**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**Form 10-QSB**

 

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**ý**** QUARTERLY REPORT PURSUANTTO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the Quarterly Period Ended March 31,2005**

 

**or**

 

**o**** TRANSITION REPORT PURSUANTTO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**Commission File Number 000-25873**

 

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**Apollo Resources International, Inc.**

(Exact name of registrant as specified in itscharter)

 
| **Utah**                                                        | ** ** | **84-1431425**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of incorporation  or organization) |       | (I.R.S. Employer Identification No.) |

 

**3001 Knox Street, Suite 403**

**Dallas, TX 75205**

(Address of principal executive offices,including zip code)

 

**(214) 389-9800**

(Registrant’s telephone number, includingarea code)

 

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Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 

Yes ý    No o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).Yes  o  No ý

 

Asof May 20, 2005 there were 45,355,798 shares of the registrant’s commonstock outstanding.

 

 

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**APOLLO RESOURCES INTERNATIONAL, INC.**

**BALANCE SHEETS**

 
| ** **                                                                                                                                                                                  | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                  | ** ** | ** **               | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                                                  |       |                     |       |                        |       |
| Current Assets                                                                                                                                                                              |       |                     |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                   |       | $                        | 55,559     |                        | $          | 56,018 |   |
| Accounts receivable working interest owners                                                                                                                                                 |       | 115,110                  |       | 102,790                     |       |
| Trade accounts receivable                                                                                                                                                                   |       | 35,294                   |       | 35,063                      |       |
| Other current assets                                                                                                                                                                        |       | 32,548                   |       | 38,352                      |       |
| Total Current Assets                                                                                                                                                                        |       | 238,511                  |       | 232,223                     |       |
| Property and equipment, net                                                                                                                                                                 |       | 16,081,534               |       | 7,564,531                   |       |
| Investment in joint ventures                                                                                                                                                                |       | 1,370,797                |       | —                      |       |
| Investment in convertible preferred stock                                                                                                                                                   |       | 495,000                  |       | —                      |       |
| Patents and assigned technology net of  amortization of $15,300 at December 31, 2004                                                                                                   |       | —                   |       | 35,903                      |       |
| Deposits                                                                                                                                                                                    |       | 303,475                  |       | 56,475                      |       |
|                                                                                                                                                                                        |       | $                        | 18,489,317 |                        | $          | 7,889,132 |   |
|                                                                                                                                                                                        |       |                     |       |                        |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                              |       |                     |       |                        |       |
| Current Liabilities                                                                                                                                                                         |       |                     |       |                        |       |
| Accounts payable and accrued liabilities                                                                                                                                                    |       | $                        | 706,052    |                        | $          | 379,152 |   |
| Royalty payable                                                                                                                                                                             |       | 829,956                  |       | 807,970                     |       |
| Production and payroll taxes payable                                                                                                                                                        |       | 159,686                  |       | 147,067                     |       |
| Lease payable                                                                                                                                                                               |       | 511,071                  |       | —                      |       |
| Notes payable                                                                                                                                                                               |       | 3,658,995                |       | 1,971,072                   |       |
| Total Current Liabilities                                                                                                                                                                   |       | 5,865,760                |       | 3,305,261                   |       |
| Long-term debt                                                                                                                                                                              |       | 35,291                   |       | —                      |       |
| Total Liabilities                                                                                                                                                                           |       | 5,901,051                |       | 3,305,261                   |       |
|                                                                                                                                                                                        |       |                     |       |                        |       |
| Stockholders’ Equity                                                                                                                                                                   |       |                     |       |                        |       |
| Common stock, $.001 par value; 150,000,000  shares authorized; and 39,380,273 and 23,853,900 shares issued and  outstanding at March 31, 2005 and December 31, 2004, respectively |       | $                        | 39,380     |                        | $          | 23,854 |   |
| Additional paid-in capital                                                                                                                                                                  |       | 17,002,375               |       | 6,739,052                   |       |
| Accumulated deficit                                                                                                                                                                         |       | (1,560,289               | )          | (1,610,181                  | )          |
| Common stock issued for future services                                                                                                                                                     |       | (2,893,200               | )          | (568,854                    | )          |
| Total Stockholders’ Equity                                                                                                                                                             |       | 12,588,266               |       | 4,583,871                   |       |
|                                                                                                                                                                                        |       | $                        | 18,489,317 |                        | $          | 7,889,132 |   |

 

Seeaccompanying notes to financial statements.

 

2

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**APOLLO RESOURCES INTERNATIONAL, INC.**

**STATEMENT OF OPERATIONS**

 
| ** **                                 | ** ** | **Three Months  Ended  March 31, 2005** | ** ** |
|--------------------------------------------|------------|----------------------------------------------|------------|
| Oil & gas sales, net              |       | $                                            | 141,937    |   |
| Other sales                                |       | 6,555                                        |       |
| Total sales                                |       | 148,492                                      |       |
| Cost of sales                              |       | 158,206                                      |       |
| Gross profit (loss)                        |       | (9,714                                       | )          |
| Selling, general and administrative        |       | 2,056,952                                    |       |
| Operating loss                             |       | (2,066,666                                   | )          |
| Interest income (expense), net             |       | (71,423                                      | )          |
| Other income                               |       | 5,295                                        |       |
| Loss from operations before income taxes   |       | (2,132,794                                   | )          |
| Income taxes                               |       | —                                       |       |
| Loss before extraordinary item             |       | (2,132,794                                   | )          |
|                                       |       |                                         |       |
| Extraordinary item:                        |       |                                         |       |
| Gain on extinguishment of debt, net of tax |       | 2,182,686                                    |       |
| Net Income                                 |       | $                                            | 49,892     |   |
|                                       |       |                                         |       |
| Income (loss) per common share:            | ** ** | ** **                                   | ** ** |
| ** **                                 | ** ** | ** **                                   | ** ** |
| Basic and diluted:                         |       |                                         |       |
| Loss before extraordinary item             |       | $                                            | (.07       | ) |
| Extraordinary item                         |       | .07                                          |       |
| Net loss                                   |       | —                                       |       |
| ** **                                 | ** ** | ** **                                   | ** ** |
| Weighted average shares:                   | ** ** | ** **                                   | ** ** |
| ** **                                 | ** ** | ** **                                   | ** ** |
| Basic and diluted                          |       | 32,027,005                                   |       |

 

Seeaccompanying notes to financial statements.

