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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

S QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES ACT OF 1934

For the quarterly period ended March 31, 2012

 

OR

 

£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES ACT OF 1934

 

For the transition period from ___________to ____________

 

Commission File Number 333-123465

 

UNIVERSAL BIOENERGY, INC.

(Exact name of Registrant as specified in its charter)

 

Nevada   20-1770378 State of Incorporation IRS Employer Identification No.

 

19800 Mac Arthur Blvd., Suite 300

Irvine, CA 92612

(Address of principal executive offices)

 

(949) 559-5017 

(Issuer’s telephone number)

 

Indicate by check mark whether the Registrant (1) has filed all reports required 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   S     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 (§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 S

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non–accelerated filer. See definition of “accelerated filer large accelerated filer” and “smaller reporting company” in Rule 12b–2 of the Exchange Act. (Check one):

 

Large accelerated filer  ¨                 Accelerated filer  ¨             Non–Accelerated filer  ¨  Smaller reporting company  S

 

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

 

Transitional Small Business Disclosure Format (check one): Yes £ No S

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

     
Class   Outstanding at   May 18, 2012

 

Common stock, $0.001 par value

  297,210,041

 

 

(1)

 

  

UNIVERSAL BIOENERGY INC.

 

INDEX TO FORM 10-Q FILING

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

 

TABLE OF CONTENTS

 

 

       PAGE
PART I - FINANCIAL INFORMATION  
     
Item 1.   Condensed Consolidated Financial Statements  
    Condensed Consolidated Balance Sheets 3
           Condensed Consolidated Statements of Income 4
    Condensed Consolidated Statements of Cash Flows 5
    Notes to Condensed Consolidated Financial Statements 6
Item 2.   Management Discussion & Analysis of Financial Condition and Results of Operations 16
Item 3   Quantitative and Qualitative Disclosures About Market Risk 28
Item 4.

Controls and Procedures

28
       
   
PART II - OTHER INFORMATION  
     
Item 1.   Legal Proceedings 29
Item 1A        Risk Factors 29
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds 30
Item 3.   Defaults Upon Senior Securities 31
Item 4.   Mine Safety Disclosures 31
Item 5   Other information 31
Item 6.   Exhibits 31

 

CERTIFICATIONS

 

Exhibit 31 – Management Certification…………………………………………………….... 58-61

 

Exhibit 32 – Sarbanes-Oxley Act……………………………………………………………. 62-63

 

  

(2)

  

PART I — CONSOLIDATED FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

The accompanying reviewed interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q. Therefore, they do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, cash flows, and stockholders' equity in conformity with generally accepted accounting principles. Except as disclosed herein, there has been no material change in the information disclosed in the notes to the financial statements included in the Company's annual report on Form 10-K for the year ended December 31, 2011, as amended filed April 19, 2012. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations and financial position have been included and all such adjustments are of a normal recurring nature. Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that can be expected for the year ending December 31, 2012.

 

  

UNIVERSAL BIOENERGY, INC.

        CONSOLIDATED BALANCE SHEETS

 

   March 31, 2012 December 31, 2011
   (Unaudited)   (Audited) 
 ASSETS:         
CURRENT ASSETS:         
  Cash  $22,151  $3,706 
  Accounts receivable   2,047,079   10,004,123 
  Other loans   —     —   
     Total current assets   2,069,230   10,007,829 
          
PROPERTY AND EQUIPMENT - net   8,297   8,951 
          
OTHER ASSETS:         
 Accounts receivable - other   10,050   10,050 
 Investments   2,889,500   889,500 
 Intangible assets   250,000   250,000 
 Deposit   7,453   46,516 
     Total other assets   3,157,003   1,196,066 
          
   TOTAL ASSETS  $5,234,529  $11,212,846 
          
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):         
          
CURRENT LIABILITIES:         
  Accounts payable  $2,164,529  $10,099,502 
  Other accounts payable and accrued expenses   306,522   208,848 
  Accrued interest   195,778   101,860 
  Line of credit   17,479   7,850 
Current portion of long term debt   302,703   - 
  Advances from affiliates   4,250   4,250 
   Total current liabilities   2,991,261   10,422,310 
          
Long term debt   1,392,487   494,646 
          
     TOTAL LIABILITIES   4,383,748   10,916,956 
          
STOCKHOLDERS' EQUITY (DEFICIT):         
   Preferred stock, $.001 par value, 1,000,000 shares         
   authorized. Preferred stock Series A, zero issued and outstanding shares   —     —   
   March 31, 2012 and December 31, 2011, respectively.         
   Preferred stock Series B, 232,080 issued and outstanding shares         
   March 31, 2012 and December 31, 2011, respectively   232   232 
   Common stock, $.001 par value, 1,000,000,000 shares authorized;         
   278,306,264 and 199,969,927 issued and outstanding as of         
   March 31, 2012 and December 31, 2011, respectively   278,306   199,970 
   Additional paid-in capital   20,284,738   19,111,601 
   Noncontrolling interest   (167,495)  (125,543)
   Accumulated deficit   (19,545,000)  (18,890,370)
     Total stockholders' deficit   850,781   295,890 
          
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)  $5,234,529  $11,212,846 

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

  

(3)

 

UNIVERSAL BIOENERGY, INC. 

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 

   For Quarters Ending
   March 31,
   2012  2011
       
  REVENUES  $13,007,160   $22,247,354 
           
  COST OF SALES   12,989,939    22,219,582 
           
  GROSS PROFIT   17,220    27,772 
           
OPERATING EXPENSES:          
    General and administrative   430,385    329,190 
    Sales and marketing   9,502    6,775 
    Depreciation and amortization expense   654    1,123 
        Total operating expenses   440,541    337,088 
           
LOSS FROM OPERATIONS   (423,320)   (309,316)
           
OTHER INCOME (EXPENSE):          
    Other income   4,295    588 
    Interest (expense), including amortization of beneficial conversion feature   (277,557)   (285,359)
       Total other expense   (273,262)   (284,771)
           
Net (Loss)   (696,582)   (594,087)
           
 Net (loss) attributable to noncontrolling interest   (41,952)   (17,053)
           
NET (LOSS) ATTRIBUTABLE TO UNIVERSAL  $(654,630)  $(577,034)
           
NET (LOSS) PER SHARE:          
    Basic and diluted loss per share  $*  $(0.01)
           
    Weighted average of shares outstanding   239,138,096    63,484,245 
           
* = Less than (.01)          

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

 

 

(4)

 

UNIVERSAL BIOENERGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

   For The Three Months Ended
   March 31,
   2012  2011
       
CASH FLOWS FROM OPERATING ACTIVITIES:         
 Net (Loss)  $(696,582)  $(594,087)
 Adjustments to reconcile net (loss) to net cash         
    (used in) operating activities:         
 Depreciation expense   654   1,123 
 Common stock issued for services   5,000   193,250 
 Amortization of Beneficial conversion features   146,666   35,556 
 Changes in assets and liabilities:         
  Accounts receivable   7,957,044   9,045,011 
  Prepaid expenses and other assets   39,063   —   
  Accrued expenses and other liabilities   191,592   148,672 
  Accounts payable   (7,934,973)   (8,873,605)
         Net cash used in operating activities   (291,535)   (44,080)
          
CASH FLOWS FROM INVESTING ACTIVITIES:         
   Investment in participation agreement - see note 10   —     (139,500)
         Net cash provided by (used in) investing activities   —     (139,500)
          
CASH FLOWS FROM FINANCING ACTIVITIES:         
  Principal payments on notes payable and line of credit   (316,884)   —   
  Proceeds from notes payable issued and line of credit   626,864   197,300 
         Net cash provided by financing activities   309,980   197,300 
          
INCREASE (DECREASE) IN CASH   18,445   13,720 
          
CASH, BEGINNING OF YEAR   3,706   —   
          
CASH, END OF YEAR  $22,151  $13,720 
          
SUPPLEMENTAL CASH FLOW INFORMATION:         
          
Interest paid  $—    $—   
Taxes paid  $—    $—   
Issuance of common stock for the conversion of debt  $485,138  $118,850 
Investment in membership acquisition agreement by issuing notes payable  $2,000,000  $—   
Convertible notes issued for accrued liabilities  $18,764  $305,745 
Beneficial conversion feature of convertible notes payable  $2,565,787  $1,149,975 

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

 

(5)

 

 

UNIVERSAL BIOENERGY, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

 

 

NOTE 1 - DESCRIPTION OF BUSINESS

 

Overview of the Company

Universal Bioenergy Inc. is an independent diversified energy company, headquartered in Irvine, California. Our common stock is presently listed on the OTC Markets Group trading systems under the trading symbol “UBRG”. Universal Bioenergy Inc., was incorporated on August 13, 2004 in the State of Nevada, under the name of Palomine Mining Inc. On October 24, 2007, the Company changed its name from Palomine Mining Inc., to Universal Bioenergy Inc. to better reflect its new business plan and strategic direction.

The Company’s primary business focus is the production, marketing and sales of natural gas, petroleum, coal, propane and alternative energy. Through its 49% owned subsidiary, NDR Energy Group LLC, the Company presently sells natural gas to 28 of the largest public utilities, electric power producers and local gas distribution companies that serve millions of commercial, industrial and residential customers throughout the United States. The Company is also engaged in the acquisition of oil and gas fields, lease acquisitions, and development of newly discovered or recently discovered oil and gas fields, re-entering existing wells, transmission and marketing of the products to our customer base. The Company intends to continue its growth through an ongoing series of acquisitions.

Our principal and administrative offices are located at 19800 MacArthur Blvd., Suite 300, Irvine, California 92612. Our telephone number is 949-559-5017.

Universal Bioenergy files or furnishes various reports with the Securities and Exchange Commission (“SEC”). These reports, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (“1934 Act”), are available free of charge on Universal Bioenergy’s corporate website, www.universalbioenergy.com, as promptly as practicable after they are filed with, or furnished to, the SEC. The information contained on this website is not incorporated by reference into this Quarterly Report on Form 10-Q and should not be considered part of this report. Reports filed with the SEC are also made available on its website at www.sec.gov.

Whitesburg Friday Branch Mine LLC

On February 20, 2012, the Company expanded into the coal energy market by the acquisition of forty percent (40%) of the Member Interests of Whitesburg Friday Branch Mine LLC, “Whitesburg”, a Kentucky Limited Liability Company. “Whitesburg” is engaged in the business of coal mining, operations and coal production at a coal mining property known as the Whitesburg Friday Branch Mine, located at Friday Branch Road, in Whitesburg, Letcher County, Kentucky for the marketing of “Thermal/Steam” non-coking coal in the United States of America. The Whitesburg Mine operates, mines and markets thermal coal for sale to electric utilities for use in coal fired power plant electric generation. The Whitesburg mining operations are the surface and high wall mining type and does not include any underground mining.

 

 

NDR Energy Group LLC

In April 2010, we expanded into the natural gas energy market by the acquisition of a 49% stake in NDR Energy Group LLC, in Charlotte, North Carolina (“NDR Energy”). NDR Energy Group was established in the State of Maryland on September 28, 2005. Through NDR Energy, we have contracts signed with 28 major utility companies in the United States, with strong Standard & Poor’s credit ratings. NDR Energy Group markets and distributes natural gas and propane to 28 of the largest public utilities, electric power producers and local gas distribution companies that serve millions of commercial, industrial and residential customers throughout the country. Our customers include Southern California Gas Company, Pacific Gas & Electric, CenterPoint Energy Resources, Baltimore Gas & Electric, Memphis Light Gas & Water, Duke (Ohio & Kentucky), Michigan Consolidated and National Grid. Our gas suppliers include EDF Trading, Chevron Texaco, Conoco Phillips, Chesapeake Energy Marketing, and Anadarko.

 

Company History

 

Universal Bioenergy, Inc. (UBRG) f/k/a Palomine Mining, Inc. was incorporated on August 13, 2004 under the laws of the State of Nevada.

 

Universal Bioenergy North America, Inc. (“UBNA”), our wholly owned subsidiary, was incorporated in the State of Nevada on January 23, 2007.

 

In October 2007, UBNA entered into a Purchase Agreement with UBRG in which UBNA became a subsidiary of UBRG. The purchase was consummated on December 6, 2007.

 

On October 24, 2007, the Company changed its name from Palomine Mining Inc., to Universal Bioenergy, Inc. to better reflect its business plan.

 

On March 7, 2008, the Board of Directors approved a change in the Company’s fiscal year end from January 31 to December 31. 

 

On April 12, 2010, Universal Bioenergy and NDR Energy Group, LLC, a Maryland limited liability company entered into a Member Interest Purchase Agreement in which Universal Bioenergy purchased a 49% Member Interest NDR Energy Group. NDR Energy Group markets energy and fuel such as natural gas, and propane.

 

On February 20, 2012, the Company acquired forty percent (40%) of the Member Interests of Whitesburg Friday Branch Mine LLC, a Kentucky Limited Liability Company. Whitesburg Friday Branch Mine LLC is engaged in the business of coal mining, operations, production and marketing of “Thermal/Steam” non-coking coal at a coal mining property known as the Whitesburg Friday Branch Mine, located in Letcher County, in Whitesburg, Kentucky.

 

(6)

 

NOTE 2 - BASIS OF PRESENTATION

 

Interim Financial Statements

 

The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In our opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months period ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. While management of the Company believes that the disclosures presented herein and adequate and not misleading, these interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the footnotes thereto for the fiscal year ended December 31, 2011 as filed with the Securities and Exchange Commission.

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States of America. Significant accounting policies are as follows:

 

Principle of Consolidation

 

The consolidated financial statements include the accounts of Universal Bioenergy, Inc., Universal Bioenergy North America, Inc., and NDR Energy Group, LLC. Intercompany accounts and transactions have been eliminated in the consolidated financial statements.

 

On April 12, 2010, the Company acquired a direct 49% financial interest in NDR Energy Group LLC (“NDR”). Additionally, through Varlos Energy Holdings LLC, an entity owned by officers of the Company, it acquired an additional 2% financial interest in NDR for a total direct and indirect financial interest and control of 51% of NDR. The operating agreement of NDR, provides for voting in proportion to ownership. The Company directly has 51% voting control of NDR through its 49% member interest and through a Voting Trust which the Company has the 2% voting interest of Varlos Energy Holdings LLC, and has accordingly consolidated its financial position, results of operations, and cash flows into these financial statements.

 

Use of Estimates and Assumptions

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and (iii) the reported amount of net sales and expenses recognized during the periods presented. Adjustments made with respect to the use of estimates often relate to improved information not previously available. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of financial statements; accordingly, actual results could differ from these estimates.

 

Revenue and Cost Recognition

 

Revenue includes product sales. The Company recognizes the majority of its consolidated revenue and cash flow from the sale of natural gas and related energy products at the time title to the product transfers, the amount is fixed and determinable, evidence of an agreement exists and the customer bears the risk of loss, net of provision for rebates and sales allowances in accordance with ASC Topic 605 “Revenue Recognition in Financial Statements”.

 

Management has considered the various factors discussed in ASC 605-45-14-4-c and ASC 605-45-45 and believe that our natural gas purchase and sale transactions are appropriately reported gross rather than net. Generally the Company is the primary obligor in the arrangement, and the Company has latitude in establishing price, we have discretion in supplier selection, and we have credit risk in the event our customer defaults on the transaction. Additionally, the Company’s supplier is not the primary obligor in the arrangement and the amount the Company earns is not fixed. Those transactions where the Company operates as an agent or broker for either the supplier or the customer at a fixed fee are reported net.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. At March 31, 2012 and December 31, 2011 the Company had no cash equivalents.

 

Property and Equipment

 

Property and equipment is recorded at cost and depreciated over the estimated useful lives of the assets using principally the straight-line method. When items are retired or otherwise disposed of, income is charged or credited for the difference between net book value and proceeds realized. Ordinary maintenance and repairs are charged to expense as incurred, and replacements and betterments are capitalized.

 

The range of estimated useful lives used to calculated depreciation for principal items of property and equipment are as follows:

 

Asset Category  

Depreciation/Amortization Period

Building

Plant Equipment

Furniture and Fixture

 

40 Years

15 Years

3 Years

Office equipment   3 Years
Leasehold improvements   5 Years

 

Goodwill and Other Intangible Assets

 

The Company adopted Statement of Financial Accounting Standard (“FASB”) Accounting Standards Codification (“ASC”) Topic 350 Goodwill and Other Intangible Assets, effective July 1, 2002. In accordance with (“ASC Topic 350”) "Goodwill and Other Intangible Assets," goodwill, represents the excess of the purchase price and related costs over the value assigned to net tangible and identifiable intangible assets of businesses acquired and accounted for under the purchase method, acquired in business combinations is assigned to reporting units that are expected to benefit from the synergies of the combination as of the acquisition date. Under this standard, goodwill and intangibles with indefinite useful lives are no longer amortized. The Company assesses goodwill and indefinite-lived intangible assets for impairment annually during the fourth quarter, or more frequently if events and circumstances indicate impairment may have occurred in accordance with ASC Topic 350. If the carrying value of a reporting unit's goodwill exceeds its implied fair value, the Company records an impairment loss equal to the difference. ASC Topic 350 also requires that the fair value of indefinite-lived purchased intangible assets be estimated and compared to the carrying value. The Company recognizes an impairment loss when the estimated fair value of the indefinite-lived purchased intangible assets is less than the carrying value.

