10-Q 1 s111610010q.htm FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010 s111610010q.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, 2010

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 ¨ 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 September 30, 2010, there were 1,529,378,400 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 Registration Statement on Form 10, 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.

 
i

 
 
Item 1. Financial Statements
UNITED STATES OIL AND GAS CORP
CONSOLIDATED BALANCE SHEETS
 
AS OF SEPTEMBER 30, 2010 AND DECEMBER 31, 2009
   
September
30, 2010
   
December
31, 2009
 
ASSETS
           
 CURRENT ASSETS:
           
   Cash and cash equivalents
  $ 434,621     $ 337,350  
   Accounts receivable – trade, net
    1,824,690       1,359,698  
   Note receivable
    -       350,000  
   Inventory
    355,290       194,093  
   Prepaid Expenses
    41,595       38,281  
   Deferred tax asset
    -       102,000  
   Other current assets
    770          
     Total Current Assets
    2,656,966       2,381,422  
 PROPERTY AND EQUIPMENT, net
    1,460,439       94,561  
   Other Assets:
               
     Deposits
    1,490       171,490  
     Intangible Assets
    6,050       6,050  
     Accumulated Amortization
    (5,311 )     (5,004 )
     Goodwill
    3,396,127       3,039,734  
   Total Other Assets
    3,398,356       3,212,279  
     Total Assets
  $ 7,515,761     $ 5,688,253  
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
  CURRENT LIABILITIES:
               
   Notes Payable – Current
    3,768,133       3,750,000  
   Related Party Notes Payable – Current
    286,606       -  
   Convertible Notes Payable
    1,042,800       420,400  
   Accounts Payable
    919,423       599,491  
   Accrued Expenses
    103,517       65,395  
   Lines of Credit
    26,000       -  
   Interest Payable
    43,935       38,126  
   Taxes Payable
    411,538       194,509  
     Total Current Liabilities
    6,601,952       5,067,921  
   Deferred Tax Liability
    50,700       -  
   Notes Payable – Long Term
    62,895       750,000  
   Related Party Notes Payable – Long Term
    511,217       -  
     Total Liabilities
    7,226,764       5,817,921  
 STOCKHOLDERS’ EQUITY
               
   Common Stock, .000003 par value, 5,000,000,000 shares authorized,
               
   1,529,378,400 issued and outstanding at September 30, 2010
    4,587       2,996  
   Preferred Stock, .001 par value, 10,000,000 shares authorized, 121,888 issued
               
   and outstanding pari passu or senior to any new preferred shares, convertible
               
   to common stock at 80% of market price, callable any time at $6 per share,
               
   dividends shall not accrue unless declared, $5 per share liquidation preference
    122       126  
   Additional Paid In Capital
    2,766,275       2,145,361  
   Retained Earnings (Deficit)
    (2,090,349 )     (2,278,151 )
   Net Income (loss)
    (391,637 )        
     Total Stockholders’ Equity
    288,998       (129,668 )
     Total Liabilities and Stockholders’ Equity
  $ 7,515,761     $ 5,688,253  
See Notes to Financial Statements.
 
 
1

 
 
UNITED STATES OIL AND GAS CORP
CONSOLIDATED STATEMENTS OF INCOME
 
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

   
Three Months Ended
September 30,
   
Nine Months Ended 
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
SALES, net
  $ 6,363,658     $ 3,710,571     $ 17,729,277     $ 5,274,365  
Cost of Goods Sold
    5,802,529       2,979,260       16,114,269       4,435,199  
  Gross Profit
    561,129       731,311       1,615,008       839,166  
Operating Expenses:
                               
  Salaries and Benefits
    242,920       119,628       679,783       164,989  
  Consultant Fees
    5,500       7,731       22,535       355,468  
  Service and Prospecting Fees
    21,365       111,327       86,699       314,920  
  Travel and Entertainment
    3,666       889       9,409       7,073  
  Professional Fees
    39,820       20,328       156,530       123,914  
  General and Administrative
    88,950       28,078       222,063       57,088  
  Repairs and Maintenance
    47,503       23,829       120,975       54,558  
  Depreciation
    65,283       42,999       178,525       42,999  
  Amortization
    102       -       303       -  
  Bad Debt Expense
    4,526       (3,663 )     6,601       (3,663 )
  Other Operating Expense
    13,898       (20,467 )     52,580       (20,467 )
    Total Operating Expenses
    533,533       330,678       1,536,003       1,096,878  
Income (loss) from Operations
    27,596       400,633       79,005       (257,712 )
Non-Operating Income (expense):
                               
