URX Unified Refining Energy Corp

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

(Mark One)

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

 

FOR THE QUARTERLY PERIOD ENDED MAY 31, 2008

 

or

 

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

 

For the transition period from                      to                     

 

Commission File No. 001-33868

 

UNITED REFINING ENERGY CORP.

(Exact name of registrant as specified in its charter)

 

Delaware		42-1732420
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
823 Eleventh Avenue New York, New York		10019
(Address of principal executive office)		(Zip Code)

 

212-956-5803

(Registrant’s telephone number, including area code)

 

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 is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨		Accelerated filer   ¨
Non-accelerated filer   x   (Do not check if a smaller reporting company)		Smaller reporting company   ¨

 

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

 

Number of shares outstanding of Registrant’s Common Stock as of July 14, 2008: 56,250,000

 

 

 

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Table of Contents

FORM 10-Q – CONTENTS

 

				PAGE(S)
PART I.		FINANCIAL INFORMATION		3
Item 1.		Financial Statements		3
		Balance Sheets – May 31, 2008 (unaudited) and August 31, 2007		3
		Statements of Operations – for the quarter and nine months ended May 31, 2008 (unaudited) and June 25, 2007 (inception) to May 31, 2008 (unaudited)		4
		Statements of Stockholders’ Equity – for the nine months ended May 31, 2008 (unaudited) and June 25, 2007 (inception) to May 31, 2008 (unaudited)		5
		Statements of Cash Flows – for the nine months ended May 31, 2008 (unaudited) and June  25, 2007 (inception) to May 31, 2008 (unaudited)		6
		Notes to Financial Statements (unaudited)		7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 3.		Quantitative and Qualitative Disclosures about Market Risk		15
Item 4.		Controls and Procedures		15
PART II.		OTHER INFORMATION		16
Item 1.		Legal Proceedings		16
Item 1A.		Risk Factors		16
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		16
Item 3.		Defaults Upon Senior Securities		16
Item 4.		Submission of Matters to a Vote of Security Holders		16
Item 5.		Other Information		16
Item 6.		Exhibits		16
Signatures				17

 

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PART I. FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS.

 

UNITED REFINING ENERGY CORP.

(A Development Stage Company)

 

BALANCE SHEETS

 

		May 31, 2008 (unaudited)				August 31, 2007
ASSETS
Current Assets:
Cash and cash equivalents		$	20,234			$	22,702
Cash and cash equivalents held in trust			452,057,105				—
Prepaid expenses			94,010				—
Deferred offering costs			—				259,971
Deferred tax asset			228,509				—
Total Assets		$	452,399,858			$	282,673
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accrued expenses		$	41,256			$	—
Accrued offering costs			—				59,738
Note payable – stockholder			—				200,000
Income taxes payable			377,676				—
Deferred underwriters’ fees			15,750,000				—
Total Current Liabilities			16,168,932				259,738
Common stock, subject to possible redemption (17,999,999 shares at redemption value)			180,839,958				—
COMMITMENTS (Note 3)
STOCKHOLDERS’ EQUITY:
Preferred Stock, $.0001 par value 1,000,000 shares authorized, none issued or outstanding			—				—
Common Stock, $.0001 par value, 150,000,000 shares authorized; 38,250,001 and 12,937,500 issued and outstanding, respectively (excluding 17,999,999 shares subject to redemption at May 31, 2008)			3,825				1,294
Additional paid in capital			255,919,289				23,706
Deficit accumulated during the development stage			(532,146	)			(2,065	)
Total Stockholders’ Equity			255,390,968				22,935
Total Liabilities and Stockholders’ Equity		$	452,399,858			$	282,673

 

See accompanying notes to the financial statements.

 

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UNITED REFINING ENERGY CORP.

