Amendment to Current Report — Form 8-K Filing Table of Contents
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of Principal Executive Offices/including Zip Code)
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telephone number, including area code)
Check
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appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions (see
General
Instruction A.2. below):
o
Written
communications
pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o
Soliciting
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14a-12 under the Exchange Act (17 CFR 240.14a-12)
o
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EXPLANATORY
NOTES
WE
ARE FILING THIS REPORT TO CORRECT INACCURACIES AND UPDATE INFORMATION IN OUR
REPORT ON FORM 8-K (EVENT DATE OF AUGUST 27, 2007 FILED ON SEPTEMBER 10,2007).
Unless
otherwise indicated or the context otherwise requires, all references below
in
this Current Report on Form 8-K to "we,""us" and the "Company" are to Russoil
Corporation a Nevada corporation, together with its wholly owned subsidiary,
OJSE Smolenergy, a Russian Federation Corporation that holds a majority (51%)
interest in Gorstovoye LLC, a limited liability formed under the laws of the
Russian Federation. Specific discussions or comments relating only to Russoil
Corporation will reference “Russoil”, those relating to OJSE Smolenergy will
reference “Smolenergy” and, those relating to Gorstovoye LLC will reference
“Gorstovoye”.
Unless
otherwise indicated or the context otherwise requires, the number of shares
of
the Company’s common stock gives effect to a 28.5 to 1 stock split effected on
April 30, 2007.
This
Current Report on Form 8-K (the “Current Report”) contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933,
as
amended (the “Securities Act”), Section 21E of the Securities Exchange Act of
1934 (the “Exchange Act”) and the Private Securities Litigation Reform Act of
1995. Forward-looking statements reflect the current view about future events
and financial performance based on certain assumptions. They include opinions,
forecasts, projections, guidance, expectations, beliefs or other statements
that
are not statements of historical fact. In some cases, forward-looking statements
can be identified by words such as “may”, “can”, “should”, “could”, “expects”,
“hopes”, “believes”, “plans”, “anticipates”, “estimates”, “predicts”,
“projects”, “potential”, “intends”, “approximates” or the negative or other
variation of such terms and other comparable expressions.
Forward-looking
statements in this Current Report may include, but not be limited to, statements
about or based upon estimates of:
·
future
financial and operating results, including projections of revenues,
income, expenditures, cash balances and other financial
items;
·
capital
requirements and the need for additional
financing;
·
our
ability to develop commercially productive oil
wells;
·
our
success in locating commercially producing oil
wells;
2
·
growth,
expansion and acquisition
strategies;
·
current
and future economic and political
conditions;
·
overall
industry and market performance;
·
competition;
·
management’s
goals and plans for future operations;
and
·
other
assumptions described in this Current Report underlying or relating
to any
forward-looking statements.
The
forward-looking statements in this Current Report are only predictions. Actual
results could and likely will differ materially from these forward-looking
statements for many reasons, including the risks described under “Risk Factors”
and elsewhere in this Current Report. No guarantee about future results,
performance or achievements can be made. These forward-looking statements are
made only as of the date hereof, and we undertake no obligation to update or
revise the forward-looking statements, whether as a result of new information,
future events or otherwise. The safe harbors for forward-looking statements
provided by the Private Securities Litigation Reform Act are unavailable to
issuers of a “penny stock”. Our shares may be considered a penny stock and, as a
result, the safe harbors may not be available to us.
Item
1.01 Entry into a Material Definitive Agreement.
Reference
is made to the disclosure made under Item 2.01 of this Current Report on Form
8-K, which is incorporated herein by reference.
Item
2.01 Completion of Acquisition or Disposition of Assets.
Pursuant
to a Share Exchange Agreement dated as of May 31, 2007 (the “Combination
Agreement”), by and among Russoil, Smolenergy and the Stockholders of Smolenergy
(the “Stockholders”), Russoil was to have received all of the issued and
outstanding capital stock of Smolenergy from the Stockholders in exchange for
approximately 52% of the issued and outstanding capital stock of Russoil. The
initial Combination Agreement was terminated after Smolenergy was found to
be
indebted to Victor Ekimov, the person who transferred 51% of the equity
interests in Gorstovoye, LLC, Smolenergy’s majority owned subsidiary, and
operational base, to Smolenergy for approximately $26,000,000 on or about May25, 2007. As a result, the initial Combination Agreement was terminated and
a
second Combination Agreement was entered into on August 31, 2007 with Mr. Viktor
Ekimov, canceling all indebtedness of Smolenergy, relating to Gorstovoye, 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.
3
A
Voting
Agreement had been entered into by Messrs. Ekimov and Hutchinson. However,
Mr.
Hutchinson resigned as a director and has released Mr. Ekimov from his
obligations under the Voting Agreement.
Form
10-SB Disclosure
Item
2.01
of Form 8-K provides that if a registrant reporting a transaction under Item
2.01 was a “shell company” (as such term is defined in Rule 12b-2 under the
Exchange Act), prior to such transaction, the registrant must disclose the
information that would be required if it were filing a general form for
securities registration on Form 10-SB. Please note that the information provided
below relates to the combined company after the acquisition of a majority of
Smolenergy’s capital stock. Since Russoil’s sole operations after the
acquisition will consist solely of Smolenergy’s operations, the following
discussion of our business and operations will refer to Smolenergy’s business
and operations.
RISK
FACTORS
Risk
Factors Relating to Smolenergy’s Continued Ownership of an Interest in
Gorstovoye.
As
a
Foreign (to Russia) Corporation we have encountered difficulties in
communicating with our Siberian based operations. Translation delays and errors
can result in misunderstandings that could trigger unusual events and reporting
inaccuracies. This is exacerbated by having personnel and land use license
rights located in Siberia. We have encountered delays in sending and receiving
information. The Company’s Form 8-K, filed on September 10, 2007, reported a
completed transaction (including 51% of the interests of Gorstovoye) pending
certain obligations of the parties including the delivery of 110,000,000 shares
to Viktor Ekimov. Lacking required information, our transfer agent did not
deliver 110,000,000 shares to Viktor Ekimov until November 2007, as quickly
as
possible after the Company received the necessary information. On or about
September 24, 2007, Ariust sold Gorstovoye to an entity ostensibly owned by
Viktor Ekimov. In order to complete the transactions with the Company, Ariust
had to secure the retransfer of Gorstovoye to itself and finally on or about
January 16, 2007, Smolenergy acquired a 51% interest in Gorstovoye. The Company
believes that the communication difficulties are waning but have not yet been
solved.
Potential
Voidability of the Transaction and Potential Violations of Russian
Law.
·
OOO
Managing Company, Tomskpodvodtruboprovodstroy (“TPTPS”), the founding
owner of Gorstovoye, may have breached Russian law, as a legal entity
cannot be the sole holder of another legal entity. Both TPTPS and
Gorstovoye were legal entities owned solely by another legal entity
and
the sale of Gorstovoye from TPTPS to Ariust can be declared void
until
January 17, 2009.
4
·
Smolenergy
keeps its own register of shareholders, that register may not be
kept in
strict compliance with Russian law.
·
The
Company’s agreement with Smolenergy provided for the surrender and
cancellation of all of Smolenergy’s then issued and outstanding shares.
However, no consideration was provided to the holders of Smolenergy’s
shares. An absence of reciprocal consideration may constitute a reason
for
a Russian court to require that the Company return the shares to
Ariust
and to compensate Smolenergy for any
losses.
·
Smolenergy’s
acquisition of 51% of Gorstovoye is subject to a pledge of those
interests
in favor of Ariust. If the pledge is not released, under Russian
law, this
may be considered to be a non-fulfillment of Smolenergy’s payment
obligations allowing Ariust to seek cancellation of the Combination
Agreement but as the pledge is a document not recordable in Russia
and
upon Ariust receiving the 110,000,000 shares of the Company’s common
stock, Ariust may have difficulties in enforcing its
rights.
