10-Q 1 usoilandgas10q093011.htm usoilandgas10q093011.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 


FORM 10-Q
 

 
UNITED STATES OIL AND GAS CORP
(Exact name of registrant as specified in its charter)

Delaware
 
26-0231090
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer
Identification Number)

11782 Jollyville Road, Suite 211B
Austin, Texas 78759
(Address of Principal Executive Offices including Zip Code)
 
Issuer’s telephone number: (512) 464-1225
 
þ
 Quarterly report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2011

OR

¨
 Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _________to_________

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 þ 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 (Section 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 þ No ¨

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 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 þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes ¨ No þ

As of November 11, 2011, there were 2,337,209,521 shares of the issuer’s common stock, $0.000003 par value, outstanding.
 
 
 

 
 
Caution Regarding Forward-Looking Information; Risk Factors
 
This quarterly report on Form 10-Q contains forward-looking statements. From time to time, our public filings, press releases and other communications will contain forward-looking statements. Forward-looking information is often, but not always, identified by the use of words such as “anticipate”, “believe”, “expect”, “plan”, “intend”, “forecast”, “target”, “project”, “may”, “will”, “should”, “could”, “estimate”, “predict” or similar words suggesting future outcomes or language suggesting an outlook. Forward-looking statements in this quarterly report on Form 10-Q include, but are not limited to, statements with respect to expectations of our prospects, future revenues, earnings, activities and technical results.
 
Forward-looking statements and information are based on current beliefs as well as assumptions made by, and information currently available to, us concerning anticipated financial performance, business prospects, strategies and regulatory developments. Although management considers these assumptions to be reasonable based on information currently available to it, they may prove to be incorrect. The forward-looking statements in this quarterly report on Form 10-Q are made as of the date it was issued and we do not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.
 
By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, and risks that outcomes implied by forward-looking statements will not be achieved. We caution readers not to place undue reliance on these statements as a number of important factors could cause the actual results to differ materially from the beliefs, plans, objectives, expectations and anticipations, estimates and intentions expressed in such forward-looking statements. These risks and uncertainties may cause our actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by any forward-looking statements. When relying on our forward-looking statements to make decisions, investors and others should carefully consider the foregoing factors and other uncertainties and potential events.
 
Our public filings are available at www.usaoilandgas.com and on EDGAR at www.sec.gov.
 
Please see Part I, Item 1A—“Risk Factors” of our Annual Report on Form 10-K, as well as Part II, Item IA—“Risk Factors” of this quarterly report on Form 10-Q, for further discussion regarding our exposure to risks. Additionally, new risk factors emerge from time to time and it is not possible for us to predict all such factors nor to assess the impact such factors might have on our business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

 
 

 
 
Item 1. Financial Statements
UNITED STATES OIL AND GAS CORP
CONSOLIDATED BALANCE SHEETS
 (Unaudited)

   
September 30, 2011
   
December 31, 2010
 
ASSETS
           
 CURRENT ASSETS:
           
   Cash and cash equivalents
  $ 10,709     $ 4,007  
   Restricted Cash
    15,792       181,164  
   Accounts receivable – trade, net
    77,898       93,474  
   Inventory
    156,439       153,407  
   Prepaid Expenses
    9,407       1,247  
   Other current assets
    600       -  
Current assets of Discontinued Operations
               
   Cash and cash equivalents
    -       -  
   Restricted Cash
    391,164       105,212  
   Accounts receivable – trade, net
    1,895,031       1,601,118  
   Inventory
    302,858       268,061  
   Prepaid Expenses
    36,803       24,946  
   Other current assets
    1,340       450  
     Total Current Assets
    2,898,041       2,433,086  
                 
   Property and equipment, net
    411,109       494,327  
   Other Assets:
               
     Deposits
    -       600  
     Intangible Assets, net
    646,800       705,600  
     Goodwill
    75,111       75,111  
Assets of Discontinued Operations
               
   Property and equipment, net
    565,061       459,205  
   Other Assets:
               
     Goodwill
    1,760,505       2,681,925  
     Deposits
    -       890  
     Intangible Assets, net
    337       639  
   Total Other Assets
    3,458,923       4,418,297  
     Total Assets
  $ 6,356,964     $ 6,851,383  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
               
  CURRENT LIABILITIES:
               
   Notes Payable – Current
    162,959       47,811  
   Related Party Notes Payable – Current
    519,491       776,300  
   Common Stock Payable – Related Party
    -       150,000  
   Convertible Notes Payable, net of discount
    734,953       809,960  
   Deferred Revenue
    -       34,489  
   Derivative Liability
    660,614       810,539  
   Accounts Payable
    418,634       342,290  
   Accrued Expenses
    85,006       44,452  
   Interest Payable
    139,858       47,210  
Current Liabilities of Discontinued Operations
               
   Accounts Payable
    615,718       421,184  
   Accrued Expenses
    73,751       75,207  
   Lines of Credit
    229,605       160,076  
     Total Current Liabilities
    3,640,589       3,719,518  
   Notes Payable – Long Term
    35,563       39,781  
   Convertible Notes Payable – Long Term, net of discount
    305,972       49,642  
   Related Party Notes Payable – Long Term
    -       4,803  
Liabilities of Discontinued Operations
               
  Related Party Notes Payable – Long Term
    3,450,000       3,750,000  
     Total Liabilities
    7,432,124       7,563,744  
                 
 Stockholders’ Equity (Deficit)
               
   Common Stock, .000003 par value, 5,000,000,000 shares authorized,
   2,337,209,521 and 1,590,690,900 outstanding at September 30, 2011
   and December 31, 2010, respectively
    7,012       4,771  
   Preferred Stock, .001 par value, 10,000,000 shares authorized, 54,163
   and 115,638 issued and outstanding at September 30, 2011 and
   December 31, 2010, respectively pari passu or senior to any new
   preferred shares, convertible to common at 80%  of market price, callable
   by the Company any time at $6 per share, dividends shall not accrue
   unless declared, $5 per share liquidation preference
    54       116  
   Additional Paid In Capital
    5,479,334       3,465,082  
   Retained Deficit
    (6,561,560 )     (4,182,330 )
     Total Stockholders’ Equity (deficit)
    (1,075,160 )     (712,361 )
     Total Liabilities and Stockholders’ Equity (deficit)
  $ 6,356,964     $ 6,851,383  

The accompanying notes are an integral part of these consolidated financial statements.
 
 
1

 
 
United States Oil and Gas Corp
Consolidated Statements of Operations
(Unaudited)

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2011
   
2010
   
2011
   
2010
 
         
Restated, see Note 3
         
Restated, see Note 3
 
SALES, net
  $ 1,665,448     $ 1,653,234     $ 5,108,591     $ 4,929,315  
Cost of Goods Sold
    1,642,221       1,515,300       4,940,247       4,498,455  
Gross Profit
    23,227       137,934       168,344       430,860  
Operating Expenses:
                               
  Salaries and Benefits
    113,261       97,188       404,121       239,207  
  Consultant Fees
    26,000       5,500       63,000       44,089  
  Service and Prospecting Fees
    19,098       21,365       69,531       49,890  
  Travel and Entertainment
    491       2,113       5,776       49,839  
  Professional Fees
    41,362       37,324       118,327       97,731  
  General and Administrative
    67,035       49,628       182,465       167,418  
  Repairs and Maintenance
    2,865       8,623       4,269       26,929  
  Depreciation
    13,155       18,116       38,764       37,406  
  Amortization
    19,600       19,600       58,800       59,576  
  Change in A/R provision
    943       (615 )     1,655       615  
  Other Operating Expense
    -       13,898       1,235       58,762  
    Total Operating Expenses
    303,810       272,740       947,943       831,462  
Income (Loss) from Operations
    (280,583 )     (134,806 )     (779,599 )     (400,602 )
Non-Operating Income (expense):
                               
  Interest Income
    905       -       2,031       20  
  Interest Expense
    (47,440 )     (18,271 )     (137,443 )     (79,525 )
  Accretion Expense on Convertible Notes
    (89,562 )     (14,624 )     (398,479 )     (96,614 )
  Loss on Conversion of Debt
    -       -       (481,082 )     -  
  Gain (loss) on Derivative Liability
    (16,410 )     92,616       (124,719 )     97,163  
  Finance Fee
    -       -       (5,000 )     (250,000 )
  Other Income (loss)
    6,103       387       21,193       (2,590 )
    Total Non-Op. Inc.(expense), net
    (146,404 )     60,108       (1,123,499 )     (331,546 )
Income (Loss) Before Income Taxes
    (426,987 )     (74,698 )     (1,903,098 )     (732,148 )
Income Tax Expense (benefit)
    -       -       4,199       273  
Net Loss from Continuing Operations
    (426,987 )     (74,698 )     (1,907,297 )     (732,421 )
Net Income (Loss) from Discontinued Operations
    (752,048 )     85,199       (471,933 )     120,464  
NET INCOME (LOSS)
  $ (1,179,035 )   $ 10,501     $ (2,379,230 )   $ (611,957 )
                                 
Earnings Per Share:
                               
From Continuing Operations
                               
   Basic
  $ (0.00 )   $ (0.00 )   $ (0.00 )   $ (0.00 )
   Diluted
  $ (0.00 )   $ (0.00 )   $ (0.00 )   $ (0.00 )
From Discontinued Operations
                               
   Basic
  $ 0.00     $ 0.00     $ (0.00 )   $ 0.00  
   Diluted
  $ 0.00     $ 0.00     $ (0.00 )   $ 0.00  
Net
                               
   Basic
  $ (0.00 )   $ 0.00     $ (0.00 )   $ (0.00 )
   Diluted
  $ (0.00 )   $ 0.00     $ (0.00 )   $ (0.00 )
                                 
Wtd. avg. shares outstanding basic
    2,337,209,521       1,279,378,400       2,312,051,026       1,112,711,733  
Wtd. avg. shares outstanding diluted
    2,337,209,521       1, 491,764,813       2,312,051,026       1,112,711,733  

The accompanying notes are an integral part of these consolidated financial statements.
 