 

3

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**APOLLO RESOURCES INTERNATIONAL, INC.**

**STATEMENTS OF STOCKHOLDERS’ EQUITY**

 
| ** **                                                                        | ** ** | **Common  Stock** | ** ** | **Additional  Paid In  Capital** | ** ** | **Common  Stock Issued  for Future  Services** | ** ** | **Accumulated  Deficit** | ** ** | **Totals** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------------------------------|------------|--------------------------|------------|------------|------------|
| **Balance December 31, 2004**                                                |       | $                 | 23,854     |                             | $          | 6,739,052                                      |       | $                        | (568,854   | )          | $          | (1,610,181 | ) | $ | 4,583,871 |   |
| Common stock issued in acquisitions                                               |       | 8,000             |       | 3,992,000                        |       | —                                         |       | —                   |       | 4,000,000  |       |
| Common Stock issued for investment in joint  venture                              |       | 1,700             |       | 1,324,300                        |       | —                                         |       | —                   |       | 1,326,000  |       |
| Issuance of 871,006 shares of common stock  through PPM sales                     |       | 871               |       | 746,041                          |       | —                                         |       | —                   |       | 746,912    |       |
| Issuance of 4,625,367 shares of common  stock for services                        |       | 4,625             |       | 3,305,912                        |       | —                                         |       | —                   |       | 3,310,537  |       |
| Issuance of 180,000 shares of common stock  for employee compensation             |       | 180               |       | 173,220                          |       | —                                         |       | —                   |       | 173,400    |       |
| Issuance of 150,000 shares of common stock  as collateral for equipment purchases |       | 150               |       | 221,850                          |       | —                                         |       | —                   |       | 222,000    |       |
| Common stock issued for future services                                           |       | —            |       | —                           |       | (2,324,346                                     | )          | —                   |       | (2,324,346 | )          |
| Capital contribution to subsidiary                                                |       | —            |       | 500,000                          |       | —                                         |       | —                   |       | 500,000    |       |
| Net and comprehensive income                                                      |       | —            |       | —                           |       | —                                         |       | 49,892                   |       | 49,892     |       |
| **Balance March 31, 2005**                                                   |       | $                 | 39,380     |                             | $          | 17,002,375                                     |       | $                        | (2,893,200 | )          | $          | (1,560,289 | ) | $ | 12,588,266 |   |

 

Seeaccompanying notes to financial statements

 

4

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**APOLLO RESOURCES INTERNATIONAL, INC.**

**STATEMENTS OF CASH FLOWS**

 
| ** **                                | ** ** | **Three Months Ended****March, 31****2005** | ** ** |
|-------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                | ** ** | ** **                                  | ** ** |
| **Cash Flows from Operating Activities:** |       |                                        |       |
| Net income                                |       | $                                           | 49,892     |   |
| Non-cash items included in net loss:      |       |                                        |       |
| Depreciation, amortization and depletion  |       | 28,396                                      |       |
| Common stock issued for services          |       | 878,095                                     |       |
| Stock compensation expense                |       | 472,574                                     |       |
| Common stock issued for compensation      |       | 173,400                                     |       |
| Gain on extinguishment of debt            |       | (2,182,686                                  | )          |
| Other                                     |       | (3,894                                      | )          |
|                                      |       |                                        |       |
| Changes in assets and liabilities:        |       |                                        |       |
| Decrease (increase) in:                   |       |                                        |       |
| Accounts receivable                       |       | (12,551                                     | )          |
| Prepaid and other assets                  |       | (19,196                                     | )          |
|                                      |       |                                        |       |
| Increase (decrease) in:                   |       |                                        |       |
| Accounts payable and accrued expenses     |       | 334,605                                     |       |
| Net cash used in operating activities     |       | (281,365                                    | )          |
|                                      |       |                                        |       |
| **Cash Flows From Investing Activities:** |       |                                        |       |
| Cash acquired in acquisitions             |       | 2,003                                       |       |
| Purchase of equipment                     |       | (325                                        | )          |
| Net cash provided by investing activities |       | 1,678                                       |       |
|                                      |       |                                        |       |
| **Cash Flows From Financing Activities:** |       |                                        |       |
| Proceeds from notes payable               |       | 112,005                                     |       |
| Proceeds from sales of common stock       |       | 382,434                                     |       |
| Repayments of notes payable               |       | (215,211                                    | )          |
| Net cash provided by financing activities |       | 279,228                                     |       |
|                                      |       |                                        |       |
| Net decrease in cash                      |       | (459                                        | )          |
|                                      |       |                                        |       |
| Cash and cash equivalents                 |       |                                        |       |
| Beginning of year                         |       | 56,018                                      |       |
| End of year                               |       | $                                           | 55,559     |   |

 

Seeaccompanying notes to financial statements.

 

5

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**1.  NATURE OFOPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

Companyand Purpose - The Company was incorporated on July 9, 1997 under the lawsof the State of Utah. Effective October 28, 2004, the Company executed ashare exchange agreement, in which the Company acquired an oil and natural gasproduction company. With this acquisition the Company changed its primarybusiness focus to oil & natural gas production. Subsequentacquisitions and ventures have expanded the Company’s oil and gas productioncapabilities, added oil and natural gas transportation via the acquisition ofpipelines and developed an alternative fuels segment with ventures in biodieseland hydrogen energy alternatives. Before October 28, 2004, the Company wasaccounted for as a developmental stage company for the purpose of raisingcapital to invest in a joint venture which acquired a license to certaintechnology relating to the production of hydrogen, to generate hydrogen forsale, and to market hydrogen generating equipment and products.

 

Basisof Presentation - The accompanying consolidated financial statements includethe accounts of the Company and its wholly owned subsidiaries. The results ofoperations of the Company’s Russian oil and gas subsidiary JSC Kaliningradneft(“Kaliningrad”) acquired March 18, 2005, are not included with theaccounts presented in this Form 10-QSB due to necessary conversions ofKaliningrad’s financial statements into United States generally acceptedaccounting principals are not yet completed. The Company plans to file anamendment to this Form 10-QSB at such time as these conversions have beencompleted. All significant intercompany transactions and balances have beeneliminated. Results of operations for the Company’s gas transmission companyOGC Pipeline, LLC (“OGC”) have been consolidated since February 7, 2005the effective date of the acquisition.

 

With the execution of the share exchange agreement on October 28, 2004,the Company affected a 2 for 1 reverse split of its common stock. Pursuant tothe agreement, the Company acquired all of the issued and outstanding shares ofTheseus Resources, Inc. ("Theseus"), in exchange for the issuance of18,000,000 post-split shares of the Company's restricted common stock. Thistransaction was recorded as a reverse acquisition using the purchase method ofbusiness combinations. In a reverse acquisition all accounting history becomesthat of the accounting acquirer. Therefore all historical information prior tothe acquisition is that of Theseus. Subsequently there are no comparativefinancial statements presented for the three month period ended March 31, 2005.

 

Inmanagement’s opinion, these financial statements include all adjustmentsnecessary, accept those related to Kaliningrad discussed above, to presentfairly the financial position of the Company at March 31, 2005 and theresults of operations and changes in cash flows for the three month periodended March 31, 2005. The accounting and reporting policies of the Companyconform to generally accepted accounting principles and reflect practicesappropriate for its industry.  Revenue isrecognized when earned in accordance with the accrual basis of accounting.  These policies are summarized below.

 

Management’sEstimates and Assumptions – The presentation of financial statements inconformity with accounting principles generally accepted in the United Statesrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period. Actual results could differfrom those estimates. The Company reviews all significant estimates affectingthe financial statements on a recurring basis and records the effect of anynecessary adjustments prior to their issuance.

 

Cashand Cash Equivalents—Cash equivalents consist of highly liquid investments withoriginal maturities of three months or less.

 

AccountsReceivable— At March 31, 2005, the amounts carried in accounts receivablewere considered by management to be collectible in full.

 

Accounts Receivable WorkingInterest Owners— The Company previously advanced funds to working interestowners.  As net royalties are earned, theworking interest owners are reducing their receivable on a quarterly basis. Theworking interest owners receive 54% of the revenue and are billed 54% of thedirect expenses.  For the period ended March 31,2005, the working interest owners accrued revenue of $23,269. As of March 31,2005 the working interest owners owed the Company approximately $115,000.

