10-Q 1 c51911110q.htm FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011 c51911110q.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 March 31, 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 ¨ 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 May 16, 2011, there were 2,312,209,521 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.

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

   
March, 31,
2011
   
December 31,
2010
 
ASSETS
           
 CURRENT ASSETS:
           
   Cash and cash equivalents
  $ 42,185     $ 4,007  
   Restricted Cash
    265,480       286,376  
   Accounts receivable – trade, net
    1,880,329       1,694,592  
   Inventory
    410,103       421,468  
   Prepaid Expenses
    22,777       26,193  
   Other current assets
    453       450  
     Total Current Assets
    2,621,327       2,433,086  
   Property and equipment, net
    922,951       953,532  
   Other Assets:
               
     Deposits
    1,490       1,490  
     Intangible Assets, net
    686,538       706,239  
     Goodwill
    2,757,036       2,757,036  
   Total Other Assets
    3,445,064       3,464,765  
     Total Assets
  $ 6,989,342     $ 6,851,383  
LIABILITIES AND STOCKHOLDERS’ DEFICIT
               
  CURRENT LIABILITIES:
               
   Notes Payable – Current
    35,535       47,811  
   Related Party Notes Payable – Current
    530,624       626,300  
   Common Stock Payable – Related Party
    -       150,000  
   Convertible Notes Payable, net of discount
    783,963       809,960  
   Deferred Revenue
    14,319       34,489  
   Derivative Liability
    806,076       810,539  
   Accounts Payable
    987,253       913,473  
   Accrued Expenses
    136,366       119,660  
   Lines of Credit
    183,223       160,076  
   Interest Payable
    67,527       47,210  
     Total Current Liabilities
    3,544,886       3,719,518  
   Notes Payable – Long Term
    39,781       39,781  
   Convertible Notes Payable – Long Term, net of discount
    164,939       49,642  
   Related Party Notes Payable – Long Term
    3,563,803       3,754,803  
     Total Liabilities
    7,313,409       7,563,744  
 Stockholders’ Deficit
               
   Common Stock, .000003 par value, 5,000,000,000 shares authorized,
               
   1,941,055,675 and 1,590,690,900 outstanding at March 31, 2011
               
   and December 31, 2010
    5,823       4,771  
   Preferred Stock, .001 par value, 10,000,000 shares authorized, 115,638
               
   and 115,638 issued and outstanding at March 31, 2011
               
   and December 31, 2010
               
   pari passu or senior to any new preferred shares, convertible to common
               
   at 80% of market price, callable any time at $6 per share, dividends
               
   shall not accrue unless declared, $5 per share liquidation preference
    116       116  
   Additional Paid In Capital
    4,387,209       3,465,082  
   Retained Deficit
    (4,717,215 )     (4,182,330 )
     Total Stockholders’ Deficit
    (324,067 )     (712,361 )
     Total Liabilities and Stockholders’ Deficit
  $ 6,989,342     $ 6,851,383  

The accompanying notes are an integral part of these consolidated financial statements.
 
 
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United States Oil and Gas Corp
Consolidated Statements of Operations
(Unaudited)

   
Three Months Ended March 31,
 
   
2011
   
2010
 
         
Restated, see Note 3
 
SALES, net
  $ 7,067,487     $ 5,395,447  
Cost of Goods Sold
    6,526,718       5,060,070  
Gross Profit
    540,769       335,377  
Operating Expenses:
               
  Salaries and Benefits
    255,173       98,570  
  Consultant Fees
    21,000       29,264  
  Service and Prospecting Fees
    29,948       7,500  
  Travel and Entertainment
    4,467       45,448  
  Professional Fees
    57,241       2,122  
  General and Administrative
    93,044       127,491  
  Repairs and Maintenance
    50,644       29,571  
  Depreciation
    18,089       18,191  
  Amortization
    19,701       20,477  
  Bad Debt Expense
    157,690       169,145  
  Other Operating Expense
    1,235       18,507  
    Total Operating Expenses
    708,232       566,286  
Loss from Operations
    (167,464 )     (230,909 )
Non-Operating Income (expense):
               
  Interest Income
    28,488       24,429  
  Interest Expense
    (46,936 )     (44,167 )
  Accretion Expense on Convertible Notes
    (224,289 )     (67,366 )
  Loss on Conversion of Debt
    (136,203 )     -  
  Gain (loss) on Derivative Liability
    10,516       (37,418 )
  Finance Fee
    (5,000 )     (250,000 )
  Other Income (loss)
    6,003       (3,500 )
    Total Non-Operating Income (expense), net
    (367,421 )     (378,022 )
Loss Before Income Taxes
    (534,885 )     (608,931 )
Income Tax Expense (benefit)
    -       29,945  
NET LOSS
  $ (534,885 )   $ (638,876 )
                 
                 
Earnings Per Share:
               
   Basic
  $ (0.00 )   $ (0.00 )
   Diluted
  $ (0.00 )   $ (0.00 )
Weighted average shares outstanding basic and diluted
    1,808,762,767       1,013,344,773  

The accompanying notes are an integral part of these consolidated financial statements.
 