 
2

 
 
United States Oil and Gas Corp
Consolidated Statements of Cash Flows
(Unaudited)
 
   
Nine Months Ended September 30,
 
   
2011
   
2010
 
         
Restated, see Note 3
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net Income (loss)
  $ (2,379,230 )   $ (611,957 )
Adjustments to reconcile net loss to net cash (used) provided by operating activities:
               
Loss on conversion of debt
    481,080       -  
Amortization of discount on debt
    398,009       96,614  
Amortization of deferred financing costs
    5,000       -  
Fee to extend note's maturity
    -       250,000  
Shares issued for services
    25,000       -  
Gain/Loss on derivative liabilities
    124,719       (97,163 )
Change in accounts receivable provision
    123,496       169,145  
Depreciation expense
    167,424       169,913  
Impairment of Goodwill
    921,420       -  
Loss on fixed asset disposal
    14,823       -  
Amortization of intangibles
    59,103       59,777  
Gain on preferred stock received
    (62 )     -  
Changes in operating assets and liabilities:
               
Accounts receivable
    (401,832 )     (464,992 )
Inventory
    (37,828 )     (161,197 )
Other current assets
    (140,597 )     31,144  
Accounts payable
    270,936       319,932  
Accrued expenses
    140,760       57,443  
Deferred revenue/tax
    (34,489 )     194,784  
CASH  (USED) PROVIDED BY OPERATING ACTIVITIES
    (262,268 )     13,443  
CASH FLOWS FROM INVESTING ACTIVITIES
               
Cash paid for purchase of fixed assets
    (204,886 )     (83,430 )
CASH USED BY INVESTING ACTIVITIES
    (204,886 )     (83,430 )
CASH FLOWS FROM FINANCING ACTIVITIES
               
Proceeds from sale of stock
    -       125,000  
Borrowings on convertible debt
    410,000       100,000  
Financing costs for debt offering
    (5,000 )     -  
Borrowings on letters of credit, net
    69,529       26,276  
Borrowings on debt
    150,000       -  
Principal payments on debt
    (39,062 )     (63,403 )
Borrowings on related party debt
    89,000       -  
Principal payments on related party debt
    (200,611 )     (20,615 )
CASH PROVIDED BY FINANCING ACTIVITIES
    473,856       167,258  
NET INCREASE (DECREASE) IN CASH
    6,702       97,271  
CASH AT BEGINNING OF YEAR
    4,007       337,350  
CASH AT PERIOD END
  $ 10,709     $ 434,621  
                 
                 
NON-CASH TRANSACTIONS
               
Conversion of related party debt
    583,815       -  
Conversion of convertible debt and accrued interest to common stock
    250,000       267,808  
Derivative liability from issuance of convertible notes payable (recorded as discount on debt)
    251,886       -  
Settlement of portion of derivative liability
    526,530       18,118  
Shares issued for stock payable
    150,000       -  

The accompanying notes are an integral part of these consolidated financial statements.
 
 
3

 
 
 UNITED STATES OIL AND GAS CORP
Notes to Unaudited Consolidated Financial Statements

Note 1.  Organization, Nature of Operations, Concentration of Credit Risk, and Summary of Significant Accounting Policies

United States Oil and Gas Corp (the “Company”), a Delaware corporation, was organized in 1988.  The principal business activity of the Company is the acquisition and subsequent management of domestic oil and gas service companies, with particular focus on those companies that primarily market and distribute refined fuels, distillates (liquid petroleum products that are burned in a furnace or boiler for the generation of heat or used in an engine for the generation of power) and propane to retail and wholesale customers. The Company’s principal executive office is located in Austin, Texas. The Company acquired its first company, Turnbull Oil, Inc. (“Turnbull”), located in Plainville, Kansas, on May 15, 2009. On January 1, 2010, the Company acquired its second wholly owned operating subsidiary, United Oil & Gas, Inc. (“United”), located in Bottineau, North Dakota.

Turnbull is a corporation organized under the laws of Kansas. Its wholly owned subsidiary, Basinger, Inc., is also a corporation organized under the laws of Kansas. The corporations are bulk distributors of petroleum products from Plainville, Palco, Hill City and Utica, Kansas. Their primary customers are businesses in the agricultural and oil related industries in Kansas. The Company sold Turnbull in October 2011. For a description of this transaction please see Note 16 below.

The principal business activities of United are sales, made throughout North Dakota and neighboring states, of oil and gas, and the operation of a convenience store located in Belcourt, North Dakota.

Oil and gas service companies such as Turnbull and United purchase bulk fuel, distillates and propane from regional suppliers, then store, sell, and deliver to, among other customers, local businesses, drillers, farms, wholesalers, and individuals. The margin on sales is adjusted according to purchase price. Therefore, while sales volume can vary greatly from one year to the next (because of large fluctuation in wholesale fuel costs), margins remain fairly consistent.

In addition to its acquisition strategy, the Company intends to acquire and/or develop and deploy proprietary technologies that will explore or extract oil and gas trapped in the earth using the latest technologies that create the smallest ecological footprint as possible. The Company has one patent that supports this ancillary strategy but does not rely on revenue generation from this technology in its financial projections.

Summary of Significant Accounting Policies

Principles of Consolidation.  The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of United States Oil and Gas Corp and its wholly owned subsidiaries Turnbull, Basinger, and United (collectively, the “Company” or “USOG”).  All significant intercompany transactions and balances have been eliminated in the consolidated financial statements.

Revenue Recognition. Revenue is generally recognized when persuasive evidence of an arrangement exists, delivery of the product has occurred, the fee is fixed and determinable, and collectability is probable.
The Company derives revenues from three primary sources—refined fuels sales, parts sales and services.  For refined fuels sales and parts sales, revenue is generally recognized when persuasive evidence of an arrangement exists, delivery has occurred, the contract price is fixed or determinable, title and risk of loss has passed to the customer and collection is reasonably assured.  The Company’s sales are typically not subject to rights of return and, historically, sales returns have not been significant.  System sales that do not involve unique customer acceptance terms or new specifications or technology with customer acceptance provisions and that involve installation services are accounted for as multiple-element arrangements, where the fair value of the installation service is deferred when the product is delivered and recognized when the installation is complete.  In all cases, the fair value of undelivered elements, such as accessories ordered by customers, is deferred until the related items are delivered to the customer.  For certain other system sales that do involve unique customer acceptance terms or new specifications or technology with customer acceptance provisions, all revenue is generally deferred until customer acceptance.  Deferred revenue from such sales is presented as unearned revenues in accrued liabilities in the accompanying consolidated balance sheets.

Taxes collected from customers and remitted to government agencies for specific revenue producing transactions are recorded net with no effect on the income statement.
 
 
4

 

Deferred Revenue. At September 30, 2011, and December 31, 2010, the Company had $0 and $34,489, respectively, of deferred revenue related to payments received in advance from the State of North Dakota through its fuel assistance program. This revenue was realized in the first fiscal quarter of 2011.

Shipping and Handling Costs. Shipping and handling costs are included in products cost of revenues.

Cash and Cash Equivalents. The Company considers all highly liquid cash investment instruments with an original maturity of three months or less to be cash equivalents.  The Company maintains its cash accounts at banks which are guaranteed by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. The Company’s deposits are periodically in excess of federally insured limits on a temporary basis. The Company had at September 30, 2011 and December 31, 2010, $0 and $0, respectively, of cash balances in excess of the FDIC limits. There were no cash equivalents at September 30, 2011 or December 31, 2010.

Cash Restriction. The Company considers $406,956 and $286,376 of cash on hand to be restricted cash at September 30, 2011 and December 31, 2010, respectively. This cash is considered restricted to working capital purposes of the subsidiaries, and the cash is controlled by managers of the subsidiaries as stipulated in the acquisition agreements. Once payment has been made on debt outstanding to subsidiary managers, cash will become unrestricted.

Accounts Receivable. Accounts receivable is recorded net of an allowance for expected losses. The allowance is estimated from historical performance and projections of trends.

Gross accounts receivables of approximately $2.4 million and $2.0 million at September 30, 2011 and December 31, 2010, respectively, consist principally of trade receivables from a large number of customers dispersed across a wide geographic base in Kansas, the Dakotas and parts of Montana and have been reduced by allowances for doubtful accounts of approximately $434,000 and $325,820 at September 30, 2011 and December 31, 2010, respectively.

Inventories. Inventories consist of equipment and various components and are stated at the lower of cost or market. Cost is determined on a standard cost basis, which approximates the first-in first-out (FIFO) basis.  

