UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q/A

(Amendment No. 1) 

 

 

☑ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended June 30, 2012

 

 

☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934

 

 

For the transition period from ______ to _______

 

 

Commission file number: 000-27739

 

 

ROYAL QUANTUM GROUP, INC.

(Exact name of registrant as specified in its charter)

 

Nevada		90-0315909
(state or other jurisdiction of incorporation or organization)		(I.R.S. Employer I.D. No.)
7044 Portal Way, Unit K-110 Ferndale, WA 98248		(403) 288-4321
(Address of principal executive offices)		(Issuer's telephone number)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐   Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☐ No ☐ (Not required)   Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act

 

Large Accelerated Filer		☐	Accelerated Filer	☐
Non-Accelerated Filer		☐	Smaller Reporting Company	☑

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No ☑     As of June 30, 2012, there were 52,991,272 shares of the registrant’s $0.001 par value common stock issued and outstanding.

 

Explanatory Note   The sole purpose of this Amendment to the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2012 (the “10-Q”), is to furnish the Interactive Data File exhibits required by Item 601(b)(101) of Regulation S-K. No other changes have been made to the 10-Q, and this Amendment has not been updated to reflect events occurring subsequent to the filing of the 10-Q.

 

 

 

Page - 1

 

 

TABLE OF CONTENTS

 

		PAGE
PART I	FINANCIAL INFORMATION	3
ITEM 1.	FINANCIAL STATEMENTS	3
ITEM 2.	MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	13
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	15
ITEM 4.	CONTROLS AND PROCEDURES	16
PART II	OTHER INFORMATION	16
ITEM 1.	LEGAL PROCEEDINGS	16
ITEM 1A.	RISK FACTORS	16
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	16
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	16
ITEM 4.	MINE SAFETY DISCLOSURES	16
ITEM 5.	OTHER INFORMATION	17
ITEM 6.	EXHIBITS	18

 

Special Note Regarding Forward-Looking Statements

 

 

Information included in this Form 10-Q contains forward-looking statements that may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Royal Quantum Group, Inc. (the “Company”), to be materially different from future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” or “project” or the negative of these words or other variations on these words or comparable terminology. These forward-looking statements are based on assumptions that may be incorrect, and there can be no assurance that these projections included in these forward-looking statements will come to pass. Actual results of the Company could differ materially from those expressed or implied by the forward-looking statements as a result of various factors. Except as required by applicable laws, the Company has no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

 

 

*Please note that throughout this Quarterly Report, and unless otherwise noted, the words "we," "our," "us," the "Company," or "RYQG" refers to Royal Quantum Group, Inc.

 

 

PART I - FINANCIAL INFORMATION

 

 

 

ITEM 1. FINANCIAL STATEMENTS

 

INDEX
Condensed Balance Sheet as of June 30, 2012 (unaudited) and Condensed Consolidated Balance Sheet as of December 31, 2011 (audited)	F-1
Condensed Statement of Operations for the Three and Six Months Ended June 30, 2012 and 2011 (unaudited)	F-2
Condensed Statement of Cash Flows for the Six Months Ended June 30, 2012 and 2011 (unaudited)	F-3
Notes to Condensed Financial Statements (unaudited)	F-5

 

 

 

Page - 2

 

 

 

ROYAL QUANTUM GROUP

CONDENSED BALANCE SHEETS

 

	June 30,			December 31,
	2012			2011
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	35,225		$	42,890
Accounts receivable		47,171			61,486
Prepaid Services		1,500			—
Total current assets		83,896			104,376
Property and equipment:
Furniture and fixtures		1,851			1,851
Less: accumulated depreciation		(1,851	)		(1,851	)
Total property and equipment, net		—			—
Other assets:
Proved oil and gas properties, full cost method		563,677			604,083
Less: accumulated depletion		(207,863	)		(223,447	)
Unproved oil and gas properties		—			17,507
Deferred offering costs		—			98,357
Total other assets		355,814			496,500
Total assets	$	439,710		$	600,876

 

The accompanying notes to condensed financial statements are an integral part of these statements.

 

 

 

Page - 3

 

 

 

ROYAL QUANTUM GROUP

CONDENSED BALANCE SHEETS continued

 

		June 30,				December 31,
		2012				2011
		(Unaudited)
LIABILITIES & STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable		$	137,508			$	128,339
Royalties due stockholders			27,431				36,303
Related party payables			400,674				333,674
Notes payable			431,341				424,948
Stockholder loans			19,845				19,845
Total current liabilities			1,016,799				943,109
Long-term liabilities:
Asset retirement obligation			11,725				11,725
Total long-term liabilities			11,725				11,725
Total liabilities			1,028,524				954,834
Stockholders' Deficit:
Preferred stock, par value $.001
authorized 10,000,000 shares
no shares issued at March 31, 2012
and December 31, 2011			—				—
Common stock, par value $.001
Issued 52,991,272 shares at June 30, 2012
and 52,991,272 shares at December 31, 2011			52,991				52,991
Additional paid-in capital			5,433,446				5,433,446
Accumulated deficit			(6,065,162	)			(5,812,024	)
Other comprehensive gain/(loss)			(10,089	)			(28,371	)
Total stockholders' deficit			(588,814	)			(353,958	)
Total liabilities and stockholders' deficit		$	439,710			$	600,876

 

The accompanying notes to condensed financial statements are an integral part of these statements.

