UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-Q/A

Amendment No. 1

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: June 30, 2014

 

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from: ______ to ______

 

XR ENERGY INC.

(Exact name of registrant as specified in its charter)

  

Nevada		333-178156		27-0851973
(State or Other Jurisdiction		(Commission		(I.R.S. Employer
of Incorporation or Organization)		File Number)		Identification No.)

  

8411 Sterling Street Suite 102, Irving TX 75063

(Address of Principal Executive Offices) (Zip Code)

 

Telephone (972) 929-4444
(Registrant’s telephone number, including area code)

 

373 Smithtown Bypass, Suite 198 Hauppaguge, NY 11788
(Former name or former address and former fiscal year, if changed since last report)

  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

 

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	x

 

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

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:43,918,800 shares of common stock issued and outstanding as of September 19, 2014. 

 

 

 

 

Explanatory Note

 

This Form 10-Q/A amends the Quarterly Report on Form 10-Q of XR Energy Inc. for the period ended June 30, 2014 filed on August 25, 2014 (the “Form 10-Q”) which was filed un-reviewed by the company’s auditors.

 

 

 

 

 

TABLE OF CONTENTS

 

PART I – Financial Information				3
Item 1.	Financial Statements			4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk			19
Item 4.	Controls and Procedures			19
PART II – Other Information				20
Item 1.	Legal Proceedings			20
Item 1A.	Risk Factors			20
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds			20
Item 3.	Defaults Upon Senior Securities			20
Item 4.	Mine Safety Disclosures			20
Item 5.	Other Information			20
Item 6.	Exhibits			21
SIGNATURES				22

 

2

  

PART I. FINANCIAL INFORMATION

 

Safe Harbor Statement

 

This report on Form 10-Q contains certain forward-looking statements. All statements other than statements of historical fact are “forward-looking statements” for purposes of these provisions, including any projections of earnings, revenues, or other financial items; any statements of the plans, strategies, and objectives of management for future operation; any statements concerning proposed new products, services, or developments; any statements regarding future economic conditions or performance; statements of belief; and any statement of assumptions underlying any of the foregoing. Such forward-looking statements are subject to inherent risks and uncertainties, and actual results could differ materially from those anticipated by the forward-looking statements.

 

These forward-looking statements involve significant risks and uncertainties, including, but not limited to, the following: growth and anticipated operating results; developments in our markets and strategic focus; product development and reseller relationships and future economic and business conditions. Our actual results could differ materially from those anticipated in such forward-looking statements as a result of a number of factors. These forward-looking statements are made as of the date of this filing, and we assume no obligation to update such forward-looking statements. The following discusses our financial condition and results of operations based upon our consolidated financial statements which have been prepared in conformity with accounting principles generally accepted in the United States. It should be read in conjunction with our financial statements and the notes thereto included elsewhere herein.

 

3

 

ITEM 1. Financial Statements

 

The unaudited interim financial statements of XR Energy, Inc. (the “Company,” “XR,” “we,” “our,” or “us”) follow. All currency references in this report are in U.S. dollars unless otherwise noted.

 

XR Energy, Inc. and Subsidiary

Consolidated Balance Sheet

As of June 30, 2014

 

				June 30,
				2014
					(Unaudited)
Assets
Current Assets
	Cash			$	-
	Accounts Receivable				19,479
	Accrued Commissions Receivable				1,052
		Total Current Assets			20,531
Property and Equipment, Net of Accumulated Depreciation, Depletion and Amortization of $396					127,034
		Total Assets		$	147,565
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities
	Accounts Payable and Accrued Expenses			$	36,532
	Note Payable to Investor Entity				7,500
	Due to Former Chief Executive Officer				8,111
		Total Current Liabilities			52,143
	Asset Retirement Obligations				61,251
		Total Liabilities			113,394
Stockholders' Equity (Deficit)
	Series A Convertible Preferred Stock, par value $.0001, 50,000,000 shares authorized, 10,000,000 shares issued and outstanding				1,000
	Common Stock, $.0001 par value, 500,000,000 shares authorized, 43,918,800 shares issued and outstanding				4,392
	Additional Paid-In Capital				21,444,425
	Accumulated Deficit				(21,415,646	)
	Total Stockholders' Equity (Deficit)				34,171
		Total Liabilities and Stockholders' Equity (Deficit)		$	147,565

 

See accompanying notes to consolidated financial statements

 

4

 

XR Energy, Inc. and Subsidiary

Consolidated Statements of Operations

For The Periods Ended June 30, 2014

(Unaudited)

 

							For The Period
			For The Three				February 7, 2014
			Months Ended				(Inception) To
			June 30, 2014				June 30, 2014
Sales of Oil			$	20,420			$	20,420
Commission Income				351				351
	Total Revenues			20,771				20,771
Oil Lease Operating Costs				12,396				12,396
Depletion				401				401
Accretion of Asset Retirement Obligations				506				506
General and Administrative Expenses				15,620				15,757
	Total Costs and Expenses			28,923				29,060
Loss From Operations				(8,152	)			(8,289	)
Other (Expenses):
	Stock-Based Compensation In Connection With The Reverse Acquistion of XR Energy of Texas, Inc.			(20,677,357	)			(21,407,357	)
(Loss) Before Income Taxes				(20,685,509	)			(21,415,646	)
Provision (Credit) For Income Taxes				-				-
	Net (Loss)		$	(20,685,509	)		$	(21,415,646	)
Net (Loss) Per Common Share:
	Basic and Diluted		$	(0.62	)		$	(0.68	)
Weighted Average Common Shares Outstanding:
	Basic and Diluted			33,325,771				31,508,008

