SAXON CAPITAL GROUP INC 10-Q/A

Item 1. Financial Statements INDEX TO FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm 3 Consolidated Balance Sheets as of March 31, 2008 (restated) (unaudited) and December 31, 2007 4 Consolidated Statements of Operations for the three months ended March 31, 2008 (restated) and 2007 (restated) (unaudited) 5 Consolidated Statement of Stockholders¡¯ Equity for the three months ended March 31, 2008 (restated) (unaudited) 6 Consolidated Statements of Cash Flows for three months ended March 31, 2008 (restated) and 2007 (restated) (unaudited) 7 Notes to the Consolidated Financial Statements ¡§C March 31, 2008 (unaudited) 8 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of USA Superior Energy Holdings, Inc (Formerly Comlink Communications Company) Houston, Texas We have reviewed the accompanying consolidated balance sheet of USA Superior Energy holdings, Inc (the "Company") as of March 31, 2008, and the related consolidated statements of operations, and cash flows for the three-month periods ended March 31, 2008 and 2007. These consolidated financial statements are the responsibility of the Company's management. We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that USA Superior will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, USA Superior has raised limited capital and incurred losses from operations since inception, which raise substantial doubt about their ability to continue as a going concern. Management's plans regarding those matters also are described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. As discussed in Note 6, the consolidated financial statements as of March 31, 2008, and the related consolidated statements of operations, and cash flows for the three-month periods ended March 31, 2008 and 2007 have been restated. We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years then ended (not presented herein); and in our report dated May 16, 2008, we expressed an unqualified opinion on those consolidated financial statements and included an explanatory paragraph related to the going concern uncertainty .In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2007, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. /s/ Malone & Bailey, PC www.malone-bailey.com Houston, Texas May 30, 2008 -3- USA SUPERIOR ENERGY HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS As of March 31, 2008 and December 31, 2007 (Unaudited) ASSETS March 31, 2008 December 31, 2007 Current assets (Restated) Cash and cash equivalents $ 41,625 $ 256,943 Restricted cash 150,000 50,000 Accounts receivable 2,500 - Prepaid expenses and other current assets 143,759 24,699 Total current assets 337,884 331,642 Oil and gas properties, including $348,086 of unproved properties, net of accumulated depletion, depreciation and amortization of $52,257 and $36,991, respectively ¡§C using full cost method of accounting 1,553,023 1,568,289 Office equipment, net of depreciation of $14,839 and $9,391, respectively 28,924 34,372 Other assets 750 750 Total assets $ 1,920,581 $ 1,935,053 LIABILITIES AND STOCKHOLDERS¡¯ EQUITY Current liabilities Accounts payable and accrued liabilities $ 448,493 $ 326,730 Convertible demand note, net of unamortized discount of $ 242,207 and $244,154, respectively 36,936 27,000 Current portion of notes payable 472,403 347,762 Advances payable ¡§C related party 109,259 114,259 Total current liabilities 1,067,091 815,751 Convertible debenture, net of unamortized discount of $248,084 and $257,316, respectively 236,715 215,947 Notes payable 270,317 363,957 Asset retirement obligations 116,050 115,520 Total liabilities 1,690,173 1,511,175 STOCKHOLDERS¡¯ EQUITY Common shares, $0.001 par value, 150,000,000 shares authorized, 56,160,000 and 55,760,000 shares issued and outstanding, respectively 56,160 55,760 Additional paid-in capital 8,377,720 7,924,850 Stock subscription receivable (130,000 ) - Accumulated deficit (8,073,472 ) (7,556,732 ) Total stockholders¡¯ equity 230,408 423,878 Total liabilities and stockholders¡¯ equity $ 1,920,581 $ 1,935,053 The accompanying notes are an integral part of these consolidated financial statements. -4- USA SUPERIOR ENERGY HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS For the three months ended March 31, 2008 and 2007 (Unaudited) 2008 2007 (Restated) (Restated) Revenue $ 115,563 $ 15,443 Operating expenses Lease operating expenses 104,254 18,763 General and administrative, including stock based compensation of $207,436 