 

 

 

Page - 4

 

 

 

ROYAL QUANTUM GROUP

CONDENSED STATEMENT OF OPERATIONS

 

		For the Three Months								For the Six Months
		June 30,								June 30,
		2012				2011				2012				2011
Oil revenue		$	99,537			$	221,426			$	210,184			$	308,286
Operating expenses
Production costs			48,615				74,473				84,957				114,996
Royalty expense			39,499				116,692				95,607				153,707
Related party consulting fees			45,000				45,000				90,000				90,000
Related party rent expense			3,968				4,786				7,954				7,936
Professional fees			28,059				11,753				150,662				25,194
General & administrative			3,984				23,266				8,916				28,657
Total operating expenses			(169,125	)			(275,970	)			(438,096	)			(420,490	)
Loss from operations			(69,588	)			(54,544	)			(227,912	)			(112,204	)
Other income (expenses)
Interest expense			(12,751	)			(11,822	)			(25,226	)			(23,087	)
Total other income (expense)			(12,751	)			(11,822	)			(25,226	)			(23,087	)
Net loss		$	(82,339	)		$	(66,366	)		$	(253,138	)		$	135,291	)
Loss per share - Basic and diluted		$	(0.00	)		$	(0.00	)		$	(0.00	)		$	(0.00	)
Weighted average shares outstanding			52,991,272				50,332,668				52,991,272				50,258,338

 

The accompanying notes to condensed financial statements are an integral part of these statements.

 

 

 

 

Page - 5

 

 

 

ROYAL QUANTUM GROUP

CONDENSED STATEMENT OF CASH FLOWS

 

		For the Six Months Ended June 30,
		2012				2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(253,138	)		$	(135,291	)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation			—				186
Depletion			35,528				46,795
(Increase) decrease in accounts receivable			14,315				(47,126	)
(Increase) decrease in prepaid services			(1,500	)			(60	)
Decrease in deferred offered costs			98,357				—
Increase (decrease) in accrued interest on notes payable			25,226				24,566
Increase (decrease) in accounts payable			9,166				(36,300	)
Increase (decrease) in royalties due stockholders			(8,872	)			4,691
Increase (decrease) in related party accounts payable			67,000				25,000
Net cash (used in) operating activities			(13,918	)			(117,539	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in oil and gas properties			6,801				(134,883	)
Net cash provided by (used in) investing activities			6,801				(134,883	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of units consisting of common stock and oil and gas
royalties			—				95,000
Net cash provided by financing activities			—				95,000
Effect of exchange rates on cash			(548	)			(445	)
Net increase (decrease) in cash and cash equivalents			(7,665	)			(157,867	)
Cash and cash equivalents - beginning of period			42,890				205,102
Cash and cash equivalents - end of period		$	35,225			$	47,235
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest		$	—			$	—
Income taxes		$	—			$	—
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Value of stock based offering costs charged to expense		$	98,357			$	—
		$	—			$	—

 

The accompanying notes to condensed financial statements are an integral part of these statements.

 

 

 

 

Page - 6

 

 

 

ROYAL QUANTUM GROUP, INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012 AND 2011

NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION

 

 

Royal Quantum Group, Inc. (“the Company”) was incorporated under the laws of the State of Nevada on October 22, 1996 under the name PSM Corp. The Company changed its emphasis to the exploration and development of natural resources and on November 23, 2005 changed its name to Royal Quantum Group, Inc.

 

 

Interim Financial Statements

 

 

Royal Quantum Group, Inc.’s interim financial statements are unaudited. They contain all necessary adjustments (consisting only of normal recurring adjustments) for a fair statement of the referenced interim period results. These interim period results do not indicate expected full-year results or results for future periods, due to several factors, including price volatility of crude oil and natural gas, price volatility of commodity derivatives, volatility of interest rates, estimates of reserves, drilling risks, geological risks, transportation restrictions, timing of acquisitions, product demand, market competition, interruption(s) in production, our ability to obtain additional capital, and the success of proposed enhanced oil recovery work (EOR). These interim financial statements should be read in conjunction with the audited financial statements and related notes included in Royal Quantum Group, Inc.’s Form 10-K for the year ended December 31, 2011 filed with Commission on April 16, 2012.

 

 

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Management has made certain estimates and assumptions that affect reported amounts in the financial statements and disclosures of contingencies. Actual results may differ from those estimates. The Company has made assumptions in valuing its oil and natural gas reserves, which may affect the amounts at which oil and natural gas properties are recorded. The Company has also computed the components of the investments units sold in its private offerings using assumptions such as volatility, expected life and the risk-free interest rate (See Note 7).

