November 30, 2007
United States
Securities and Exchange Commission
Washington, D.C. 20549-7010
DIVISION OF CORPORATION FINANCE
MAIL STOP 7010
Attn: Karl Hiller
Branch Chief
Re: Apollo Drilling, Inc.
Form 10-KSBfor Fiscal Year Ended December 31, 2006
Filed July 11, 2007
File No. 000-50834
Thank you for your letter dated September 18, 2007 regarding the above filing. We appreciate your comments, and want to ensure that we comply with all applicable disclosure requirements and enhancement of overall disclosures wherever possible. We have been as detailed as necessary in providing the information so you may better understand our disclosures. If you have any additional questions, or comments please feel free to call me at 214-389-9800.
Following are our responses and what revisions look like in our amended Form 10-KSBA ending December 31, 2006.
General
1. Please file your Form 10-QSB for the quarters ended March 31, 2007 and June 30, 2007without further delay.
Response: Both the March 31 and the June 30 10-QSB are currently in the final audit review stage. Both will be filed once this process is completed.
Apollo Drilling Inc-File No. 000-50834
Form 10-KSB for the Fiscal Year Ended December 31, 2006 Management's Discussion and Analysis
The final 12/31/06 is currently being reviewed by the auditors and will be restated upon completion.
Sales, page 8
| 2. | We note you disclose that you commenced operations in October 2006, provided |
| drilling services to your parent, Apollo Resources International, and recorded |
| revenue of $1.2 million, which made up 100% of your total revenue for 2006. |
| Please expand your disclosure to discuss your service and pricing arrangement |
| with your parent. In addition, please disclose this related party transaction in your |
| financial statements as required by paragraph 2 of SFAS 57 as well as provide |
| the information outlined in Item 404 of Regulation S-B where you discuss |
| related party transactions on page 17. |
Response: The Company recorded revenue of $1,201,451 for 2006. The Company also provided drilling services totaling $420,508 to the parent,
Apollo Resources International, Inc. These drilling services were provided at standard day rates and are included in total revenues. We have also disclosed this
arrangement with the parent in the related party transaction footnote on page 17.
Other Income and Expenses page 8
3. Please change your wording to refer to the $168,745 charge as fixed asset impairment, instead of fixed -asset valuation reserve, consistent with your wording used on page F-12.
Response: The wording was changed to read as “ impairment”.
Controls and Procedures, page 12
4. Please expand your disclosure to clarify when the material weakness was
identified, by whom it was identified and when the material weakness first began. Additionally, discuss how your disclosure processes for testing GAAP compliance have been improved, and detail any additional enhancements implemented that assisted in the remediation of your material weakness.
Response: Based on managements evaluation, and as determined by the Company, there were control deficiencies that constituted material weaknesses related to internal controls over financial reporting with respect to the preparation, review, presentation and disclosure of the consolidated statements, during the fourth quarter of the year ended December 31, 2006. Our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are not effective.
Subsequently, during the second quarter 2007, management implemented enhancements to Apollo Drilling’s internal controls over financial reporting with respect to the consolidated financial statements. Apollo Drilling has created templates to be used in financial reporting to provide more detailed information. Also, the disclosure processes for testing GAAP compliance have been improved through the utilization of GAAP checklists and implementing a process that ensures the
Apollo Drilling Inc-File No. 000-50834
timely review and approval of complex accounting estimates by qualified accounting personnel. In addition, management hired a new Chief Financial Officer and Controller. Management has assessed the operating effectiveness of these enhanced controls and believes the material weaknesses have been remediated. As a result, management believes there are no material inaccuracies or omissions of material fact and to the best of its knowledge, believes that the consolidated financial statements for the year ended December 31, 2006 fairly present in all material respects the financial condition and results of operations for the Corporation in conformity with accounting principles generally accepted in the United States of America.
Note: The restated10KSB/A for December 31, 2006 is currently being reviewed by the auditors and will be restated upon completion.
Extension of Compliance Date for Management's Report on Internal Control over Financial Reporting, page 13
5. We note you disclose that there were no changes in your internal controls that have materially affected, or are reasonably likely to materially affect, these
controls subsequent to the date of certifying officers' evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Please expand your disclosure to explain your basis for this conclusion, in light of your disclosure on page12 that you implemented enhancements toremediate your material weakness during 2007.
Additionally, please expand your disclosure to conclude on whether you had any change in your internal control over financial reporting that occurred during the
2006 fiscal period covered by your report that has materially affected, or is reasonably likely to materially affect, your internal control over financial reporting, to comply with Item 308(c) of Regulation S-B.
Response: We have expanded our disclosures to include the following: All of the changes described in the remediation of material weaknesses occurred during the second quarter of 2007. Other than as described previously, there have not been any changes in the Company’s internal controls that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.
Note: The restated10KSB/A for December 31, 2006 is currently being reviewed by the auditors and will be restated upon completion.