·
The
Russian equivalent of United States anti-trust and anti-competition
statutes requires a notification to or the prior consent of the
appropriate authorities. No notice has been given nor consent obtained.
If
these transactions were found to violate the Russian Anti-Competition
laws, they could be voided. The Company believes this most unlikely
but it
may be subject to a fine.
·
Russian
law requires that a Russian LLC may not have another legal entity
as its
sole holder. This was breached when 100% of the interests in Gorstovoye
were sold to Ariust. As a consequence, the transfer to Ariust may
be
voided by a Russian court within 3 years. In this instance, until
January17, 2009. Ariust may also be obliged to return all 100% of its interests
in Gorstovoye to TPTPS and TPTPS would return the consideration to
Ariust.
·
The
Resolutions of Ariust and Smolenergy authorizing the sale of Gorstovoye
from Ariust to Smolenergy, appear to lack the specificity required
by
Russian law.
We
have incurred significant losses. We expect future losses and we may never
become profitable.
We
have
incurred significant losses and a substantial accumulated deficit. We expect
to
continue to incur net losses until our development work is completed, and we
produce oil in sufficient quantities of sales that generate sufficient revenues
to fund our continuing operations. We may fail to produce oil or insufficient
quantities to achieve significant revenues from sales or achieve or sustain
profitability. There can be no assurance of when, if ever, we will be profitable
or be able to maintain profitability.
5
Potential
Loss of Licenses
In
April
of 2007, the Federal Agency of the Ministry of Natural Resources of the Russian
Federation (the “Ministry”) issued warnings to Gorstovoye that it was acting
inconsistently with its Gorstovoye License Agreement as it had not submitted
to
the Ministry plans for (a) operation and maintenance of (as well as estimates
of
total oil reserves) and (b) remediation of occasional oil spills. Gorstovoye
had
until December of 2007 to eliminate these infractions. A Russian Federation
surveyor visited the Gorstovoye oil field and advised that we were in compliance
with three of the four element requirements of our license and the last
element, the actual extraction of oil, we believe will be met with the planned
drilling of several wells. We are expecting written verification of the
foregoing.However,
there can be no assurances that the submitted plans will be acceptable to the
Ministry in a timely manner, or at all, and that Gorstovoye will not have their
licenses for the Gorst oil field revoked. If Gorstovoye’s licenses were to be
revoked, we would be without business operations and our securities would be
without value.
We
have only a limited operating history.
Gorstovoye
was organized in April 2002 and Smolenergy was organized in October 2006. Since
2002, Gorstovoye has been engaged in the exploration of oil and gas in the
Gorst
oil field in the face of its poor geographical location and a lack of funding.
We will be subject to the general business risk factors that similar young
companies experience with the responsibilities and complexities attendant to
any
such organization, including (i) the ability to attract and maintain competent
and experienced management and operating personnel, (ii) the ability to secure
appropriate debt and equity capital to finance desired growth, and (iii) the
efficient management and performance of everyday operations.
It
is anticipated that the Auditor’s Report for Smolenergy will contain a
Qualification.
It
is
anticipated that the Qualification will state that Smolenergy did not have
sufficient time to have an estimate of the fair value of Gorstovoye done by
a
professional appraiser and that this could result in a restatement of those
financial statements. There can be no assurance that the fair value of
Gorstovoye has been properly estimated and a restatement of the financial
statements will not have a material impact on our balance sheet and overall
financial condition.
6
If
we are unable to obtain additional funding our business operations will be
harmed.
Our
assets are insufficient to meet our operating expenses and capital expenditures
through the end of fiscal year 2008. We do not know if additional financing
will
be available when needed, or if it is available, if it will be available on
commercially reasonable terms or insufficient funds may prevent us from
implementing our business strategy or may require us to delay, scale back or
cease operations.
Dependence
on and Transactions with an Affiliated Company.
TPTPS
performs approximately 60% of the construction work in Gorstovoye oil fields.
Viktor Ekimov is the General Director and sole stockholder of TPTPS, holds
a
controlling interest in Ariust and, as a consequence, is beneficial owner of
approximately 52% of the Company’s voting securities. TPTPS owned Gorstovoye
prior to its sale to Ariust. In August 2005, TPTPS increased Gorstovoye’s
capital by approximately 230 million Russian Rubles (approximately
US$9,332,000), from 30 million Russian Rubles (approximately US$1,217,000).
TPTPS paid its capital contribution by issuing approximately 40 demand
promissory notes. Gorstovoye used the promissory notes to meet its financial
obligations to TPTPS and other suppliers and service providers with the balance
being returned to TPTPS.
Litigation:
Costs and Expenses; Potential Loss of Suppliers and Service Providers;
Bankruptcy.
Gorstovoye
constantly lacks funds to fulfill its payment obligations for goods, works
and
services. Creditors have demanded payment in arbitration court even for minor
amounts. Almost all court cases are lost by Gorstovoye. In January 2007, a
judgment by a Moscow court was entered against Gorstovoye in favor of a service
provider for approximately 4,160,000 Russian Rubles (approximately US$169,000)
and has commenced collection proceedings, if this debt remains uncollected,
the
claimant could commence bankruptcy proceedings. The same service provider has
commenced another proceeding in the Moscow courts against Gorstovoye in the
approximate amount of 6,810,000 Russian Rubles (approximately US$276,000).
Not
only have these lawsuits caused Gorstovoye to incur litigation costs and fees
but also diverts management’s time attention away from Gorstovoye’s proposed
business. Also, suppliers and service providers can become antagonistic, and
refuse or be reticent in providing goods and services to Gorstovoye and as
a
result, substantially diminish and even eliminate its ability to
operate.
Our
planned business depends on the level of activity in the oil industry, which
is
significantly affected by volatile oil prices.
Our
planned business depends on the level of activity in oil exploration,
development and production in markets worldwide. Oil prices, market expectations
of potential changes in these prices and a variety of political and economic
factors significantly affect this level of activity. Oil prices are extremely
volatile and are affected by numerous factors, including:
7
o
worldwide
demand for oil and gas;
o
the
ability of the Organization of Petroleum Exporting Countries,
commonlycalled
"OPEC," to test and maintain production levels and
pricing;
o
the
level of production in non-OPEC
countries;
o
the
policies of the various governments regarding exploration and development
of
their oil and gas reserves;
o
advances
in exploration and development technology;
and
o
the
political environment of oil-producing
regions.
The
oil and gas business involves many operating risks that can cause substantial
losses. Insurance may not be adequate to protect against all these
risks.
The
oil
and gas business involves a variety of operating risks, including:
-
fire;
-
explosion;
-
blow-out;
-
uncontrollable
flows of oil, gas, or well fluids;
-
natural
disasters;
-
pipe
failure;
-
casing
collapse;
-
stuck
tools;
-
abnormally
pressured formations; and
-
environmental
hazards such as oil spills, gas leaks, pipeline ruptures and
discharges of
toxic gases.
If
any of
these events occur, we could incur substantial losses as a result
of:
-
injury
or loss of life;
-
severe
damage to and destruction of property, natural resources and
equipment;
-
pollution
and other environmental damage;
-
clean-up
responsibilities;
-
regulatory
investigation and penalties; and
-
suspension
of operations.
If
we
experience any of these problems, it could affect wellbores, platforms,
gathering systems and processing facilities, which could adversely affect our
ability to conduct operations.
8
If
oil and natural gas prices decrease, we may be required to take write-downs
of
any carrying values of our oil and natural gas properties.
Accounting
rules require that we review periodically the carrying value of our oil and
natural gas properties for possible impairment. Based on specific market factors
and circumstances at the time of the prospective impairment reviews, and the
continuing evaluation of development plans, production data, economics and
other
factors, we may be required to write down any carrying value of our oil and
natural gas properties. A write-down constitutes a non-cash charge to earnings.