 

Impairment of Long-Lived Assets

 

In accordance with ASC Topic 365, long-lived assets, such as property, plant, and equipment, and purchased intangibles, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Goodwill and other intangible assets are tested for impairment. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. There were no events or changes in circumstances that necessitated an impairment of long-lived assets.

 

(7)

  

Income Taxes

 

Deferred income taxes are provided based on the provisions of ASC Topic 740, "Accounting for Income Taxes", to reflect the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

 

The Company adopted the provisions of ASC Topic 740; "Accounting For Uncertainty In Income Taxes-An Interpretation Of ASC Topic 740 ("ASC Topic 740"). ASC Topic 740 contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not, that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount, which is more than 50% likely of being realized upon ultimate settlement. The Company considers many factors when evaluating and estimating the Company's tax positions and tax benefits, which may require periodic adjustments. At September 30, 2011, the Company did not record any liabilities for uncertain tax positions.

 

Share-Based Compensation

 

The Company applies Topic 718 “Share-Based Payments” (“Topic 718”) to share-based compensation, which requires the measurement of the cost of services received in exchange for an award of an equity instrument based on the grant-date fair value of the award.  Compensation cost is recognized when the event occurs.  The Black-Scholes option-pricing model is used to estimate the fair value of options granted.

 

Concentration of Credit Risk

 

The Company maintains its operating cash balances in banks located in Irvine, California, and Charlotte, North Carolina. The Federal Depository Insurance Corporation (FDIC) insures accounts at each institution up to $250,000.

 

Earnings Per Share

 

Basic income (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the reporting period. Diluted earnings per share reflects the potential dilution that could occur if stock options, warrants, and other commitments to issue common stock were exercised or equity awards vest resulting in the issuance of common stock that could share in the earnings of the Company. Diluted loss per share is the same as basic loss per share, because the effects of the additional securities, a result of the net loss would be anti-dilutive.  

 

The Company's financial instruments consist primarily of cash, accounts payable.

 

Fair Value of Financial Instruments

 

The Company's financial instruments consist primarily of cash, accounts payable and accrued expenses, and debt. The carrying amounts of such financial instruments approximate their respective estimated fair value due to the short-term maturities and approximate market interest rates of these instruments.  The estimated fair value is not necessarily indicative of the amounts the Company would realize in a current market exchange or from future earnings or cash flows.

 

The Company adopted ASC Topic 820, Fair Value Measurements (“ASC Topic 820”), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  The standard provides a consistent definition of fair value which focuses on an exit price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The standard also prioritizes, within the measurement of fair value, the use of market-based information over entity specific information and establishes a three-level hierarchy for fair value measurements based on the nature of inputs used in the valuation of an asset or liability as of the measurement date.

 

The three-level hierarchy for fair value measurements is defined as follows:

 

£

Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or

liabilities in active markets;

 

 

£

Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in

active markets, and inputs that are observable or the asset or liability other than quoted prices, either

directly or indirectly including inputs in markets that are not considered to be active;

 

 

£ Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value. measurement

 

(8)

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)

 

Reclassification

 

Certain prior period amounts have been reclassified to conform to current year presentations.

 

Recently Issued Accounting Standards

 

The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on its consolidated financial condition or the consolidated results of its operations.

 

In September 2011, the FASB issued ASU 2011-08 which provides an entity the option to first assess qualitative factors to determine whether it is necessary to perform the current two-step test for goodwill impairment. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. The revised standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company does not expect that the adoption of this standard will have a material impact on the Company’s results of operations, cash flows or financial condition.

 

In December 2011, FASB issued Accounting Standards Update 2011-11, “Balance Sheet - Disclosures about Offsetting Assets and Liabilities” to enhance disclosure requirements relating to the offsetting of assets and liabilities on an entity's balance sheet. The update requires enhanced disclosures regarding assets and liabilities that are presented net or gross in the statement of financial position when the right of offset exists, or that are subject to an enforceable master netting arrangement. The new disclosure requirements relating to this update are retrospective and effective for annual and interim periods beginning on or after January 1, 2013. The update only requires additional disclosures, as such, the Company does not expect that the adoption of this standard will have a material impact on the Company’s results of operations, cash flows or financial condition.

 

No other accounting standards or interpretations issued recently are expected to a have a material impact on the Company’s consolidated financial position, operations or cash flows.

 

NOTE 4 - NET LOSS PER SHARE

 

The net loss per common share is calculated by dividing the income and loss by the weighted average number of shares outstanding during the periods.

 

         
The following table represents the computation of basic and diluted income and losses per share:
         
   

For the Three Months Ended

March 31, 2012

 

 

 

For the Three Months Ended

March 31, 2011

 

         
Net Loss available for common shareholders $   (654,630) $      (577,034)
         
Weighted average common shares outstanding         239,138,096      63,484,245
Basic and fully diluted net loss per share $ * $ (.01)

*Less than $0.01 per share

 

Net loss per share is based upon the weighted average shares of common stock outstanding

             

 

The effect of common shares issuable under convertible notes is Anti-Dilutive and not included in diluted net loss per share.

 

NOTE 5 - EQUITY

 

On May 9, 2011, the Company amended its Articles of Incorporation and increased the authorized shares of common stock to 1,000,000,000 shares at $.001 par value. There are 278,306,261 shares of common stock issued and outstanding as of March 31, 2012.

 

On June 6, 2011, our Board of Directors passed a resolution and declared a stock dividend to distribute to all registered shareholders of record on or before July 1, 2011, on a 10 for 1 basis.

 

On July 12, 2011, our transfer agent, issued 11,415,311 shares of common stock to all registered shareholders of record in accordance with the resolution and declaration.

 

The Company has authorized a total of 1,000,000 shares of Preferred Stock with a par value of $0.001 per share. On September 29, 2008, the Company authorized 100,000 Series A Preferred shares and 232,080 Series B Preferred Shares of stock. As of March 31, 2012, there were no Series A preferred shares issued and outstanding, and a total of 232,080 Series B preferred shares issued and outstanding.

 

(9)

 

RECENT SALES OF UNREGISTERED SECURITIES

 

Common Stock Issued

 

Fiscal Year 2012

 

At March 31, 2012, there were no outstanding stock options or warrants.

 

On January 19, 2012 the Company completed a partial conversion one of its revised Notes payable dated December 23, 2011, with an original outstanding amount of $99,134. On December 29, 2011, $30,000 worth of this note was converted, leaving a $69,134 balance. On January 19, 2012 a total of $30,134 worth of the Note was converted, and 2,897,500 common shares were issued for that part of the conversion, which leaves a remaining balance of $39,000 of the principal of the Note. This revised Note combined two existing Notes, one dated March 28, 2011 for $72,500, and one dated May 20, 2011 for $20,600, which were purchased by the current Note Holder from the previous Note Holder on December 23, 2011. This conversion of debt reduced the Company’s Notes payables by $30,134.

 

On February 2, 2012, the Company issued 227,925 shares of common stock to a consultant in accordance with their consulting agreement.

 

On February 9, 2012 the Company completed a partial conversion of one of its Notes payable dated February 23, 2011, with a principal amount of $45,400. A total of $42,100 worth of the Note was converted, and 19,136,364 common shares were issued for that part of the conversion, which leaves a remaining balance of $3,300 of the principal of the Note. This conversion of debt reduced the Company’s Notes payables by $42,100.

 

On February 9, 2012 the Company completed the final conversion one of its revised Notes payable dated December 23, 2011, with an original amount of $99,134. A total of $39,000 worth of the Note was converted, and 5,118,243 common shares were issued for that part of the conversion, which leaves a remaining balance of $0.00 of the principal of the Note. This revised Note combined two existing Notes, one dated March 28, 2011 for $72,500, and one dated May 20, 2011 for $20,600, and accrued interest in the amount of $6,034, which were purchased by the current Note Holder from the previous Note Holder on December 23, 2011. This conversion of debt reduced the Company’s Notes payables by $39,000, and the balance on the Note for $99,134 to $0.00.

 

On February 10, 2012 the Company completed a partial conversion of one of its Notes payable dated February 23, 2011, with a principal amount of $45,400. A total of $3,300 worth of the Note was converted, and 1,500,000 common shares were issued for that part of the conversion, which leaves a remaining balance of $0.00 of the principal of the Note. This conversion of debt reduced the Company’s Notes payables by $3,300.

 

On February 13, 2012, a $49,500 partial interest in an existing Note, dated May 23, 2011 for $89,000, was purchased from the Note Holder by another non-related creditor. On February 13, 2012, the $39,500 portion of the Note payable was fully converted to common stock, and a total of 6,100,000 shares were issued for this conversion. This conversion of debt reduced the Company’s Notes payables by $49,500.

 

On February 13, 2012, a $55,000 partial interest in an existing Note, dated May 30, 2011 for $110,424, was purchased from the Note Holder by another non-related creditor. On February 29, 2012, the $55,000 portion of the Note payable was completely converted to common stock, and a total of 7,543,662 shares were issued for this conversion, which leaves a remaining balance of $0.00 of the principal of the Note. This conversion of debt reduced the Company’s Notes payables by $55,000.

 

On February 15, 2012, a $89,000 partial interest, (including $80,000 principal and $9,000 interest) in an existing Note, dated December 31, 2010 for $163,694, was purchased from the Note Holder by another non-related creditor. The $9000 interest was assigned by the original Note Holder to another party and subsequently purchased by the party that purchased the $80,000 principal. On March 2, 2012, the $89,000 portion of the Note payable was completely converted to common stock, and a total of 12,575,757 shares were issued for this conversion, which leaves a remaining balance of $0.00 of the principal of the Note. This conversion of debt reduced the Company’s Notes payables by $89,000.

 

On February 27, 2012, a $62,520 partial interest in an existing Note, dated May 30, 2011 for $110,424, was purchased from the Note Holder by another non-related creditor. On March 8, 2012, the $62,520 portion of the Note payable was completely converted to common stock, and a total of 8,294,778 shares were issued for this conversion, which leaves a remaining balance of $0.00 of the principal of the Note. This conversion of debt reduced the Company’s Notes payables by $62,520.

 

On March 1, 2012, a $83,694 partial interest, in an existing Note, dated December 31, 2010 for $163,694, was purchased from the Note Holder by another non-related creditor. On March 20, 2012, the $83,694 portion of the Note payable was completely converted to common stock, and a total of 9,884,965 shares were issued for this conversion, which leaves a remaining balance of $0.00 of the principal of the Note. This conversion of debt reduced the Company’s Notes payables by $83,694.

 

On March 2, 2012, a $9,000 partial interest in an existing Note payable, dated December 31, 2010 for $163,694, was completely converted to common stock, and a total of 857,143 shares were issued for this conversion, which leaves a remaining balance of $0.00 of the principal of the Note. This conversion of debt reduced the Company’s Notes payables by $9,000.

 

On March 5, 2012, a $39,500 partial interest in an existing Note, dated May 23, 2011 for $89,000, was purchased from the Note Holder by another non-related creditor. On March 7, 2012, the $39,500 portion of the Note payable was completely converted to common stock, and a total of 4,200,000 shares were issued for this conversion, which leaves a remaining balance of $0.00 of the principal of the Note. This conversion of debt reduced the Company’s Notes payables by $39,500.

 

Issuance of Preferred Shares

 

More detailed information about the issuance of preferred shares is discussed in our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2011. The information is fully discussed in Part II, Item 8. – Note 4 – Equity, “Preferred Stock”, pages 41 through 42. There have been no material changes from the information previously disclosed in that Form 10-K/A.

   

NOTE 6 - PROPERTY AND EQUIPMENT

 

The Company has property and equipment as of March 31, 2012 and December 31, 2011 as follows:

 

    March 31, 2012  

December 31,

2011

Equipment $ 13,094 $ 13,094
Land   -   -
Building   -   -
Accumulated depreciation   (4,797)        (4,143)

 

Total

 

$

 

8,297

 

$

 

8,951

 

There was $654 and $1,123 depreciation expense for the three months ended March 31, 2012 and 2011 respectively.

 

(10)

 

NOTE 7 – NOTES PAYABLE

 

       
    March 31, 2012   December 31, 2011
         
On August 26, 2010 the Company entered into a two (2) year convertible Promissory Note with a non-related creditor for $36,919 at 10% interest.  The holder has the right to convert the note to common stock at $.05. On October 25, 2011, $27,249 worth of this note was converted, leaving a $9,670 balance. See Item 5 Common Stock issued   9,670   9,670
         
On August 30, 2010 the Company entered into a two (2) year convertible Promissory Note with a non-related creditor for $25,300 at 10% interest.  The holder has the right to convert the note to common stock at $.05.    25,300   25,300
         
On August 30, 2010 the Company entered into a two (2) year convertible Promissory Note with a non-related creditor for $25,200 at 10% interest.  The holder has the right to convert the note to common stock at $.05.    25,200   25,200
         
On December 3, 2010 the Company entered into a two (2) year convertible Promissory Note with a non-related creditor for $4800 at 10% interest.  The holder has the right to convert the note to common stock at $.005.    4,800   4,800
         
On December 31, 2010 the Company entered into a two (2) year convertible Promissory Note with Richard D Craven, its former CEO for $163,694 at 10% interest for the accrued compensation and expenses owed to him for the fiscal year 2009 in accordance with his Employment Agreement.  The holder has the right to convert the note to common stock at $.01. On February 15, 2012, a $89,000 partial interest in this Note ($80,000 principal and $9,000 accrued interest) was purchased by  non-related creditor. On March 1, 2012, the balance of $83,694 in principal in this Note  was purchased by non-related creditor. On March 2, 2012 $9,764 in accured interest was in the Note was purchased by a non-related creditor. On March 2, 2012, $80,000 principal, and $9,000 in  interest of the Note was converted to stock. On March 20, 2012 $83,694 of the Note was converted to stock. See Note 5 Equity, Common Stock issued.   -   163,694
         
On December 31, 2010 the Company entered into a two (2) year convertible Promissory Note with its President and CEO, Vince M. Guest for  $136,000 at 10% interest for the accrued compensation owed to him for the fiscal year 2010 in accordance with his Employment Agreement.  The holder has the right to convert the note to common stock at $015.    136,000   136,000
         
On December 31, 2010 the Company entered into a two (2) year convertible Promissory Note with its Vice President Solomon Ali, for $165,000 at 10% interest for the accrued compensation owed to him for the fiscal year 2010 in accordance with his Employment Agreement.  The holder has the right to convert the note to common stock at $015.    165,000   165,000
         
On January 18, 2011 the Company entered into a two (2) year convertible Promissory Note with a non-related creditor for $10,000 at 10% interest.  The holder has the right to convert the note to common stock at $.005.    10,000   10,000
         
On January 19. 2011 the Company entered into a two (2) year convertible Promissory Note with a non-related creditor for $10,000 at 10% interest.  The holder has the right to convert the note to common stock at $.005.    10,000   10,000
         
On February 23. 2011 the Company entered into a two (2) year convertible Promissory Note with a non-related creditor for $45,400 at 10% interest.  The holder has the right to convert the note to common stock at $.005. Conversion rate subsequently reduced to $.0022 per share per Board of Directors resolution.  On February 9, 2012, $42,400 worth of the Note was converted. On February 10, 2012 the remaining $3,300 of this Note was converted. See Note 5, Equity, Common Stock issued.    -   45,400
         
On March 10. 2011 the Company entered into a two (2) year convertible Promissory Note with a non-related creditor for $25,000 at 10% interest.  The holder has the right to convert the note to common stock at $005.    25,000   25,000
         
On March 14. 2011 the Company entered into a two (2) year convertible Promissory Note with a non-related creditor for $25,000 at 10% interest.  The holder has the right to convert the note to common stock at $005.    25,000   25,000
         
On May 23, 2011 the Company entered into a three (3) year convertible Promissory Note with a non-related creditor for $89,000 at 10% interest.  The holder has the right to convert the note to common stock at $.005. On February 13, 2012, a $49,500 partial interest in this Note was purchased by  non-related creditor. On March 5, 2012, the balance of $39,500 in principal purchased by non-related creditor. On February 15, 2012, $49,500 of the Note was converted to stock. On March 7, 2012 $39,500 of the Note was converted to stock. See Note 5 Equity, common Stock issued.   -   89,000
         
On May 30, 2011 the Company entered into a three (3) year convertible Promissory Note with a non-related creditor for $110,424 at 10% interest.  The holder has the right to convert the note to common stock at $.005. *See note below. On February 13, 2012, a $55,000 partial interest in this Note was purchased by  non-related creditor. On February 27, 2012, the balance of $62,520 of the Note was purchased by non-related creditor. On February 29, 2012, $55,000 of the Note was converted to stock. On March 8, 2012 $62,520 of the Note was converted to stock. See Note 5 Equity, common Stock issued.   -   110,424
         
On June 25, 2011 the Company entered into a three (3) year convertible Promissory Note with a non-related creditor for $49,200 at 10% interest.  The holder has the right to convert the note to common stock at $.005.    49,200   49,200
         