 

 

Going Concern

 

 

The Company’s financial statements have been prepared on a going concern basis which contemplates the realization of assets and the liquidation of liabilities in the ordinary course of business. The Company has incurred substantial losses from operations and has a working capital deficit, which history and circumstance raise substantial doubt as to the Company’s ability to continue as a going concern. The Company had a net loss of $253,138 for the six months ended June 30, 2012 and an accumulated deficit at June 30, 2012 of $6,065,162. The Company has raised sufficient funds through the private sale of participating units to acquire working interests in nine oil and gas wells. Seven of the wells are currently producing as of June 30, 2012. Total gross revenue generated from these seven wells during the six months ended June 30, 2012 amounted to $210,184. Although the Company has been successful in raising the necessary funds to acquire these working interests and has been able to generate net revenue from these wells, there is no assurance that these wells will continue to generate positive cash flow. Currently the net revenue generated from these wells is not sufficient to fund all of the Company’s operating costs. The Company is seeking to raise additional funds to acquire other oil and gas properties; however, there is no assurance that the necessary funds will be raised or even if the funds are raised, that the working interest acquired in the future will generate sufficient revenue to assist in the financing of the Company’s operations. Until such funding is obtained and/or positive results from planned property development materialize, doubt about the Company’s ability to continue as a going concern may remain.

 

 

 

Page - 7

 

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

 

Cash and Cash Equivalents

 

 

For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents to the extent the funds are not being held for investment purposes.

 

 

Use of Estimates

 

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

 

Accounts Receivable

 

 

Accounts receivable are reported at the customer’s outstanding balances less any allowance for doubtful accounts. Interest is not accrued on overdue accounts receivable.

 

 

Allowance for Doubtful Accounts

 

 

An allowance for doubtful accounts on accounts receivable is charged to operations in amounts sufficient to maintain the allowance for uncollectible accounts at a level management believes is adequate to cover any probable losses. Management determines the adequacy of the allowance based on historical write-off percentages and information collected from individual customers. Accounts receivable are charged off against the allowance when collectibility is determined to be permanently impaired. Management has determined that as of June 30, 2012, no allowance was required.

 

 

Revenue Recognition

 

 

Oil and gas production revenues are recognized at the point of sale.

 

 

Oil and Gas Properties

 

 

The Company uses the full cost method of accounting under which all costs incurred in the acquisition, exploration and development of oil and natural gas reserves, including costs related to unsuccessful wells and estimated future site restoration and abandonment, are capitalized until such time as the aggregate of such costs net of accumulated depletion and oil and natural gas related deferred income taxes, on a country-by-country basis, equals the sum of 1) the discounted present value (at 10%), using prices as of the end of each reporting period on a constant basis, of the Company’s estimated future net cash flows from estimated production of proved oil and natural gas reserves as determined by independent petroleum consultants, less estimated future expenditures to be incurred in developing and producing the proved reserves but excluding future cash outflows associated with settling asset retirement obligations accrued on the balance sheet; plus 2) the cost of major development projects and unproven properties not subject to depletion, if any; plus 3) the lower of cost or estimated fair value of unproven properties included in costs subject to depletion; less 4) related income tax effects. If net capitalized costs exceed this limit, the excess is expensed unless subsequent market price changes eliminate or reduce the indicated write-down in accordance with U.S. SEC Staff Accounting Bulletin (“SAB”) Topic 12D. Depletion is computed using the units-of-production method whereby capitalized costs, net of estimated salvage values, plus estimated future costs to develop proved reserves and satisfy asset retirement obligations, are amortized over the total estimated proved reserves on a country-by-country basis. Investments in major development projects are not depleted until either proved reserves are associated with the projects or impairment has been determined.

 

 

 

Page - 8

 

 

 

Property and Equipment

 

 

Property and equipment are stated at cost, less accumulated depreciation. Depreciation is provided over the five year estimated useful life of the assets computed on the straight-line method.

 

 

Gains and losses resulting from sales and dispositions of property and equipment are included in current operations. Maintenance and repairs are charged to operations as incurred. Depreciation expense for the three months ended June 30, 2012 and 2011 amounted $0 and $93, respectively. Depreciation expense for the six months ended June 30, 2012 and 2011 amounted $0 and $186, respectively.

 

 

Foreign Currency Translation

 

 

The Company's primary functional currency is the U.S. dollar. For foreign operations whose functional currency is the local foreign currency, balance sheet accounts are translated at exchange rates in effect at the end of the year and income statement accounts are translated at average exchange rates for the period. Translation gains and losses are included as a separate component of stockholders’ deficit.

 

 

Concentrations of Credit Risk

 

 

The Company’s revenue is dependent upon the successful efforts of the respective well’s operator. Currently production from the Company’s seven wells is sold to one customer.