(A Development Stage Company)

 

STATEMENTS OF OPERATIONS

(unaudited)

 

		Three Months Ended May 31, 2008				Nine Months Ended May 31, 2008				For the period from June 25, 2007 (inception) to May 31, 2008
Revenue		$	—			$	—			$	—
Operating expenses:
Compensation expense to sponsor			—				3,980,000				3,980,000
Formation and operating costs			530,084				670,019				672,084
Loss for the period before interest and income taxes			(530,084	)			(4,650,019	)			(4,652,084	)
Interest income			2,576,260				5,896,105				5,896,105
Income before provision for income taxes			2,046,176				1,246,086				1,244,021
Provision for income taxes			647,367				1,776,167				1,776,167
Net income (loss) for the period			1,398,809				(530,081	)		$	(532,146	)
Accretion of trust account relating to common stock subject to possible redemption			559,524				1,379,968
Net income (loss) attributable to common shareholders		$	839,285			$	(849,887	)
Number of shares outstanding subject to possible redemption
Basic and diluted			17,999,999				17,999,999
Net income (loss) per share subject to possible redemption – basic and diluted		$	.03			$	.08
Weighted average number of shares outstanding
Basic and diluted			38,250,001				27,706,205
Net income (loss) per share – basic and diluted		$	.01			$	(.05	)

 

See accompanying notes to the financial statements.

 

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UNITED REFINING ENERGY CORP.

(A Development Stage Company)

 

STATEMENTS OF STOCKHOLDERS’ EQUITY

For the period from June 25, 2007 (Inception) to May 31, 2008

(unaudited)

 

		Shares			Common Stock				Additional Paid in Capital				(Deficit) Accumulated During the Development Stage				Total
Balance at June 25, 2007 (Inception)		—			$	—			$	—			$	—			$	—
Issuance of common stock to initial stockholder at $0.002 per share		12,937,500				1,294				23,706				—				25,000
Net loss for the period		—				—				—				(2,065	)			(2,065	)
Balance at August 31, 2007		12,937,500				1,294				23,706				(2,065	)			22,935
Issuance of Sponsor Warrants to purchase 2,500,000 shares of common stock		—				—				3,980,000				—				3,980,000
Proceeds from the sale of 15,600,000 warrants to our sponsor		—				—				15,600,000				—				15,600,000
Sale of 45,000,000 units through public offering, net of underwriters discount and offering expenses and excluding $179,459,990 of proceeds allocable to 17,999,999 shares of common stock subject to possible redemption		27,000,001				2,700				237,695,382				—				237,698,082
Forfeiture of 1,687,500 shares of common stock by sponsor due to non-exercise of over-allotment option by underwriters		(1,687,500	)			(169	)			169				—				—
Accretion of trust account relating to common stock subject to possible redemption		—				—				(1,379,968	)			—				(1,379,968	)
Net loss for the period		—				—				—				(530,081	)			530,081
Balance at May 31, 2008		38,250,001			$	3,825			$	255,919,289			$	532,146			$	255,390,968

 

See accompanying notes to the financial statements.

 

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UNITED REFINING ENERGY CORP.

(A Development Stage Company)

 

STATEMENTS OF CASH FLOWS

(unaudited)

 

		Nine Months Ended May 31, 2008				From June 25, 2007 (inception) to May 31, 2008
Cash flows from operating activities:
Net loss		$	(530,081	)		$	(532,146	)
Adjustments to reconcile net loss to net cash used in operating activities:
Compensation expense to sponsor			3,980,000				3,980,000
Interest income			(5,896,105	)			(5,896,105	)
Change in operating assets and liabilities:
Prepaid expenses			(94,010	)			(94,010	)
Income taxes payable			377,676				377,676
Accrued expenses			41,256				41,256
Deferred tax asset			(228,509	)			(228,509	)
Net cash used in operating activities			(2,349,773	)			(2,351,838	)
Cash flows from investing activities:
Purchase of investments held in trust account			(454,583,605	)			(454,583,605	)
Withdrawal from trust account for working capital requirements			2,526,500				2,526,500
Interest earned on cash and cash equivalents held in trust			5,896,105				5,896,105
Net cash used in investing activities			(446,161,000	)			(446,161,000	)
Cash flows from financing activities:
Proceeds from issuance of common stock			—				25,000
Deferred offering costs			200,233				—
Proceeds from issuance of insider warrants			15,600,000				15,600,000
Net proceeds of units through public offering deferred as underwriters’ fees			15,750,000				15,750,000
Net proceeds from sale of units through public offering allocable to stockholders’ equity			237,698,082				237,698,082
Portion of net proceeds from sale of units through public offering allocated to shares of common stock subject to possible redemption			179,459,990				179,459,990
Proceeds from notes payable			100,000				300,000
Payments of notes payable			(300,000	)			(300,000	)
Net cash provided by financing activities:			448,508,305				448,533,072
Net increase (decrease) in cash and cash equivalents			(2,468	)			20,234
Cash and cash equivalents, beginning of period			22,702				—
Cash and cash equivalents, end of period		$	20,234			$	20,234
Cash paid during the period for:
Income taxes		$	1,627,000			$	1,627,000
Supplemental disclosure of non-cash activities:
Compensation expense to sponsor		$	3,980,000			$	3,980,000
Net proceeds of units through public offering deferred as underwriters’ fees		$	15,750,000			$	15,750,000
Accretion of trust account relating to common stock subject to possible redemption		$	1,379,968			$	1,288,564

