Check
whether the issuer (1) filed all reports required to be filed by Section 13
or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. YES x
NO
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
Large
Accelerated Filer ¨
Accelerated
Filer ¨
Non-Accelerated
Filer x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
YES
o
NO
x
APPLICABLE
ONLY TO CORPORATE ISSUERS:
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
As
of May14, 2008 the issuer had 210,250,000shares
outstanding.
*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,”“accelerated filer” and “smaller
reporting company” in rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer ¨
Accelerated
filer ¨
Non-accelerated
filer ¨
Smaller
reporting company x
TABLE
OF CONTENTS
Page
PART
I
Item
1. Financial Statements (Unaudited)
3-13
Item
2. Management’s Discussion and Analysis or Plan of
Operation
14
Item
4. Controls and Procedures
17
PART
II
Item
1. Legal Proceedings
17
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
A
summary
of the significant accounting policies applied in the presentation of the
accompanying financial statements follows:
General
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q, and therefore,
do not
include all the information necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles.
In
the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three period ended March 31, 2008 are not necessarily indicative
of the results that may be expected for the fiscal year ending December 31,2008. The unaudited condensed consolidated financial statements should be
read
in conjunction with the consolidated December 31, 2007 financial statements
and
footnotes thereto included in the Company's SEC Form 10-KSB.
Basis
of Presentation
Russoil
Corporation, formerly Cassidy Media, Inc. ( the “Company”) , was formed under
the laws of the State of Nevada in June, 2006. The consolidated financial
statements include the accounts of the Company and its wholly owned subsidiary,
OJSC Smolenergy (“Smolenergy”) and majority owned subsidiary, Gorstovoe LLC
(“Gorstovoe”). Both entities are formed under the laws of the Russian Federation
and organized for the purpose of exploring and developing oil and gas properties
wells in South Western Siberia. All significant intercompany balances and
transactions have been eliminated in consolidation.
The
Company entered the development stage in January, 2008 , as defined by Statement
of Financial Accounting Standards No. 7 ("SFAS No. 7") and has not commenced
planned principal operations. To date, the Company not generated revenues,
has
incurred expenses and has sustained losses. Consequently, its operations
are
subject to all the risks inherent in the establishment of a new business
enterprise. For the period from inception as a development stage enterprise
through March 31, 2008, the Company has accumulated losses of
$458,995.
Combination Agreement
and Corporate Restructure
Pursuant
to a Combination Agreement (“Agreement”) dated May 31, 2007, as
amended, during the year ended December 31, 2007, the Company issued 110,000,000
shares of its common stock to the owner of Gorstovoe LLC, “Gorstovoye” an oil
and gas exploration company organized under the laws of the Russian Federation
in consideration for a 51% controlling interest in Gorstovoye.
As
a
result of delays in the obtaining approvals from Russian government ministries
to effect the transfer and the Company obtaining satisfactory evidence of
the
seller’s ownership of the 51% interest in Gorstovoye, the acquisition of the 51%
in Gorstovoye by the Company was not consummated until January 16, 2008,
and
accordingly, has been accounted during the period ended March 31, 2008. As
a
result of the consummation of the Agreement, there was a change in control
of
Russoil. In accordance with SFAS No. 141, Gorstovoye was the accounting
acquiring entity. The transaction is in substance a recapitalization of
Gorstovoye’s capital structure.
For
accounting purposes, Russoil has accounted for the transaction as a reverse
acquisition and Gorstovoye is the surviving entity. The Company did not
recognize goodwill or any material intangible assets in connection with the
consummated transaction. Prior to the Agreement, Russoil was an inactive
corporation with no significant assets and liabilities.
The
accompanying financial statements present the historical financial condition,
results of operations and cash flows of the Company prior to the
merger.
The
total
consideration paid was $998,703 and the significant components of the
transaction were as follows:
7
RUSSOIL
CORPORATION
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - SUMMARY OF ACCOUNTING POLICIES (continued)
Assets
acquired:
(000’s)
Advances
- related party
$
200
Other
current assets
1
Property,
plant and equipment
2
Cash
3
Total
assets acquired
206
Liabilities
assumed:
Advances
from related parties
359
Accounts
payable and accrued liabilities
245
Notes
payable - related parties
401
Convertible
note payable - related party
200
Total
liabilities assumed
1,205
NET
LIABILITIES ASSUMED
$
999
The
net
liabilities assumed is accounted for as a recapitalization of the Company’s
capital structure, and accordingly the Company has charged the $998,703
to
additional paid in capital during the three months ended March 31,2008.
Stock
Based Compensation
On
January 1, 2006, the Company adopted the fair value recognition provisions
of
Financial Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards ("SFAS") No. 123, Accounting for Stock Based Compensation, to account
for compensation costs under our stock option plans. We previously utilized
the
intrinsic value method under Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (as amended) ("APB 25"). Under the
intrinsic value method prescribed by APB 25, no compensation costs were
recognized for our employee stock options because the option exercise price
equaled the market price on the date of the grant. Prior to January 1, 2006
we
only disclosed the pro forma effects on net income and earnings per share
as if
the fair value recognition provisions of SFAS 123(R) had been
utilized.
