10-Q 1 form10q.htm US NATURAL GAS CORP FORM 10-Q form10q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
(Mark One)

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2011
 
¨ TRANSITION REPORT UNDER SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________

COMMISSION FILE NUMBER: 333-154799

US NATURAL GAS CORP
 (Name of registrant in its charter)

Florida
 
26-2317506
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
1717 Dr. Martin Luther King Jr. St. N, St. Petersburg, FL 33704
 (Address of principal executive offices) (Zip Code)

Issuer’s telephone Number: (727) 824-2800

 
Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x No  o
 
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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o No  x
 
The number of shares of registrant’s common stock outstanding as of November 11, 2011 was 365,633,608. 
 
 
 
 
 
1

 

 
 
US NATURAL GAS CORP
INDEX
 

PART I: FINANCIAL INFORMATION    
 
ITEM 1:
FINANCIAL STATEMENTS
 
 
Report of Independent Registered Certified Public Accounting Firm
F-2
 
Consolidated Balance Sheets as of  September 30, 2011 (unaudited) and December 31, 2010
F-3
 
Consolidated Statements of Operations for the nine months ended September 30, 2011 and 2010, and from Inception (March 28, 2008) through September 30, 2011 (unaudited)
F-4
 
Consolidated Statement of Operations for the three months ended September 30, 2011 and 2010 (unaudited)
F-5
 
Consolidated Statement of Stockholders' Equity from Inception (March 28, 2008) through September 30, 2011 (unaudited)
F-6 - F-8
 
Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010, and from Inception (March 28, 2008) though September 30, 2011 (unaudited)
F-9 - F-10
 
Notes to the Consolidated Financial Statements
F-11 - F-33
     
     
ITEM 2:
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
3
ITEM 3 :
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
13
ITEM 4:
CONTROLS AND PROCEDURES
13
PART II: OTHER INFORMATION    
 
ITEM 1
LEGAL PROCEEDINGS
14
ITEM 1A :
RISK FACTORS
14
ITEM 2
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
14
ITEM 3
DEFAULTS UPON SENIOR SECURITIES
14
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
14
ITEM 5
OTHER INFORMATION
15
ITEM 6:
EXHIBITS
16
SIGNATURES
19
 
 
 
2

 
 
PART I - FINANCIAL INFORMATION

INDEX TO FINANCIAL STATEMENTS
 

 
Financial Statements
 
Page
     
Report of Independent Registered Certified Public Accounting Firm
 
F-2
     
Consolidated Balance Sheets as of  September 30, 2011 (unaudited) and December 31, 2010
 
F-3
     
Consolidated Statements of Operations for the nine months ended September 30, 2011 and 2010, and from Inception (March 28, 2008) through September 30, 2011 (unaudited)
 
F-4
     
Consolidated Statements of Operations for the three months ended September 30, 2011 and 2010 (unaudited)
 
F-5
     
Consolidated Statement of Stockholders' Equity from Inception (March 28, 2008) through September 30, 2011 (unaudited)
 
F-6 - F-8
        
   
Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010, and from Inception (March 28, 2008) though September 30, 2011 (unaudited)
 
F-9 - F-10
     
Notes to the Consolidated Financial Statements
 
F-11 - F-33
     
 
 

 
F-1

 
 
 

REPORT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM

  
To the Stockholders and Board of Directors
US NATURAL GAS CORP (Effective March 22, 2010)
St Petersburg, Florida
 
In accordance with the terms and objectives of our engagement, we have reviewed the accompanying consolidated balance sheet of US NATURAL GAS CORP (Formally Adventure Energy, Inc.)  (A Development Stage Enterprise) as of September 30, 2011, and the related consolidated statements of operations for the nine months and three months ended September 30, 2011 and 2010, and the related consolidated statement of cash flows for the nine months ended September 30, 2011 and 2010, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows from inception (March 28, 2008) through September 30, 2011.  These consolidated financial statements are the responsibility of US NATURAL GAS CORP’s management.
 
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States).  A review of interim consolidated financial information consists principally of applying analytical procedures and making inquires of persons responsible for financial and accounting matters.  A review (as defined by the Public Company Accounting Oversight Board (United States)) is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the consolidated financial statements taken as a whole.  Accordingly, we do not express such an opinion.
 
Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements as of September 30, 2011, and for the nine months and three months ended September 30, 2011 and 2010 and from inception (March 28, 2008) through September 30, 2011 in order for them to be in conformity with accounting principles generally accepted in the United States of America.
 