 

Concentrationof Credit Risk— Financial instruments which potentially subject the Company toconcentrations of credit risk consist principally of accounts receivable andtemporary cash investments.  Exposure tolosses on receivables is principally dependent on each customer’s financialcondition.  The Company controls itsexposure to credit risk through credit approvals, credit limits and monitoringprocedures and establishes allowances for anticipated losses. The Companyplaces its temporary cash investments with quality financial institutions and,by policy, limits the amount of credit exposure with any one financialinstrument.

 

FairMarket Value of Financial Instruments— The estimated fair value of cash andcash equivalents, accounts receivable, accounts payable and accrued expensesand other liabilities approximate their carrying amounts in the financial statements.The Company’s financial instruments include notes payable. The carrying valueof notes payable approximates market value because the borrowing rate issimilar to other financial instruments with similar terms.

 

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Patentsand Assigned Technology — The Company contributed its Patent technology toDecarb Energy Technologies, LLC (“Decarb”) upon entering into a joint venturewith Decarb. This joint venture between the Company and a former officer of theCompany, enables the Company to continue its research in hydrogen fuelalternatives. The Patent technology relates to a Hydrogen Generation System andFuel Pellet technology relating to the production of hydrogen.

 

Warrants- During 2003, the Company issued a former officer in connection with suchofficer’s employment agreement, a warrant for 65,000 shares of restrictedcommon stock. Such warrant as an exercise price of $2.50 per share and expireon December 11, 2006. In addition, the Company issued to a shareholder inconnection with a private placement, a warrant for the purchase of 110,000shares of restricted common stock. Such warrant has an exercise price of $2.50per share and expired February 19, 2005.

 

StockOptions and Warrants—The Company accounts for its stock-based compensationplans in accordance with Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees” (APB 25) and related interpretations. TheCompany accounts for stock-based compensation for non-employees under the fairvalue method prescribed by Statement of Financial Accounting Standards No. 123,“Accounting for Stock-Based Compensation.” Through March 31, 2005, therehave been no significant grants to non-employees.

 

TheCompany grants incentive and non-qualified stock options and has reserved8,350,000 shares of common stock for issuance under its stock option plans. Themajority of the options granted become exercisable at the date of grant, andgenerally expire three years after the date of grant.

 

TheCompany adopted the disclosure provisions of Statement of Financial AccountingStandards No. 123 (SFAS No. 123), “Accounting for Stock BasedCompensation.” This statement requires the Company to provide pro formainformation regarding net income and net income per share as if compensationcost for the Company’s stock options had been determined in accordance with thefair value method. The fair value of these options was estimated at the date ofgrant using a Black-Scholes option pricing model with the following weightedaverage assumptions for 2005.

 

| Dividend Yield          |   | 0    | %      |
|-------------------------|--------|------|--------|
| Expected volatility     |   | 80   | %      |
| Risk free interest rate |   | 3.25 | %      |
| Expected life (years)   |   | 3    |   |

 

Hadcompensation cost for the Company’s stock option plans been determined based onthe fair value at the grant date consistent with the provisions of SFAS No. 123,the Company’s net loss and loss per share would have been reduced to the proforma amounts indicated below: 

 
| ** **                                                                                                       | ** ** | **March 31,  2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|
|                                                                                                             |       |                     |       |
| Net income, as reported                                                                                          |       | $                        | 49,892     |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards |       | (937                     | )          |
| Adjusted net income (loss)                                                                                       |       | $                        | 48,955     |   |
|                                                                                                             |       |                     |       |
| Earnings per share                                                                                               |       |                     |       |
| As reported                                                                                                      |       |                     |       |
| Basic and diluted                                                                                                |       | $                        | —     |   |
| As adjusted                                                                                                      |       |                     |       |
| Basic and diluted                                                                                                |       | $                        | —     |   |

 

Revenue– Oil and natural gas production revenue is recognized at the time and point ofsale after the product has been extracted from the ground.

 

7

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ComprehensiveIncome—Comprehensive income includes all changes in equity except thoseresulting from investments by stockholders and distributions to stockholders.

 

Earningsper Share - Earnings (loss) per common share is presented in accordance withthe provisions of the Statement of Financial Accounting Standards No. 128,“Earnings Per Share” (SFAS 128), which requires the presentation of “basic”and “diluted” earnings per share. Basic earnings (loss) per share are based onthe weighted average shares outstanding. Diluted earnings per share include theeffect of dilutive securities such as stock options and warrants.

 

Thefollowing table reconciles basic earnings per share to diluted earnings pershare under the provisions of SFAS 128.

 
| ** **                        | ** ** | **Net Income  (Numerator)**             | ** ** | **Shares  (Denominator)** | ** ** | **Per Share  Amount** | ** ** |
|-----------------------------------|------------|-----------------------------------------|------------|---------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **In thousands, except per share data** | ** ** |
| ** **                        | ** ** | ** **                              | ** ** |
| Quarter Ended March 31, 2005 |       |                                    |       |                      |       |                  |       |
| Basic earnings per share          |       | $                                       | 49,892     |                      | 32,027,005 |                  | $          | — |   |
| Effect of dilutive securities:    |       |                                    |       |                      |       |                  |       |
| Stock options and warrants        |       | —                                  |       | —                    |       |                  |       |
| Convertible notes                 |       | —                                  |       | 403,516                   |       |                  |       |
| Diluted earnings per share        |       | $                                       | 49,892     |                      | 32,430,521 |                  | $          | — |   |

 

Totalstock options and warrants outstanding At March 31, 2005 that are notincluded in the diluted earnings per share computation are approximately 80,875.These stock options and warrants were not included at March 31, 2005 dueto exercise prices exceeding the average market value of the Company’s commonstock. Convertible notes included in the computation of diluted earnings pershare are approximately 403,516 shares.

 

Basic net income per shareis computed by dividing net income available to common shareholders (numerator)by the weighted average number of common shares outstanding during the year(denominator).  Diluted net income pershare is computed using the weighted average number of common shares andpotential common shares outstanding during the year.  Potential common shares result from theassumed exercise, using the treasury stock method, of outstanding stock optionsand warrants having a dilutive effect. The numerators for the period presented are equal to the reported net income.

 

IncomeTaxes— The Company utilizes the liability method for accounting for incometaxes.  The liability method accounts fordeferred income taxes by applying enacted statutory rates in effect at thebalance sheet date to differences between financial statement amounts and taxbases of assets and liabilities.  Theresulting deferred income tax liabilities are adjusted to reflect changes intax laws and rates.  Temporarydifferences consist of the difference in financial statement and income taxbases for accounting for start-up and organizational costs.  Deferred income taxes related to an asset orliability are classified as current or non-current based on the classification ofthe related asset or liability.  Deferredtax assets related to losses accumulated during the development stage andthereafter have been reduced by a corresponding valuation allowance at March 31,2005, and accordingly, no income tax expense or benefit has been recognized.Net operating loss carryforwards approximating $4.9 million expire in the years2013 through 2019.