We may incur impairment charges in the future, which could have material adverse
effect on our results of operations in the periods taken. Our international
operations involve additional risks not associated with domestic operations.
Subsoil
Use License.
The
Company believes Smolenergy has a satisfactory right to use Gorstovoye, in
the
form of a Subsoil Use License (expiring in March 2014). The interests owned
or
to be acquired by Gorstovoye may be subject to one or more royalty, overriding
royalty and other outstanding interests customary in the industry. The interests
may additionally be subject to burdens such as net profits interests, overriding
royalty interests, back-ins, liens incident to operating agreements, current
taxes, development obligations under oil and natural gas leases and other
encumbrances, easements and restrictions, any or all of which may detract
substantially from the value of interests or materially interfere with
Gorstovoye’s operations or projected profits.
Exploration
is a high-risk activity and the seismic and other advanced technologies we
use
are expensive, require experienced personnel, and cannot eliminate exploration
risk.
Exploration
activities are substantially more risky than development or exploitation
activities. We use seismic data and other advanced technologies to reduce our
risk, but exploratory drilling remains a speculative activity. Even when
extensively used and properly interpreted, seismic data and visualization
techniques only assist geoscientists in identifying subsurface structures and
hydrocarbon indicators. They do not conclusively allow the interpreter to know
if hydrocarbons are present or if they are economically producible. The use
of
seismic data and certain other technologies also requires greater pre-drilling
expenditures than traditional drilling strategies. Gorstovoye could incur losses
as a result of such expenditures. Poor results from our exploration activities
could have a material adverse effect on our future results of operations and
financial condition. Western Siberia is a highly competitive area and our
success there will depend on our ability to attract and retain experienced
geoscientists and other professional staff.
9
Oil
and gas operations are subject to extensive environmental and other governmental
regulation, which can affect the cost, manner, or feasibility of doing
business.
Development,
production and sale of oil and gas are subject to extensive environmental and
other governmental regulation. We have made and expect to make substantial
expenditures to comply with environmental and other governmental regulations.
These regulations could change in ways that might substantially increase our
costs. Those changes have in the past significantly altered the marketing of
oil
and gas, and the effect of these changes on our ability to market our oil and
gas at reasonable prices is uncertain. Environmental regulations could impose
liability for pollution clean up and damages and require cessation of operations
in affected areas. Any such costs, damages, suspension or termination could
materially and adversely affect our financial condition and operations. We
are
subject to regulations that impose permitting, reclamation, land use,
conservation, and other restrictions on our ability to drill and
produce.
Gorstovoye
and other properties that we may acquire an interest in or acquire outright,
may
not perform as we projected, and we may not be able to discover liabilities
carried with the properties or obtain protection from sellers against
them.
The
successful acquisition of producing properties requires assessments of many
factors, which are inherently inexact and may be inaccurate, including:
-
the
amount of recoverable reserves;
-
future
oil and gas prices;
-
estimates
of operating costs;
-
estimates
of future development costs; and
-
potential
environmental and other
liabilities.
Our
review will not reveal all existing or potential problems, nor will it permit
us
to become familiar enough with the properties to assess fully their deficiencies
and capabilities. We may not inspect every well, platform or pipeline. We cannot
necessarily observe structural and environmental problems, such as pipeline
corrosion or groundwater contamination, when an inspection is made. We may
not
be able to obtain contractual indemnities from the seller for liabilities they
created. We may be required to assume the risk of the physical condition of
the
properties in addition to the risk that the properties may not perform in
accordance with our expectations.
We
plan to operate in a highly competitive industry which may adversely affect
our
planned operations.
We
operate in a highly competitive environment. Competition is particularly intense
with respect to the acquisition of desirable undeveloped crude oil and natural
gas properties. The principal competitive factors in the acquisition of such
undeveloped crude oil and natural gas properties include the staff and data
necessary to identify, investigate and purchase such properties, and the
financial resources necessary to acquire and develop such properties. We compete
with major and independent crude oil and natural gas companies for properties
and the equipment and labor required to develop and operate such properties.
Many of these competitors have financial and other resources substantially
greater than ours.
10
The
principal resources necessary for the exploration and production of crude oil
and natural gas are leasehold prospects under which crude oil and natural gas
reserves may be discovered, drilling rigs and related equipment to explore
for
such reserves and knowledgeable personnel to conduct all phases of crude oil
and
natural gas operations. We must compete for such resources with both major
crude
oil and natural gas companies and independent operators. We cannot assure you
that such materials and resources will be available to us.
Our
principal competitors would include major integrated oil companies and their
marketing affiliates and national and local gas gatherers, brokers, marketers
and distributors of varying sizes, financial resources and experience. Certain
such competitors, such as major crude oil and natural gas companies, have
capital resources and control supplies of natural gas substantially greater
than
we have. Smaller local distributors may enjoy a marketing advantage in their
immediate service areas.
We
will
be competing against other companies in the natural gas processing business
both
for supplies of natural gas and for customers to which they will sell their
products. Competition for natural gas supplies is based primarily on location
of
natural gas gathering facilities and natural gas gathering plants, operating
efficiency and reliability and ability to obtain a satisfactory price for
products recovered. Competition for customers is based primarily on price and
delivery capabilities.
Reserve
estimates are inherently uncertain and depend on many assumptions that may
turn
out to be untrue.
The
process of estimating oil and gas reserves is complex and inherently uncertain.
It requires various assumptions, including assumptions required by the SEC
relating to oil and gas prices, drilling and operating expenses, capital
expenditures, taxes and availability of funds. We must project production rates
and timing of development expenditures. We need to analyze available geological,
geophysical, production and engineering data, and the extent, quality and
reliability of this data can vary. Oil and gas reserve engineering is a
subjective process of estimating accumulations of oil and gas that cannot be
measured in an exact manner. Estimates from other engineers might differ
materially from those shown. The accuracy of any reserve estimate is a function
of the quality and quantity of available data, engineering and geological
interpretation and judgment.
Actual
future production, oil and gas prices, revenues, taxes, development
expenditures, operating expenses and quantities of recoverable oil and gas
reserves most likely will vary from our estimates. Any significant variance
could materially affect the estimated quantities and present value of reserves
shown herein. In addition, we may adjust estimates of proved reserves to reflect
production history, results of exploration and development, prevailing oil
and
gas prices and other factors, many of which are beyond our
control.
11
Recovery
of undeveloped reserves generally requires significant capital expenditures
and
successful drilling operations.
Ability
to manage growth and achieve business strategy.
The
Company expects to experience significant growth as a result of the acquisition
of a 51% interest in Gorstovoye and the drilling and workovers contemplated
herein.
Gorstovoye’s
anticipated growth will place a significant strain on the Company’s financial,
technical, operational and administrative resources. Neither Gorstovoye’s chief
accountant nor its chief geologist, have visited the oil field during
approximately the last two years. Our ability to grow will depend upon a number
of factors, including, but not limited to, its ability to develop Gorstovoye
sites, its ability to retain and attract skilled personnel, the results of
its
drilling program, oil and gas prices, access to capital and other factors.
There
can be no assurance that the Company will be successful in achieving growth
or
any other aspect of its business strategy or that we will be successful in
managing its growth.
We
will have substantial risks in making acquisitions.
The
Company seeks to purchase additional properties and explore for oil and natural
gas. The successful acquisition of producing properties requires an assessment
of recoverable reserves, future oil and natural gas prices, operating costs,
potential environmental and other liabilities and other factors. Such
assessments are necessarily imprecise, and their accuracy is inherently
uncertain. In connection with such an assessment, the Company will need to
perform a review of the subject properties that it believes to be generally
consistent with industry practices, which includes on-site inspections and
the
review of reports filed with various regulatory entities. Such a review,
however, will not reveal all existing or potential problems nor will it permit
a
buyer to become sufficiently familiar with the properties to fully assess their
deficiencies and capabilities. Inspections may not always be performed on every
well, and structural and environmental problems are not necessarily observable
even though an inspection is undertaken. Even when problems are identified,
the
seller may be unwilling or unable to provide effective contractual protection
against all or part of such problems. There can be no assurances that any
acquisition can be made at acceptable prices or acceptable terms or will be
successful in producing economically recoverable reserves or derive a profit
to
the Company. There can be no assurance that the condition of the properties
acquired or the circumstances relating to such properties (such as the viability
of the site to produce hydrocarbons, the ability of the Company to profitably
develop the property or the liability of the Company with respect to the
acquired property) will not materially change from the time when such properties
were acquired.