  Interest Income
    30,266       12,282       83,194       12,568  
  Interest Expense
    (18,271 )     (27,500 )     (79,772 )     (27,500 )
  Finance Fee
    -               (250,000 )     -  
  Other Income (loss)
    387       1,677       (4,205 )     1,677  
  Recovery of bad debt
    1,300       -       4,870       -  
    Total Non-Operating Income, net
    13,682       (13,541 )     (245,913 )     (13,255 )
Income (loss) Before Income Taxes
    41,278       387,092       (166,908 )     (270,967 )
Income Tax Expense
    91,815       6,954       224,729       6,954  
NET INCOME (LOSS)
  $ (50,537 )   $ 380,138     $ (391,637 )   $ (277,921 )
                                 
Earnings Per Share:
                               
   Basic
    0.00               0.00          
   Diluted
    0.00               0.00          
 
See Notes to Financial Statements
 
 
2

 
 
UNITED STATES OIL AND GAS CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

   
Three Months Ended 
September 30,
   
Nine Months Ended 
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
CASH FLOWS FROM OPERATING ACTIVITIES
                       
  Net Income (loss)
  $ (50,537 )   $ 380,138     $ (391,637 )   $ (277,921 )
  Adjustments to reconcile net income (loss) to net cash
                               
    Depreciation and amortization
    65,385       42,999       178,828       42,999  
    Changes in operating assets and liabilities:
                               
      Accounts Receivable
    (210,473 )     (339,906 )     (464,992 )     (339,906 )
      Inventories
    (119,112 )     (38,769 )     (161,197 )     (38,769 )
      Prepaids
    (33,480 )             (3,634 )        
      Net increase in taxes payable
    91,814               224,729          
      Accounts payable
    244,433       160,110       319,932       202,280  
      Accrued expenses
    (1,220 )             39,171          
      Interest payable
            12,522       (25,273 )     12,522  
      Finance fee utilized through increase in note payable
                    250,000          
      Other current assets
                    (450 )        
      Other non-cash reconciling items
                    29,697       (3,680 )
   Net cash provided by (used in) operating activities
    (13,190 )     217,094       (4,826 )     (402,475 )
CASH FLOWS FROM INVESTING ACTIVITIES
                               
    Purchases of property and equipment
    (69,313 )             (128,513 )        
    Assumed subsidiary receivables/acquisitions’ payables
                    55,083          
    Deposit on acquisition
            (7,290 )             (177,890 )
    Investment in subsidiaries
                            (504,850 )
   Net cash provided by (used in) investing activities
    (69,313 )     (7,290 )     (73,430 )     (682,740 )
CASH FLOWS FROM FINANCING ACTIVITIES
                               
    Additional Paid in Capital
            88,690               90,530  
    Proceeds from line of credit
    26,276               26,276          
    Proceeds from issuance of preferred stock
                            97,565  
    Payments towards notes payable – Current
    (36,159 )             701,589          
    Proceeds from sale of convertible notes
    65,000               90,000       1,080,600  
    Payment on long-term notes payable
                    (785,607 )        
    Imputed interest paid on convertible notes
                    18,269          
    Issuance of common stock
                    125,000       185,690  
   Net cash provided by (used in) financing activities
    55,117       88,690       175,527       1,454,385  
NET CHANGE IN CASH AND CASH EQUIVALENTS
    (27,386 )     298,494       97,271       369,170  
CASH, BEGINNING OF PERIOD
    462,007       395,510       337,350       324,834  
CASH, END OF PERIOD
  $ 434,621     $ 694,004     $ 434,621     $ 694,004  
SUPPLEMENTAL DISCLOSURES
                               
    Cash paid during the period for:
                               
      Interest
    18,271               102,711          
      Taxes
                               
    Non-Cash Investing and Financing Activities:
                               
      Capital assets acquired in purchase of subsidiary
                               
      (includes increase in fair market value of $820,000)
                    1,078,077          
      Issuance of debt for purchase
                    (650,000 )        
      Assumption of debt for purchase
                    (319,553 )        
      Prior year payment on purchase
                    (170,000 )        
      Goodwill acquired in purchase of subsidiary
                    356,393          
      Debt converted to equity
    250,000               247,500          
 
See Notes to Financial Statements

 
3

 
 
UNITED STATES OIL AND GAS CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

The consolidated financial statements included in this report have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission for interim reporting and include all normal and recurring adjustments which are, in the opinion of management, necessary for a fair presentation. These financial statements have not been audited by an independent accountant. The consolidated financial statements include the accounts of the Company and its subsidiaries.  All inter-company transactions and balances have been eliminated in the financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations for interim reporting.