 
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United States Oil and Gas Corp
Consolidated Statements of Cash Flows
(Unaudited)

   
Three Months Ended March 31,
 
   
2011
   
2010
 
         
Restated, see Note 3
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net loss
  $ (534,885 )   $ (638,876 )
Adjustments to reconcile net loss to net cash
               
provided by operating activities:
               
Loss on conversion of debt
    136,203       -  
Amortization of discount on debt
    224,289       67,366  
Fee to extend note's maturity
    -       250,000  
Shares issued for services
    25,000       -  
Loss (gain) on derivative liabilities
    (10,516 )     37,418  
Change in accounts receivable provision
    157,690       169,145  
Depreciation expense
    54,418       53,191  
Amortization of intangibles
    19,701       20,477  
Changes in operating assets and liabilities:
               
Accounts receivable
    (343,427 )     17,245  
Inventory
    11,365       (70,819 )
Other current assets
    24,309       64,624  
Accounts payable
    218,464       36,889  
Accrued expenses
    50,061       21,269  
Deferred revenue
    (20,170 )     -  
CASH PROVIDED BY OPERATING ACTIVITIES
    12,502       27,929  
CASH FLOWS FROM INVESTING ACTIVITIES
               
Cash paid for purchase of fixed assets
    (23,518 )     33,519  
CASH (USED) PROVIDED BY INVESTING ACTIVITIES
    (23,518 )     33,519  
CASH FLOWS FROM FINANCING ACTIVITIES
               
Proceeds from sale of stock
    -       125,000  
Borrowings on convertible debt
    225,000       -  
Borrowings on letters of credit, net
    23,146       -  
Principal payments on debt
    (12,276 )        
Principal payments on related party debt
    (186,676 )     (20,615 )
CASH PROVIDED BY FINANCING ACTIVITIES
    49,194       104,385  
NET INCREASE IN CASH
    38,178       165,833  
CASH AT BEGINNING OF YEAR
    4,007       337,350  
CASH AT PERIOD END
  $ 42,185     $ 503,183  
                 
NON-CASH TRANSACTIONS
               
Conversion of related party debt
    250,000       -  
Conversion of convertible debt and accrued interest to common stock
    192,836       -  
Derivative liability from issuance of convertible notes payable (recorded as discount on debt)
    175,189       -  
Settlement of portion of derivative liability
    (169,136 )     -  
Shares issued for stock payable
    150,000       -  

The accompanying notes are an integral part of these consolidated financial statements.
 
 
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 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 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.
 
 
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Taxes collected from customers and remitted to government agencies for specific revenue producing transactions are recorded net with no effect on the income statement.

Deferred Revenue. At March 31, 2011, the Company had $14,319 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 second fiscal quarter of 2011. At December 31, 2010, the Company had $34,489 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 March 31, 2011 and December 31, 2010, $0 and $0, respectively, of cash balances in excess of the FDIC limits. There were no cash equivalents at March 31, 2011 or December 31, 2010.

Cash Restriction. The Company considers $265,480 and $286,376 of cash on hand to be restricted cash at March 31, 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 March 31, 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 $494,230 and $325,820 at March 31, 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 March 31, 2011 includes the cost of delivery driver’s salaries in the amount of $81,000 and depreciation of assets used for the storage and delivery of product to customer in the amount of $36,000. Cost of Goods Sold for the three months ended March 31, 2010 includes the cost of delivery driver’s salaries in the amount of $80,000 and depreciation of assets used for storage and delivery of product to customers in the amount of $35,000.

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 March 31, 2011 and March 31, 2010 were approximately $1,600 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.
 
 
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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.

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 $2,757,036 at March 31, 2011, is related to the Company's acquisitions of Turnbull Oil Inc in 2009 for $2,681,925 and United Oil and Gas in 2010 for $75,111. 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. No evaluation was necessary at March 31, 2011, as no impairment indicators were prevalent.

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 intangible 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.
 
 
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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.

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 valuating 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 March 31, 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.
 
 
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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 March 31, 2011, the Company had convertible notes valued at $948,942 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 35% to 215% and a risk-free interest rate ranging from 0.59% to 1.02%, the Company determined the fair value of the derivative liability to be $806,076 as of March 31, 2011.

The following table summarizes the assets and liabilities measured at fair value on a recurring basis as of December 31, 2010 and March 31, 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
    806,076       -       -       806,076       806,076  
Total at 03/31/11
    806,076       -       -       806,076       806,076  

There were no instruments valued at fair value on a non-recurring basis as of March 31, 2011 and December 31, 2010.

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.
 
 
8

 

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.

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 $4,717,215 as of March 31, 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.
 
