click Here for more Sky Petroleum (CE) Charts.