 

See accompanying notes to the financial statements.

 

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UNITED REFINING ENERGY CORP.

(A Development Stage Company)

 

NOTES TO FINANCIAL STATEMENTS

 

NOTE 1—ORGANIZATION AND BUSINESS OPERATIONS

 

United Refining Energy Corp. (the “Company”) was incorporated in Delaware on June 25, 2007 as a blank check company, BCC™, formed for the purpose of acquiring, through a merger, capital stock exchange, asset acquisition or any other similar business combination, an unidentified operating business or assets. The Company intends to focus on identifying a prospective target business in the energy industry, with a particular focus on businesses or assets involved in the refining of petroleum products (“Business Combination”), but will not be limited to pursuing acquisition opportunities only within that industry.

 

At May 31, 2008, the Company is currently evaluating acquisition candidates. All activity through May 31, 2008 relates to the Company’s formation, the initial public offering, (the “Offering”) described below and its search for a Business Combination. The Company has selected August 31 as its fiscal year end.

 

The Company is considered to be a development stage company and as such the financial statements presented herein are presented in accordance with Statement of Financial Accounting Standard No. 7.

 

The registration statement for the Offering was declared effective on December 11, 2007. The Company consummated the Offering on December 17, 2007 and received net proceeds of $448,700,000, which includes $15,600,000 from the Insider Warrants sold in a private placement (described in Note 4) and $15,750,000 of the underwriters’ deferred discount (See Note 3). The net proceeds from the Offering were placed in a trust account (“Trust Account”) established for the benefit of the Public Stockholders of the Company. The Company’s management intends to apply substantially all of the net proceeds of the Offering toward consummating a Business Combination. The initial target business must have a fair market value equal to at least 80% of the Company’s net assets held in the trust account at the time of such acquisition.

 

The Company’s Amended and Restated Certificate of Incorporation provides that the Company’s corporate existence will cease in the event it does not consummate a Business Combination by December 11, 2009 or June 11, 2010 in the event the holders of the common stock sold as part of the Units in the Offering (“Public Stockholders”) approve a proposal to extend the period of time to consummate a Business Combination by an additional six (6) months (the “Extended Period”). If the Company does not effect a Business Combination by December 11, 2009 or June 11, 2010, as the case may be, the Company will promptly distribute the amount held in trust (the “Trust Account”), which is substantially all of the proceeds from the Offering, including any accrued interest, to its Public Stockholders.

 

On September 6, 2007, the Company’s Board of Directors approved a .625-for-one reverse stock split. All share and per share data in these financial statements have been adjusted to give effect to the reverse split.

 

On November 30, 2007, the Company’s Board of Directors approved a 2.3-for-one stock dividend. All share and per share data in these financial statements have been adjusted to give effect to the stock dividend.