The Company believes that the disclosures are adequate to prevent the information from being misleading. However, these financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Registration Statement on Form 10.  The financial data for the interim periods presented may not necessarily reflect the results to be anticipated for the complete year.

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations and Concentration of Credit Risk

The principal business activities of United States Oil and Gas Corp, (the Company) is the acquisition of domestic oil and gas service companies, those that primarily 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 overseeing the operations of acquired businesses. 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. It is the parent of its wholly owned subsidiary Basinger, Inc., also a corporation organized under the laws of Kansas. The corporations are bulk distributors of petroleum products form Plainville, Palco, Hill City and Utica, Kansas. Their primary customers are businesses in the agricultural and oil related industries in Kansas.

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.

Principles of Consolidation
 
The consolidated financial statements include the accounts of Turnbull, Basinger, and United. Intercompany balances and transactions are eliminated in consolidation.
 
 
4

 
 
Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

The Company maintains its cash accounts at banks which are guaranteed by the Federal Deposit Insurance Corporation up to $250,000. The Company’s deposits are periodically in excess of federally insured limits on a temporary basis.

Accounts Receivable

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

Net accounts receivables of approximately $1.8 million and $1.4 million at September 30, 2010 and December 31, 2009, 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 $190,000 and $248,000 at September 30, 2010 and December 31, 2009, respectively.

Inventory

Inventories are valued at the lower of cost, using the first-in, first-out (FIFO) method, or market.

Property and Equipment

Property and equipment are stated at cost. 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 currently. Depreciation is provided over the estimated useful lives of the individual assets using the accelerated and straight-line depreciation methods and range from five to 39 years.

Income Taxes

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.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make 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 amounts could differ from those estimates.

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.

Advertising

All advertising costs are expensed as incurred. Advertising expenses were approximately $0 and $0 during the nine months ended September 30, 2010 and the nine months ended September 30, 2009, respectively.
 
 
5

 
 
NOTE 2 – ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following:
   
Sep. 30,
2010
   
Dec. 31,
2009
 
Accounts receivable
  $ 2,014,690     $ 1,607,698  
Allowance for uncollectible accounts
    (190,000 )     (248,000 )
    $ 1,824,690     $ 1,359,698  

NOTE 3 – PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:
   
Sep. 30,
2010
   
Dec. 31,
2009
 
Buildings
  $ 603,382     $ 73,075  
Equipment
    675,393       12,457  
Land
    71,825       3,198  
Vehicles
    1,505,578       86,089  
Intangible Assets
    6,050       6,050  
Accumulated depreciation and amortization
    (1,401,050 )     (80,258 )
    $ 1,461,178     $ 94,561  

Depreciation and amortization expense for the nine months ended September 30, 2010 and the year ended December 31, 2009 totaled $178,525 and $75,488, respectively.

NOTE 4 - LINES OF CREDIT

The Company has a $750,000 line of credit at Sunflower Bank, maturing December 31, 2010, with an interest rate of 1.3% plus the Wall Street Journal prime rate (3.25% as of September 30, 2010). The line of credit is secured by all accounts receivable, inventory and equipment. As of September 30, 2010 and December 31, 2009, the balance outstanding was zero. The Company also has a $50,000 line of credit with the State Bank of Bottineau with an interest rate of 6.95%. As of September 30, 2010 and December 31, 2010, the balance outstanding was $26,000 and zero respectively.

NOTE 5 – DEBT

Debt consisted of the following:
   
 
Sep. 30,
2010
   
 
Dec. 31,
2009
 
Short term:
           
Unsecured convertible notes payable with annual interest rate of 5%1
  $ 219,700     $ 99,800  
Unsecured convertible notes payable with annual interest rate of 10%2
    73,100       320,600  
Note payable with annual interest payable quarterly maturing Apr. 9, 20113
    750,000       750,000  
Total convertible notes   
    1,042,800       1,170,400  
Unsecured note payable with 3.5% annual interest maturing Dec. 31, 20104
    3,731,065       3,750,000  
Current portion of long term notes payable on capital equipment
    37,068          
Non-related party notes payable - current   
    3,768,133       3,750,000  
Lines of Credit with 6.95% interest and no term
    26,000          
Related party notes payable and $150,000 debt payable in stock
    286,606          
Long term unsecured notes payable with annual interest of 5%, maturing Dec. 31, 2011
    511,217          
Long term portion of notes payable on capital equipment with average 9% annual interest rate
    62,895          
Total Debt   
  $ 5,697,651     $ 4,920,400  
 
 
6

 
 
 
1 Notes bear 5% interest and become due on December 31, 2010. No interest payments are required and the note can be converted to common stock by the note holder or the company. The notes include a beneficial conversion feature whereby the 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.
 
