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 fiscal year ended June 30, 2013. 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 and six months ended December 31, 2013 are not necessarily
indicative of the results that can be expected for the fiscal year ending June 30, 2014.
UNIVERSAL BIOENERGY, INC.
|
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
ASSETS:
|
(Unaudited)
|
|
|
(Audited)
|
|
December 31, 2013
|
|
|
June 30, 2013
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash
|
$
|
3,385
|
|
|
|
$
|
2,130
|
|
Accounts receivable
|
|
6,035,719
|
|
|
|
|
9,173,462
|
|
Other loans
|
|
—
|
|
|
|
|
600
|
|
Total current assets
|
|
6,039,104
|
|
|
|
|
9,176,192
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT - net
|
|
3,687
|
|
|
|
|
6,335
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS:
|
|
|
|
|
|
|
|
|
Accounts receivable - other
|
|
(2,150
|
)
|
|
|
|
10,050
|
|
Investments
|
|
2,929,550
|
|
|
|
|
2,919,500
|
|
Intangible assets
|
|
250,000
|
|
|
|
|
250,000
|
|
Deposit
|
|
6,516
|
|
|
|
|
7,452
|
|
Total other assets
|
|
3,183,916
|
|
|
|
|
3,187,002
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
$
|
9,226,706
|
|
|
|
$
|
12,369,529
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts payable
|
$
|
6,255,276
|
|
|
|
$
|
9,333,980
|
|
Other accounts payable and accrued expenses
|
|
185,540
|
|
|
|
|
363,922
|
|
Accrued interest
|
|
166,126
|
|
|
|
|
124,949
|
|
Line of credit
|
|
7,272
|
|
|
|
|
6,618
|
|
Current portion of long term debt
|
|
803,502
|
|
|
|
|
150,821
|
|
Derivative liability
|
|
165,304
|
|
|
|
|
212,683
|
|
Advances from affiliates
|
|
3,513
|
|
|
|
|
4,250
|
|
Total current liabilities
|
|
7,586,534
|
|
|
|
|
10,197,223
|
|
|
|
|
|
|
|
|
|
|
Long term debt
|
|
|
|
|
|
|
|
|
Notes payable
|
|
341,653
|
|
|
|
|
352,150
|
|
Notes payable - related parties
|
|
—
|
|
|
|
|
624,098
|
|
Total long-term debt
|
|
341,653
|
|
|
|
|
976,248
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
7,928,187
|
|
|
|
|
11,173,471
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY (DEFICIT):
|
|
|
|
|
|
|
|
|
Preferred stock, $.001 par value, 10,000,000 shares authorized. Preferred stock Series A, 1,000,000 issued and
outstanding shares December 31, 2013 and zero as of June 30, 2013, respectively.
|
|
—
|
|
|
|
|
—
|
|
Preferred stock Series B, 232,080 issued and outstanding shares December 31, 2013 and June 30, 2013, respectively
|
|
232
|
|
|
|
|
232
|
|
Common stock, $.001 par value, 3,000,000,000 shares authorized; 2,833,340,081 and 2,660,594,986 issued
and outstanding as of December 31, 2013 and June 30, 2013, respectively
|
|
2,833,340
|
|
|
|
|
2,660,595
|
|
Additional paid-in capital
|
|
21,287,362
|
|
|
|
|
20,884,031
|
|
Noncontrolling interest
|
|
(283,194
|
)
|
|
|
|
(270,979
|
)
|
Accumulated deficit
|
|
(22,539,221
|
)
|
|
|
|
(22,077,821
|
)
|
Total stockholders' equity (deficit)
|
|
1,298,520
|
|
|
|
|
1,196,058
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
$
|
9,226,706
|
|
|
|
$
|
12,369,529
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
|
UNIVERSAL BIOENERGY, INC.
|
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
For The 3 Months Ending December 31,
|
|
For The 6 Months Ending December 31,
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
18,705,137
|
|
|
$
|
13,322,660
|
|
|
$
|
32,577,739
|
|
|
$
|
28,885,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF SALES
|
|
|
18,685,525
|
|
|
|
13,303,088
|
|
|
|
32,545,312
|
|
|
|
28,841,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
19,613
|
|
|
|
19,572
|
|
|
|
32,428
|
|
|
|
43,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
204,396
|
|
|
|
394,760
|
|
|
|
360,281
|
|
|
|
740,217
|
|
Sales and marketing
|
|
|
—
|
|
|
|
12,942
|
|
|
|
—
|
|
|
|
28,389
|
|
Depreciation and amortization expense
|
|
|
654
|
|
|
|
—
|
|
|
|
1,308
|
|
|
|
654
|
|
Total operating expenses
|
|
|
205,050
|
|
|
|
407,702
|
|
|
|
361,589
|
|
|
|
769,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(185,437
|
)
|
|
|
(388,130
|
)
|
|
|
(329,161
|
)
|
|
|
(725,683
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
7,293
|
|
|
|
12,525
|
|
|
|
14,648
|
|
|
|
18,488
|
|
Initial (loss) on embedded derivatives issued
|
|
|
0
|
|
|
|
159,447
|
|
|
|
(92,168
|
)
|
|
|
131,858
|
|
Change in fair value of derivative liabilities
|
|
|
151,039
|
|
|
|
1,131,139
|
|
|
|
303,836
|
|
|
|
700,481
|
|
Interest (expense), including amortization of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
beneficial conversion feature
|
|
|
(132,743
|
)
|
|
|
(132,749
|
)
|
|
|
(370,771
|
)
|
|
|
(1,066,079
|
)
|
Total other expense
|
|
|
25,589
|
|
|
|
1,170,362
|
|
|
|
(144,455
|
)
|
|
|
(215,252
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(LOSS) FROM CONTINUING OPERATIONS
|
|
|
(159,848
|
)
|
|
|
782,232
|
|
|
|
(473,616
|
)
|
|
|
(940,935
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(LOSS) FROM DISCONTINUED OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on sale of bio-diesel plant equipment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss)
|
|
|
(159,848
|
)
|
|
|
782,232
|
|
|
|
(473,616
|
)
|
|
|
(940,935
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) attributable to noncontrolling interest
|
|
|
(4,084
|
)
|
|
|
(36,073
|
)
|
|
|
(12,215
|
)
|
|
|
(66,165
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (LOSS) ATTRIBUTABLE TO UNIVERSAL
|
|
$
|
(155,763
|
)
|
|
$
|
818,305
|
|
|
$
|
(461,400
|
)
|
|
$
|
(874,770
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (LOSS) PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average of shares outstanding
|
|
|
2,701,496,674
|
|
|
|
615,689,097
|
|
|
|
2,606,396,706
|
|
|
|
554,593,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Less than $0.01 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
|
UNIVERSAL BIOENERGY, INC.