 
9

 

Note 3.  Restatement of Consolidated Financial Statements for Prior Period

The Company has determined that its previously issued consolidated financial statements for the three months ended March 31, 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 $764,400 reclassification of purchase price from fixed assets and goodwill to intangible assets.  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 the proper 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 (see note 15 for more detail). This primarily resulted in a derivative liability of $845,921, a loss on the valuation of the derivative at period end of $37,418, discounts to notes payable of $232,801, and amortization expense of $67,366.

Consolidated Balance Sheet at March 31, 2010

   
Prior
   
Adjustment
   
Restated
 
Property and equipment, net
  $ 1,460,293     $ (500,075 )   $ 960,218  
Intangible Assets, net
    1,046       764,400       765,446  
Goodwill
    3,396,127       (639,091 )     2,757,036  
Total Other Assets:
    3,398,663       125,309       3,523,972  
Total Assets:
    6,988,389       (374,766 )     6,613,623  
Notes Payable – current - total
    4,562,633       (165,435 )     4,397,198  
Derivative Liability
    -       845,921       845,921  
Total Current Liabilities
    5,533,784       680,486       6,214,270  
Total Liabilities
    6,904,888       680,486       7,585,374  
Additional Paid In Capital
    2,517,775       55,679       2,573,454  
Retained Earnings
    (2,437,480 )     (1,110,931 )     (3,548,411 )
Total Stockholders’ Equity (Deficit)
    83,504       (1,055,252 )     (971,748 )
Total Liabilities and Stockholders’ Deficit
  $ 6,988,389     $ (374,766 )   $ 6,613,623  

 
10

 
 
Consolidated Statement of Operations for the three months ended March 31, 2010

   
Prior
   
Adjustment
   
Restated
 
Cost of Goods Sold
  $ 4,945,070     $ 115,000     $ 5,060,070  
Gross Profit
    450,377       (115,000 )     335,377  
Operating Expenses:
                       
Salaries and Benefits
    178,570       (80,000 )     98,570  
Depreciation
    55,837       (37,646 )     18,191  
Amortization
    877       19,600       20,477  
Bad Debt Expense
    1,498       167,647       169,145  
Total Operating Expense
    496,685       69,601       566,286  
Loss from Operations
    (46,308 )     (184,601 )     (230,909 )
Accretion Expense - Convertible Notes
    -       (67,366 )     (67,366 )
Loss on Conversion of Debt
    -       (37,418 )     (37,418 )
Recovery of bad debt
    2,360       (2,360 )     -  
Total Non-operating income, net
    (270,878 )     (107,144 )     (378,022 )
Loss before income taxes
    (317,186 )     (291,745 )     (608,931 )
NET LOSS
  $ (347,131 )   $ (291,745 )   $ (638,876 )

Consolidated Statement of Cash Flows for the three months ended March 31, 2010

    Prior    
Adjustment
   
Restated
 
CASH FLOWS FROM OPERATING ACTIVITIES
                 
Net Loss
  $ (347,131 )   $ (291,745 )   $ (638,876 )
Loss on derivative liabilities
    -       37,418       37,418  
Depreciation expense
    55,837       (2,646 )     53,191  
Amortization of intangibles
    877       19,600       20,477  
Amortization of discount on debt
    -       67,366       67,366  
Bad debt expense
    -       169,145       169,145  

Note 4. Accounts Receivable

Accounts receivable consisted of the following:

   
March 31, 2011
   
December 31, 2010
 
Accounts receivable
  $ 2,374,559     $ 2,020,412  
Allowance for uncollectible accounts
    (494,230 )     (325,820 )
    $ 1,880,329     $ 1,694,592  

Note 5.  Property, Plant and Equipment

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

   
March 31, 2011
   
December 31, 2010
 
Buildings
  $ 274,229     $ 274,229  
Equipment
    574,701       550,864  
Land
    15,273       15,273  
Vehicles
    1,078,311       1,078,311  
Accumulated depreciation
    (1,019,563 )     (965,145 )
Net Property, Plant, and Equipment
  $ 922,951     $ 953,532  

Depreciation expense for the three months ended March 31, 2011 and March 31, 2010 totaled $54,418 and $53,191, respectively.
 
 
11

 

Note 6. Intangible Assets 

Intangible assets consisted of the following:

   
March 31, 2011
   
December 31, 2010
 
Trade Name – Basinger
  $ 6,050     $ 6,050  
Trade Name – United
    128,000       128,000  
Customer List
    656,000       656,000  
Accumulated amortization
    (103,512 )     (83,811 )
Net Intangible Assets
  $ 686,538     $ 706,239  

Amortization expense for the three months ended March 31, 2011 and March 31, 2010 totaled $19,701 and $20,477, respectively. Intangible assets are amortized straight line over an estimated useful life of 10 years.