We audited the accompanying consolidated balance sheet as of December 31, 2010, and we expressed an unqualified opinion on it in our report dated April 7, 2011.  We have not performed any auditing procedures since that date.

The accompanying consolidated financial statements assume that US NATURAL GAS CORP will continue as a going concern.  As discussed in the notes to the consolidated financial statements and elsewhere in this Form 10-Q, US NATURAL GAS CORP has incurred significant operating losses for the nine months and three months ended September 30, 2011 and 2010, and from inception  (March 28, 2008) through September 30, 2011.  In addition, although US NATURAL GAS CORP has commenced planned principal business operations there are insignificant revenues from oil and natural gas production and its current liabilities substantially exceed its current assets.

These factors, among others, raise substantial doubt about US NATURAL GAS CORP’s ability to continue as a going concern.  US NATURAL GAS CORP management’s plans regarding these matters are disclosed  in the notes to the consolidated financial statements and elsewhere in this Form 10-Q.  In accordance with accounting principles generally accepted in the United States of America, these consolidated financial statements do not, at this time, include any adjustments that might result from the resolution of this significant uncertainty.
 

 
/s/ Louis Gutberlet, CPA 
on behalf of LGG & Associates, PC
LGG & Associates, PC
Certified Public Accountants
 and Management Consultants
 

 
Monday, November 14, 2011
Lawrenceville, Georgia
 
 
 
 
F-2

 
 

US NATURAL GAS CORP
(Formerly Adventure Energy, Inc.)
(A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS
    
   
September 30, 2011
   
December 31, 2010
 
 ASSETS
           
CURRENT ASSETS
           
      Cash and cash equivalents
 
$
11,474
   
$
1
 
      Accounts receivable:
               
             Joint interest billing
   
262,947
     
227,036
 
             Other
   
69,451
     
17,432
 
      Marketable equity securities
   
2,265
     
6,793
 
      Prepaid expenses
   
13,850
     
33,008
 
      Notes receivable, current
   
15,500
     
115,474
 
      Notes receivable, stockholder
   
142,158
     
110,597
 
                 
      Total current assets
   
517,645
     
510,341
 
                 
PROPERTY AND EQUIPMENT
               
      Oil and gas properties and equipment, net
   
4,745,990
     
4,557,661
 
                 
OTHER ASSETS
               
      Notes receivable, net of current portion
   
556,542
     
557,726
 
      Debenture escrow
   
-
     
99,190
 
      Miscellaneous
   
93,001
     
150,910
 
                 
 TOTAL ASSETS
 
$
5,913,178
   
$
5,875,828
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
CURRENT LIABILITIES
               
       Accounts payable and accrued expenses
 
$
994,691
   
$
1,030,505
 
       Accounts payable, revenue distribution
   
823
     
7,924
 
       Notes payable, current
   
962,267
     
1,224,870
 
       Loans payable, other
   
2,441
     
5,986
 
       Convertible debentures payable
   
236,500
     
280,000
 
                 
       Total current liabilities
   
2,196,722
     
2,549,285
 
                 
LONG-TERM LIABILITIES
               
        Notes payable, net of current portion
   
550,000
     
550,000
 
                 
STOCKHOLDERS' EQUITY
               
       Preferred stock:
               
Series A
   
1,000
     
1,000
 
Series B
   
300
     
300
 
Series C
   
829
     
-
 
       Common stock                                                                                  
   
360,919
     
 148,947
 
Additional paid in capital
   
5,980,761
     
5,356,187
 
Deficit accumulated during the development stage
   
(3,171,543
)
   
(2,729,891
)
       Treasury stock, at cost
   
(5,810
)
   
  -
 
                 
     Total stockholders' equity
   
  3,166,456
     
  2,776,543
 
                 
 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
 
$
  5,913,178
   
$
5,875,828
 

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


 
F-3

 
 
US NATURAL GAS CORP
(Formerly Adventure Energy, Inc.)
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended September 30, 2011 and 2010 and from Inception (March 28, 2008) through September 30, 2011
     
               
Inception
 
               
through
 
   
2011
   
2010
   
September 30, 2011
 
Revenue earned
                 
     Oil and gas production sales
 
$
28,532
   
$
25,291
   
$
78,623
 
     Net gain on sale of oil and gas properties and equipment
   
35,856
     
155,598
     
524,637
 
     Well management Fees
   
20,859
     
14,070
     
51,226
 
     Other
   
33,582
     
6,070
     
53,372
 
                         
               Total revenue earned
   
118,829
     
201,029
     
707,858
 
                         
Cost of oil and gas operations
   
54,499
     
121,174
     
245,646
 
                         
Gross profit (loss)
   