|
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
|
|
|
|
|
|
For Six Months Ended December 31,
|
|
|
2013
|
|
2012
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net (Loss)
|
|
$
|
(473,616
|
)
|
|
$
|
(940,935
|
)
|
Adjustments to reconcile net (loss) to net cash
|
|
|
|
|
|
|
|
|
(used in) and provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
1,308
|
|
|
|
654
|
|
Common stock issued for services
|
|
|
—
|
|
|
|
3,800
|
|
Amortization of Beneficial conversion features
|
|
|
266,229
|
|
|
|
310,700
|
|
Loss (Gain) on embedded derivatives
|
|
|
211,668
|
|
|
|
(832,339)
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(545,644
|
)
|
|
|
689,108
|
|
Prepaid expenses and other assets
|
|
|
14,936
|
|
|
|
1,200
|
|
Accrued expenses and other liabilities
|
|
|
(368,427
|
)
|
|
|
(65,363)
|
|
Accounts payable
|
|
|
675,300
|
|
|
|
(596,658
|
)
|
Net cash (used in) operating activities
|
|
|
(218,245
|
)
|
|
|
(1,429,832
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Investment in participation agreement - see note 10
|
|
|
(40,050
|
)
|
|
|
—
|
|
Net cash provided by (used in) investing activities
|
|
|
(40,050
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Advances from affiliate
|
|
|
—
|
|
|
|
—
|
|
Principal payments on notes payable and line of credit
|
|
|
(153,500
|
)
|
|
|
(1,977,134
|
)
|
Proceeds from notes payable issued and line of credit
|
|
|
413,787
|
|
|
|
1,408,067
|
|
Net cash provided by financing activities
|
|
|
259,550
|
|
|
|
(569,067)
|
|
|
|
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH
|
|
|
1,255
|
|
|
|
1,101
|
|
|
|
|
|
|
|
|
|
|
CASH, BEGINNING OF PERIOD
|
|
|
2,130
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
CASH, END OF PERIOD
|
|
$
|
3,385
|
|
|
$
|
(3,447)
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
—
|
|
|
$
|
—
|
|
Taxes paid
|
|
$
|
—
|
|
|
$
|
—
|
|
Investment in membership acquistion by issuing notes payable
|
|
$
|
—
|
|
|
$
|
|
|
Issuance of common stock for the conversion of debt
|
|
$
|
155,200
|
|
|
$
|
2,288,944
|
|
Common stock issued for intangible assets in acquisition
|
|
$
|
—
|
|
|
$
|
—
|
|
Convertible notes issued for accrued liabilities
|
|
$
|
388,250
|
|
|
$
|
4,000
|
|
Beneficial conversion feature of convertible notes payable
|
|
$
|
448,662
|
|
|
$
|
(671,045)
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
|
UNIVERSAL
BIOENERGY, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED December 31, 2013 AND 2012
NOTE
1 - DESCRIPTION OF BUSINESS
Overview
of the Company
Universal
Bioenergy Inc. (the “Company”)
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, liquefied natural
gas (LNG), propane, refined petroleum products, electricity, and alternative energy. Through its 49% owned subsidiary, NDR Energy
Group LLC, the Company has contracts to sells natural gas to 31 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, development of newly discovered
or recently discovered oil and gas fields, re-entering existing wells, and 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 18100 Von Karman Avenue, Suite 850, 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.
Global
Energy Group LLC
With
offices in both the United States and United Kingdom, GEG is positioned to take advantage of strategic relationships with investor
partners and commodities traders in North America, Europe, and world emerging markets.
Global
Energy Group, LLC “GEG”, our primary shareholder, is a holding company whose primary business is the acquisition of
strategic business assets, companies, and investment or joint ventures in both private and public companies creating a mandated
diversity in GEG’s portfolio. With offices in both the United States and United Kingdom, GEG is positioned to take advantage
of strategic relationships with investor partners and commodities traders in North America, Europe, and world emerging markets.
On April 10, 2013, Global Energy Group LLC, (“GEG”), converted its portfolio of Convertible Promissory Notes into
common shares of UBRG stock; and was issued 1,568,630,000 common shares for that conversion. The 1,568,630,000 shares was the
equivalent of 61.78% of UBRG’s 2,538,903,268 outstanding shares of common stock that were issued and outstanding on May
20, 201. As of June 30, 2013, GEG’s holdings were the equivalent of 55.36% of the issued and outstanding shares of UBRG.
Company
History
Universal
Bioenergy, Inc. (UBRG) was incorporated on August 13, 2004, under the laws of the State of Nevada.
On
October 24, 2007, the Company changed its name from Palomine Mining Inc., to Universal Bioenergy, Inc. to better reflect its business
plan.
On
July 15, 2013, the Board of Directors approved a change in the Company’s fiscal year end from December 31 to June 30.
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 and six months period ended December 31, 2013, are
not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2014.
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 June 30, 2013, 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., 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 control of 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, discretion in supplier selection, and 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
December 31, 2013
and
June 30, 2013
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
|
|
40 Years
|
Plant Equipment
|
|
15 Years
|
Furniture and Fixture
|
|
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, 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.
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 December
31, 2013,
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, and 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
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
July 2012, the FASB issued ASU No. 2012-02, “
Testing Indefinite-Lived Intangible Assets for Impairment
”.
The guidance allows companies to perform a “qualitative” assessment to determine whether further impairment testing
of indefinite-lived intangible assets is necessary, similar in approach to the goodwill impairment test.
ASU
2012-02 allows companies the option to first assess qualitatively whether it is more likely than not that an indefinite-lived
intangible asset is impaired before determining whether it is necessary to perform the quantitative impairment test. An entity
is not required to calculate the fair value of an indefinite-lived intangible asset and perform the quantitative impairment test
unless the entity determines that it is more likely than not that the asset is impaired. Companies can choose to perform the qualitative
assessment on none, some, or all, of its indefinite-lived intangible assets; or choose to only perform the quantitative impairment
test for any indefinite-lived intangible in any period.
In
August 2012, the FASB issued ASU 2012-03, “Technical Amendments and Corrections to SEC Sections: Amendments to SEC Paragraphs
Pursuant to SEC Staff Accounting Bulletin (SAB) No. 114. , Technical Amendments Pursuant to SEC Release No. 33-9250, and Corrections
Related to FASB Accounting Standards Update 2010-22 (SEC Update)” in Accounting Standards Update No. 2012-03. This update
amends various SEC paragraphs pursuant to the issuance of SAB No. 114. The adoption of ASU 2012-03 is not expected to have a material
impact on our financial position or results of operations.
In
October 2012, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2012-04, “Technical
Corrections and Improvements” in Accounting Standards Update No. 2012-04. The amendments in this update cover a wide range
of Topics in the Accounting Standards Codification.
These
amendments include technical corrections and improvements to the Accounting Standards Codification and conforming amendments related
to fair value measurements. The amendments in this update will be effective for fiscal periods beginning after December 15, 2012.
The adoption of ASU 2012-04 is not expected to have a material impact on our financial position or results of operations.