Note 7.  Accrued Liabilities

Accrued liabilities consisted of the following:

   
March 31, 2011
   
December 31, 2010
 
Accrued salaries
  $ 41,597     $ 30,537  
Accrued state fuel tax
    52,343       77,244  
Miscellaneous accruals
    42,426       11,879  
    $ 136,366     $ 119,660  

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 March 31, 2011). The line of credit is secured by all accounts receivable, inventory and equipment. As of March 31, 2011 and December 31, 2010, the balance outstanding was $139,981 and $140,000, respectively. 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 March 31, 2011 and December 31, 2010, the balance outstanding was $43,242 and $20,000, respectively.

Note 9. Debt

Debt consisted of the following:

   
March 31,
2011
   
December
31, 2010
 
Short term:
           
Unsecured convertible notes payable with annual interest rate of 5%1
  $ 75,000     $ 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
    90,000       50,000  
Convertible note payable with interest payable quarterly4
    750,000       750,000  
Long-term:
               
Unsecured convertible notes payable  - annual interest of 10%2
    185,000       -  
Discount on convertible notes from derivative valuation
    (216,052 )     (265,152 )
     Total convertible notes
    948,902       859,602  
Unsecured related party notes payable5
    440,000       631,103  
Common Stock payable6
    -       150,000  
Notes payable on capital equipment7
    75,317       87,592  
Long term unsecured related party note payable with 5% annual interest8
    3,654,427       3,750,000  
     Total Debt
  $ 5,118,646     $ 5,478,297  
 
 
12

 

 
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 $1,592 in accrued interest expense payable at March 31, 2011.
 
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. There is no accrued interest at March 31, 2011. There was $3,042 of accrued interest expense payable at March 31, 2011.
 
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. Note is due on November 29, 2011 and there was $1,775 in accrued interest payable at March 31, 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 $12,500 of accrued interest at March 31, 2011.
 
5 Balance primarily consists of note for $500,000 to Debbie Werner. The note is due December 31, 2011 and bears 5% interest. There was $30,425 of accrued interest at March 31, 2011. Remaining portion is unsecured debt owed to Debbie Werner that bears no interest and has no due date.
 
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%. $47,811 is current and due in 2011. $39,781 is long term and due beyond 2011. There was no accrued interest at March 31, 2011.
 
8 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 fiscal quarter of 2011, Mr. Turnbull sold an additional $200,000 of the debt to third parties who converted the debt into 133 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 March 31, 2011 was $3,550,000. There was $17,507 of accrued interest at March 31, 2011. The remaining balance of $104,427 at March 31, 2011 is unsecured note payable with zero interest to related party. The amount of imputed interest was immaterial to the financial statements.

Minimum principal payments of debt in subsequent years:

2011
  $ 1,350,122  
2012
    3,764,943  
2013
    22,704  
2014
    11,929  
2015
    185,000  

Interest expense on the notes payable totaled $46,936 for the three months ended March 31, 2011 and $44,167 for the three months ended March 31, 2010. Accretion expense for the three months ended March 31, 2011 and the three months ended March 31, 2010 was $224,289 and $67,366, respectively.

Note 10. Concentrations

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

   
March 31, 2011
   
December 31, 2010
 
   
Amount
   
%
   
Amount
   
%
 
Customer A
  $ 260,000       13     $ 260,121       15  
Customer B
    -       -       242,779       14  

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

   
March 31, 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 March 31, 2011.
 
 
13

 

Note 11.  Stockholders’ Deficit

The Company’s Articles of Incorporation authorize 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 March 31, 2011, 115,638 shares were issued and outstanding.

The Company’s Articles of Incorporation authorize the issuance of up to 5,000,000,000 shares of common stock at a par value of $0.000003.  At March 31, 2011, 1,941,055,675 shares were issued and outstanding.

Earnings Per Share (EPS) was calculated by dividing net loss as of March 31, 2011 of (534,885) by the weighted average number of common shares outstanding in the quarter (1,808,762,767). 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, convertible debt holders converted a total of $192,836 of convertible notes and accrued interest into 107,225,767 shares of common stock. The conversions were within the terms of the agreement for all conversions. $41,027 of the debt converted was converted at the holder’s option. No gain or loss was recorded on these conversions as the conversions were within the original contract terms. The remaining $151,809 was converted at the Company’s option. Due to this conversion feature not being considered substantive, a loss was recorded for $86,203 which was the difference between the value of the shares issued of $238,012 and the debt converted.

During the three months ended March 31, 2011, related party debt holders sold a total of $250,000 of debt to third parties. The third parties then exchanged the debt into convertible notes that were converted to common stock. A total of 177,139,008 common shares were issued.

Loss on conversions The Company booked a loss on conversion of $50,000 for the modification and conversion of the $250,000 of related party debt. 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 of $31,722 at the modification date. The discount was fully amortized upon conversion of the debt.

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 issuance.

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.