64,330
     
79,855
     
462,212
 
                         
Operating Expenses
                       
     Selling, general and administrative
   
549,284
     
485,548
     
1,551,498
 
     Stock issued for legal services
   
-
     
170,547
     
699,031
 
     Stock issued for consulting and other services
   
137,632
     
94,000
     
1,722,883
 
     Depreciation, depletion and amortization
   
189,163
     
79,527
   
$
355,081
 
                         
Total operating expenses
   
876,079
     
829,622
     
4,328,493
 
                         
Loss from operations
   
(811,749
)
   
(749,767
)
   
(3,866,281
)
                         
Other Income (expenses)
                       
      Net gain from sale of marketable equity securities and investments
   
235,218
     
295,212
     
463,218
 
      Forgiveness of debt
   
352
     
-
     
376,220
 
      Interest income
   
30,608
     
50
     
45,013
 
Refund of payroll taxes
   
124,285
     
-
     
124,285
 
Interest expense
   
(20,366
)
   
(19,120
)
   
(313,998
)
                         
Loss before provision for income taxes
   
(441,652
)
   
(473,625
)
   
(3,171,543
)
                         
Provision for income taxes
   
-
     
-
     
-
 
                         
     Net loss
 
$
(441,652
)
 
$
(473,625
)
 
$
(3,171,543
)
                         
Basic loss per common share
 
$
(0.00
)
 
$
(0.01
)
       
Diluted loss per common share
 
$
(0.00
)
 
$
(0.01
)
       
                         
                         
Weighted average common shares outstanding - basic
   
232,453,098
     
53,505,552
         
Weighted average common shares outstanding - diluted (see Note A)
   
-
     
-
         

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

 
F-4

 
US NATURAL GAS CORP
(Formerly Adventure Energy, Inc.)
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 30, 2011 and 2010
 
             
             
   
2011
   
2010
 
Revenue earned
           
     Oil and gas production sales
 
$
8,976
   
$
14,756
 
     Net gain on sale of oil and gas properties and equipment
   
35,856
     
101,088
 
     Well management Fees
   
-
     
14,070
 
     Other
   
13,609
     
6,070
 
                 
               Total revenue earned
   
58,441
     
135,984
 
                 
Cost of oil and gas operations
   
14,904
     
(556
)
                 
Gross profit (loss)
   
43,537
     
136,540
 
                 
Operating Expenses
               
     Selling, general and administrative
   
210,669
     
185,554
 
     Stock issued for legal services
   
-
     
84,867
 
     Stock issued for consulting and other services
   
96,000
     
-
 
     Depreciation, depletion and amortization
   
67,057
     
35,221
 
                 
Total operating expenses
   
373,726
     
305,642
 
                 
Loss from operations
   
(330,189
)
   
(169,102
)
                 
Other Income (expenses)
               
      Net gain from sale of marketable equity securities and investments
   
439
     
45,322
 
      Forgiveness of debt
   
-
     
-
 
      Interest income
   
20,842
     
35
 
Refund of payroll taxes
   
124,285
     
-
 
Interest expense
   
7,300
     
(3,120
)
                 
Loss before provision for income taxes
   
(177,323
)
   
(126,865
)
                 
Provision for income taxes
   
-
     
-
 
                 
     Net loss
 
$
(177,323
)
 
$
(126,865
)
                 
Basic loss per common share
 
$
(0.00
)
 
$
(0.00
)
Diluted loss per common share
 
$
(0.00
)
 
$
(0.00
)
                 
                 
Weighted average common shares outstanding - basic
   
297,986,687
     
92,109,421
 
Weighted average common shares outstanding - diluted (see Note A)
   
-
     
-
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
F-5

 
 
US NATURAL GAS CORP
 (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
From Inception (March 28, 2008) through September 30, 2011    
 
                           
Additional
   
Deficit Accumulated
             
   
Preferred stock
   
Common Stock
   
Paid in
   
During
   
Treasury stock
       
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Development
   
Shares
   
Amount
   
Total
 
                                                       
Issuance of common stock for cash on March 28, 2008 at $.001 per share
        $ -       10,000,000     $ 10,000     $ -     $ -           $ -     $ 10,000  
                                                                     
Issuance of common stock for consulting and other services at $.25 to $.35 per share
                  854,236       854       290,445                             291,299  
                                                                     