In
April 2013, the FASB issued ASU No. 2013-07, Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting
(“ASU 2013-07"). With ASU 2013-07, the FASB amends the guidance in the FASB Accounting Standards Codification [FASB
ASC] Topic 205, entitled Presentation of Financial Statements. The amendments serve to clarify when and how reporting entities
should apply the liquidation basis of accounting. The guidance is applicable to all reporting entities, whether they are public
or private companies or not-for-profit entities. The guidance also provides principles for the recognition of assets and liabilities
and disclosures, as well as related financial statement presentation requirements. With the new guidance, reporting entities in
liquidation are required to prepare financial statements using a basis of accounting that communicates information to users of
the financial statements to enable those users to develop expectations about how much the reporting entities will have available
for distribution to investors after disposing of its assets and settling its obligations. The requirements in ASU 2013-07 are
effective for annual reporting periods beginning after December 15, 2013, and interim reporting periods within those annual periods.
Reporting entities are required to apply the requirements in ASU 2013-07 prospectively from the day that liquidation becomes imminent.
Early adoption is permitted.
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 Six Months Ended December 31, 2013
|
|
For
the Six Months Ended December 31, 2012
|
|
|
|
|
Net
Loss for common shareholders
|
$
|
(461,400)
|
$
|
(874,770)
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
2,606,396,706
|
|
554,593,028
|
|
|
|
|
|
Basic
and fully diluted net loss per share
|
$
|
*
|
$
|
*
|
|
|
|
|
|
Net
loss per share is based upon the weighted average shares of common stock outstanding
|
*Net
Loss per share is less than $(0.01)
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
December 26, 2012, the Company amended its
Articles of Incorporation,
and increased the authorized shares of common stock from 1,000,000,000 to 3,000,000,000 shares at $.001 par value.
There
are
2,833,340,081
shares
of common stock
issued and outstanding as of December 31, 2013.
On
December 26, 2012, the
Board of Directors increased the
total number of authorized shares of Preferred Stock to
10,000,000 shares with a par value of $0.001 per share. As of December 31, 2013, there were 1,000,000 Series A Preferred
Shares issued and outstanding, and a total of 232,080 Series B preferred shares issued and outstanding.
RECENT
SALES OF UNREGISTERED SECURITIES
Common
Stock Issued
For
Second Fiscal Quarter Period Ending December 31, 2013
At
December 31, 2013, there were no outstanding stock options or warrants.
On
October 18, 2013, the Company completed a full conversion one of its amended Notes payable dated October 16, 2013 with a principal
amount of $50,000. A total of $50,000 worth of the Note was converted, and 77,000,000 common shares were issued for this conversion.
Previously, on October 16, 2013, a non-affiliated party purchased a partial interest of $50,000 worth of a Note dated December
30, 2012, in a private non-public transaction from a non-related creditor. An amended Note for $50,000 dated October 16, 2013
at 12% interest was issued to the new Note Holder. This conversion of debt reduced the Company’s Notes Payables by $50,000.
A balance of $00.00 of remains on the Amended Note, and $71,150 remains on the original Note.
On
October 28, 2013, the Company completed a partial conversion one of its amended Notes payable dated July 18, 2013 with a principal
amount of $130,000. This was the sixth in a series of conversions for this Note, including one on October 11, 2013, one on October
16, 2013, and one on October 28, 2013. A total of $46,000 worth of the Note was converted, and 76,483,517 common shares were issued
for these three partial conversions. Previously, on July 18, 2013, a non-affiliated party purchased four existing Notes in a private
non-public transaction from a non-related creditor. An amended Note for $130,000 dated July 18, 2013 at 12% interest was issued
to the new Note Holder. The amended Note consolidated the four original Notes, which included $96,200 in principal, $19,049 in
accrued interest and a $14,751 premium. This conversion of debt reduced the Company’s Notes Payables by $46,000. A balance
of $28,457 of remains on the Amended Note.
On
October 28, 2013 the Company completed the final and full conversion of one of its Notes payable dated March 18, 2013, for a Note
with a principle amount of $42,500, and a total of 126,285,714 common shares were issued. The final conversion of the Note included
$42,500 in principal and $1,700 in accrued interest that was due on the Note upon conversion. This leaves a remaining balance
of $0.00 on this Note. This conversion of debt reduced the Company’s Notes Payables by a principal amount of $42,500.
On
December 20, 2013 the Company completed a partial conversion of one of its Notes payable dated June 12, 2013, for a Note with
a principle amount of $53,000, and a total of 75,000,000 common shares were issued. The final conversion of the Note included
$15,000 in principal and $00.00 in accrued interest that was due on the Note upon conversion. This leaves a remaining balance
of $38,000 on this Note. This conversion of debt reduced the Company’s Notes Payables by a principal amount of $15,000.
Issuance
of Preferred Shares
No
preferred shares were issued for this reporting period.
More
detailed information about the issuance of preferred shares was discussed in our Annual Report on Form 10-K for the fiscal year
ended June 30, 2013. The information is fully discussed in Part II, Item 8. – Note 4 – Equity, “Preferred Stock”.
There have been no material changes from the information previously disclosed in that Form 10-K.
NOTE
6 - PROPERTY AND EQUIPMENT
The
Company
has property and equipment as of December
31, 2013
and June
30, 2013 as follows:
|
December
31, 2013
|
|
June 30, 2013
|
Equipment
|
|
13,094
|
|
|
$
|
13,094
|
|
Land
|
|
—
|
|
|
|
—
|
|
Building
|
|
—
|
|
|
|
—
|
|
Accumulated depreciation
|
|
(9,407
|
)
|
|
|
(6,759
|
)
|
Total
|
|
3,687
|
|
|
$
|
6,335
|
|
There
was $2,648 and $1,308 depreciation expense for the six months
ended December 30, 2013 and 2012 respectively.
NOTE
7 – NOTES PAYABLE
NOTE
7 – NOTES PAYABLE
|
|
|
|
|
December
31, 2013
|
June
30, 2013
|
|
|
|
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. Conversion
price change to $0.0025 by Board. On March 15, 2013, $60,000 worth of the Note was converted by a non-affliate assignee, leaving
a balance of $76,000.
|
|
76,000
|
|
|
76,000
|
|
|
|
|
|
|
|
|
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. On July 12, 2012, $100,000
worth of the Note was converted by non-affliates (assignees) to stock, leaving a balance of $65,000. Converion
price changed to $0.015 by Board.
|
|
65,000
|
|
|
65,000
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
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.
Conversion price changed to $0.002 by Board. Partial conversion of $25,000 on April 24, 2013, leaving a balance of $45,000.
|
|
45,000
|
|
|
45,000
|
|
|
|
|
|
|
|
|
On
July 2, 2012 the Company entered into a two (2) year Promissory Note with its President, Vince M. Guest
for $174,000 at 10% interest for a “special performance bonus” awarded him in accordance with his Employment Agreement.