 

On November 30, 2007, the Company granted to United Refining, Inc. (the “Sponsor”) 2,500,000 warrants to purchase up to 2,500,000 shares of common stock (“Sponsor Warrants”). The Sponsor Warrants are identical to the warrants sold in the Offering, except that: (i) the Sponsor Warrants are exercisable at $12.50 per share, (ii) the Sponsor Warrants will be non-redeemable so long as they are held by the Sponsor or its permitted assigns and (iii) the Sponsor Warrants expire on December 11, 2012. The Company performed a Black-Scholes calculation to determine the value of the warrants, using an expected life of 5 years, volatility of 26.67% and a risk free interest rate of 3.38%. The grant of the Sponsor Warrants is recorded as compensation expense in accordance with Financial Accounting Board Opinion No. 123(R) (Statement 123) and is included in the amount of $3,980,000 in the Company’s Statements of Operations.

 

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UNITED REFINING ENERGY CORP.

(A Development Stage Company)

 

NOTES TO FINANCIAL STATEMENTS—(Continued)

 

On December 11, 2007, the Sponsor forfeited 1,437,500 shares of common stock. All shares and per share data in these financial statements have been adjusted to give effect to the forfeiture.

 

On January 15, 2008, the Underwriters informed the Company that they would exercise no part of the Over-allotment Option. As a result, the Sponsor forfeited 1,687,500 shares of common stock to maintain ownership of 20.0% of the Company’s outstanding shares of common stock.

 

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Interim Financial Statements

 

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting primarily of only normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended May 31, 2008 are not necessarily indicative of the results that may be expected for the year ending August 31, 2008. For further information, refer to the Company’s audited financial statements and footnotes thereto for the period from inception (June 25, 2007) to August 31, 2007 included in the Company’s Registration Statement on Form S-1, as amended. See also the Company’s Current Report on Form 8-K, filed on December 18, 2007 for the audited financial statements and notes thereto for the period from inception (June 25, 2007) through December 17, 2007.

 

Basis of Presentation

 

The financial statements include the accounts of the Company. The Company is currently evaluating acquisition candidates. All activity through May 31, 2008 is related to the Company’s formation, the Offering and its search for a Business Combination. The Company has selected August 31 as its fiscal year end.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingencies at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual amounts could differ from those estimates.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.

 

Cash and Cash Equivalents Held in Trust

 

The Company’s restrictive investment held in the trust account at May 31, 2008 is invested in U.S. Government Institutional money market securities. The Company recognized interest income of $2,576,260 on investments held in trust for the three months ended May 31, 2008; $5,896,105 for the nine months ended May 31, 2008 and for the period from inception (June, 25, 2007) to May 31, 2008, which is included in the accompanying Statements of Operations.

 

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UNITED REFINING ENERGY CORP.

(A Development Stage Company)

 

NOTES TO FINANCIAL STATEMENTS—(Continued)

 

Deferred Offering Costs

 

Deferred Offering costs as of August 31, 2007 consisted principally of legal, accounting and underwriting fees that are related to the Offering and were charged to capital upon completion of the Offering.

 

Deferred Underwriters Fees

 

Pursuant to the Underwriting Agreement, the Company is obligated to the underwriters for up to $15,750,000 of deferred fees and expenses related to the Offering, which is payable to the underwriters upon the consummation of a Business Combination.

 

Notes Payable

 

The Company’s sponsor United Refining, Inc. provided two no-interest loans to the Company in the aggregate amount of $300,000 which was repaid at the consummation of the Offering from the proceeds of the offering. The proceeds of this loan were used to cover pre-offering expenses.

 

Common Stock, Subject to Possible Conversion

 

With respect to the Extended Period (which proposal is approved) or the Business Combination which is approved and consummated, any Public Stockholder who voted against the Extended Period (which proposal is approved) or the Business Combination, as the case may be, may demand that the Company redeem his or her shares. The initial per share redemption price will equal $9.97 per share (plus a portion of the interest earned on the Trust Account) but net of: (i) taxes payable on interest earned on the Trust Account and State of Delaware franchise taxes and (ii) up to $3,700,000 of interest income released to the Company to fund working capital. Accordingly, Public Stockholders holding up to one share less than 40.0% of the aggregate number of shares owned by all Public Stockholders may seek redemption of their shares in the event of a Business Combination. Such Public Stockholders are entitled to receive their per share interest in the Trust Account computed without regard to the shares held by the Initial Stockholder. As a result of this redemption right, $179,459,990 plus accretion of $1,288,564 has been classified as Common Stock, Subject to Possible Redemption on the accompanying balance sheet as of May 31, 2008.