In
adopting SFAS No. 123(R), the Company elected to use the modified prospective
method to account for the transition from the intrinsic value method to the
fair
value recognition method. Under modified prospective method, compensation
cost
is recognized from the adoption date forward for all new stock options granted
and for any outstanding unvested awards as if the fair value method had been
applied to those awards as of the date of the grant. In the three months
ended
March 31, 2008 and 2007; the Company did not grant any employee stock
options.
8
RUSSOIL
CORPORATION
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - SUMMARY OF ACCOUNTING POLICIES (continued)
Revenue
Recognition
Revenues
are recognized in the period that services are provided. For revenue from
product sales, the Company recognizes revenue in accordance with Staff
Accounting Bulletin No. 104, REVENUE RECOGNITION ("SAB104"), which superseded
Staff Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS
("SAB101"). SAB 101 requires that four basic criteria must be met before
revenue
can be recognized: (1) persuasive evidence of an arrangement exists; (2)
delivery has occurred; (3) the selling price is fixed and determinable; and
(4)
collectability is reasonably assured. Determination of criteria (3) and (4)
are
based on management's judgments regarding the fixed nature of the selling
prices
of the products delivered and the collectability of those amounts. Provisions
for discounts and rebates to customers, estimated returns and allowances,
and
other adjustments are provided for in the same period the related sales are
recorded. The Company defers any revenue for which the product has not been
delivered or is subject to refund until such time that the Company and the
customer jointly determine that the product has been delivered or no refund
will
be required. At September 30, 2007the Company did not have any deferred
revenue.
SAB
104
incorporates Emerging Issues Task Force 00-21 (“EITF 00-21”), MULTIPLE
DELIVERABLE REVENUE ARRANGEMENTS. EITF 00-21 addresses accounting for
arrangements that may involve the delivery or performance of multiple products,
services and/or rights to use assets. The effect of implementing EITF 00-21
on
the Company’s financial position and results of operations was not
significant.
Concentrations
of Credit Risk
Financial
instruments and related items which potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents.
The Company places its cash and temporary cash investments with credit quality
institutions. At times, U.S. investments may be in excess of the FDIC insurance
limit.
Use
of
Estimates
The
preparation of the financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to
make
estimates and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
Comprehensive
Income (Loss)
The
Company adopted Statement of Financial Accounting Standards No. 130; “Reporting
Comprehensive Income” (SFAS) No. 130 establishes standards for the reporting and
displaying of comprehensive income and its components. Comprehensive income
is
defined as the change in equity of a business during a period from transactions
and other events and circumstances from non-owners sources. It includes all
changes in equity during a period except those resulting from investments
by
owners and distributions to owners. SFAS No. 130 requires other comprehensive
income (loss) to include foreign currency translation adjustments and unrealized
gains and losses on available for sale securities.
Foreign
Currency Translation
The
Company translates the foreign currency financial statements into US Dollars
using the year end or average exchange rates in accordance with the regulations
of SFAS No. 52, “Foreign Currency Translation”. Assets, liabilities and equity
of these subsidiaries were translated at exchange rates as of the balance
sheet
date. Revenues, expenses and retained earnings are translated at average
rates
in effect for the periods presented. The cumulative translation adjustment
is
included in the accumulated other comprehensive gain (loss) within shareholders’
equity.
Liquidity
As
shown
in the accompanying consolidated financial statements, the Company incurred
net
loss of $458,995 for three months ended March 31, 2008. The Company's current
liabilities exceeded its current assets by $2,343,458 as of March 31,2008.
9
RUSSOIL
CORPORATION
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - SUMMARY OF ACCOUNTING POLICIES (continued)
Impairment
of Long-Lived Assets
The
Company follows Statement of Financial Accounting Standards No. 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”). SFAS No.
144 requires that long-lived assets and certain identifiable intangibles
held
and used by the Company be reviewed for impairment whenever events or changes
in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Events relating to recoverability may include significant
unfavorable changes in business conditions, recurring losses, or a forecasted
inability to achieve break-even operating results over an extended period.
The
Company evaluates the recoverability of long-lived assets based upon forecasted
discounted cash flows. Should impairment in value be indicated, the carrying
value of the long-lived assets and certain identifiable intangibles will
be
adjusted, based on estimates of future discounted cash flows resulting from
the
use and ultimate disposition of the asset. SFAS No. 144 also requires assets
to
be disposed of be reported at the lower of the carrying amount or the fair
value
less disposal costs.
Income
taxes
The
Company follows SFAS No. 109, “Accounting for Income Taxes” (SFAS No. 109) 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 during 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.
Net
Loss Per Share
Basic
loss per share is computed by dividing net loss by the weighted average number
of outstanding shares of common stock. Diluted loss per share, if any, is
computed by dividing net loss by the weighted average number of shares adjusted
for the potential dilution that could occur if stock options, warrants and
other
convertible securities were exercised or converted into common stock. Net
loss
per share excludes the dilutive effect of 2,000,000 shares that are issuable
upon conversion of the convertible note payable principal and interest
outstanding, as such shares would reduce the loss per share.