2 Convertible notes bear 10% interest, payable in stock upon conversion. The note includes a beneficial 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.
 
3 The note bears 8% annual interest that is payable quarterly and the note comes due on April 9, 2011 unless converted to common stock by note holder. The note includes a beneficial conversion whereby the holder can convert the note into common stock at 80% of most recent public trading value anytime before note becomes due.
 
4 Note to Jeff Turnbull (“Note Payable”) 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.

Minimum principal payments of debt in subsequent years:
2011
  $ 5,634,756  
2012
    15,097  
2013
    18,866  
2014
    28,932  

Interest expense on the notes payable totaled $79,772 for the nine months ended September 30, 2010 and $154,208 for the year ended December 31, 2009.

NOTE 6 – ACCRUED LIABILITIES

Accrued liabilities consisted of the following:
   
Sep. 30,
2010
   
Dec. 31,
2009
 
Accrued salaries
  $ 24,541     $ 12,807  
Accrued property tax
    4,234       4,234  
Accrued state fuel tax
    72,281       44,093  
Miscellaneous accruals
    2,460       4,261  
    $ 103,517     $ 65,395  

NOTE 7 – CONCENTRATIONS

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

   
Sep. 30, 2010
   
Dec. 31, 2009
 
   
Amount
   
%
   
Amount
   
%
 
Customer A        
  $ 210,522     12     $ 203,955     15  
Customer B        
                  163,164     12  
Total        
  $ 210,522     12     $ 367,118     27  

NOTE 8 – TAXES

The provision for income taxes consisted of the following:
   
Sep. 30,
2010
   
Dec. 31,
2009
 
Currently payable at statutory rates
  $ 217,028     $ 340,735  
Change in deferred taxes
    7,700       (53,700 )
 
  $ 224,728     $ 287,035  

Because the Company and its Turnbull subsidiary have different tax year ends, separate tax returns are filed. The amounts currently payable relate to the tax returns filed by Turnbull and its subsidiary.
 
 
7

 
 
Deferred tax assets and liabilities result from temporary differences consisting of the following:
   
Sep. 30,
2010
   
Dec. 31,
2009
 
Deferred tax assets
           
Allowance for doubtful accounts
  $ 101,680     $    
Net Operating Loss carry-forward
    480,000          
Less Valuation Allowance – Net Operating Loss
    (480,000 )        
       Total Deferred tax asset, all long term
    101,680          
Deferred tax liability
               
           Fixed asset depreciation
    152,380          
       Net Deferred Tax Liability
  $ 50,700     $    

The effective income tax rate for income from continuing operations for the years ended 2010 and 2009 varies from the statutory income tax rates as follows:
   
Sep. 30, 
2010
 
Dec. 31,
2009
Statutory combined rate
    41 %     41 %
Permanent and other differences
    1 %     -2 %
 
    42 %     39 %

Accounting for uncertain tax positions

On January 1, 2009 the Company adopted a standard under which tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in our tax returns that do not meet these recognition and measurement standards.

Upon the adoption of the standard the Company had no liabilities for unrecognized tax benefits and, as such, the adoption had no impact on the Company financial statements and the Company has recorded no additional interest or penalties. The adoption of the standard did not impact the Company's effective tax rates.

The Company's policy is to recognize potential interest and penalties accrued related to unrecognized tax benefits within income tax expense. For the nine months ended September 30, 2010, the Company did not recognize any interest or penalties in the Company's statement of operations, nor did the Company have any interest or penalties accrued in its balance sheet at September 30, 2010 relating to unrecognized benefits. With few exceptions, the Company is no longer subject to U.S., federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2006.

Net Operating Loss Carry Forward

The Company has a net operating loss carry forward in the amount of $1,488,547 that would normally generate a deferred tax asset in the amount of $480,000. It is management’s opinion that it is unlikely to utilize the net operating loss, therefore valuation allowance of $480,000 has been established for a result in a net zero deferred tax asset.