 

See accompanying notes to consolidated financial statements

 

5

 

XR Energy, Inc. and Subsidiary

Consolidated Statement of Stockholders' Equity

For The Period February 7, 2014 (Inception) To June 30, 2014

(Unaudited)

 

			Common Stock								Series A Convertible Preferred								Additional								Total
			Number of				Par				Number of				Par				Paid-In				Accumulated				Stockholders'
			Shares				Value				Shares				Value				Capital				Deficit				Equity
	Issuance of common shares for investor relations services			1,000,000			$	100											$	729,900							$	730,000
	Issuance of common shares to acquire leasehold interests effective May 31, 2014, at amortized depleted historical cost of affiliate that assigned them prior to the reverse acquisition of XR Energy of Texas, Inc.			29,000,000				2,900												63,790								66,690
	Common shares retained by pre-reverse acquisition shareholders (1)			3,818,800				382												(51,255	)							(50,873	)
	Conversion of convertible promissory note and related accrued interest			10,100,000				1,010												10,502,990								10,504,000
	Issuance of Series A Convertible Preferred Stock to the majority shareholder											10,000,000			$	1,000				10,199,000								10,200,000
	Net (loss) for the period February 7, 2014 (inception) to June 30, 2014																						$	(21,415,646	)			(21,415,646	)
	Balance, June 30, 2014			43,918,800			$	4,392				10,000,000			$	1,000			$	21,444,425			$	(21,415,646	)		$	34,171
(1)	Balance at June 1, 2014			22,818,800			$	2,282			$	-			$	-			$	54,418			$	(107,573	)		$	(50,873	)
	Recapitalization of common shares of XR Energy, Inc. in connection with the reverse acquisition of XR Energy of Texas, Inc.			(19,000,000	)			(1,900	)			-				-				(105,673	)			107,573				-
	Net			3,818,800			$	382			$	-			$	-			$	(51,255	)		$	-			$	(50,873	)

  

See accompanying notes to consolidated financial statements

 

6

 

XR Energy, Inc. and Subsidiary

Consolidated Statement of Cash Flows

For The Period February 7, 2014 (Inception) To June 30, 2014

(Unaudited)

 

Cash Flows from Operating Activities:
	Net (Loss)					$	(21,415,646	)
	Adjustments to reconcile net (loss) to net cash provided (used) by operating activities:
		Depletion					401
		Stock-based compensation in connection with the reverse acquistion of XR Energy of Texas, Inc.					21,407,357
		Accretion of Asset Retirement Obligations					506
		Changes in Operating Assets and Liabilities:
			Accounts Receivable				(19,479	)
			Accrued Commissions Receivable				(351	)
			Accounts Payable and Accrued Expenses				27,212
		Total Adjustments					21,415,646
		Net cash provided by (used in) operating activities					-
Net increase (decrease) in cash							-
Cash, Beginning of Period							-
Cash, End of Period						$	-
Supplemental disclosures:
		Interest and Taxes paid:
			Interest Expense			$	-
			Income Taxes			$	571
Non-Cash Operating, Investing, and Financing Activities
	Amount Due Former Officer of XR Energy, Inc. as the Legal Acquirer Paid Directly By Investor Entity (See Note 7)
		In Connection With The Reverse Acquisition				$	7,500
	10,000,000 Common Shares Issued In Satisfaction of Convertible Note and Accrued Interest:
			Stock-based Compensation Recognized in Other Expenses			$	10,477,357
			Debt Satisfied				26,643
			Fair Value of Common Stock on June 11,2014 ($1,010 Credited to Common Stock, $10,502,990 Credited to Additional Paid-in Capital			$	10,504,000
	29,000,000 Common Shares Issued To Acquire Leasehold Interests					$	66,690
	3,818,800 Common Shares Retained By Pre-Reverse Acquisition Shareholders Related To The Reverse Acquisition of XR Energy of Texas, Inc.					$	(50,873	)

 

See accompanying notes to consolidated financial statements

 

7

 

XR Energy, Inc. and Subsidiary

Notes to Consolidated Financial Statements

For The Period February 7, 2014 (Inception) To June 30, 2014 (Unaudited)

 

(1) Organization and Business Description

 

XR Energy, Inc. (“XR” or the “Company”) was incorporated under the laws of the State of Nevada on August 31, 2009. XR offers energy consulting services to smaller sized middle market companies in the New York Metropolitan Area and earns a commission from the related utility, or Energy Service Company (“ESCO”), for energy supply brokered and sold to its customers.