On July 29, 2011, the Company entered into a three (3) year convertible Promissory Note with a non-related creditor for $40,000 at 10% interest.  The holder has the right to convert the note to common stock at $005.    40,000   40,000
         
On August 29, 2011, the Company entered into a three (3) year convertible Promissory Note with a non-related creditor for $29,500 at 10% interest. The holder has the right to convert the note to common stock at $.005. *See note below.   29,500   29,500
         
On October 2, 2011 the Company entered into a three (3) year convertible Promissory Note with a non-related creditor for $202,200 at 10% interest.  The holder has the right to convert the note to common stock at $0.005.    202,200   202,200
         
On October 20, 2011 the Company entered into a one (1) year convertible Promissory Note with a non-related creditor for $200,000 at 12% interest.  The holder has the right to convert the note to common stock on April 20, 2012 at a 30% discount to the market price. The $116,000 balance on the Note was paid on February 24, 2012, leaving a $0.00  balance.   -   200,000
         
On October 22, 2011 the Company entered into a one (1) year convertible Promissory Note with a non-related creditor for $125,000 at 12% interest.  The holder has the right to convert the note to common stock on April 22, 2012 at a 30% discount to the market price. This Note was paid in full on March 16, 2012.   -   125,000
         
On October 23, 2011 the Company entered into a one (1) year convertible Promissory Note with a non-related creditor for $125,000 at 12% interest.  The holder has the right to convert the note to common stock at a 30% discount to the market price.    125,000   125,000
         
On October 25, 2011 the Company entered into a one (1) year convertible Promissory Note with a non-related creditor for $103,600 at 12% interest.  The holder has the right to convert the note to common stock  at a 30% discount to the market price.    103,600   103,600
         
On October 25, 2011 the Company entered into a three (3) year convertible Promissory Note with a non-related creditor for $96,400 at 12% interest.  The holder has the right to convert the note to common stock  at $0.005.    96,400   96,400
         
On October 31, 2011 the Company entered into a three (3) year convertible Promissory Note with a non-related creditor for $74,760 at 10% interest.  The holder has the right to convert the note to common stock  at $0.005.    74,760   74,760
         
On October 31, 2011 the Company entered into a ten (10) month convertible Promissory Note with a non-related creditor for $68,000 at 8% interest.  The holder has the right to convert the note to common stock  at a 50% discount to the market price.   68,000   68,000
         
On December 23, 2011 the Company entered into a one (1) year convertible Promissory Note with a non-related creditor for $50,000 at 12% interest.  The holder has the right to convert the note to common stock  at a 50% discount to the market price.    50,000   50,000
         
On December 31, 2011 the Company entered into a two (2) year convertible Promissory Note with  its Vice President, Solomon Ali for $151,400 at 10% interest for the accrued compensation owed to him for the fiscal year 2011 in accordance with his Employment Agreement.  The holder has the right to convert the note to common stock  at $0.01.   151,400   151,400
         
On December 31, 2011 the Company entered into a two (2) year convertible Promissory Note with  its Manager of Business Development, Don Deluna, for $40,500 at 10% interest for the accrued compensation owed to him for the fiscal year 2011 in accordance with his Employment Agreement.  The holder has the right to convert the note to common stock at $0.02..    40,500   40,500
         
On December 31, 2011 the Company entered into a two (2) year convertible Promissory Note with its President and CEO, Vince M. Guest for $162,175 at 10% interest for the accrued compensation owed to him for the fiscal year 2011 in accordance with his Employment Agreement.  The holder has the right to convert the note to common stock at $0.01.    162,175   162,175
         
On December 31, 2011 the Company entered into a two (2) year convertible Promissory Note with  a non-related creditor  for $14,407.92 at 12% interest for consulting services provided to the Company in accordance with their Consulting Agreement.  The holder has the right to convert the note to common stock on  July 1, 2012 at $0.01.    14,407   14,407
         
Modified Note for $99,134. On December 23, 2011, two existing Notes, one dated March 28, 2011 for $72,500, and one dated May 20, 2011 for $20,600 were purchased from the Note Holder by another non-related creditor. The Notes were assigned via an Assignment and Modification Agreement which combined the two existing Notes into a revised Note in the amount of $99,134, at 12% interest. The revised $99,134 Note includes the original principal amount of $93,100 for both Notes and accrued interest in the amount of $6,034. On February 9, 2012, this note was fully converted leaving a $0.00 balance.   -   69,134
         
On January 4, 2012 the Company entered into a three (3) year convertible Promissory Note with a non-related creditor for $55,000 at 12% interest. The holder has the right to convert the note to common stock at $0.005.    55,000   -
         
On January 30, 2012 the Company entered into a three (3) year convertible Promissory Note with a non-related creditor for $43,700 at 12% interest. The holder has the right to convert the note to common stock at $0.005.    43,700   -
         
On February 1, 2012 the Company entered into a ten (10) month convertible Promissory Note with a non-related creditor for $53,000 at 8% interest.  The holder has the right to convert the note to common stock at a 50% discount to the market price.    53,000   -
         
On February 15, 2012 the Company entered into a one (1) year convertible Promissory Note with a non-related creditor for $30,000 at 12% interest.  The holder has the right to convert the note to common stock  at a 50% discount to the market price.    30,000   -
         
On February 20, 2012 the Company entered into a two (2) year Promissory Note with a non-related creitor for $2,000,000 at 12% interest. The holder has the right to convert the note to common stock  at a 30% discount to market at the time of conversion.    2,000,000   -
         
On February 23, 2012 the Company entered into a two (2) year convertible Promissory Note with  a non-related creditor for $80,000 at 12% interest.  The holder has the right to convert the note to common stock  at $0.008.    80,000   -
         
On February 29, 2012 the Company entered into a three (3) year convertible Promissory Note with a non-related creditor for $122,800 at 12% interest. The holder has the right to convert the note to common stock at $0.005.    122,800   -
         
On March 1, 2012, the balance of $83,694 in principal on an original Note dated December 31, 2010  was purchased by non-related creditor. On March 2, 2012 $9,764 in accured interest was in the Note was purchased by a non-related creditor. On March 20, 2012 $83,694 of the Note was converted to stock. See Note 5 Equity, Common Stock issued, leaving a new principal balance of $9,764.   9,764   -
         
On March 7, 2012 the Company entered into a one (1) year convertible Promissory Note with a non-related creditor for $30,000 at 12% interest.  The holder has the right to convert the note to common stock  at a 50% discount to the market price.    30,000   -
         
On March 15, 2012 the Company entered into a two (2) year convertible Promissory Note with  a non-related creditor for $70,000 at 12% interest.  The holder has the right to convert the note to common stock  at $0.008.    70,000   -
         
On March 30, 2012 the Company entered into a three (3) year convertible Promissory Note with a non-related creditor for $123,600 at 12% interest. The holder has the right to convert the note to common stock at $0.005.    123,600   -
         
         
     Total long-term note payable $ 4,260,976 $ 2,445,765
     Less current portion   (302,703)   -
     Less Discount from Beneficial Conversion Feature $ (2,565,787) $ (1,951,119)
     Long-term portion of note payable $ 1,392,486 $ 494,646

 

Principal maturities of notes payable as of March 31, 2012 for the next five years and thereafter is as follows:

 

2012  $ 775,334
   
 2013  $ 498,482
   
 2014  $ 2,642,060
   
 2015  $ 345,100
   
 2016  $ -0-
   
 Total  $ 4,260,976

 

For the above convertible notes, pursuant to ASC Topic 470, the Company reviewed and determined that in most cases a beneficial conversion feature existed since the conversion price was less than market price at the date the notes were issued. The beneficial conversion feature is amortized over the life of the note using the interest method.

 

* For more information on the Convertible Notes see Part II - Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations under “Debt”, and Item 8 - Note 7, “Notes Payable”, and Part I – Item 1A, “Risk Factors”, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

 

(11)

  

NOTE 8 - INCOME TAXES

 

The Company adopted ASC Topic 740 which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Temporary differences between taxable income reported for financial reporting purposes and income tax purposes are insignificant.

 

For income tax reporting purposes, the Company’s aggregate unused net operating losses approximate $3,871,000 which expire in various years through 2028, subject to limitations of Section 382 of the Internal Revenue Code, as amended. The Company has provided a valuation reserve against the full amount of the net operating loss benefit, because in the opinion of management based upon the earning history of the Company; it is more likely than not that the benefits will not be realized.

Under the Tax Reform Act of 1986, the benefits from net operating losses carried forward may be impaired or limited on certain circumstances. Events which may cause limitations in the amount of net operating losses that the Company may utilize in any one year include, but are not limited to, a cumulative ownership change of more than 50% over a three-year period. The impact of any limitations that may be imposed for future issuances of equity securities, including issuances with respect to acquisitions have not been determined.

 

The provision (benefit) for income taxes from continued operations for the three months ended March 31, 2012 and 2011 consist of the following:

 

 

    March 31, 2012   March 31, 2011
Current:        
        Federal $ - $ -
        State   -   -
         
Deferred:        
        Federal $ 1,538,000 $ 760,000
        State     402,000   200,000
    1,940,000   960,000
Valuation allowance   -1,940,000   -960,000
     
(Benefit) provision for income taxes, net $ - $ -

 

The difference between income tax expense computed by applying the federal statutory corporate tax rate and actual income tax expense is as follows:

 

  March 31, 2012 March 31, 2011
     
Statutory federal income tax rate 34.00% 34.00%
     
State Income taxes and other 9.00% 9.00%
     
Valuation allowance -43% -43%
     
Effective tax rate - -

 

Deferred income taxes result from temporary differences in the recognition of income and expenses for the financial reporting purposes and for tax purposes. The tax effect of these temporary differences representing deferred tax asset and liabilities result principally from the following:  

 

   

    March 31,2012   March 31, 2011
         
Total deferred tax asset $ 1,940,000 $ 960,000
Valuation allowance   (1,940,000)   (960,000)
         
       Net deferred  tax asset $ - $ -
         
             

 

The Company has a net operating loss carry forward of approximately $9,200,000 however in accordance with IRC 382 the loss is limited to 49% of the loss carry forward. The loss is limited due to the change in control of at least 50%; therefore this loss of approximately $4,521,000 is available to offset future taxable income through 2028.

 

During the three months ended March 31, 2012 and 2011, the valuation allowance increased by $280,000 and $250,000, respectively.

NOTE 9 – RELATED PARTY TRANSACTION

 

On December 31, 2011 the Company entered into a two (2) year Promissory Note with its Vice President, Solomon Ali for $151,400 at 10% interest for the accrued compensation owed to him for the fiscal year 2011 in accordance with his Employment Agreement. The holder has the right to convert the Note to common stock at $0.01.

 

On December 31, 2011 the Company entered into a two (2) year Promissory Note with its Manager of Business Development, Don Deluna, for $40,500 at 10% interest for the accrued compensation owed to him for the fiscal year 2011 in accordance with his Employment Agreement. The holder has the right to convert the Note to common stock at $0.02.

 

On December 31, 2011 the Company entered into a two (2) year Promissory Note with its President and CEO, Vince M. Guest for $162,175 at 10% interest for the accrued compensation owed to him for the fiscal year 2011 in accordance with his Employment Agreement. The holder has the right to convert the Note to common stock at $0.01.

 

Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers;

 

There are no changes to report in our Board of Directors, Officers or compensation arrangements for our Officers during for the period ending March 31, 2012. The situation regarding these matters has not changed materially from the description in the Annual Report on Form 10-K/A for the period ended December 31, 2011.

 

(12)

  

NOTE 10 – ACQUISTION

 

Entry into a Material Definitive Agreement

 

Whitesburg Friday branch Mine LLC

 

Universal Bioenergy Corporation, a Nevada corporation (the “Company”), and Whitesburg Friday Branch Mine LLC, a Kentucky Limited Liability Company (“WFBM” or “Whitesburg”) with its principal offices at 1541 Downtown West Boulevard, Knoxville, Tennessee 37919, entered into a Member Interest Exchange Agreement (the “Agreement”) dated October 17, 2011.  Pursuant to the Agreement, and subject to the terms and conditions set forth therein, and the subsequent amendment to the Agreement dated February 20, 2012, (the “Amendment”), the Company acquired forty percent (40%) of the Member Interests of Whitesburg, from JLP and Partners LLC, a Kentucky Limited Liability Company (“JLP”), in exchange for consideration consisting of two million, seven hundred thousand dollars ($2,700,000) payable in cash, debt instrument and/or and common stock of the Company pursuant to the terms and conditions set forth in the Agreement.

 

Pursuant to the Agreement and following the execution of the Amendment, the parties properly and timely performed all terms and conditions as required pursuant to the Agreement, and therefore the transaction contemplated by the “Member Interest Purchase Agreement” (Agreement), and the Amendment was “closed” on February 20, 2012.

 

The completion of the acquisition was approved by the Board of Directors of the Company.

 

“Whitesburg” is engaged in the business of coal mining, operations and coal production at a coal mining property known as the Whitesburg Friday Branch Mine, located at Friday Branch Road, in Whitesburg, Kentucky for the marketing of “Thermal/Steam” non-coking coal in the United States of America.

 

Thermal/Steam coal is used as a primary source of energy for coal fired powered plant electric generation. The Whitesburg Mine operates, mines and markets thermal coal in Letcher County in eastern Kentucky for sale to electric utilities for use in coal fired power plant electric generation. The Whitesburg mining operations are the surface and high wall mining type and does not include any underground mining. Whitesburg’s management has represented that it owns the leases for the coal mineral rights, has the requisite mining permits from the State of Kentucky. Whitesburg Friday Branch Mine started full mining production in March 2012 and currently has coal on the ground ready to delivered to its customers.

 

Universal’s management believes that the association with Whitesburg for the production and marketing of high grade thermal coal should give it a high margin energy product to sell to its electric utility and coal production customers.

 

Additional Summary of the Purchase Agreement

 

The Company was granted the right, but not the obligation, to conduct exploration, drill and develop the real property, to produce and market any and all Petroleum and Natural Gas (methane), and related hydrocarbons produced from the development the real property owned, managed or controlled by Whitesburg Friday Branch Mine, and from all geological formations under the property, and Leases, and/or from any new and/or existing gas wells.

The Company shall be granted One (1) Seat on “Whitesburg’s” Board of Directors, or appointed as a Managing Member to represent the interests of the Company and its shareholders, according to Whitesburg’s Operating Agreement.

 

Management determined that the Company was the acquirer in the business combination in accordance with FASB codification Topic 805, "Business Combinations", based on the following factors: (i) there was not a change in control of the Company since neither Whitesburg, nor any of the sellers obtained a controlling financial interest (ownership either directly or indirectly of more than 50 percent of the outstanding voting shares of the Company) or the power to control the Company through a lesser percentage of ownership, by contract, lease, agreement with other stockholders, or by court decree; (ii) the Company was the entity in the transaction that issued its equity instruments, (if any) and in a business combination, the acquirer usually is the entity that issues its equity interests; (iii) the Company’s pre-transaction directors retained the largest relative voting rights of the Company post-transaction; (iv) the composition of the Company’s current board of directors and management has not changed during this acquisition. The Company had no pre-existing relationship with Whitesburg.

 

NOTE 11 - CONTINGENCIES

 

There are no contingencies to report at this time

 

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NOTE 12 – SUBSEQUENT EVENTS

 

The following events occurred subsequent to the period covered by this Form 10-Q Quarterly Report for the period ended March 31, 2012.

 

On April 1, 2012, NDR Energy Group, signed a Master Core Secondary Market Services Agreement with Southern California Gas Company (“SoCal”), under their Park, Loan and Wheel Program for natural gas storage facility services. Under the terms of the Agreement, SoCal which owns and operates 134 billion cubic feet of underground gas storage facilities will provide the storage capacity, and Universal / NDR Energy Group would purchase, supply and transport the natural gas from the gas fields to the facility for storage. NDR Energy Group would sell the natural gas in the marketplace to meet seasonal load imbalances, engage in futures contracts and spot market sales, physical gas trading, financial gas trading; includes hedging, and the use of natural gas derivatives and other financial instruments to generate greater revenues and profits.

 

On April 2, 2012, a $9,764 partial interest in an existing Note payable, dated December 31, 2010 for $163,694, was completely fully to common stock, and a total of 1,212,919 shares were issued for this conversion. This conversion of debt reduced the Company’s Notes payables by $9,734.

 

On April 4, 2012, the Company announced that NDR Energy Group was awarded a gas supply contract with Pacific Gas & Electric’s, Electric Fuel Division Corporation. Under the terms of the contract, NDR Energy Group is to deliver natural gas supplies for the customer’s electric power generation plants for one to three months, starting on July 1, 2012. The contract is projected, but not guaranteed, to generate millions of dollars in revenue.

 

On April 4, 2012, two existing Notes, one dated July 29, 2011 for $40,000, and one dated June 25, 2011 for $49,200 were purchased from the Note Holder by another non-related creditor. The Notes were assigned via an Assignment and Modification Agreement which combined the two existing Notes into a revised Note in the amount of $96,300, at 12% interest. The revised $96,300 Note includes the original principal amount of $89,200 for both Notes and accrued interest in the amount of $7,100. The holder has the right to convert the note to common stock at a 50% discount to the market price at the time of conversion.