The Holder has the right to convert the Note to common stock at $0.005. Conversion price changed to $0.0025 by Board.
|
|
174,000
|
|
|
174,000
|
|
|
|
|
|
|
|
|
On
July 2, 2012 the Company entered into a two (2) year Promissory Note with its Manager of Business Development,
Donald DeLuna for $35,250 at 10% interest for a “special performance bonus” awarded him in accordance with his
Employment Agreement. The Holder has the right to convert the Note to common stock at $0.005. Conversion price changed to
$0.0025 by Board.
|
|
35,250
|
|
|
35,250
|
|
|
|
|
|
|
|
|
On
November 30, 2012 the Company entered into a three (3) year Promissory Note with a non-related creditor for $135,100 at 12%
interest. The Holder has the right to convert the Note to common stock at a fixed conversion price of $0.002 per share.
|
|
135,100
|
|
|
135,100
|
|
|
|
|
|
|
|
|
On
December 30, 2012 the Company entered into a three (3) year Promissory Note with a non-related creditor for $121,150 at 12%
interest. The Holder has the right to convert the Note to common stock at a fixed conversion price of $0.002 per share. On
October 16, 2013, a non-affiliated party purchased a partial interest of $50,000 worth of this Note in a private transaction.
An amended Note for $50,000 dated October 16, 2013 at 12% interest was issued to the new Note Holder. On October 18,
2013, a total of $50,000 worth of the Note was converted.
|
|
71,150
|
|
|
121,150
|
|
|
|
|
|
|
|
|
On
December 31, 2012 the Company entered into a two (2) year convertible Promissory Note with its Vice President,
Solomon Ali for $162,500 at 10% interest for the accrued compensation owed to him for the fiscal year 2012 in accordance with
his Employment Agreement. The holder has the right to convert the Note to common stock at $0.0025.
|
|
162,500
|
|
|
162,500
|
|
|
|
|
|
|
|
|
On
December 31, 2012 the Company entered into a two (2) year convertible Promissory Note with its Manager of Business
Development, Don Deluna, for $50,400 at 10% interest for the accrued compensation owed to him for the fiscal year 2012 in
accordance with his Employment Agreement. The holder has the right to convert the Note to common stock at
$0.0025.
|
|
50,400
|
|
|
50,400
|
|
|
|
|
|
|
|
|
On
December 31, 2012 the Company entered into a two (2) year convertible Promissory Note with its President and CEO, Vince M.
Guest for $130,000 at 10% interest for the accrued compensation owed to him for the fiscal year 2012 in accordance with his
Employment Agreement. The holder has the right to convert the Note to common stock at $0.0025.
|
|
130,000
|
|
|
130,000
|
|
|
|
|
|
|
|
|
On
December 31, 2012 the Company entered into a two (2) year convertible Promissory Note with a non-related creditor for
$39,851.60 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 at $0.0025.
|
|
39,851
|
|
|
39,851
|
|
|
|
|
|
|
|
|
On
February 28, 2013 the Company entered into a three (3) year Promissory Note with a non-related creditor for $18,000 at 12%
interest. The Holder has the right to convert the Note to common stock at a fixed conversion price of $0.002 per share.
|
|
18,000
|
|
|
18,000
|
|
|
|
|
|
|
|
|
On
March 18, 2013 the Company entered into a nine (9) month convertible Promissory Note with a non-related creditor for $42,500
at 8% interest. The Holder has the right to convert the Note to common stock at a variable conversion
price at 50% discount to the market price at the time of conversion. This Note was converted to stock on October 28, 2013,
which reduced the Company's notes payables by $42,500.
|
|
—
|
|
|
42,500
|
|
|
|
|
|
|
|
|
On
March 30, 2013 the Company entered into a three (3) year Promissory Note with a non-related creditor for $950.00 at 12% interest.
The Holder has the right to convert the Note to common stock at a fixed conversion price of $0.002 per share.
|
|
950
|
|
|
950
|
|
|
|
|
|
|
|
|
On
April 1, 2013, a non-afilliated party purchased $49,000 of the principal of a $123,600 Note dated March 20, 2012,
in a private non-public transaction. The Holder paid $7,000 as a premium for $49,000 of principal. A modified Note for $56,000
was issued to the new Note Holder. On April 23, 2013, the Company completed a partial conversion one of its amended
Notes payable. A total of $49,000 worth of the Note was converted to common shares at a 50% discount to market prices. That
part of the conversion this debt reduced the Company’s Notes Payables by $49,000. A Balance of $7,000 remains
on the modified Note.
|
|
7,000
|
|
|
7,000
|
|
|
|
|
|
|
|
|
On
April 1, 2013 the Company entered into a nine (9) month convertible Promissory Note with a non-related creditor for $19,500
at 12% interest. The Holder has the right to convert the Note to common stock at a variable conversion
price at 50% discount to the market price at the time of conversion.
|
|
19,500
|
|
|
19,500
|
|
|
|
|
|
|
|
|
On
April 30, 2013 the Company entered into a three (3) year convertible Promissory Note with a non-related creditor for $44,500
at 12% interest. The Holder has the right to convert the Note to common stock at $0.002.
|
|
44,500
|
|
|
44,500
|
|
|
|
|
|
|
|
|
On
June 12, 2013 the Company entered into a nine (9) 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 variable conversion price
at 50% discount to the market price at the time of conversion. On December 20, 2013, $15,000 of this Note was converted to
stock, which reduced the Company's Notes payables to $38,000.
|
|
38,000
|
|
|
53,000
|
|
|
|
|
|
|
|
|
*On
July 18, 2013 the Company issued an Amended twelve (12) month Convertible Promissory Note with a non-related creditor
for $130,000 at 12% interest. The Holder purchased four existing Promissory Notes from another Note Holder in a private non-public
transaction. The Amended Note consolidated the four original Notes, which included $96,200 in principal, $19,049 in accrued
interest and a $14,751 premium. The Holder has the right to convert the Promissory Note
to common stock at a variable conversion price at 50% discount to the market price at the time of conversion. As of December
31, 2013, a total of $101,543 worth of the Note was converted to stock.
|
|
28,457
|
|
|
—
|
|
|
|
|
|
|
|
|
On
July 18, 2013 the Company entered into a twelve (12) month convertible Promissory Note with a non-related creditor for $43,500
at 12% interest. The Holder has the right to convert the Note to common stock at a variable conversion
price at 50% discount to the market price at the time of conversion.
|
|
43,500
|
|
|
43,500
|
|
|
|
|
|
|
|
|
On
September 30, 2013, the Company entered into a three (3) year Promissory Note with a non-related creditor for $28,700
at 12% interest. The Holder has the right to convert the Note to common stock at a fixed conversion price of $0.00115 per
share.
|
|
28,700
|
|
|
28,700
|
|
|
|
|
|
|
|
|
On
October 30, 2013, the Company entered into a three (3) year Promissory Note with a non-related creditor for $8,797.67
at 12% interest. The Holder has the right to convert the Note to common stock at a fixed conversion price of $0.00115 per
share.
|
|
8,798
|
|
|
0
|
|
|
|
|
|
|
|
|
On
November 30, 2013, the Company entered into a three (3) year Promissory Note with a non-related creditor for $8,539.07
at 12% interest. The Holder has the right to convert the Note to common stock at a fixed conversion price of $0.00115 per
share.
