UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2008
333-117114
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Commission File number
USA SUPERIOR ENERGY HOLDINGS, INC.
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(Exact name of registrant as specified in its charter)
NEVADA 30-0220588
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(State or other jurisdiction of incorporation) (IRS Employer Identification No.)
1726 Augusta Drive, Suite 105, Houston, Texas 77057
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 832-251-3000
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Securities Registered pursuant to Section 12(b) of the Exchange Act:
Common Stock, $.001 par value Over The Counter Bulletin Board
(Title of Class) (Name of exchange on which registered)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes | _| No | X |
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. (Check one):
Large accelerated filer |_| Accelerated filer |_|
Non-accelerated filer |_| (Do not check if a smaller reporting company)
Smaller reporting company |X|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes |_| No |X|
EXPLANATORY NOTE
On May 20, 2008, we filed our Form 10-Q without a review by an independent account in accordance with professional standards for conducting such reviews. The required review was completed on May 30, 2008 and the required Report of Independent Registered Public Accounting Firm is included herein.
Subsequent to the filing of our Form 10-Q, the Board of Directors of USA Superior Energy Holdings, Inc. concluded that we are required to restate our previously issued financial statements for the quarters ended March 31, 2008 and 2007. Management identified various places where corrections were necessary in its 2008 and 2007 financial statements and determined that a restatement was necessary in respect of the following: revision of stock based compensation for 2007, revision in applying reverse merger accounting in 2007, revision of the valuation of stock and warrants to be issued under a financial services contract in 2008, correction of certain errors in the timing of recording certain transactions in 2007. As a result of the Board¡¯s decision and the aforementioned revisions to our financial statements, our previously issued financial statements for the quarters ended March 31, 2008 and 2007 (which were included in our Quarterly Report on Form 10-Q) should no longer be relied upon. Restated financials for the quarters ended March 31, 2008 and 2007 are included herein.
Other than the foregoing items, no part of the Quarterly Report on Form 10-Q initially filed on May 20, 2008 is being amended, and the filing of this Amended Quarterly Report on Form 10-Q/A should not be understood to mean that any other statements contained therein are untrue or incomplete as of any date subsequent to May 20, 2008.
PART I- FINANCIAL INFORMATION
Item 1. Financial Statements
INDEX TO FINANCIAL STATEMENTS
| Report of Independent Registered Public Accounting Firm | 3 |
| | |
| Consolidated Balance Sheets as of March 31, 2008 (restated) (unaudited) and December 31, 2007 | 4 |
| | |
| Consolidated Statements of Operations for the three months ended March 31, 2008 (restated) and 2007 (restated) (unaudited) | 5 |
| | |
| Consolidated Statement of Stockholders¡¯ Equity for the three months ended March 31, 2008 (restated) (unaudited) | 6 |
| | |
| Consolidated Statements of Cash Flows for three months ended March 31, 2008 (restated) and 2007 (restated) (unaudited) | 7 |
| | |
| Notes to the Consolidated Financial Statements ¡§C March 31, 2008 (unaudited) | 8 |
| | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of USA Superior Energy Holdings, Inc
(Formerly Comlink Communications Company)
Houston, Texas
We have reviewed the accompanying consolidated balance sheet of USA Superior Energy holdings, Inc (the "Company") as of March 31, 2008, and the related consolidated statements of operations, and cash flows for the three-month periods ended March 31, 2008 and 2007. These consolidated financial statements are the responsibility of the Company's management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that USA Superior will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, USA Superior has raised limited capital and incurred losses from operations since inception, which raise substantial doubt about their ability to continue as a going concern. Management's plans regarding those matters also are described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
As discussed in Note 6, the consolidated financial statements as of March 31, 2008, and the related consolidated statements of operations, and cash flows for the three-month periods ended March 31, 2008 and 2007 have been restated.
We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years then ended (not presented herein); and in our report dated May 16, 2008, we expressed an unqualified opinion on those consolidated financial statements and included an explanatory paragraph related to the going concern uncertainty .In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2007, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived.