and $3,020,000, respectively 463,751 3,375,085 Depreciation, depletion and amortization 21,243 1,069 Total operating expenses 589,248 3,394,917 Operating loss (473,685 ) (3,379,474 ) Other income (expense) Interest expense (43,055 ) - Total other expense (43,055 ) - Net loss (516,740 ) (3,379,474 ) Net loss per share: Basic and diluted $ (0.01 ) $ (0.09 ) Weighted average shares outstanding: Basic and diluted 56,067,692 35,666,630 The accompanying notes are an integral part of these consolidated financial statements. -5- USA SUPERIOR ENERGY HOLDINGS, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS¡¯ EQUITY For the years three months ended March 31, 2008 (Unaudited) Common Shares Par Amount Additional Paid-In Capital Stock Subscription Receivable Accumulated Deficit Total Balance, December 31, 2007 55,760,000 $ 55,760 $ 7,924,850 $ - $ (7,556,732 ) $ 423,878 Shares issued in exchange for subscription receivable 400,000 400 299,600 (130,000) - 170,000 Warrants issued for services - - 153,270 - - 153,270 Net loss - - - - (516,740 ) (516,740 ) Balance, March 31, 2008 (Restated) 56,160,000 $ 56,160 $ 8,377,720 $ (130,000 ) $ (8,073,472 ) $ 230,408 The accompanying notes are an integral part of these consolidated financial statements. -6- USA SUPERIOR ENERGY HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the three months ended March 31, 2008 and 2007 (Unaudited) 2008 2007 (Restated) (Restated) CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (516,740 ) $ (3,379,474 ) Adjustments to reconcile net loss to cash used by operating activities: Depreciation, depletion and amortization 21,243 1,069 Amortization of debt discount 11,179 - Stock based compensation 207,436 3,020,000 Net change in operating assets and liabilities 131,564 (250,939 ) NET CASH USED BY OPERATING ACTIVITIES (145,318 ) (609,344 ) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment - (41,528 ) Investment in oil and gas properties - (400,000 ) Increase in restricted cash (100,000 ) - CASH FLOWS USED IN INVESTING ACTIVITIES (100,000 ) (441,528 ) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of short-term debt 100,000 25,000 Proceeds from sale of units - 1,000,000 Capital contributions from shareholder - 161,976 Repayments of notes payable (70,000 ) - CASH FLOWS USED BY FINANCING ACTIVITIES 30,000 1,186,976 NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS (215,318 ) 136,104 Cash and cash equivalents, beginning of period 256,943 297 Cash and cash equivalents, end of period $ 41,625 $ 136,401 Cash paid for: Interest $ 1,001 $ - Income taxes $ - $ - Supplemental Schedule of Non-cash Investing and Financing Activities: Purchase oil and gas properties through issuance of notes payable $ - $ 750,097 Recapitalization - 18,360 Asset retirement obligation incurred - 88,066 The accompanying notes are an integral part of these consolidated financial statements -7- USA SUPERIOR ENERGY HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2008 NOTE 1 ¡§C ORGANIZATION AND BUSINESS OPERATIONS USA Superior Energy Holdings, Inc. (the "Company" or "USA Superior"), a Nevada corporation, was originally formed on November 12, 2003 as Comlink Communications Company ("Comlink"). In fiscal the fiscal year ended 2006, Comlink was essentially dormant with no operating business, having discontinued all prior operations in the first quarter of 2006. Prior operations consisted of an attempt to market two-way radio communication equipment over the internet. The Company had no capital and no prospects to raise capital to carry out the prior business plan. The current business of the Company is to develop, own and operate prospects and energy projects in East and Southwest Texas. The Company primarily focuses on properties with a potential for enhanced secondary or tertiary recovery using modern state-of-the-art workover and stimulation techniques. On January 16, 2007, USA Superior and Comlink Communications Company ("Comlink") consummated a merger that was effected through a reverse merger in which the shareholders of USA Superior agreed to receive 34,000,000 shares of common stock of Comlink in exchange for 100% of the issued and outstanding shares of USA Superior. Concurrent with the merger, USA Superior's executive management and directors assumed control and responsibility for Comlink's activities and its strategic direction. The merger effected a change in control of Comlink and immediately following the merger, USA Superior's former stockholders held