 

On April 4, 2012, the Company entered into a one (1) year convertible Promissory Note with a non-related creditor for $50,000 at 12% interest. The holder has the right to convert the note to common stock after October 4, 2012 at a 50% discount to the market price.

 

On April 11, 2012, the Company completed a partial conversion one of its revised Notes payable dated April 4, 2012, with an amount of $96,300. A total of $26,300 worth of the Note was converted, and 3,094,118 common shares were issued for that part of the conversion. On April 24, 2012 the Company completed a another partial conversion of this same revised Note, and a total of $20,000 worth of the Note was converted, and 3,079,923 common shares were issued for that part of the conversion. A total of 6,174,041 combined shares were issued for these to conversions, which leaves a remaining balance of $50,000 of the principal of the Note. This revised Note combined two existing Notes, one dated June 25, 2011 for $49,200, and one dated June 29, 2011 for $40,000, which were purchased by the current Note Holder from the previous Note Holder on April 4, 2012. This conversion of debt reduced the Company’s Notes payables by $50,000.

 

On April 24, 2012, the Company completed a partial conversion one of its revised Notes payable dated April 4, 2012, with an amount of $96,300. A total of $20,000 worth of the Note was converted, and 3,076,923 common shares were issued for that part of the conversion. On May 1, 2012 the Company completed a the final conversion of this same revised Note, and a total of $50,000 worth of the Note was converted, and 7,142,857 common shares were issued for that conversion, which leaves a remaining balance of $00.00 of the principal of the Note. This revised Note combined two existing Notes, one dated June 25, 2011 for $49,200, and one dated June 29, 2011 for $40,000, which were purchased by the current Note Holder from the previous Note Holder on April 4, 2012. This final conversion of this Note reduced the Company’s Notes payables by another $50,000, and reduced the Notes payables by a total of $96,300 with this final conversion.

 

On May 9, 2012, the Company completed a partial conversion of one of its Notes payable dated October 31, 2011, with a principal amount of $68,000. A total of $12,000 worth of the Note was converted, and 1,621,622 common shares were issued for that part of the conversion, which leaves a remaining balance of $56,000 of the principal of the Note. This conversion of debt reduced the Company’s Notes payables by $12,000.

 

On May 11, 2012, the Company completed a partial conversion of one of its Notes payable dated October 31, 2011, with a principal amount of $68,000. A total of $15,000 worth of the Note was converted, and 2,173,913 common shares were issued for that part of the conversion, which leaves a remaining balance of $41,000 of the principal of the Note. This conversion of debt reduced the Company’s Notes payables by $15,000.

 

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NOTE 13 - GOING CONCERN ISSUES

 

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America which contemplate continuation of the Company as a going concern. The Company has accumulated losses totaling $ 19,545,000 from its inception to March 31, 2012. Furthermore, the Company has consistently had to raise debt and equity capital to fund cash used in operations.

These factors raise doubt about the ability of the Company to continue as a going concern, if the Company does not continue to raise sufficient amounts of capital. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. The Company's ability to meet its obligations and continue as a going concern is dependent upon its ability to obtain additional financing, achievement of profitable operations and/or the discovery, distribution and marketing of its supplies of natural gas, propane and coal reserves.

The negative working capital at March 31, 2012 is a condition experienced by many high-growth companies similar to ours, and has not had a significant negative effect on our operations. This is due to our ability to raise capital, the contracts we have with our utility customers, their strong S&P credit ratings, and their consistent payment of our invoices on schedule. Due to the timing of the transactions, we are able to maximize the efficiency of the billing and payment cycles, thereby minimizing the impact of any occasional periods of negative working capital. Additionally, our ability to purchase gas at the wellhead and from other independent producers at the producer’s price, and obtain lines of credit and accounts receivable facilities should enable us to greatly improve our cash flow and increase our working capital.

Our ability to implement our growth plans will depend primarily on our ability to obtain additional private or public equity or debt financing. We are currently seeking additional capital from our current investors and creditors to achieve our goals and objectives. However, such financing from these investors and creditors may not be available at all, or we may be unable to locate and secure additional capital on terms and conditions that are acceptable to us. Our failure to obtain additional capital may have a material adverse effect on our business. We believe, although we cannot guarantee, and remain confident, that we will be able to raise capital in sufficient amounts to execute the business strategies, plans and decisions that have been made by the Company, and to meet the potential challenges.

The Company in association with its investors and creditors was able to raise sufficient amounts of capital to meet its operating expenses and working capital needs for the period ending March 31, 2012. We were also able to proceed with the acquisition of the ownership interest in a coal mining company which management believes, but cannot guarantee, will generate additional revenue, positive working capital, and net earnings for the Company in the fiscal year 2012 and beyond.

 

NOTE 14 – COMMITMENTS AND CONTINGENCIES

 

There are no Commitments and Contingencies to report for this period.

 

NOTE 15 - CONCENTRATIONS

 

At March 31, 2012, 100% of the Company's accounts receivable was due from a single customer, during the three months ended March 31, 2012, and 68% of total revenue was generated from a single customer, for the three months ended March 31, 2011.

 

NOTE 16 - INVESTMENTS IN PARTNERSHIPS AND LLC'S

 

Universal Bioenergy, Inc., is a limited partner in Progas Energy Services, and is a minority member of Whitesburg Friday Branch Mine, LLC

 

In 2011, the Company acquired a 7.5 percent interest in Progas Energy Services. The fair market value of which has not been established. Also, in 2011, the Company acquired a 40 percent interest in Whitesburg Friday Branch Mine, LLC. The fair market value of which has not been established.

 

 

Partnership Percentage of Ownership Book Equity 12/31/11 Partnership Contributions (Distributions) Share of Net Income (Loss) Book Equity 3/31/12
Progas Energy Services 7.5% $189,500 $0 $0 $189,500

Whitesburg Friday Branch

Mine, LLC

40% $700,000 $2,000,000 $0 $2,700,000
Totals   $889,500 $2,000,000 $0 $2,889,500

 

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* * * * * *

In this Quarterly Report on Form 10-Q, “Company,” “our company,” “us,” and “our” refer to Universal Bioenergy, Inc. and its subsidiaries, unless the context requires otherwise.

 

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

 

The following discussion and analysis presents management’s perspective of our business, financial condition and overall performance. This information is intended to provide investors with an understanding of our past performance, current financial condition and outlook for the future and should be read in conjunction with the financial statements presented herein and our reports filed with the Securities and Exchange Commission.

As used below, “we”, “us”, “our”, “Universal”, “Universal Bioenergy”, “Company” or “our company” refers to Universal Bioenergy, Inc. and all of its subsidiaries.

 

Management’s Discussion and Analysis contains various “forward looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, regarding future events or the future financial performance of the Company that involve risks and uncertainties. Certain statements included in this Form 10Q, including, without limitation, statements related to anticipated cash flow sources and uses, and words including but not limited to “anticipates”, “believes”, “plans”, “expects”, “future” and similar statements or expressions, identify forward looking statements. Any forward-looking statements herein are subject to certain risks and uncertainties in the Company’s business, including but not limited to, reliance on key customers and competition in its markets, market demand, technological developments, maintenance of relationships with key suppliers, difficulties of hiring or retaining key personnel and any changes in current accounting rules, planned capital expenditures, potential increases in prospective production costs, future cash flows and borrowings, pursuit of potential acquisition opportunities, the possibility that the industry may be subject to future regulatory or legislative actions (including additional taxes, changes in environmental regulation, and disclosure requirements under the Dodd-Frank Wall Street Reform), our financial position, business strategy and other plans, objectives for future operations, difficulties of hiring or retaining key personnel and any changes in current accounting rules, all of which may be beyond the control of the Company. The Company adopted at management’s discretion, the most conservative recognition of revenue based on the most astringent guidelines of the SEC in terms of recognition of software licenses and recurring revenue. Management will elect additional changes to revenue recognition to comply with the most conservative SEC recognition on a forward going accrual basis as the model is replicated with other similar markets (i.e. SBDC). The Company’s actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth therein.

 

Forward-looking statements involve risks, uncertainties and other factors, which may cause our actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. Factors and risks that could affect our results and achievements and cause them to materially differ from those contained in the forward-looking statements include those identified in the section titled “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, as well as other factors that we are currently unable to identify or quantify, but that may exist in the future.

 

We based the forward-looking statements on our current expectations, estimates and projections about ourselves and the industries in which we operate in general. We caution you these statements are not guarantees of future performance as they involve assumptions that, while made in good faith, may prove to be incorrect, and involve risks and uncertainties we cannot predict. In addition, we based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. Accordingly, our actual outcomes and results may differ materially from what we have expressed or forecast in the forward-looking statements. Any differences could result from a variety of factors, including the following:

 

 

  1. Fluctuations in crude oil, natural gas and natural gas liquids prices, refining and marketing margins.
  2. Potential failures or delays in achieving expected reserve or production levels from existing and future oil and gas development projects due to operating hazards, drilling risks and the inherent uncertainties in predicting oil and gas reserves and oil and gas reservoir performance.
  3. Failure of new products and services to achieve market acceptance.
  4. Unexpected technological or commercial difficulties in manufacturing, refining or transporting our products.
  5. Lack of, or disruptions in, adequate and reliable transportation for our crude oil, natural gas, natural gas liquids, liquefied natural gas (LNG) and refined products.
  6. Inability to timely obtain or maintain permits, including those necessary for construction projects; or to comply with government regulations; or make capital expenditures required to maintain compliance.
  7. Failure to complete definitive agreements and feasibility studies for, and to timely complete construction of, announced and future exploration and production, LNG, and transportation projects.
  8. Potential disruption or interruption of our operations due to accidents, extraordinary weather events, civil unrest, political events or terrorism.
  9. International monetary conditions and exchange controls.
  10. Substantial investment or reduced demand for products as a result of existing or future environmental rules and regulations.
  11. Liability resulting from litigation.
  12. General domestic and international economic and political developments, including armed hostilities; expropriation of assets; changes in governmental policies relating to crude oil, natural gas, natural gas liquids or refined product pricing, regulation or taxation; other political, economic or diplomatic developments; and international monetary fluctuations.
  13. Changes in tax and other laws, regulations (including alternative energy mandates), or royalty rules applicable to our business.
  14. Limited access to capital or significantly higher cost of capital related to uncertainty in the domestic or international financial markets.
  15. Inability to obtain economical financing for projects, construction or modification of facilities and general corporate purposes.

 

In addition, the foregoing factors may affect generally our business, results of operations and financial position. Forward-looking statements speak only as of the date the statement was made. We do not undertake and specifically decline any obligation to update any forward-looking statements.

 

Overview of Our Company

Universal Bioenergy Inc. is an independent diversified energy company, headquartered in Irvine, California. Our common stock is presently listed on the OTC Markets Group under the trading symbol “UBRG”. The Company was incorporated on August 13, 2004 in the State of Nevada, under the name of Palomine Mining Inc. On October 24, 2007, we changed our name from Palomine Mining Inc., to Universal Bioenergy Inc. to better reflect our new business plan and strategic direction.

Our primary business focus is the production, marketing and sales of natural gas, propane, coal, oil and alternative energy. Through our subsidiary, NDR Energy Group, we presently sell natural gas to 28 of the largest public utilities, electric power producers and local gas distribution companies that serve millions of commercial, industrial and residential customers throughout the United States. We are also engaged in the acquisition of oil and gas fields, lease acquisitions and development of newly discovered or recently discovered oil and gas fields, re-entering existing wells, transmission and marketing of the products to our customer base. We are continuing our growth through an ongoing series of acquisitions.

 

Recent Developments

Whitesburg Friday Branch Mine LLC

On February 20, 2012, we expanded into the coal energy market by the acquisition of forty percent (40%) of the Member Interests of Whitesburg Friday Branch Mine LLC, “Whitesburg”, a Kentucky Limited Liability Company. “Whitesburg” is engaged in the business of coal mining, operations and coal production at a coal mining property known as the Whitesburg Friday Branch Mine, located at Friday Branch Road, in Whitesburg, Letcher County, Kentucky for the marketing of “Thermal/Steam” non-coking coal in the United States of America.

 

Thermal/Steam coal is used as a primary source of energy for coal fired powered plant electric generation. The Whitesburg Mine operates, mines and markets thermal coal for sale to electric utilities for use in coal fired power plant electric generation. The Whitesburg mining operations are the surface and high wall mining type and does not include any underground mining. Whitesburg owns the leases for the coal mineral rights, has the requisite mining permits from the State of Kentucky. Whitesburg Friday Branch Mine started full mining production in March 2012, and currently has coal on the ground ready to delivered to its customers. Universal’s management believes that the association with Whitesburg for the production and marketing of high grade thermal coal should give it a high margin energy product to sell to its electric utility and coal production customers.

 

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NDR Energy Group LLC

In April 2010, we expanded into the natural gas energy market by the acquisition of a 49% stake in NDR Energy Group LLC, (“NDR Energy”), in Charlotte, North Carolina. NDR Energy Group was established in the State of Maryland on September 28, 2005. Through NDR Energy, we have contracts signed with 28 major utility companies in the United States, with strong Standard & Poor’s credit ratings. NDR Energy Group markets and distributes natural gas and propane to 28 of the largest public utilities, electric power producers and local gas distribution companies that serve millions of commercial, industrial and residential customers throughout the country. Our customers include Southern California Gas Company, Pacific Gas & Electric, CenterPoint Energy Resources, Baltimore Gas & Electric, Memphis Light Gas & Water, Duke (Ohio & Kentucky), Michigan Consolidated and National Grid. Our gas suppliers include EDF Trading, Chevron Texaco, Conoco Phillips, Chesapeake Energy Marketing, and Anadarko.

 

Business Strategy

Our primary objective is be one of the top independent energy companies in the U.S., and to deliver maximum value to our shareholders, and generate increasing revenues and solid earnings for the long-term growth of our Company. In the year 2010, management totally re-organized and re-structured the Company with a new strategic direction and business plan, of which these strategies were implemented in 2011 and are ongoing. Our primary objective is to exploit changes in the energy market, with the intent to propel us to a dominant market position, and be one of the top independent energy companies in the United States. Another major objective in our revised business plan is to finding new ways to create more value for our shareholders and investors. Our management intends to deliver greater value to our shareholders and investors by generating increasing revenues, producing solid earnings, and improving returns on invested capital, for the long-term growth of our Company. We believe this is the ultimate measure of our success.

Our management believes that our business model and strategy is working very successfully. We are a high growth company that is rapidly growing at double-digit rates. We achieved sales of $41,320,647 for the fiscal year 2010, and increased our sales by 73.64% to a record $71,747,840 in the fiscal year 2011. By building on our successes in 2011, we plan, although we cannot provide assurances as to timing and attainment, to achieve these future objectives by pursuing the following strategies;

 

Mergers and Acquisitions

We plan to continue our growth by means of mergers and acquisitions of other companies in the natural gas, propane, petroleum, coal and alternative energy industries. This may also include liquefied natural gas (LNG), compressed natural gas (CNG), biofuels, syngas and acquisitions of patented energy technologies.

 

Vertical Integration

We have adapted our business strategy to become a more vertically integrated company to give us greater management control over our supply chain, from the producer, through marketing, distribution, and directly to our customer.

 

Oil and Gas Field Development

We intend to pursue the acquisition of more oil and gas properties and assets. This includes existing oil and gas fields, development of newly discovered or recently discovered oil and gas fields, re-entering existing capped wells and lease acquisitions. We especially have a high level of interest in the development of existing fields whereby we can re-enter previously drilled capped wells to extract the oil and gas using new drilling/extraction methods and techniques. Fields with previously drilled capped wells would be of highest priority for us, since they had been “proven wells” before, and would therefore have lower development costs and lower associated financial risks.

 

Own Our Oil and Gas Supply

We plan to own and/or control our own natural gas supply by obtaining the gas at the wellhead from supplies with large reserves and inventories, to market and distribute directly to our growing customer base.

 

Increase Operating Income

We intend to increase our operating income and earnings by obtaining our gas at the wellhead at the producers’ price, and aggregating the purchase of our gas supply through a large number of independent producers with long-term purchase agreements to supply to our customers.

 

CORPORATE FINANCE

 

The Company’s Capital Structure

In management’s efforts to grow and expand the Company, we must obtain the necessary capital to achieve those objectives, decide on the best methods to obtain that capital, and the capital structure of the Company. The primary ways a company will raise capital is either through debt financing (borrowing money), or equity financing (selling a portion of the company via shares of stock) or a combination of both. The type of capital chosen (debt or equity), and methods of raising the capital depend on a number of factors including; the company’s life cycle stage, e.g., start-up, development, high-growth or maturity, future growth prospects, strength of the national economy and the credit markets.

 

Potential investors in any company, including ours will consider those factors and the relative risks to their investment capital. To limit their risks, these investors may limit the size of their investment, or provide it to the company in stages, that is contingent upon the company reaching stated goals e.g., production, marketing, distribution and revenues. The ultimate question for management is; how do you get the investors to commit to making what could be a high risk investment for them, although one that would correspondingly benefit the Company, however one that the investor could lose if the Company were to fail. Management considered both the equity and the debt financing options based on the Company’s life cycle stage, economy, credit markets and other circumstances at the time, and reached the following conclusions;

 

Equity Financing - Management decided not to raise capital through an equity offering in its initial start-up and development stage for a variety of reasons;

 

(1) The Company would have had to go through the process of filing a registration statement.