 

 

Loss per Share of Common Stock

 

 

The Company reports earnings (loss) per share in accordance with Accounting Standards Codification “ASC” Topic 260-10, "Earnings per Share." Basic earnings (loss) per share is computed by dividing income (loss) available to common shareholders by the weighted average number of common shares available. Diluted earnings (loss) per share is computed similar to basic earnings (loss) per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Diluted earnings (loss) per share has not been presented since the effect of the assumed conversion of warrants and debt to purchase common shares would have an anti-dilutive effect. Potential common shares as of June 30, 2012 that have been excluded from the computation of diluted net loss per share consist of (a) warrants to purchase 700,000 shares of the Company’s common stock and (b) Unit holders’ options to convert their respective oil revenue interests into a total 1,801,500 shares of the Company’s common stock.

 

 

Asset Retirement Obligations

 

 

The Surface Mining Control and Reclamation Act of 1977 and similar state statutes require mine properties to be restored in accordance with specified standards. Accounting Standards Codification (“ASC”) Topic 410-20 requires recognition of an asset retirement obligation (“ARO”) for eventual reclamation of disturbed acreage remaining after mining has been completed. The Company records its reclamation obligations on a permit-by-permit basis using requirements as determined by the Office of Surface Mining of the U.S. Department of the Interior (“OSM”). The liability is calculated based upon the reclamation activities remaining after removal ceases, assuming that reclamation activities have been contemporaneous within state and federal guidelines during mining. A liability is recorded for the estimated future cost that a third party would incur to perform the required reclamation and mine closure discounted at the Company’s credit-adjusted risk-free rate. A corresponding increase in the asset carrying value of mineral rights is also recorded. The ARO asset is amortized on the units-of-production method over the proven and probable reserves associated with that permit.

 

 

 

Page - 9

 

 

 

Long-Lived Assets

 

 

The Company accounts for its long-lived assets in accordance with ASC No. 360, “Property, Plant and Equipment.” ASC No. 360 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the historical cost carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the carrying value of an asset by estimating the future net cash flows expected to result from the asset, including eventual disposition. If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset’s carrying value and fair value or disposable value. As of June 30, 2012, the Company does not believe there has been any impairment of its long-lived assets.

 

 

Fair Value of Financial Instruments

 

 

Pursuant to ASC No. 820, “Fair Value Measurements and Disclosures,” the Company is required to estimate the fair value of all financial instruments included on its balance sheet as of June 30, 2012. The Company’s financial instruments consist of cash, accounts receivables, payables, and other obligations. The Company considers the carrying value of such amounts in the financial statements to approximate their fair value.

 

 

Income Taxes

 

 

The Company accounts for its income taxes under the provisions of ASC No. 740 “Income Taxes.” The method of accounting for income taxes under ASC No. 740 is an asset and liability method. The asset and liability method requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between tax bases and financial reporting bases of other assets and liabilities.

 

 

Recent Accounting Pronouncements

 

 

In December 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” This update defers the requirement to present items that are reclassified from accumulated other comprehensive income to net income in both the statement of income where net income is presented and the statement where other comprehensive income is presented. The Company does not expect the adoption of ASU 2011-12 to have a material impact on its consolidated financial statements.

 

 

In December 2011, the FASB issued ASU No. 2011-11 “Balance Sheet: Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”). This Update requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The objective of this disclosure is to facilitate comparison between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of IFRS. The amended guidance is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The Company does not expect the adoption of ASU 2011-11 to have a material impact on its consolidated financial statements.

 

 

In September 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-08, “Testing Goodwill for Impairment” (“ASU No. 2011-08”), which is intended to reduce the complexity and costs to test goodwill for impairment. The amendment allows an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity will no longer be required to calculate the fair value of a reporting unit unless the entity determines, based on its qualitative assessment, that it is more likely than not that the fair value of the reporting unit is less than its carrying amount. ASU No. 2011-08 also expands upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The amendment becomes effective for annual and interim goodwill impairment tests performed for the Company’s fiscal year ending September 30, 2013. Early adoption is permitted. The Company does not expect the adoption of ASU 2011-08 to have a material impact on its consolidated financial statements.

 

 

The Company continually assesses any new accounting pronouncements to determine their applicability to the Company. Where it is determined that a new accounting pronouncement affects the Company’s financial reporting, the Company undertakes a study to determine the consequence of the change to its financial statements and assures that there are proper controls in place to ascertain that the Company’s financials properly reflect the change.

 

 

 

Page - 10

 

 

 

NOTE 3 - INVESTMENT IN OIL & GAS PROPERTY

 

 

As of June 30, 2012, the Company’s accrued asset retirement obligation totaled $11,725 and this amount was included in the capitalized cost of the oil and gas properties. Depletion expense is included in production expense as reflected in the accompanying condensed statements of operations. Depletion expense for the three months ended June 30, 2012 and 2011 amounted to $16,321 and $32,428, respectively. Depletion expense for the six months ended June 30, 2012 and 2011 amounted to $35,528 and $46,795, respectively. During the three months ended June 30, 2012, the Company charged against accumulated depletion the $10,000 deposit it had on the on Flat Creek lease as the option to drill on the property expired. Further, during the three months ended March 31, 2012, the Company determined that its interest in the Bond #3 well was commercially unproductive and the well was abandoned. The well’s cost basis of $47,866 was also charged against accumulated depletion pursuant to ASC Topic 932-360-40 “Extractive Activities.”