12
Uncertainty
in Enforcing United States Judgments.
All
of
the Company’s directors and executive officers reside outside of the United
States, service of process upon such persons may be difficult to effect in
the
United States upon all such directors and officers.
All
of
the Company’s assets are and will be located outside of the United States, in
the Russian Federation, and any judgment obtained in the United States may
not
be enforced in that jurisdiction. There is substantial doubt as to the
enforceability in the Russian Federation of actions to enforce judgments of
the
United States’ courts arising out of or based on the civil liability provisions
of United States federal or state securities laws or otherwise.
Risks
Related to Our Common Stock; Liquidity Risks
We
have no plans to issue dividends.
We
have
no present intention of paying any dividends on our capital stock in the
foreseeable future, as we intend to use earnings, if any, to generate increased
growth. The payment of dividends in the future, if any, rests solely within
the discretion of the Board of Directors and will depend upon, among other
things, earnings, capital requirements and financial condition, as well as
other
factors deemed relevant by the Board of Directors. Although dividends are
not limited currently by any agreements, it is anticipated that future
agreements, if any, with institutional lenders or others may also limit the
ability to pay dividends.
The
price of our Common Stock may fluctuate significantly, which could lead to
losses for stockholders.
Stock
of
public companies can experience extreme price and volume fluctuations. These
fluctuations often have been unrelated or out of proportion to the operating
performance of such companies. We expect our stock price to be similarly
volatile. Broad market fluctuations may continue and could harm our stock price.
Any negative change in the public’s perception of the prospects of our Company
or companies in our market could also depress our stock price, regardless of
our
actual results. Factors affecting the trading price of our Common Stock may
include:
·
variations
in operating results;
·
recruitment
or departure of key personnel;
·
litigation,
legislation, regulation or technological developments that adversely
affect our business;
13
·
changes
in the estimates of operating results or changes in recommendations
by any
securities analyst that elect to follow our common stock; and
·
market
conditions in oil and gas
industries.
Certain
financial statements attached as exhibits to this Report have not been
audited.
Certain
of the financial statements attached hereto are unaudited. No assurance can
be
given that if such financial statements were audited, they would not be
materially different.
You
may lose your investment in the Shares.
An
investment in the shares involves a high degree of risk. An investment in the
shares is suitable only for investors who can bear a loss of their entire
investment.
The
issuance of preferred stock may have the effect of preventing a change of
control and could dilute the voting power of our Common Stock and reduce the
market price of our Common Stock.
Our
authorized capital stock includes 5,000,000 shares of preferred stock, of which
all 5,000,000 shares is blank check preferred stock. Our board of directors
is
authorized to designate such stock with preferences and relative, participating,
optional or other special rights and qualifications, limitations or restrictions
as they deem advisable without shareholder approval. The effect of designating
and issuing shares of preferred stock over the rights of our common shareholders
cannot be stated until our board of directors determines the specific rights
of
such preferred stock. However, the effects might include, among other things,
restricting dividends on the common stock, diluting the voting power of the
common stock, reducing the market price of the common stock, or impairing the
liquidation rights of the common stock, without further action by our
shareholders. The designation and issuance of preferred stock could also have
the effect of making it more difficult or time consuming for a third party
to
acquire a majority of our outstanding voting stock or otherwise effect a change
of control. Shares of preferred stock may be sold to third parties that indicate
that they would support our board of directors in opposing a hostile takeover
bid. Our blank check preferred stock is not intended to be an anti-takeover
measure, and we are not aware of any present third party plans to gain control
of us. Although we may consider issuing preferred stock in the future for
purposes of raising additional capital or in connection with acquisition
transactions, it currently has no binding agreements or commitments with respect
to the issuance of any shares of preferred stock.
14
Our
common stock is quoted on the OTC Bulletin Board and the limited reported
quotations and volume of shares have been volatile.
Our
common stock is quoted on the OTC Bulletin Board under the symbol “RUSO.”
Trading in our common stock has been limited and volatile. There can be no
assurance that a stable market for our shares will exist, or if it exists,
it
will be sustained.
In
the event that we fail to timely file any periodic report filings with the
SEC,
our Common Stock may be removed from the Over-The-Counter Bulletin Board.
Pursuant
to the Over-The-Counter Bulletin Board ("OTCBB")
rules
relating to the timely filing of periodic reports with the SEC, any OTCBB issuer
which fails to file a periodic report (Form 10-QSB's or 10-KSB's) by the due
date of such report (not withstanding any extension granted to the issuer by
the
filing of a Form 12b-25), three (3) times during any twenty-four (24) month
period is automatically removed from the OTCBB. In the event an issuer is
removed, such issuer would not be eligible to return to the OTCBB for a period
of one-year, during which time any subsequent late filing would reset the
one-year period of removal. We filed our Form 10-QSB for the periods ended
June
and September 30, 2007 late. If we are late in our filings two more times in
the
twenty-four (24) month period and removed from the OTCBB, the market value
of
our common stock could be reduced significantly and sales of share of our common
stock may be difficult.
Principal
Beneficial Shareholder Controls the Company.
The
principal beneficial shareholder of Russoil, Victor Ekimov, beneficial owner,
in
the aggregate of, 110,000,000 shares of our common stock (approximately 52%)
Accordingly, Mr. Ekimov could have control over matters requiring a vote of
our
shareholders. This concentration of ownership could also have the effect of
delaying or preventing a change in control or discouraging a potential acquirer
from attempting to obtain control of us, which in turn could have a material
adverse effect on the market price of the our common stock or prevent our
shareholders from realizing a premium over the market price for their shares
of
our common stock.
Our
Common Stock may be subject to Penny Stock Rules, which could affect
trading.
Broker-dealer
practices in connection with transactions in “penny stocks” are regulated by
certain rules adopted by the SEC. Penny stocks generally are equity securities
with a price of less than $5.00, subject to exceptions. The rules require that
a
broker-dealer, prior to a transaction in a penny stock not otherwise exempt
from
the rules, deliver a standardized risk disclosure document that provides
information about penny stocks and the risks in the penny stock market. The
broker-dealer also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in connection with the transaction and monthly account statements
showing the market value of each penny stock held in the customer’s account. In
addition, the rules generally require that prior to a transaction in a penny
stock the broker-dealer must make a special written determination that the
penny
stock is a suitable investment for the purchaser and receive the purchaser’s
written agreement to the transaction. These disclosure requirements may have
the
effect of reducing the liquidity of penny stocks. Our common stock is subject
to
the penny stock rules, and investors acquiring shares of our common stock may
find it difficult to sell their shares of our common stock.
15
BUSINESS
Overview
Prior
to
the acquisition of a 51% interest in Gorstovoye in January 2008, both Russoil
and Smolenergy had only nominal activities and should consider to be “shell”
corporations.
Upon
closing of the Combination Agreement, 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 attract investments in the Russian oil and
gas energy field.
On
January 16, 2008, Smolenergy acquired a 51% of the interests of the Limited
Liability Company, Gorstovoye, a Russian Federation limited liability company
formed on April 23, 2002 (“Gorstovoye”) Gorstovoye is engaged in investing in
oil and gas petroleum assets. It 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
deficits.