Issuance of common stock for legal services valued at $.35 per share
                  1,250,000       1,250       436,250                             437,500  
                                                                     
Issuance of common stock and warrants for cash at $.25 to $.35 per share
                  135,715       136       43,364                             43,500  
                                                                     
Net loss for the period March 28, 2008 to December  31, 2008
                                          (749,550 )                   (749,550 )
                                                                     
Balance at December 31, 2008, Restated-Note S
    -       -       12,239,951       12,240       770,059       (749,550 )     -       -       32,749  
                                                                         
Issuance of Series A and B shares at par value
    1,300,000       1,300                       299,700                               301,000  
                                                                         
Issuance of common stock for consulting and other services at $.07 thru $.66 per share
                    9,565,959       9,566       1,428,209                               1,437,775  
                                                                         
Issuance of common stock for legal services at $.11 and $.35 per share
                    380,000       380       125,471                               125,851  
                                                                         
Net loss for the year ended December 31, 2009
                                            (1,638,715 )                     (1,638,715 )
                                                                         
Balances at December 31, 2009
    1,300,000       1,300       22,185,910       22,186       2,623,439       (2,388,265     -       -       258,660  
 

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

 
F-6

 

US NATURAL GAS CORP
 (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)
From Inception (March 28, 2008) through September 30, 2011    
 
 
                           
Additional
   
Deficit Accumulated
                   
    Preferred stock     Common Stock    
Paid in
   
During
    Treasury stock        
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Development
   
Shares
   
Amount
   
Total
 
                                                       
Issuance of common stock for consulting and other services at $.01 thru $.09 per share
                    5,450,000       5,450       150,100                               155,550  
                                                                         
Issuance of common stock for cash at $.01 thru $.25 per share
                    7,882,096       7,882       148,274                               156,156  
                                                                         
Issuance of common stock for debt reduction at $.01 thru $.10 per share
                    63,234,114       63,234       661,610                               724,844  
                                                                         
Issuance of common stock and warrants for acquisition of Wilon Resources, Inc. at $.035 per share
                    48,207,973       48,208       1,639,071                               1,687,279  
                                                                         
Issuance of common stock for legal services at $.05 thru $.10 per share
                    1,987,285       1,987       133,693                               135,680  
                                                                         
Net loss for the year ended December 31, 2010
                                            (341,626 )                     (341,626 )
                                                                         
Balances at December 31, 2010
    1,300,000       1,300       148,947,378       148,947       5,356,187       (2,729,891 )     -       -       2,776,543  
                                                                         
Issuance of Series C shares in exchange for cancel of common stock
    787,740       788       (31,509,597 )     (31,509 )     30,721                               -  
                                                                         
Issuance of Series C shares for director's salaries at $.244 per share
    40,909       41                       9,959                               10,000  
                                                                         
Cancel common stock held in
escrow upon satisfaction
of debenture
      (1,209,628 )     (1,210 )     (97,980 )                             (99,190 )
                                                                         
                                                                         

The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
 
F-7

 

 
US NATURAL GAS CORP
 (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)
From Inception (March 28, 2008) through September 30, 2011
 
           
Additional
   
Deficit Accumulated
           
 
Preferred stock
 
Common Stock
   
Paid in
   
During
 
Treasury Stock
       
 
Shares
   
Amount
 
Shares
   
Amount
   
Capital
   
Development
 
Shares
   
Amount
   
Total
 
                                                         
Issuance of common stock for consulting and other services at $.002 thru $.012 per share
            30,371,788       30,372       98,190                       128,562  
                                                         
Issuance of common stock for cash at $.008 thru $.015 per share
            3,631,313       3,631       36,369                       40,000  
                                                         
Issuance of common stock for debt reduction at $.001 thru $.01 per share
            210,687,322       210,688       547,315                       758,003  
                                                         
Purchase of common stock at $.001 thru $.017 per share
                                        632,866       (5,810 )     (5,810 )
                                                             
Net loss for the nine months ending September 30, 2011
                                 
(441,652
)                   (441,652 )
                                                             
Balances at September 30,    2011
2,128,649
  $
2,129
    360,918,576     $ 360,919     $ 5,980,761   $
(3,171,543
)   632,866     $ (5,810 )   $ 3,166,456  


The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
F-8

 
 
 US NATURAL GAS CORP
(Formerly Adventure Energy, Inc.)
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2011 and 2010 and from Inception (March 28, 2008) through September 30, 2011
 