 

(2) The direct and indirect flotation costs of the issuance of an equity capital raise could have run $250,000 or more, and the Company did not have those funds available.

 

(3) It would have been very difficult to get an investment banker to underwrite a new issuance for a development stage company with a limited operating history and revenues.

 

(4) Many investors did not want to take an equity position in the Company at that time and the corresponding risks of ownership.

 

(5) The issuance of equity to these investors, after resolving the potential regulatory hurdles, legal issues, time constraints, and costs would have resulted in immediate dilution for the other shareholders, giving them only limited hopes that value would be created.

 

Therefore, due to the above stated reasons, the economic climate and the Company’s circumstances at that time, management elected not to pursue raising capital through an equity offering at that time.

 

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Debt Financing – Management elected to raise capital for the Company through debt financing for the following reasons;

 

(1) Due to the Companies rapid growth, it had immediate and continuous need for capital.

 

(2) The investors were more willing to invest funds more expeditiously, and take a creditor’s position instead of as an owner by taking an equity position.

 

(3) With those immediately available funds, management could grow the Company rapidly and create short-term economic value to the Company by closing on several target mergers and acquisitions prior to any equity dilution taking place.

 

(4) The investors were issued Promissory Notes that were unsecured without any collateral (taking a high risk).

 

(5) The Notes required no monthly payments which allowed us to use that free cash flow for operating expenses, reduced our cash outlays, interest payments and improve our budget, plans and forecast our cash flow.

 

(6) The investor received the potential upside of conversion of the Notes into equity while protecting our downside with the use of the cash flow.

 

(7) Should the investors decide to convert the Notes into common stock, then the Company’s debt would be eliminated from its balance sheet.

 

(8) The tax benefits of debt financing is that it’s less expensive, while the Company is taxed on earnings, it is not generally taxed on borrowed money and the interest on the Notes is tax deductible.

 

(9) Since the investors does not have any equity interests, it has no voting rights or other control over the management of the Company, its operations and no claim to its future earnings.

 

(10) If the Company ever suffers a negative financial situation, it is much easier to re-negotiate the terms of the Notes with the individual investors than with a bank, or a group of investors through an equity or bond offering.

 

Based on the reasons above, and since the Company required immediate capital to rapidly expand, grow, restructure its operations, enter new markets, finance new acquisitions and execute its marketing plans; raising capital through debt financing was our best alternative. This strategy resulted in our gaining a greater share of the energy market, increased revenues, increased assets, market capitalization value and our shareholders owning a portion of a much larger and more valuable company. As the Company continues to advance and develop through the different stages of its business life cycle, management will evaluate options, alternatives, and make strategic decisions for the best investment opportunities, financing and capital structure at that time.

 

Accounts Receivables

We are currently seeking to obtain additional accounts receivable financing and commercial letters of credit to significantly improve our revenues and profits for the purchase and sale of natural gas. We currently invoice our customers between the 10th and 15th of the month, for the previous months gas sales. The customer in accordance with our “Purchase Agreement” sends us full payment via wired funds by the 25th of the month, or 10 to15 days after receipt of our invoice.

 

Presently NDR Energy Group turns over its accounts receivables for the sale of natural gas about 7 to 12 times per year or every 30 to 40 days. We are currently in the process of re-negotiating our agreements with our electric utility customers to change the invoicing and payment terms from 30 to 40 days, to invoicing them on a weekly basis. While there can be no guarantees, management believes that, if implemented, this will increase the accounts receivables turnover times to 52 times per year, and will shorten the collection time that we receive payment on our customer’s invoices. This change coupled with the use of an accounts receivables factoring line will give NDR Energy the ability to purchase gas from our suppliers at larger discounts, thereby increasing the overall profit margin to as much as $0.07 to $0.20 per mcf (MMBtu) in the sale of gas to our existing customers.

 

The growth and position of NDR Energy Group will be further enhanced once the Company is able to sell off its account receivables. NDR Energy Group will then have the ability to purchase and sell gas more often, for example, on a daily and weekly basis instead of just on a monthly basis or longer. We believe this would also allow us to generate more accounts receivables and purchase even larger quantities of gas. The profit margins for the sales of gas on the daily “Spot Market” and the weekly sales of gas is, in our estimation significantly higher, by as much $1.00 to $5.00 or more in the winter months than the margins on the NYMEX futures market. Therefore, it is critical that NDR Energy Group have access to accounts receivables (AR) funding line and Letters of Credit so it may take advantage of opportunities and discounts to sell gas on the daily and weekly time frames. It will also enable NDR Energy Group to develop new gas supplier relationships and agreements with better terms, conditions and less restrictive repayment policies. There can be no assurances that these objectives can be attained.

 

Our Utility Customers

All of our utility customers are typically multi-million and multi-billion dollar municipally owned or Fortune 500 investor owned publicly traded utilities with strong Standard & Poor’s credit ratings. We generally enter into a purchase or sales agreement with the customer and/or supplier, using the North American Energy Standards Board (“NAESB”), “Base Contract for Sale and Purchase of Natural Gas”, which is the standard agreement used in use the natural gas industry. The contract terms are usually 1 to 5 years to supply gas to its customers, however in some cases shorter terms of 1 to 6 months will be considered for some customers. We will invoice the customers between the 10th and 15th of each month, for the previous months gas sales, and the customer, in accordance with our “Purchase Agreement”, sends us full payment via wired funds by the 25th of the month, or 10 to15 days after receipt of the invoice. The customers have paid all of the invoices for the delivery of gas for the last 5 to 7 years without fail. This further reduces the risk to our Company and our shareholders.

 

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Recent Developments and Significant Accomplishments

 

NDR Energy Group Signs Contract with Duke Energy Commercial Asset Management Group

On September 26, 2011, we announced that NDR Energy Group, our subsidiary, signed an agreement to supply natural gas to Duke Energy Commercial Asset Management Group Inc., the commercial power division of Duke Energy, one of the largest electric power companies in the United States. Duke Energy, is a Fortune 500 company, traded on the New York Stock Exchange, and reported revenues of $14.27 billion in 2010 in their SEC filings. Duke Energy supplies and delivers energy to approximately 4 million U.S. customers. They have approximately 35,000 megawatts of electric generating capacity in the Carolinas and the Midwest, and natural gas distribution services in Ohio and Kentucky. Their commercial and international businesses own and operate diverse power generation assets in North America and Latin America, including a portfolio of renewable energy assets.

 

Universal Bioenergy Launch of New Corporate Website

On October 11, 2011, we launched a totally new corporate website to better serve the needs of its shareholders, investors and the public interests. The new website reflects Universal’s commitment to be one of the largest independent energy companies, and provides the investment community with the most current information on our products, mergers, acquisitions, growth and expansion. It also highlights the Company’s subsidiaries such as NDR Energy Group and Texas Gulf Oil & Gas.

 

The corporate website was designed specifically with our shareholders in mind, and was designed to allow the user the ability to explore a wide variety of valuable information about our Company. Among the highlights of the website are, a History of the Company, Business Strategy, Marketing Plans, Product Distribution, the Energy Industry and Future Plans and Outlook of the Company. It also features current information on the Company’s Stock Performance, a Newsroom, News Releases, a weekly Standard & Poor’s Factual Stock Report on Universal and an extensive Investors Relations section for their shareholders and investors. The website can be located at www.universalbioenergy.com. The website and its contents are expressly not incorporated into this filing.

 

Acquisition of Whitesburg Friday Branch Mine LLC Thermal Coal Mining Operations

On October 17, 2011, our company and Whitesburg Friday Branch Mine LLC, a Kentucky Limited Liability Company (“Whitesburg”), entered into a Member Interest Exchange Agreement, (the “Exchange Agreement”). Pursuant to the Exchange Agreement, and subject to the conditions set forth therein, the Company will acquired, subject to the terms and conditions of the Exchange Agreement, 40% of the Member Interests and assets of Whitesburg Friday Branch Mine LLC, of Kentucky, a privately held company, from JLP and Partners LLC, a Kentucky Limited Liability Company (“JLP”), for a total consideration of $2.7 million. The Whitesburg Friday Branch Mine, operates, mines and produces thermal coal in eastern Kentucky for sale to electric utilities for use in coal fired generation, steam plant electric power production.

 

Steam plant electrical power production is highly dependent on thermal coal. Thermal coal is used as a primary source of energy for coal fired steam powered generators in electric utility plants. The Whitesburg mining operations are the surface and high wall mining type, and does not include any underground mining. Whitesburg already owns the leases for the coal mineral rights and has the required mining permits from the State of Kentucky. Since NDR Energy Group already sells natural gas to our electric utility customers to generate electricity, we believe thermal coal would give us another energy related product to sell to our current and expanding customer base to increase our revenues. The Agreement also includes provisions for us to develop the oil and natural gas potential on the mine property if these resources are discovered. According to the Energy Information Administration, coal as a fuel source for electricity generation will increase 25% by 2035 in the United States. As petroleum reserves diminish, gas to liquid process can use coal as a source for many chemical compounds for the chemical, polymer and other industries. Additionally, an advantage of using clean coal technology will be to increase demand for coal as the source to produce synthetic natural gas (syngas). According to Whitesburg Friday Branch Mine LLC, the mine is projected to produce over $264 million in revenues from the sale of coal in the next 5 years. No assurances can be provided that such revenues will transpire.

 

This acquisition was reported on the Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 28, 2012.

 

NDR Energy Group Signs Contract with Laclede Gas Company

On October 25, 2011, NDR Energy Group completed the execution of a natural gas supply agreement with Laclede Gas Company. Laclede Gas is a public utility engaged in the retail distribution and sale of natural gas. According to Laclede Gas Company, it is the largest natural gas distribution utility in Missouri, serving approximately 630,000 residential, commercial and industrial customers in the city of St. Louis and ten other counties in Eastern Missouri. As an adjunct to its gas distribution business, Laclede Gas Company operates an underground natural gas storage field, a propane storage cavern and propane vaporization facilities. Laclede Gas Company is a wholly owned subsidiary of the Laclede Group, Inc., a public utility holding company which reported over $1.73 billion in revenue 2010, in its SEC filings.

 

NDR Energy Awarded $11.47 Million Gas Supply Contract with Southern California Gas

On March 1, 2012, the Company announced that NDR Energy Group was awarded a contract to supply natural gas to Southern California Gas Company, a subsidiary of Sempra Energy. According to Southern California Gas Company, Southern California Gas Company is the nation’s largest natural gas distribution utility, with 20.7 million customers. Under the terms of the contract NDR Energy Group is to supply the customer with an estimated 25,000 mcf per day, or a total of 4.5 billion cubic feet (bcf) of natural gas for six months from April through October, with an estimated value of $11,475,000. Since most of these contracts are for delivery of gas from between 1 to 12 months in the future, due to price fluctuations in gas supplies, transportation and other factors, the final net profit cannot be determined until after the delivery, invoicing and payment of the gas from the customer. The resultant profit will be reflected in the Company’s financials for the corresponding period after the delivery, invoicing and payment of the gas.

 

Terminated Agreements

 

There are no terminated agreements to report for this reporting period.

 

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THE COMPANY’S FUTURE PLANS AND OUTLOOK

 

Stock Dividends and Distributions

 

Due to management’s strong confidence in the current and future growth and expansion of the Company, it is considering additional ways to bring more value to our shareholders. We are considering, but can provide no assurances as to implementation, the following proposals for dividends and distributions;

 

  1. A special dividend in the form of common stock
  2. Regular dividends issued in stock or cash (subject to the Company’s future earnings and availability of funds)
  3. A dividend in the form of Preferred stock, or Preferred stock with the option to convert them to common stock. The issuance of any options or its exercise at a cost would be subject to SEC guidelines and a possible registration of an offering.
  4. The issuance of warrants or options to buy additional shares from the Company, (subject to SEC guidelines)

In addition to potential price appreciation of the common stock, this could provide the shareholders with additional current income, cash flow and (although we cannot guarantee it) the potential to earn higher returns from these stock dividends and distributions than they might earn on their other investments.

 

The Company’s management is currently evaluating the above proposals and others in this regard and its potential benefits to the shareholders and impacts on the Company, however no decisions have been made regarding this matter. We believe this will reward our loyal shareholders for their ongoing support, and to give them a greater stake in our Company.

 

Universal Bioenergy Considers Changing Its Name

 

Our management is presently considering changing its name to reflect its current business model and its future growth as it continues to expand its marketing of natural gas, propane, petroleum and thermal coal. The name Universal Bioenergy, reflected our original plans to produce and market “green” energy technologies, such as biodiesel fuel, solar, wind, wave and other technologies. In December 2009, after conducting its business summit in Las Vegas, Nevada, on January 12, 2010, we announced that it was charting a bold new course for our Company. We shut down our biodiesel refinery in Nettleton, Mississippi in 2010, and later on March 31, 2011, we completed the dismantling of the facilities structures and plant equipment at the biodiesel refinery. This marked our exit from green energy technologies, and to grow and expand into more profitable conventional energy products and technologies. The name “Universal Bioenergy” has also caused some confusion in the minds of potential shareholders, and investors because we no longer market and produce “green energy” products. We believe a strategic name change will help us to build a better “brand”, improve our image, attract more shareholders and investors, and more fully reflect the emphasis of our current and future business trends in the marketplace. On June 18th 2010, the majority of the shareholders, and the Board of Directors each approved separate Resolutions to amend the Articles of Incorporation granting the Board of Directors the right to change our Company’s name. On May 9, 2011, we filed a Certificate of Amendment with the Nevada Secretary of State, to amend our Articles of Incorporation, which granted the Board of Directors the full right and authority to change the name of the Company at a future date without out any shareholder action or approval.

 

Universal Bioenergy – Considers Options for Merger, Acquisition or Consolidation

Our management is considering the possibility of completing a merger or consolidation with another company to increase its market share, share price, market value, expand horizontally into other national or international geographical markets, expand vertically and create more value for its shareholders. Our Company’s management is currently evaluating the possibility of a merger or consolidation and its potential benefits and impacts on our Company, however no decisions have been made regarding this matter. Any final proposals regarding this matter would be presented to the Board of Directors and the shareholders for approval as required by Federal and State laws, guidelines and our corporate By-Laws.

The issues and benefits that would have to be considered include;

 

  1. The potential value of the synergies and strategic fit of the target or acquiring company
  2. The financial, accounting, tax and legal effects
  3. The acquisition or sell of stock and/or assets of either company
  4. Consideration of a merger or consolidation with another company to create a new stronger more valuable company
  5. Completion of a horizontal acquisition of a competitor or other company in our industry
  6. Completion of a vertical acquisition with another company either upstream or downstream in our industry that may include exploration companies, producers, distributors and marketers
  7. Consideration of a triangular or a reverse triangular merger with a strong operating company on another exchange such as the NASDAQ, NYSE/AMEX or OTCBB
  8. Potential increase in the price of our common stock
  9. Economies of scale from the two companies combined resources
  10. Potential reductions in operating costs
  11. Potential to increase the earnings and earnings per share of the Company
  12. The potential to create more value for our shareholders

 

Plans to Up-List to NASDAQ or other National Stock Exchange

Based on our growth by mergers, acquisitions, and revenues, and future plans for expansion, our management is evaluating and positioning our Company to potentially qualify, and apply to up-list to a major national stock exchange, which stock exchanges list similarly situated energy technology companies, such as NASDAQ, NYSE Amex Equities, or others. Our management has already been in discussions with several investment bankers, advisory firms and our securities counsel to review the exchange requirements, legal issues involved, improving our capital structure, procedural guidelines and other related issues to qualify to be listed on one of the major national exchanges. Management believes that, if we can successfully position our company to qualify to meet the listing requirements for one of the stock exchanges, it would greatly increase our market value, and should make it attractive to more retail and institutional investors. We also feel this would be of great benefit to our shareholders. No assurances can be provided that this aspect of our long-term business plan will be achieved. 

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Consideration of Reverse Stock Split

 

As an additional requirement to qualify to be listed on one of the major national stock exchanges, management in consultation with its accountants, auditors, investment advisors and securities counsel is considering the options of the benefits of implementing a reverse split of its common stock. If a reverse stock split were effected, it would result in a reduction in the number of the Company’s outstanding shares, and a corresponding increase in the price of our stock or its earnings per share. Some of the factors under consideration are;

 

  1. Improving the liquidity and marketability of the stock to a more popular trading range to make it more attractive to institutional and other major investors
  2. Increase the price to a range to reflect the revenues, growth and stability of the Company
  3. Increase the price to qualify for the minimum share price requirements to qualify for a major stock exchange such as NASDAQ or NYSE/AMEX
  4. The Company may consider purchasing the shares of some of the minority shareholders
  5. Allow the Company to raise more capital for its growth and expansion

 

Management believes that the current stock price is currently undervalued, and the share price does not fully reflect its true value in proportion to its operating fundamentals, and based on the Company’s rapid growth, revenues, acquisitions and plans for expansion. Many institutional investors and investment funds have guidelines that prevent them from investing in our common stock at the current prices that the stock trades at. With a high stock price, it is possible that many institutional investors, larger private equity firms, hedge funds, pensions and trusts that were previously prohibited from acquiring our shares, could then purchase our shares. The reverse stock split of our shares of common stock may also help to create greater investor interest in the Company by producing a share price the common stock for our Company that is more consistent with other high growth companies of our size in our in the market place. If a reverse stock split was implemented it would reduce the amount of outstanding shares, increase our share price, and help the Company qualify to up-list to a major stock exchange such as NASDAQ, or NYSE/AMEX. Management believes this would be beneficial to our shareholders.