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/s/ Malone & Bailey, PC www.malone-bailey.com Houston, Texas May 30, 2008 |
USA SUPERIOR ENERGY HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
As of March 31, 2008 and December 31, 2007
(Unaudited)
| ASSETS | | March 31, 2008 | | | December 31, 2007 | |
| Current assets | | (Restated) | | | | | |
| Cash and cash equivalents | | $ | 41,625 | | | $ | 256,943 | | |
| Restricted cash | | | 150,000 | | | | 50,000 | | |
| Accounts receivable | | | 2,500 | | | | - | | |
| Prepaid expenses and other current assets | | | 143,759 | | | | 24,699 | | |
| Total current assets | | | 337,884 | | | | 331,642 | | |
| | | | | | | | | | |
| Oil and gas properties, including $348,086 of unproved properties, net of accumulated depletion, depreciation and amortization of $52,257 and $36,991, respectively ¡§C using full cost method of accounting | | | 1,553,023 | | | | 1,568,289 | | |
| Office equipment, net of depreciation of $14,839 and $9,391, respectively | | | 28,924 | | | | 34,372 | | |
| Other assets | | | 750 | | | | 750 | | |
| | | | | | | | | | |
| Total assets | | $ | 1,920,581 | | | $ | 1,935,053 | | |
| | | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS¡¯ EQUITY | | | | | | | | | |
| Current liabilities | | | | | | | | | |
| Accounts payable and accrued liabilities | | $ | 448,493 | | | $ | 326,730 | | |
| Convertible demand note, net of unamortized discount of $ 242,207 and $244,154, respectively | | | 36,936 | | | | 27,000 | | |
| Current portion of notes payable | | | 472,403 | | | | 347,762 | | |
| Advances payable ¡§C related party | | | 109,259 | | | | 114,259 | | |
| Total current liabilities | | | 1,067,091 | | | | 815,751 | | |
| | | | | | | | | | |
| Convertible debenture, net of unamortized discount of $248,084 and $257,316, respectively | | | 236,715 | | | | 215,947 | | |
| Notes payable | | | 270,317 | | | | 363,957 | | |
| Asset retirement obligations | | | 116,050 | | | | 115,520 | | |
| Total liabilities | | | 1,690,173 | | | | 1,511,175 | | |
| | | | | | | | | | |
| STOCKHOLDERS¡¯ EQUITY | | | | | | | | | |
| Common shares, $0.001 par value, 150,000,000 shares authorized, 56,160,000 and 55,760,000 shares issued and outstanding, respectively | | | 56,160 | | | | 55,760 | | |
| Additional paid-in capital | | | 8,377,720 | | | | 7,924,850 | | |
| Stock subscription receivable | | | (130,000 | ) | | | - | | |
| Accumulated deficit | | | (8,073,472 | ) | | | (7,556,732 | ) | |
| Total stockholders¡¯ equity | | | 230,408 | | | | 423,878 | | |
| | | | | | | | | | |
| Total liabilities and stockholders¡¯ equity | | $ | 1,920,581 | | | $ | 1,935,053 | | |
The accompanying notes are an integral part of these consolidated financial statements.
USA SUPERIOR ENERGY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended March 31, 2008 and 2007
(Unaudited)
| | | 2008 | | | 2007 | | | |
| | | (Restated) | | | (Restated) | | | |
| Revenue | | $ | 115,563 | | | $ | 15,443 | | | |
| | | | | | | | | | | |
| Operating expenses | | | | | | | | | | |
| Lease operating expenses | | | 104,254 | | | | 18,763 | | | |
| General and administrative, including stock based compensation of $207,436 and $3,020,000, respectively | | | 463,751 | | | | 3,375,085 | | | |
| Depreciation, depletion and amortization | | | 21,243 | | | | 1,069 | | | |
| Total operating expenses | | | 589,248 | | | | 3,394,917 | | | |
| Operating loss | | | (473,685 | ) | | | (3,379,474 | ) | | |
| | | | | | | | | | | |
| Other income (expense) | | | | | | | | | | |
| Interest expense | | | (43,055 | ) | | | - | | | |
| Total other expense | | | (43,055 | ) | | | - | | | |
| | | | | | | | | | | |
| Net loss | | | (516,740 | ) | | | (3,379,474 | ) | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Net loss per share: | | | | | | | | | | |
| Basic and diluted | | $ | (0.01 | ) | | $ | (0.09 | ) | | |
| | | | | | | | | | | |
| Weighted average shares outstanding: | | | | | | | | | | |
| Basic and diluted | | | 56,067,692 | | | | 35,666,630 | | | |
The accompanying notes are an integral part of these consolidated financial statements.