               
Inception
 
               
through
 
   
2011
   
2010
   
September 30, 2011
 
OPERATING ACTIVITIES:
 
 
   
 
   
 
 
Net loss
  $ (441,652 )   $ (473,625 )   $ (3,171,543 )
   Adjustments to reconcile net loss to net cash provided by operating activities:
                       
       Depreciation, depletion and amortization
    189,163       79,527       355,081  
       Bad debt expenses
    4,720       -       4,720  
       Forgiveness of debt
    (352 )     -       (376,220 )
       Gain from sale of marketable equity securities and investments, net
    (235,218 )     (295,212 )     (463,218 )
       Gain from sale of oil and gas properties and equipment, net
    (35,856 )     (155,598 )     (524,637 )
       Issuance of stock for consulting and other services
    137,632       316,929       2,292,330  
   Changes in operating assets and liabilities:
                       
       Accounts receivable, joint interest billing
    (40,631 )     (8,716 )     (81,292 )
       Accounts receivable, other
    (7,019 )     75,139       31,704  
       Materials and supplies
    -       15,000       -  
       Prepaid expenses
    19,158       14,764       24,937  
       Other assets
    (5,727 )     (81,050 )     (88,501 )
       Accounts payable and accrued expenses
    71,472       (15,699 )     853,809  
       Accounts payable, revenue distribution
    (7,101 )     8,531       823  
                   Net cash flows from operating activities
    (351,411 )     (520,010 )     (1,142,007 )
                         
 
                       
INVESTING ACTIVITIES:
                       
      Purchase of investments
    -       (26,500 )     (296,240 )
      Proceeds from sale of investments
    -       48,730       60,230  
      Purchases of  marketable equity securities
    (31,016 )     (2,333,761 )     (2,359,869 )
      Proceeds from sale of marketable equity securities
    270,761       2,666,378       2,967,090  
      Collections on notes receivable
    101,158       98,755       202,913  
      Lending on notes receivable, stockholder
    (31,561 )     -       (142,158 )
      Purchase of oil and gas properties and equipment
    (319,874 )     (367,863 )     (1,023,800 )
      Proceeds from sale of oil and gas properties and equipment
    42,800       158,600       497,350  
                   Net cash flows from investing activities
    32,268       244,339       (94,484 )
 
                       
FINANCING  ACTIVITIES:
                       
      Issuance of common stock and warrants for cash
    40,000       94,306       267,156  
      Purchase of treasury stock
    (5,810 )     -       (5,810 )
      Borrowings from notes payable
    32,500       -       174,568  
      Payments on notes payable
    (6,000 )     (20,000 )     (36,000 )
      Borrowings from loans payable - stockholders, net
    -       13,323       119,506  
      Borrowings from loans payable - other, net
    2,426       21,015       61,655  
      Borrowing from related entity, net
    -       (44,201 )     94,390  
      Borrowings from convertible debentures
    267,500       190,000       572,500  
                 Net cash flows from financing activities
    330,616       254,443       1,247,965  
 
                       
 
                       
NET  INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    11,473       (21,288 )     11,474  
 
                       
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    1       26,488       -  
 
                       
CASH AND CASH EQUIVALENTS,  END OF PERIOD
  $ 11,474     $ 5,260     $ 11,474  
 
                       



The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
 
F-9

 
 
US NATURAL GAS CORP
(Formerly Adventure Energy, Inc.)
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2011 and 2010 and from Inception (March 28, 2008) through September 30, 2011
 
               
Inception
 
               
through
 
 
 
2011
   
2010
   
September 30, 2011
 
Supplemental Disclosures of Cash Flow Information:
 
 
   
 
   
 
 