New
Accounting Pronouncements
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities.” SFAS No. 159 permits entities to
choose to measure many financial instruments, and certain other items, at
fair
value. SFAS No. 159 applies to reporting periods beginning after November15,2007. The adoption of SFAS 159 is not expected to have a material impact
on the
Company’s financial position, results of operations, or cash flows.
In
June 2007, the Accounting Standards Executive Committee issued Statement of
Position 07-1, “Clarification of the Scope of the Audit and Accounting Guide
Investment Companies and Accounting by Parent Companies and Equity Method
Investors for Investments in Investment Companies” (“SOP 07-1”). SOP 07-1
provides guidance for determining whether an entity is within the scope of
the
AICPA Audit and Accounting Guide Investment Companies (the “Audit Guide”). SOP
07-1 was originally determined to be effective for fiscal years beginning
on or
after December 15, 2007, however, on February 6, 2008, FASB issued a
final Staff Position indefinitely deferring the effective date and prohibiting
early adoption of SOP 07-1 while addressing implementation issues.
In
June
2007, the FASB ratified the consensus in EITF Issue No. 07-3, “Accounting
for Nonrefundable Advance Payments for Goods or Services to be Used in Future
Research and Development Activities” (EITF 07-3), which requires that
nonrefundable advance payments for goods or services that will be used or
rendered for future research and development (R&D) activities be deferred
and amortized over the period that the goods are delivered or the related
services are performed, subject to an assessment of recoverability.
EITF 07-3 will be effective for fiscal years beginning after
December 15, 2007. The Company does not expect that the adoption of
EITF 07-3 will have a material impact on our consolidated financial
position, results of operations or cash flows.
10
RUSSOIL
CORPORATION
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - SUMMARY OF ACCOUNTING POLICIES (continued)
In
December 2007, the FASB issued SFAS No. 141(R), "Business
Combinations"
("SFAS No. 141(R)"), which establishes principles and requirements for how
an acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest
in an
acquiree, including the recognition and measurement of goodwill acquired
in a
business combination. SFAS No. 141(R) is effective as of the beginning of
the
first fiscal year beginning on or after December 15, 2008. Earlier adoption
is prohibited and the Company is currently evaluating the effect, if any,
that
the adoption will have on its financial position, results of operations or
cash
flows.
In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling
Interest in Consolidated Financial Statements, an amendment of ARB
No. 51"
("SFAS
No. 160"), which will change the accounting and reporting for minority
interests, which will be recharacterized as noncontrolling interests and
classified as a component of equity within the consolidated balance sheets.
SFAS
No. 160 is effective as of the beginning of the first fiscal year beginning
on
or after December 15, 2008. Earlier adoption is prohibited and the Company
is currently evaluating the effect, if any, that the adoption will have on
its
financial position, results of operations or cash flows.
In
December 2007, the FASB ratified the consensus in EITF Issue No. 07-1,
“Accounting for Collaborative Arrangements” (EITF 07-1). EITF 07-1
defines collaborative arrangements and requires collaborators to present
the
result of activities for which they act as the principal on a gross basis
and
report any payments received from (made to) the other collaborators based
on
other applicable authoritative accounting literature, and in the absence
of
other applicable authoritative literature, on a reasonable, rational and
consistent accounting policy is to be elected. EITF 07-1 also provides for
disclosures regarding the nature and purpose of the arrangement, the entity’s
rights and obligations, the accounting policy for the arrangement and the
income
statement classification and amounts
arising from the agreement. EITF 07-1 will be effective for fiscal years
beginning after December 15, 2008, which will be the Company’s fiscal year
2009, and will be applied as a change in accounting principle retrospectively
for all collaborative arrangements existing as of the effective date. The
Company has not yet evaluated the potential impact of adopting EITF 07-1 on
our consolidated financial position, results of operations or cash
flows.
Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not, or are not believed by
management to, have a material impact on the Company’s present or future
consolidated financial statements.
Entities
controlled by Company shareholders and consultants have advanced funds to
the
Company for working capital purposes. Formal repayment terms do
not exist for certain advances. The amount of the advances due the entities
at March 31, 2008 and December 31, 2007 were $1,230,684 and $1,627,000,
respectively.
Notes
Payable to Related Parties
Notes
payable to Company shareholders, entities controlled by Company shareholders
and
consultants as of March 31, 2008 and December 31, 2007 are as
follows:
On
July3, 2007, the Company issued a $200,000 convertible promissory note to a related
party, due on demand with interest accruing at 10% per annum. The note is
convertible at any time, at the holder’s option, at $0.10 per share. The
conversion price is subject to certain anti-dilutive adjustments.
In
accordance with Emerging Issues Task Force Issue 98-5, Accounting for
Convertible Securities with a Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios (“EITF 98-5”), the Company recognized an imbedded
beneficial conversion feature present in the Convertible Note. The Company
allocated a portion of the proceeds equal to the intrinsic value of that
feature
to additional paid-in capital. The Company recognized and measured an aggregate
of $200,000 of the proceeds, which is equal to the intrinsic value of the
imbedded beneficial conversion feature, to additional paid-in capital and
a
discount against the Convertible Note. The debt discount attributed to the
beneficial conversion feature is charged to current period
earnings.