USA SUPERIOR ENERGY HOLDINGS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS¡¯ EQUITY
For the years three months ended March 31, 2008
(Unaudited)
| | | Common Shares | | | Par Amount | | | Additional Paid-In Capital | | Stock Subscription Receivable | | | Accumulated Deficit | | | Total | |
| | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2007 | | | 55,760,000 | | | $ | 55,760 | | | $ | 7,924,850 | | $ | - | | | $ | (7,556,732 | ) | | $ | 423,878 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Shares issued in exchange for subscription receivable | | | 400,000 | | | | 400 | | | | 299,600 | | | (130,000) | | | | - | | | | 170,000 | |
| Warrants issued for services | | | - | | | | - | | | | 153,270 | | | - | | | | - | | | | 153,270 | |
| Net loss | | | - | | | | - | | | | - | | | - | | | | (516,740 | ) | | | (516,740 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Balance, March 31, 2008 (Restated) | | | 56,160,000 | | | $ | 56,160 | | | $ | 8,377,720 | | $ | (130,000 | ) | | $ | (8,073,472 | ) | | $ | 230,408 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
USA SUPERIOR ENERGY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 2008 and 2007
(Unaudited)
| | | 2008 | | | 2007 | |
| | | (Restated) | | | (Restated) | |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | |
| Net loss | | $ | (516,740 | ) | | $ | (3,379,474 | ) |
| Adjustments to reconcile net loss to cash used by operating activities: | | | | | | | | |
| Depreciation, depletion and amortization | | | 21,243 | | | | 1,069 | |
| Amortization of debt discount | | | 11,179 | | | | - | |
| Stock based compensation | | | 207,436 | | | | 3,020,000 | |
| Net change in operating assets and liabilities | | | 131,564 | | | | (250,939 | ) |
| NET CASH USED BY OPERATING ACTIVITIES | | | (145,318 | ) | | | (609,344 | ) |
| | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | |
| Purchase of property and equipment | | | - | | | | (41,528 | ) |
| Investment in oil and gas properties | | | - | | | | (400,000 | ) |
| Increase in restricted cash | | | (100,000 | ) | | | - | |
| CASH FLOWS USED IN INVESTING ACTIVITIES | | | (100,000 | ) | | | (441,528 | ) |
| | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | |
| Proceeds from issuance of short-term debt | | | 100,000 | | | | 25,000 | |
| Proceeds from sale of units | | | - | | | | 1,000,000 | |
| Capital contributions from shareholder | | | - | | | | 161,976 | |
| Repayments of notes payable | | | (70,000 | ) | | | - | |
| CASH FLOWS USED BY FINANCING ACTIVITIES | | | 30,000 | | | | 1,186,976 | |
| | | | | | | | | |
| NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS | | | (215,318 | ) | | | 136,104 | |
| Cash and cash equivalents, beginning of period | | | 256,943 | | | | 297 | |
| Cash and cash equivalents, end of period | | $ | 41,625 | | | $ | 136,401 | |
| Cash paid for: | | | | | | | | |
| Interest | | $ | 1,001 | | | $ | - | |
| Income taxes | | $ | - | | | $ | - | |
| | | | | | | | | |
| Supplemental Schedule of Non-cash Investing and Financing Activities: | | | | | | | | |
| Purchase oil and gas properties through issuance of notes payable | | $ | - | | | $ | 750,097 | |
| Recapitalization | | | - | | | | 18,360 | |
| Asset retirement obligation incurred | | | - | | | | 88,066 | |
The accompanying notes are an integral part of these consolidated financial statements
USA SUPERIOR ENERGY HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
NOTE 1 ¡§C ORGANIZATION AND BUSINESS OPERATIONS
USA Superior Energy Holdings, Inc. (the "Company" or "USA Superior"), a Nevada corporation, was originally formed on November 12, 2003 as Comlink Communications Company ("Comlink"). In fiscal the fiscal year ended 2006, Comlink was essentially dormant with no operating business, having discontinued all prior operations in the first quarter of 2006. Prior operations consisted of an attempt to market two-way radio communication equipment over the internet. The Company had no capital and no prospects to raise capital to carry out the prior business plan.
The current business of the Company is to develop, own and operate prospects and energy projects in East and Southwest Texas. The Company primarily focuses on properties with a potential for enhanced secondary or tertiary recovery using modern state-of-the-art workover and stimulation techniques.
On January 16, 2007, USA Superior and Comlink Communications Company ("Comlink") consummated a merger that was effected through a reverse merger in which the shareholders of USA Superior agreed to receive 34,000,000 shares of common stock of Comlink in exchange for 100% of the issued and outstanding shares of USA Superior. Concurrent with the merger, USA Superior's executive management and directors assumed control and responsibility for Comlink's activities and its strategic direction. The merger effected a change in control of Comlink and immediately following the merger, USA Superior's former stockholders held approximately 59% of Comlink's issued and outstanding common shares. After the merger, Comlink's name was changed to USA Superior Energy Holdings, Inc., and the stock symbol was changed to OTCBB: USSU.
For Securities and Exchange Commission ("SEC') reporting purposes, the merger between USA Superior and Comlink was treated as a reverse merger with USA Superior being the "accounting acquirer" and, accordingly, it assumed Comlink's reporting obligations with the SEC. In accordance with SEC requirements, the historical financial statements and related disclosures presented herein for the period prior to the date of merger (i.e., January 16, 2007) are those of USA Superior. The assets and liabilities of Comlink were recorded, as of completion of the merger, at fair value, which is considered to approximate historical cost, and added to those of USA Superior.