 

**2.GOING CONCERN AND MANAGEMENT PLANS**

 

Duringthe period ending March 31, 2005, the Company recorded net income of$49,892. Since the Company completed its reverse merger on October 28,2004, the Company has accumulated losses aggregating $1.6 million. The Company’scontinued existence is dependent upon its ability to take advantage ofacquisition opportunities, raise capital through private securities offerings,secure collateralized debt financing and use these sources of capital to growand enhance its oil and gas production operations. During the fourth quarter offiscal 2004 the Company completed the acquisition of BC&D Oil &Gas Corporation (“BC&D”). The acquisition of BC&D marked the initialentrance of the Company into the oil and natural gas production business.During the first quarter of fiscal 2005, the Company completed the acquisitionsof Kaliningrad, a Russian oil and gas production company, and OGC, a gasgathering company. The Kaliningrad acquisition increased the Company’s oil andnatural gas production capabilities as

 

8

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wellas marking the Company’s initial venture into international oil and gasproduction. The OGC acquisition added a pipeline network to the Company’sassets enabling the Company to diversify into the oil and gas transmissionbusiness. In addition, the Company has acquired a 50% interest in Decarb andEarth Biofuels, Inc. (“Biofuels”). Decarb is focused on developinghydrogen fuel alternatives involving propane, while Biofuels produces anddistributed bio-diesel fuel. The Company believes these acquisitions will be amajor part of establishing future financial stability. The Company has alsocontinued to raise capital through a variety of private securities offerings ofits common stock.

 

Managementis focusing on expanding and improving its oil and natural gas productionoperations and alternative fuels ventures. Through acquisition, organic growth andfunding via collateralized loans and private placement offerings, the Companyplans to continue to increase the profitability of its operations necessary tosupport operations.

 

Therecan be no assurance that any of management’s plans as described above will besuccessfully implemented or that the Company will continue as a going concern.

 

The Company’s Liquidity Plan

 

Recentoperating results give rise to concerns about the Company’s ability to generatecash flow from operations sufficient to make scheduled debt payments as theybecome due. During the first quarter ended March 31, 2005, the Companycontinued to seek financing from private placements and seek acquisitions toexpand its opportunities in the areas of oil and gas production, oil and gastransmission and alternative fuels businesses. The Company has implemented costsaving measures including staff reductions. The Company will take additionalcost savings measures, if necessary, to enhance its liquidity position.

 

TheCompany’s need to raise additional equity or debt financing and the Company’sability to generate cash flow from operations sufficient to make scheduledpayments on its debts as they become due will depend on its future performanceand the Company’s ability to successfully raise capital and implement businessand growth strategies. The Company’s performance will also be affected byprevailing economic conditions. Many of these factors are beyond the Company’scontrol. If future cash flows and capital resources are insufficient to meetthe Company’s debt obligations and commitments, the Company may be forced toreduce or delay activities and capital expenditures, obtain additional equitycapital or restructure or refinance its debt. In the event that the Company isunable to do so, the Company may be left without sufficient liquidity and itmay not be able to meet its debt service requirements. In such a case, thiscould result in a substantial portion of the Company’s indebtedness becomingimmediately due and payable. As a result, the Company’s may not be able tocontinue operations due to liens or other secured positions placed on theCompany’s assets.

 

**3.PROPERTY AND EQUIPMENT**

 

TheCompany follows the full cost method of accounting for exploration anddevelopment of oil and gas properties whereby all costs in acquiring, exploringand developing properties are capitalized, including estimate of abandonmentcosts, net of estimated equipment salvage costs.  No costs related to production, generalcorporate overhead, or similar activities have been capitalized. Leaseholdcosts are depleted based on the units-of-production method based on estimatedproved reserves. Property and equipment are stated at cost less accumulateddepreciation. The Company records impairment losses on long-lived assets usedin operations when events and circumstances indicate that the assets might beimpaired and the undiscounted cash flows estimated to be generated by thoseassets are less than the carrying amounts of those assets.

 

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Depreciationis calculated on a straight-line basis over the estimated useful lives of thevarious assets as follows:

 

| Leasehold improvements  |   | 5-7 Years |   |
|-------------------------|--------|-----------|--------|
| Machinery and equipment |   | 5-7 Years |   |
| Gas Plant               |   | 7 Years   |   |
| Automobiles             |   | 5 Years   |   |

 

Property, plant andequipment consist of the following:

 

| ** **                                                 | ** ** | **March 31,  2005** | ** ** |
|------------------------------------------------------------|------------|--------------------------|------------|
| Building                                                   |       | $                        | 46,297     |   |
| Machinery and equipment                                    |       | 1,949,548                |       |
| Gas Plant                                                  |       | 316,443                  |       |
| Intangible drilling costs                                  |       | 229,848                  |       |
| Oil & gas leases                                  |       | 7,694,708                |       |
| Pipeline easements                                         |       | 7,987,706                |       |
| Automobiles                                                |       | 49,107                   |       |
|                                                       |       | 18,273,657               |       |
| Less accumulated depreciation, amortization  and depletion |       | 2,192,123                |       |
|                                                       |       | $                        | 16,081,534 |   |

 

Depreciation,amortization and depletion expense for the period ended March 31, 2005 was$28,396.

 

**4.ACQUISITIONS**

 

Effective February 7, 2005 the Company acquired100% membership interest in OGC from SW Energy Investments, Inc. (“SWEnergy”). In consideration of this acquisition the Company exchanged 8,000,000shares of the Company’s common stock valued at $.50, the closing market priceon February 7, 2005. In this acquisition the Company acquiredapproximately 1,800 miles of pipeline used for the transmission of oil andnatural gas. Post acquisition SW Energy owns approximately 18% of theoutstanding common stock of the Company.

 

This transaction was recorded using the purchasemethod of business combinations.

 

The following is a condensed balance sheetdisclosing the actual carrying values of OGC’s assets and liabilities at theacquisition date.

 
| ASSETS                                          |   |      |      |
|-------------------------------------------------|--------|-----------|-----------|
|                                            |   |      |      |
| Cash and cash equivalents                       |   | $         | 2,003     |   |
| Pipeline easements                              |   | 7,987,706 |      |
|                                            |   |      |      |
| Total assets                                    |   | $         | 7,989,709 |   |
|                                            |   |      |      |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY      |   |      |      |
|                                            |   |      |      |
| Accounts payable and accrued expenses           |   | $         | 1,204,170 |   |
| Notes payable                                   |   | 2,785,539 |      |
| Stockholders’ equity                       |   | 4,000,000 |      |
|                                            |   |      |      |
| Total liabilities and stockholders’ equity |   | $         | 7,989,709 |   |

 

10

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Thefollowing represents the approximate pro-forma effect assuming the acquisitionwith OGC had occurred on January 1, 2005, the beginning of the Company’scurrent fiscal year.

 
| ** **                                                     | ** ** | **Three Months Ended  March 31, 2005** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------------|------------|
|                                                           |       |                                        |       |
| Net Income, as reported                                        |       | $                                           | 49,892     |   |
| Additional estimated OGC net loss (prior to  acquisition date) |       | (27,916                                     | )          |
|                                                           |       |                                        |       |
| Pro-forma net income                                           |       | $                                           | 21,976     |   |
|                                                           |       |                                        |       |
| Weighted average shares outstanding                            |       | 32,027,005                                  |       |
| Adjustment to reflect common stock issued  to SW Energy        |       | 3,288,889                                   |       |
|                                                           |       |                                        |       |
| Pro-forma weighted average shares  outstanding                 |       | 35,315,894                                  |       |
|                                                           |       |                                        |       |
| Loss per share, as reported                                    |       | $                                           | —     |   |
|                                                           |       |                                        |       |
| Pro-forma loss per share                                       |       | $                                           | —     |   |