Property, Plant, and Equipment. Property, plant, and equipment is recorded at cost and depreciated over the estimated useful lives of 3 to 40 years using the straight-line method. Expenditures for renewals and improvements that significantly add to the productive capacity or extend the useful life of an asset are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred.

Cost of Goods Sold. Cost of Goods Sold for the three months ended September 30, 2011 includes the cost of delivery driver’s salaries in the amount of $76,768 and depreciation of assets used for the storage and delivery of product to customer in the amount of $41,480. Cost of Goods Sold for the three months ended September 30, 2010 includes the cost of delivery driver’s salaries in the amount of $33,136 and depreciation of assets used for storage and delivery of product to customers in the amount of $36,018.

Advertising Costs. All advertising costs are expensed as incurred and are included in selling and administrative expenses in the consolidated statements of income.  Advertising expenses for the three months ended September 30, 2011 and September 30, 2010 were approximately $0 and $0, respectively.

Presentation of Sales and Use Tax. Several states impose various sales, use, utility and excise tax on all of the Company's sales to non-exempt customers.  The company collects the various taxes from these non-exempt customers and remits the entire amount to the applicable jurisdiction.  The Company's accounting policy is to exclude the tax collected and remitted to the various taxing jurisdictions from revenue and cost of sales.

Income Taxes. The Company provides for deferred taxes in accordance with ASC Topic 740 Income Taxes, which requires the Company to use the asset and liability approach to account for income taxes.  This approach requires the recognition of deferred income tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities.  The provision for income taxes is based on income before income taxes as reported in the accompanying consolidated statements of income.  The Company recognizes tax benefits for uncertain tax positions when they satisfy a greater than 50% probability threshold and provides for the estimated impact of interest and penalties for the uncertain tax benefits.
 
 
5

 

Deferred tax provisions/benefits are calculated for certain transactions and events because of differing treatments under generally accepted accounting principles and the currently enacted tax laws of the Federal government.  The results of these differences on a cumulative basis, known as temporary differences, result in the recognition and measurement of deferred tax assets and liabilities in the accompanying balance sheets.

Intangible Assets. Intangible assets are carried at the purchased cost less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, which is ten years.

Goodwill. Goodwill represents the excess of the cost for the United and Turnbull acquisitions over the net of the amounts assigned to the assets acquired and liabilities assumed. The Company accounts for its goodwill in accordance with generally accepted accounting standards, which requires the Company to test goodwill for impairment annually or whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable, rather than amortize.

The goodwill balance of $1,835,616 at September 30, 2011, is related to the Company's acquisitions of Turnbull in 2009 for $2,681,925 and United in 2010 for $75,111 and a valuation allowance on the Turnbull goodwill of $(921,420). The acquired subsidiaries have years of historical operations which represent the goodwill associated with these companies.  

Generally accepted accounting standards require that a two-step impairment test be performed annually or whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The first step of the test for impairment compares the book value of the Company to its estimated fair value. The second step of the goodwill impairment test, which is only required when the net book value of the item exceeds the fair value, compares the implied fair value of goodwill to its book value to determine if an impairment is required.

The Company tested for impairment of our goodwill at December 31, 2010 and determined that an impairment was not necessary. The Company sold Turnbull at a loss subsequent to September 30, 2011, which indicated an impairment. As a result, goodwill was impaired for $921,420 to mark the carrying value of Turnbull down to the proceeds received on October 1, 2011.

Impairment of Long Lived Assets. The Company has adopted the FASB standard that requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period.  The Company evaluates the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should an impairment in value be indicated, the carrying value of long-lived assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset. The FASB also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less costs to sell.  

Concentrations of Credit Risk. Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of trade receivables.  All of its customers are located in the U.S. and all sales are denominated in U.S. dollars.  The Company performs ongoing credit evaluations of its customers to minimize credit risk.

Use of Estimates. The preparation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires the use of management’s estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Accounting for Derivative Instruments. The FASB statement on derivative instruments and hedging activities requires all derivatives to be recorded on the balance sheet at fair value. These derivatives, including embedded derivatives in the Company's structured borrowings, are separately valued and accounted for on the Company's balance sheet. Fair values for exchange traded securities and derivatives are based on quoted market prices. Where market prices are not readily available, fair values are determined using market based pricing models incorporating readily observable market data and requiring judgment and estimates.
 
 
6

 

Monte Carlo Valuation Model. The Company valued the conversion features in their convertible notes using a Monte Carlo method, with the assistance of a valuation consultant. The Monte Carlo model for valuing financial derivatives relies on simulating the possible behavior of a stock price many times, with the results of each simulation varying based on a stochastic model. The various results are then combined through averaging or another method to estimate the value of the stock (and, derivatively, the stock option). In general, the more random simulations computed, and the more complex the model will be and subsequently the more accurate the estimate will be.

Stock Based Compensation. Beginning January 1, 2006, the Company adopted the FASB standard related to stock based compensation. The standard requires all share-based payments to employees (which includes non-employee Directors), including employee stock options, warrants and restricted stock, be measured at the fair value of the award and expensed over the requisite service period (generally the vesting period). The fair value of common stock options or warrants granted to employees is estimated at the date of grant using the Black-Scholes option pricing model by using the historical volatility of comparable public companies. The calculation also takes into account the common stock fair market value at the grant date, the exercise price, the expected life of the common stock option or warrant, the dividend yield and the risk-free interest rate.

The Company from time to time may issue stock options, warrants and restricted stock to acquire goods or services from third parties. Restricted stock, options or warrants issued to other than employees or directors are recorded on the basis of their fair value, which is measured as of the date required by the Emerging Issues Task Force guidance related to accounting for equity instruments issued to non-employees. In accordance with this guidance, the options or warrants are valued using the Black-Scholes option pricing model on the basis of the market price of the underlying equity instrument on the “valuation date,” which for options and warrants related to contracts that have substantial disincentives to non-performance, is the date of the contract, and for all other contracts is the vesting date. Expense related to the options and warrants is recognized on a straight-line basis over the shorter of the period over which services are to be received or the vesting period. As of September 30, 2011 and December 31, 2010, no options or warrants related to compensation have been issued, and none are outstanding.

Fair Value of Financial Instruments. The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, other assets, fixed assets, derivative liability, deferred revenue, accounts payable, accrued liabilities and short-term debt.  The estimated fair value of cash, accounts receivable, other assets, accounts payable, deferred revenue and accrued liabilities approximated their carrying amounts due to the short-term nature of these instruments.  The carrying value of short-term debt also approximates fair value since their terms are similar to those in the lending market for comparable loans with comparable risks.  None of these instruments are held for trading purposes.

The Company utilizes various types of financing to fund its business needs, including debt with warrants attached and other instruments indexed to its stock.  The Company reviews its warrants and conversion features of securities issued as to whether they are freestanding or contain an embedded derivative and if so, whether they are classified as a liability at each reporting period until the amount is settled and reclassified into equity with changes in fair value recognized in current earnings.  At September 30, 2011, the Company had convertible notes valued at $1,159,954 that contain an embedded derivative due to their conversion features not being considered fixed or determinable. In addition to these convertible notes all other debt and equity instruments convertible to common stock at the discretion of the holder were considered as a part of the derivative liability due to the tainted equity environment. These instruments consisted of convertible preferred stock valued at fair value and recorded as a part of the derivative liability.

Inputs used in the valuation to derive fair value are classified based on a fair value hierarchy which distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs).  The hierarchy consists of three levels:

·  
Level one – Quoted market prices in active markets for identical assets or liabilities;
·  
Level two – Inputs other than level one inputs that are either directly or indirectly observable; and
·  
Level three – Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.

Determining which category an asset or liability falls within the hierarchy requires significant judgment.  The Company evaluates its hierarchy disclosures each quarter.  The Company’s only asset or liability measured at fair value on a recurring basis is its derivative liability associated with the convertible debt and tainted equity (discussed above).  The Company classifies the fair value of the derivative liability under level three. The fair value of the derivative liability was calculated using the Monte Carlo model. Under the Monte Carlo model using an expected term equal to the contractual terms of the debt, volatility ranging from 98.8% to 109.1% and a risk-free interest rate ranging from 0.45% to 0.81%, the Company determined the fair value of the derivative liability to be $660,614 as of September 30, 2011.
 
 
7

 

The following table summarizes the assets and liabilities measured at fair value on a recurring basis as of December 31, 2010 and September 30, 2011:
 
         
Fair value measurements using
 
   
Carrying Value
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Derivative Liabilities
    810,539       -       -       810,539       810,539  
Total at 12/31/10
    810,539                       810,539       810,539  
                                         
Derivative Liabilities
    660,614       -       -       660,614       660,614  
Total at 9/30/11:
    660,614       -       -       660,614       660,614  

There were no instruments valued at fair value on a non-recurring basis as of December 31, 2010.