In accordance with the terms of the merger agreement, each outstanding share of USA Superior prior to the reverse merger was converted into 309.8 common shares in USA Superior (post reverse merger) with a total of 30,980,000 common shares issued to the former USA Superior stockholders. Of the 63,360,000 shares of Comlink outstanding at the time of the merger, 45,000,000 shares were cancelled concurrent with the closing of the merger.
In conjunction with the merger, USA Superior issued 3,020,000 shares of common stock. In accordance with EITF 95-8, USA Superior determined that these were shares issued for services and not additional transaction costs due to the fact that Comlink's cash balance was minimal prior to the merger. These shares had a market value of $3,020,000 on the date of the reverse merger. Of the total shares issued for services, 2,720,000 shares were issued to employees of USA Superior. Immediately following the merger, a total of 52,360,000 shares of common stock were issued and outstanding.
Since its inception, USA Superior has funded its oil and gas activities through a combination of equity and debt securities and the contribution of funds and services by its principal shareholders and management.
NOTE 2 ¡§C SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Statements
The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2007, as filed with the Securities and Exchange Commission ("SEC"). The financial statements included herein as of March 31, 2008, and for the three month periods ended March 31, 2008 and 2007, are unaudited, and in the opinion of management, the information furnished reflects all material adjustments, consisting of normal recurring adjustments and restatements (See Note 6), necessary for a fair presentation of financial position and of the results for the interim periods presented. Certain minor reclassifications of prior period financial statements have been made to conform to current reporting practices. The results of operations for interim periods are not necessarily indicative of results to be expected for a full year
Basis of presentation
USA Superior's unaudited consolidated balance sheets as of March 31, 2008 and December 31, 2007 and related consolidated statements of operations, stockholders' quity and cash flow for the three months ended March 31, 2008 and 2007 are presented in U.S. dollars and have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and the rules of the Securities and Exchange Commission.
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could materially differ from those estimates.
Management believes that it is reasonably possible the following material estimates affecting the financial statements could significantly change in the coming year: (1) estimates of proved oil and gas reserves, and (2) forecast forward price curves for natural gas and crude oil. The oil and gas industry in the United States has historically experienced substantial commodity price volatility, and such volatility is expected to continue in the future. Commodity prices affect the level of reserves that are considered commercially recoverable; significantly influence USA Superior's current and future expected cash flows; and impact the PV10 derivation of proved reserves presented in USA Superior's supplemental oil and gas reserve disclosures made herein.
Principles of consolidation
The financial statements include the accounts of its 100% owned subsidiaries USA Superior Energy, Inc. and Superior Energy, LLC and its 80% interest in the subsidiary Skyrider Energy, LLC.
Revenue and cost recognition
USA Superior uses the sales method to account for sales of crude oil and natural gas. Under this method, revenues are recognized based on actual volumes of oil and gas sold to purchasers. The volumes sold may differ from the volumes to which USA Superior is entitled based on our interest in the properties. These differences create imbalances which are recognized as a liability only when the imbalance exceeds the estimate of remaining reserves. USA Superior had no imbalances as of March 31, 2008 and December 31, 2007. Costs associated with production are expensed in the period incurred.
New Accounting Pronouncements
USA Superior does not expect the adoption of recently issued accounting pronouncements to have a significant impact on their results of operations, financial position or cash flows
NOTE 3 ¡§C GOING CONCERN
USA Superior has raised limited financing and has incurred operating losses since its inception in October 2005. These factors raise substantial doubt about USA Superior's ability to continue as a going concern. USA Superior¡¯s ability to achieve and maintain profitability and positive cash flow is dependent on its ability to secure sufficient financing to fund the acquisition, drilling and development of profitable oil and gas properties. Management is seeking financing that it believes would allow USA Superior to establish and sustain commercial production. There are no assurances that USA Superior will be able to obtain additional financing from investors or private lenders and, if available, such financing may not be on commercial terms acceptable to USA Superior or its stockholders. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
NOTE 4 ¡§C NOTES PAYABLE AND CONVERTIBLE DEBENTURES
Notes Payable ¡§C Bastrop and Caldwell County, Texas Leases
As a portion of the consideration for the purchase of the Bastrop and Caldwell County, Texas leases, USA Superior issued a $350,000 note payable to the seller. The note bears interest at 5% and requires monthly payments of $15,000 plus interest. As of December 31, 2007, USA Superior was in default on the payments of the note. On April 11, 2008, USA Superior paid the lender $50,000 for attorney fees and a partial payment on the note and entered into a Renewal and Extension Promissory Note which settled the default. Under the terms of the new note, USA Superior must make monthly payments of $15,000 plus 8% interest beginning May 15, 2008. All unpaid principal and interest is due October 15, 2008. This note is secured by 500,000 shares of USA Superior's common stock which were pledged by the Company's CEO and USA Superior's interest in the Bastrop County leases.