Financial Statements
Statement of Operations page F-4
6. Please reclassify your depreciation expense amount attributable to cost of sales within your measure of gross profit. Refer to SAB Topic I1:B foradditional guidance. In addition, please reclassify your fixed asset impairment amount within your measure of loss from operations as required by paragraph 45 of SFAS 144.
Apollo Drilling Inc-File No. 000-50834
Response: The Company has reclassified depreciation expense attributable to the cost of sales within the measure of gross profit.
Statement of Stockholders' Equity, page F-5
7. Please revise your statement of stockholders' equity to present the effects of exchanging shares in your reverse merger on a retroactive basis. Share activity of the accounting acquirer in a reverse merger should be recast using the ratio of shares issued by the legal acquirer in the reverse merger over shares of the accounting acquirer that were outstanding immediately prior to the exchange, similar to a stock split.
After recasting, all share activity immediately before the reverse merger transaction should sum to equal the number of shares issued by the accounting target. This should be followed by an entry showing the number of shares of the accounting target that were outstanding immediately before the event, along with the accounting target's net assets or liabilities received by the accounting acquirer. Revise your note disclosure on page F-7 as necessary to conform to the share amounts and net assets acquired represented in your presentation.
You may refer to the guidance in Section 1.F of Division of Corporation Finance: Frequently Requested Accounting and Financial Reporting
Interpretations and Guidance, located on our website at the following address:
http://www.sec.gov/divisions/corpfin/guidance/cfactfaq.htm#P162 22074
Please note the reference on our website to guidance issued by the Emerging Issues Committee of the Canadian Institute of Chartered Accountants, which we believe is compatible with U.S. GAAP in this area, and is available in EIC 10.
Response: The Company has revised the statement of stockholders’ equity to present the effects of exchanging shares in the reverse merger on a retroactive basis and updated the note disclosure on page F-7 as necessary to conform to the share amounts and net assets acquired.
Note: The restated10KSB/A for December 31, 2006 is currently being reviewed by the auditors and will be restated upon completion.
Description of Business History and Summary of Significant Policies I page F-7
Property and Equipment page F-8
8. We note you refer to proved oil and gas properties accounted for under the full cost method of accounting when disclosing your accounting policy for property and equipment. Please clarify whether you have proved oil and gas properties. If
Apollo Drilling Inc-File No. 000-50834
you have such properties add a note discussing the properties and your accounting treatment, and explain why they are not reflected in your financial statements. If you do not have such properties, revise your disclosure under this heading accordingly.
Response: As of December 31, 2006, Apollo Drilling, Inc. had no proven oil and/or gas reserves. The disclosure was corrected under this heading.
Revenue, page F-9
9. Please expand your disclosure to discuss the types of drilling service contracts (e.g, day rate, turnkey, and/or footage that you provide. Further, please describe how the contracts work, and how you recognize revenue for each contract type.
Response: The Company has expanded the disclosure. Apollo Drilling Inc provides day-rate drilling services. Every hour of drilling rig time has, within the contract, a stated rate per hour for the activity occurring at any given time.
Costs of Sales. page F-9
10. Please expand your disclosure to add depreciation expense as a component of your cost of sales-description, if applicable. Additionally, discuss why your cost of sales does not includes any labor costs.
Response: The Company has expanded the disclosure. Cost of sales consists primarily of drilling supplies and parts sold directly to customers and depreciation on drilling equipment, and labor costs to operate the machinery.
Accounting for Share-Based Compensation page F-9
11. We note you refer to Earth in the second paragraph of your disclosure under this heading. Please explain the relevance of Earth or revise your disclosure as appropriate.
Response: This was corrected to read “The Company” under this heading.
Recent Accounting Pronouncements page F-10
12. We note you disclose that you will adopt SFAS 158 prospectively on April 30, 2007, and that you expect the adoption SFAS 158 to reduce your reported stockholders’ equity by approximately $100 million. Please clarify why you believe the adoption of this standard will have any impact on your financial statements since it does not appear that you sponsor a defined benefit pension plan or other postretirement plan.
Apollo Drilling Inc-File No. 000-50834
Response: This paragraph was included in error and has been deleted as the Company has no defined pension plans or other postretirement plans.
Closing Comments
In connection with responding to your comments, we acknowledge that:
the company is responsible for the adequacy and accuracy of the disclosures in the filing;
staff comments or changes to disclosures in response to staff comments do not foreclose the Commission from taking any action with respect to the filing; and
the company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United
States.
We understand the purpose of your review process is to assist us in our compliance with the applicable disclosure requirements and to enhance the overall disclosures in our filing. Please
feel free to contact me or Melanie Farmer, SEC Reporting Manager, at 866-765-4940 EXT 3025 should you have any additional questions or need additional clarification.
Sincerely,
/s/Jeff F. Raley
Jeff F. Raley
Chief Executive Officer
Apollo Drilling, Inc.
(Tel) (214) 389-9800