NOTE
4 – NOTES PAYABLE
The
Company borrowed funds and issued notes payable that consist of the following
obligations as of March 31, 2008 and December 31, 2007:
The
Company is authorized to issue 5,000,000 shares, $0.0001 par value, of preferred
stock. There are no issued or outstanding shares of preferred stock
Common
Stock
The
Company is authorized to issue 14,250,000,000 shares, $0.00001 par value,
of its
common stock. As of March 31, 2008 , there are 210,000,000 shares issued
and
outstanding (See Note 1).
Effective
April 30, 2007the Company amended its Articles of Incorporation for the
purpose
of effecting a one for twenty-eight and a half (1 for 28.5) forward split
of its
common stock. In addition, the authorized common stock was increased from
five
hundred million (500,000,000) shares, $.0001 par value, to fourteen and a
quarter billion (14,250,000,000) shares, $.00001 par value. All share and
per
share data have been given retroactive effect to reflect this
recapitalization.
In
September 2007, pursuant to the Combination Agreement, the Company issued
110,000,000 shares of common stock and additionally canceled 242,000,000
shares
in conjunction with the Company’s acquisition of a 51% interest in Gorstovoye
LLC which was consummated in January 2008 (see Note 1).
12
RUSSOIL
CORPORATION
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
Company is subject to other legal proceedings and claims, which arise in
the
ordinary course of its business. Although occasional adverse decisions
or
settlements may occur, the Company believes that the final disposition
of such
matters should not have a material adverse effect on its financial position,
results of operations or liquidity.
Foreign
Currency and Political Risks
The
Company is in the development stage of owing and operating mines and its
current
market is Russina Federation. Operations outside the United States may
be
subject to certain risks which ordinarily would not be expected to exist
in the
United States, including foreign currency restrictions, extreme exchange
rate
fluctuations, expropriation of assets, civil uprisings and riots, war,
unanticipated taxes including income taxes, excise duties, import taxes,
export
taxes, sales taxes or other governmental assessments, availability of suitable
personnel and equipment, termination of existing contracts and leases,
government instability and legal systems of decrees, laws, regulations,
interpretations and court decisions which are not always fully developed
and
which may be retroactively applied. Management is not presently aware of
any
events of the type described in the country in which it presently operates
that
have not been provided for in the accompanying financial
statements.
Based
upon the advice of local advisors concerning the interpretation of the
laws,
practices and customs of the Russina Federation, management believes the
Company
follows the current practices in the Country; however, because of the nature
of
these potential risks, there can be no assurance that the Company may not
be
adversely affected by them in the future. The Company does not insure any
of its
equipment in countries outside the United States against certain political
risks
and terrorism
NOTE 7 –
GOING CONCERN MATTERS
The
accompanying financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. As shown in the accompanying financial
statements during the three months ended March 31, 2008, the Company
incurred a loss of $458,995 and had a working capital deficit of $2,479,458
as
of March 31, 2008. These factors among others may indicate that the Company
will
be unable to continue as a going concern for a reasonable period of
time.
The
Company's existence is dependent upon management's ability to develop profitable
operations and there can be no assurance that the Company's efforts will
be
successful. However, the planned principal operations have not commenced
and no
assurance can be given that management's actions will result in profitable
operations or the resolution of its liquidity problems. The accompanying
statements do not include any adjustments that might result should the Company
be unable to continue as a going concern.
In
order
to improve the Company's liquidity, the Company's management is actively
pursuing additional equity financing through discussions with investment
bankers
and private investors. There can be no assurance the Company will be successful
in its effort to secure additional equity financing
13
Item
2. Management’s
Discussion and Analysis or Plan of Operation
The
following discussion of our financial condition and results of operations should
be read in conjunction with the financial statements and the related notes
thereto included elsewhere in this Form 10-Q. The matters discussed herein
contain forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Section 27A
of the Securities Act of 1933, as amended (the “Securities Act”), which involve
risks and uncertainties. All statements other than statements of historical
information provided herein may be deemed to be forward-looking statements.
Without limiting the foregoing, the words "believes", "anticipates", "plans",
"expects" and similar expressions are intended to identify forward-looking
statements. Factors that could cause actual results to differ materially from
those reflected in the forward-looking statements include, but are not limited
to, those discussed and the risks discussed in our other filings with the
Securities and Exchange Commission (the “SEC”). Readers are cautioned not to
place undue reliance on these forward-looking statements, which reflect
management's analysis, judgment, belief or expectation only as of the date
hereof. We undertake no obligation to publicly revise these forward-looking
statements to reflect events or circumstances that arise after the date
hereof.
Overview
We
were
incorporated under Nevada law on June 7, 2006 under the corporate name Cassidy
Media, Inc. On April 25, 2007, there was a change of control, which was followed
by the filing of a Certificate of Change with the Secretary of State of Nevada
to effect a 28.5-for-1 forward stock split of our common stock. We have also
merged into our newly-formed wholly-owned subsidiary, Russoil Corporation,
and
have changed our corporate name to Russoil Corporation.
Upon
closing of the Combination Agreement (as defined below), the Company became
the
sole owner of OJSE Smolenergy, a Corporation formed under the laws of the
Russian Federation (“Smolenergy”) on October 28, 2006, to invest in Russian oil
and gas energy fields.