As additional consideration for the purchase of the Bastrop County, Texas leases, USA Superior agreed to assume the seller¡¯s noninterest bearing liability to a third party in the total amount of $440,000. This note requires payments of 25 percent of the net revenue from the production of the leases, with minimum payments of $7,500 per month and $120,000 per year. This note was recorded at the present value of the future cash payments of $400,097. Management used an interest rate of 5% to discount this rate, because it was the same as the rate on the note payable to the seller described above. USA Superior is currently in default on the note due to the fact that all required payments have not been made on the note.
Convertible Note Payable
On January 23, 2008, USA Superior issued a convertible promissory note payable to a third party in the amount of $100,000. The proceeds of this note were placed in an escrow account to indemnify a broker for potential losses to be incurred in online trading in the company¡¯s stock. The note bears interest at 8%, matures January 23, 2009 and is convertible in the event of a merger transaction at the lowest rate available to other convertible note holders.
NOTE 5 ¡§C STOCKHOLDERS¡¯ EQUITY
Issuance of Common Shares and Warrants
On March 1, 2008, as modified April 22, 2008, USA Superior entered into an agreement with a third party for financial advisory services for the period from March 1, 2008 through February 28, 2010. Under the terms of the contract USA Superior will make monthly payments of $5,000 for a total of 23 months. In addition, USA Superior has issued a warrant to purchase 1,000,000 shares of common stock for a period of five years at an exercise price of $0.17 and USA Superior¡¯s CEO will pay the third-party 1,250,000 shares of the common stock owned by him. The warrants were valued at $153,270 using the Black-Scholes model with the following assumptions:
| | Assumption |
| Exercise price | $ 0.17 |
| Stock price on the issuance date | $ 0.18 |
| Term (years) | 5 |
| Risk free interest rate | 2.64 % |
| Volatility | 124 % |
The value of the warrants has been recorded as a prepaid asset and is being amortized over the two year term of the agreement. The 1,250,000 shares of stock have not yet been transferred by the CEO.
Issuance of Common Stock for Subscription Agreement
In January 2008, USA Superior issued 400,000 shares of stock to an employee of the company in exchange for a stock subscription receivable in the amount of $130,000. The shares were valued at $300,000 on the date of issuances. USA Superior recognized $170,000 of compensation expense related to the difference in the market value of the shares and the cash to be received from the employee.
NOTE 6 ¡§C RESTATEMENT
Restatement of March 31, 2008 financial statements
The Company determined that its restricted cash and current notes payable were understated by $100,000. Accrued interest and interest expense were understated by $1,333 related to the understatement of the current note payable. Prepaids and other current assets and additional paid-in capital were overstated by $948,760 related to the valuation of stock and warrants to be issued under a financial services contract. Lease operating expense was overstated by $14,759 due to an arithmetic error. General and administrative expenses were overstated by $52,754 related to the amortization of prepaid expenses and an arithmetic error.
Below is the detailed effect of the restatement
| | | As Reported | | | As Restated | |
| Balance Sheet as of March 31, 2008 | | | | | | |
| ASSETS | | | | | | |
| Restricted cash | | $ | 50,000 | | | $ | 150,000 | |
| Prepaids and other current assets | | $ | 1,092,519 | | | $ | 143,759 | |
| Current Assets | | $ | 1,186,644 | | | $ | 337,884 | |
| TOTAL ASSETS | | $ | 2,768,711 | | | $ | 1,920,581 | |
| | | | | | | | | |
| LIABILITIES | | | | | | | | |
| Accounts payable and accrued liabilities | | $ | 352,895 | | | $ | 448,493 | |
| Current portion of notes payable | | $ | 372,403 | | | $ | 472,403 | |
| Current Liabilities | | $ | 871,493 | | | $ | 1,067,091 | |
| Notes payable | | $ | 363,957 | | | $ | 270,317 | |
| Total Liabilities | | $ | 1,588,215 | | | $ | 1,690,173 | |
| | | | | | | | | |
| STOCKHOLDERS' EQUITY | | | | | | | | |
| Capital stock | | $ | 56,160 | | | $ | 56,160 | |