 

Effective June 1, 2014 (pursuant to an Acquisition Agreement dated March 11, 2014), XR acquired 100% of the outstanding capital stock of XR Energy of Texas, Inc (“XRT”) in exchange for XR delivering 30,000,000 of newly issued shares of XR common stock to the former XRT shareholders (see Note 4). After the exchange, the former XRT shareholders owned approximately 88.7% of the issued and outstanding shares of XR common stock. In addition, prior to the reverse acquisition, XR Energy had nominal revenue producing operations in its consulting business, as well as nominal assets and liabilities on its balance sheet as the legal acquirer in the reverse acquisition. Accordingly, the Company has deemed XRT to be the accounting acquirer for financial reporting purposes. The accompanying consolidated financial statements reflect the operations of XRT from its inception on February 7, 2014 to June 1, 2014 and XRT and XR thereafter.

 

Effective May 31, 2014, XRT acquired certain oil leasehold interests located in Texas from Sterling Royalties, LLC (“Sterling”) in exchange for XRT delivering 96,667 shares of XRT’s non-publicly traded common stock to Sterling, representing approximately 96.7% of the issued and outstanding shares of XRT common stock after the exchange. Sterling is owned by family of Akram Chaudhary, the Company’s Chief Executive Officer. XRT was incorporated under the laws of the state of Texas on February 7, 2014 for the purpose of acquiring those oil leasehold interests. Accordingly, it had no operations or assets prior to the acquisition of those leasehold interests. Since XRT only acquired those oil leasehold interests from Sterling, the consolidated financial statements do not represent the acquisition of an ongoing business that existed prior to June 1, 2014 for the accounting acquirer XRT.

 

Going Concern Uncertainty

 

The accompanying financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America, which contemplates the Company continuing as a going concern. As of June 30, 2014, the Company had cash of $0 and a working capital deficit of $31,612. For the period February 7, 2014 (inception) through June 30, 2014, the Company had a net loss of $21,415,646. These factors raise substantial doubt as to the ability of the Company to continue as a going concern. However, the Company plans to improve its financial condition by raising additional capital by selling shares of its common stock. Also, the Company plans to acquire additional oil leasehold interests in order to attain profitable operations. However, there is no assurance that the Company will be successful in accomplishing these objectives. The financial statements do not include any adjustments for the recoverability and classification of assets and the classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

Effective March 20, 2014, Tara Muratore resigned as a director and Chief Financial Officer of the Company and was replaced by David Taylor. Effective April 4, 2014, Anthony Muratore resigned as a director and Chief Executive Officer of the Company and was replaced by Akram Chaudhary, the Chief Executive Officer of XRT.

 

(2) Interim Financial Statements

 

The accompanying unaudited interim financial statements of XR Energy, Inc. (the “Company”) have been prepared by management in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all information and footnotes required by generally accepted accounting principles for annual audited financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included.

 

8

 

XR Energy, Inc. and Subsidiary

Notes to Consolidated Financial Statements

For The Period February 7, 2014 (Inception) To June 30, 2014 (Unaudited)

 

The results of operations for the periods ended June 30, 2014 are not necessarily indicative of the results to be expected for the period ending December 31, 2014. The accompanying unaudited interim financial statements should be read in conjunction with the Company’s audited financial statements and notes related thereto for the year ended December 31, 2013, which are those of the legal acquirer prior to the reverse acquisition, included in our Form 10-K filed with the SEC. 

(3) Summary of Significant Accounting Policies

Principles of Consolidation – The consolidated financial statements include the accounts of XR (from June 1, 2014 through June 30, 2014) and its wholly owned subsidiary XRT (from its inception on February 7, 2014 to June 30, 2014). All significant intercompany balances and transactions are eliminated in consolidation.

 

Use of estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the periods presented. Actual results could differ from those estimates.

 

Fair value of Financial Instruments – The Company’s financial instruments consist of cash, accounts receivable, accrued commissions receivable, accounts payable and accrued expenses, note payable to investor entity and the amount due to the former Chief Executive Officer. The fair value of these financial instruments approximate their carrying amounts reported on the balance sheet.

 

Cash and Cash Equivalents – For purposes of reporting within the statement of cash flows, the Company considers all cash on hand, cash accounts not subject to withdrawal restrictions or penalties, and all highly liquid debt instruments purchased with a maturity of three months or less to be cash and cash equivalents.

 

Property and Equipment – Property and equipment are stated at cost less accumulated depreciation and amortization expense based on the respective useful lives on a straight line basis. Costs of improvements that appreciably improve the efficiency or productive capacity of existing properties or extend their lives are capitalized. Maintenance and repairs are expensed as incurred. Upon retirement or sale, the cost of property and equipment, net of the related accumulated depreciation and amortization, is removed and, if appropriate, gain or loss is recognized.