NOTE 9 – EMPLOYEE BENEFIT PLAN

The Company sponsors a Sec. 401(k) defined contribution retirement plan. 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. Contributions for the nine months ended September 30, 2010 and September 30, 2009 totaled $10,305 and $8,319, respectively.

 
8

 
 
NOTE 10 – COMMON STOCK

Common stock consists of 5,000,000,000 authorized shares of $0.000003 par value common stock.  At September 30, 2010, 1,529,378,400 shares were issued and outstanding.

Earnings Per Share (EPS) was calculated by dividing net income as of September 30, 2010 ($50,537) by the number of common shares as of September 30, 2010 (1,529,378,400). The result was ($0.00003).

On a fully diluted basis, there would have been 2,102,428,400 shares as of September 30, 2010, creating earnings per share of ($0.00002). Calculation of fully diluted shares is as follows if preferred shareholders with 121,888 of preferred shares outstanding and convertible note-holders with $292,800 of convertible notes converted their preferred shares and notes to common shares per the applicable conversion rate at 9/30/10: The $5 per share preferred shares are convertible at 80% of the average stock price for the last three days of the quarter ($0.002) and would have created 380,900,000 additional common shares (121,888 times 5 divided by $0.002 divided by 80%). The $292,800 of convertible notes was convertible at the same 80% rate. With the interest built in this would have created an additional 192,150,000 shares (292,800 plus interest divided by $0.002 divided by 80%).

NOTE 11 – PREFERRED STOCK

Preferred stock consists of 10,000,000 authorized shares of $0.001 par value. At September 30, 2010, 121,888 shares were issued and outstanding.

NOTE 12 – RELATED PARTY TRANSACTIONS AND COMMITMENTS

The Company has entered into various agreements with certain shareholders and affiliates. Such commitments are expected to be satisfied through cash payments. Cash payments under these agreements for the nine months ended September 30, 2010 and the twelve months ended December 31, 2009 totaled $191,031 and $990,881, respectively.  These related party payments included:
Contract
 
Affiliate
 
Monthly
Amount
 
Sep. 30,
2010
   
Dec. 31,
2009
 
The Company entered into a contractual agreement for the procurement of human resources. Monthly service costs were $5,000 for Q3, 2010. Contract was terminated at September 30, 2010
 
HR Management Systems is an affiliated company with Alex Tawse, President and Shareholder
 
No current commitment
  $ 62,750     $ 216,000  
The Company has ended a financial consulting agreement with Kaleidoscope Real Estate, Inc. as of June 30, 2009.
 
Kaleidoscope is no longer an affiliated company or shareholder
 
No current commitment
    0       120,000  
The Company has entered into a contract with its President for services.
 
Alex Tawse, President and Shareholder
 
Currently $10,000 per month
    90,000       96,000  
The Company has paid Jeff Turnbull for prepaid interest on Note Payable.
 
Jeff Turnbull is an Officer in Turnbull
        38,281       38,281  
The Company has paid United for acquisition made on January 1, 2010.
 
United is an affiliated company
 
No current commitment
            350,000  
The Company has paid United as deposit on acquisition made on January 1, 2010.
 
United is an affiliated company
 
No current commitment
            170,600  
            $ 191,031     $ 990,881  

NOTE 13 – PRIOR PERIOD ADJUSTMENT

The financial statements reflect a prior period adjustment increasing retained earnings by $187,802. The adjustment is due to a correction of depreciation expense for Turnbull Oil and Gas. During 2007, 2008 and 2009 Turnbull Oil and Gas used a method of depreciation that expensed the cost of equipment in the year purchased rather than depreciating the equipment over the life of the assets. The impact is income from the year ended December 31, 2009 was under stated by $187,802, fixed assets net of accumulated depreciation and total assets as of December 31, 2009 was understated by $187,802 and retained earnings as of December 31, 2009 was understated by $187,802.
 
 
9

 
 
NOTE 14 – SUBSEQUENT EVENTS

On October 15, 2010, five note holders converted $73,100 of convertible notes into 45,687,500 shares of common stock.

The Company has evaluated subsequent events through November 15, 2010, the date of this review report.

NOTE 15 – CASH FLOW

The Company has incurred substantial losses and debt in the acquisition of its subsidiaries. As of September 30, 2010, the Company’s current liabilities exceed its current assets by approximately $3,944,986. These factors along with the uncertain economy create an uncertainty as to the Company’s ability to continue as a going concern. The Company is developing a plan to reduce its liabilities and improve its cash flows by issuing additional stock and notes payable along with improving operations. The financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.
 