The following table summarizes the discontinued assets and liabilities measured at fair value on a non-recurring basis as of September 30, 2011:

         
Fair value measurements using
 
   
Carrying Value
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Total Assets of Discontinued Operations
    4,490,193       4,490,193       -       -       4,490,193  
Total Liabilities of Discontinued Operations
    (2,250,698 )     (2,250,698 )                     (2,250,698 )
                                         
Goodwill at September 30, 2011
    2,681,925       2,681,925                       2,681,925  
Valuation allowance for goodwill
    (921,420 )     (921,420 )                     (921,420 )
Fair Value at time of disposition:
    4,000,000       4,000,000       -       -       4,000,000  

Recently Issued Accounting Standards. In January 2010, the FASB issued FASB ASU No. 2010-06, “Improving Disclosures about Fair Value Measurements,” which is now codified under FASB ASC Topic 820, “Fair Value Measurements and Disclosures.” This ASU will require additional disclosures regarding transfers in and out of Levels 1 and 2 of the fair value hierarchy, as well as a reconciliation of activity in Level 3 on a gross basis (rather than as one net number). The ASU also provides clarification on disclosures about the level of disaggregation for each class of assets and liabilities and on disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. FASB ASU No. 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for the disclosures requiring a reconciliation of activity in Level 3. Those disclosures will be effective for interim and annual periods beginning after December 15, 2010. The adoption of the portion of this ASU effective after December 15, 2009, as well as the portion of the ASU effective after December 15, 2010, did not have an impact on the Company’s consolidated financial position, results of operations or cash flows.

In April 2010, the FASB issued FASB ASU No. 2010-17, “Milestone Method of Revenue Recognition,” which is now codified under FASB ASC Topic 605, “Revenue Recognition.” This ASU provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research and development transactions. Consideration which is contingent upon achievement of a milestone in its entirety can be recognized as revenue in the period in which the milestone is achieved only if the milestone meets all criteria to be considered substantive. A milestone should be considered substantive in its entirety, and an individual milestone may not be bifurcated. An arrangement may include more than one milestone, and each milestone should be evaluated individually to determine if it is substantive. FASB ASU No. 2010-17 was effective on a prospective basis for milestones achieved in fiscal years (and interim periods within those years) beginning on or after June 15, 2010, with early adoption permitted. If an entity elects early adoption, and the period of adoption is not the beginning of its fiscal year, the entity should apply this ASU retrospectively from the beginning of the year of adoption. This ASU did not have any effect on the timing of revenue recognition and the Company’s consolidated results of operations or cash flows.
 
 
8

 

In December 2010, the FASB issued FASB ASU No. 2010-28, “When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts,” which is now codified under FASB ASC Topic 350, “Intangibles — Goodwill and Other.” This ASU provides amendments to Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not a goodwill impairment exists. When determining whether it is more likely than not an impairment exists, an entity should consider whether there are any adverse qualitative factors, such as a significant deterioration in market conditions, indicating an impairment may exist. FASB ASU No. 2010-28 is effective for fiscal years (and interim periods within those years) beginning after December 15, 2010. Early adoption is not permitted. Upon adoption of the amendments, an entity with reporting units having carrying amounts which are zero or negative is required to assess whether is it more likely than not the reporting units’ goodwill is impaired. If the entity determines impairment exists, the entity must perform Step 2 of the goodwill impairment test for that reporting unit or units. Step 2 involves allocating the fair value of the reporting unit to each asset and liability, with the excess being implied goodwill. An impairment loss results if the amount of recorded goodwill exceeds the implied goodwill. Any resulting goodwill impairment should be recorded as a cumulative-effect adjustment to beginning retained earnings in the period of adoption. This guidance will be applied as necessary during the 2011 fiscal year when evaluating goodwill for impairment.

In December 2010, the FASB issued FASB ASU No. 2010-29, “Disclosure of Supplementary Pro Forma Information for Business Combinations,” which is now codified under FASB ASC Topic 805, “Business Combinations.” A public entity is required to disclose pro forma data for business combinations occurring during the current reporting period. This ASU provides amendments to clarify the acquisition date to be used when reporting the pro forma financial information when comparative financial statements are presented and improves the usefulness of the pro forma revenue and earnings disclosures. If a public company presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) which occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The supplemental pro forma disclosures required are also expanded to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. FASB ASU No. 2010-29 is effective on a prospective basis for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010, with early adoption permitted. The adoption of this ASU will not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

Note 2. Going Concern

These financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business. The Company has generated modest revenues since inception and has never paid any dividends and is unlikely to pay dividends. The Company has accumulated losses since inception equal to $6,561,560 as of September 30, 2011. These factors raise substantial doubt regarding the ability of the Company to continue as a going concern. The continuation of the Company as a going concern is dependent upon the continued financial support from its debt holders, the ability of the Company to obtain necessary equity financing to continue operations and pay down debt and to generate enough operating cash flows to sustain operations in the future.

Note 3.  Restatement of Consolidated Financial Statements for Prior Period

The Company has determined that its previously issued consolidated financial statements for the three and nine months ended September 30, 2010 contained errors. As part of the financial statement review, it was determined that certain accounting policies had not been applied properly in the prior periods.

A summary of the changes made is listed below. One source of the restatements was the application of the purchase price for the acquisition of United Oil and Gas. Significant adjustments from this were the $357,809 reclassification of purchase price from fixed assets to goodwill.  The second source of restatement was the reclassification of $99,013 of Additional Paid In Capital primarily to Preferred Convertible Shares. Finally, there was a significant restatement of expense due to the improper GAAP accounting for several Derivative Instruments the Company has on its balance sheet. These are Convertible Notes Payable that have a variable conversion feature that is dependent on the price of the stock at the time of conversion. This primarily resulted in a derivative liability of $711,340, a gain on the valuation of the derivative at period end of $97,163, discounts to notes payable of $232,801, and amortization expense of $67,366. All of these adjustments were made to the financial statements for the three months ended March 31, 2010 and were presented in the Form 10-Q for the period ended March 31, 2011. However, there are some additional adjustments related to the derivative liability for the three and nine months ended September 30, 2010 that are presented below (see Note 15 for more detail). Adjustments also include reclassifications for discontinued operations. The discontinued operations adjustments were a part of the adjustments since the Company is required to retroactively adjust the presentation of prior period financial statements for discontinued operations.
 
 
9

 

Consolidated Balance Sheet at September 30, 2010

   
Prior
   
Adjustment
   
Restated
 
Cash and Cash Equivalents
  $ 434,621     $ (336,743 )   $ 97,878  
Accounts Receivable - net
    1,824,690       (1,755,200 )     69,490  
Inventory
    355,290       (199,891 )     155,399  
Prepaid Expenses
    41,595       (36,460 )     5,135  
Other Current Assets
    770       (450 )     320  
Total Current Assets
    2,656,966       (2,328,744 )     328,222  
Current Assets of discontinued operations
    -       2,328,744       2,328,744  
Property and equipment, net
    1,460,439       (950,465 )     509,974  
Property and equipment, net of discontinued operations
    -       455,685       455,685  
Goodwill
    3,396,127       (3,321,016 )     75,111  
Intangible Assets
    6,050       777,950       784,000  
Accumulated Amortization
    (5,311 )     (53,492 )     (58,803 )
Other Long Term Assets
    1,490       (890 )     600  
Other Long Term Assets of discontinued operations
    -       2,683,554       2,683,554  
Total Other Assets
    3,398,356       (2,597,448 )     800,908  
Total Other Assets of discontinued operations
    -       2,683,554       2,683,554  
Total Assets:
  $ 7,515,761     $ (5,876,657 )   $ 1,639,104  
Total Assets of discontinued operations
    -       5,467,983       5,467,983  
Notes Payable – current
    3,768,133       (136,187 )     3,631,946  
Derivative Liability
    -       711,340       711,340  
Accounts Payable
    919,423       (534,835 )     384,588  
Accrued Expenses
    103,517       (69,096 )     34,421  
Accrued Taxes Payable
    411,538       (411,538 )     -  
Total Current Liabilities
    6,601,952       (440,316 )     6,161,636  
Total Current Liabilities of discontinued operations
    -       1,015,469       1,015,469  
Deferred Tax Liability
    50,700       (50,700 )     -  
Total Liabilities
    7,226,764       (491,016 )     6,735,748  
Total Liabilities of discontinued operations
    -       1,066,169       1,066,169  
Retained Earnings, including current year loss
    (2,481,986 )     (1,039,507 )     (3,521,493 )
Additional Paid in Capital
    2,766,275       55,679       2,821,954  
Total Stockholders’ Equity (Deficit)
    288,998       (983,828 )     (694,830 )
Total Liabilities and Stockholders’ Equity (Deficit)
  $ 7,515,761     $ (408,674 )     7,107,087  
 
 
10

 
 
Consolidated Statement of Operations for the three months ended September 30, 2010

   
Prior
   
Adjustment
   
Restated
 
SALES, net
  $ 6,363,658     $ (4,710,424 )   $ 1,653,234  
Cost of Goods Sold
    6,363,658       (4,848,358 )     1,515,300  
Gross Profit
    561,129       (423,195 )     137,934  
Operating Expenses:
                       