approximately 59% of Comlink's issued and outstanding common shares. After the merger, Comlink's name was changed to USA Superior Energy Holdings, Inc., and the stock symbol was changed to OTCBB: USSU. For Securities and Exchange Commission ("SEC') reporting purposes, the merger between USA Superior and Comlink was treated as a reverse merger with USA Superior being the "accounting acquirer" and, accordingly, it assumed Comlink's reporting obligations with the SEC. In accordance with SEC requirements, the historical financial statements and related disclosures presented herein for the period prior to the date of merger (i.e., January 16, 2007) are those of USA Superior. The assets and liabilities of Comlink were recorded, as of completion of the merger, at fair value, which is considered to approximate historical cost, and added to those of USA Superior. In accordance with the terms of the merger agreement, each outstanding share of USA Superior prior to the reverse merger was converted into 309.8 common shares in USA Superior (post reverse merger) with a total of 30,980,000 common shares issued to the former USA Superior stockholders. Of the 63,360,000 shares of Comlink outstanding at the time of the merger, 45,000,000 shares were cancelled concurrent with the closing of the merger. In conjunction with the merger, USA Superior issued 3,020,000 shares of common stock. In accordance with EITF 95-8, USA Superior determined that these were shares issued for services and not additional transaction costs due to the fact that Comlink's cash balance was minimal prior to the merger. These shares had a market value of $3,020,000 on the date of the reverse merger. Of the total shares issued for services, 2,720,000 shares were issued to employees of USA Superior. Immediately following the merger, a total of 52,360,000 shares of common stock were issued and outstanding. Since its inception, USA Superior has funded its oil and gas activities through a combination of equity and debt securities and the contribution of funds and services by its principal shareholders and management. NOTE 2 ¡§C SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Interim Financial Statements The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2007, as filed with the Securities and Exchange Commission ("SEC"). The financial statements included herein as of March 31, 2008, and for the three month periods ended March 31, 2008 and 2007, are unaudited, and in the opinion of management, the information furnished reflects all material adjustments, consisting of normal recurring adjustments and restatements (See Note 6), necessary for a fair presentation of financial position and of the results for the interim periods presented. Certain minor reclassifications of prior period financial statements have been made to conform to current reporting practices. The results of operations for interim periods are not necessarily indicative of results to be expected for a full year Basis of presentation USA Superior's unaudited consolidated balance sheets as of March 31, 2008 and December 31, 2007 and related consolidated statements of operations, stockholders' quity and cash flow for the three months ended March 31, 2008 and 2007 are presented in U.S. dollars and have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and the rules of the Securities and Exchange Commission. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could materially differ from those estimates. Management believes that it is reasonably possible the following material estimates affecting the financial statements could significantly change in the coming year: (1) estimates of proved oil and gas reserves, and (2) forecast forward price curves for natural gas and crude oil. The oil and gas industry in the United States has historically experienced substantial commodity price volatility, and such volatility is expected to continue in the future. Commodity prices affect the level of reserves that are considered commercially recoverable; significantly influence USA Superior's current and future expected cash flows; and impact the PV10 derivation of proved reserves presented in USA Superior's supplemental oil and gas reserve disclosures made herein. Principles of consolidation The financial statements include the accounts of its 100% owned subsidiaries USA Superior Energy, Inc. and Superior Energy, LLC and its 80% interest in the subsidiary Skyrider Energy, LLC. Revenue and cost recognition USA Superior