 

Oil and Gas Properties – The Company applies the successful efforts method of accounting for oil and gas properties. Exploration costs such as exploratory geological and geophysical costs, delay rentals, and exploration overhead are charged against earnings as incurred. If an exploratory well provides evidence to justify potential completion as a producing well, drilling costs associated with the well are initially capitalized, or suspended, pending a determination as to whether a commercially sufficient quantity of proved reserves can be attributed to the area as a result of drilling. At the end of each quarter, management reviews the status of all suspended exploratory well costs in light of ongoing exploration activities—in particular, whether the Company is making sufficient progress in its ongoing exploration and appraisal efforts or, in the case of discoveries requiring government sanctioning, whether development negotiations are underway and proceeding as planned. If management determines that future appraisal drilling or development activities are unlikely to occur, associated suspended exploratory well costs are expensed.

 

Acquisition costs of unproved properties are periodically assessed for impairment and are transferred to proved oil and gas properties to the extent the costs are associated with successful exploration activities. Significant undeveloped leases are assessed individually for impairment, based on the Company’s current exploration plans, and a valuation allowance is provided if impairment is indicated. Unproved oil and gas properties with individually insignificant lease acquisition costs are amortized on a group basis (thereby establishing a valuation allowance) over the average lease terms, at rates that provide for full amortization of unsuccessful leases upon lease expiration or abandonment. Costs of expired or abandoned leases are charged against the valuation allowance, while costs of productive leases are transferred to proved oil and gas properties. Costs of maintaining and retaining unproved properties, as well as amortization of individually insignificant leases and impairment of unsuccessful leases, are expensed.

 

9

 

XR Energy, Inc. and Subsidiary

Notes to Consolidated Financial Statements

For The Period February 7, 2014 (Inception) To June 30, 2014 (Unaudited)

 

Depletion - Costs of drilling successful wells, associated asset retirement costs, and capital lease assets used in oil and gas activities are depreciated using the unit-of-production (UOP) method based on total estimated proved developed oil and gas reserves. Costs of acquiring proved properties, including leasehold acquisition costs transferred from unproved properties, are depleted using the UOP method based on total estimated proved developed and undeveloped reserves. Oil and gas equipment, principally consisting of oil well rigs, pumps and other equipment to operate the wells, are depreciated using the straight-line method over the useful lives of the assets as follows:

 

Rigs	15 years
Pumps, tanks and other equipment affixed to the wells and spare parts for the wells	5 to 10 years

  

Impairments – Property and equipment are reviewed for impairment at the lowest level for which identifiable cash flows are independent of cash flows from other assets, and when facts and circumstances indicate that net book values may not be recoverable. In performing this review, an undiscounted cash flow test is performed on the impairment unit. If the sum of the undiscounted future net cash flows is less than the net book value of the property, an impairment loss is recognized for the excess, if any, of the property’s net book value over its estimated fair value.

 

Asset Retirement Obligations – Asset retirement obligations (ARO’s) associated with the retirement of tangible long-lived assets are recognized as liabilities with increases to the carrying amounts of the related long-lived assets in the period incurred, typically when an oil well is drilled or purchased. The cost of the tangible asset, including the asset retirement cost, is depreciated over the useful life of the asset. ARO’s are recorded at estimated fair value, measured by reference to the expected future cash outflows required to satisfy the retirement obligations discounted at the Company’s credit-adjusted risk-free interest rate. Accretion expense is recognized over time as the discounted liabilities are accreted to their expected settlement value. If estimated future costs of ARO’s change, an adjustment is recorded to both the asset retirement obligation and the long-lived asset. Revisions to the estimated ARO’s can result from changes in retirement cost estimates, revisions to estimated inflation rates and changes in the estimated timing of abandonment. The Company’s asset retirement obligations primarily relate to plugging of abandoned and support wells at the conclusion of their useful lives.

 

Revenue Recognition – Sales of oil are recognized when delivery to the purchaser has occurred and title has transferred. Commission income is recognized when the utility delivers the energy services to our referred customers, the respective customer accepts such energy services, the amount billed by the utility is fixed and determinable and the collection of the related receivable is probable.

 

Stock-Based Compensation – Stock-based compensation is accounted for at fair value in accordance with FASB ASC 718, “Compensation – Stock Compensation”. The Company recognizes stock-based compensation expense for the fair value of all shares and stock options that are ultimately expected to vest over the requisite service period of the respective awards. To date, the Company has not granted any stock options.

 

10

 

XR Energy, Inc. and Subsidiary

Notes to Consolidated Financial Statements

For The Period February 7, 2014 (Inception) To June 30, 2014 (Unaudited)

 

Income Taxes - The Company accounts for income taxes under the provisions of Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 740 “Income Tax”. ASC 740 requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and tax bases of certain assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. The deferred tax assets and liabilities are classified according to the financial statement classification of the assets and liabilities generating the differences. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company has adopted the provisions of FASB ASC 740-10-05 “Accounting for Uncertainty in Income Taxes”. The ASC clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The ASC prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The ASC provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. At June 30, 2014, the Company had no material unrecognized tax benefits.

 

Loss Per Common Share - Basic loss per share is computed by dividing the net loss attributable to the common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted loss per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if potentially dilutive common share equivalents (such as stock options and convertible securities) had been issued and if the additional common shares were dilutive. For the three months ended June 30, 2014 and for the period February 7, 2014 (inception) to June 30, 2014, The 10,000,000 potentially dilutive common shares related to the Series A Convertible Preferred Stock (see Note 9) were excluded from the EPS calculation because their inclusion would have been anti-dilutive.