On
January 16, 2008, the Company, through its ownership of
Smolenergy, consummated its acquisition of a 51% interest in
Gorstovoye, LLC (“Gorstovoye”), formed in April 23, 2002 to invest in oil
and petroleum assets. Gorstovoye has obtained licenses from the Federal Agency
of the Ministry of Natural Resources of the Russian Federation (the “Ministry”)
for the Gorstovoye oil field until:
·
March18, 2014, conduct mineral exploration and production including oil
and
gas;
The
Gorstovoye oil field is situated in the Tomsk Region of the Western Siberian
Lowland and, geographically, poses distinct difficulties as it is accessible
to
normal vehicular traffic from late December through late April. Other times
it
is accessible only via all terrain vehicles or helicopter. Smolenergy and
Gorstovoye have sustained significant losses and have a significant accumulated
deficit.
On
November 23, 2006, the Commission of the Rosprirodnadzor (supervising body
for
natural resources) Administration for the Tomskaya area found four instances
of
non-compliance with the conditions for the use of the Grostovoye
oilfield. Thereafter, the same instances of non-compliance were stated in a
Rosnedra (Governmental Department for subsoil management) letter of April 20,2006. On May 10, 2006, the Rosprirodnadzor Commission directed that the
requirements of the License Agreement and other criticisms made by that
Commission be met within 9 months. In effect, there were only two shortcomings.
First, drawing-up of a project to scientifically substantiate new volumes of
oil
and gas production. Second, a plan to eliminate oil leakage be created. The
Company believes it has met these last two remaining requirements. It is the
Company’s view that they are immaterial.
On
October 15, 2007, the plan to eliminate oil spillage was drawn up, approved
by
the Siberian Regional Center of the Russian Emergency Situations Ministry,
the
Rosprirodnadzor Administration for the Tomskaya area and the Rostechnadzor
(supervising body for machinery and equipment) Administration for the Tomskaya
area, and also there was set into operation the plan of actions for oil leakage
prevention on the Gorstovoye hazardous production facilities located in the
Gorstovoye oilfield in the Alexandrovsk district of the Tomskaya area.
As
for
oil production, on June 16, 2006,
the OOO
Gostovoye and OAO TomskNIPIoil VNK, a
scientific Siberian institute, entered into an agreement for development of
scientific and technical product – Project of the Gorstovoye oilfield
production testing. Work under that agreement began on June 16, 2007 and the
date for that product presentation was June 16, 2008.
On
May 6,2008, the final version of the product presentation together with all remarks
was considered by the Central Commission for Natural Resources for
Khanty-Mansijski National Okrug, city of Yugra, and approved as the Project
of
the Gorstovoye oilfield production testing for three year
term.
Now
the
Project of the Gorstovoye oilfield production testing is under consideration
for
final approval by the Rosnedra Central Commission for Natural Resources.
We
have
generated no operating revenues from operations from our inception. We believe
we will begin earning revenues from operations in 2008 from actual operation
as we transition from a development stage company to that of an active
growth stage company. Accordingly, the comparison of current period operating
results with those of prior periods is not meaningful.
Costs
and Expenses
From
our
inception as a development stage company in January 2008 through March 31,2008,
we have not generated any revenues and have incurred cumulative losses of
$458,995.
In
addition, a significant part of the overall remaining costs are associated
principally with compensation to employees and consultants and professional
services rendered. Selling, general and administrative (“SG&A”) expenses for
the quarter ended March 31, 2008 increased from $116,000
in the
quarter ended March 31, 2007 to $218,429 for
the
quarter ended March 31, 2008, or $102,429.
SG&A expenses consisted of accounting, legal, consulting, startup and
organizational expenses. As a result of the above-mentioned expenses, net losses
increased from $137,550
in the
quarter ended March 31, 2007 to $458,995 for
the
quarter ended March 31, 2008, or $321,445.
Liquidity
and Capital Resources
As
of
March 31, 2008, we had $35,000 in cash. We incurred a net loss of
$458,995 for
the three months ended March 31, 2008. In addition, we had a working
capital deficit of $2,479,458
as of
March 31, 2008.
While
we
have raised capital to meet our working capital and financing needs in the
past,
additional financing is required within the next
3
months in
order
to meet our current and projected cash flow deficits from operations and
development. We have sufficient funds to conduct our operations for several
months, but not for 3
months
or
more.
There can be no assurance that financing will be available in amounts or on
terms acceptable to us, if at all.
15
By
adjusting our operations and development to the level of capitalization, we
believe we have sufficient capital resources to meet projected cash flow
deficits. However, if during that period or thereafter, we are not successful
in
generating sufficient liquidity from operations or in raising sufficient capital
resources, on terms acceptable to us, this could have a material adverse effect
on our business, results of operations liquidity and financial
condition.
Our
registered independent certified public accountants have stated in their report
dated April 14, 2008, that we have incurred operating losses since our inception
, and that we are dependent upon management's ability to develop profitable
operations. These factors among others may raise substantial doubt about our
ability to continue as a going concern.
The
consolidated financial statements contained in this Report have been prepared
on
a ‘going concern’ basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. For the reasons
discussed in this Report, there is a significant risk that we will be unable
to
continue as a going concern, in which case, you would suffer a total loss on
your investment in our Company.