 

Effective March 18, 2005, the Company enteredinto a stock sale agreement with Kaliningrad. At the time of this filing thepurchase balance sheet was being converted into United Stated generallyaccepted accounting principals and could not be made available for inclusion inthis filing. The Company plans to amend this Form 10-QSB to include theactual and pro-forma effects of this transaction at such time as thisinformation is made available to the Company. Pursuant to the stock saleagreement the Company has acquired 90% of the equity interest of Kaliningrad.In consideration, the Company has executed a convertible debenture, maturing March 18,2006, in the amount of $18,500,000 payable to the shareholders of Kaliningrad.This convertible debenture accrues interest annually at 6%. This debenture isconvertible into the Company’s common stock and is subject to a share price notless than $2.00 per share. This transaction marks the Company’s initialentrance into international oil and natural gas production with the acquisitionof Kaliningrad. Kaliningrad currently produces approximately 21,000 barrels ofoil per month from eight wells. Kaliningrad is one of three oil exploration andproduction companies that currently operate in the far-western Russian provinceof Kaliningrad. Oil reserves for Kaliningrad have been certified by thegovernment at 4.32 million barrels.

 

**5.EQUITY TRANSACTIONS**

 

During the quarter ended March 31, 2005, theCompany issued 8,000,000 shares of its common stock to acquire 100% membershipinterest in OGC. The Company also issued 1,7000,000 shares of its common stockas consideration to enter into a 50% joint venture with Earth Biofuels, Inc.(“Biofuels”).

 

The Company issued 871,006 shares of its commonstock through private placements. These shares were issued at prices rangingfrom $.35 to $.84 per share. The gross proceeds of these sales amounted to$382,434.

 

The Company issued 4,625,367 shares of the Company’scommon stock to consultants pursuant to the Company’s 2004 and 2005 StockOption and Award Plans. These shares of common stock were issued at the fairmarket value price on the date of issuance and resulted in approximately $878,000of consulting services expense in the quarter ended March 31, 2005.

 

The Company issued 180,000 shares of its commonstock to employees has compensation valued at $173,400.

 

The Company issued 150,000 of its common stockvalued at $222,000 as collateral for equipment purchases for a related party.

 

**6.LEASES**

 

The Company currently maintains an agreement topurchase office space in Trona, California to facilitate its hydrogenalternative fuel technology development for $54,994. The office lease is for aterm of 59 months commencing on March 31, 2005 at $917 per month. TheCompany entered into a twelve month capital lease agreement valued at $511,071 forequipment and a gas plant on January 17, 2005. The capital lease agreementcalls for eleven monthly installments of $15,000 with a final payment of$346,071 due at the end of the lease.

 

11

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Thefollowing is a schedule of future minimum rent and lease payments due:

 

| **Year Ending December 31,** | ** ** | ** ** | ** ** |
|-----------------------------------|------------|------------|------------|
| 2005                              |       | 519,325    |       |
| 2006                              |       | 11,006     |       |
| 2007                              |       | 11,006     |       |
| 2008                              |       | 11,006     |       |
| 2009                              |       | 11,006     |       |
| Thereafter                        |       | 2,716      |       |
| Total                             |       | 566,065    |       |

 

Rent expense was $1,800 the three months ended March 31,2005.

 

**7. INVESTMENTS**

 

As part of establishing the Company’s investment in alternative fuels, the Company executed a purchase and sale agreement on February 25, 2005 to acquire a 50% interest in Biofuels in exchange for 1,700,000 shares of restricted common stock of the Company. In addition, on December 6, 2004, the Company formed Decarb a joint venture between the Company and a former officer of the Company. The Company has a 50% interest in this venture, and will continue its hydrogen fuel development through this venture.

 

Both of these investments have been accounting for using the equity method of accounting. During the three months ended March 31, 2005, the Company realized $6,015 of income related to the Biofuels investment and a $720 loss related to its investment in Decarb.  These amounts have been classified in the Company’s statement of operations under the caption “Other income”.

 

On March 31, 2005 the Company assigned a note receivable valued at $495,000 in exchange for 495,000 shares, $1.00 par value, convertible preferred stock of Blue Wireless and Data, Inc. This investment is shown as a non-current liability in the Company’s balance sheet.

 

**8. NOTES PAYABLE**

 

AtMarch 31, 2005 the Company maintained notes payable due on its recentpipeline acquisition and to various investors. All notes are classified ascurrent liabilities due to their maturity dates being less than twelve monthsexcept for the Company’s note for its building in Trona, California, which has$35,291 classified as long-term debt. The Company is currently in negotiationswith these note holders to obtain more favorable terms. The Company’s debtobligations result from its recent acquisitions and are as follows: 

 
| **Lender**                       | ** ** | **Maturity Date** | ** ** | **Interest  Rate** | ** ** | **Original  Principal  Amount** | ** ** |
|----------------------------------|------------|-------------------|------------|--------------------|------------|---------------------------------|------------|
| Jimmy Brown                      |       | On Demand         |       | 13.00              | %          | $                               | 200,000    |   |
| Convertible note Donnie Hill (1) |       |              |       | 6.00               | %          | $                               | 1,000,000  |   |
| TelcoEnergy Corporation          |       | 9/22/2005         |       | 6.00               | %          | $                               | 179,000    |   |
| Peter Knollenberg                |       | On Demand         |       | 6.00               | %          | $                               | 150,000    |   |
| JPB resources, Inc.         |       | 2/24/2006         |       | 13.00              | %          | $                               | 50,000     |   |
| JPB resources, Inc.         |       | On Demand         |       | 11.00              | %          | $                               | 100,000    |   |
| Bruce Blackwell (2)              |       |              |       | 11.00              | %          | $                               | 100,000    |   |
| Convertible notes (3)            |       | On Demand         |       | 10.00              | %          | $                               | 631,539    |   |
| Koch Pipeline Company, L.P.      |       |              |       | 9.00               | %          | $                               | 1,100,000  |   |
| Other (4)                        |       |              |       |               |       | $                               | 183,746    |   |

 

----

(1) TheConvertible note due to the former owner of BC&D Oil & GasCorporation is pending the outcome of current litigation.

(2) OnMarch 4, 2005, the Company reached agreement with Mr. Blackwell toconvert his convertible debenture to common stock of the Company.

(3) Convertiblenotes due to the former owners of OGC Pipeline, LLC.

(4) Consistsof 7 notes for insurance, building lease and promissory notes due to vendors.

 

12

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**9.ROYALTY PAYABLE**

 

TheCompany has various royalty arrangements with non-working interest owners.  As of March 31, 2005 the Company owedroyalties of $829,956 to non-working interest owners and regulatory agencies.