uses the sales method to account for sales of crude oil and natural gas. Under this method, revenues are recognized based on actual volumes of oil and gas sold to purchasers. The volumes sold may differ from the volumes to which USA Superior is entitled based on our interest in the properties. These differences create imbalances which are recognized as a liability only when the imbalance exceeds the estimate of remaining reserves. USA Superior had no imbalances as of March 31, 2008 and December 31, 2007. Costs associated with production are expensed in the period incurred. New Accounting Pronouncements USA Superior does not expect the adoption of recently issued accounting pronouncements to have a significant impact on their results of operations, financial position or cash flows NOTE 3 ¡§C GOING CONCERN USA Superior has raised limited financing and has incurred operating losses since its inception in October 2005. These factors raise substantial doubt about USA Superior's ability to continue as a going concern. USA Superior¡¯s ability to achieve and maintain profitability and positive cash flow is dependent on its ability to secure sufficient financing to fund the acquisition, drilling and development of profitable oil and gas properties. Management is seeking financing that it believes would allow USA Superior to establish and sustain commercial production. There are no assurances that USA Superior will be able to obtain additional financing from investors or private lenders and, if available, such financing may not be on commercial terms acceptable to USA Superior or its stockholders. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. NOTE 4 ¡§C NOTES PAYABLE AND CONVERTIBLE DEBENTURES Notes Payable ¡§C Bastrop and Caldwell County, Texas Leases As a portion of the consideration for the purchase of the Bastrop and Caldwell County, Texas leases, USA Superior issued a $350,000 note payable to the seller. The note bears interest at 5% and requires monthly payments of $15,000 plus interest. As of December 31, 2007, USA Superior was in default on the payments of the note. On April 11, 2008, USA Superior paid the lender $50,000 for attorney fees and a partial payment on the note and entered into a Renewal and Extension Promissory Note which settled the default. Under the terms of the new note, USA Superior must make monthly payments of $15,000 plus 8% interest beginning May 15, 2008. All unpaid principal and interest is due October 15, 2008. This note is secured by 500,000 shares of USA Superior's common stock which were pledged by the Company's CEO and USA Superior's interest in the Bastrop County leases. As additional consideration for the purchase of the Bastrop County, Texas leases, USA Superior agreed to assume the seller¡¯s noninterest bearing liability to a third party in the total amount of $440,000. This note requires payments of 25 percent of the net revenue from the production of the leases, with minimum payments of $7,500 per month and $120,000 per year. This note was recorded at the present value of the future cash payments of $400,097. Management used an interest rate of 5% to discount this rate, because it was the same as the rate on the note payable to the seller described above. USA Superior is currently in default on the note due to the fact that all required payments have not been made on the note. Convertible Note Payable On January 23, 2008, USA Superior issued a convertible promissory note payable to a third party in the amount of $100,000. The proceeds of this note were placed in an escrow account to indemnify a broker for potential losses to be incurred in online trading in the company¡¯s stock. The note bears interest at 8%, matures January 23, 2009 and is convertible in the event of a merger transaction at the lowest rate available to other convertible note holders. NOTE 5 ¡§C STOCKHOLDERS¡¯ EQUITY Issuance of Common Shares and Warrants On March 1, 2008, as modified April 22, 2008, USA Superior entered into an agreement with a third party for financial advisory services for the period from March 1, 2008 through February 28, 2010. Under the terms of the contract USA Superior will make monthly payments of $5,000 for a total of 23 months. In addition, USA Superior has issued a warrant to purchase 1,000,000 shares of common stock for a period of five years at an exercise price of $0.17 and USA Superior¡¯s CEO will pay the third-party 1,250,000 shares of the common stock owned by him. The warrants