 

Recent Accounting Pronouncements - Management does not believe that any recently issued, but not yet effective, accounting standard if currently adopted would have a material effect on the accompanying financial statements.

 

(4) Acquisition of XR Energy of Texas, Inc.

 

As described in Note 1 above, XR Energy of Texas, Inc. (“XRT”) was deemed to have acquired XR Energy, Inc. (“XR”) effective June 1, 2014. The identifiable net assets of XR at the June 1, 2014 date of acquisition were;

 

Accrued commissions receivable		$	701
Total Assets		$	701
Accounts payable and accrued expenses		$	10,963
Due to former Chief Executive Officer			15,611
Convertible note payable			25,000
Total Liabilities			51,574
Negative Identifiable Net Assets		$	(50,873	)

 

11

 

XR Energy, Inc. and Subsidiary

Notes to Consolidated Financial Statements

For The Period February 7, 2014 (Inception) To June 30, 2014 (Unaudited)

 

Stockholders’ Deficit;
Common Stock		$	2,282
Additional Paid-in Capital			54,418
Accumulated deficit			(107,573	)
Total		$	(50,873	)

  

As XR has had only nominal business operations, the reverse acquisition has been accounted for as a recapitalization and no goodwill has been recognized. The shareholders of the legal acquirer retained 3,818,800 shares of XR common stock, which has been reflected at the ($50,873) amount of negative identifiable net assets of XR at June 1, 2014.

 

The operating results of XR have been included in the Company’s consolidated financial statements only from the June 1, 2014 date of acquisition. The following pro-forma information summarizes the results of operations for the period February 7, 2014 (inception) to June 30, 2014 as if the acquisition had occurred on February 7, 2014. The pro-forma information is not necessarily indicative of the results that would have been reported had the transaction actually occurred on February 7, 2014, nor is it intended to project results of operations for any future period.

 

Revenues		$	22,516
Net loss		$	(21,426,531	)
Net loss per common share-basic and diluted		$	(.66	)

 

(5) Property and Equipment, Net

 

At June 30, 2014, Property and Equipment, Net consisted of the following;

 

						Accumulated
						Depreciation,
						Depletion and
Oil and gas proved properties:		Gross				Amortization				Net
Lease acquisition costs:
Chrane lease (Taylor County, TX)		$	70,449			$	396			$	70,053
Brown Snyder leases (Jones County, TX) *			39,522				-				39,522
Burnett Tidewater leases (Wichita County, TX) *			13,574				-				13,574
Subtotals			123,545				396				123,149
Asset retirement obligations:
Chrane leases			835				5				830
Brown Snyder lease			797				-				797
Burnett Tidewater leases			2,258				-				2,258
Subtotals			3,890				5				3,885
Totals		$	127,435			$	401			$	127,034

 

The wells associated with the Brown Snyder and Burnett Tidewater leases currently have nominal barrels of oil production. In the opinion of Management, the total recoverable barrels from these wells can be increased by the completion of workovers. Accordingly, management believes it is premature to impair part or all of the net capitalized costs associated with these leases (a total of $40,319 for the Brown Snyder leases and a total of $15,382 for the Burnett Tidewater leases). Completion of the workovers is dependent on the Company’s ability to raise sufficient financing to pay for the work.

 

12

 

XR Energy, Inc. and Subsidiary

Notes to Consolidated Financial Statements

For The Period February 7, 2014 (Inception) To June 30, 2014 (Unaudited)

 

As discussed in Note 1 above, the above leasehold interests were acquired effective May 31, 2014 from Sterling in exchange for approximately 97% of the issued and outstanding common stock of XRT. Sterling acquired the leases from various entities controlled by the Company’s Chief Executive Officer, Akram Chaudhary (“Chaudhary”), for nominal consideration. Accordingly, the lease acquisition costs and asset retirement obligations relating to the leasehold interests acquired from Sterling were recorded at the estimated original cost to Chaudhary’s affiliates in arms length transactions less estimated applicable depletion commencing from the respective original acquisition dates; December 1, 1996 for the Chrane lease, September 1, 1993 for the Brown Snyder leases and June 1, 1993 for the Burnett Tidewater leases.

 

(6) Related Party Transactions

 

Included in Accounts Payable and Accrued Expenses at June 30, 2014 is $12,892 due to Chan West Oil Corporation (“Chan West”), operator of the leasehold interests acquired from Sterling effective May 31, 2014 (see Note 5 above). Chan West is owned and controlled by Chaudhary. For June 2014, Chan West charged XRT a total of $5,250 for overhead recovery fees included in Oil Lease Operating Costs in the Consolidated Statements of Operations.

 

Included in Accounts Payable and Accrued Expenses at June 30, 2014 is $8,925 due to a company which is owned by the former Chief Executive Officer of XR for rent and related costs for office space utilized by XR under a verbal month-to-month agreement. This agreement terminated effective March 31, 2014.