Salaries and Benefits
    242,920       (145,732 )     97,188  
Travel and Entertainment
    3,666       (1,553 )     2,113  
Professional Fees
    39,820       (2,496 )     37,324  
General and Administrative
    88,950       (39,322 )     49,628  
Repairs and Maintenance
    47,503       (38,880 )     8,623  
Depreciation
    65,283       (47,167 )     18,116  
Amortization
    102       19,498       19,600  
Bad Debt Expense
    4,526       (5,141 )     (615 )
Total Operating Expense
    533,533       (260,793 )     272,740  
Income (loss) from Operations
    27,596       (162,402 )     (134,806 )
Interest Income
    30,266       (30,266 )     -  
Accretion Expense - Convertible Notes
    -       (14,624 )     (14,624 )
Gain (Loss) on derivative liability
    -       92,616       92,616  
Bad debt recovery (expense)
    1,300       (1,300 )     -  
Total Non-operating income, net
    13,682       46,426       60,108  
Income (loss) before income taxes
    41,278       (115,976 )     (74,698 )
Income Tax Expense (benefit)
    91,815       (91,815 )     -  
Net Loss from Continuing Operations
    -       (74,698 )     (74,698 )
Net Income from Discontinued Operations
    -       85,199       85,199  
Net Income (loss)
  $ (50,537 )   $ 61,038     $ 10,501  
 
 
11

 

Consolidated Statement of Operations for the nine months ended September 30, 2010

   
Prior
   
Adjustment
   
Restated
 
SALES, net
  $ 17,729,277     $ (12,799,962 )   $ 4,929,315  
Cost of Goods Sold
    16,114,269       (11,615,814 )     4,498,455  
Gross Profit
    1,615,008       (1,184,148 )     430,860  
Operating Expenses:
                       
Salaries and Benefits
    679,783       (440,576 )     239,207  
Servicing and Prospecting Fees
    86,699       (36,809 )     49,890  
Travel and Entertainment
    9,409       40,430       49,839  
Professional Fees
    156,530       (58,799 )     97,731  
General and Administrative
    222,063       (54,645 )     167,418  
Repairs and Maintenance
    120,975       (94,046 )     26,929  
Depreciation
    178,525       (141,119 )     37,406  
Amortization
    303       59,273       59,576  
Bad Debt Expense
    6,601       (5,986 )     615  
Other Operating Expenses
    52,580       6,182       58,762  
Total Operating Expense
    1,536,003       (704,541 )     831,462  
Income (loss) from Operations
    79,005       (479,607 )     (400,602 )
Interest Income
    83,194       (83,174 )     20  
Interest Expense
    (79,772 )     247       (79,525 )
Accretion Expense - Convertible Notes
    -       (96,614 )     (96,614 )
Gain (Loss) on derivative liability
    -       97,163       97,163  
Bad debt recovery (expense)
    4,870       (4,870 )     -  
Other Income (loss)
    (4,205 )     1,615       (2,590 )
Total Non-operating income, net
    (245,913 )     (85,633 )     (331,546 )
Income (loss) before income taxes
    (166,908 )     (565,240 )     (732,148 )
Income Tax Expense (benefit)
    224,729       (224,456 )     273  
Net Loss from Continuing Operations
    -       (723,421 )     (723,421 )
Net Income from Discontinued Operations
    -       120,464       120,464  
Net Income (loss)
  $ (391,637 )   $ (220,320 )   $ (611,957 )
 
 
12

 

Consolidated Statement of Cash Flows for the nine months ended September 30, 2010

   
Prior
   
Adjustment
   
Restated
 
Net  Income
  $ (391,637 )   $ (220,320 )   $ (611,957 )
Amortization expense on debt discount
    -       (96,614 )     (96,614 )
Gain on derivative liabilities
    -       (97,163 )     (97,163 )
Depreciation expense
    178,525       (8,612 )     169,913  
Amortization of intangibles
    303       59,474       59,777  
Change in accounts receivable provision
    -       169,145       169,145  
Other current assets
    340       30,804       31,144  
Accrued expenses
    39,171       18,272       57,443  
Deferred revenue/tax
    224,729       (29,945 )     194,784  
Cash  (Used) Provided by Operating Activities
    (4,826 )     18,269       13,443  
Cash paid for purchase of fixed assets
    (128,513 )     45,083       (83,430 )
Assumed subsidiary receivables/acquisitions’ payables
    55,083       (55,083 )     -  
Cash Used by Investing Activities
    (73,430 )     (10,000 )     (83,430 )
Borrowings on convertible debt
    90,000       10,000       100,000  
Imputed interest paid on convertible notes
    18,269       (18,269 )     -  
Cash Provided by Financing Activities
    175,527       (8,269 )     167,258  

Note 4. Accounts Receivable

Accounts receivable consisted of the following:

   
September 30, 2011
   
December 31, 2010
 
Continuing Operations:
           
  Accounts receivable
  $ 77,898     $ 93,474  
  Allowance for uncollectible accounts
    -       -  
Discontinued Operations:
               
  Accounts receivable
    2,329,757       1,926,938  
  Allowance for uncollectible accounts
    (434,726 )     (325,820 )
    $ 1,972,929     $ 1,694,592  
 
 
13

 

Note 5.  Property, Plant and Equipment

Property, plant and equipment at cost consisted of the following:

   
September 30, 2011
   
December 31, 2010
 
Continuing Operations:
           
  Buildings
  $ 144,153     $ 145,101  
  Equipment
    297,045       301,181  
  Land
    5,000       5,000  
  Vehicles
    143,803       219,162  
  Accumulated depreciation
    (178,892 )     (176,117 )
Discontinued Operations:
               
  Buildings
    143,822       143,822  
  Equipment
    69,779       75,836  
  Land
    10,273       10,273  
  Vehicles
    897,506       701,968  
  Accumulated depreciation
    (556,319 )     (472,694 )
Net Property, Plant, and Equipment
  $ 976,170     $ 953,532  

Depreciation expense for the nine months ended September 30, 2011 and September 30, 2010 totaled $167,424 and $169,913, respectively. Depreciation expense for the three months ended September 30, 2011 and September 30, 2010, totaled $58,516 and $62,637, respectively.

Note 6. Intangible Assets 

Intangible assets consisted of the following:

   
September 30, 2011
   
December 31, 2010
 
Continuing Operations:
           
  Trade Name – United
  $ 128,000     $ 128,000  
  Customer List
    656,000       656,000  
  Accumulated amortization
    (137,200 )     (78,400 )
Discontinued Operations:
               
  Trade Name – Basinger
    6,050       6,050  
  Accumulated amortization
    (5,713 )     (5,411 )
Net Intangible Assets
  $ 647,137     $ 706,239  

Amortization expense for the nine months ended September 30, 2011 and September 30, 2010 totaled $59,103 and $59,777, respectively. Amortization expense for the three months ended September 30, 2011 and September 30, 2010, totaled $19,700 and $19,702, respectively. Intangible assets are amortized straight line over an estimated useful life of 10 years.
 
 
14

 

Note 7.  Accrued Liabilities

Accrued liabilities consisted of the following:

   
September 30, 2011
   
December 31, 2010
 
Continuing Operations:
           
  Accrued salaries
  $ 68,883     $ 20,000  
  Accrued state fuel tax
    14,675       16,312  
  Miscellaneous accruals
    1,448       8,140  
Discontinued Operations:
               
  Accrued salaries
    23,872       10,537  
  Accrued state fuel tax
    45,956       60,931  
  Miscellaneous accruals
    3,923       3,739  
    $ 158,757     $ 119,659  

Note 8. Lines of Credit

The Company has a $750,000 line of credit at Sunflower Bank, maturing December 31, 2011, with an interest rate of 1.3% plus the Wall Street Journal prime rate (3.25% as of September 30, 2011). The line of credit is secured by all accounts receivable, inventory and equipment. As of September 30, 2011 and December 31, 2010, the balance outstanding was $229,605 and $140,000, respectively. The Company also has a $50,000 open line of credit with the State Bank of Bottineau with an interest rate of 6.95%. As of September 30, 2011 and December 31, 2010, the balance outstanding was $0 and $20,076, respectively. The debt is due on demand.

Note 9. Debt

Debt consisted of the following:
 
   
September 30, 2011
   
December 31, 2010
 
Short term:
           
Unsecured convertible notes payable with annual interest rate of 5%1
  $ -     $ 259,800  
Unsecured convertible notes payable with annual interest rate of 10%2
    64,954       64,954  
Unsecured convertible notes payable with annual interest rate of 8%3
    125,000       50,000  
Convertible note payable with interest payable quarterly4
    650,000       750,000  
Long-term:
               
Unsecured convertible notes payable  - annual interest of 10%2
    320,000       -  
Discount on convertible notes from derivative valuation
    (119,029 )     (265,152 )
     Total convertible notes
    1,040,925       859,602  
Unsecured related party notes payable5
    519,491       631,103  
Common Stock payable6
    -       150,000  
Notes payable on capital equipment7
    48,522       87,592  
Unsecured note payable8
    150,000       -  
Discontinued long term unsecured related party note payable with 5% annual interest9
    3,450,000       3,750,000  
     Total Debt
  $ 5,208,938     $ 5,478,297  
 
 
15

 

 
1 Notes bear 5% interest and become due in 2011. No interest payments are required and the note can be converted to common stock by the note holder or the company. The note holder can convert the note into common stock at 50% of the average closing bid price of the Common Stock for the ten days prior to the date of conversion. All notes have been converted to stock as of April 13, 2011. There was no accrued interest expense payable at September 30, 2011.
 