 

**10. EXTRAORDINARYITEM**

 

EffectiveMarch 31, 2005 the Company executed a Compromise of Debt Agreement withKoch Pipeline Company, L.P. (“Koch”) This agreement effectively reduced theprincipal and interest obligation on the note payable assumed in theacquisition of OGC in February. The principal and interest was reduced to$1,1000,000 as full payment on the pipeline assets resulting in forgiveness ofdebt in the amount of $2,182,686 in principal and accrued interest. The Companyis currently in negotiations to work out the terms of the payments to Koch forthe $1,100,000 balance and has made payment totaling $50,000 to date.

 

**11.RELATED PARTY TRANSACTIONS**

 

TheCompany entered into a management services agreement with DGMAC, LLC effective March 15,2005. Under the terms of this agreement the Company is charged $40,000 monthlyfor services provided by Dennis McLaughlin its Chief Executive Officer andChairman of the Board. The Company and Mr. McLaughlin have agreed to forgoaccrual of these amounts until such time as the Company secures the financingnecessary to execute its business plan.

 

TheCompany entered into a management services agreement with Johnny FlameConsulting, LLC effective March 15, 2005. Under the terms of the agreementthe Company is charged $15,000 monthly for services provided by ChristopherChambers its Corporate Secretary.The Company and Mr. Chambers have agreed to forgo accrual of theseamounts until such time as the Company secures the financing necessary toexecute its business plan.

 

The Company entered into a management services agreement with MAC Partners, LP (“MAC”) effective November 12, 2004. Under the terms of this agreement the Company is charged $45,000 monthly for general administration, human resources, turnkey office and legal services. In addition, MAC provides the services of Mr. J. Mark Ariail and Mr. Wayne McPherson the Company’s Chief Financial Officer and Chief Operating Officer. Effective March 15, 2005, Mr. Ariail and Mr. McPherson’s services were no longer provided by MAC and they became employees of the Company. The Company and MAC are currently under negotiations to restructure the management services agreement as provided under the terms of the agreement. On February 15, 2005, MAC loaned the Company $112,015 through a promissory note bearing interest at 7% per annum. This promissory note matures on February 15, 2007 and contains a default interest provision of 18% per annum. At March 31, 2005 approximately $57,000 was outstanding on this promissory note. This note was paid in full during second quarter of 2005.

 

 On January 17, 2005 the Company enteredinto a Bill of Sale and Assignment Agreement whereby it assigned two generatorsand a gas plant, valued at approximately $500,000 to Sovereign StrategicPartners, Ltd. (“Sovereign”) in exchange for a note receivable payable toSovereign in the amount of $495,000. This note receivable was secured by anAgreement of Pledge whereby 20,000,000 shares of Blue Wireless and Data, Inc.(“Blue”) were contributed as collateral. Subsequently, the Company entered intoa Capital Lease Agreement with Sovereign whereby Sovereign leased thegenerators and gas Plant to the Company. The Company subsequently assigned thenote receivable to MAC in exchange for 495,000 shares of convertible preferredstock of Blue, which was owned by MAC. Mr. McLaughlin currently serves asthe Chairman of the Board of Blue and Mr. Chambers serves as Blue’s ChiefExecutive Officer.

 

Duringthe quarter ended March 31, 2005, the Company issued 150,000 shares of itscommon stock valued at $222,000 to Blue to be pledged as collateral for anequipment loan for Blue. Mr. McLaughlin currently serves as the Chairmanof the Board of Blue and Mr. Chambers serves as Blue’s Chief ExecutiveOfficer.

 

13

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**12.SUPPLEMENTAL CASH FLOW INFORMATION**

 

Significantnon-cash transactions are summarized as follows:

 
| ** **                                           | ** ** | **March 31,****2005** | ** ** |
|------------------------------------------------------|------------|----------------------------|------------|
| Common stock issued for services                     |       | $                          | 878,095    |   |
| Common stock issued in acquisition of  subsidiary    |       | $                          | 4,000,000  |   |
| Common stock issued for investment in joint  venture |       | $                          | 1,700.000  |   |
| Gain on extinguishment of debt                       |       | $                          | 2,182,686  |   |

 

**Item 2.****   ****MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**RESULTSOF OPERATIONS FOR THE THREE MONTHS PERIOD ENDED MARCH 31, 2005**

 

Overview

 

TheCompany derives its revenue primarily from monthly oil and natural gasproduction sales. During the first quarter ended March 31, 2005, theCompany acquired an oil and natural gas production company in Russia to add toits domestic oil and natural gas production company acquired in 2004. With theseacquisitions the Company changed its business focus to oil and natural gasproduction from the development of hydrogen generating technology. During thefirst quarter of 2005, the Company continued to expand its capabilities in theoil and natural gas business by acquiring a series of pipelines. In addition,during the first quarter of 2005, the Company started its alternative fuelsbusiness segment designed to compliment the growing need for alternative energysources versus the increasing demand of traditional oil and natural gas energysources. The Company also focused on raising capital through private placementsof it common stock and securing collateralized debt financing essential toproviding the capital to expand its business segments.

 

CriticalAccounting Policies

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions that affect the amounts reported in the accompanying financialstatements and related footnotes. Management bases its estimates andassumptions on historical experience, observance of industry trends and variousother sources of information and factors. Actual results could differ fromthese estimates. Critical accounting policies are defined as those that arereflective of significant judgments and uncertainties, and potentially couldresult in materially different results under different assumptions andconditions.

 

RevenueRecognition

 

Oiland natural gas production revenue is recognized at the time and point of saleafter the product has been extracted from the ground.

 

BusinessCombinations

 

Businesscombinations are accounted for using the purchase method. Under the purchasemethod the Company reports the acquired entities assets and liabilities at fairmarket value. Any excess of the fair market value of the consideration givenover the fair market value of the net assets acquired is reported as goodwill.If the fair market value of the consideration given is less than the fairmarket value of the net assets acquired, the resulting excess of fair value ofacquired net assets over the cost of the acquired entity is allocated, on a prorata basis, against certain assets acquired in the business combination. If anyexcess over cost remains after reducing certain assets to zero, the remainingexcess is recognized as an extraordinary gain. The operating statements of theCompany for purchase method combinations report combined results only for theperiod subsequent to the combination.

 

Sales

 

Salesfor oil and natural gas production were $141,937 for the quarter ended March 31,2005. The company also realized revenue of $5,888 on contracts related to itspipeline assets.

 

14

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# **Costof Sales**

# ** **

Cost of sales relate to oiland gas production were $158,206 consisting of employee benefit cost,regulatory taxes on the oil and natural gas production, purchases of suppliesand equipment and electric utility cost for the oil and natural gas fieldoperations.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses were $2,056,952 for the three monthsended March 31, 2004. These costs reflect $1,350,669 of non-cash stockcompensation expense incurred through the issuance of common stock in privateplacements and the issuance of stock to consultants. The Company also incurrednon-cash expense for the issuance of common stock valued at $173,400 ascompensation to non-executive employees. The balance of the increase inoperating expenses was primarily related to investor relations, travel,business insurance and professional fees for management, legal and accountingservices.