|
|
8,539
|
|
|
—
|
|
|
|
|
|
|
|
|
On
December 31, 2013, the Company entered into a three (3) year Promissory Note with a non-related creditor for $8,200
at 12% interest. The Holder has the right to convert the Note to common stock at a fixed conversion price of $0.00115 per
share.
|
|
8,200
|
|
|
—
|
|
|
|
|
|
|
|
|
On
December 31, 2013 the Company entered into a two (2) year convertible Promissory Note with its Vice President,
Solomon Ali for $160,000 at 10% interest for the accrued compensation owed to him for the fiscal year 2013 in accordance with
his Employment Agreement. The holder has the right to convert the Note to common stock at $0.00015.
|
|
160,000
|
|
|
0
|
|
|
|
|
|
|
|
|
On
December 31, 2013 the Company entered into a two (2) year convertible Promissory Note with its Manager of Business
Development, Don Deluna, for $67,300 at 10% interest for the accrued compensation owed to him for the fiscal year 2013 in
accordance with his Employment Agreement. The holder has the right to convert the Note to common stock at
$0.00015.
|
|
67,300
|
|
|
0
|
|
|
|
|
|
|
|
|
On
December 31, 2013 the Company entered into a two (2) year convertible Promissory Note with its President and CEO, Vince M.
Guest for $160,950 at 10% interest for the accrued compensation owed to him for the fiscal year 2012 in accordance with his
Employment Agreement. The holder has the right to convert the Note to common stock at $0.00015.
|
|
160,950
|
|
|
—
|
|
|
|
|
|
|
|
|
Total
long-term note payable
|
|
1,641,053
|
|
$
|
1,234,110
|
|
Less
Current portion
|
|
(928,867
|
)
|
|
(150,821
|
)
|
Less
Debt discount
|
|
(56,390
|
)
|
|
(104,685
|
)
|
Less
Convertible notes, net
|
|
(80,067
|
)
|
|
(131,056
|
)
|
Less
Beneficial Conversion Feature
|
|
(234,076
|
)
|
|
(131,056
|
)
|
Long-term
portion of notes payable
|
|
341,653
|
|
$
|
847,548
|
|
Principal
maturities of notes payable as of December 31, 2013, for the next five years and thereafter is as follows:
|
2014
|
|
|
$
|
928,866
|
|
|
2015
|
|
|
$
|
594,500
|
|
|
2016
|
|
|
$
|
117,687
|
|
|
2017
|
|
|
$
|
0
|
|
|
2018
|
|
|
$
|
0
|
|
|
Total
|
|
|
$
|
1,641,053
|
|
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 Note 7, “Notes Payable”, and Part I – Item
1A, “Risk Factors”, in our Annual Report on Form 10-K for the fiscal year ended June 30, 2013.
Embedded
Derivatives
Notes
that are convertible at a discount to market are considered embedded derivatives. For more information on the Notes affected,
refer to Management’s Discussion and analysis, and the above list.
Under
Financial Accounting Standard Board (“FASB”), U.S. GAAP,
Accounting Standards Codification,
“Derivatives and Hedging”, ASC Topic 815 (“ASC
815”) requires that all derivative financial instruments be recorded on the balance sheet at fair value. Fair values for
exchange traded securities and derivatives are based on quoted market prices. Where market prices are not readily available, fair
values are determined using market based pricing models incorporating readily observable market data; requiring judgment and estimates.
The
Company issued convertible Notes, and has evaluated the terms and conditions of the conversion features contained in the Notes
to determine whether they represent embedded or freestanding derivative instruments under the provisions of ASC 815. The Company
determined that the conversion features contained in the Notes represent freestanding derivative instruments that meet the requirements
for liability classification under ASC 815. As a result, the fair value of the derivative financial instruments in the Notes is
reflected in the Company’s balance sheet as a liability. The fair value of the derivative financial instruments of the convertible
Notes and warrants was measured at the inception date of the Notes and warrants, and each subsequent balance sheet date. Any changes
in the fair value of the derivative financial instruments are recorded as non-operating, non-cash income, or expense at each balance
sheet date.
The
Company valued the conversion features in its convertible Notes using the Black-Scholes model. The Black-Scholes model values
the embedded derivatives based on a risk-free rate of return ranging from 0.10% to 0.11%, grant dates of Notes, the term of the
Notes, conversion prices are 50% of current stock prices on the measurement date ranging from $0.00015 to $0.0005, and the computed
measure of the Company’s stock volatility, ranging from 166.86% to 10.93%
Included
in the December 31, 2013, is a derivative liability in the amount of $165,305 to account for this transaction. This liability
arose in the second quarter of 2012, and the balance was $165,305 as of June 30, 2013. It will be revalued quarterly henceforth,
and adjusted as a gain or loss to the statements of operations depending on its value at that time.
Included
in our Statements of Operations for the three months ended December 31, 2013 was $20,432 and $0 in non-cash charges pertaining
to the derivative liability as it pertains to change in derivative liability and amortization of debt discount, respectively.
NOTE
8 – RELATED PARTY TRANSACTION
Related
party transactions reported for this period are as follows:
There
are no Related Party Transactions to report for this period.
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 December 31, 2013. The situation regarding these matters has not changed materially from the description in the Annual
Report on Form 10-K for the period ended June 30, 2013.
NOTE
9 – ACQUISTION
There
are no acquisitions to report for this period.
NOTE
10 - CONTINGENCIES
There
are no Commitments and Contingencies to report for this period.
NOTE
11 – SUBSEQUENT EVENTS
The
following events occurred subsequent to the period covered by this Form 10-Q Quarterly Report for the period ended December 31,
2013.
There
are events subsequent to report for this period.
NOTE
12 - 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
$22,539,221
from its
inception to December 31, 2013. 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 December 31, 2013, 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, 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 December 31, 2013. 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
2014
and beyond.
NOTE
13 - CONCENTRATIONS
At
December 31, 2013, 100% of the Company's accounts receivable was due from three customers during the three months ended December
31, 2013, and 94% of total revenue was generated from four customers, for the three months ended December 31, 2012.
NOTE
14 - 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 Ennergy Services. The fairmarket value of which has been established.
Also i
n
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 6/30/13
|
Partnership Contributions (Distributions)
|
Share of Net Income (Loss)
|
Book Equity 9/30/13
|
Progas Energy Services
|
7.5%
|
$197,631
|
$0
|
$8,513
|
$198,013
|
Whitesburg Friday Branch Mine, LLC
|
40%
|
$2,700,000
|
$0
|
$0
|
$2,700,000
|
Totals
|
|
$2,897,630
|
$0
|
$8,513
|
$2,898,013
|
*
* * * * *
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.
Included
in this annual report are "forward-looking" statements within the meaning of the Private Securities Litigation Reform
Act of 1995 ("PSLRA") as well as historical information.
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 and the Jobs Act
of 2012 ), 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.