were valued at $153,270 using the Black-Scholes model with the following assumptions: Assumption Exercise price $ 0.17 Stock price on the issuance date $ 0.18 Term (years) 5 Risk free interest rate 2.64 % Volatility 124 % The value of the warrants has been recorded as a prepaid asset and is being amortized over the two year term of the agreement. The 1,250,000 shares of stock have not yet been transferred by the CEO. Issuance of Common Stock for Subscription Agreement In January 2008, USA Superior issued 400,000 shares of stock to an employee of the company in exchange for a stock subscription receivable in the amount of $130,000. The shares were valued at $300,000 on the date of issuances. USA Superior recognized $170,000 of compensation expense related to the difference in the market value of the shares and the cash to be received from the employee. NOTE 6 ¡§C RESTATEMENT Restatement of March 31, 2008 financial statements The Company determined that its restricted cash and current notes payable were understated by $100,000. Accrued interest and interest expense were understated by $1,333 related to the understatement of the current note payable. Prepaids and other current assets and additional paid-in capital were overstated by $948,760 related to the valuation of stock and warrants to be issued under a financial services contract. Lease operating expense was overstated by $14,759 due to an arithmetic error. General and administrative expenses were overstated by $52,754 related to the amortization of prepaid expenses and an arithmetic error. Below is the detailed effect of the restatement As Reported As Restated Balance Sheet as of March 31, 2008 ASSETS Restricted cash $ 50,000 $ 150,000 Prepaids and other current assets $ 1,092,519 $ 143,759 Current Assets $ 1,186,644 $ 337,884 TOTAL ASSETS $ 2,768,711 $ 1,920,581 LIABILITIES Accounts payable and accrued liabilities $ 352,895 $ 448,493 Current portion of notes payable $ 372,403 $ 472,403 Current Liabilities $ 871,493 $ 1,067,091 Notes payable $ 363,957 $ 270,317 Total Liabilities $ 1,588,215 $ 1,690,173 STOCKHOLDERS' EQUITY Capital stock $ 56,160 $ 56,160 Additional paid-in capital $ 9,364,470 $ 8,377,720 Stock subscription receivable $ (130,000 ) $ (130,000 ) Accumulated deficit $ (8,110,134 ) $ (8,073,472 ) TOTAL STOCKHOLDERS' EQUITY $ 1,180,496 $ 230,408 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,768,711 $ 1,920,581 STATEMENT OF OPERATIONS for the three months ended March 31, 2008 Lease operating expense $ 89,495 $ 104,254 General and administrative expense $ 516,505 $ 463,751 Total operating expenses $ 627,243 $ 589,248 Operating loss $ (511,680 ) (473,685 ) Interest expense $ (41,722 ) $ (43,055 ) Net loss $ (553,402 ) $ (516,740 ) Loss per common share (basic and diluted) $ (0.01 ) $ (0.01 ) Weighted averages shares outstanding 56,064,348 56,067,692 STATEMENT OF CASH FLOWS for the three months ended March 31, 2008 Net loss $ (553,402 ) $ (516,740 ) Net cash used in operating activities $ (145,318 ) $ (145,318 ) Net cash used in investing activities $ - $ (100,000 ) Net cash provided by (used in) financing activities $ (70,000 ) $ 30,000 Net decrease in cash and cash equivalents $ (215,318) $ (215,318 ) Restatement of March 31, 2007 financial statements The Company determined that certain components of the statement of operations were misstated due to timing differences in the recognition of revenue and expense. General and administrative expenses were understated related to stock based compensation for stock issued in the reverse merger Below is the detailed effect of the restatement As Reported As Restated STATEMENT OF OPERATIONS for the three months ended March 31, 2007 Revenues $ 53,418 $ 15,443 Lease operating expense $ 32,989 $ 18,763 General and administrative expense $ 305,856 $ 3,375,085 Depreciation and amortization $ - $ 1,069 Total operating expenses $ 305,856 $ 3,394,917 Operating loss $ (285,427 ) (3,379,474 ) Interest expense $ - $ - Net loss $ (285,427 ) $ (3,379,474 ) Loss per common share (basic and diluted) $ (0.00 ) $ (0.09 ) Weighted averages shares outstanding 59,663,336 35,666,630 STATEMENT OF CASH FLOWS for the three months ended March 31, 2007 Net loss $ (285,427 ) $ (3,379,474 ) Net cash used in operating activities $ (882,468 ) $ (609,344 ) Net cash used in investing activities $ (19,616 ) $ (441,528 ) Net cash provided by financing activities $ 975,000 $ 1,186,976 Net increase in cash and cash equivalents $ 72,916 $ 136,401