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 three months ended March 31, 2011 and the twelve months ended December 31, 2010 totaled $30,000 and $221,031, respectively.  These related party payments included:
 
 
 
14

 

Contract
 
Related Party
 
Monthly
Amount
March
31, 2011
December
31, 2010
The Company entered into a contractual agreement for the procurement of human resources. The contract was terminated at Sep. 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
30,000
120,000
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
         
30,000
$221,031

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 March 31, 2011 and March 31, 2010 of $3,220 and $2,730, 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.

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  

 
15

 
 
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 months ended March 31, 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.

Note 15. Derivative Liability

At March 31, 2011, the Company had convertible notes with a face value of $1,089,954 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 three months ended March 31, 2011:

Derivative liability at December 31, 2010
    810,539  
Derivative liability from issuance of convertible notes payable (recorded as discount on debt)
    175,189  
Derivative liability from issuance of convertible notes payable (recorded as loss)
    31,722  
Gain on derivative liability
    (42,238 )
Settlement of portion of derivative liability
    (169,136 )
Derivative liability at March 31, 2011
  $ 806,076  

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

Derivative Liabilities
 
March 31, 2011
   
December 31, 2010
 
Embedded conversion feature
  $ 324,906     $ 256,749  
Other derivative instruments
    481,170       553,790  
  Totals
  $ 806,076     $ 810,539  
 
 
16

 
 
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. Subsequent Events

On April 5, 2011, the Company converted all outstanding principal and interest owed pursuant to a $25,000 Convertible Promissory Note issued March 28, 2011 to an accredited investor into an aggregate of 25,000,000 shares of the Common Stock, at an average conversion price of $0.001 per share.
 
On April 7, 2011, the Company converted all outstanding principal and interest owed pursuant to a $100,000 Convertible Promissory Note issued March 28, 2011 to an accredited investor into an aggregate of 100,000,000 shares of the Common Stock, at an average conversion price of $0.001 per share.

On April 8, 2011, the Company converted all outstanding principal and interest owed pursuant to a $100,000 Convertible Promissory Note issued March 28, 2011 to an accredited investor into an aggregate of 100,000,000 shares of the Common Stock, at an average conversion price of $0.001 per share.

On April 9, 2011, the Company amended its Convertible Promissory Note due to mature on April 9, 2011 in the aggregate amount of $750,000 and issued to an accredited investor. The maturity date was extended to December 31, 2011. All other terms remained the same.

On April 11, 2011, the Company converted all outstanding principal and interest owed pursuant to a $100,000 Convertible Promissory Note issued March 28, 2011 to an accredited investor into an aggregate of 100,000,000 shares of the Common Stock, at an average conversion price of $0.001 per share.

On April 12, 2011, the Company converted all outstanding principal and interest owed pursuant to a $50,000 Convertible Promissory Note issued October 12, 2010 to an accredited investor into an aggregate of 46,153,846 shares of the Common Stock, at an average conversion price of $0.001 per share.

On May 4, 2011, the Company issued a Convertible Promissory Note in the amount of $50,000 to an accredited investor. The Note bears 8% interest and is due on January 25, 2012. After six months, the Note allows for the holder to convert to Common Stock at a 45% discount on the average of the lowest three-day price in the previous ten trading days.

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 “the Company,” “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 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.
 
 
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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 the quarter. 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 2009-2010. 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.

Going forward, our primary emphasis will be a consolidation on a tax basis of both of our subsidiaries in order to increase the bottom line; seeking internal growth opportunities plus a third target for acquisition; and further significant reduction of debt.

Results of Operations
   
Three Months Ended March 31,
       
Sales by Subsidiary ($000’s)
 
2011
   
2010
   
Change
 
     $     %     $     %     $     %  
                                           
   Turnbull
    5,316       75       3,715       69       1,601       43  
   United
    1,751       25       1,681       31       70       4  
Total
    7,067       100       5,396       100       1,671          

Net Sales. For the quarter ended March 31, 2011, total net sales were $7.1 million. Turnbull subsidiary provided 75% of sales compared to 25% from United. Sales for the quarter ended March 31, 2011 compare to $5.4 million of sales for the quarter ended March 31, 2010. Percentage of sales between subsidiaries remains fairly constant with only a few percentage points change from quarter to quarter.

The overall economy appears to be improving, and we anticipate slowly increasing sales during 2011 at both Turnbull and United. The increase in oil and gas prices in the first quarter of 2011 had a positive impact on sales but it did not materially affect volume. At United we expect improved sales volume due in part to the planned opening of a second retail store late in 2011 and continued growth in the propane business due to increase in economic activity in the area. This is in large part due to increased oil drilling within the area covered by the Bakken Formation.