Inflation
It
is the
opinion of the Company that inflation has not had a material effect on its
operations.
Off-Balance
Sheet Arrangements
None
Foreign
Currency Fluctuations
Foreign
Currency and Political Risks
The
Company is in the development stage of owing and operating mines and its
current
market is Russina Federation. Operations outside the United States may be
subject to certain risks which ordinarily would not be expected to exist
in the
United States, including foreign currency restrictions, extreme exchange
rate
fluctuations, expropriation of assets, civil uprisings and riots, war,
unanticipated taxes including income taxes, excise duties, import taxes,
export
taxes, sales taxes or other governmental assessments, availability of suitable
personnel and equipment, termination of existing contracts and leases,
government instability and legal systems of decrees, laws, regulations,
interpretations and court decisions which are not always fully developed
and
which may be retroactively applied. Management is not presently aware of
any
events of the type described in the country in which it presently operates
that
have not been provided for in the accompanying financial
statements.
Based
upon the advice of local advisors concerning the interpretation of the laws,
practices and customs of the Russina Federation, management believes the
Company
follows the current practices in the Country; however, because of the nature
of
these potential risks, there can be no assurance that the Company may not
be
adversely affected by them in the future. The Company does not insure any
of its
equipment in countries outside the United States against certain political
risks
and terrorism.
Currency
Consideration
The
Company translates the foreign currency financial statements of its Russian
subsidiary in accordance with the requirements of Statement of Financial
Accounting Standards No. 52, "Foreign Currency Translation." Assets and
liabilities are translated at the rates of exchange at the balance sheet date,
and related revenue and expenses are translated at average monthly exchange
rates in effect during the period. Resulting translation adjustments are
recorded as a separate component in stockholders' equity. Foreign currency
transaction gains and losses are included in the statement of
income.
We
currently do not engage in hedging. However, we may
do so in the future.
Critical
Accounting Policies and Estimates
We
prepare our financial statements in accordance with accounting principles
generally accepted in the United States, and make estimates and assumptions
that
affect our reported amounts of assets, liabilities, revenue and expenses. We
base our estimates on historical experience and other assumptions that we
believe are reasonable in the circumstances. Actual results may differ from
these estimates.
The
following critical accounting policies affect our more significant estimates
and
assumptions used in preparing our consolidated financial
statements.
16
Critical
Accounting Policies and Estimates
The
discussion and analysis of our financial condition and results of operations
are
based upon our consolidated financial statements, which have been prepared
in
accordance with accounting principles generally accepted in the United States
of
America. The preparation of our consolidated financial statements requires
us to
make estimates and assumptions that affect our reported results of operations
and the amount of reported assets, liabilities and proved oil and gas reserves.
Some accounting policies involve judgments and uncertainties to such an extent
that there is reasonable likelihood that materially different amounts could
have
been reported under different conditions, or if different assumptions had
been
used. Actual results may differ from the estimates and assumptions used in
the
preparation of our consolidated financial statements. Described below are
the
most significant policies we apply in preparing our consolidated financial
statements, some of which are subject to alternative treatments under accounting
principles generally accepted in the United States of America. We also describe
the most significant estimates and assumptions we make in applying these
policies.
Oil
and Gas Activities
Accounting
for oil and gas activities is subject to special, unique rules. Two generally
accepted methods of accounting for oil and gas activities are available —
successful efforts and full cost. The most significant differences between
these
two methods are the treatment of exploration costs and the manner in which
the
carrying value of oil and gas properties are amortized and evaluated for
impairment. The successful efforts method requires exploration costs to be
expensed as they are incurred while the full cost method provides for the
capitalization of these costs. Both methods generally provide for the periodic
amortization of capitalized costs based on proved reserve quantities. Impairment
of oil and gas properties under the successful efforts method is based on
an
evaluation of the carrying value of individual oil and gas properties against
their estimated fair value, while impairment under the full cost method requires
an evaluation of the carrying value of oil and gas properties included in
a cost
center against the net present value of future cash flows from the related
proved reserves, using period-end prices and costs and a 10% discount
rate.
Full
Cost Method
We
intend
to use the full cost method of accounting for our oil and gas activities.
Under
this method, all costs incurred in the acquisition, exploration and development
of oil and gas properties are capitalized into a cost center (the amortization
base). Such amounts include the cost of drilling and equipping productive
wells,
dry hole costs, lease acquisition costs and delay rentals. Costs associated
with
production and general corporate activities are expensed in the period incurred.
The capitalized costs of our oil and gas properties, plus an estimate of
our
future development and abandonment costs are amortized on a unit-of-production
method based on our estimate of total proved reserves. Our financial position
and results of operations would have been significantly different had we
used
the successful efforts method of accounting for our oil and gas
activities.
Proved
Oil and Gas Reserves
Our
engineering estimates of proved oil and gas reserves directly impact financial
accounting estimates, including depreciation, depletion and amortization
expense
and the full cost ceiling limitation. Proved oil and gas reserves are the
estimated quantities of oil and gas reserves that geological and engineering
data demonstrate with reasonable certainty to be recoverable in future years
from known reservoirs under period-end economic and operating conditions.