 

Concentration of Credit Risk

 

Financial instruments that potentially subject the Company to credit risk consist of cash and cash equivalents and the cash and cash equivalents held in trust. The Company’s policy is to limit the amount of credit exposure to any one financial institution and place investments with financial institutions evaluated as being creditworthy, or in short-term money market funds which are exposed to minimal interest rate and credit risk.

 

Income Taxes

 

The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and the tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse.

 

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UNITED REFINING ENERGY CORP.

(A Development Stage Company)

 

NOTES TO FINANCIAL STATEMENTS—(Continued)

 

Income/Loss Per Common Share

 

Basic income/loss per share excludes dilution and is computed by dividing the income/loss available to common stockholders by the weighted average common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or redeemed for common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. At May 31, 2008, there were no such potentially dilutive securities. Therefore, basic and diluted income/loss per share were the same for the three and nine month periods ended May 31, 2008 for the shares subject to conversion.

 

Fair Value of Financial Instruments

 

The fair values of the Company’s assets and liabilities that qualify as financial instruments under SFAS No. 107 “Disclosures about Fair Value of Financial Instruments,” approximate their carrying amounts presented in the balance sheet at May 31, 2008 and August 31, 2007.

 

The Company accounts for derivative instruments, if any, in accordance with SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities.” as amended, (“SFAS 133”) which establishes accounting and reporting standards for derivative instruments.

 

Recently Issued Accounting Standards

 

In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS 141 (revised 2007), Business Combinations, (“SFAS 141(R)”). SFAS 141(R) retains the fundamental requirements of the original pronouncement requiring that the purchase method be used for all business combinations, but also provides revised guidance for recognizing and measuring identifiable assets and goodwill acquired and liabilities assumed arising from contingencies, the capitalization of in-process research and development at fair value, and the expensing of acquisition-related costs as incurred. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008. In the event that the Company completes acquisitions subsequent to its adoption of SFAS 141 (R), the application of its provisions will likely have a material impact on the Company’s results of operations, although the Company is not currently able to estimate that impact.

 

In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51. SFAS 160 requires that ownership interests in subsidiaries held by parties other than the parent, and the amount of consolidated net income, be clearly identified, labeled and presented in the consolidated financial statements. It also requires once a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value. Sufficient disclosures are required to clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. It is effective for fiscal years beginning after December 15, 2008, and requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements are applied prospectively. The Company does not expect the adoption of SFAS 160 to have a material impact on its financial condition or results of operations.

 

The Company does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying financial statements.

 

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UNITED REFINING ENERGY CORP.

(A Development Stage Company)

 

NOTES TO FINANCIAL STATEMENTS—(Continued)

 

NOTE 3—COMMITMENTS

 

Administrative Services Agreement

 

The Company utilizes certain administrative, technological and secretarial services, as well as certain limited office space provided by United Refining, Inc., its Sponsor. The Sponsor has agreed that, until the acquisition of a target business by the Company, it will make such services available to the Company, as may be required by the Company from time to time. The Company has agreed to pay United Refining, Inc. $7,500 per month for such services commencing December 11, 2007 and terminating upon the earlier of the date the Company consummates a Business Combination or dissolves and liquidates in accordance with its amended and restated certificate of incorporation. The Company has paid the Sponsor $42,678 through May 31, 2008 for these costs.

 

Underwriting Agreement

 

In connection with the Offering, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Deutsche Bank Securities Inc. and Maxim Group LLC, the representatives of the underwriters in the Offering (the “Underwriters”).