In
April
of 2007, the Ministry issued warnings to Gorstovoye that it was acting
inconsistently with its Gorstovoye License Agreement as it had not submitted
to
the Ministry plans for (a) operation and maintenance of (as well as estimates
of
total oil reserves) and (b) remediation of occasional oil spills. A Russian
Federation surveyor visited the Gorstovoye oil field and advised that we were
in
compliance with three of the four element requirements of our license and the
last element, the actual extraction of oil, we believe will be met with
the planned drilling of several wells. We are expecting written verification
of
the foregoing.
16
Gorsk
Oil Field
Gorstovoye
obtained the right to use the subsurface resource area that includes the Gorst
oil field in August 2002 by the transfer of the license initially issued to
the
local government to Gorstovoye. After the license was transferred to Gorstovoye,
it commenced work on developing design and estimation documents and obtaining
permits to fulfill the conditions of the license agreement.
Gorstovoye
was part of the Russian Federations Program for Geological Study of Subsurface
Resources in this license area during 2003 through 2005.
Seismic
exploration was conducted and completed in the fourth quarter of 2003 to learn
the density of seismic lines in the northern portion of the field and revealed
the structure of the northern portion of the Gorst field, and, in part, the
southern portion, in significantly greater detail. This work was needed to
refine the geological model of the structure of the northern part of the field.
During 2003 and 2004, Gorstovoye began setting up oil production for the
production testing stage in the priority (northern) part of the field and
organized the work to comply with regulatory requirements in effect governing
the development of oil fields in the Russian Federation. This work was a
necessary prerequisite to move on to the design and implementation of production
testing and the drilling of development wells.
Two
development wells were drilled. One of them was abandoned on the basis of
geophysicists’ findings that it was water-saturated. Because of this finding,
other potential oil beds were not tested, despite some positive readings.
Initially, the drilling results from this well discredited the significance
of
the Gorst oil field. Geologists could not understand why wells were water
bearing at a level that they expected to be mineral viable. In 2005-2006
energy-information processing of satellite imaging of the field’s territory,
nuclear-geochemical study of core material from another well, seismic lines
studies and determination of the content of metal-containing minerals showed
that the beds under another well were oil-saturated.
As
a
result of this studying of seismic lines and energy-information filtering
through satellite imaging, the Company believes it will be able to efficiently
locate an appraisal well to penetrate productive oil-bearing beds, and to
construct a cluster for drilling productive development wells in the area in
the
future.
Due
to
the conclusions that were initially drawn about the negative results from
drilling, the first well, the second well was drilled in the direction of a
third well. At present, this third well, appears to be productive. Due to the
lack of funding, the third well has not been completely tested.
17
On
the
whole, the Company believes the studies done by Gorstovoye have resulted in
a
clearer picture of the geological model of the Gorst field and made it possible,
based on this model, to plan an efficient program of geological exploration
and
production testing that can prepare the field for development in approximately
three years provided adequate financing is obtained, of which no assurance
can
be given, is secured.
In
2003,
Gorstovoye completed a “Design for Production Testing of the Gorst Field" and it
was approved by the Ministry. A plan for the construction of Field Facilities
for the Gorst Oil Field was prepared for the initial, northern part of the
field
in the production testing stage, which, in turn, includes the following
designs:
·
Construction
of field facilities for part of the Northern oil
field;
·
Construction
of field facilities for the oil treatment and pumping area with a
gas
recovery unit, a water treatment and separation
facility(“TWSF”);
·
Oil
pipeline from the Gorst field to the TWSF;
·
Construction
of development wells; and
·
Drilling
of wells for domestic and drinking water supply in the territory
of the
Gorst Oil Field.
The
designs for production testing and construction of field facilities have
received affirmative findings from Russian Federation industrial safety reviews.
The designs have been endorsed by the Russian Federation’s Regional Authority
and the industrial safety findings have been appropriately
registered.
Site
Preparation
A
foundation for the implementation of the Gorstovoye development plan by the
construction of surface facilities for the Gorst field has been completed and
includes:
·
Oil
treatment and pumping area with gas recovery
unit;
·
Custody
transfer meter (“CTM”);
·
Oil
pipeline from the Gorst Oil Field’s TWSF to the Gorst CTM;
·
Power
supply;
·
Water
intake for domestic and drinking water supply, with water and power
lines;
·
Cluster
of development wells and process service lines;
and
·
Office
and service complex.
During
2003 through 2005 the following site specific construction work was
performed:
“CLUSTER”
One:
·
a
site was filled, and the cluster base was constructed;
·
a
well metering station with a control unit was
installed;
·
a
package transformer substation was
installed;
·
an
oil pipeline was constructed to the
TWSF;
18
·
an
oil pipeline was constructed from the third well;
·
planking
was laid along the right-of-way road from the third well to Cluster
One;
·
planking
was laid along the right-of-way road from Cluster One to the TWSF;
and
·
another
well was drilled.
GORST
– NORTH OIL PIPELINE:
·
an
oil pipeline from the Gorst TWSF to the CTW at the northern field
was
constructed.
OIL
TREATMENT AND PUMPING AREA WITH GAS RECOVERY UNIT - TREATMENT
AND WATER SEPARATION FACILITY (TWSF):
·
the
area for the TWSF, with the pipeline route and the flare area (for
the
burning off of excess combustibles), was
filled;
·
two
stock tanks were built, pressure-tested, treated for protection against
corrosion and calibrated;
·
a
separation unit installed;
·
a
pumphouse with two pumps was constructed for internal and external
oil
transfer pumping; and
·
an
emergency power generating unit, tank and storage facilities were
prepared.
The
Company believes that all of the necessary components are in place to begin
oil
production in a production testing mode, provided adequate financing is
obtained. To finance the foregoing, it is estimated that the Company will
initially require an estimated US$5,000,000 in investment capital with an
approximate total of US$100,000,000 necessary to bring all projects to
completion. There can be no assurance that such financing will be obtained
on
terms commercially reasonable to the Company, or at all.
Limitations
of Local Geography
The
Gorst
oil field’s ground surface is very boggy, with individual dry ridges. Travel to
the oil field by motor vehicle is possible for only four months out of the
year:
from the end of December until the end of April, after the streams and wetlands
have frozen, on temporary winter roads. For the other eight months of the year,
the only way to get to the Gorst oil field is by all-terrain vehicle or
helicopter. There are no roads in the oil field itself.
As
a
consequence, there are two ways of delivering oil for sale. The first is to
hold
the oil in tanks at the TWSF during the warm portion of the year and use trucks
to transport in the wintertime. This option can and should be fully used until
the TWSF and the oil pipeline to the CTM are put into operation. When the
pipeline is fully operational truck transportation can be used to meet the
Company’s own needs and the needs of small consumers that cannot access pipeline
transportation.
Obviously,
the second option is more efficient: transportation of oil through a pipeline.
This option can be put into operation when all work will be completed on
construction of the TWSF and CTM.
19
Initially,
our plan is to produce dry oil. The oil is treated to market standards in two
stages. The first stage of treatment is to be done in units at the Gorst TWSF.
Wells produce a mixture of gas and oil that is pumped through a pipeline to
the
Gorst TWSF and is fed into the first- and second-stage gas-oil separators,
separating gas from oil. The separated gas goes to the gas dryer (PGD) and
then
through gas lines to meet the Company’s own needs: (boiler room, gas-piston
power plant and two furnaces (to be constructed) for heating the oil); the
remainder of the gas is flared (burned off). From the second-stage separator,
the oil is to go to holding tanks to accumulate and periodically pumped through
the pipeline to Gorst’s CTW, then it is to go through pipelines to the planned
North treatment and water separation facility, and is to be transferred by
pipeline systems i.e., to the oil treatment facility (OTF) at the Sovetskoye
Central Tank Farm.
The
second and final stage of oil treatment takes place at the OTF, and the oil
is
delivered through pipeline systems, to the Aleksandrovskoye delivery and
acceptance point (DAP).
From
there, the oil is transported and delivered to Russian refineries or for export.