 

 

NOTE 4 - RELATED PARTY TRANSACTIONS

 

 

The Company has entered into a month-to-month lease agreement with Trio Gold for an office in Calgary, Alberta, Canada. Trio Gold’s President is the father of Ron Ruskowsky, the President and CEO of the Company. This lease can be canceled on one month’s written notice. The lease agreement was amended in February 2011 which increased rental payments from approximately $450 to $1,300 per month plus applicable taxes. The Company incurred rent expense of $3,968 and $4,786 for the three months ended June 30, 2012 and 2011, respectively. The Company incurred rent expense of $7,954 and $7,936 for the six months ended June 30, 2012 and 2011, respectively.

 

 

The Company’s President provides services through a consulting agreement that the Company has with Santeo Financial for $15,000 a month. The $15,000 monthly fee is accrued by the Company and is reduced by amounts actually paid. As of June 30, 2012, the Company owed Santeo Financial $395,693. Consulting fees expensed during the three months ended June 30, 2012 and 2011 amounted to $45,000 and $45,000, respectively. Consulting fees expensed during the six months ended June 30, 2012 and 2011 amounted to $90,000 and $90,000, respectively. Mr. Ruskowsky owns a controlling interest in Santeo Financial.

 

 

As of June 30, 2012, the Company owed Roger Janssen, an officer and director of the Company, $1,345 for services previously performed.

 

 

As of June 30, 2012, the Company owed Phil Van Angren, a former officer and former director of the Company, $3,636 for consulting services previously performed.

 

 

As of June 30, 2012, certain shareholders have advanced the Company a total of $19,845 that is payable on demand and is non-interest bearing.

 

 

 

Page - 11

 

 

 

 

NOTE 5 – NOTES PAYABLE

 

 

The Company has a note payable to Integrated Business Concepts, Inc. that is due upon demand and is assessed interest at an annual rate of 12%. As of June 30, 2012, the balance due including accrued interest amounted to $431,341. Interest accrued and charged to operations for the three months ended June 30, 2012 and 2011 amounted to $12,751 and $11,822, respectively. Interest accrued and charged to operations for the six months ended June 30, 2012 and 2011 amounted to $25,226 and $23,087, respectively. Effective July 23, 2012, the Company and Integrated Business Concepts agreed to fully settle the amount due for $2,500, which was paid in July 2012.

 

 

NOTE 6 – INCOME TAXES

 

 

Deferred income tax assets and liabilities are computed annually for differences between financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.

 

 

The effective tax rate on the net loss before income taxes differs from the U.S. statutory rate as follows:

 

			June 30,
			2012				2011
Current expense - Benefit
Federal			—				—
State			—				—
Total current expense (benefit)			—				—
Deferred Benefit
Federal			—				—
State			—				—
Total deferred benefit			—				—
U.S statutory rate			34.00	%			34.00	%
Less valuation allowance			-34.00	%			-34.00	%
Effective tax rate			0.00	%			0.00	%
The significant components of deferred tax assets and liabilities are as follows:
Deferred tax assets
Net operating losses		$	1,391,787			$	1,067,460
		$	1,391,787			$	1,067,460
Less valuation allowance		$	(1,391,787	)		$	(1,067,460	)
Deferred tax asset - net valuation allowance			—				—

 

The net change in the valuation allowance for 2012 was $(55,467).

 

 

At June 30, 2012, The Company has a net operating loss carryover of approximately $4,093,491 available to offset future income for income tax reporting purposes, which will expire in various years through 2032, if not previously utilized.

 

 

The Company adopted the provisions of ASC 740-10-50, formerly FIN 48, “Accounting for Uncertainty in Income Taxes.” The Company had no material unrecognized income tax assets or liabilities for the periods ended June 30, 2012 and 2011.

 

 

The Company’s policy regarding income tax interest and penalties is to expense those items as general and administrative expense but to identify them for tax purposes. During the year ended December 31, 2011 and 2010, there were no income tax, or related interest and penalty items in the income statement, or liability on the balance sheet. The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company is no longer subject to U.S. federal or state income tax examination by tax authorities for years before 2009. The Company is not currently involved in any income tax examinations.

 

 

 

Page - 12

 

 

 

NOTE 7 - COMMON STOCK AND WARRANTS

 

 

The following table sets forth common share purchase warrants outstanding as of June 30, 2012:

 

		Warrants Outstanding				Weighted Average Exercise Price
Balance, December 31, 2011			1,792,000			$	0.25
Warrants granted			—			$	—
Warrants expired			(1,092,000	)		$	0.25
Balance, June 30, 2012			700,000			$	0.25

 

NOTE 8 - FAIR VALUE

 

 

The Company’s financial instruments consist of principally related party payables, stockholder loans and notes payable. The Company believes all of the financial instruments’ recorded values approximate fair market value because of their nature and respective durations.