 

Our management is currently evaluating the possibility of a reverse stock split and its potential benefits and impacts on our Company, however no decisions have been made regarding this matter. Any final proposals regarding this matter would be presented to the Board of Directors and the shareholders for approval as required by Federal and State laws, guidelines and our corporate By-Laws.

 

New Business Model

Mergers and Acquisitions

Management has determined that it is in our best interests to chart a bold new course for the Company to grow by mergers and acquisitions. Management is planning for expansion, by additional mergers and acquisitions, to generate greater revenues and profits, and by shifting our focus to invest in far more profitable natural and alternative energy technologies. We anticipate, but can provide no assurances, acquiring 3 to 5 additional new companies in the next 2 to 3 years.

 

Some  companies being targeted are, natural gas producers  to obtain natural gas  directly from the wellhead,  gas gathering pipeline companies, propane producers, high wall surface coal mines and the acquisition of energy technology patents and licenses. We’re also looking at acquiring petroleum and gas wells, assets and properties in Texas, Louisiana and other states. Acquiring interests in properties in these areas will work very well with our strategic plans for Texas Gulf Oil & Gas Inc.  We have adapted our business strategy to become a more vertically integrated company, to give us greater management control over our supply chain, from the producer, through marketing, distribution, and directly to the customer. We believe, but can provide no assurances, that this will bring even greater revenues for our company and more value to our shareholders.

 

Termination of Acquisitions - As part of our business strategy, we review acquisition and strategic investment prospects that we believe would complement our current product offerings, augment our market coverage or enhance our technological capabilities, or otherwise offer growth opportunities. From time to time we review investments in new businesses and we expect to make investments in, and to acquire, businesses, products, or technologies in the future. We expect to continue pursuing selective acquisitions of businesses. Very often during the acquisition and due diligence process, management will not be able to consummate the transaction because we cannot close it on terms and conditions acceptable to us, or because of other negative factors as described below.

 

In the event that management and its acquisitions team have identified a strong potential target company, we will issue a Letter of Intent to start the due diligence process to acquire that company. Afterwards, our legal counsel will prepare a definitive agreement with all of the final terms and conditions to complete the acquisition. Proper due diligence for proper technical, financial and legal review can be very expensive and time consuming. Often during the due diligence process we discover that the representations and warranties made by the target company regarding its business, operations, assets, financials, books, records, properties, contracts, liabilities, pending litigation, permits, licenses and business status are not accurate or complete, there may be misrepresentations, or there is an adverse material change in the business prior to the closing of the acquisition. In that event, management will elect to terminate that acquisition to avoid any negative impacts on our operations, avoid any adverse legal and financial exposure to the Company and to protect our shareholders. Due to these factors we and other companies that pursue other companies as acquisition targets do not expect that they will close on every potential acquisition target.

 

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Market Expansion

Management believes that there are currently there are 3240 utilities in the United States. Through NDR Energy Group, we have firm contracts signed with 28 of these major utilities, and are in discussions with another 14 utility companies to obtain contracts from them also. Our plans are to develop an aggressive sales force, to obtain agreements with a total of 100 utilities, and other customers including, Federal and State Departments and Agencies, Cities, Municipalities, and large commercial and industrial corporate clients, in the next 12 to 24 months. This will give us a much greater market share, more customers for our gas supply division, thereby further increasing our revenues and profits.

 

Forecast of Projected Revenues and Earnings and Market Value

Our primary objective is to exploit changes in the energy market to propel the Company to a dominant market position, and be one of the top independent energy companies in the United States. Another major goal is to finding new ways to create more value for, and maximize the wealth of our shareholders, and bring increased value to our stakeholders and the investment community. The financial projections presented below are estimates based on Management’s analysis of the present targeted market segments of the energy industry we are involved in, future industry trends, our current and growing customer base, our strategic joint ventures, strategic alliances, and other capital development projects we are pursuing. The financial plan is intended for rapid but controlled growth and required our management to make certain assumptions and estimates.

Focus on Earnings

We achieved sales revenue of $13,007,160 for the three months year ending March 31, 2012, as compared to $22,247,354 for the same period in 2011. Our cost of sales was $12,989,939 for the three months year ending March 31, 2012, as compared to $22,247,354 for the same period in 2011. While building our business, we focused on generating substantial sales revenues, a broad customer base, and gaining the greatest share of the market in the shortest period of time. That strategy affected how we obtained our supplies, their relative cost, and how we priced our products for sell to our customers. To gain a great market share in a short period of time, initially resulted in higher cost of goods sold, and selling the product, at or slightly below our costs, and that directly impacted our profitability. This caused almost negligible gross profit and negative earnings. This strategy was only a temporary measure, while we were building greater market share, last year.  

A major goal for the fiscal 2012 year and beyond is to begin to generate earnings for the Company. We intend to increase our operating income and earnings through current and future acquisitions in the energy industry, and high profit centers which will include gas storage, physical and financial gas trading, transportation, management and higher sales of natural gas, propane, oil and coal. We also plan to obtain our natural gas supplies at the wellhead and aggregating the purchase of our gas supply through a large number of independent producers with long-term purchase agreements to supply to our customers.

 

Our management’s plans for increasing earnings include the following;

 

• First, we are changing our strategy for obtaining our supplies of natural gas.

• Second, we are negotiating with independent oil and gas producers to obtain our supplies at the wellhead, and aggregating the supply under long-term supply agreements to market to our customers.

• Third, we engaged in a joint venture with Progas Energy Services, to develop the Northwest Premont oil and gas field in Texas. We will obtain our share of the oil and gas from that field, from the wellhead at the producer’s price.

• Forth, we are attempting to obtain more bank funding, lines of credit, and Letters of Credit, as opposed to using the suppliers “trade credit”, to purchase the gas.

• Fifth, we will be re-negotiating our existing supplier agreements to purchase the gas in larger quantities, with greater economies of scale, on better terms, at lower purchase costs, and reduce the high financing costs. This should drive our costs down, and potentially produce higher profit margins for our company.  

• Sixth, our management has decided to expand into the coal energy sector of the energy industry. Thermal/Steam non-coking coal is used as a primary source of energy for coal fired powered plant electric generation. We plan to mine, produce and market “Thermal/Steam” coal to sale to other major coal producers and electric utility customers for power generation.

• Seventh, our Company through NDR Energy Group has expanded its product mix to include the sales and distribution of propane due to the higher profit margins.

• Eighth, we intend to expand into gas storage, physical and financial gas trading, transportation and, gas management.

New Profit Centers

We also plan to increase our revenues and profits by engaging in some are all of the services indicated below. These services are currently being provided to us by our natural gas suppliers and the cost for these services are charged to us, and are included in the price of the gas that we purchase from them. Implementing these new profit centers may generate an additional $0.05 to $0.25 in revenue per mcf, of natural gas that we sell to our customers. These services include;

1. Scheduling - tracking nominations, confirmations product movement and verification

2. Gas Nominations - delivery of a specified volume over a defined period of time

3. Capacity Releases - release of transportation capacity on interstate natural gas pipelines

4. Gas Transmission - Delivery via the interstate pipeline system to the Local Utility and customers

5. Pipeline Balancing - matching customer's daily usage with the customer's confirmed pipeline delivery

6. Risk Management – developing supply pricing strategy, options, demand, daily and futures contracts

7. Gas Storage - match seasonal load variations, and production over periods of fluctuating demand

8. Gas Trading - physical trading and financial trading, and hedging of gas futures

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Value of Our Customer Contracts

Our customer contracts are a very valuable asset for us. Through NDR Energy Group, we presently sell natural gas to 28 of the largest public utilities, electric power producers and local gas distribution companies that serve millions of commercial, industrial and residential customers throughout the United States. Since they are regulated by various Federal and/or State agencies, they must guarantee a constant uninterruptible supply of natural gas and electricity to their customers, which include private homes, commercial and industrial users, medical facilities, educational facilities, federal/ state buildings, the military and many more. Therefore the public gas and electric utility companies have very stringent guidelines about the suppliers and vendors they do business with. The pursuit and acquisition of new customers by us, can be time consuming and very costly, especially when you are attempting to transact business with large national and multinational companies with very strict guidelines. They usually require us and NDR Energy to respond to a very rigorous Request for Qualifications (RFQ) or Request for Proposals (RFP) process, which includes extensive background information on company, its officers, operations staff, financial stability, credit worthiness, track record, and our ability to furnish them with a firm, reliable, uninterruptible supply of natural gas. We are responsible for transportation of the gas to their contracted delivery points, any shortages, and the gas must meet certain standards in terms of quality, pressure, and heat content. There can also be substantial legal and monetary damages to us for failure to pay our suppliers for the gas, and for failure to deliver the gas to the utilities, because they could not supply electricity and gas to the general public.

Management believes, each of our customer contracts would have a potential to generate an estimated $12+ million annually in natural gas sales. We believe, the retail value of each of these contracts could very significant, if someone were to purchase one or more these contracts based on their potential sales value over a period of 5 to 10 years or more.

Future Capital Funding

To ensure our ability to remain as a going concern, and develop a long-term profitable business, management is planning to raise additional funds in debt or equity capital to fund the growth of our company. We anticipate using the proceeds to purchase some of the companies we have targeted for future acquisitions, and some for working capital. Management believes, although we cannot guarantee, that we successful in raising additional capital to fund our plans for growth and expansion.

The raising of additional capital through the sale of equity may result in a dilution of the current shareholders interests. However, management anticipates that the shareholders would likely receive greater potential financial rewards by means of a significant increase in the price of the stock, greater market value of the Company, and more liquidity. Since our management has re-engineered our company by creating more value to it, through its recent acquisitions, and is positioning it to qualify/apply to be listed on another stock exchange, we believe this should make it attractive to more retail and institutional investors. We feel this would be of great benefit to our shareholders.

Corporate Governance and Management

Amendment to Company’s Articles of Incorporation

On May 9, 2011, we filed a Certificate of Amendment with the Nevada Secretary of State, to amend our Articles of Incorporation. A complete copy of the Amendment was attached as Exhibit 99.1 to the filing on Form 8-K, filed on May 19, 2011 The Amendment incorporated the following changes;

  1. Increased the number of authorized shares of the Company’s common stock from 200,000,000 to a total of 1,000,000,000 shares.
  2. Grant to the Board of Directors the full right and authority to increase or otherwise change the authorized shares of common stock and preferred stock without any shareholder action or approval.
  3. Grant to the Board of Directors the full right and authority to change the name of the Corporation at a future date without out any shareholder action or approval.
  4. To authorize that each Director shall be elected to serve for a minimum period of one year, and up to three years, or shall serve until his successor is elected and qualifies. Directors need not be stockholders.

 

This action was approved by a vote of the majority of the shareholders of the Company and by the Board of Directors on April 23, 2010.

 

Our Beneficial Shareholders

 

At March 31, 2012, there were 278,306,261 shares of our Common Stock issued and outstanding and there were approximately 70 shareholders of record of our common stock on the records of our transfer agent. The shareholder of record is the name of an individual or entity that an issuer or transfer agent carries in its records as the registered holder (not necessarily the beneficial owner) of the issuer's securities. Dividends and other distributions are paid only to shareholders of record.

The actual “Beneficial Shareholder”, (the true owner of the shares) will generally have their shares held in the “street name” of their nominee, within a brokerage account, a mutual fund or a custodian bank for safety and convenience of trading, with the bank or broker holding title to the shares. The Depository Trust Company (DTC) through its partnership nominee CEDE & Company is the largest shareholder of record of our shares of Common Stock. CEDE & Company as nominee holds over 81.21 million shares of our common stock for its Broker Dealers and other members on behalf of their beneficial shareholders. Management believes based on its tracking of the transactional record data of OTCMarkets / Pink Sheets of the total volume of stock trades and number of executed trades that the estimated amount of beneficial shareholders of our stock is in the range of 3000 to 5000 or more.

Management Incentive Programs

 

We have an incentive program for the Officers, in accordance with their Employment Agreements, whereby they may receive bonuses and equity awards based on the added “economic value” that they bring to our company. This may include increases in revenues, earnings, cash flow, debt reduction, return on net assets, return on stockholders equity, return on assets, return on capital, stockholder returns, return on sales, gross or net profit margin, productivity, expense, margins, operating efficiency, objective measures of customer satisfaction, working capital, financing, earnings per share, market share, inventory turns, acquisitions or strategic transactions, or other means of bringing additional value to our Company. Since management has deferred most or all of their compensation, provisions have been made to issue them long-term Notes for their salary, with the option to convert the Notes into to common stock of our company.

 

 

Voting Trust and Control of NDR Energy Group LLC

 

The Company and Varlos Energy Holdings LLC entered into a Voting Trust, via a Voting Trust Agreement whereby Varlos Energy granted and transferred its Two (2%) percent member interests to the Company and its Voting Trustee, Vince M. Guest, for the purpose of having the Company to vote Varlos Energy’s member interests in NDR Energy Group LLC, for any corporate lawful act for a period not to exceed Ten (10) years. This Voting Trust vests in the Company, and the Trustee, Fifty One (51%) percent (the “Majority”) of the control of the membership ownership interests of NDR Energy Group LLC, and the authority over all of its management and operations decisions, with the combination of the Company’s Forty Nine (49%) percent member interests and the voting rights and control of Varlos Energy’s Two (2%) percent member interests.

 

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Universal Bioenergy North America

Discontinued Operations

Universal Bioenergy North America, Inc., (UBNA), is a subsidiary of our company. It is a Nevada corporation that was formed on January 23, 2007 that was acquired by our company in December 2007, for the purpose of operating a biodiesel plant in the city of Nettleton, County of Monroe, Mississippi to produce biodiesel fuel and a marketable byproduct of glycerin. The biodiesel plant was acquired by Universal Bioenergy North America out of a bankruptcy action. As of the date of this report, we have not manufactured any biodiesel fuel We have generated no revenues from the subsidiary, Universal Bioenergy North America, Inc., as the refinery was not in production as of September 30, 2011. Due to the current state and future outlook of the biodiesel market, management decided to dismantle the refinery, and engaged an outside contractor to complete the work.

On March 31, 2011, we completed the dismantling of the facilities structures and plant equipment at the biodiesel refinery in Nettleton, Mississippi. The plant was dismantled due to the following reasons; (1) the current negative economic climate, (2) the collapse of the biodiesel market in 2009 and 2010, (3) the market operating at 10% to 17% capacity, (4) a glut of idle biodiesel plants on the market and bankrupt producers, (5) the negative future market outlook, (6) the estimated cost of over $500,000 to restart the plant, (7) potential legal liabilities, (8) lack of a clear and strong U.S energy policy, (9) lack of consistent federal government support, tax credits and subsidies, (10) inability of biodiesel to effectively compete against petroleum diesel, (11) low profit margins, (12) and the volatility and high cost of feedstocks.

On August 31, 2011, the property located in Nettleton that was formerly used as a biodiesel refinery, was sold by the Monroe County Chancery Clerk, of the State of Mississippi at a county tax forfeiture sale to recover the property taxes due the County. After consulting with our outside professionals, and due to the circumstances indicated above regarding the dismantling of the plant, the negative state of the biodiesel industry and our new direction to pursue the production and marketing of natural gas, petroleum, coal and propane; our management determined that retaining the property would provide no further benefit to our company, and furthermore it was not consistent with our long-term business objectives. Therefore, it was decided not to pay the property taxes, thereby forfeiting the property and allow the Monroe County Chancery Clerk to sell the property at the tax forfeiture sale. According to the Monroe County tax records, the property was purchased at the tax forfeiture sale by another company which had no relationship with our company, or any of our Officers, Directors or Employees.

FUTURE OUTLOOK FOR THE NATURAL GAS INDUSTRY

Seasonal Nature of Natural Gas Business

 

Generally, the demand for natural gas decreases during the summer months and increases during the winter months. Seasonal anomalies such as mild winters or hot summers sometimes lessen this fluctuation. In addition, pipelines, utilities, local distribution companies and industrial users utilize natural gas storage facilities and purchase some of their anticipated winter requirements during the summer. This can also lessen seasonal demand fluctuations.

 

Oil and natural gas prices have fluctuated dramatically in recent years and will likely continue to be volatile in the future. Lower oil or natural gas prices may not only decrease our revenues but also may reduce the amount of oil or natural gas that may be produced economically from our prospects. A substantial or extended decline in oil and natural gas prices may materially and adversely affect our future business, financial condition, results of operations, liquidity or ability to finance planned capital expenditures.