      Taxes paid
  $ -     $ -     $ -  
      Interest paid
  $ -     $ -     $ -  
      Issuance of common stock for reduction of convertible debenture
  $ 311,000     $ 25,000     $ 336,000  
      Issuance of common stock in A/R other
  $ 45,000     $ 1,000     $ 45,000  
      Issuance of common stock for purchase of oil and gas properties and equipment
  $ 930     $ -     $ 6,515  
      Issuance of common stock for acquisition of SLMI Options, LLC
  $ -     $ -     $ 99,600  
      Issuance of preferred stock for acquisition of SLMI Options, LLC
  $ -     $ -     $ 1,300  
      Retirement of common stock for funding of debenture escrow
  $ (99,190 )   $ -     $ -  
      Issuance of common stock for funding of prepaid expenses
  $ -     $ -     $ 39,000  
      Issuance of common stock for funding of other assets
  $ -     $ -     $ 169,683  
      Issuance of common stock for reduction of accounts payable and accrued expenses
  $ 106,928     $ -     $ 197,028  
      Issuance of common stock for reduction of loans payable, shareholder
  $ -     $ 25,000     $ 88,370  
      Issuance of common stock for reduction of loans payable, other
  $ -     $ 31,300     $ 31,300  
      Issuance of common stock for reduction of notes payable
  $ 295,073     $ 270,699     $ 785,147  
      Issuance of common stock for acquisition of Wilon Resources, Inc.
  $ -     $ 1,687,279     $ 1,687,279  
      Financing the sale of oil and gas properties with a note receivable
  $ -     $ -     $ 300,000  
      Note receivable for Series B convertible preferred stock
  $ -     $ -     $ 300,000  
                         

The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
 
F-10

 
 
US NATURAL GAS CORP
(Formerly Adventure Energy, Inc.)
 (A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
From Inception (March 28, 2008) through September 30, 2011 (Unaudited)
 
NOTE A – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Nature of Operations
 
US Natural Gas Corp (the “Company”) (formerly “Adventure Energy, Inc.”) was incorporated in the state of Florida on March 28, 2008. The Company is an independent oil and natural gas operator engaged in exploration, development and production activities in the Appalachian Basin, particularly in Kentucky and West Virginia. The Company's business strategy focuses primarily on the drilling and acquisition of proven developed and undeveloped properties and on the enhancement and development of those properties.
 
On July 20, 2009, the Company formed E 2 Investments, LLC ("E 2") to actively make equity investments in private and publically owned companies and to acquire energy related holdings.
 
On August 25, 2009, the Company formed Wilon Resources, Inc. in the state of Tennessee.  On February 9, 2010, Wilon Resources, Inc. ("Wilon") merged with and into Wilon Resources of Tennessee, Inc. ("WRT"), a publically owned Tennessee Corporation.  All of the stock of Wilon owned by the Company was acquired by WRT for consideration equal to 1,000 shares of WRT for every one share of Wilon held by the Company.  Subsequent to the merger, Wilon approved the use of the name Wilon Resources, Inc. by WRT.
 
On September 4, 2009, the Company entered into a lender acquisition agreement with SLMI Holdings, LLC, a Nevada Limited Liability Company.  Through this agreement, the Company acquired SLMI Options, LLC.  The sole purpose of this acquisition of SLMI Options, LLC is to hold three commercial notes issued by Wilon Resources, Inc., (formerly "Wilon Resources of Tennessee, Inc.') in the years 2005 through 2007.
 
On February 1, 2010, the Company formed US Natural Gas Corp in the state of Florida.  Subsequently, on March 22, 2010 the Company changed the name to US Natural Gas Corp KY.  With this name change, all assets held in the state of Kentucky were transferred from US Natural Gas Corp to US Natural Gas Corp KY.
 
On February 2, 2010, the Company formed E 3 Petroleum Corp ("E 3") in the state of Florida. E 3 acts as the operator and bonding entity for the Company’s wells in the states of Kentucky and West Virginia. 
 
On March 19, 2010, the shareholders of Adventure Energy, Inc. (now US Natural Gas Corp) approved an amendment to its Articles of Incorporation changing the name of the Company to US Natural Gas Corp, and an amendment deleting Article 8 thereof to eliminate reference to a non-existent Shareholders' Restrictive Agreement. Wilon simultaneously completed a name change to US Natural Gas Corp WV. On April 13, 2010, the Company received approval from FINRA recognizing the name change and approving a corresponding change of the Company's trading symbol from "ADVE" to "UNGS".   

On March 19, 2010, the Company's shareholders approved with 16,611,138 votes "for" and zero votes "against" to an exchange of shares between the Company and Wilon Resources, Inc. ("Wilon"), whereby the Company acquired all of the outstanding shares of Wilon.  For each share of common stock of Wilon exchanged, the Company issued one share of the Company's common stock plus one warrant to purchase one additional share of common stock of the Company at an exercise price of  $.25 (25 cents) per share to be exercisable for a period of 5 years from the date of issue. Wilon's shareholders approved the share exchange with 27,843,109 votes "for" and zero votes "against".  
 
On June 3, 2010, the Financial Industry Regulatory Authority (FINRA) made the final approval of the share exchange.  The Company accounted for the acquisition of Wilon using the purchase method on June 3, 2010.
 