   
Three Months Ended March 31,
       
Operating Expenses by Division: ($000’s)
 
2011
   
2010
   
Change
 
    $      %     $      %      $      %  
   Corporate
    200       28       160       28       40       25  
   Turnbull
    361       51       295       52       66       22  
   United
    147       21       111       20       36       32  
Total
    708       100       566       100       142          

Operating expenses. Operating expenses increased by $142,000, or 25%, for the quarter ended March 31, 2011 compared to the same period in 2010. Corporate overhead costs increased by $40,000 (25%) for the quarter ended March 31, 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. Turnbull operating costs increased by $66,000 (22%) from an increase in salaries due to an additional driver and an increase in repair and maintenance expense from preventative maintenance costs to existing equipment. United operating expenses increased by $36,000 (32%). The increase was from higher salary costs, increased repair and maintenance expense on existing equipment, and from additional expense for prepaid improvements at a second convenience store location.
 
 
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Three Months Ended March 31,
       
Operating Income(Loss) by Division: ($000’s)
 
2011
   
2010
   
Change
 
    $     %     $     %     $     %  
   Corporate
    (200 )     119       (161 )     70       (39 )     (24 )
   Turnbull
    75       (44 )     (120 )     51       195       162  
   United
    (42 )     25       50       (21 )     (92 )     (184 )
Total
    (167 )     100       (231 )     100       64          
 
Operating Income/(Loss). For the three months ended March 31, 2011, operating loss was $167,000, a reduction in loss of $64,000 compared to the same period in 2010. This is despite the increase in corporate operating costs, as described above. Turnbull provided operating income for the quarter ended March 31, 2011 of $75,000 compared to a loss of $120,000 for the same period in 2010. The 2010 loss was primarily due to the booking of reserve against accounts receivable of $170,000. During 2010, we adopted a policy of reserving all receivables over 90 days past due. If the expense from the reserve is backed out, Turnbull had operating income of $50,000 for the three months ended March 31, 2010. If the $169,000 reserve from the three months ended March 31, 2011 is backed out, Turnbull had operating income of $278,000. For the three months ended March 31, 2011, United sustained an operating loss of $42,000 compared to operating profit of $50,000 for the same period in 2010. Some of this reduction in operating profit is from the additional operating cost described above but margin on sales was also lower in 2011 compared to 2010. This is due to increased competition in the local market created by the increase in fuel prices during the first calendar quarter of 2011.
 
   
Three Months Ended March 31,
       
Net Income(Loss) by Division: ($000’s)
 
2011
   
2010
   
Change
 
    $       %     $       %     $       %  
   Corporate
    (605 )     113       (559 )     87       (46 )     (8 )
   Turnbull
    109       (20 )     (125 )     20       234       187  
   United
    (39 )     7       45       (7 )     (84 )     (187 )
Total
    (535 )     100       (639 )     100       104          
 
Net Income/(Loss). For the quarter ended March 31, 2011, Net Loss was $535,000, a reduction in loss of $104,000 over the same period in 2010. In addition to the factors discussed above, the biggest component of the difference was a non-operating expense of $250,000 incurred in 2010 as part of renegotiating the terms of the note payable to Jeff Turnbull. This was offset by accretion expense from derivative instruments of $225,000 for the three months ended March 31, 2011 compared to $67,000 for the same period in 2010 and a net loss from conversion of debt of $136,000 for the three months ended March 31, 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).  The Company incurred interest expense of $47,000 for the three months ended March 31, 2011 compared to expense of $44,000 for the same period in 2010. Most of the increase is attributable to interest accruing on our outstanding promissory notes. For the three months ended March 31, 2011, this was offset by interest income of $28,000, mostly from Turnbull subsidiary. Interest income for the same period in 2010 was $24,000.

Provision for Income Taxes. The tax expense for the quarter ended March 31, 2011 was $0 compared to $30,000 for the same period in 2010. This is because as of July 1, 2010 the Company will consolidate with Turnbull Oil on a tax basis as well as financial reporting basis.
 
 
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Liquidity and Capital Resources
 
Our cash balance at March 31, 2011 was $42,000 compared to $4,000 at December 31, 2010. An additional $265,000 is held as restricted cash at quarter ended March 31, 2011 because cash balances at subsidiaries are controlled by subsidiary managers until the promissory notes issued in connection with such acquisition are paid in full. In the quarter ended March 31, 2011, operating activities provided $13,000 ($535,000 from net loss). Included as a non-cash expense was $74,000 of depreciation and amortization expense and $224,000 expense from accretion of our discount on debt. Other adjustments related primarily to changes in accounts receivable, inventory, taxes payable, and accounts payable. Investing activities utilized $24,000. This balance is for the purchase of an equipment trailer at Turnbull subsidiary. Financing activities provided $49,000. Financing activities for the three months ended March 31, 2011 included the reduction of existing debt by $199,000 and the sale of convertible notes in the amount of $225,000.
 
On a consolidated basis, current assets on the balance sheet as of March 31, 2011 were $2.6 million against current liabilities of $3.5 million. A large component of the current liabilities is an $806,000 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 note payable to Jeff Turnbull that is due on December 31, 2012. The balance on that note at March 31, 2011 was $3.55 million.
 