| Additional paid-in capital | | $ | 9,364,470 | | | $ | 8,377,720 | |
| Stock subscription receivable | | $ | (130,000 | ) | | $ | (130,000 | ) |
| Accumulated deficit | | $ | (8,110,134 | ) | | $ | (8,073,472 | ) |
| TOTAL STOCKHOLDERS' EQUITY | | $ | 1,180,496 | | | $ | 230,408 | |
| | | | | | | | | |
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | | $ | 2,768,711 | | | $ | 1,920,581 | |
| | | | | | | | | |
| STATEMENT OF OPERATIONS for the three months ended March 31, 2008 | | | | | | | | �� |
| Lease operating expense | | $ | 89,495 | | | $ | 104,254 | |
| General and administrative expense | | $ | 516,505 | | | $ | 463,751 | |
| Total operating expenses | | $ | 627,243 | | | $ | 589,248 | |
| Operating loss | | $ | (511,680 | ) | | | (473,685 | ) |
| Interest expense | | $ | (41,722 | ) | | $ | (43,055 | ) |
| Net loss | | $ | (553,402 | ) | | $ | (516,740 | ) |
| | | | | | | | | |
| Loss per common share (basic and diluted) | | $ | (0.01 | ) | | $ | (0.01 | ) |
| | | | | | | | | |
| Weighted averages shares outstanding | | | 56,064,348 | | | | 56,067,692 | |
| | | | | | | | | |
| STATEMENT OF CASH FLOWS for the three months ended March 31, 2008 | | | | | | | | |
| Net loss | | $ | (553,402 | ) | | $ | (516,740 | ) |
| Net cash used in operating activities | | $ | (145,318 | ) | | $ | (145,318 | ) |
| Net cash used in investing activities | | $ | - | | | $ | (100,000 | ) |
| Net cash provided by (used in) financing activities | | $ | (70,000 | ) | | $ | 30,000 | |
| Net decrease in cash and cash equivalents | | $ | (215,318) | | | $ | (215,318 | ) |
Restatement of March 31, 2007 financial statements
The Company determined that certain components of the statement of operations were misstated due to timing differences in the recognition of revenue and expense. General and administrative expenses were understated related to stock based compensation for stock issued in the reverse merger
Below is the detailed effect of the restatement
| | | As Reported | | | As Restated | |
| STATEMENT OF OPERATIONS for the three months ended March 31, 2007 | | | | | | | | |
| Revenues | | $ | 53,418 | | | $ | 15,443 | |
| Lease operating expense | | $ | 32,989 | | | $ | 18,763 | |
| General and administrative expense | | $ | 305,856 | | | $ | 3,375,085 | |
| Depreciation and amortization | | $ | - | | | $ | 1,069 | |
| Total operating expenses | | $ | 305,856 | | | $ | 3,394,917 | |
| Operating loss | | $ | (285,427 | ) | | | (3,379,474 | ) |
| Interest expense | | $ | - | | | $ | - | |
| Net loss | | $ | (285,427 | ) | | $ | (3,379,474 | ) |
| | | | | | | | | |
| Loss per common share (basic and diluted) | | $ | (0.00 | ) | | $ | (0.09 | ) |
| | | | | | | | | |
| Weighted averages shares outstanding | | | 59,663,336 | | | | 35,666,630 | |
| | | | | | | | | |
| STATEMENT OF CASH FLOWS for the three months ended March 31, 2007 | | | | | | | | |
| Net loss | | $ | (285,427 | ) | | $ | (3,379,474 | ) |
| Net cash used in operating activities | | $ | (882,468 | ) | | $ | (609,344 | ) |
| Net cash used in investing activities | | $ | (19,616 | ) | | $ | (441,528 | ) |
| Net cash provided by financing activities | | $ | 975,000 | | | $ | 1,186,976 | |
| Net increase in cash and cash equivalents | | $ | 72,916 | | | $ | 136,401 | |
Item 2. Management's Discussion Analysis of Financial Condition and Results of Operations
The following discussion will assist you in understanding our financial position, liquidity, and results of operations. The information below should be read in conjunction with the consolidated financial statements, and the related notes to consolidated financial statements. Our discussion contains both historical and forward-looking information. We assess the risks and uncertainties about our business, long-term strategy, and financial condition before we make any forward-looking statements, but we cannot guarantee that our assessment is accurate or that our goals and projections can or will be met. Statements concerning results of future exploration, exploitation, development, and acquisition expenditures as well as expense and reserve levels are forward-looking statements. We make assumptions about commodity prices, drilling results, production costs, administrative expenses, and interest costs that we believe are reasonable based on currently available information.