 
 
 
 
 
10

 

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 Registration Statement on Form 10.  This discussion also contains forward-looking statements.  Please see the “Caution Regarding Forward-Looking Information; Risk Factors” above.

Company Overview

United States Oil and Gas Corp, referred to as “the Company,” “USOG,” “we,” “our” or “us”, was founded in April 2007. 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 intend to improve operational efficiencies through the application of executive level expertise and hope to gain additional advantages by realizing synergies among the acquired companies.

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, located in Plainville, Kansas, and its subsidiary, Basinger propane, located in Utica, Kansas, on May 15, 2009. We made our second acquisition, United, 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 2010. We intend to continue to integrate these acquisitions with a short-term focus on acquiring additional oil and gas service companies and expanding within the oil and gas service sector. 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. 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.

Results of Operations

REVENUES
 
Three months ended Sep. 30
Nine months ended Sep. 30
(dollars in 000’s)
2010
2009
2010
2009
 
$
%
$
%
$
%
$
%
Sales by Subsidiary:
               
   Turnbull
4,710
74
3,711
100
12,800
72
5,274
100
   United
1,653
26
-
-
4,929
28
-
-
TOTAL
6,363
100%
3,711
100%
17,729
100%
5,274
100%

For the quarter ended September 30, 2010, sales were $6.36 million. Turnbull subsidiary provided 74% of sales compared to 26% from United. For the nine moths ended September 30, 2010, sales were $17.73 million with a similar breakdown of 72% and 28% coming from Turnbull and United, respectively. 2010 sales compare to $5.27 million of sales in 2009, all of which occurred in the second and third quarter. Sales in 2010 were substantially higher because the acquisition of Turnbull was not completed until May 15, 2009 and acquisition of United was not completed until January 1, 2010. Percentage of sales between subsidiaries remains fairly constant with only a few percentage points change from quarter to quarter.
 
 
11

 
 
GROSS PROFIT
 
Three months ended Sep.30
Nine months ended Sep. 30
(dollars in 000’s)
2010
2009
2010
2009
 
$
%
$
%
$
%
$
%
Gross Profit by Subsidiary:
               
   Turnbull
407
73
731
100
1,109
69
839
100
   United
154
27
-
-
506
31
-
-
TOTAL
561
100%
731
100%
1,615
100%
839
100%

Gross profit the three months ended September 30, 2010 decreased by $170 thousand (23%) over the same period in 2009. This is because of unusually high rate of fuel price increase that occurred in Q3, 2009 that allowed for higher sales on lower cost fuel. Gross profit for the nine months ended September 30, 2010 increased by $776 thousand (92%) over the same period in 2009. This is because Turnbull subsidiary was not acquired until May 15, 2009 and United was not acquired until January 1, 2010. Turnbull contributed 73% and 69% of gross profit for the three months ended September 30, 2010 and nine months ended September 30, 2010 respectively. Gross profit percentages between subsidiaries remain fairly consistent and in line with overall sales contribution percentages.

OPERATING EXPENSES
 
Three months ended Sep. 30
Nine months ended Sep. 30
(dollars in 000’s)
2010
2009
2010
2009
 
$
%
$
%
$
%
$
%
Total Operating Expenses by division:
               
   Corporate
105
20
140
42
387
25
814
74
   Turnbull
265
50
191
58
681
44
283
26
   United
164
30
-
 
468
30
-
 
TOTAL
534
100%
331
100%
1,536
100%
1,097
100%

Operating expenses increased by $203 thousand (61%) for the three months ended September 30, 2010 and by $439 thousand (40%) for the nine months ended September 30, 2010 over the same periods in 2009. This is primarily due to the acquisitions of Turnbull and United completed in May, 2009 and January, 2010 respectively but it is offset by a significant reduction in overhead costs at the corporate level. Corporate overhead costs dropped by $35 thousand (25%) and by $427 thousand (52%) for the three months ended September 30, 2010 and nine months ended September 30, 2010 over the same periods in 2009. This is because of the reduction in the use of consultants and drop in acquisition prospecting costs. Turnbull Oil operating costs increased by 74 thousand (39%) for the three months ended September 30, 2010 compared to the same period last year due to increased repair and maintenance costs, additional driver costs, and increased depreciation expense from vehicle acquisitions made in the last 12 months.