 

Short-Term Outlook

On March 6, 2012 the U.S. Energy Information Administration (“EIA”) released its “Short-Term Energy Outlook” EIA expects that natural gas consumption will average 68.9 billion cubic feet per day (Bcf/d) in 2012, an increase of 2.1 Bcf/d (3.1 percent) from 2011. EIA expects that large gains in electric power use will offset declines in residential and commercial use. Because of the much-warmer-than-normal winter this year, EIA expects residential and commercial consumption to fall by 0.5 percent and 0.1 percent, respectively, in 2012, reflecting a downward revision in projected consumption from last month’s Outlook.

 

The EIA Report projected consumption of natural gas in the electric power sector grows by close to 9 percent in 2012, primarily driven by the relative advantages of natural gas over coal for power generation in a growing number of economic dispatch decisions. Consumption in the electric power sector peaks in the third quarter of 2012, when electricity demand for air conditioning is highest.

 

The EIA Report that growth in total natural gas consumption continues into 2013, with forecast consumption averaging 69.3 Bcf/d (U.S. Natural Gas Consumption Chart). Consumption in the residential and commercial sectors increases in 2013 because of the forecast return to near-normal temperatures next winter. The increase in consumption in these sectors more than offsets a decline in power sector natural gas burn stemming from the projected increase in natural gas prices relative to coal prices later this year and next.

 

Long-Term Outlook

The U.S. Energy Information Administration, in its “Annual Energy Outlook 2011 Report”, estimates that natural gas demand in the United States could grow from 21.0 Tcf to be 26.3 Tcf, (Trillion Cubic Feet), by the year 2035. The EIA, “Natural Gas Year-In Review 2009, Report” stated, “Over the past several years, natural gas use for electric power has increased, with gas making up an increasing percentage share of total generation relative to coal. In 2009, natural gas made up almost 24 percent of net power generation with 931,000 Megawatt-hours (MWH) of electric power generated from natural gas. By comparison, in 1996, natural gas made up only 14 percent of power generation.” Consumption of natural gas for electric power increased from a level of 18.3 billion cubic feet, (Bcf) per day in 2008, to 18.9 Bcf per day in 2009. This increase was caused by fuel-switching due to sharp declines in the price of natural gas, as coal prices actually rose between 2008 and 2009, while consumption of coal at electric power plants declined 11 percent.

 

The U.S. Energy Information Administration, in its “Annual Energy Outlook 2011 Report stated that, Shale gas production in the United States grew at an average annual rate of 17 percent between 2000 and 2006. Early success in shale gas production was achieved primarily in the Barnett Shale in Texas. By 2006, the success in the Barnett shale, coupled with high natural gas prices and technological improvements, turned the industry focus to other shale plays. The combination of horizontal drilling and hydraulic fracturing technologies has made it possible to produce shale gas economically, leading to an average annual growth rate of 48 percent over the 2006 to 2010 period. Shale gas production continues to increase strongly through 2035 in the AEO2011 Reference case, growing almost fourfold from 2009 to 2035. While total domestic natural gas production grows from 21.0 trillion cubic feet in 2009 to 26.3 trillion cubic feet in 2035, shale gas production grows to 12.2 trillion cubic feet in 2035, when it makes up 47 percent of total U.S. production—up considerably from the 16-percent share in 2009.

 

According to a report released by the Massachusetts Institute of Technology, it stated that, “Natural gas will provide an increasing share of America’s energy needs over the next several decades, doubling its share of the energy market to 40 percent, from 20 percent.”

 

COAL INDUSTRY MARKET SEGMENT

 

To further enhance our growth and expansion, management has decided to expand into the coal energy sector of the energy industry. Thermal/Steam non-coking coal is used as a primary source of energy for coal fired powered plant electric generation. We plan to mine, produce and market “Thermal/Steam” coal to sale to other major coal producers and electric utility customers for power generation. We will be pursuing acquisitions of mining operations which are the surface and high wall mining type and that does not include any underground mining. According to the American Coal Foundation, 9 out of every 10 tons of coal mined in the United States today is used to generate electricity, and more than half of the electricity used in this country is coal generated electricity. The following is a summary and overview of the industry and market, which information was excerpted primarily from the U.S. Department of Energy’s, “Energy Information Agency” (EIA).

 

Future Outlook for the Coal Industry

International. The international market for coal consumption is a very dynamic and fast changing one especially in developing regions due to industrialization and technological development. This change has been one of increased consumption as noted in the EIA’s report International Energy Outlook 2011 where we see that in the years from 2000 to 2010, there have been significant increases in yearly coal consumption globally ranging from as little as 0.8% to as high 10.7% annually. Due to the industrialization in the developing regions of the globe, this trend of increasing coal consumption will remain a reality. EIA projections show a conservative average of almost 1.4% increased coal consumption each year through 2035.

 

The U.S. Energy Information Administration (EIA) says, coal as a fuel source for electricity generation will increase 25% by 2035 in the United States. Overall, the EIA predicts that coal will remain the dominate fuel source for electricity generation, growing to about 11,000 terawatt hours from its current level of about 8,000.

 

 

Net Loss as adjusted for non-recurring and/or non-cash expenses

     
    Three Months Ended   Three Months Ended
    March 31,   March 31,
    2012   2011
         
Losses available for common shareholders $ ($654,630) $ ($577,034)
         
Other non-cash expenses            654           1,123
Stock issued for services        5,000      193,250
         
Losses available for common shareholder, as adjusted $ ($648,976) $ ($154,872)
         

 

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RESULTS OF OPERATIONS

 

Three Months Ended March 31, 2012 compared to the Three Months Ended March 31, 2011

 

Review and Analysis of Current Results of Operations

 

Revenues

 

Our revenues for the three months period ended March 31, 2012 declined due to the following conditions in the U.S. energy market;

 

According to the Energy Information Administration, the warm weather this winter has resulted in natural gas working inventories that continue to set new record seasonal highs, with February 2012 ending at an estimated 2.44 trillion cubic feet (Tcf), about 41 percent above the same time last year. EIA’s average 2012 Henry Hub natural gas spot price forecast is $3.17 per million British thermal units (MMBtu), a decline of about $0.83 per MMBtu from the 2011 average spot price. EIA expects that Henry Hub spot prices will average $3.96 per MMBtu in 2013.

According to Bloomberg / Business week, “The price of natural gas is at a 10-year low after a surprising jump in supplies. But the government says natural gas inventories expanded more than expected following a recent production boom. Supplies are currently 59 percent above the five-year average, and they're expected to keep growing over the next few months.”

Our primary revenues from this period are from the sale of natural gas and propane.  Our revenues for the three months ended March 31, 2012 were $13,007,160 as compared to $22,247,354 for the same period in 2011. This resulted in an decrease of $9,240,194 in revenues or 41.53% over the previous year. Our Cost of Sales for this period was $12,989,939. This has resulted in a gross profit margin for this period of $17,220.  The high proportionate cost of sales relative to the gross revenues, reflected in this period, is due to purchasing the gas from some of the suppliers at near retail cost, and high financing costs added to the gas by the suppliers.   Management plans are to reduce the purchasing cost of the gas, and the financing cost, by obtaining our own credit facility and lines of credit and obtaining our gas at the wellhead. We believe, this will allow us to purchase the gas in larger quantities, with greater economies of scale, on better terms, at lower costs and reduce the high financing costs, thereby significantly increasing our the gross profit.

 

Additionally, in 2011, while building our business, we focused on generating substantial sales revenues, a broad customer base, and gaining the greatest share of the market in the shortest period of time. That strategy affected how we obtained our supplies, their relative cost, and how we priced our products for sell to our customers. To gain a great market share in a short period of time, initially resulted in higher cost of goods sold, and selling the product at or slightly below our costs, which directly impacted our profitability. This caused almost negligible gross profit and negative earnings, in 2011, which continued in the first quarter of 2012. This strategy was only a temporary measure, while we were building greater market share, last year.  

 

We incurred losses of $654,630 for the three months ended March 31, 2012 and $577,034 for the same period in 2011. Our accumulated deficit since our inception through March 31, 2012 amounts to $19,545,000. We issued 227,925 of common shares for services with an aggregate fair value of approximately $5,000 that was included in the $430,385 in general and administrative expenses for the three month period ended March 31, 2012. Excluding the value of the common shares of $5,000 from the general and administrative expenses of $430,385 would reduce the actual net G&A expenses to $425,385. We also incurred interest expenses of $277,557. Excluding the value of the common stock that was issued for services, and interest expenses which together totaled $282,557, would correspondingly reduce our net loss of $430,385 to an adjusted net loss of $147,828 for the period ending March 31, 2012. Based on an adjusted net loss of $147,828, this loss equals only 1.13% of our total revenues of $13,007,160 for the period ended March 31, 2012, as compared to 0.44% for the same period ended 2011.

 

Operating Costs and Expenses.

 

Our Cost of Sales for the three months ended March 31, 2011 were $12,989,939 as compared to $22,219,582 for the same period in 2011.  Our primary operation is the marketing of natural gas and propane to our major customers nationwide. Our operating expenses for the three months ended March 31, 2012 were $440,541 as compared to $337,088 for the same period in 2011. We pay our employees and consultants largely in common shares as our cash availability is currently limited.

 

We increased our total operating expenses from $337,088 for the period ending 2011, by a total of $103,453, or by 27.43%, to $440,541 for the period ending March 31, 2012. Based on our plans for growth and expansion, and increasing revenues through sales of natural and other products, we believe we will continue the trend to reduce our net losses down to zero, and then move our company toward solid profitability.

 

Assets

 

Our “total assets” have increased by $866,712, or 19.84% to $5,234,529 for the period ending March 31, 2012, compared to $4,367,817 for the same period in 2011. A total of $866,712 was primarily from our investment in the Whitesburg Friday Branch Mine LLC acquisition, which was also offset from a reduction in the amount of our Accounts Receivables from the sales of natural gas due to the unseasonably warm winter on the east coast, a reduced demand in natural gas for heating, a decline in natural gas prices, and an increase in natural gas working inventories. Our Property and Equipment and long-term physical assets were also reduced by $127,147 due to the discontinued operations of our biodiesel refinery in Nettleton, Mississippi. See – Universal Bioenergy North America Inc., Discontinued Operations for more information. However, this reduction in our “total assets”, was offset somewhat by an increase in our investment in the Whitesburg Friday Branch Mine, LLC acquisition. Oil and gas companies generally book their inventories and supplies of oil and gas reserves as assets on their balance sheets, since these are very valuable assets owned by the company.

 

Liquidity and Capital Resources

 

Our management looks to a variety of funding sources, to meet our short and long-term liquidity requirements. We currently generate the majority of our consolidated revenues and cash flow from the marketing and sale of natural gas and propane to its 28 electric utility customers through NDR Energy. Our revenues, profits and future growth depend to a great extent on the prevailing prices of natural gas. Our revenue, profitability and future growth of are largely dependent on a number of factors including, the prevailing and future prices for natural gas, which is also dependent or influenced by numerous factors beyond our control, such as regulatory developments, changing economic conditions, and competition from other energy sources.

 

Working Capital

 

Our working capital requirements increased significantly, and we incurred significant fluctuations in our working capital for this period. This resulted in a working capital deficit of ($922,031) for the period ending March 31, 2012, as compared to a working capital deficit of ($545,666) for the period ending March 31, 2011. This increased our working capital deficit by $376,365 or by 68.97%. The working capital deficit was due to the costs of pursuing acquisitions, funding of NDR Energy Group’s operating expenses, the amount of funds borrowed from our creditors, purchase of natural gas inventories, our capital spending exceeding our cash flows from operations, and from the increase in accrued expenses.

 

We typically have positive cash flow and working capital each month to meet our capital requirements. The negative working capital for the period ending March 31, 2012 is an occasional event experienced by many companies and has not had a significant negative effect on our operations. This is due to our ability to raise capital, the contracts we have with our utility customers, their strong S&P credit ratings, and their consistent payment of our invoices on schedule. Due to the timing of the transactions, we are able to maximize the efficiency of the billing and payment cycles, thereby minimizing the impact of any occasional periods of negative working capital. Additionally, as we purchase gas at the wellhead, obtain lines of credit and accounts receivable facilities, this should enable us to greatly improve our cash flow and increase our working capital.

 

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Cash Flows

 

The prices and margins in the energy industry are normally volatile, and are driven to a great extent by market forces over which we have no control. Taking into consideration other extenuating factors, as these prices and margins fluctuate, this would result in a corresponding change in our revenues and operating cash flows. Our cash flows for the nine months ended March 31, 2012 and 2011 were as follows:

 

Cash Flows from Operating Activities

 

Our cash used in operating activities for the three months ended March 31, 2012 was $ 291,535 as compared to ($44,080) for the three months ended March 31, 2011. The decrease was primarily attributable to the accruing certain management salaries, issuing stock for professional services in lieu of cash payments and the reduction of Notes payable and interest with stock in lieu of cash payments.

 

Cash Flows from Investing Activities

 

Cash used in investing activities for the three months ended March 31, 2012 was $0.00 as compared to cash provided by investing activities of $139,500 for the three months ended March 31, 2011.

 

Cash Flows from Financing Activities

 

Our cash provided by financing activities for the three months ended March 31, 2012 was $ 309,980 as compared to $197,300 for the three months ended March 31, 2011. The net cash provided by financing activities is primarily attributable to our Notes Payables.

 

Liabilities / Indebtedness

 

Current liabilities decreased to $2,991,261 for the three months ended March 31, 2012, compared to $4,371,869 for the same period in 2011. This 31.58% decrease was primarily due to a $1,802,469 decrease in accounts payable from the purchasing costs and supplies of natural gas. Our long term liabilities are $1,392,487 for the period ending March 31, 2012, compared to $248,912 for the three months ending March 2011. This increase was primarily due to the conversion of the accrued compensation and expenses of certain officers and employees into long term notes payable, to reduce our current liabilities, improve our cash flow, and improve the Balance Sheet.

  

DEBT

 

Debt and Debt Financing

 

Long-Term Debt and Promissory Notes - In its efforts to expand and grow, we borrowed direct cash funds from various investors to raise capital, and we issued them debt instruments in the form of Promissory Notes to evidence that debt. These are long-term Notes with various rates and maturities, that grant the Note Holder the right, (but not the obligation) to convert them into shares of our common stock of the Company in lieu of receiving payment in cash. The issued Notes are primarily unsecured obligations. The principal amount of the Notes may be prepaid at the option of Maker, in whole or part at any time, together with all accrued interest upon written notice to Holder.

 

Many of these Notes have above market interest rates, and high price conversion discounts rates to market. Management issued the Note primarily for the following reasons;

 

a. Universal was considered a development stage company, with a limited operating history, and had limited revenues and earnings
b. The investors that accepted a Note, with deferred payments, with the option to convert the Note to high risk penny stock, for the cash obligation, felt they were taking an extremely high risk
c. The investors’ concern about the historically high inherent risks in penny stocks
d. The investors’ concern about the lack of liquidity and limited trading volume in our stock.
e. The investors’ concern about the volatility of the stock price at that time
f.

A significant price discount to market was required by them to offset declines in the stock price to

cover the risk of partial or even total loss

g. The investors had very limited or no collateral for their investments or loans to the Company
h. Many of the Notes were issued when our common stock was trading in the 2 cent to 3 cent range
i.

The loans were made on the best possible terms we could get from the investors at that time, because

of the high risks, the recessionary economy and tight credit lending market at that time.

j. Due to these inherent risk factors and their potential effect on the investors, the Board of Directors approved the conversion prices for the Notes in a range of $.005 to $.05 per share, or at a 30% to 50% discount to market.

The investors have provided us with critical short and long-term funds that we have used for operations, working capital, and investment capital for our business acquisitions to expand and grow our Company. These investors invested funds our Company when it was still a development stage company with a limited operating history, limited revenues, negative earnings and limited stock liquidity. They accepted Promissory Notes with the option to convert them to shares of common stock, and were taking what was considered to be a high risk investment at that time. We retain the right to re-negotiate the terms and conditions of the Notes, including increasing the conversion prices, if the stock price rises considerably and consistently over time, on terms that would be more favorable to us and our shareholders. It could take several years to convert all of the Notes to stock if all of the investors requested it. It is possible that some may never convert their Notes to stock and may take cash only when we are is in the best position to settle the obligation on a cash basis. No additional consideration was paid to convert any Note.

 

Most of the Notes that some of the investors elected to convert, were not converted at the stated amount in the Note, (such as $0.005 in some cases), but were converted at a 30% to 50% discount to the market price at the time of conversion to reflect a re-negotiated conversion price due to a modification of the terms of the Note.

 

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List of Notes

 

On January 4, 2012, the Company entered into a three (3) year convertible Promissory Note with a non-related creditor for $55,000 at 12% interest. The holder has the right to convert the note to common stock at $0.005.

 

On January 30, 2012, the Company entered into a three (3) year convertible Promissory Note with a non-related creditor for $43,700 at 12% interest. The holder has the right to convert the note to common stock at $0.005.

 

On February 1, 2012, the Company entered into a ten (10) month convertible Promissory Note with a non-related creditor for $53,000 at 8% interest. The holder has the right to convert the note to common stock at a 50% discount to the market price at the time of conversion.

 

On February 15, 2012, the Company entered into a one (1) year convertible Promissory Note with a non-related creditor for $30,000 at 12% interest. The holder has the right to convert the note to common stock at a 50% discount to the market price at the time of conversion.