Necessary
Future Development
Two
principle issues need to be addressed as prerequisites to meeting the basic
objectives set by the plan of operation:
1.
Conversion.
Convert
the greater part of the oil reserves from the current oil category to a higher
category.
2.
Production
Testing.
Intensive production testing for the purpose of determining the basic parameters
needed to draw up design documents for development of the field. Also, field
facilities and service lines need to be constructed.
In
order
to raise the category of oil and gas reserves in the Gorst field it is necessary
to drill three vertical appraisal wells penetrating Paleozoic deposits to a
depth of at least 100 meters. These wells should be located in the northern,
central and southern parts of the field. The average depth of these wells is
planned to be 2,600-2,700 meters. The highest priority is planned to be a well
with a depth of 2,600 meters, to be drilled in the northern part of the field
at
the intersection of two seismic lines. The category of the reserves could be
increased by further testing and also by recalculating the reserves for the
whole field on the basis of new drilling data from wells and from previous
and
newly drilled wells.
The
Company must conduct intensive, efficient production testing, which will not
only make it possible to prepare the field for development, but to provide
for
production of oil in volumes sufficient for subsequent development of the field
with the Company’s own revenues. At least three development wells need to be
drilled in an initial cluster during the investment period and gradually put
into production testing, at least two development wells need to be drilled
and
put into production testing. In summary it is necessary to construct and put
into production testing one appraisal well and five development
wells.
20
Upon
receipt of $5,000,000 in financing, of which no assurance can be given, we
expect to be able to have at least eight oil-producing wells in the
field.
During
the winter of 2006 and 2007 all of the necessary materials were brought in
for
construction of three wells in the first cluster, and also for appraisals.
The
development wells are being prepared for drilling. A similar operation to bring
in materials for drilling three additional wells was carried out in the winter
of 2007 - 2008.
Mineral
Trading
During
the second quarter of fiscal 2007, Smolenergy, for the first time, engaged
in
the bartering of petroleum products. No cash was received from customers nor
paid to suppliers and a loss was sustained. The Company is unsure if it will
engage in such activities in the future. Under Generally Accepted Accounting
Principles in the United States (US GAAP), any such transactions are not
recognizable as revenue.
Competition
We
compete in a highly competitive industry. We encounter competition in all of
our
operations, including property acquisition, and equipment and labor required
to
operate and to develop our properties. Russoil competes with major oil
companies, independent oil companies, and individual producers and operators.
Many competitors have financial and other resources substantially greater than
ours.
Russian
joint stock companies are corporate entities with limited liability similar
to
corporations formed under United States laws. Shareholders of Russian joint
stock companies generally are not liable for debts and obligations of the
company. However, shareholders of a bankrupt joint stock company may be held
liable for debts and obligations of the bankrupt company if they have exercised
their authority to undertake an action knowing that bankruptcy would be the
result of their actions. In closed joint stock companies, i.e. companies with
a
limited number of shareholders, such as Smolenergy, any transfer of shares
by a
shareholder to a third party is subject to the pre-emptive right of the other
shareholders to acquire such shares at the price offered to a third
party.
Under
Russian law, a simple majority of voting shares is sufficient to control
adoption of most resolutions. Resolutions concerning amendment of the company
charter, reorganizations (including mergers), liquidation, any increase in
authorized shares, or certain "large" transactions require the approval of
the
shareholders holding 75% of the outstanding shares.
21
A
Russian
joint stock company has no obligation to pay dividends to the holders of common
shares. Any dividends paid to shareholders must be recommended by the board
of
directors and then approved by a majority vote at the general meeting of
shareholders. Dividends may be paid every quarter of a year.
Environmental
Regulation
The
government of the Russian Federations, Ministry of Natural Resources, and other
agencies establish special rules, restrictions and standards for enterprises
conducting activities affecting the environment. The general principle of
Russian environmental law is that any environmental damage must be fully
compensated. Under certain circumstances, top officers of the entity causing
substantial environmental damage may be subject to criminal
liability.
The
law
of the Russian Federation on subsoil requires that all users of subsoil ensure
safety of works related to the use of subsoil and comply with existing rules
and
standards of environment protection. Failure to comply with such rules and
standards may result in termination or withdrawal of the Smolenergy
license.
Taxation
As
a
Russian resident entity i.e., Smolenergy/Gorstovoye is subject to all applicable
Russian taxes, many of which currently impose a significant burden on profits.
The most significant Russian taxes and duties including but not limited
to:
·
20%
value added tax (established pursuant to Chapter 21 of the Tax Code
of
Russia), applicable only to domestic sale of goods in Russia and
the
Ukraine. No value added tax is payable on goods exported to the West
from
Russia;
·
20
to 24% profit tax which includes 6% federal profit tax, 12 to 16%
regional
profit tax and 2% local tax (in accordance with Chapter 25 of the
Tax Code
of Russia). Russian law allows the carry forward and use of losses,
subject to limitations;
·
Income
tax on dividends payable to Smolenergy shareholders. The tax must
be
withheld by Smolenergy from the amount distributed to each shareholder.
The current rate of tax on dividends payable to corporate foreign
shareholders is 15%. However, dividends payable to Russoil, a United
States resident company, are subject to regulations contained in
the
United States - Russia tax treaty which limits the tax on dividends
payable to Russoil to 5% (as long as Russoil holds more than a 10%
interest in Smolenergy);
·
Tax
on production of minerals applicable to all subsoil users producing
minerals, including crude oil. After expiration of the temporary
tax rate
period, the tax will apply at the rate of 16.5% of the value of the
oil
produced by the taxpayer;
22
·
Unified
social tax (established pursuant to Chapter 24 of the Tax Code of
Russia)
at the rate of up to 35.6% of the
payroll;
·
Transport
tax (established pursuant to Chapter 28 of the Tax Code of Russia)
payable
by owners of motor vehicles at the rate established by regional
authorities based on the type and capacity of the vehicle. The maximum
amount of tax payable by an owner of a motor car per year is RUR
150 (ca.
USD 4.78) per horsepower;
·
Oil
export duty, currently in the amount of US$ 25.9 per ton of crude
oil
being exported;
·
Regional
property tax payable annually at 2% of the value of assets of the
entity.
New
tax
laws including those setting forth rules for application of the value-added
tax,
profit tax, and tax on the production of minerals were enacted within the past
years. The cost of legal and accounting advice to keep up with changes in the
Russian tax laws may be significant and penalties for violations, even
inadvertent ones, may be steep. If revisions impose confiscatory taxes, our
profitability will be adversely affected.
Employees
We
currently have 17 full time employees including three executive officers, three
administrative and clerical persons and 11 oil filed workers. We also utilize
the services of independent contractors on an as-needed basis.
Properties
Smolenergy
leases offices in Moscow and Smolenska, Russia at an annual aggregate cost
of
approximately US$80,000.
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$270,000 at the CBR exchange rate
as
of June 30, 2007). 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. The Company’s management estimates
the probability of overcoming this litigation is significant. Thus, no
contingent liabilities were accrued in the financial statements for this
claim.
23
DIRECTORS
AND EXECUTIVE OFFICERS
Prior
to
the completion of the acquisition of Smolenergy, our board of directors and
sole
executive officer was Mr. Silvestre Hutchinson. Effective as of the closing
of
that acquisition of Smolenergy, Messrs. Viktor Ekimov, Evgeny Fedosov, Evgeny
Bagay, and Elias Kamennoy were appointed as directors of the Company and (b)
Mr.
Hutchinson resigned, effective immediately, as President, Chief Executive
Officer and Chief Financial Officer of the Company but remained as a Director
until he resigned from that position in January 2008. The below named persons
were appointed to the positions set forth opposite their names and will serve
in
those capacities until their successors are duly elected or appointed and
qualified.