 

 

The Company complies with the provisions of ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”). ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements required under other accounting pronouncements. ASC 820-10-35, “Fair Value Measurements and Disclosures - Subsequent Measurement” (“ASC 820-10-35”), clarifies that fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. ASC 820-10-35 also requires that a fair value measurement reflect the assumptions market participants would use in pricing an asset or liability based on the best information available. Assumptions include the risks inherent in a particular valuation technique (such as a pricing model) and/or the risks inherent in the inputs to the model. The Company also follows ASC 825 “Interim Disclosures about Fair Value of Financial Instruments,” previously referred to as FAS 107-1 to expand required disclosures.

 

 

ASC 820-10-35 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under ASC 820-10-35 are described below:

 

 

Level 1. Valuations based on quoted prices in active markets for identical assets or liabilities that an entity has the ability to access.

 

 

Level 2. Valuations based on quoted prices for similar assets or liabilities, quoted prices for identical assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.

 

 

Level 3. Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

 

The Company utilizes the best available information in measuring fair value. The following table summarizes, by level within the fair value hierarchy, the financial assets and liabilities recorded at fair value on a recurring basis as of June 30, 2012:

 

 

 

Page - 13

 

 

 

June 30, 2012

 

 

Fair Value Measurements

 

		Level 1				Level 2				Level 3				Total Fair Value
Liabilities
Related party payable			-			$	400,674				-			$	400,674
Notes payable			-			$	431,341				-			$	431,341
Stockholder loans			-			$	19,845				-			$	19,845

 

NOTE 9 – SUBSEQUENT EVENTS

 

 

As discussed in Note 5, the Company settled the total amount it owed Integrated Business Concepts of $439,636 for $2,500. The settlement had in effective date of July 23, 2012.

 

 

[END NOTES TO FINANCIALS]

 

 

ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

 

 

The following Management's Discussion and Analysis should be read in conjunction with Royal Quantum Group, Inc.’s financial statements and the related notes thereto. The Management's Discussion and Analysis contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Any statements that are not statements of historical fact are forward-looking statements. When used, the words “believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,” “expect,” and the like, and/or future-tense or conditional constructions (“will,” “may,” “could,” “should,” etc.), or similar expressions, identify certain of these forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements in this Report on Form 10-Q. The Company’s actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors. The Company does not undertake any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Report on Form 10-Q.

 

 

The following discussion should be read in conjunction with our unaudited consolidated financial statements and related notes and other financial data included elsewhere in this report. See also the notes to our consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2011.

 

 

Critical Accounting Policies and Estimates

 

 

The discussion and analysis of the Company’s financial condition and results of operations are based upon the Company’s condensed financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. In consultation with the Company’s Board of Directors, management has identified the following accounting policies that it believes are key to an understanding of its financial statements. These are important accounting policies that require management’s most difficult, subjective judgments.

 

 

 

Page - 14

 

 

 

Revenue Recognition

 

 

The Company recognizes oil and gas revenue from its interest in producing wells as oil and gas is sold from those wells.

 

 

Oil and Gas Properties

 

 

The Company uses the full cost method of accounting under which all costs incurred in the acquisition, exploration and development of oil and natural gas reserves, including costs related to unsuccessful wells and estimated future site restoration and abandonment, are capitalized until such time as the aggregate of such costs net of accumulated depletion and oil and natural gas related deferred income taxes, on a country-by-country basis, equals the sum of 1) the discounted present value (at 10%), using prices as of the end of each reporting period on a constant basis, of the Company’s estimated future net cash flows from estimated production of proven oil and natural gas reserves as determined by independent petroleum consultants, less estimated future expenditures to be incurred in developing and producing the proven reserves but excluding future cash outflows associated with settling asset retirement obligations accrued on the balance sheet; plus 2) the cost of major development projects and unproven properties not subject to depletion, if any; plus 3) the lower of cost or estimated fair value of unproven properties included in costs subject to depletion; less 4) related income tax effects. If net capitalized costs exceed this limit, the excess is expensed unless subsequent market price changes eliminate or reduce the indicated write-down in accordance with U.S. Securities and Exchange Commission Staff Accounting Bulletin (“SAB”) Topic 12D. Depletion is computed using the units-of-production method whereby capitalized costs, net of estimated salvage values, plus estimated future costs to develop proven reserves and satisfy asset retirement obligations, are amortized over the total estimated producing life of the well.

 

 

Foreign Currency Translation

 

 

The Company's primary functional currency is the U.S. dollar. For foreign operations whose functional currency is the local currency, balance sheet accounts are translated at exchange rates in effect at the end of the year and income statement accounts are translated at average exchange rates for the period. Translation gains and losses are included as a separate component of stockholders’ deficit.