 

ExtraordinaryItem

 

EffectiveMarch 31, 2005 the Company executed a Compromise of Debt Agreement withKoch Pipeline Company, L.P. (“Koch”) This agreement effectively reduced theprincipal and interest obligation on the note payable assumed in the acquisitionof OGC in February. The principal and interest was reduced to $1,1000,000 asfull payment on the pipeline assets resulting in forgiveness of debt in theamount of $2,182,686 in principal and accrued interest. The Company iscurrently in negotiations to work out the terms of the payments to Koch for the$1,100,000 balance and has made payment totaling $50,000 to date.

 

Liquidityand Capital Resources

 

Cashused in operating activities was $281,365 for the three months ended March 31,2005.  This use of cash reflectsincreases in accounts receivable and other assets. .

 

Netcash provided by investing activities was $1,678 for three months ended March 31,2005. This positive cash flow reflects cash acquired in the OGC acquisition.

 

Netcash provided by financing activities was $279,228 for three months ended March 31,2005. Proceeds from sales of common stock of $382,434 and proceeds from notespayable of $112,005 primarily account for this positive cash flow. In addition,the Company paid down debt in the amount of $215,211.

 

Duringthe period ending March 31, 2005, the Company recorded net income of$49,892. Since the Company completed its reverse merger on October 28,2004, the Company has accumulated losses aggregating $1.6 million. The Company’scontinued existence is dependent upon its ability to take advantage ofacquisition opportunities, raise capital through private securities offerings,secure collateralized debt financing and use these sources of capital to growand enhance its oil and gas production operations. During the fourth quarter offiscal 2004 the Company completed the acquisition of BC&D. The acquisitionof BC&D marked the initial entrance of the Company into the oil and naturalgas production business. During the first quarter of fiscal 2005, the Companycompleted the acquisitions of Kaliningrad, a Russian oil and gas productioncompany, and OGC, a gas gathering company. The Kaliningrad acquisitionincreased the Company’s oil and natural gas production capabilities as well asmarking the Company’s initial venture into international oil and gasproduction. The OGC acquisition added a pipeline network to the Company’sassets enabling the Company to diversify into the oil and gas transmissionbusiness. In addition, the Company has acquired a 50% interest in Decarb and Biofuels.Decarb is focused on developing hydrogen fuel alternatives involving propane,while Biofuels produces and distributed bio-diesel fuel. The Company believesthese acquisitions will be a major part of establishing future financialstability. The Company has also continued to raise capital through a variety ofprivate securities offerings of its common stock.

 

Managementis focusing on expanding and improving its oil and natural gas productionoperations and alternative fuels ventures. Through acquisition, organic growthand funding via collateralized loans and private placement offerings, theCompany plans to continue to increase the profitability of its operationsnecessary to support operations.

 

Therecan be no assurance that any of management’s plans as described above will besuccessfully implemented or that the Company will continue as a going concern.

 

15

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The Company’s Liquidity Plan

 

Recentoperating results give rise to concerns about the Company’s ability to generatecash flow from operations sufficient to make scheduled debt payments as theybecome due. During the first quarter ended March 31, 2005, the Companycontinued to seek financing from private placements and seek acquisitions toexpand its opportunities in the areas of oil and gas production, oil and gastransmission and alternative fuels businesses. The Company has implemented costsaving measures including staff reductions. The Company will take additional costsavings measures, if necessary, to enhance its liquidity position.

 

TheCompany’s need to raise additional equity or debt financing and the Company’sability to generate cash flow from operations sufficient to make scheduledpayments on its debts as they become due will depend on its future performanceand the Company’s ability to successfully raise capital and implement businessand growth strategies. The Company’s performance will also be affected byprevailing economic conditions. Many of these factors are beyond the Company’scontrol. If future cash flows and capital resources are insufficient to meetthe Company’s debt obligations and commitments, the Company may be forced toreduce or delay activities and capital expenditures, obtain additional equitycapital or restructure or refinance its debt. In the event that the Company isunable to do so, the Company may be left without sufficient liquidity and itmay not be able to meet its debt service requirements. In such a case, thiscould result in a substantial portion of the Company’s indebtedness becomingimmediately due and payable. As a result, the Company’s may not be able tocontinue operations due to liens or other secured positions placed on theCompany’s assets.

 

16

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# **Off-Balance Sheet Arrangements**

 

# **At March 31, 2005 the Company had noobligations that would qualify to be disclosed as off-balance sheetarrangements.**

# ** **

RiskFactors

 

TheCompany’s revenue and operating results may fluctuate significantly fromquarter to quarter, and fluctuations in operating results could cause its stockprice to decline.

 

The Company’s revenue and operating results may varysignificantly from quarter-to-quarter due to a number of factors. In futurequarters, operating results may be below the expectations of public marketanalysis or investors, and the price of its common stock may decline. Factorsthat could cause quarterly fluctuations include:

 

•              the ability to secure new significantcontracts during a quarter; and

 

•              the ability to raise the necessary capital tofund working capital, execute mergers, acquisitions and asset purchases.

 

Themarket in which the Company competes is intensely competitive and actions bycompetitors could render its services less competitive, causing revenue andincome to decline.

 

Theability to compete depends on a number of factors outside of the Company’scontrol, including:

 

•              the prices at which others offer competitiveservices, including aggressive price competition and discounting;

 

•              the ability of competitors to undertake moreextensive marketing campaigns;

 

•              the extent, if any, to which competitorsdevelop proprietary tools that improve their ability to compete;

 

•              the extent of competitors’ responsiveness tocustomer needs.

 

TheCompany may not be able to compete effectively on these or other factors. Ifthe Company is unable to compete effectively, market position, and thereforerevenue and profitability, would decline.

 

TheCompany must continually enhance its services to meet the changing needs of itscustomers or face the possibility of losing future business to competitors.

 

Futuresuccess will depend upon the Company’s ability to enhance existing services andto introduce new services to meet the requirements of customers in a rapidlydeveloping and evolving market. Present or future services may not satisfy theneeds of the market. If the Company is unable to anticipate or respondadequately to its customers’ needs, lost business may result and financialperformance will suffer.

 

17

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TheCompany is dependent on a limited number of key personnel, and the loss ofthese individuals could harm its competitive position and financialperformance.

 

TheCompany’s business consists primarily of the delivery of oil and natural gasand, accordingly, its success depends upon the efforts, abilities, businessgeneration capabilities and project execution of its executive officers. TheCompany’s success is also dependent upon the managerial, operational andadministrative skills of its executive officers. The loss of any executiveofficer could result in a loss of customers or revenue, and could thereforeharm the Company’s financial performance.

 

TheCompany’s ability to secure debt and equity financing could have an adverseeffect on the Company’s financial health.

 

Theinability to raise debt to fund working capital may:

 

•              require the Company to dedicate a substantialportion of its cash flows to pay down debt;

 

•              increase the Company’s vulnerability togeneral adverse economic and industry conditions;

 

•              limit the Company’s ability to fund futureworking capital and other general corporate requirements; and

 

•              limit the Company’s flexibility in planningfor, or reacting to, changes in the Company’s business and the industry inwhich it operates.

 

Theability to make payments on and to refinance the Company’s debt will depend onfinancial and operating performance, which may fluctuate significantly fromquarter to quarter and is subject to prevailing economic conditions and tofinancial, business and other factors beyond the Company’s control.