Business Strategy
USA Superior Energy Holdings, Inc. (the "Company") is focused on acquiring, owning, operating and applying enhanced oil recovery ("EOR") techniques to existing shallow fields of oil and gas. The Company performs complete workover and stimulation services in these existing fields to restart or substantially increase production. It utilizes state-of-the-art workover and shallow-well drilling techniques in these fields including new and innovative technologies under development by the Company. These new technologies include specialized shallow-well cased hole horizontal drilling ("CHHD") and nitrogen ("N2") injection which will be utilized to increase production volumes and reserve recoverability from the Company's projects. Currently, the Company is involved in developing, owning and operating energy projects and prospects in East, Central and South Texas and currently has active projects and prospects in Bastrop, Caldwell, Navarro and Zavalla counties. These fields are known as the Bateman Project in Bastrop and Caldwell Counties (comprised of the Bateman Field and part of the adjacent Dale McBride Field), the Benton Field in Navarro County and the Del Monte Prospect in Zavalla County.
Going Concern
We incurred a net loss of $516,740 for the quarter ended March 31, 2008 and have a working capital deficit of $872,966 at March 31, 2008, excluding prepaid expenses relating primarily to services paid for with common stock. We require significant additional funding to sustain our operations and satisfy our contractual obligations for our planned oil and gas exploration and development operations. Our ability to establish the Company as a going concern is dependent upon our ability to obtain additional financing, in order to fund our planned operations and ultimately, to achieve profitable operations.
Liquidity and Capital Resources
Our main sources of liquidity and capital resources for the quarter ended March 31, 2008 were cash flows from operations and draw down of our cash balances. During the quarter, we entered into a financing arrangement with our oil purchasing customers which allows for immediate payment on barrels delivered. While this may reduce the price we might otherwise receive for our production, we have been able to accelerate cash flow from revenues to enhance our liquidity by receiving cash upon the delivery of our barrels.
During the quarter ended March 31, 2008, net cash flow used by operating activities decreased by $464,000 to $145,000, as compared to $609,000 for the quarter ended March 31, 2007, primarily because of our increased revenue. Excluding the effects of significant unforeseen expenses or other income, our cash flow from operations fluctuates primarily because of variations in oil and gas production rates and in commodity prices. In addition, our oil and gas production from either of our properties may be curtailed due to maintenance and weather-related factors beyond our control.
Our realized oil and gas prices vary significantly due to world political events, supply and demand for products, product storage levels, and weather patterns, among other factors. We sell 100% of our production at spot market prices. Accordingly, product price volatility will affect our cash flow from operations.
We anticipate making capital expenditures of approximately $4,000,000 over the next several years to drill additional wells on our existing properties. The remainder of our 2008 capital budget will be funded from a combination of our cash flow from operations, our cash and cash equivalents and the proceeds from offerings of debt and/or equity securities.
On March 31, 2008, our current liabilities exceeded our current assets by $872,966, excluding prepaid expenses relating primarily to services paid for with common stock. In order to achieve positive cash flow from operations during 2008, we will require additional funding in order to complete our plans to maintain, workover and begin EOR operations on existing wells and to develop additional wells on existing properties.
Results of Operations
Revenue
We produced 1,322 barrels of oil and recognized revenue of $115,563 during the quarter ended March 31, 2008, an increase of approximately 1,100 barrels and approximately $100,000 over the same period in 2007, primarily because we had a full quarter of production from the Bateman Project which was acquired in late in the first quarter of 2007 and because we realized significantly higher prices for our production.
The following chart summarizes the Company¡¯s sales of oil and gas since its acquisition of the Bateman project on March 20, 2007:
| | Sales (Bbls) | |
| | Gross | Net | Average Price/Bbl |
| | | | |
| Second Quarter 2008 (a) | 1,501 | 1,183 | $ 98.41 |
| | | | |
| First Quarter 2008 | 1,656 | 1,322 | 91.63 |
| | | | |
| Fourth Quarter 2007 | 178 | 139 | 80.99 |
| | | | |
| Third Quarter 2007 | 920 | 727 | 70.11 |
| | | | |
| Second Quarter 2007 | 3,275 | 2,606 | 60.96 |
| | | | |
| First Quarter 2007 (b) | 358 | 284 | 57.09 |
(a) Through May 2008
(b) Bateman Project acquired March 20, 2007
The Company's ability to maintain and increase sales from recent levels is dependent on its ability to raise funds to correct its working capital deficit and for the investment of additional funds into the extensive maintenance, workover and planned enhancement operations to accelerate the realization of production volumes.
Lease operating expense and production taxes
Our production costs totaled $104,254 during the quarter ended March 31, 2008, an increase of $85,491 over the same period in 2007, primarily because we had a full quarter of production from the Bateman Project which was acquired in late in the first quarter of 2007.
General and administrative expense (G&A expense)
General and administrative expense for the quarter ended March, 31 2008 decreased $2,911,334 from the comparable 2007 period to $463,751. The largest portion of the reduction came from a decrease in stock based compensation of $2,812,564 from the same period in 2007 which related to the reverse merger and compensation of key employees and consultants.