 

 

Asset Retirement Obligations

 

 

The Company use Accounting Standards Codification (“ASC”) Topic 410-20, Asset Retirement Obligations, which established accounting standards for recognition and measurement of a liability for an asset retirement obligation (“ARO”) and the associated asset retirement costs. The provisions of ASC Topic 410-20 apply to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal operation of a long-lived asset. ASC Topic 410-20 also requires companies to recognize a liability for the fair value of a legal obligation to perform asset retirement activities that are conditional on a future event, if the amount can be reasonably estimated.

 

 

Fair Value Measurement

 

 

The Company adopted ACS Topic 820-10, formerly Statement of Financial Accounting Standard No. 157, Fair Value Measurements (“Topic 820-10”), at the beginning of fiscal year 2009 to measure the fair value of certain of its financial assets and liabilities required to be measured on a recurring basis. The adoption of Topic 820-10 did not impact the Company’s consolidated financial position or results of operations. Topic 820-10 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Topic 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability. The three levels of the fair value hierarchy under Topic 820-10 are described below:

 

 

 

Page - 15

 

 

 

Level 1. Valuations based on quoted prices in active markets for identical assets or liabilities that an entity has the ability to access. The Company has no Level 1 assets or liabilities.

 

 

Level 2. Valuations based on quoted prices for similar assets or liabilities, quoted prices for identical assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.

 

 

The Company has no Level 2 assets. The Company’s Level 2 liabilities consist of related party payables, notes payable, and stockholder loans. Due to the short-term nature of related party payables and stockholders loans, the fair values of these instruments approximate their respective carrying values. The Company determines the fair value of notes payable based on the effective yields of similar obligations.

 

 

Level 3. Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The Company has no Level 3 assets or liabilities.

 

 

Liquidity and Capital Resources.

 

 

For the Six Month Period Ended June 30, 2012 versus June 30, 2011

 

 

During the six months ended June 30, 2012, net cash used in the Company’s operating activities totaled $(13,918) compared to $(117,539) during the six months ended June 30, 2011. During the six months ended June 30, 2012, net cash provided by investing activities totaled $6,801 compared to $(134,883) used during the six months ended June 30, 2011. The $6,801 consisted of a refund based upon the final accounting on the development of the Chuck#1 property. During the six months ended June 30, 2012, the Company had no investment activities as compared to six months ended June 30, 2011, when the Company received $95,000 from the sale of participating units in the Bond #4 program. During the six months ended June 30, 2012, net cash decreased $(7,665) as compared to $(157,867) during the six months ended June 30, 2011.

 

 

At June 30, 2012, the Company had cash of $35,225 accounts receivable of $47,171, and prepaid expenses of $1,500 that comprised the Company’s total current assets totaling $83,896. The Company’s property and equipment at June 30, 2012 had a net book value of $0, consisting of furniture and fixtures with a cost basis of $1,851 net of accumulated depreciation of $1,851. The Company also had accumulated net capitalized costs of oil & gas properties totaling $355,814 at June 30, 2012, while the Company’s total assets at June 30, 2012 were $ 439,710.

 

 

At June 30, 2012, the Company had total current liabilities totaling $1,016,799 consisting of $137,508 in accounts payable, $27,431 due certain shareholders on their interest in the Company’s oil and gas net revenue, $400,674 due to related parties, $431,341 in notes payable, and $19,845 in shareholder loans. Additionally, the Company’s long term debt at June 30, 2012 included $11,725 on the Company’s accrued asset recovery obligations relating to its oil and gas properties. Therefore, at June 30, 2012, the Company had total liabilities of $1,028,524. The Company had no other long term liabilities, commitments or contingencies. Other than anticipated explorations costs associated with the mineral and oil interests that the Company acquired and the anticipated increases in the legal and accounting costs associated with being a public company, Company management is not aware of any other known trends, events or uncertainties which may affect the Company’s future liquidity.

 

 

At June 30, 2012, the Company had a stockholders’ deficit totaling $588,814 compared to $353,958 at the period ending December 31, 2011.

 

 

 

Page - 16

 

 

 

RESULTS OF OPERATIONS

 

 

For the Six Months Ended June 30, 2012 versus June 30, 2011

 

 

The Company’s revenue for the six months ended June 30, 2012 was $210,184 with associated production and royalty costs of $180,564 as compared to June 30, 2011 revenue totaling $308,286 and with production and royalty costs for the year of $268,703. The Company incurred administrative expenses for the six months ended June 30, 2012 totaling $257,532 that included related party consulting fees of $90,000, related party rent of $7,954, professional fees of $150,662, and other general and administrative expenses of $8,916.

 

 

Administrative expense for the six months ended June 30, 2011 totaled $151,787 and included related party consulting fees of $90,000, related party rent of $7,936, professional fees of $25,194, and other general and administrative expenses of $28,657.