 

(7) Note Payable To Investor Entity

 

Note Payable at June 30, 2014 represents the balance due Common Sense Holdings, LLC (“Common Sense”), an investor entity further described in Note 10, that resulted from a payment made directly to the former Chief Executive Officer of XR at closing of the reverse acquisition for monies owed by XR. The amount due is non-interest bearing and is payable on demand.

 

(8) Convertible Note Payable

 

As of September 13, 2013, a $25,000 Promissory Note and accrued interest in the amount of $808 was due to the former Chief Executive Officer of the pre-reverse acquisition legal acquirer (the “Holder”). On September 13, 2013, the Holder sold this Promissory Note to an investor entity, Beacon Capital, LLC (“Beacon”), for face value. The purchaser and XR agreed to extend the due date for an additional six months through March 12, 2014 (“Maturity Date”) under the same terms and conditions. On November 25, 2013, this note was amended to add a conversion feature whereby the note was convertible in whole or in part, at the sole discretion of the holder, beginning after the Maturity Date into shares of common stock at a conversion price of $.0025 per share. Since the common stock had not yet begun trading, XR did not recognize any beneficial conversion feature debt discount from this November 25, 2013 amendment. On March 4, 2014, XR and Beacon agreed to extend the Maturity Date of the Convertible Promissory Note for an additional six months to September 12, 2014. This note, plus accrued interest of $1,643, was fully converted on June 11, 2014 for 10,100,000 freely tradable shares of common stock (see Note 9).

 

13

 

XR Energy, Inc. and Subsidiary

Notes to Consolidated Financial Statements

For The Period February 7, 2014 (Inception) To June 30, 2014 (Unaudited)

 

(9) Capital Stock

 

On February 10, 2014, XRT issued 3,333 shares of common stock (1,000,000 shares of XR common stock after the June 1, 2014 closing of the Acquisition Agreement dated March 11, 2014 (see Note 1)) to Global Media Network USA, Inc. (“Global Media”) for certain investor relations services in connection with the then contemplated reverse acquisition of XR. The Company recognized a stock-based compensation of $730,000, which is based on the $.73 closing trading price of XR common stock on February 10, 2014, in Other Expenses in the Consolidated Statement of Operations for the period February 7, 2014 (inception) to June 30, 2014 .

 

Also on February 10, 2014, XRT issued 96,667 shares of common stock (29,000,000 shares of XR common stock after the June 1, 2014 closing of the Acquisition Agreement dated March 11, 2014 (see Note 1)) to Sterling in exchange for certain oil leases assigned to XRT effective May 31, 2014 (see Note 5).

 

Effective May 14, 2014, the Company increased its authorized shares of common stock from 100,000,000 to 500,000,000 shares and authorized 50,000,000 shares of preferred stock, with a par value of $.0001.

 

On June 1, 2014, the Company delivered to XRT 30,000,000 newly issued shares in the name of XRT Shareholders in exchange for 100% of the XRT shares. Concurrently, the now Company’s controlling shareholders of the legal acquirer delivered and assigned a total of 19,000,000 shares registered in their names to the Company for cancellation. The transaction was accounted for as a reverse acquisition in which XRT is deemed to be the accounting acquirer. The capital balances have been retroactively adjusted to reflect the reverse acquisition. The shareholders of the legal acquirer retained 3,818,800 shares of XR common stock, which has been reflected at the ($50,873) amount of negative identifiable assets of XR at June 1, 2014 (see Note 4).

 

On June 5, 2014, the Board authorized and issued 10,000,000 shares of Series A Convertible Preferred Stock to Sterling Properties, LLC, the now majority shareholder of the Company and an entity owned by the family of the Company’s Chief Executive Officer. The Series A Preferred Stock has 25 votes for each share, but no less than the majority of voting rights, has a liquidation preference of $0.0001 per share and does not participate in any dividend declared with respect to the common stock. Also, each outstanding share of Series A Preferred Stock is convertible at the option of the holder into one restricted share of the Company’s common stock. As a result, the Company recognized stock based compensation of $10,200,000 based on the fair-market value of the underlying common stock on the date of issuance, which was $1.02 per share, in Other Expenses in the Consolidated Statement of Operations for the period February 7, 2014 (inception) to June 30, 2014.

 

On June 11, 2014 (see Note 8), the Company issued a total of 10,100,000 shares of XR common stock to six Beacon individual and corporate assignees (one of which is Common Sense for 1,600,000 shares) in satisfaction of an XR $25,000 convertible note plus accrued interest of $1,643. The Company recognized stock based compensation of $10,477,357 based on the excess of the fair market value of the underlying common stock on June 11, 2014 ($10,504,000 based on the $1.04 closing trading price of XR common stock on June 11, 2014) over the amount of debt satisfied ($26,643), which has been included in Other Expenses in the Consolidated Statement of Operations for the period February 7, 2014 (inception) to June 30, 2014.