We
claim the protection afforded by the safe harbor for forward-looking statements provided by the PSLRA.
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 June 30, 2013, 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:
-
Fluctuations in crude oil, natural
gas and natural gas liquids prices, refining and marketing margins.
-
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.
-
Failure of new products and
services to achieve market acceptance.
-
Unexpected technological or
commercial difficulties in manufacturing, refining, or transporting our products.
-
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.
-
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.
-
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.
-
Potential disruption or interruption
of our operations due to accidents, extraordinary weather events, civil unrest, political events, or terrorism.
-
International monetary conditions
and exchange controls.
-
Substantial investment or reduced
demand for products as a result of existing or future environmental rules and regulations.
-
Liability resulting from litigation.
-
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.
-
Changes in tax and other laws,
regulations (including alternative energy mandates), or royalty rules applicable to our business.
-
Limited access to capital or
significantly higher cost of capital related to uncertainty in the domestic or international financial markets.
-
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”. Our 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, located in Charlotte, North Carolina, we presently sell natural gas. Through NDR Energy Group,
we have contracts signed with 31 major utility companies in the United States with strong Standard & Poor’s credit 1ratings.
NDR Energy Group markets and distributes natural gas and propane to 30 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, Conoco Phillips, Chesapeake Energy Marketing, and Anadarko.
Recent
Developments and Significant Accomplishments
NDR
Energy Group signs Contract to sell Electric Power to San Diego Gas and Electric
On
September 27, 2013, the Company announced NDR Energy Group signed an agreement to supply electric power San Diego Gas and Electric
(SDG&E), one of the largest electric power utilities on the west coast. SDG&E is a public utility that provides energy
service to 3.4 million people. SDG&E’s parent company, Sempra Energy is a Fortune 500 energy services company that provides
electricity and natural gas services, and reported revenues of approximately $9.6 billion in its 2012 Annual Report.
Global
Energy Group LLC
Global
Energy Group, LLC “GEG”, our primary shareholder, is a holding company whose primary business is the acquisition of
strategic business assets, companies and, investment or joint ventures in both private and public companies.
On
January 11, 2013, Global Energy Group LLC, (“GEG”), purchased a portfolio of 14 of the Company’s Promissory
Notes, in a private transaction directly from the individual Note Holders, with a total principal amount of $3,234,775. On April
10, 2013, the Company, at the direction of “GEG”, converted this portfolio of 14 Promissory Notes into common shares
of stock; and issued 1,568,630,000 common shares for that conversion. The Promissory Notes were converted into common stock at
the market price at the time of conversion. The 1,568,630,000 shares was the equivalent of 61.78% of the Company’s 2,538,903,268
outstanding shares of common stock that were issued and outstanding on May 20, 2013, as reported in the Company’s Form 10-Q
Report for the period ended March 31, 2013. Global Energy Group is now deemed an affiliate.
The
shares issued to Global Energy Group are restricted securities. Restricted securities are securities acquired in unregistered,
private sales from the issuer or from an affiliate of the issuer. Investors typically receive restricted securities through private
placement offerings pursuant to Regulation D, employee stock benefit plans, as compensation for professional services, or in exchange
for providing "seed money" or start-up capital to the company. Rule 144(a)(3) identifies what sales result in restricted
securities. Pursuant to Rule 144 of the Securities Act of 1933, control securities are those held by an affiliate of the issuing
company. An affiliate is a person, such as an officer, director or large shareholder, (e.g. owning 10% of a company’s outstanding
shares), in a relationship of control with the issuer. Control means the power to direct the management and policies of the company
in question, whether through the ownership of voting securities, by contract, or otherwise.
Therefore,
Global Energy Group is subject to the limitations of Rule 144 on sales of any of its stock. The restrictions on the sales of restricted
stock per Rule 144 include holding the stock for a minimum of six months after issuance, and it would therefore be limited to
selling an amount equal to 1% of the Company’s issued and outstanding shares every 90 days. When and if it did decide to
sell any of its stock, the federal securities laws require them to file a Form 144, (Notice of Proposed Sale of Securities), notifying
the SEC of their intent to sell any of its stock in accordance with the Rule 144 guidelines and limitations.
As
of December 31, 2013, to the best of our knowledge, Global Energy Group LLC had no plans or proposals to acquire any additional
securities of the issuer, and it has not disposed of any of the securities of the Company, (with the exception of the 300 million
shares it sold back to the Company on July 25, 2013, which shares were retired and returned to the Company treasury
Financial
Restructuring Plan to Reduce Debt and Improve Balance Sheet
Management
believes it has improved our financials and restructured our Balance Sheet, by reducing our long-term debt and converting $3,234,775
in outstanding debt on the Balance Sheet to shares of common stock and issued the shares to our creditor. We believe the benefit
to our company was to eliminate this $3,234,775 of outstanding long-term debt and liabilities owed by us, reduce our interest
expenses, enhance our financial position and strengthen the Balance Sheet. Our long-term liabilities are $976,248 for the period
ending June 30, 2013, and $341,653 for the period ended December 31, 2013.
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. By building on our successes in fiscal
2013 we plan, although we cannot provide assurances as to timing and attainment, to achieve these future objectives by pursuing
the following strategies:
Our
primary objective is to exploit changes in the energy market, with the intent to propel our Company to a prominent 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.
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.
Refined
Energy Product Sales
The
Energy Products division intends to market and distribute refined petroleum based energy products including industrial fuels,
diesel fuels, gasoline, kerosene, jet fuel aviation fuels, Jet A and Jet A-1, motor oils and other lubricants. NDR Energy Group
will be procuring these energy products to market through its distribution channels. The products will be sold to its existing
customer base, and its expanding customer base which will include federal and state agencies, U.S. military, cities, municipalities
and large commercial and industrial companies. Refined oil energy products typically have higher profit margins, and should generate
additional streams of revenues and profits for the Company.
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.
CORPORATE
FINANCE
The
Company’s Capital Structure
In
management’s
efforts to grow and expand our 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 our 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 our life cycle stage, economy, credit markets, and other circumstances at the time, and
reached the following conclusions:
Based
on the reasons above, and since we required immediate capital to rapidly expand, grow, restructure its operations, enter new markets,
finance new acquisitions, and execute our marketing plans; raising capital through debt financing was our best alternative. This
strategy resulted, we believe, 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 we continue to advance
and develop through the different stages of our business life cycle, management will evaluate options, alternatives, and make
strategic decisions for the best investment opportunities, financing, and capital structure at that time.
Terminated
Agreements
There
are no terminated agreements to report for this reporting period.
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:
-
A special dividend in the form
of common stock;
-
Regular dividends issued in
stock or cash (subject to the Company’s future earnings and availability of funds);
-
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.
-
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 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:
-
The potential value of the synergies
and strategic fit of the target or acquiring company.
-
The financial, accounting, tax,
and legal effects.
-
The acquisition or sell of stock
and/or assets of either company.
-
Consideration of a merger or
consolidation with another company to create a new stronger more valuable company.