 

Therecan be no assurance that the Company’s business will generate sufficient cashflow from operations or that future borrowings will be available to it in anamount sufficient to enable it to pay debt or to fund other liquidity needs.The Company may need to refinance all or a portion of its debt on or beforematurity. The Company can give no assurance that it will be able to refinanceany of its debt on commercially reasonable terms or at all.

 

“SafeHarbor” Statement Under The Private Securities Litigation Reform Act:

 

Withthe exception of historical information, the matters discussed in this reportare “forward looking statements” as that term is defined in Section 21E ofthe Securities Exchange Act of 1934.

Cautionary and Forward Looking Statements

 

In addition to statements ofhistorical fact, this Form 10-QSB contains forward-looking statements.  The presentation of future aspects of theCompany found in these statements is subject to a number of risks anduncertainties that could cause actual results to differ materially from thosereflected in such statements.  Readersare cautioned not to place undue reliance on these forward-looking statements,which reflect management’s analysis only as of the date hereof.  Without limiting the generality of theforegoing words such as “may,” “will,” “expect,” “believe,” “anticipate,”“intend,” or “could” or the negative variations thereof or comparable terminologyare intended to identify forward-looking statements.

 

These forward-lookingstatements are subject to numerous assumptions, risks and uncertainties thatmay cause the Company’s actual results to be materially different from anyfuture results expressed or implied by the Company in those statements.

 

18

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Some of these risks mightinclude, but are not limited to, the following:

 

(a)           volatility or decline of the Company’s stockprice;

 

(b)           potential fluctuation in quarterly results;

 

(c)           failure of the Company to earn revenues orprofits;

 

(d)           inadequate capital to continue or expand itsbusiness, inability to raise additional capital or financing to implement itsbusiness plans;

 

(e)           failure to commercialize its technology or tomake sales;

 

(f)            rapid and significant changes in markets;

 

(g)           litigation with or legal claims andallegations by outside parties;

 

(h)           insufficient revenues to cover operatingcosts.

 

Thereis no assurance that the Company will be profitable, the Company may not beable to successfully develop, manage or market its products and services, theCompany may not be able to attract or retain qualified executives andtechnology personnel, the Company’s products and services may become obsolete,government regulation may hinder the Company’s business, and additionaldilution in outstanding stock ownership may be incurred due to the issuance ofmore shares, warrants and stock options, or the exercise of warrants and stockoptions, and there exist other risks inherent in the Company’s businesses.

 

TheCompany undertakes no obligation to publicly revise these forward-lookingstatements to reflect events or circumstances that arise after the datehereof.  Readers should carefully reviewthe factors described in other documents the Company files from time to timewith the Securities and Exchange Commission, including the Quarterly Reports onForm 10-QSB and Annual Report on Form 10-KSB filed by the Company and anyCurrent Reports on Form 8-K filed by the Company.

 

**Item 3.****       ****Controls and Procedures**

 

Themanagement of the company has evaluated the effectiveness of the issuer’sdisclosure controls and procedures as of a date within 90 days prior to thefiling date of the report (evaluation date) and has concluded that thedisclosure controls and procedures are adequate and effective based upon itsevaluation as of the evaluation date.

 

Therewere no significant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of the mostrecent evaluation of such, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

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**PART II – OTHER INFORMATION**

 

**Item 1.****       ****Legal Proceedings**

 

OnNovember 5, 2004, the Company received notice that it has been named as across-defendant by cross-complainants Omar V. Sanchez and SovCap Advisors,Inc., in Foster v SovCap, Case No. 04CC08470, as per a filing dated October 15,2004, in the Superior Court of the State of California for the County ofOrange, Central District Center. The complaint by the cross-defendants allegesbreach of an oral contract, fraud allegations and claims for indemnity in asuit by one of the Company’s shareholders against SovCap and Sanchez.  The Company believes the cross-complaint iswithout merit but cannot predict the outcome of the cross-complaint at thistime.

 

OnMarch 7, 2005, the Company received notice that it has been named as adefendant, among others, by plaintiffs Donnie Hill, a former employee of theCompany, and BC&D Operating Co., Inc. Case No. CV-2005-128 in the FifthJudicial District Court, State of New Mexico, for the County of Lea. Theplaintiffs allege breach of contract related to certain stock purchaseagreements with the preceding owner of BC&D, breach of contract related toMr. Hill’s employment agreement with the preceding owner of BC&D, breach ofcovenant of good faith and fair dealing, negligent misrepresentation, fraudulentmisrepresentation, violation of the New Mexico Securities Act by the precedingowner of BC&D, civil conspiracy, calling for the appointment of a receiverfor the assets and business affairs of BC&D, constructive trust,declaratory judgment related to the Company election as successor operators andlastly punitive damages related to the above allegations. These allegationsstem from the Company’s execution of a share exchange agreement with TKM,whereby the Company gained control of 100% of the assets of BC&D. Thedefendants seek unspecified damages regarding the above claims.

 

TheCompany has become subject to various claims and other legal matters in thecourse of conducting its business. The Company believes that neither suchclaims and legal matters nor the cost of prosecuting and/or defending suchclaims and legal matters will have a material adverse effect on the Company’sresults of operations, financial condition or cash flows. No material claimsare currently pending; however, no assurances can be given that future claims,if any, may not be material.

 

**Item 2.****       ****Change in Securities and Use of Proceeds**

 

Duringthe first quarter ended March 31, 2005, the Company issued 871,006 shares ofcommon stock, via private placement.  TheCompany is seeking working capital and funds to service its debts and toupgrade and purchase equipment to increase its oil and natural gas productionrelated to its domestic operations. The common stock was sold at prices rangingfrom $.35 to $.84 per share. The gross proceeds of these sales amounted to$382,434.

 

**Item 3.****       ****Defaults upon Senior Securities** – None

 

**Item 4.****       ****Submission of Matters to a Vote of Security Holders**

 

OnJanuary 14, 2005, shareholders of the Company received a Notice Of Action ByWritten Consent Of Shareholders. This document informed shareholders that theCompany had secured a Written Consent in Lieu of Special Meeting representingmore than 70% of outstanding shareholders. This written consent approved thechanging of the name of the Company from Powerball International, Inc. toApollo Resources International, Inc. and approved the increase in thecapitalization of the Company’s authorized shares of common stock from25,000,000 to 150,000,000 shares. The effective date of these changes wasFebruary 3, 2005. The written consent of a majority of the Company’sshareholders satisfies the shareholder approval requirements under Utah law,the Company’s Articles of Incorporation and its Bylaws.

 

**Item 5.****       ****Other Information** –None

 

**Item 6.****       ****Exhibits and Reports on Form 8-K**

 
| **Date  of Filing** | ** ** | **Subject**                                                       |
|---------------------|------------|-------------------------------------------------------------------|
| March 3, 2005       |       | Unregistered sales of equity securities.                          |
| May 31, 2005        |       | Stock Sale Agreement between the Company and JSC Kaliningradneft. |

 

Exhibits:  Exhibit 31 and 32

 

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**SIGNATURES**

 

Pursuant to the requirement of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized this 23rd day of May, 2005.

 
|   |   | Apollo  Resources International, Inc. |
|--------|--------|---------------------------------------|
|   |   |                                  |   |
|   |   |                                  |   |
|   |   | /s/  Dennis G. McLaughlin, III        |   |
|   |   | Dennis  G. McLaughlin, III, CEO       |

 

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