 

14

 

XR Energy, Inc. and Subsidiary

Notes to Consolidated Financial Statements

For The Period February 7, 2014 (Inception) To June 30, 2014 (Unaudited)

 

(10) Subsequent Events

 

On August 8, 2014, XR received $50,000 from Common Sense (see Note 7) and issued a Promissory Note to Blue Oak, LLC (“Blue Oak”) in the amount of $50,000. The Promissory Note provides for interest at a rate of 10% per annum that is payable on the maturity date, which is August 8, 2015. Both Common Sense and Blue Oak are associates of Beacon.

 

On September 11, 2014 XR paid Chan West $40,000 in partial reimbursement of June, July and August 2014 lease operating cost invoices, including amounts due Chan West for overhead recovering fees for those three months.

 

  

15

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

As used in this Form 10-Q, references to “XR Energy,” the “Company,” “we,” “our” or “us” refer to XR Energy Inc. unless the context otherwise indicates.

 

Forward-Looking Statements

 

The following discussion and analysis and results of operations should be read in conjunction with our unaudited financial statements and accompanying notes and the other financial information which are included elsewhere in this Form 10-Q (the “Report”). This Report contains forward-looking statements which relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties, and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.

 

For a description of such risks and uncertainties, refer to our Registration Statement on Form S-1 which was declared effective by the Securities and Exchange Commission on July 19, 2012 (registration statement no. 333-178156). While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein. We assume no obligation to update forward-looking statements, except as otherwise required under the applicable federal securities laws.

 

Business Overview

 

XR Energy, Inc. (“XR” or the “Company”) was incorporated under the laws of the State of Nevadaon August 31, 2009. XR offers energy consulting services to smaller sized middle market companies in the New York Metropolitan Area and earns a commission from the related utility, or Energy Service Company (“ESCO”), for energy supply brokered and sold to its customers.

 

Recent Developments

 

Acquisition of XR Energy of Texas, Inc.

 

Effective June 1, 2014 (pursuant to an Acquisition Agreement dated March 11, 2014), XR acquired 100% of the outstanding capital stock of XR Energy of Texas, Inc (“XRT”) in exchange for XR delivering 30,000,000 of newly issued shares of XR common stock to the former XRT shareholders. After the exchange, the former XRT shareholders owned approximately 88.7% of the issued and outstanding shares of XR common stock. Accordingly, the Company has deemed XRT to be the accounting acquirer for financial reporting purposes. The consolidated financial statements reflect the assets, liabilities and operations of XRT from its inception on February 7, 2014 to June 1, 2014 and XRT and XR thereafter.

 

Effective March 20, 2014, Tara Muratore resigned as a director and Chief Financial Officer of the Company and was replaced by David Taylor. Effective April 4, 2014, Anthony Muratore resigned as a director and Chief Executive Officer of the Company and was replaced by Akram Chaudhary, the Chief Executive Officer of XRT.

 

16

 

Results of Operations

 

For The Period February 7, 2014 (Inception) Through June 30, 2014

 

Revenues

 

Revenues for the period totaled $20,771 of which $20,420 was directly related to sales of crude oil in XRT that began in June and $351 was related to commission income generated in XR in June. 

 

Oil Lease Operating Costs

 

Oil lease operating costs for the period were $12,396, or 60% of crude oil sales generated by XRT, which resulted in a gross margin of $8,024, or 40%.

 

General and Administrative Expenses

 

General and administrative expenses for the period were $15,620 of which $8,074 was incurred by XRT, primarily professional fees of $6,335, and $7,683 was incurred by XR, primarily professional fees of $5,750.

 

Depreciation, Depletion, and Amortization  

 

Depreciation, Depletion, and Amortization for the period were $401.

 

Loss from Operations

 

The loss from operations for the period was $8,289 that resulted primarily from the loss generated by XR of $8,239.

 

Other Income (Expenses)

 

Includesan expense related to the stock based compensation in connection with the reverse acquisition of $21,407,357.  Also included was an amount of $506 for the accretion.

 

For The Three Months Ended June 30, 2014

 

Revenues

 

Revenues for the period totaled $20,771 of which $20,420 was directly related to sales of crude oil in XRT that began in June and $351 was related to commission income generated in XR in June. 

 

17

 

Oil Lease Operating Costs

 

Oil lease operating costs for the period were $12,396, or 60% of crude oil sales generated by XRT, which resulted in a gross margin of $8,024, or 40%.

 

General and Administrative Expenses

 

General and administrative expenses for the period were $15,620 of which $6,937 was incurred by XRT, primarily professional fees of $5,500, and $8,683 was incurred by XR, primarily professional fees of $5,750.

 

Depreciation, Depletion, and Amortization 

 

Depreciation, Depletion, and Amortization for the period were $401.

 

Loss from Operations

 

The loss from operations for the period was $8,152.

 

Other Income (Expenses)

 

Includesan expense related to the stock based compensation in connection with the reverse acquisition of $20,677,357.  Also included was an amount of $506 for the accretion.