-
Completion of a horizontal acquisition
of a competitor or other company in our industry.
-
Completion of a vertical acquisition
with another company either upstream or downstream in our industry that may include exploration companies, producers, distributors,
and marketers.
-
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.
-
Potential increase in the price
of our common stock.
-
Economies of scale from the
two companies combined resources.
-
Potential reductions in operating
costs.
-
Potential to increase the earnings
and earnings per share of the Company.
-
The potential to create more
value for our shareholders.
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 affected, 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:
-
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.
-
Increase the price to a range
to reflect the revenues, growth, and stability of the Company.
-
Increase the price to qualify
for the minimum share price requirements to qualify for a major stock exchange such as NASDAQ or NYSE/AMEX.
-
The Company may consider purchasing
the shares of some of the minority shareholders.
-
Allow the Company to raise more
capital for its growth and expansion.
Management
believes that the current stock price is currently undervalued, the share price does not fully reflect its true value in proportion
to its operating fundamentals, and is not 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.
Business
Model
Mergers
and Acquisitions
Management
has determined that it is in our best interests to chart a strategic course for the Company to grow faster by more 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, of acquiring 5 to 10 acquisitions
of additional new companies with revenues in the $10 million to $80 million range with stable cash flows and EBITDA’s in
the $1 million to $8 million range in the next 1 to 3 years. The potential target’s profile will primarily include
companies with well-established marketing and distribution channels, a defensible competitive position, and strong growth opportunities.
This will also include companies that have a strong asset base with hard or fixed assets, property, plant, equipment, proprietary
technologies, patents, and exclusive licenses. We are aggressively seeking potential acquisition targets to meet these objectives.
Some companies
being targeted are, oil producers, oil drilling companies, refined oil product producers, natural gas producers, gas marketers, pipeline
companies, pipeline construction companies, gas storage facilities, propane producers, high wall surface coal mines, refined oil
product producers, and the acquisition of energy technology patents and licenses. We’re also looking at acquiring producing
petroleum and gas wells, assets/properties, and related energy companies. Acquiring interests in properties in these areas will
work very well with our strategic plans for the expansion of our subsidiary 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, solid earnings, and bring 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.
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 $18,705,137 for the three months ending December 31, 2013, as compared to $13,322,660
for the same period in 2012. Our cost of sales was $18,685,525 for the three months ending December
31, 2013, as compared to $13,303,088 for the same period in 2012.
A
major goal for the fiscal 2014 year and beyond is to begin to generate earnings for our 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, electric
power, refined energy products, and coal.
Our
management’s plans for increasing earnings include the following:
•
First, we have expanded our sales of natural gas beyond just base load transactions to include monthly term transactions, spot
market sales, and sales gas for electric power generation.
•
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 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.
•
Fourth, 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. Universal plans to mine, produce, and
market “Thermal/Steam” coal to sale to other major coal producers and electric utility customers for power generation.
•
Fifth, we intend to expand into gas storage, physical and financial gas trading, transportation, and gas management.
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
Promissory Notes for
their salary, with the option to convert the Notes into to common stock of our company.
Discontinued
Operations
There
are no Discontinued Operations to report for this period.
Net
Loss as adjusted for non-recurring and/or non-cash expenses
|
|
|
|
|
|
Six
Months Ended
|
|
Six
Months Ended
|
|
|
December
31,
|
|
December
31,
|
|
|
2013
|
|
2012
|
|
|
|
|
|
Losses
available for common shareholders
|
$
|
(461,400)
|
$
|
(874,770)
|
|
|
|
|
|
Other
non-cash expenses
|
|
1,308
|
|
1,962
|
Stock
issued for services
|
|
-0-
|
|
118,280
|
|
|
|
|
|
Losses
available for common shareholder, as adjusted
|
$
|
(460,092)
|
$
|
(754,528)
|
|
|
|
|
|
RESULTS
OF OPERATIONS
Three
and Six Months Ended December 31, 2013 compared to the Three and Six Months Ended December 31, 2012
Review
and Analysis of Current Results of Operations
Revenues
Our
revenues for the three months period ended December 31, 2013, increased compared to the three months period ended December 30,
2012.
Our
primary revenues from this period are from the sale of natural gas and propane. Our revenues for the three and six months
ended December 31, 2013 were $18,705,137 and $32,577,523 respectively, as compared to $13,322,660 and $28,885,520 respectively
for the same periods in 2012. This resulted in an increase of $3,692,003 in revenues or 12.78% over the previous year.
Our
Cost of Sales for the three and six months ended December 31, 2013 were $18,685,525 and $32,545,212 respectively, as compared
to $13,303,088 and $28,841,943 for the same periods in 2012.
This
has resulted in a gross profit margin for three and six months ended December 31, 2013 of $19,613 and $32,4288, respectively,
as compared to $19,572 and $43,577, respectively, for the same periods in 2012.
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 gross profit.
We
incurred losses of $461,400 for the six months ended December 31, 2013; and $874,770 for the same period in 2012. Our accumulated
deficit since our inception through December 31, 2013 amounts to $22,539,221. We did not issue any common shares for services
for this period which had an aggregate fair value of approximately $0.00 that was included in the $360,281 in general and administrative
expenses for the six month period ended December 31, 2013.
We
also incurred interest expenses of $295,204 for the six month period ended December 31, 2013. Excluding the value of the common
stock that was issued for services and interest expenses, which together totaled $295,204, would correspondingly reduce our net
loss of $461,400 to an adjusted net loss of $166,196 for the three month period ending December 31, 2013. Based on an adjusted
net loss of $166,196, this loss equals only 0.51% of our total revenues of $32,577,739 for the six month period ended December
31, 2013, as compared to 6.69% for the same period ended 2012.*
*The
disclosure of this information statement, is a “non-GAAP financial accounting measure”, and is a supplemental measure
of our performance, which information is derived from our consolidated financial information, although it is not included in our
consolidated financial statements which were prepared in accordance with accounting principles generally accepted in the United
States of America (“GAAP”). These financial measures are considered “non-GAAP financial measures” under
SEC rules.
Regarding
Increase in Expenses and Losses.
This increase in operating expenses, and the resulting net loss, was primarily due
to increases in accrued interest, the current portion of long term debt, and in embedded derivative liability costs as indicated
below.
The
Company issued convertible Promissory Notes, and determined that the conversion features contained in the Notes represent freestanding
derivative instruments that meet the requirements for liability classification under Financial Accounting Standard Board (“FASB”),
U.S. GAAP, Accounting Standards Codification, Derivatives and Hedging (Topic ASC 815). As a result, the fair value of the derivative
financial instruments in the Promissory Notes is reflected in the Company’s balance sheet as a liability. The fair value
of the derivative financial instruments of the convertible Notes and warrants was measured at the inception date of the Promissory
Notes and warrants, and each subsequent balance sheet date. Any changes in the fair value of the derivative financial instruments
are recorded as non-operating, non-cash income, or expense, at each balance sheet date.