Accounts receivable at March 31, 2011 were $1.9 million compared to $1.7 million December 31, 2010. These balances are shown net of allowance for doubtful accounts in the amount of $494,000 and $326,000, respectively. 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. A reserve is booked against all accounts that are over 90 days past due. Goodwill of $2.8 million is the result of the Turnbull/Basinger and United acquisitions. The value of the Goodwill is evaluated on an annual basis for impairment and adjusted down if necessary. There was no adjustment made at March 31, 2011.
 
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 Working Capital Performance Measures
 
March 31, 2011
   
December 31, 2010
   
Ratio of current assets to current liabilities
    0.74       0.65  
Ratio of total assets to total liabilities
    0.96       0.91  
Working capital (current assets minus current liabilities)
  $ (924,000 )   $ (1,286,000 )
Net cash provided by (used in) the three months ended:
 
March 31, 2011
   
March 31, 2010
   
Operating activities
  $ 13,000     $ 28,000  
Investing activities
    (24,000 )     34,000  
Financing activities
    49,000       104,000  
Earnings before taxes, interest, depreciation/amort. gain/loss on convertible debt (Modified EBITDA)
  $ (82,000 )   $ (411,000 )

Balance sheet ratios and working capital improved during the three months ended March 31, 2011 as overall debt was reduced.

We use a modified EBITDA number as a key performance measure. Modified EBITDA is net income adjusted by removing tax expense, interest expense, depreciation and amortization expense, amortization of discount on convertible debt, and gain and loss on the conversion of debt. We feel that this provides an accurate and useful measure of performance because it eliminates non-cash expenses that are largely unrelated to operations. The following presents a reconciliation of our modified EBITDA to Net Income:
 
 
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Three months ended
 
   
March 31, 2011
   
March 31, 2010
 
Modified EBITDA
  $ (82,000 )   $ (411,000 )
Income Tax Expense
    -       (30,000 )
Net Interest (Income)/Expense
    (19,000 )     (21,000 )
Depreciation Expense
    (54,000 )     (53,000 )
Amortization Expense
    (20,000 )     (20,000 )
Amortization of discount on convertible debt
    (224,000 )     (67,000 )
Loss on Conversion of Debt
    (136,000 )     (5,000 )
Net Income:
  $ (535,000 )   $ (607,000 )

The modified EBITDA balance for the three months ended March 31, 2011 was a loss of $82,000, an improvement of $329,000 over the same period in 2010. Modified EBITDA includes bad debt expense of $169,000 and $170,000 for the three months ended March 31, 2011 and 2010 respectively. These items are discussed in more detail within Operating Income/(Loss) above. The 2010 modified EBITDA includes a one-time non-cash fee of $250,000 that was incurred from the renegotiation of Turnbull note payable.
 
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 our outstanding promissory notes.
 
Off-Balance Sheet Arrangements

As of March 31, 2011 we had no off-balance sheet arrangements.

Critical 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.  We derive 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.  Our 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.

Deferred Revenue. At March 31, 2011, we had $14,319 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 second fiscal quarter of 2011. At December 31, 2010, we had $34,489 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.
 
 
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Shipping and Handling Costs. Shipping and handling costs are included in products cost of revenues.

Cash and Cash Equivalents. We consider all highly liquid cash investment instruments with an original maturity of three months or less to be cash equivalents.  We maintain our cash accounts at banks which are guaranteed by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. Our deposits are periodically in excess of federally insured limits on a temporary basis. We had at March 31, 2011 and December 31, 2010, $0 and $0, respectively, of cash balances in excess of the FDIC limits.

Cash Restriction. We consider $265,480 and $286,376 of cash on hand to be restricted cash at March 31, 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 March 31, 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 $494,230 and $325,820 at March 31, 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 March 31, 2011 includes the cost of delivery driver’s salaries in the amount of $81,000 and depreciation of assets used for the storage and delivery of product to customer in the amount of $36,000. Cost of Goods Sold for the three months ended March 31, 2010 includes the cost of delivery driver’s salaries in the amount of $80,000 and depreciation of assets used for storage and delivery of product to customers in the amount of $35,000.

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 March 31, 2011 and March 31, 2010 were approximately $1,600 and $0, respectively.

Presentation of Sales and Use Tax. Several states impose various sales, use, utility and excise tax on all of our sales to non-exempt customers.  We collect the various taxes from these non-exempt customers and remit the entire amount to the applicable jurisdiction.  Our accounting policy is to exclude the tax collected and remitted to the various taxing jurisdictions from revenue and cost of sales.

Income Taxes. We provide for deferred taxes in accordance with ASC Topic 740 Income Taxes, which requires us 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.  We recognize 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.
 
 
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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. We account for our goodwill in accordance with generally accepted accounting standards, which requires us 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 $2,757,036 at March 31, 2011, is related to our acquisitions of Turnbull in 2009 for $2,681,925 and United in 2010 for $75,111. 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 our book value to our 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.