On January 11, 2011, the Board of Directors of B.T.U. Pipeline, Inc. ("BTU"), a wholly owned subsidiary of the Company, elected to dissolve the corporation. BTU was organized under the state of Tennessee and was acquired in the Wilon Resources, Inc. acquisition in 2010. BTU's sole purpose of existence was to serve as the bonding company and operator of the Company's West Virginia natural gas wells. Any remaining assets of BTU were assigned to US Natural Gas Corp WV on January 11, 2011 and appropriate documentation filed with the County Clerk of Wayne County, West Virginia. The Articles of Dissolution and Articles of Termination were filed with the State of Tennessee Department of State on March 4, 2011 after the Company's Certificate of Tax Clearance was received from the Tennessee Department of Revenue. The corporation was effectively terminated and dissolved on March 15, 2011 with the Tennessee Secretary of State.
 

 
F-11

 

US NATURAL GAS CORP
(Formerly Adventure Energy, Inc.)
 (A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
From Inception (March 28, 2008) through September 30, 2011 (Unaudited)


NOTE A – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Principles of Consolidation
 
The consolidated financial statements include the accounts of US Natural Gas Corp, and all of its wholly owned subsidiaries, US Natural Gas Corp WV, US Natural Gas Corp KY, SLMI Options, LLC, E2 Investments, LLC, E3 Petroleum Corp and B.T.U. Pipeline, Inc.. All intercompany accounts and transactions have been eliminated in consolidation.
 
Basis of Presentation
 
The accompanying interim unaudited financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission  (the “SEC”) for interim financial statements and in the opinion of management contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly, in all material respects, the Company's consolidated financial position as of September 30, 2011, and the results of its operations for the nine months and three months ended September 30, 2011 and 2010 and from inception (March 18, 2008) through September 30, 2011, and cash flows for the nine months ended September 30, 2011 and 2010 and from inception (March 18, 2008) through September 30, 2011. These results have been determined on the basis of accounting principles generally accepted in the United States of America and have been applied consistently as those used in the preparation of the Company's 2010 Annual Report on Form 10-K.
 
Cash and Cash Equivalents
 
The Company considers all liquid debt securities with an original maturity of 90 days or less that are readily convertible into cash to be cash equivalents.

Marketable Equity Securities
 
Marketable equity securities are stated at lower of cost or market value with unrealized gains and losses included in operations.  The Company has classified its marketable equity securities as trading securities.
 
Recently Enacted Accounting Standards

In July 2010, the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (“Wall Street Reform Act”) was signed into law. The Wall Street Reform Act permanently exempts small public companies with less than $75 million in market capitalization (nonaccelerated filers) from the requirement to obtain an external audit on the effectiveness of internal financial reporting controls provided in Section 404(b) of the Sarbanes-Oxley Act of 2002. Section 404(b) requires a registrant to provide an attestation report on management’s assessment of internal controls over financial reporting by the registrant’s external auditor. Disclosure of management’s attestation on internal controls over financial reporting under existing Section 404(a) is still required for nonaccelerated filers.

In February, 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-09, effective immediately, which amended ASC Topic 855, Subsequent Events. The amendment was made to address concerns about conflicts with SEC guidance and other practice issues. Among the provisions of the amendment, the FASB defined a new type of entity, termed an “SEC filer,” which is an entity required to file with or furnish its financial statements to the SEC. Entities other than registrants whose financial statements are included in SEC filings (e.g., businesses or real estate operations acquired or to be acquired, equity method investees, and entities whose securities collateralize registered securities) are not SEC filers. While an SEC filer is still required by U.S. GAAP to evaluate subsequent events through the date its financial statements are issued, it is no longer required to disclose in the financial statements that it has done so or the date through which subsequent events have been evaluated. The Company does not believe the changes have a material impact on its results of operations or financial position.

In January 2010, the FASB issued ASU 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements”. This update requires more robust disclosures about valuation techniques and inputs to fair value measurements. The update is effective for interim and annual reporting periods beginning after December 15, 2009. This update had no material effect on the Company’s consolidated financial statements.


 
F-12

 


US NATURAL GAS CORP
(Formerly Adventure Energy, Inc.)
 (A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
From Inception (March 28, 2008) through September 30, 2011 (Unaudited)

NOTE A – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

In July 2009, the FASB issued ASC 855-10-50, “Subsequent Events”, which requires an entity to recognize in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the preparation of the financial statements. The final rules were effective for interim and annual reports issued after June 15, 2009. The Company has adopted the policy effective September, 2009. There was no material effect on the Company’s consolidated financial statements as a result of adoption.