The
Company valued the conversion features in its convertible Promissory Notes using the Black-Scholes model. Included in our Statements
of Operations for the three ended December 30, 2013, are $165,304 in non-cash charges pertaining to the derivative liability as
it pertains to change in derivative liability and amortization of debt discount, respectively.
Operating
Costs and Expenses
Our
Cost of Sales for the three months ended December 31, 2013 were $18,685,525 as compared to $13,303,088 for the same period in
2012, and our Cost of Sales for the six months ended December 31, 2013 were $32,545,312 as compared to $28,841,943 for the same
period in 2012. This was an increase of $3,703,369 or 12.84% in our Cost of Sales. Our primary operation is the marketing
of natural gas, propane and coal to our customers. Our total operating expenses for the three months ended December 31, 2013 were
$205,050, as compared to $407,702 for the same period in 2012 and for the six months ended December 31, 2013 were $361,589 as
compared to $769,261 for the same period in 2012. We pay our employees and consultants largely in common shares as our cash
availability is currently limited.
We
decreased our total operating expenses from $769,261 for the six month period ending December 31, 2012, by a total of $407,672,
or by 53.00%, to $361,589 for the period ending December 31, 2013.
Based
on our plans for growth and expansion, and increasing revenues through sales of natural and other products, we believe we will
soon reduce our net losses down to zero; and then move our company toward solid profitability. Since we are a high growth company,
growing by mergers and acquisitions, we generally expect to have corresponding increases in costs reflected in our operating expenses.
Assets
Our
“total assets” have decreased by $3,142,823, or 25.41%, to $9,226,706 for the period ending December 31, 2013, compared
to $12,369,529 for the year ended June 30, 2013. This was due to an decrease in the amount of our Accounts Receivables from the
sales of natural gas
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 31 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, 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, and we incurred significant fluctuations in our working capital for this period. This
resulted in a working capital deficit of ($1,547,430) for the period ending December 31, 2013, as compared to a working capital
deficit of ($1,021,031) for the period ending December 31, 2012. This increased our working capital deficit by $526,399 or by
51.56%. The working capital deficit was primarily due to the costs of pursuing acquisitions, funding of NDR Energy’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 December 31, 2013, 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.
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 six months ended
December 31, 2013 and 2012 were as follows:
Cash
Flows from Operating Activities
Our
cash, used in operating activities, for the six months ended December 31, 2013, was $218,245, as compared to cash used in operating
activities of $1,429,832 for the six months ended December 31, 2012. The decrease was primarily attributable to amortization of
beneficial conversion feature, the accruing certain management salaries, and a reduction of prepaid expenses.
Cash
Flows from Investing Activities
Cash
used in investing activities for the six months ended December 31, 2013 was $40,050 as compared to cash provided by investing
activities of $0.00 for the six months ended December 31, 2012.
Cash
Flows from Financing Activities
Our
cash provided by financing activities for the six months ended December 31, 2013 was $259,550, as compared to $569,067 for the
six months ended December 31, 2012. The net cash used in financing activities is primarily attributed to our Notes Payables.
Liabilities
/ Indebtedness
Current
liabilities decreased to $7,586,534 for the six months ended December 31, 2013, compared to $10,197,223 for the same period in
2012. This 25.60% decrease was primarily due to a $3,078,704 decrease in accounts payable from the purchasing costs and supplies
of natural gas. Our long term liabilities are $341,653 for the period ending December 31, 2013, compared to $976,248 for the six
months ending December 31, 2012. In the past twelve months the Company has significantly reduced its borrowings from its creditors
to further reduce its short and long-term debt.
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 in lieu of receiving payment in cash. The issued Promissory Notes are primarily unsecured obligations. The principal
amount of the Promissory 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 Promissory Notes have above market interest rates, and high price conversion discounts rates to market. Management issued
the Promissory Notes 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 Promissory Note, with deferred payments, with the option to convert the Promissory 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 the Company’s 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 the Company’s 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 initially 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 in 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 Promissory Notes,
including adjusting the conversion prices if the stock price rises or falls considerably and consistently over time, on terms
that would be more favorable to us and our shareholders or the Note Holder. It could take several years to convert all of the
Promissory Notes to stock if all of the investors requested it. It is possible that some may never convert their Promissory Notes
to stock and may take cash only when we are in the best position to settle the obligation on a cash basis. No additional consideration
was paid to convert any Promissory Note.
Most
of the Promissory Notes that the investors elected to convert, were converted at the market price of the stock at the time of
conversion. Some of the Notes were converted at a 30% to 50% discount to the market price at the time of conversion to reflect
a conversion price due to a modification of the terms of the Promissory Note.
Should
the investors decide to convert their respective Promissory Notes into common stock then the corresponding debt represented by
that Promissory Note would be eliminated from the Company’s balance sheet. The respective investors typically will convert
the principal balance on their Promissory Notes in 25% to 33% portions, and usually will not convert their Promissory Notes into
more than 4.99% of the Company’s outstanding shares of stock at any time. In the past twelve months the Company has significantly
reduced its borrowings from its creditors to further reduce its short and long-term debt.
LIST
OF PROMISSORY NOTES
List
of Notes from October 1, 2013 through December 31, 2013
On
October 30, 2013, the Company entered into a three (3) year Promissory Note with a non-related creditor for $8,797.67 at 12% interest.
The Holder has the right to convert the Note to common stock at a fixed conversion price of $0.00115 per share.
On
November 30, 2013, the Company entered into a three (3) year Promissory Note with a non-related creditor for $8,539.07 at 12%
interest. The Holder has the right to convert the Note to common stock at a fixed conversion price of $0.00115 per share.
On
December 31, 2013, the Company entered into a three (3) year Promissory Note with a non-related creditor for $8,200.00 at 12%
interest. The Holder has the right to convert the Note to common stock at a fixed conversion price of $0.00115 per share.
On
December 31, 2013 the Company entered into a two (2) year convertible Promissory Note with its Vice President, Solomon Ali for
$160,000 at 10% interest for the accrued compensation owed to him for the fiscal year 2013 in accordance with his Employment Agreement.
The holder has the right to convert the Note to common stock at $0.00015.
On
December 31, 2013 the Company entered into a two (2) year convertible Promissory Note with its Manager of Business Development,
Don Deluna, for $67,300 at 10% interest for the accrued compensation owed to him for the fiscal year 2013 in accordance with his
Employment Agreement. The holder has the right to convert the Note to common stock at $0.00015.
On
December 31, 2013 the Company entered into a two (2) year convertible Promissory Note with its President and CEO, Vince M. Guest
for $160,950 at 10% interest for the accrued compensation owed to him for the fiscal year 2013 in accordance with his Employment
Agreement. The holder has the right to convert the Note to common stock at $0.00015.
If
all of these Notes were converted to common stock it could take several years; and the amount of stock that could be issued cannot
be determined. 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 them by the Company has become a debt or liability on the
books. We have issued them Promissory Notes that include an option to convert the notes to shares of common stock to reflect these
liabilities. This has reduced some of the need to borrow 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 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.