 

Liquidity and Capital Resources

 

As of June 30, 2014, the Company had a cash balance of $0.The continuation of the Company as a going concern is dependent upon its ability to identify future investment opportunities, obtain the necessary debt or equity financing and generate earnings from future operations. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

As of September 13, 2013, the Company had borrowed $25,000 related to a Promissory Note payable to the former Chief Executive Officer (the “Holder”). On September 13, 2013, the Holder sold this Promissory Note to an unrelated third party (Beacon Capital, LLC) for face value. The purchaser and the Company agreed to extend the due date for an additional six months through March 12, 2014 (“Maturity Date”) under the same terms and conditions. On November 25, 2013, this note was amended to add a conversion feature whereby the note is convertible in whole or in part, at the sole discretion of the holder, beginning after the Maturity Date into shares of common stock at a conversion price of $.0025 per share. Since the common stock had not yet begun trading, the Company did not recognize any beneficial conversion feature debt discount from this November 25, 2013 amendment. On March 4, 2014, the Company and Beacon Capital, LLC agreed to extend the Maturity Date of the Convertible Promissory Note for an additional six months to September 12, 2014.This note, plus accrued interest of $1,643, was fully converted on June 11, 2014 for 10,100,000 shares of common stock.

 

We currently have no other commitments with any person for any capital expenditures.

 

18

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

Michael T. Studer CPA P.C. is our auditors. There have not been any changes in or disagreements with accountants on accounting and financial disclosure or any other matter.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

As a “smaller reporting company” as defined by Rule 229.10(f)(1), we are not required to provide the information required by this Item 3.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report (the “Evaluation Date”). Based on this evaluation, our principal executive officer and principal financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information relating to us required to be disclosed in our Securities and Exchange Commission (“SEC”) reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Based on our evaluation, management concluded that our internal control over financial reporting was effective as of March 31, 2014.

 

Changes in Control Over Financial Reporting

 

During our most recent fiscal quarter, there has not occurred any change in our internal control over financial reporting (as such term is defined in Rule 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

19

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

There are no pending legal proceedings to which the Company is a party or in which any director, officer or affiliate of the Company, any owner of record or beneficially of more than 5% of any class of voting securities of the Company, or security holder is a party adverse to the Company or has a material interest adverse to the Company. The Company’s property is not the subject of any pending legal proceedings.

 

Item 1A. Risk Factors

 

As a “smaller reporting company” as defined by Rule 229.10(f)(1), we are not required to provide the information required by this Item 1A.

 

Purchases of equity securities by the issuer and affiliated purchasers

 

None.

 

Item 2. Unregistered Sale of Securities and Use of Proceeds

 

None.

 

Item 3. Defaults upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other information

 

N/A

 

20

 

Item 6. Exhibits

 

Exhibit No.		Description		Location
3.1		Articles of Incorporation of XR Energy, Inc		Incorporated by reference to Exhibit 3.1 to Registrant’s SEC Form S-1 filed on November 23, 2011
3.2		By-laws of XR Energy, Inc		Incorporated by reference to Exhibit 3.1 to Registrant’s SEC Form S-1 filed on November 23, 2011
4.1		Promissory Note		Incorporated by reference to Exhibit 4.1 to Registrant’s Amendment No. 1 to SEC Form S-1 filed on May 15, 2012
10.1		Consulting Agreement dated September 22, 2009 between XR Energy Inc. and RJB Consulting Inc		Incorporated by reference to Exhibit 3.1 to Registrant’s SEC Form S-1 filed on November 23, 2011
10.2		Consulting Agreement dated September 22, 2009 between XR Energy Inc. and Stephen Giametta		Incorporated by reference to Exhibit 3.1 to Registrant’s SEC Form S-1 filed on November 23, 2011
10.3		Consulting Agreement dated September 22, 2009 between XR Energy Inc. and AndewVicari		Incorporated by reference to Exhibit 3.1 to Registrant’s SEC Form S-1 filed on November 23, 2011
10.4		Compensation Agreement dated August 2, 2010 between XR Energy Inc. and East Coast Power, LLC		Incorporated by reference to Exhibit 10.5 to Registrant’s Amendment No. 3 to SEC Form S-1 filed on June 29, 2012.
10.5		Representative & Fee Agreement dated May 23, 2012 between Lexington Power & Light LLC. and East Coast Power, LLC		Incorporated by reference to Exhibit 10.5 to Registrant’s Amendment No. 3 to SEC Form S-1 filed on June 29, 2012.
31.1		Rule 13a-14(a)/15d-14(a) Certifications ofAkram Chaudhary, President		Filed herewith.
31.2		Rule 13a-14(a)/15d-14(a) Certifications of David Taylor, Treasurer		Filed herewith.
32.1		Section 1350 Certifications of Akram Chaudhary, President		Filed herewith.
32.2		Section 1350 Certifications of David Taylor, Treasurer		Filed herewith.

 

101.INS	XBRL Instance Document**
101.SCH	XBRL Taxonomy Extension Schema Document**
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document**
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document**
101.LAB	XBRL Taxonomy Extension Label Linkbase Document**
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document**

 

*Filed herewith.

 

**Furnished herewith.

 

21

 

SIGNATURES

 

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

 

 

	XR ENERGY INC.
Dated: September 19, 2014	By:	/s/ Akram Chaudhary
	Name:	Akram Chaudhary
	Title:	President (principal executive officer) and Director

 

 

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