 

Pursuant to the Underwriting Agreement, the Company is obligated to the Underwriters for certain fees and expenses related to the Offering, including underwriting discounts and commissions of $31,500,000, of which $15,750,000 has been paid at the closing of the Offering and $15,750,000 has been deferred upon the consummation of a Business Combination. The deferred discount can be reduced up to $6,299,999 if up to one share less then 40% of the aggregate number of shares owned by all Public Stockholders seek redemption.

 

NOTE 4—COMMON AND PREFERRED STOCK, SPONSOR WARRANTS AND INSIDER WARRANTS

 

On December 17, 2007, the Company consummated the offering of 45,000,000 units (“Units”) of its securities, each Unit consisting of one share of common stock, par value $0.0001 per share, and one warrant (“Warrant”) to purchase one share of Common Stock, pursuant to the registration statement on Form S-1, as amended. The Units were sold at a public offering price of $10.00 per Unit, generating gross proceeds of $450,000,000.

 

a)	Common and Preferred Stock

 

The Company was incorporated in Delaware on June 25, 2007 and has the authority to issue 150,000,000 shares of common stock having a par value of $.0001 per share and 1,000,000 shares of preferred stock having a par value of $.0001 per share. Concurrent with its incorporation, the Company entered into a securities subscription agreement with its Sponsor, whereby the Sponsor purchased 12,937,500 shares of common stock of the Company for $25,000 in cash.

 

As of May 31, 2008, there are 30,650,000 authorized but unissued shares of our common stock available for issuance (after appropriate reservation for the issuance of shares upon full exercise of our outstanding warrants) and all of the 1,000,000 shares of preferred stock available for issuance.

 

b)	Sponsor Warrants

 

On November 30, 2007, the Company issued 2,500,000 Sponsor Warrants to its Sponsor, exercisable at an initial purchase price of $12.50 per share effective on December 11, 2007 and expiring on December 11, 2012. These warrants and the shares purchasable hereunder constitute “restricted securities” under federal securities

 

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UNITED REFINING ENERGY CORP.

(A Development Stage Company)

 

NOTES TO FINANCIAL STATEMENTS—(Continued)

 

laws and applicable regulations and may not be resold or transferred without registration under the Securities Act of 1933. The grant of the warrants to our Sponsor is recorded as compensation expense in accordance with Statement of Financial Accounting Standard No. 123(R) and was valued using the Black-Scholes model, Accordingly, $3,980,000 is recorded as compensation expense in the Company’s Statements of Operations.

 

c)	Insider Warrants

 

On December 10, 2007, our Sponsor purchased 15,600,000 common stock warrants (“Insider Warrants”) from the Company at a price of $1.00 per warrant in a private placement pursuant to Regulation D of the Securities Act of 1933, as amended. Proceeds from the sale of the Insider Warrants of $15,600,000 were placed in the Trust Account. The Insider Warrants are identical to those sold in the Offering except that none of the Insider Warrants are transferable or salable until after the Company completes a Business Combination, are not subject to redemption if held by our Sponsor or its permitted assigns and may be exercised on a “cashless” basis at any time after they become exercisable if held by our Sponsor or its permitted assigns. The holder of Insider Warrants does not have any right to any liquidation distributions with respect to the shares underlying such Insider Warrants in the event we fail to consummate a Business Combination, in which event the Insider Warrants will expire worthless.

 

As of May 31, 2008, there are 63,100,000 warrants outstanding. Each warrant, excluding the Sponsor Warrants, will be exercisable for one share of common stock at an exercise price of $7.00 per share, while the Sponsor Warrant will be exercisable for one share of common stock at the price of $12.50 per share. None of the warrants may be exercised until after consummation of our Business Combination and the funding in the trust account disbursed. The warrant exercise price will be paid directly to the Company and not placed in the trust account.

 

NOTE 5—INCOME TAXES

 

Provision for income taxes for the three month period ended May 31, 2008 consists of current federal tax of $647,367. The nine month period ended May 31, 2008 as well as the period from June 25, 2007 (inception) to May 31, 2008 consists of current federal tax of $1,776,167. The provisions for the three and nine months are net of a deferred benefit of $228,509.