2 Convertible notes bear 10% interest, payable in stock upon conversion. The note includes a conversion feature whereby the holder can convert the note at any time into common stock at 80% of the average price per share over the last fiscal quarter. There is $17,003 in accrued interest payable at September 30, 2011. Notes are due on demand.
 
3 Convertible notes bear 8% interest, payable in stock upon conversion. The note holder can convert the note after six months into common stock at 45% of the average price per share over the last fiscal quarter. Notes are due from September 30, 2011 to January 25, 2012, and there was $6,963 in accrued interest payable at September 30, 2011.
 
4 The note bears 8% annual interest that is payable quarterly. The note originally came due on April 9, 2011 but was extended to December 31, 2011. Note may be converted to common stock by note holder. The note holder can convert the note into common stock at 80% of most recent public trading value anytime before note becomes due. There was $23,475 of accrued interest at September 30, 2011.
 
5 Balance primarily consists of note for $500,000 to Debbie Werner of which $335,000 remains due at September 30, 2011. The note is due December 31, 2011 and bears 5% interest. There was $38,905 of accrued interest at September 30, 2011. Remaining balance of $184,491 consists of related party debt bearing no interest. The amount of imputed interest was immaterial to the financial statements.
 
6 Balance consists $150,000 of common stock due to Debbie Werner. The payable was part of the acquisition agreement dated January 1, 2010. Stock was paid in February 2011.
 
7 Balance consists of four notes payable on capital equipment. The average interest rate is 9%. $12,959 is current and due in 2011. $35,563 is long term and due beyond 2011. There was no accrued interest at September 30, 2011.
 
8 The note bears annual interest rate of 7% and is due on January 15, 2012. Note was signed on August 22, 2011. Accrued interest at September 30, 2011 was $1,093.
 
9 Balance primarily consists of note to Jeff Turnbull. This note was extended from April 9, 2010 to December 31, 2010 in exchange for increasing balance of the note from $3,750,000 to $4,000,000. The $250,000 increase was booked as finance fee expense in the first quarter of 2010. During the quarter ended September 30, 2010, Jeff Turnbull converted $250,000 of note payable into 500 million shares of common stock. The balance was reduced to $3,750,000 in July, 2010 when Mr. Turnbull converted $250,000 of the debt into 500 million shares of USOG common stock. In the first nine months of 2011, Mr. Turnbull sold an additional $300,000 of the debt to third parties who converted the debt into 233 million shares of common stock. In December, 2010, the note term was extended to December 31, 2012. The note earns 2% interest in 2011 and 10% interest in 2012. Note balance at September 30, 2011 was $3,450,000. There was $51,809 of accrued interest at September 30, 2011.

Minimum principal payments of debt in subsequent years:

2011
  $ 1,472,404  
2012
    3,450,000  
2013
    23,434  
2014
    11,929  
2015
    95,209  

Interest expense on the notes payable totaled $137,443 for the nine months ended September 30, 2011 and $79,772 for the nine months ended September 30, 2010. Interest expense on the notes payable totaled $50,569 for the three months ended September 30, 2011, and $18,271 for the three months ended September 30, 2010. Accretion expense for the nine months ended September 30, 2011 and the nine months ended September 30, 2010 was $398,479 and $96,614, respectively. Accretion expense for the three months ended September 30, 2011, and the three months ended September 30, 2010, was $89,562 and $14,624, respectively.

Note 10. Concentrations

The Company had concentrations with certain customers (receivables in excess of 10% of total) as follows:

   
September 30, 2011
   
December 31, 2010
 
   
Amount
   
%
   
Amount
   
%
 
Customer A
  $ 315,137       13     $ 260,121       15  
Customer B
  $ -       -     $ 242,779       14  
 
 
16

 

The Company had concentrations in volume of business with certain vendors (purchases in excess of 10% of total) as follows:

   
September 30, 2011
   
December 31, 2010
 
   
Amount
   
%
   
Amount
   
%
 
Vendor A
  $ -       -     $ 3,988,823       18  
 
The Company had no sales concentrations over 10% during the twelve months ended December 31, 2010 or nine months ended September 30, 2011.

Note 11.  Stockholders’ Deficit

The Company’s Certificate of Incorporation authorizes the issuance of up to 10,000,000 shares of preferred stock at a par value of $0.001. The voting rights, dividend rate, redemption price, rights of conversion, rights upon liquidation and other preferences are subject to determination by the Board of Directors. At September 30, 2011, 54,163 shares were issued and outstanding.

The Company’s Certificate of Incorporation authorizes the issuance of up to 5,000,000,000 shares of common stock at a par value of $0.000003.  At September 30, 2011, 2,337,209,521 shares were issued and outstanding.

Earnings Per Share (EPS) was calculated by dividing net loss for the three months ended September 30, 2011 of $(1,179,035) by the weighted average number of common shares outstanding in the quarter which was 2,337,209,521. The result was $(0.00).

On a fully diluted basis, the calculation was the same as all potential stock issuances from convertible notes and preferred shares would have an anti-dilutive effect on earnings per share.

During the three months ended March 31, 2011, the Company issued 60,000,000 shares of common stock to Debbie Werner to pay $150,000 liability from acquisition of United. The Company relieved the stock payable of $150,000 with the issuance and recognized no gain or loss as the value of the shares was equal to $150,000 on the date of grant.

The Company issued 10 million shares of restricted common stock to an employee for services during the three months ended March 31, 2011. These shares were valued and expensed for $25,000 based on the closing price of the shares on the date of grant.

During the six months ended June 30, 2011, convertible debt holders converted $56,027 of convertible notes and accrued interest into 46,677,083 shares of common stock. These notes converted were converted at the holder’s option. No gain or loss was recorded on these conversions as the conversions were within the original contract terms.

During the six months ended June 30, 2011, related party debt holders sold a total of $450,000 of debt to third parties. The third parties then exchanged the debt into convertible notes that were converted to common stock. A total of 373,139,008 common shares were issued upon conversion of these modified notes. The loss on these conversions was $224,000 and is included within the loss of $324,000 for modification and conversion of notes described below.

During the six months ended June 30, 2011, a third party convertible debt holder sold a total of $100,000 of convertible debt to another third party. The recipient of the convertible note then converted the note into common stock. A total of 100,000,000 common shares were issued upon conversion. The convertible note was a part of the derivative liability prior to conversion. The embedded derivative was marked to market upon the settlement date and re-classed to additional paid in capital upon settlement. No gain or loss was recorded on the conversion.

Loss on conversions The Company booked a loss on conversion of $324,000 for the modification and conversion of $550,000 of debt into common stock. The loss was the difference between the reduction of debt and the stock value of the shares issued on the date of conversion for all notes convertible at the Company’s option. All convertible notes convertible at the holder’s option were valued as a part of the derivative liability with an offsetting discount of $113,794 and loss at the modification date. The discount was fully amortized upon conversion of the debt.
 
 
17

 

The Company also recognized a loss of $157,148 on the conversion of convertible debt of $219,800 and accrued interest of $7,991. These convertible notes were convertible at the Company’s option and therefore not considered to have substantive conversion features. As a result a loss was recorded on the conversion dates based on the difference between the fair value of the shares issued and the value of the liability converted.

Note 12. Related Party Transactions and Commitments

The Company has entered into various agreements with certain shareholders and related parties. Such commitments are expected to be satisfied through cash payments. Cash payments under these agreements for the nine months ended September 30, 2011 and September 30, 2010 totaled $90,000 and $191,031, respectively.  These related party payments included:

           
September 30,
 
Contract
 
Related Party
 
Monthly Amount
 
2011
   
2010
 
The Company entered into a contractual agreement for the procurement of human resources. The contract was terminated at September 30, 2010
 
HR Management Systems is a related party of the Company with Alex Tawse, President and Shareholder of both entities
 
No current commitment
  $ -     $ 62,750  
The Company has entered into a contract with its President for services
 
Alex Tawse, President and Shareholder
 
Currently $12,000 per month
    90,000       90,000  
The Company has paid Jeff Turnbull for prepaid interest on Note Payable
 
Jeff Turnbull is an officer of Turnbull Oil but is not an affiliate of the Company
        -       38,281  
            $ 90,000     $ 191,031  

Note 13.  Employee Benefit Plans

The Company sponsors a defined contribution retirement plan for its employees, which allows participants to make contributions by salary reduction pursuant to Section 401(k) of the Internal Revenue Code. Employees of the Company are eligible to participate in the plan. The Company matches the employees’ contribution with an employer contribution up to 3% of gross salary. The Company made contributions for the three months ended September 30, 2011 and September 30, 2010 of $3,737 and $4,473, respectively.

Note 14.  United Business Combination

On January 1, 2010, the Company entered into an agreement to purchase a 100% of the issued and outstanding capital stock of United (the "Purchase Agreement") in exchange for forgiveness of debt in the amount of $520,000, $150,000 in stock and a promissory note in the aggregate principal amount of $500,000 payable to Debbie and Mike Werner, bearing interest at 5.0% per annum and maturing on December 31, 2011. The promissory note contains a provision that allows for the profits from the operations of United to be used towards payment of the note.  Payments on the note from profits from the operations are evaluated on a quarterly basis and as of April 13, 2011 no payments have been made.  The stock was issued on February 11, 2011 in the amount of 60 million shares.