We tested for impairment of our goodwill at December 31, 2010 and determined that an impairment was not necessary. No evaluation was necessary at March 31, 2011, as no impairment indicators were prevalent.

Impairment of Long Lived Assets. We adopted the FASB standard that requires that long-lived assets and certain identifiable intangibles held and used by us 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.  We evaluate the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should an impairment in value be indicated, the carrying value of intangible 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 us to concentrations of credit risk, consist principally of trade receivables.  All of our customers are located in the U.S. and all sales are denominated in U.S. dollars.  We perform ongoing credit evaluations of our 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 our structured borrowings, are separately valued and accounted for on our 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.
 
 
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Monte Carlo Valuation Model. We valued the conversion features in our convertible notes using a Monte Carlo method, with the assistance of a valuation consultant. The Monte Carlo model for valuating 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, we 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.

We 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 March 31, 2011 and December 31, 2010, no options or warrants related to compensation have been issued, and none are outstanding.

Fair Value of Financial Instruments. Our 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.

We utilize various types of financing to fund its business needs, including debt with warrants attached and other instruments indexed to its stock.  We review our 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 March 31, 2011, we had convertible notes valued at $948,942 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.
 
 
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Determining which category an asset or liability falls within the hierarchy requires significant judgment. We evaluate our hierarchy disclosures each quarter.  Our 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).  We classify 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 35% to 215% and a risk-free interest rate ranging from 0.59% to 1.02%, we determined the fair value of the derivative liability to be $806,076 as of March 31, 2011.

The following table summarizes the assets and liabilities measured at fair value on a recurring basis as of December 31, 2010 and March 31, 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
    806,076       -       -       806,076       806,076  
Total at 03/31/11
    806,076       -       -       806,076       806,076  

There were no instruments valued at fair value on a non-recurring basis as of March 31, 2011 and December 31, 2010.

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 our 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 our consolidated results of operations or cash flows.
 
 
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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 our consolidated financial position, results of operations or cash flows.

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. 
 
 
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Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by the company in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. We performed an evaluation, under the supervision and participation of our management, including our Chief Executive Officer/Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2011. Based on this evaluation, our Chief Executive Officer/Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of March 31, 2011.  We believe that the consolidated financial statements contained in this report present fairly our financial condition, results of operations, and cash flows for the fiscal years covered thereby in all material respects.

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.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following deficiencies were noted during our annual audit for the year ended December 31, 2011 and still exist at March 31, 2011:

 
1.
As of March 31, 2011, we did not maintain effective controls over the control environment.  Specifically we have not developed and effectively communicated to our employees its accounting policies and procedures.  This has resulted in inconsistent practices. Since these entity level programs have a pervasive effect across the organization, management has determined that these circumstances constitute a material weakness.
 
2.
As of March 31, 2011, we did not maintain effective controls over financial statement disclosure. Specifically, controls were not designed and in place to ensure that all disclosures required were originally addressed in our financial statements. Accordingly, management has determined that this control deficiency constitutes a material weakness.


Changes in Internal Controls over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended March 31, 2011 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 
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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 Annual Report on Form 10-K we filed with the Securities and Exchange Commission on April 19, 2011.

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

Between January 4, 2011 and February 1, 2011, all outstanding principal and interest owed with respect to $184,800 of convertible notes was converted by the Company into an aggregate 110,225,767 shares of the Company’s Common Stock (the “Common Stock”), at an average conversion price of $0.002 per share.

Between January 13 and February 24, 2011, the Company entered into three Wrap Around Agreements with Magna Group LLC (“Magna”) that allowed Magna to convert $200,000 of Company debt held by Magna into shares of Common Stock at a 40% discount on the average of the average trading prices in each of the five days prior to the day of requested conversion. On January 18, 2011, Magna converted $40,000 of the debt into 22,222,222 shares of Common Stock. On January 31, 2011, Magna converted $40,000 of the debt into 26,490,066 shares of Common Stock. The Wrap-Around Agreement was a result of $200,000 reduction in the note payable to Jeff Turnbull.

Between January 28 and February 17, 2011, the Company accepted a total of $95,000 from five accredited investors in exchange for Convertible Promissory Notes (the “Notes”). The Notes allowed for conversion into shares of the Common Stock following a six month holding period. The Notes bear 10% interest, are due December 31, 2015, and are convertible into common stock of the company at a 20% discount.
 
 
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Between February 17, 2011 and May 14, 2011, the Company accepted an aggregate of $270,000 in exchange for the Notes to twelve accredited investors. At the market price, when purchased, the Notes would convert into 154,606,601 shares of common stock.

Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Removed and Reserved


Item 5.  Other Information

None.

Item 6. Exhibits

Exhibit
Description
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:
 May 20, 2011
 
 BY: /s/ Alex Tawse
     
 Chief Executive Officer and Chief Financial Officer
     
 (Principal Executive and Principal Financial Officer)

 
 
 
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