 

The Company’s effective tax rate does not approximate the federal statutory rate, due to compensation costs which are not deductible for tax purposes. No provision for state and local income taxes has been made since the Company was formed as a vehicle to effect a Business Combination and, as a result does not conduct operations and is not engaged in a trade or business in any state. The Company is incorporated in Delaware and accordingly is subject to franchise taxes. Delaware franchise tax expense of $14,000 for the three and nine month periods ended May 31, 2008 ($14,000 for the period from June 25, 2007 to May 31, 2008), are included as part of formation and operating costs in the accompanying statements of operations.

 

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about us that may cause our 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 such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “continue,” or the negative of such terms or other similar expressions. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those described under “Risk Factors” in our registration statement of Form S-1 declared effective on December 11, 2007. The following discussion should be read in conjunction with our Financial Statements and related Notes thereto included elsewhere in this report.

 

Overview

 

The Company was formed on June 25, 2007, for the purpose of acquiring, merging with, engaging in a capital stock exchange with, purchasing all or substantially all of the assets of or engaging in any other similar business combination of an unidentified operating business. The Company intends to focus on identifying a prospective target business in the energy industry throughout the world, with a particular focus on businesses or assets involved in the refining of petroleum and specialized products (such as petrochemicals) and services to the energy industry, but our efforts will not be limited to the energy industry.

 

For the three months ended May 31, 2008, the Company had a net income of $1,398,809, attributable to interest income from trust fund investments. For the nine months ended May 31, 2008, the Company had a net loss of $530,081, attributable to compensation, formation and operating costs expenses offset by interest income from trust fund investments.

 

For the period from June 25, 2007 (inception) through May 31, 2008, the Company had a net loss of $532,146, attributable to compensation, formation and operating costs expenses offset by interest income from trust fund investments.

 

In the Offering, which was declared effective December 11, 2007, the Company sold to the public 45,000,000 units (the “Units”) at a price of $10.00 per Unit. Net proceeds from the Offering totaled approximately $448,700,000, which includes $15,600,000 from the sale of the Insider Warrants and was net of $16,900,000 in underwriting fees and other expenses paid at closing. Each Unit consists of one share of the Company’s common stock and one warrant to purchase one share of common stock. On December 10, 2007, the Company sold to its Sponsor, 15,600,000 Insider Warrants for an aggregate purchase of $15,600,000. See discussion in Note 4. The sale of the Insider Warrants to the Sponsor will not result in the recognition of any stock-based compensation expense because they are being sold at or above fair market value.

 

Each Unit consists of one share of the Company’s common stock, $0.0001 par value, and one Callable Common Stock Purchase Warrant (“Warrant”). Each Warrant will entitle the holder to purchase from the Company one share of common stock at an exercise price of $7.00 commencing the later of the consummation of a Business Combination or one year from the effective date of the registration statement related to the Offering and expiring on the fourth anniversary thereof. The Warrants will be callable at a price of $.01 per Warrant upon 30 days’ notice after the Warrants become exercisable, only in the event that the last sale price of the common stock is at least $14.25 per share for any 20 trading days within a 30 trading day period ending on the third day prior to the date on which notice of the call is given. The Company may not call the Warrants unless the Warrants and the shares of common stock underlying the Warrants are covered by an effective registration statement from the beginning of the measurement period through the date fixed for the call.

 

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The Company sold the Units issued in the Offering to the underwriters at a price per unit equal to $9.30 (discount and compensation of $0.70 per share), resulting in an aggregate underwriting fee to the underwriters of $31,500,000.

 

There are 30,650,000 authorized but unissued shares of our common stock available for issuance (after appropriate reservation for the issuance of shares upon full exercise of the outstanding warrants) and all of the 1,000,000 shares of preferred stock available for issuance. On January 15, 2008, the Underwriters informed the Company that they will exercise no part of the Over-allotment option granted to the Underwriters at the Offering. The Sponsor has forfeited 1,687,500 shares as the Over-allotment Option was not exercised in order for the Sponsor to maintain ownership of 20.0% of the Company’s outstanding common stock.