 

 

For the three Months Ended June 30, 2012 versus June 30, 2011

 

 

The Company’s revenue for the three months ended June 30, 2012 was $99,537 with associated production and royalty costs of $88,114 as compared to June 30, 2011 revenue totaling $221,426 and with production and royalty costs for the year of $191,165. The Company incurred administrative expenses for the three months ended June 30, 2012 totaling $81,011, that included related party consulting fees of $45,000, related party rent of $3,968, professional fees of $28,059, and other general and administrative expenses of $3,984. Administrative expenses for the three months ended June 30, 2011 totaled $84,805 and included related party consulting fees of $45,000, related party rent of $4,786, professional fees of $11,753, and other general and administrative expenses of $23,266.

 

 

The Company’s Plan of Operation for the Next Twelve Months.

 

 

The Company’s focus is to acquire oil and gas, mineral and resources properties for exploration and development with the intent to bring the projects to feasibility at which time the Company will either contract out the operations or form joint venture with qualified interested parties to complete the projects. The Company intends to continue to raise additional capital for participation in additional oil and gas projects.

 

 

The Company’s forecast for the period for which the Company’s financial resources will be adequate to support operations involves risks and uncertainties and actual results could differ as a result of a number of factors. The Company will need to raise additional capital to expand operations to the point at which the Company is able to operate profitably. Other than anticipated explorations costs associated with the resources and mineral interests that the Company acquires and the anticipated increases in the legal and accounting costs associated with being a public company, the Company is not aware of any other known trends, events or uncertainties, which may affect the Company’s future liquidity.

 

 

In the event that the Company experiences a shortfall in capital, the Company intends to pursue opportunities to raise funds through public or private financing as well as through borrowings and via other resources, such as the Company’s officers, directors and principal shareholders. The Company cannot guaranty that additional funding will be available on favorable terms, if at all. If adequate funds are not available, then the Company’s ability to expand operations may be significantly hindered. If adequate funds are not available, the Company believes that the Company’s officers, directors and principal shareholders will contribute funds to pay for the Company’s expenses to achieve the Company’s objectives over the next twelve months.

 

 

The Company’s belief that the Company’s officers, directors and principal shareholders will pay the Company’s expenses is based on the fact that the Company’s officers, directors and principal shareholders collectively own approximately 43% of the Company’s outstanding common stock and will likely continue to pay the Company’s expenses as long as they maintain their ownership of the Company’s common stock, so long as they do not incur financial hardship.

 

 

The Company is not currently conducting any research and development activities and management does not anticipate conducting such activities in the near future. Management does not anticipate future purchases or sales of any significant equipment. In the event that the Company’s customer base expands, then management may need to hire additional employees or independent contractors as well as purchase or lease additional equipment.

 

 

 

Page - 17

 

 

 

ITEM 3. QUANTITATIVE AND QUALITATATIVE DISCLOSURES ABOUT MARKET RISK

 

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

 

ITEM 4. CONTROLS AND PROCEDURES

 

 

Evaluation of Disclosure Controls and Procedures

 

 

Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by our company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management carried out an evaluation under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 ("Exchange Act").

 

 

Based on this evaluation, our principal executive and principal financial and accounting officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were effective as of June 30, 2012.

 

 

Management’s Report on Internal Control Over Financial Reporting

 

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

 

 

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

 

 

Changes In Internal Control and Financial Reporting

 

 

QUARTERLY EVENTS

 

 

As previously reported in Current Report on Form 8-K as filed with the commission on August 6,2012, Ron Ruskowsky resigned from all positions with the Company, including but not limited to, that of President, Chief Executive Officer, Chief Financial Officer, Treasurer, Secretary and Director on July 31, 2012. The resignation was not the result of any disagreement with the Company on any matter relating to the Company’s operations, policies or practices.

 

 

As of July 31, 2012, Roger Janssen was appointed as the Company’s Chief Executive Officer, Chief Financial Officer and a Chairman of the Board of Directors.

 

 

 

Page - 18

 

 

 

PART II — OTHER INFORMATION

 

 

ITEM 1. LEGAL PROCEEDINGS

 

 

None.

 

 

ITEM 1A. RISK FACTORS

 

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

 

1. Quarterly Issuances:

 

 

During the quarter, we did not issue any unregistered securities other than as previously disclosed.

 

 

2. Subsequent Issuances:

 

 

Subsequent to the quarter, we did not issue any unregistered securities other than as previously disclosed.

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

 

None.

 

 

ITEM 4. MINE SAFETY DISCLOSURES

 

 

Not Applicable

 

 

ITEM 5. OTHER INFORMATION

 

 

None.

 

 

 

Page - 19

 

 

 

Item 6. Exhibits

 

31.01		Certification of Principal Executive Officer Pursuant to Rule 13a-14	Filed herewith.
31.02		Certification of Principal Financial Officer Pursuant to Rule 13a-14	Filed herewith.
32.01		CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act	Filed herewith.
32.02		CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act	Filed herewith.

 

SIGNATURES

 

 

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

Royal Quantum Group, Inc.

 

 

A Nevada corporation

 

August 16, 2012	By:	/S/ Roger Janssen
		Roger Janssen
	Its:	Principal executive officer
		Principal accounting officer
		President, CEO and a director

 

 

 

 

Page - 20