OPERATING INCOME (LOSS)
 
Three months ended Sep. 30
Nine months ended Sep. 30
(dollars in 000’s)
2010
2009
2010
2009
 
$
%
$
%
$
%
$
%
Operating Income (loss) by division:
               
   Corporate
(105)
 
(140)
 
(387)
 
(814)
 
   Turnbull
143
 
541
 
428
 
556
 
   United
(10)
 
-
-
38
 
-
-
TOTAL
28
100%
401
100%
79
100%
(258)
100%
 
For the three months ended September 30, 2010, operating income was $28 thousand, a reduction of $373 thousand over the same period in 2009. This is due to the extraordinarily high profit margin on Turnbull sales in Q3, 2009, as described above. For the nine months ended September 30, 2010, operating income was $79 thousand, a $337 thousand improvement over 2009. This is because of the timing of the Turnbull and United acquisitions and reduction in corporate overhead costs. Turnbull provided the vast majority of operating income for the three months ended September 30, 2010 with a loss of $105 thousand recorded at a corporate level and small loss of $10 thousand for United.
 
 
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Liquidity and Capital Resources
 
Our cash balance at September 30, 2010 was $434,621 compared to $337,350 at December 31, 2009. In the nine months ended September 30, 2010, operating activities utilized $4,826 investing activities utilized $73,430, and financing activities provided $175,527.
 
On a consolidated basis, current assets on the balance sheet as of September 30, 2010 were $2.66 million against current liabilities of $6.60 million. The largest component of the current liabilities is a $3.75 million note payable, to Jeff Turnbull for the acquisition of Turnbull, which was amended in March 2010 to extend the maturity date to December 31, 2010 and increase the principal amount owed under the note from the original amount of $3,750,000 to $4,000,000 to include in the principal amount interest that had accrued under the note from the date of the original note to the date the note was re-issued. The amount was reduced July, 2010 when Mr. Turnbull converted $250 thousand of the debt into common stock. The United acquisition includes a note payable for $500,000 that is due by December 31, 2011. There is also a note payable to investor for $750,000 that is due on April 15, 2011.
 
Accounts receivable are shown net of allowance for doubtful accounts in the amount of $1.8 million. Accounts receivable are from customers of Turnbull, Basinger, and United. Turnbull evaluates accounts receivable annually and writes off accounts considered uncollectible. Turnbull also charges 21% interest on all accounts receivable over 30 days, which historically has covered amounts lost due to uncollectible accounts. Goodwill of $3.40 million is the result of the Turnbull/Basinger and United acquisition.
 
The notes payable-current balance of $3.77 million as of September 30, 2010, includes the note payable to Jeff Turnbull for the Turnbull/Basinger acquisition. The convertible notes payable balance of $1.04 million at September 30, 2010 includes the $750,000 note payable is to a Canadian accredited investor. Additional information regarding these notes as well as the Convertible Preferred Series A shares outstanding and convertible notes outstanding can be found within the notes to the financial statements. $247,500 of such notes converted to 16,455,520 shares of common stock in the first quarter of 2010.
 
In 2010, we raised an additional $125,000 via the sale of shares in a private placement offering of our common stock in the State of New York, as shown in the table below. We are pursuing additional cash from the sale of convertible notes to existing shareholders as well as equity financing through investment banks and accredited investors to fund the remaining balance on the note to Jeff Turnbull and owners of United. Once these notes are paid, we will have full discretion over the proceeds from operations, which during the periods these notes are outstanding are under the sole discretion of Mr. Turnbull and the owners of United, respectively, as agreed between us and Mr. Turnbull and us and the owners of United. Limitations on our ability to receive funds from our operating subsidiaries are primarily a function of our ability to retire the notes.
 
Date of Sale
 
# of Shares
 
Sale Price
 
Aggregate
 
# of Shareholders
 
2/1/10
  4,545,454   $     0.01   $ 50,000.00   1  
3/12/10
  8,333,333   $     0.01   $ 75,000,00   1  
Total
  12,878,787       $ 125,000.00      
 
During the remainder of 2010, we intend to try to raise money through the sale of equity or debt securities to investors. Additionally, we have engaged in preliminary discussions with certain of our affiliates and other parties regarding the potential issuance of convertible debt to finance our growth. However, we do not know if we will be successful in selling our securities or raising capital through the issuance of debt on terms favorable to us, or at all.
 
 
13

 
 
Off-Balance Sheet Arrangements

As of September 30, 2010 we had no off-balance sheet arrangements.