The
process of estimating quantities of proved reserves is very complex, requiring
significant subjective decisions in the evaluation of all geological,
engineering and economic data for each reservoir. The data for a given reservoir
may change substantially over time as a result of numerous factors including
additional development activity, evolving production history and continual
reassessment of the viability of production under varying economic conditions.
Changes in oil and gas prices, operating costs and expected performance from
a
given reservoir also will result in revisions to the amount of our estimated
proved reserves.
Depreciation,
Depletion and Amortization
The
quantities of estimated proved oil and gas reserves are a significant component
of our calculation of depletion expense and revisions in such estimates may
alter the rate of future expense. Holding all other factors constant, if
reserves are revised upward, earnings would increase due to lower depletion
expense. Likewise, if reserves are revised downward, earnings would decrease
due
to higher depletion expense or due to a ceiling test write-down.
Full
Cost Ceiling Limitation
Under
the
full cost method, we are subject to quarterly calculations of a ceiling or
limitation on the amount of our oil and gas properties that can be capitalized
on our balance sheet. If the net capitalized costs of our oil and gas properties
exceed the cost center ceiling, we are subject to a ceiling test write-down
to
the extent of such excess. If required, it would reduce earnings and impact
stockholders’ equity in the period of occurrence and result in lower
amortization expense in future periods. The discounted present value of our
proved reserves is a major component of the ceiling calculation and represents
the component that requires the most subjective judgments. However, the
associated prices of oil and gas reserves that are included in the discounted
present value of the reserves do not require judgment. The ceiling calculation
dictates that prices and costs in effect as of the last day of the quarter
are
held constant. However, we may not be subject to a write-down if prices increase
subsequent to the end of a quarter in which a write-down might otherwise
be
required. If oil and gas prices decline, even if for only a short period
of
time, or if we have downward revisions to our estimated proved reserves,
it is
possible that write-downs of our oil and gas properties could occur in the
future.
17
Future
Development and Abandonment Costs
Future
development costs include costs incurred to obtain access to proved reserves
such as drilling costs and the installation of production equipment. Future
abandonment costs include costs to dismantle and relocate or dispose of our
production platforms, gathering systems and related structures and restoration
costs of land and seabed. Our operators develop estimates of these costs
for
each of our properties based upon their geographic location, type of production
structure, well depth, currently available procedures and ongoing consultations
with construction and engineering consultants. Because these costs typically
extend many years into the future, estimating these future costs is difficult
and requires management to make judgments that are subject to future revisions
based upon numerous factors, including changing technology and the political
and
regulatory environment. We review our assumptions and estimates of future
development and future abandonment costs on an annual basis.
The
accounting for future abandonment costs changed on January 1, 2003 with the
adoption of SFAS No. 143,
Accounting for Asset Retirement Obligations.
This
new standard requires that a liability for the discounted fair value of an
asset
retirement obligation be recorded in the period in which it is incurred and
the
corresponding cost capitalized by increasing the carrying amount of the related
long-lived asset. The liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. Holding all other factors constant, if our estimate of future abandonment
and development costs is revised upward, earnings would decrease due to higher
depreciation, depletion and amortization (DD&A) expense. Likewise, if these
estimates are revised downward, earnings would increase due to lower DD&A
expense. Of the total ARO, $41,552 and $25,300 are classified as a long-term
liability at March 31, 2007 and 2006, respectively. For each of the years
ended
March 31, 2007 and 2006, the Company recognized no depreciation expense related
to its ARO, due to the assumption of a full offset of salvage values.
Allocation
of Purchase Price in Business Combinations
As
part
of our business strategy, we actively pursue the acquisition of oil and gas
properties. The purchase price in an acquisition is allocated to the assets
acquired and liabilities assumed based on their relative fair values as of
the
acquisition date, which may occur many months after the announcement date.
Therefore, while the consideration to be paid may be fixed, the fair value
of
the assets acquired and liabilities assumed is subject to change during the
period between the announcement date and the acquisition date. Our most
significant estimates in our allocation typically relate to the value assigned
to future recoverable oil and gas reserves and unproved properties. As the
allocation of the purchase price is subject to significant estimates and
subjective judgments, the accuracy of this assessment is inherently
uncertain.
Effective
January 1, 2002, we adopted SFAS No. 142,
Goodwill and Other Intangible Assets,
under
which goodwill is no longer subject to amortization. Rather, goodwill of
each
reporting unit is tested for impairment on an annual basis, or more frequently
if an event occurs or circumstances change that would reduce the fair value
of
the reporting unit below its carrying amount. In making this assessment,
we rely
on a number of factors including operating results, economic projections
and
anticipated cash flows. As there are inherent uncertainties related to these
factors and our judgment in applying them to the analysis of goodwill
impairment, there is risk that the carrying value of our goodwill may be
overstated. If it is overstated, such impairment would reduce earnings during
the period in which the impairment occurs and would result in a corresponding
reduction to goodwill.