The
names
of our current officers and directors are set forth below:
Name
Age
Position(s)
Evgeny
Bagay
57
Chief
Executive Officer and a Director
Evgeny
Fedosov
56
Chief
Financial Officer and a Director
Viktor
Ekimov
55
Director
Elias
Kamennoy
21
Director
Set
forth
below is biographical information concerning each of our executive officers
and
directors based on information supplied by them.
Evgeny
Bagay,
age 57,
is the Company’s Chief Executive Officer and a Director. He has been a Deputy
General Director of Smolenergy since 2006. From 2001 until joining Smolenergy,
he had been Deputy General of Mikasoil, a petroleum refinery.
Evgeny
Fedosov,
age 56,
is the Company’s Chief Financial Officer and a Director. Mr. Evgeny has been the
Financial Director and Chairman of the Board of Directors of Smolenergy since
June 2006. For more than five years before joining Smolenergy, he was the
General Director of JSC Slavneft - Moscow, an oil construction and
reconstruction firm.
Viktor
Ekimov,
age 55,
is a Director of the Company. Mr. Ekimov for more than the past five years
has
been the General Director and sole stockholder of OJSE UC
Tomskpodvodtraboprovodstroy. He is currently a Deputy of the State Duma for
the
Tomskoy and Councilman of the Directors of OAO Commercial Bank in Tomsk. He
is
the author of scientific articles addressing the problems of welding devices
for
mineral pipelines.
Elias
Kamennoy,
age 21,
is a Director of the Company. He is a student at Moscow State
University.
24
Myron
Gushlak of Bluewater Partners, S.A. (“Bluewater”) has acted as an advisor to
Russoil and acted as a liaison between Mr. Hutchinson, Russoil’s attorneys and
accountants and representatives of Smolenergy. Mr.
Gushlak should be deemed an affiliate of Bluewater and Bluewater is a
shareholder of Russoil.
Mr.
Gushlak may be deemed to have been a “parent” or “promoter” of Russoil, as such
terms are defined by the federal securities laws. On
July
6, and October 25, 2007, the Company issued its $200,000 and $30,000, respectively, convertible promissory notes (the
“notes”) in the aggregate principal amount of $230,000 in consideration for that
same amount from Bluewater. That notes bear interest at 10% per annum and are
payable on demand. At the option of Bluewater, principal and accrued interest
may be converted into common stock of Russoil at the rate of one (1) share
for
each $0.10 (ten cents) of the indebtedness. That conversion price is subject
to
certain anti-dilutive adjustments. See also “Sales of Unregistered
Securities”.
In
July
2007, Russoil advanced $200,000 to Smolenergy in connection with the acquisition
of Smolenergy’s capital stock.
EXECUTIVE
COMPENSATION
Compensation
Neither
Russoil nor Smolenergy paid cash compensation to their current, respective,
executive officers during the years ended December 31, 2006 and 2007. However,
in June of 2006 Russoil issued 242,000,000 shares of its common stock to
Kimberly Hennessey, a former executive officer and director in consideration
of
her efforts in founding the Company, having an estimated value of $800.00 as
compensation for her services in founding the Company. See “Sales of
Unregistered Securities”.
We
do not
have a Stock Option, Stock Grant, Phantom Stock or other similar plans. We
may
adopt such plans in the future.
No
Employment Agreements
We
have
not entered into employment agreements with our executive officers as of the
date of this Currrent Report on Form 8-K. We may enter into employment
agreements with certain of our executive officers in the future. No assurance
can be give when, if ever, such agreements will be entered into or the terms
thereof.
Compensation
of Directors
Mr.
Hutchinson had been paid $12,000 assumedly for his services as a Director for
the next 12 months.
25
Security
Ownership of Certain Beneficial Owners and Management
The
following table sets forth certain information, as giving after effect to the
Share Exchange Agreement and the transactions contemplated thereby, regarding
the beneficial ownership of our Common Stock by (i) each person who, to our
knowledge, beneficially owns more than 5% of our common stock; (ii) each of
our
directors and executive officers; and (iii) all of our executive officers and
directors as a group:
Approximate
Name
and address of Beneficial Owner(2)
Amount
(1)
Percent
of
Class
Directors
and Named Executive Officers:
Viktor
Ekimov (3) (4)
110,000,000
52
%
Evgeny
Fedosov (3)
0
*
Evengy
Bagay (3)
0
*
Elias
Kamennoy (3)
0
*
All
directors and named executive officers as a group (4
persons)
110,000,000
52
%
*
Less
than 1%.
(1)
Beneficial
ownership is calculated based on 210,250,000 shares of common stock
outstanding giving after effect to the Share Exchange Agreement and
the
transactions contemplated thereby. Beneficial ownership is determined
in
accordance with Rule 13d-3 of the
SEC.
(2)
The
address for the above named directors and executive officers
is:
c/o
OJSE
Smolenergy
Nagerezhnaya
Tarasa Schevchenko ½
Building
27
121059
Moscow
(3)
Effective
as of the Company’s acquisition of Smolenergy, Messrs. Fedosov, Bagay,
Ekimov and Kamennoy became Directors of the Company and Messrs. Bagay
and
Fedosov became our Chief Executive and Chief Financial Officers,
respectively.
(4)
The
owner of record is Mr. Ekimov. However, he has advised the Company
and the
Company intends to allow Viktor Ekimov to transfer his shares to
Ariust.
Certain
Transactions
On
April23, 2007, Silvestre Hutchinson acquired control of Russoil by purchasing from
Kimberly A. Hennessey, our then President, Chief Executive Officer, Chief
Financial Officer, and Sole Director, 228,000,000 shares of Russoil’s common
stock owned by Ms. Hennessey pursuant to and in accordance with a stock purchase
agreement, dated April 25, 2007, between Mr. Hutchinson and Ms. Hennessey.
Mr.
Hutchinson also purchased 14,250,000 shares from Nicole Gagne, who was the
Company’s Secretary. In connection with that Stock Purchase Agreement, these
prior officers and directors resigned from their positions with Russoil and
Mr.
Hutchinson was appointed as the President, Chief Executive Officer, and Chief
Financial Officer, Secretary and a Director of Russoil.
26
The
founders of Gorstovoye were OAO Tomskneftegasgeologiya VNK (“Tomsk VNK”) (51%)
and TPTPS (49%). On or about October 21, 2002, Tomsk VNK sold its interests
in
Gorstovoye to TPTPS and TPTPS became OOO Gorstovoye’s sole shareholder. In
January 2006 TPTPS sold 100% of its shares in Gorstovoye to Ariust (also, a
fully owned subsidiary of TPTPS). During its fiscal year ended December 31,2006
and the nine month period ended September 30, 2007, Gorstovoye paid TPTPS the
approximate sums of $532,000 and $700,000, respectively.
All
of
the officers and directors of Smolenergy reside in the Russian Federation.
Mr.
Mikle Vax may be deemed to be a “parent” or “promoter” of this Company as such
terms are defined in the federal securities laws. Mr. Vax has facilitated
transactions among the parties, by among other things, acting as a liaison
between Smolenergy, its accountants, and representatives and Russoil, its
attorneys and representatives.
See
Item
2.1 of this Current Report on Form 8-K for a discussion of the (a) Russoil’s
acquisition of Smolenergy’s capital stock. Item 2.1 is incorporated by reference
as if fully set forth herein.
See
also,
Directors and Executive Officers.
Market
for our Securities and Related Stockholder Matters
Market
Information
Russoil’s
common stock had been quoted on the OTC Bulletin Board under the symbol
“CASD.OB” from December 2006 until our symbol was changed to "RUSO.OB" on August20, 2007. The high and low bid quotations of our common stock for the periods
indicated below are:
*From
February 2007 until May 31, 2007 quotations were offered but no transactions
were reported.
27
The
foregoing reflects inter-dealer prices, without retail mark-up, mark-down or
commissions and may not represent actual transactions.
Record
Holders
As
of
February 14, 2008, we had approximately three holders of record of our common
stock. We are uncertain of the number of beneficial owners.