Critical Accounting Policies

Certain amounts included in or affecting our consolidated financial statements and related disclosures must be estimated, requiring management to make certain assumptions with respect to values or conditions that cannot be known with certainty at the time the financial statements are prepared. The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) requires management to make 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. We are also subject to risks and uncertainties that may cause actual results to differ from estimated results. Estimates are used when accounting for depreciation and amortization of long-lived assets, self-insurance and litigation reserves, environmental reserves, allowances for doubtful accounts, and asset valuation assessments. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Any effects on our business, financial position or results of operations resulting from revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known to us. Management has reviewed these critical accounting estimates and related disclosures.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Our primary financial market risks include commodity prices for refined fuels and propane and interest rates on borrowings.

Commodity Price Risk

The risk associated with fluctuations in the prices we pay for refined fuels and propane is principally a result of market forces reflecting changes in supply and demand for refined fuels and propane and other energy commodities. Our profitability is sensitive to changes in refined fuels and propane supply costs and we generally pass on increases in such costs to customers. We may not, however, always be able to pass through product cost increases fully or on a timely basis, particularly when product costs rise rapidly.

Interest Rate Risk

We have fixed-rate debt. Changes in interest rates impact the fair value of fixed-rate debt but do not impact their cash flows. Our long-term debt is typically issued at fixed rates of interest based upon market rates for debt having similar terms. As these long-term debt issues mature, we may refinance such debt with new debt having interest rates reflecting then-current market conditions. This debt may have an interest rate that is more or less than the refinanced debt. 


Item 4.  Controls and Procedures

We maintain procedures designed to ensure that the information we are required to disclose in reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.  During the period from July 1, 2010 to September 30, 2010, an evaluation under the supervision and with the participation of management, including the Chief Executive Officer/Chief Financial Officer (our principal executive officer and principal financial officer), of the effectiveness of our disclosure controls and procedures was conducted.  Based on that evaluation, the Chief Executive Officer/ Chief Financial Officer has concluded that, as of September 30, 2010, our disclosure controls and procedures are not effective.
 
 
14

 
 
Subsequent to the date of his evaluation, there have been no changes in our internal controls that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Our management, including the Chief Executive Officer/ Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud.  A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

We are not a party to any legal proceedings and, to our knowledge, no action, suit or proceeding has been threatened against us. There are no material proceedings to which any of our directors, officers, or subsidiaries are parties to that are adverse to us or have a material interest adverse to us.

Item 1A. Risk Factors

There have been no material changes in the risk factors described in Part I, Item 1A, “Risk Factors”, of Amendment number 3 to Registration Statement on Form 10 we filed with the Securities and Exchange Commission on October 4, 2010.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

On July 9, 2010, we entered into an agreement with Jeff Turnbull (the “Agreement”) allowing for the conversion of up to $250,000 of the principal amount of a Promissory Note entered into by and between the Company and Mr. Turnbull dated May 15, 2009 (the “Turnbull Note”) into 500,000,000 shares of the our common stock. Mr. Turnbull elected to convert portions of the Turnbull Note into an aggregate of 500,000,000 Conversion Shares from time to time from July 9, 2010 to August 31, 2010.

Between January 2009 and April 2009, we sold an aggregate of $73,100 of principal amount of a Convertible Promissory Note (the “Notes”) to several accredited investors. The Notes allowed for conversion into restricted shares of the Company’s common stock (the “Conversion Shares”) following a twelve month holding period and trigger defined as the Company’s common stock becoming tradable on the Bulletin Board or AMEX.

On October 15, 2010, the Notes were converted into an aggregate 45,687,500 shares of our common stock, par value $0.0016, following commencement of trading on the OTCQB on September 29, 2010.

The issuance and sale of the shares of common stock is exempt from registration under the Securities Act of 1933 pursuant to Section 4(2) of the Securities Act of 1933 and Regulation D promulgated under the Securities Act of 1933, as amended.

Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Removed and Reserved


Item 5.  Other Information

None.
 
 
15

 
 
Item 6. Exhibits

Exhibit
Description
10.1
Notice of Conversion of Promissory Note by and between Registrant and Jeff Turnbull, filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 8, 2010 and incorporated herein by this reference.
31*
Principal Executive Officer and Principal Financial Officer certification pursuant to 18. U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32*
Principal Executive Officer and Principal Financial Officer certification pursuant to 18. U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed herewith

SIGNATURES

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

     
 UNITED STATES OIL AND GAS CORP
     
 (Registrant)
       
Date:  
 November 17, 2010  
 
 BY: /s/ Alex Tawse
     
 Chief Executive Officer and Chief Financial Officer
     
 (Principal Executive and Principal Financial Officer)

 
 
 
16