Until such time as the promissory notes issued in these transactions are repaid in full, all cash generated from the operation of United will be managed and controlled by the managers of United. The Company is not entitled to utilize the cash proceeds from United for any purpose other than to provide working capital for United without the consent of United’s manager.
 
 
18

 

The following table summarizes the final allocation of the purchase price:

Consideration Provided by USOG
     
Forgiveness of Receivable
  $ 170,000  
Forgiveness of Note Receivable
    350,000  
Note payable issued to Deb and Mike Werner
    500,000  
Stock Payable
    150,000  
Total Consideration Provided:
    1,170,000  
Net Liabilities Assumed
       
Current assets assumed
    179,920  
Current liabilities assumed
    (342,431 )
Long term liabilities assumed
    (101,959 )
Consideration paid in excess of working capital and long-term liabilities assumed:
    1,434,470  
Fixed assets
    575,359  
Customer relationships
    656,000  
Trade name
    128,000  
Residual goodwill
    75,111  
Total Allocation:
  $ 1,434,470  

Impairment of goodwill is evaluated annually. There was no impairment for the twelve months ended December 31, 2010. The Company noted no impairment indicators during the three and nine months ended September 30, 2011. The intangible assets included the fair value of trade name, customer relationships, residual goodwill, and non-compete. The useful lives of the acquired intangibles are as follows:

   
Useful Lives (Years)
 
Trade name
    10  
Customer relationships
    10  
Residual goodwill
   
Indefinite
 

The financial results of the acquired business are included in the Company's consolidated financial statements from date of acquisition.

The purchase transaction was negotiated at arm's length and was accounted for as a purchase transaction. As required by the applicable guidance in effect at the time of the acquisition, the Company valued all assets and liabilities acquired at their fair values on the date of acquisition. An independent valuation expert was hired to assist the Company in determining these fair values. Accordingly, the assets and liabilities of the acquired entity were recorded at their estimated fair values at the date of the acquisition.

In addition, the Company entered into an employment agreement effective January 1, 2010 with Mike Werner to serve as President of United for three years ended January 1, 2013. His base salary is $36,000 on an annualized basis.

The Company entered into an employment agreement effective January 1, 2010 with Deb Werner to serve as Vice President of United for three years ended January 1, 2013. Her base salary is $18,000 on an annualized basis.
 
 
19

 

Note 15. Derivative Liability

At September 30, 2011, the Company had convertible notes with a face value of $1,159,954 that contain an embedded derivative due to their conversion features not being considered fixed or determinable. In addition to these convertible notes all other debt and equity instruments convertible to common stock at the discretion of the holder were considered as a part of the derivative liability due to the tainted equity environment. These instruments consisted of convertible preferred stock valued at fair value and recorded as a part of the derivative liability.

The following shows the changes in the derivative liability measured on a recurring basis for the nine months ended September 30, 2011:

Derivative liability at December 31, 2010
  $ 810,539  
Derivative liability from convertible notes payable issuance (recorded as discount on debt)
    251,886  
Derivative liability from convertible notes payable issuance (recorded as loss)
    44,940  
Gain on derivative liability
    79,779  
Settlement of portion of derivative liability
    (526,530 )
Derivative liability at September 30, 2011
  $ 660,614  

The following tabular presentation reflects the components of derivative financial instruments on the Company’s balance sheet at September 30, 2011 and December 31, 2010:

Derivative Liabilities
 
September 30, 2011
   
December 31, 2010
 
Embedded conversion feature
  $ 399,573     $ 256,749  
Other derivative instruments
    261,041       553,790  
  Totals
  $ 660,614     $ 810,539  

The fair values of certain other derivative financial instruments (tainted equity) that existed at the time of the initial Debenture Financing were re-classed from stockholders’ equity to liabilities when, in connection with the Debenture Financing, the Company no longer controlled its ability to share-settle these instruments.

Note 16. Discontinued Operations

On October 1, 2011, the Company and Jeff Turnbull entered into a Stock Purchase and Termination Agreement pursuant to which the Company sold all of the issued and outstanding shares (the “Turnbull Shares”) of capital stock of Turnbull Oil, Inc. owned by the Company to Mr. Turnbull for consideration of cash and receivables in the amount of $545,000 and the cancellation of approximately $3.46 million of indebtedness, consisting of all principal and interest owed by the Company to Mr. Turnbull in connection with the Purchase. Revenue for discontinued operating unit for the nine months ended September 30, 1011 and September 30, 2010 was $16,066,072 and $12,799,962, respectively. The carrying value of Turnbull at the time of sale was $4,000,000 including goodwill of $1,760,505. The carrying value of goodwill for Turnbull prior to the sale was $2,681,925. The sale resulted in a $921,420 write-down of goodwill, which is reflected in the net loss from discontinued operations for the three and nine months ended September 30, 2011. This impairment was necessary to write down the carry value of Turnbull to the consideration received in the sale subsequent to period end.

Note 17. Subsequent Events

Other than the sale of Turnbull described in Note 16, there were no material subsequent events.
 
 
20

 

Item 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion should be read in conjunction with the unaudited consolidated financial statements and the notes thereto. In addition, reference should be made to our audited consolidated financial statements and notes thereto and related “Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K.  This discussion also contains forward-looking statements.  Please see the “Caution Regarding Forward-Looking Information; Risk Factors” above.

Executive Summary

United States Oil and Gas Corp, referred to as “USOG,” “we,” “our” or “us”, was founded in 1988. Headquartered in Austin, Texas, we identify and attempt to acquire domestic oil and gas service companies that market and distribute refined fuels, distillates (which are liquid petroleum products that are burned in a furnace or boiler for the generation of heat or used in an engine for the generation of power) and propane to retail and wholesale customers and oversee the operations of the businesses we acquire. Our acquisition targets are small to mid-sized family-run companies with historically profitable results, strong balance sheets, high profit margins, and solid management teams in place. Oil and gas service companies typically purchase bulk fuel and propane from regional suppliers, then store, sell, and deliver the fuel and propane to local businesses, drillers, farms, wholesalers, and individuals.

We deploy a prospecting system to identify potential acquisition targets that fit our strategy. The system incorporates successful small to mid-size Midwest companies that are not readily targeted by larger competitors. Our management then intends to use its operational expertise to increase the profitability of the acquired businesses through the implementation of streamlined processes and the synergies between the companies that are purchased.

We acquired Turnbull Oil, Inc., located in Plainville, Kansas, and its subsidiary, Basinger propane, located in Utica, Kansas, on May 15, 2009. We made our second acquisition, United Oil & Gas, Inc., located in Bottineau, North Dakota, effective January 1, 2010. The operations of Turnbull (including Basinger) and United were our sole source of revenue from sales in the quarter. We purchase fuel from local suppliers and then sell and deliver it to a broad range of regional customers. This diversification of our customer base mitigates our dependence on any one segment and allowed us to remain operationally profitable and increase revenue even during the recession in 2009-2010. Customers are primarily wholesale businesses, farmers, drillers, private individuals and construction businesses. While fuel sales remained fairly constant throughout the year, propane sales are significantly higher in the winter months when heating fuel is in high demand.

On October 1, 2011, the Company and Jeff Turnbull entered into a Stock Purchase and Termination Agreement pursuant to which the Company sold all of the issued and outstanding shares (the “Turnbull Shares”) of capital stock of Turnbull Oil, Inc. owned by the Company to Mr. Turnbull for consideration of cash and the cancellation of approximately $3.46 million of indebtedness, consisting of all principal and interest owed by us to Mr. Turnbull in connection with the original purchase of Turnbull in 2009. The financial report reflects the impact of this sale by separating Turnbull results in “discontinued operations”.

We sold Turnbull because the debt burden associated with finalizing the acquisition was becoming prohibitive and was preventing us from investing in the growth opportunities available at United subsidiary in North Dakota. The sale also provided much needed cash. However, the sale increases business risk as Turnbull Oil was a significant source of revenue and profit. Based on the sale of Turnbull, we anticipate a significant reduction in revenue and expense in future quarters due to the discontinuation of the Turnbull Operations. Our sole source of revenue now comes from United Oil.

Going forward, our primary emphasis will be growth within United subsidiary in North Dakota and continuing to reduce debt. We also plan to continue to opportunistically pursue strategic acquisitions. We have a medium to long-term focus of acquiring additional oil and gas service companies and expanding within the oil and gas service sector. Since Turnbull subsidiary was sold and is considered to be discontinued operations, the analysis below includes financial results for the corporate entity and United subsidiary only. It does not include discontinued operations from Turnbull.
 
 
21

 

Results of Operations
 
   
Three Months Ended September 30,
       
Sales by Subsidiary ($000’s)
 
2011
   
2010
   
Change
 
    $     %     $     %     $     %  
   United
    1,665       100       1,653       100       12       1  
Total
    1,665       100       1,653       100       12       1  

Net Sales. For the quarter ended September 30, 2011, total net sales were $1.7 million which is within 1% of sales for the quarter ended September 30, 2010. Compared to the three months ended September 30, 2010, prices were higher and volume was down during the quarter ended September 30, 2011. This is primarily due to heavy rain and flooding in North Dakota that caused a significant drop in fuel sales to farmers.