Revenue
Recognition
We
recognize revenue when crude oil and natural gas quantities are delivered
to or
collected by the respective purchaser. We sell our crude oil production to
two
independent purchasers and as of March 31, 2007, we did not have any natural
gas
sales. Title to the produced quantities transfers to the purchaser at the
time
the purchaser collects or receives the quantities. Prices for such production
are defined in sales contracts and are readily determinable based on certain
publicly available indices. The purchasers of such production have historically
made payment for crude oil and natural gas purchases within thirty-five days
of
the end of each production month. We periodically review the difference between
the dates of production and the dates we collect payment for such production
to
ensure that receivables from those purchasers are collectible. All
transportation costs are accounted for as a reduction of oil and natural
gas
sales revenue.
18
Our
financial statements have been prepared on the going concern basis, which
assumes the realization of assets and liquidation of liabilities in the normal
course of operations. If we were not to continue as a going concern, we would
likely not be able to realize on our assets at values comparable to the carrying
value or the fair value estimates reflected in the balances set out in the
preparation of our financial statements. There can be no assurances that we
will
be successful in generating additional cash from equity or other sources to
be
used for operations. Our financial statements do not include any adjustments
to
the recoverability of assets and classification of assets and liabilities that
might be necessary should we be unable to continue as a going concern.
Disclosure
controls and procedures are controls and other procedures that are designed
to
ensure that information required to be disclosed by us in the reports that
we
file or submit under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC’s rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by
us in
the reports that we file under the Exchange Act is accumulated and communicated
to our management, including our principal executive and financial officers,
as
appropriate to allow timely decisions regarding required
disclosure.
Evaluation
of and Report on Internal Control over Financial Reporting
As
of the
end of the period year covered by this report on Form 10-Q, our Chief Executive
Officer and Chief Financial Officer conducted an evaluation of our disclosure
controls and procedures (as defined in Rules 13a - 15(e) of the Exchange
Act.
Based on their evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures need
improvement and were not adequately effective as of March 31, 2008 to ensure
timely reporting with the Securities and Exchange Commission. Our management
is
in the process of identifying deficiencies with respect to our disclosure
controls and procedures and implementing corrective measures, which includes
the
establishment of new internal policies related to financial
reporting.
Changes
in Internal Controls over Financial Reporting
There
have been no changes in the Company's internal control over financial reporting
during the last quarterly period covered by this report that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART
II
Item
1. Legal Proceedings
In
January 2007, a judgment by a Moscow court (case #A40-67467/06-4-487) was
entered against Gorstovoye in favor of a service provider for approximately
4,160,000 Russian Rubles (approximately US$169,000). Gorstovoye is also a
defendant in a proceeding before the Moscow Arbitration court (case
#A40-3752/07-50-38). The claimant, LLC “Insider” is seeking to hold Gorstovoye
responsible for an alleged debt of JSC “Tomsktruboprovodsroy” in the total
amount of RUB 6.8 million (approximately US$290,000 at the CBR exchange rate
as
of April 14, 2008). Allegedly, Gorstovoye signed an agreement to pay this
debt. Gorstovoye’s defense is that it has never agreed to assume this obligation
and the signature on the agreement is a forgery. This matter has now been
determined in favor of Grostoyoye.
19
Item
2. Unrequested Sales of Equity Securities and Use of
Proceeds
A
Combination Agreement was entered into on August 31, 2007 by the Company,
Smolenergy and its stockholders, with Mr. Viktor Ekimov, canceling all
indebtedness of Smolenergy, relating to Gorstovoye, Smolenergy’s majority owned
subsidiary, to him in exchange for 110,000,000 shares of Russoil’s common stock
while Smolenergy’s shareholders surrendered their holdings in Smolenergy to
Russoil and, simultaneously, Mr. Silvestre Hutchinson, previously Russoil’s sole
executive officer and director, cancelled 242,000,000 shares of the Company
owned by him. As later amended, the Combination Agreement permits the transfer
of the shares to ZAO Ariust (“Ariust”). Ariust is believed to be owned and
controlled by Viktor Ekimov. Pursuant to the Combination Agreement,
the owners of Gorstovoye exchanged a 51% interest in Gorstovoye for
110,000,000 shares of the Company's common stock, representing approximately
52%
of the Company's outstanding common stock, after the return to treasury of
and retirement of the 242,000,000 shares of the Company's common stock. The
transfer of the 51% interest in Gorstovoye to the Company pursuant to
the Combination Agreement was consummated on January 16,2008.
The
Company believes that the sale of its shares to Mr. Ekimov were exempt from
the
registration requirements of the Securities Act, pursuant to Regulation S
promulgated under the Securities Act, Mr. Ekimov is believed to be a citizen
or
resident of the Russian Federation and the acquisition of Gorstovoye was capable
of being completed only in that federation and Section 4(2) of the Securities
Act, based upon the representation of Mr. Ekimov in the Combination Agreement
to
the effect that he was a sophisticated investor. The certificates for Mr.
Ekimov’s shares bear Securities Act restrictive legends and our transfer agent
has been instructed to impose “stop transfer” instructions on the certificates
for said shares.
Purchases
of equity securities by the issuer and affiliated purchasers
Certification
of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (Rule 13a-14(a)).
31.2
Certification
of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (Rule 13a-14(a)).
32.1
Certification
of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Rule
13a-14(b)).
32.2
Certification
of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Rule
13a-14(b)).
20
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