Net loss
For the quarter ended March 31, 2008, our net loss decreased to $516,740, compared to our same quarter 2007 net loss of $3,379,474. The major components of the first quarter 2008 loss were general and administrative expenses of $463,751 including stock based compensation of $207,436. The major component of the first quarter 2007 loss was general and administrative expense of $3,375,085 including stock based compensation of $3,020,000.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company¡¯s results of operations and operating cash flows can be significantly impacted by changes in market prices for oil and gas. The Company has not to date utilized derivative contracts, costless collars, or other similar economic hedging arrangements as a means to reduce its exposure to unfavorable changes in oil prices or that may expose the Company to risk of financial loss and limit the benefit of future increases in prices.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") are controls and other procedures that are designed to ensure that the information that we are required to disclose 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 SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
In connection with the preparation of this Quarterly Report on Form 10-Q, our management has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2008. The disclosure controls and procedures are not effective and during the second quarter of fiscal 2008 management will be implementing effective disclosure controls and procedures.
Management's Report on Internal Control Over Financial Reporting
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rules 13a-15(f) under the Exchange Act. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with existing policies or procedures may deteriorate.
Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, during the second quarter of the current fiscal year, our management will implement an assessment of our internal control over financial reporting, based on the criteria established in Internal Control- Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). It is the opinion of our management that our internal control over financial reporting is currently not effective. For the quarter ended March 31, 2008 there were no changes to the Company¡¯s internal controls over financial reporting.¡±
PART II- OTHER INFORMATION
Item 1. Legal Proceedings
On March 6, 2007, the Company entered into an Agreement of Sale and Purchase with Orbis Operating, LLC ("Orbis"), in which it agreed to purchase a substantial portion of the property Orbis acquired under a previous R&S Sale Agreement. Part of the purchase price included a Promissory Note in the amount of $350,000.00. After alleged numerous defaults by the Company, Orbis filed suit on March 10, 2008 in United States District Court in Bastrop County, Texas (Cause No. 26,952). The parties then entered into negotiations and reached agreement through a Loan Workout and Security Agreement on April 11, 2008. Orbis filed a Rule 11 Agreement with the Bastrop County court whereby it shall dismiss the suit with prejudice upon the full performance of USA Superior.
The terms of the settlement included:
| ¡¡è | The Company paying $50,000 cash, in which all was allocated towards Orbis'legal fees |
| ¡¡è | Principal Balance = $310,000 |
| ¡¡è | The Company is to make monthly payments on the 15th day in the amount of $15,000 plus accrued interest, (6 payments for May-Oct) |
| ¡¡è | The Company is to make a final payment of entire Principal ($202,000) on October 15, 2008 |
| ¡¡è | Once the Company fulfills obligation to plug the Gabriel wells it assumed (must be done by July 31, 2008), it will be given a $60,000 credit towards final Principal payment |
Outside of the Orbis settlement disclosures above, the Company knows of no material, active or pending legal proceedings against the Company nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any directors, officers, or affiliates, or any registered or beneficial shareholder, is an adverse party or has material interest adverse to the Company's interest.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In January 2008, the Company issued 400,000 shares of stock to an employee of the company in exchange for a stock subscription receivable in the amount of $130,000. The shares were valued at $300,000 on the date of issuances. The shares were sold pursuant to the private offering exemption under Section 4(2) of the Securities Act of 1933.
On March 1, 2008 the Company issued a warrant to Masynda Corporation in connection with advisory services to be provided by Masynda. The warrant provides Masynda the right to purchase 1,000,000 shares of Company common stock for a period of five years at an exercise price of $0.17 per share. The delivery of the warrant in exchange for services to be rendered was delivered pursuant to the private offering exemption under Section 4(2) of the Securities Act of 1933.
Item 3. Defaults Upon Senior Securities
NONE
Item 4. Submission of Matters to a Vote of Security Holders.
NONE
Item 5. Other Information
See the discussion under Part 1 ¡§C FINANCIAL INFORMATION, Item 2. Management¡¯s Discussion and Analysis of Financial Condition and Results of Operations regarding information required to be disclosed on From 8-K during the period covered by this Form 10-Q, but not reported.
Security holders of the Company may recommend nominees to the Company¡¯s board of directors by directing such nominations to the board of directors at the Company's principal office.
Item 6. Exhibits
| 31.1 | Certification of Chief Executive Officer of the Company pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2 | Certification of Chief Financial Officer of the Company pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1 | Certification of Chief Executive Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2 | Certification of Chief Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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.
USA Superior Energy Holdings, Inc.
(the ¡¡ãRegistrant¡¡À)
By: /s/ G. Rowland Carey
G. Rowland Carey
President, Chief Executive Officer,
& Chief Financial Officer