 

On February 20, 2012, the Company entered into a two (2) year Promissory Note with a non-related creditor for $2,000,000 at 12% interest. The holder has the right to convert the note to common stock at a 30% discount to market at the time of conversion.

 

On February 23, 2012, the Company entered into a two (2) year convertible Promissory Note with a non-related creditor for $80,000 at 12% interest. The holder has the right to convert the note to common stock at $0.008.

 

On February 29, 2012, the Company entered into a three (3) year convertible Promissory Note with a non-related creditor for $122,800 at 12% interest. The holder has the right to convert the note to common stock at $0.005.

 

On March 2, 2012, a $9,764 partial interest, ($9,764 of accrued interest) in an existing Note, dated December 31, 2010 for $163,694, was purchased from the Note Holder by another non-related creditor. The $9,764 interest was assigned by the original Note Holder to another party and subsequently purchased by the party that previously purchased the $83,694 principal on the Note dated December 31, 2012.

 

On March 7, 2012, the Company entered into a one (1) year convertible Promissory Note with a non-related creditor for $30,000 at 12% interest. The holder has the right to convert the note to common stock at a 50% discount to the market price at the time of conversion.

 

On March 15, 2012, the Company entered into a two (2) year convertible Promissory Note with a non-related creditor for $70,000 at 12% interest. The holder has the right to convert the note to common stock at $0.008.

 

On March 30, 2012, the Company entered into a three (3) year convertible Promissory Note with a non-related creditor for $123,600 at 12% interest. The holder has the right to convert the note to common stock at $0.005.

 

If all of these Notes were converted to common stock it could result in the potential issuance of an estimated 242,932,992 shares over several years. This would result in a dilution of the proportional or percentage of ownership of the shareholders, however we do not believe the value of the shareholders stock would be adversely affected.

 

In an effort to build a strong operating company, the officers and some our employees have not taken their salaries for the last few years, and have become creditors of the Company. The accrued compensation due to them by the Company, has become a debt or liability on the our books. We have issued them Promissory Notes that includes an option to convert the notes to shares of common stock to reflect these liabilities. This has reduced some of the need from borrowing from outside creditors. They have also taken on the very same risks upon themselves as the outside lenders and creditors. The officers would prefer to be paid in cash also as opposed to shares of common stock. If the officers ever elect to convert their Notes into shares of common stock, the shares will be subject to Rule 144 restrictions as control securities when selling them into the market.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements including arrangements that would affect the liquidity, capital resources, market risk support and credit risk support or other benefits.

 

WHERE YOU CAN FIND MORE INFORMATION

 

You are advised to read this Form 10-Q Report in conjunction with other reports and documents that we file from time to time with the SEC. In particular, please read our Quarterly Reports on Form 10-Q, Annual Report on Form 10-K, and Form 10-K/A, and Current Reports on Form 8-K, including all amendments that we file from time to time. You may obtain copies of these reports directly from us or from the SEC at the SEC’s Public Reference Room at 100 F. Street, N.E. Washington, D.C. 20549, and you may obtain information about obtaining access to the Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains information for electronic filers at its website http://www.sec.gov.

 

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are exposed to risks associated with commodity prices and interest rates. Commodity price risk is the potential loss that we may incur as a result of changes in the fair value of a particular instrument or commodity. Interest-rate risk results from our portfolio of debt and equity instruments that we issue to provide financing and liquidity for our business activities.

 

Commodity Price Risk

Our most significant market risk relates to the prices we receive for our oil and natural gas production. Realized pricing is primarily driven by the prevailing worldwide price for crude oil and spot market prices applicable to the production of oil and gas in the our U.S. and Canada. Pricing for oil and gas production has been volatile and unpredictable for several years.

 

Interest Rate Risk

We are subject to interest rate risk on our long-term fixed and variable interest rate borrowings. Fixed rate debt, where the interest rate is fixed over the life of the instrument, exposes us to (i) changes in market interest rates reflected in the fair value of the debt and (ii) the risk that we may need to refinance maturing debt with new debt at a higher rate. Variable rate debt, where the interest rate fluctuates, exposes us to short-term changes in market interest rates as our interest obligations on these instruments are periodically re-determined based on prevailing market interest rates.

 

As of March 31, 2012, we were not engaged in any other activities that would cause exposure to the risk of material earnings or cash flow loss due to changes in interest rates or market commodity prices.

 

ITEM 4.  CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

Our principal executive officer and our principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act), as of the last day of the fiscal period covered by this report, March 31, 2012. The term disclosure controls and procedures means our controls and other procedures that are designed to ensure that information required to be disclosed by us 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. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of March 31, 2012.

Changes in Internal Control over Financial Reporting in Fiscal Year 2011

 

During the fiscal year ended December 31, 2011, management recognized that there were possible deficiencies in our internal controls and addressed the material weaknesses in our internal control deficiencies as follows:

 

• We have provided more oversight of the Company’s financial reporting and internal control by those charged with corporate governance.

 

• We have engaged the services of employees, management, and outside professionals who have the qualifications and training to fulfill their assigned functions, with respect to preparing financial statements, reports and internal controls in accordance with Generally Accepted Accounting Principles.

 

• Any deficiencies in terms of completeness or accuracy in the internal control process must be reported to management on a timely basis and we have established a defined process within our organization to remediate these deficiencies, when identified.

 

• We have implemented a more effective internal review and risk assessment function by management, which functions are important to the monitoring or risk assessment component of internal control.

 

On August 18, 2011, the Company engaged a new auditor and, recently, engaged an new outside accounting firm to further develop policies, controls, and procedures to ensure that internal control over financial reporting will be effective for the year ended December 31, 2011 in light of any material weakness discovered by our current management, the need to ensure that internal controls and procedures satisfy the criteria set forth by COSO, and to rectify the significant internal control deficiencies identified by our independent registered public accounting firm.

 

Changes in Internal Control over Financial Reporting

 

There was no change in our system of internal control over financial reporting (as defined in Rules 13a-15(f) and 15-d-15(f) under the Exchange Act) during the quarter ended March 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

 

There have been no material changes to the information included in Item 3, “Legal Proceedings” in our 2011 Annual Report on Form 10-K/A. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries' officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

 

ITEM 1A - RISK FACTORS

 

In addition to the other information set forth in this report, the factors discussed in "Part I — Item 1A — Risk Factors" in our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2011, could materially affect our business, financial condition, or operating results. The risks described in our Annual Report on Form 10-K/A and our subsequent SEC reports are not the only risks facing us. There are additional risks and uncertainties not currently known to us or that we currently deem to be immaterial that may also materially adversely affect our business, financial condition, or operating results. There have been no material changes from the risk factors previously disclosed in that Form 10-K Report, except as follows:

 

THE MARKET PRICE OF OUR COMMON STOCK MAY LIMIT ITS ELIGIBILITY FOR CLEARING HOUSE DEPOSIT.

 

We are advised that if the market price for shares of our common stock is less than $0.10 per share, Depository Trust Company and other securities clearing firms may decline to accept our shares for deposit and refuse to clear trades, in our securities.  This would materially and adversely affect the marketability and liquidity of our shares and, accordingly may materially and adversely affect the value of an investment in our common stock.

WE ARE AN “EMERGING GROWTH COMPANY” AND WE CANNOT BE CERTAIN IF THE REDUCED DISCLOSURE REQUIREMENTS APPLICABLE TO EMERGING GROWTH COMPANIES WILL MAKE OUR COMMON STOCK LESS ATTRACTIVE TO INVESTORS.

We are an “emerging growth company,” as defined in the Jumpstart our Business Startups Act of 2012 or JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including not being required to comply with the auditor attestation requirements of section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. An “emerging growth company” can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.

WE WILL INCUR INCREASED COSTS AND DEMANDS UPON MANAGEMENT AS A RESULT OF COMPLYING WITH THE LAWS AND REGULATIONS THAT AFFECT PUBLIC COMPANIES, WHICH COULD MATERIALLY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS, FINANCIAL CONDITION, BUSINESS AND PROSPECTS.

As a public company and particularly after we cease to be an “emerging growth company,” we will incur significant legal, accounting and other expenses that we did not incur as a private company, including costs associated with public company reporting and corporate governance requirements. These requirements include compliance with Section 404 and other provisions of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as well as rules implemented by the SEC.

The increased costs associated with operating as a public company will decrease our net income or increase our net loss, and may require us to reduce costs in other areas of our business. Additionally, if these requirements divert our management’s attention from other business concerns, they could have a material adverse effect on our results of operations, financial condition, business and prospects.

However, for as long as we remain an “emerging growth company” as defined in the JOBS Act, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We may take advantage of these reporting exemptions until we are no longer an “emerging growth company.”

If the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30, we would cease to be an “emerging growth company” as of the following June 30, or if we issue more than $1 billion in non-convertible debt in a three-year period, we would cease to be an “emerging growth company” immediately.

 

SHOULD ONE OR MORE OF THE FOREGOING RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD THE UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THOSE ANTICIPATED, BELIEVED, ESTIMATED, EXPECTED, INTENDED OR PLANNED.

 

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ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

There were no sales of unregistered senior securities during the period ended March 31, 2012 except as follows;

 

On January 19, 2012, the Company completed a partial conversion one of its revised Notes payable dated 12/23/11, with an amount of $99,134. On December 29, 2011, $30,000 worth of this note was converted, leaving a $69,134 balance. On January 19, 2012, a total of $30,134 worth of the Note was converted, and 2,897,500 common shares were issued for that part of the conversion, which leaves a remaining balance of $39,000 of the principal of the Note. This revised Note combined two existing Notes, one dated March 28, 2011 for $72,500, and one dated May 20, 2011 for $20,600, which were purchased by the current Note Holder from the previous Note Holder on December 23, 2011. This conversion of debt reduced the Company’s Notes payables by $30,134.

 

On February 2, 2012, the Company issued 227,925 shares of common stock to a consultant in accordance with their consulting agreement.

 

On February 9, 2012, the Company completed a partial conversion of one of its Notes payable dated 02/23/11, with a principal amount of $45,400. A total of $42,100 worth of the Note was converted, and 19,136,364 common shares were issued for that part of the conversion, which leaves a remaining balance of $3,300 of the principal of the Note. This conversion of debt reduced the Company’s Notes payables by $42,100.

 

On February 9, 2012, the Company completed the final conversion one of its revised Notes payable dated 12/23/11, with an amount of $99,134. A total of $39,000 worth of the Note was converted, and 5,118,243 common shares were issued for that part of the conversion, which leaves a remaining balance of $0.00 of the principal of the Note. This revised Note combined two existing Notes, one dated March 28, 2011 for $72,500, and one dated May 20, 2011 for $20,600, and accrued interest in the amount of $6,034, which were purchased by the current Note Holder from the previous Note Holder on December 23, 2011. This conversion of debt reduced the Company’s Notes payables by $39,000 and the balance on the Note for $99,134 to $0.00.

 

On February 10, 2012, the Company completed a partial conversion of one of its Notes payable dated 02/23/11, with a principal amount of $45,400. A total of $3,300 worth of the Note was converted, and 1,500,000 common shares were issued for that part of the conversion, which leaves a remaining balance of $0.00 of the principal of the Note. This conversion of debt reduced the Company’s Notes payables by $3,300.

 

On February 13, 2012, a $49,500 partial interest in an existing Note, dated May 23, 2011 for $89,000, was purchased from the Note Holder by another non-related creditor. On February 13, 2012, the $49,500 portion of the Note payable was completely converted to common stock, and a total of 6,100,000 shares were issued for this conversion. This conversion of debt reduced the Company’s Notes payables by $49,500.

 

On February 13, 2012, a $55,000 partial interest in an existing Note, dated May 30, 2011 for $110,424, was purchased from the Note Holder by another non-related creditor. On February 29, 2012, the $55,000 portion of the Note payable was completely converted to common stock, and a total of 7,543,662 shares were issued for this conversion, which leaves a remaining balance of $0.00 of the principal of the Note. This conversion of debt reduced the Company’s Notes payables by $55,000.

 

On February 15, 2012, a $89,000 partial interest, (including $80,000 principal and $9,000 interest) in an existing Note, dated December 31, 2010 for $163,694, was purchased from the Note Holder by another non-related creditor. The $9000 interest was assigned by the original Note Holder to another party and subsequently purchased by the party that purchased the $80,000 principal. On March 2, 2012, the $80,000 portion of the Note payable was completely converted to common stock, and a total of 12,575,757 shares were issued for this conversion, which leaves a remaining balance of $0.00 of the principal of the Note. This conversion of debt reduced the Company’s Notes payables by $89,000.

 

On February 27, 2012, a $62,520 partial interest in an existing Note, dated May 30, 2011 for $110,424, was purchased from the Note Holder by another non-related creditor. On March 8, 2012, the $62,520 portion of the Note payable was completely converted to common stock, and a total of 8,294,778 shares were issued for this conversion, which leaves a remaining balance of $0.00 of the principal of the Note. This conversion of debt reduced the Company’s Notes payables by $62,520.

 

On March 1, 2012, a $83,694 partial interest, in an existing Note, dated December 31, 2010 for $163,694, was purchased from the Note Holder by another non-related creditor. On March 20, 2012, the $83,694 portion of the Note payable was completely converted to common stock, and a total of 9,884,965 shares were issued for this conversion, which leaves a remaining balance of $0.00 of the principal of the Note. This conversion of debt reduced the Company’s Notes payables by $83,694.

On March 2, 2012, a $9,000 partial interest in an existing Note payable, dated December 31, 2010 for $163,694, was completely converted to common stock, and a total of 857,143 shares were issued for this conversion, which leaves a remaining balance of $0.00 of the principal of the Note. This conversion of debt reduced the Company’s Notes payables by $9,000.

 

On March 5, 2012, a $39,500 partial interest in an existing Note, dated May 23, 2011 for $89,000, was purchased from the Note Holder by another non-related creditor. On March 7, 2012, the $39,500 portion of the Note payable was completely converted to common stock, and a total of 4,200,000 shares were issued for this conversion, which leaves a remaining balance of $0.00 of the principal of the Note. This conversion of debt reduced the Company’s Notes payables by $39,500.

 

The offer and sale of such shares of our common stock were effected in reliance on the exemptions for sales of securities not involving a public offering, as set forth in Rule 506 promulgated under the Securities Act of 1933 (the “Securities Act”) and in Section 4(2) of the Securities Act, based on the following: (a) the investors confirmed to us that they were “accredited investors,” as defined in Rule 501 of Regulation D promulgated under the Securities Act and had such background, education and experience in financial and business matters as to be able to evaluate the merits and risks of an investment in the securities; (b) there was no public offering or general solicitation with respect to the offering; (c) the investors were provided with certain disclosure materials and all other information requested with respect to our company; (d) the investors acknowledged that all securities being purchased were “restricted securities” for purposes of the Securities Act, and agreed to transfer such securities only in a transaction registered under the Securities Act or exempt from registration under the Securities Act; and (e) a legend was placed on the certificates representing each such security stating that it was restricted and could only be transferred if subsequent registered under the Securities Act or transferred in a transaction exempt from registration under the Securities Act.

 

(30)

 

Item 3.  Defaults Upon Senior Securities

 

There were no defaults upon senior securities during the period ended March 31, 2012.

 

Item 4. Mine Safety Disclosure

 

Not applicable.

 

Item 5.  Other Information

 

There is no other information to report with respect to which information is not otherwise called for by this form.

  

Item 6. Exhibits

 

 Exhibit No  Exhibit
   
  3.1  Articles of Incorporation (1)
 3.2  Bylaws (1)
  3.3  Amendment to Articles of Incorporation (2)
10.5   Employment Agreement by and between Universal and Dr. Richard Craven (3)
10.6  Employment Agreement by and between Universal and Vince M. Guest (4)
10.7  Employment Agreement by and between Universal and Solomon Ali (4)
14.1  Code of Ethics (5)
   
31.1 *

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes- Oxley Act.

31.2

Certification of Principal Financial and Accounting Officer Pursuant to Section 906

of the Sarbanes-Oxley Act.

32.1 *

Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-

Oxley Act.

32.2 *

Certification of Chief Accounting Officer Pursuant to Section 906 of the Sarbanes-

Oxley Act.

_____________________________________________________________________________

*filed herewith

 

(1) Incorporated by reference to the registration statement on Form SB-2 as filed on March 21,

2005.

(2) Incorporated by reference to the Current Report on Form 8-K as filed on October 31, 2007.

 

(3) Incorporated by reference to the Current Report on Form 8-K as filed on February 29, 2008.

 

(4) Incorporated by reference to the Form 10K for year ended December 31, 2009 as filed on

August 12, 2010.

 

(5) Incorporated by reference to the 2nd amended Form 10K/A for year ended December 31,

2007 as filed on January 4, 2010.

 

 

 

(31)

 

 

SIGNATURES

 

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

 

                                                          UNIVERSAL BIOENERGY, INC.  
     
     
Dated: May 18, 2012   By /s/ Vince M. Guest
    Vince M. Guest
   

President and Chief Executive Officer,

Principal Financial Officer, Principal

Accounting Officer and Director

 

     
         

 

 

 

(32)