Transfer
Agent
Russoil’s
transfer agent is Island Stock Transfer, 100 Second Avenue South, Suite 104N,
St. Petersburg, Florida33701, telephone number 727-289-0010.
Sales
of Unregistered Securities
In
June
2006, Russoil issued 228,000,000 shares of our common stock to Kimberly A.
Hennessey, then Russoil’s President, Chief Executive Officer, Chief Financial
Officer and a Director, and 14,250,000 shares of our common stock to Nicole
Gagne, Russoil’s Secretary, in consideration for services in connection with the
founding of Russoil. Russoil’s Board of Directors determined the fair value of
the shares at a per share amount equal to the par value of our common stock,
$0.0001 per share. As a result the fair value of the shares issued to Ms.
Hennessey was $800 and the fair value of the shares issued to Ms. Gagne was
$50.
The shares were issued pursuant to Section 4(2) of the Securities Act of 1933,
as amended (the “Securities Act”).
In
June
2006 Russoil issued 14,250,000 shares of common stock to 41 investors in a
private placement. In that private placement, Russoil sold 12,825,000 shares
of
common stock to 40 investors who were non-US persons (as defined under SEC
Regulations) pursuant to the exemption from the registration requirements of
the
Securities Act provided by Regulation S, and Russoil sold 1,425,000 shares
of
common stock to one investor pursuant to an exemption under Section 4(2) of
the
Securities Act. Russoil conducted the private placement without any general
solicitation or advertisement and a Securities Act restrictive legend was placed
on the certificates for said shares. All of the foregoing numbers of shares
give
effect to a 28.5 for 1 stock split effected on April 30, 2007.
In
August
and November 2007, Russoil received subscriptions for 660,000 shares and
400,000
shares from an entity believed to be not otherwise affiliated with Russoil
and
Bluewater, respectively, at a price of fifty cents ($0.50) per share ($330,000
from the entity and $200,000 from Bluewater). The subscriptions have been
accepted by Russoil but issuance of certificates remains pending the receipt
of
certain identifying information from each of them.
The
foregoing 1,060,000 shares have not been included in the calculations of
issued
and outstanding shares of Russoil’s common stock set forth in this
Report.
28
Securities
Authorized for Issuance under Equity Compensation Plans
Russoil
does not have any compensation plan under which equity securities are authorized
for issuance.
Description
of Russoil’s Securities
Russoil
authorized capital stock consists of 14,250,000,000 shares of common stock,
par
value $0.00001 per share, and 5,000,000 shares of preferred stock, par value
$0.00001 per share. We have 210,250,000 shares of common stock issued and
outstanding. We have not issued any shares of preferred stock. There are no
outstanding options, warrants, or rights to purchase any of our securities
except for the right of Bluewater to convert Russoil’s note into a maximum of
2,000,000 shares, subject to adjustment, of Russoil’s common stock.
Russoil’s
Common Stock
Holders
of shares of Russoil’s common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders generally. The holders of shares
of
common stock have no preemptive, conversion, subscription or cumulative voting
rights. Each holder of Russoil’s common stock is entitled to one vote for each
share held of record on all matters submitted to the vote of stockholders,
including the election of directors.
Russoil’s
board of directors has the right, without shareholder approval, to issue
preferred shares with rights superior to the rights of the holders of shares
of
common stock. As a result, preferred shares could be issued quickly and easily,
negatively affecting the rights of holders of common shares and could be issued
with terms calculated to delay or prevent a change in control or make removal
of
management more difficult. In the event that we issue up to 5,000,000 shares
of
preferred stock in order to raise capital for our operations, your ownership
interest may be diluted which results in your percentage of ownership in us
decreasing.
Russoil’s
Preferred Stock
Russoil
is authorized to issue 5,000,000 shares of preferred stock. Our Board of
Directors is authorized to issue preferred stock in one or more series, from
time to time, with each such series to have such designation, relative rights,
preferences or limitations, as shall be stated and expressed in the resolution
or resolutions providing for the issue of such series adopted by the Board
of
Directors, subject to the limitations prescribed by law and in accordance with
the provisions of our Articles of Incorporation, the Board of Directors being
expressly vested with authority to adopt any such resolution or resolutions.
As
a result, our Board of Directors may issue shares of preferred stock quickly
and
easily, to raise capital for our operations, or to delay or prevent a change
in
control or make removal of management more difficult, without stockholder
approval. Issuances of preferred stock may negatively affect your rights as
a
common stockholder and reduce your relative percentage ownership and the value
of your investment in the total equity of Russoil.
29
Shares
of
voting or convertible preferred stock could be issued, or rights to purchase
such shares could be issued, to create voting impediments or to frustrate
persons seeking to effect a takeover or otherwise gain control of Russoil.
The
ability of the Board to issue such additional shares of preferred stock, with
rights and preferences it deems advisable, could discourage an attempt by a
party to acquire control of our company by tender offer or other means. Such
issuances could therefore deprive stockholders of benefits that could result
from such an attempt, such as the realization of a premium over the market
price
for their shares in a tender offer or the temporary increase in market price
that such an attempt could cause. Moreover, the issuance of such additional
shares of preferred stock to persons friendly to the Board could make it more
difficult to remove incumbent managers and directors from office even if such
change were to be favorable to stockholders generally.
Indemnification
of Directors and Officers
Russoil’s
officers and directors are indemnified as provided by the Nevada Revised
Statutes and our bylaws.
Under
the
Nevada Revised Statutes, director immunity from liability to a company or its
shareholders for monetary liabilities applies automatically unless it is
specifically limited by a company's Articles of Incorporation. Russoil’s
Articles of Incorporation do not specifically limit our directors' immunity.
Excepted from that immunity are: (a) a willful failure to deal fairly with
Russoil or its stockholders in connection with a matter in which the director
has a material conflict of interest; (b) a violation of criminal law, unless
the
director had reasonable cause to believe that his or her conduct was lawful
or
no reasonable cause to believe that his or her conduct was unlawful; (c) a
transaction from which the director derived an improper personal profit; and
(d)
willful misconduct.
Russoil’s
bylaws provide that we will indemnify its directors and officers to the fullest
extent not prohibited by Nevada law; provided, however, that we may modify
the
extent of such indemnification by individual contracts with the directors and
officers; and, provided, further, that we shall not be required to indemnify
any
director or officer in connection with any proceeding, or part thereof,
initiated by such person unless such indemnification: (a) is expressly required
to be made by law, (b) the proceeding was authorized by our board of directors,
(c) is provided by us, in our sole discretion, pursuant to the powers vested
in
us under Nevada law or (d) is required to be made pursuant to the
bylaws.
Russoil’s
bylaws also provide that we may indemnify a director or former director of
subsidiary corporation and we may indemnify Russoil’s officers, employees or
agents, or the officers, employees or agents of a subsidiary corporation and
the
heirs and personal representatives of any such person, against all expenses
incurred by the person relating to a judgment, criminal charge, administrative
action or other proceeding to which he or she is a party by reason of being
or
having been one of our directors, officers or employees.
30
Russoil’s
directors could cause us to purchase and maintain insurance for the benefit
of a
person who is or was serving as a director, officer, employee or agent, or
as a
director, officer, employee or agent of our subsidiaries, and his or her heirs
or personal representatives against a liability incurred by him as a director,
officer, employee or agent.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling us pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion
of
the SEC, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
The
pro
forma information is based on historical financial statements giving effect
to
the proposed transactions using the purchase method of accounting and the
assumptions and adjustments in the accompanying notes to the pro forma financial
statements. The unaudited condensed combined pro forma financial information
is
not necessarily indicative of the actual results of operations or the financial
position which would have been attained had the acquisitions been consummated
at
either of the foregoing dates or which may be attained in the future. The pro
forma financial information should be read in conjunction with the historical
financial statements of Russoil Corporation (including notes thereto) included
in this Report on Form 8-K..
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 hereunto
duly authorized.