 

The Company utilizes certain administrative, technology and secretarial services, as well as certain limited office space provided by United Refining, Inc. United Refining Inc. has agreed that, until the acquisition of a target business by the Company, it will make such services available to the Company, as may be required by the Company from time to time. The Company has agreed to pay United Refining, Inc. $7,500 per month for such services commencing on the effective date of the Offering.

 

In connection with the Offering, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Deutsche Bank Securities Inc. and Maxim Group LLC, as joint representatives of the underwriters in the Offering (the “Underwriters”).

 

Pursuant to the Underwriting Agreement, the Company is obligated to the Underwriters for certain fees and expenses related to the Offering, including underwriting discounts and commission of $31,500,000, of which $15,750,000 was paid at the closing and $15,750,000 has been deferred upon the consummation of a business combination. The deferred discount can be reduced up to $6,299,999 if up to one share less than 40% of the aggregate number of shares owned by all Public Stockholders seek redemption.

 

Liquidity and Capital Resources

 

On December 11, 2007, we completed our initial purchase offering (“Offering”) of 45,000,000 Units. Each Unit consists of one share of our common stock, par value $0.001 per share, (the “Common Stock”) and one warrant entitling the holder to purchase one share of our Common Stock at a price of $10.00. As of May 31, 2008, we had cash of $20,234. Until the consummation of our Offering, our only source of liquidity was $300,000 of loans made to us by our founding stockholder. This loan was repaid on December 17, 2007 from the proceeds of our Offering.

 

The registration statement for the Company’s Offering was declared effective on December 11, 2007. The Company consummated the Offering on December 17, 2007 and received net proceeds of $448,700,000, which includes $15,600,000 from the Insider Warrants sold in a private placement and includes $15,750,000 of underwriters deferred discount. The Company’s management intends to apply substantially all of the net proceeds of the Offering toward consummating a Business Combination. The initial target business must have a fair market value equal to at least 80% of the Company’s net assets held in the trust account at the time of such acquisition. However, there is no assurance that the Company will be able to successfully affect a Business Combination.

 

The Company’s amended and restated certificate of Incorporation provides that the Company’s corporate existence will cease in the event it does not consummate a Business Combination by December 11, 2009 or June 11, 2010 in the event the holders of the common stock sold as part of the Units in the Offering (“Public Stockholders”) approve a proposal to extend the period of time to consummate a Business Combination by an additional six (6) months. If the Company does not effect a Business Combination by December 11, 2009 or June 11, 2010, as the case may be, the Company will promptly distribute the amount held in trust, which is substantially all of the proceeds from the Offering, including any accrued interest, to its Public Stockholders.

 

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Off-Balance Sheet Financing Arrangements

 

We have no obligations, assets or liabilities which would be considered off-balance sheet arrangements. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet financing.

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Market risk is the sensitivity of income to changes in interest rates, foreign exchanges, commodity prices, equity prices, and other market-driven rates or prices. We are not presently engaged in and, if a suitable business target is not identified by us prior to the prescribed liquidation date of the trust fund, we may not engage in, any substantive commercial business. Accordingly, we are not and, until such time as we consummate a business combination, we will not be, exposed to risks associated with foreign exchange rates, commodity prices, equity prices or other market-driven rates or prices. The net proceeds of our initial public offering held in the trust fund have been invested only in money market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act of 1940. Given our limited risk in our exposure to money market funds, we do not view the interest rate risk to be significant.

 

ITEM 4.

CONTROLS AND PROCEDURES.

 

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of May 31, 2008. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of May 31, 2008, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

 

No change in the our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended May 31, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II.

OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS.

 

None

 

ITEM 1A.

RISK FACTORS.

 

There has been no material changes in our Risk Factors disclosed in our registration statement on Form S-1 declared effective on December 11, 2007.

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

Not applicable.

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.

 

None

 

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

 

Not applicable.

 

ITEM 5.

OTHER INFORMATION.

 

Not applicable.

 

ITEM 6.

EXHIBITS.

 

Exhibit 31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted to Section 906 of the Sarbanes-Oxley Act of 2002

 

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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.

 

Date: July 14, 2008

 

 

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