   
Nine Months Ended September 30,
       
Sales by Subsidiary ($000’s)
 
2011
   
2010
   
Change
 
    $     %     $     %     $     %  
   United
    5,109       100       4,929       100       180       4  
Total
    5,109       100       4,929       100       180       4  

Net Sales. For the nine months ended September 30, 2011, total net sales were $5.1 million compared to $4.9 million for the same period in 2010. United subsidiary provided 100% of sales revenue. Compared to the nine months ended September 30, 2010, prices were higher but volume was down for the nine months ended September 30, 2011 primarily due to heavy rain and flooding in North Dakota that caused a significant drop in fuel sales to farmers.

Since Turnbull was sold on October 1, 2011, the focus is on improving United sales in future periods. The overall economy appears to be improving at a very slow rate, however economic activity in North Dakota is booming and we are taking steps to capitalize on the growth. We expect improved sales volume from United in the fourth quarter and into 2012.

   
Three Months Ended September 30,
       
Operating Expenses by Division: ($000’s)
 
2011
   
2010
   
Change
 
    $     %     $     %     $     %  
   Corporate
    131       43       105       38       26       25  
   United
    173       57       168       62       5       3  
Total
    304       100       273       100       31       11  

Operating expenses. Operating expenses increased by $31,000, or 11%, for the quarter ended September 30, 2011 compared to the same period in 2010. Corporate overhead costs increased by 25% primarily due to the cost of issuing proxy materials related to the annual meeting. Operating costs at United increased by 3% due to repair and maintenance expenses related to heavy rains and flooding.
 
 
22

 

   
Nine Months Ended September 30,
       
Operating Expenses by Division: ($000’s)
 
2011
   
2010
   
Change
 
    $     %     $     %     $     %  
   Corporate
    485       51       420       51       65       15  
   United
    463       49       411       49       52       13  
Total
    948       100       831       100       117       14  

Operating expenses. Operating expenses increased by $117,000 or 14%, for the nine months ended September 30, 2011 compared to the same period in 2010. Corporate overhead costs increased by $65,000 (15%) for the nine months ended September 30, 2011 compared to the same period in 2010. This is primarily the result of increased legal and audit fees (professional fees) that were incurred in connection with becoming a reporting company under the Securities Exchange Act of 1934 in July 2010 and the cost of mailing out proxy materials for the 2011 annual meeting. United operating expenses increased by $52,000 (13%). The increase is primarily due to repair and maintenance costs related to dyke improvements necessary because of heavy rains and flooding in North Dakota.

We anticipate consistent operating expenses for the fourth quarter of 2011 at the Corporate level. At United, we anticipate additional costs from planned opening of a second retail convenience store and gas at the end of 2011 or beginning of 2012.
 
    Three Months Ended September 30,          
Operating Income(Loss) by Division: ($000’s)
 
2011
    2010     Change
    $     %     $     %     $     %  
   Corporate
    (131 )     47       (105 )     78       (26 )     25  
   United
    (150 )     53       (30 )     22       (120 )     400  
Total
    (281 )     100       (135 )     100       (146 )     108  
 
Operating Income/(Loss). For the three months ended September 30, 2011, operating loss was $281,000, compared to a loss of $135,000 for the same period in 2010. This is due in part to the increase in corporate operating costs, as described above. However, the lower sales volume at United is also a significant factor. For the three months ended September 30, 2011, United sustained an operating loss of $150,000 compared to operating loss of $30,000 for the same period in 2010. The difference is primarily attributable to the decrease in fuel sales volume due to heavy rains and flooding in North Dakota as well as additional maintenance costs due to heavy rains and flooding.
 
   
Nine Months Ended September 30,
         
Operating Income(Loss) by Division: ($000’s)
 
2011
   
2010
    Change
    $     %     $     %     $     %  
   Corporate
    (484 )     62       (421 )     105       (63 )     15  
   United
    (296 )     38       20       (5 )     (316 )     (1,580 )
Total
    (780 )     100       (401 )     100       (214 )     95  
 
Operating Income/(Loss). For the nine months ended September 30, 2011, operating loss was $780,000 compared to a loss of $401,000 for the same period in 2010. Corporate operating costs increased by $63,000 (15%) due to the increase in legal and audit fees and proxy costs described above. For the nine months ended September 30, 2011, United sustained an operating loss of $296,000 compared to operating profit of $20,000 for the same period in 2010. This is due to lower gross margins due to increased competition in the local market created by the increase in fuel prices during the first calendar quarter of 2011 and the drop in sales during the second fiscal quarter of 2011 due to heavy rain and flooding. In addition, due to the economic boom in the area, the supply of fuel has been short at times, requiring deliveries from suppliers further away and pushing up freight costs. This had an additional negative impact on gross margin.
 
 
23

 
 
   
Three Months Ended September 30,
       
Net Income(Loss) by Division: ($000’s)
 
2011
   
2010
   
Change
 
    $     %           %     $     %  
   Corporate
    (281 )     66       (43 )     57       (238 )     553  
   United
    (146 )     34       (32 )     43       (114 )     356  
Total
    (427 )     100       (75 )     100       (352 )     469  
 
Net Income/(Loss). For the three months ended September 30, 2011, Net Loss was $427,000, compared to a loss of $75,000 for the same period in 2010. The difference of $352,000 is directly attributable to the reduction in operating income discussed above in addition to a gain on derivative liability of 97,000 incurred in 2010. This is a non-cash gain.
 
   
Nine Months Ended September 30,
       
Net Income(Loss) by Division: ($000’s)
 
2011
   
2010
   
Change
 
    $     %     $     %     $     %  
   Corporate
    (1,628 )     85       (745 )     102       (883 )     119  
   United
    (279 )     15       13       (2 )     (292 )     (2,246 )
Total
    (1,907 )     100       (732 )     100       (1,175 )     161  
 
Net Income/(Loss). For the nine months ended September 30, 2011, Net Loss was $1,907,000, compared to a loss of $732,000 over the same period in 2010. In addition to the factors discussed above, the difference is attributable to accretion expense from derivative instruments of $398,000 for the nine months ended September 30, 2011 compared to $97,000 for the same period in 2010 and a net loss from conversion of debt of $481,000 for the nine months ended September 30, 2011 compared to $0 for the same period in 2010. Both of these items are non-cash expense items. Additional items are discussed below.
 
Interest Income/Expense and Other Income/(Loss).  We incurred interest expense of $47,000 for the three months ended September 30, 2011 compared to expense of $18,000 for the same period in 2010. Most of the increase is attributable to interest accruing on our outstanding promissory notes, especially the $3.5 million note to Jeff Turnbull, which did not have interest payable for the three months ended September 30, 2010. Interest expense for the nine months ended September 30, 2011 was $137,000 compared to $80,000 for same period in 2010.

Liquidity and Capital Resources
 
Our cash balance at September 30, 2011 was $11,000 compared to $4,000 at December 31, 2010. An additional $16,000 is held as restricted cash at quarter ended September 30, 2011 because cash balances at subsidiary is restricted to working capital purposes until the promissory note issued in connection with the acquisition is paid in full. During the nine months ended September 30, 2011, operating activities used $262,000 ($2,379,000 from net loss). Included as a non-cash expense was $226,000 of depreciation and amortization expense and $481,000 expense from the loss on conversion of debt. Other adjustments related primarily to changes in accounts receivable, inventory, and accounts payable. Investing activities utilized $205,000. This balance is for the purchase of equipment at discontinued Turnbull subsidiary. Financing activities provided $474,000. Financing activities for the nine months ended September 30, 2011 included the reduction of existing debt by $239,000 and the sale of convertible notes in the amount of $410,000.
 
On a consolidated basis, current assets on the balance sheet as of September 30, 2011 were $271,000 against current liabilities of $2,707,000 . A large component of the current liabilities is a $661,000 liability for derivatives. This is a non-cash liability based on the expected loss on conversion of convertible debt into stock. Long-term debt primarily consists of $320,000 in convertible notes payable. The $3.5 million note payable to Jeff Turnbull was dissolved as part of the sale of Turnbull Oil on October 1, 2011.
 
 
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Accounts receivable at September 30, 2011 were $78,000 compared to $98,000 at December 31, 2010. These balances are shown net of allowance for doubtful accounts in the amount of $0 and $0, respectively. Accounts receivable are from customers of United. Goodwill of $75,111 is the result of the United acquisition The value of the goodwill is evaluated on an annual basis for impairment and adjusted down if necessary.  Because we sold Turnbull at a loss subsequent to September 30, 2011, which indicated an impairment, goodwill was impaired for $921,420 to mark the carrying value of Turnbull down to the proceeds received on October 1, 2011. This impairment is included within disclosure of discontinued operations.
 
We consider a number of liquidity and working capital performance ratios in evaluating our financial condition.  The following table includes certain ratios, working capital information, and summarized cash flows for use in understanding our current liquidity and recent trends in this area:
 
Liquidity and Non-GAAP Working Capital Performance Measures            
   
September 30, 2011
   
December 31, 2010
 
Ratio of current assets to current liabilities – continuing operations
    0.10       0.14  
Ratio of total assets to total liabilities – continuing operations
    0.46       0.54  
Working capital (current assets minus current liabilities) – continuing operations
  $ (2,451,000 )   $ (2,630,000 )
                 
Net cash provided by (used in) the nine months ended:
 
September 30, 2011
   
September 30, 2010
 
Operating activities
  $ (262,000 )   $ 13,000