In June 2009, the FASB issued ASC 105, Codification which establishes FASB Codification as the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. The final rule was effective for interim and annual reports issued after September 15, 2009. The Company has adopted the policy effective September 30, 2009. There was no material effect on the presentation of the Company’s consolidated financial statements as a result of the adoption of ASC 105.

On December 31, 2008, the SEC published the final rules and interpretations updating its oil and gas reporting requirements (“Modernization of Oil and Gas Reporting”). In January 2010, the FASB released ASU 2010-03, Extractive Activities - Oil and Gas (“Topic 932”); Oil and Gas Reserve Estimation and Disclosures, aligning U.S. GAAP standards with the SEC’s new rules. Many of the revisions were updates to definitions in the existing oil and gas rules to make them consistent with the petroleum resource management system, which is a widely accepted standard for the management of petroleum resources that was developed by several industry organizations. Key revisions include: (a) changes to the pricing used to estimate reserves utilizing a 12-month average price rather than a single day spot price which eliminates the ability to utilize subsequent prices to the end of a reporting period when the full cost ceiling was exceeded and subsequent pricing exceeds pricing at the end of a reporting period; (b) the ability to include nontraditional resources in reserves; (c) the use of new technology for determining reserves; and (d) permitting disclosure of probable and possible reserves. The SEC requires companies to comply with the amended disclosure requirements for registration statements filed after January 1, 2010, and for annual reports on Form 10-K for fiscal years ending on or after December 15, 2009. ASU 2010-03 is effective for annual periods ending on or after December 31, 2009. Adoption of Topic 932 did not have a material impact on the Company’s results of operations or financial position. In April 2010, the FASB issued ASU 2010-14, Accounting for Extractive Activities-Oil & Gas: Amendments to Paragraph 932-10-S99-1. This ASU amends terminology as defined in Topic 932-10-S99-1.

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 contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period.  Actual results could differ from those estimates.  (See Note B - Acquisition of Wilon Resources, Inc.)
 
Concentration of Credit Risk

Financial  instruments which potentially subject the Company to a concentration of credit risk consists primarily of trade accounts receivable from a variety of local,  national, and international oil and natural gas companies.  Such credit risk is considered by management to be limited due to the financial resources of those oil and natural gas companies.

Risk Factors

The Company operates in an environment with many financial  risks including, but not limited to, the ability to acquire additional economically recoverable gas reserves, the continued ability to market drilling programs, the inherent risks of the search for, development of and production of  gas, the ability to sell natural gas at prices which will provide attractive rates of return, the volatility and seasonality of  gas production and prices, and the highly competitive nature of the industry as well as worldwide economic conditions.

Fair Value of Financial Instruments
 
The Company defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties.  Financial instruments  included in the  Company's financial statements include cash and cash equivalents,  short-term investments, accounts receivable,  other receivables,  other assets,  accounts payable, notes payable and due to affiliates.  Unless otherwise disclosed in the notes to the financial statements, the carrying value of financial instruments is considered to approximate fair value due to the short maturity and characteristics of those instruments.  The carrying value of debt approximates fair value as terms approximate those currently available for similar debt instruments.
 
 
 
F-13

 
 
US NATURAL GAS CORP
(Formerly Adventure Energy, Inc.)
 (A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
From Inception (March 28, 2008) through September 30, 2011 (Unaudited)

NOTE A – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Oil and Gas Properties

The Company has adopted the successful efforts method of accounting for gas producing activities.  Under the successful efforts method, costs to acquire mineral interests in gas properties, to drill and equip exploratory wells that find proved reserves, and to drill and equip developmental wells are capitalized.  Costs to drill exploratory wells that do not find proved reserves, costs of developmental wells on properties the Company has no further interest in, geological and geophysical costs, and costs of carrying and retaining unproved properties are expensed.  Unproved gas properties that are significant are periodically assessed for impairment of value, if any, and a loss is recognized at the time of impairment by providing an impairment allowance.  Other unproven properties are expensed when surrendered or expired.

When a property is determined to contain proved reserves, the capitalized costs of such properties are transferred from unproved properties to proved properties and are amortized by the unit-of-production method based upon estimated proved developed reserves.  To the extent that capitalized costs of groups of proved properties having similar characteristics exceed the estimated future net cash flows, the excess, if any, of capitalized costs are written down to the present value of such amounts.  Estimated future net cash flows are determined based primarily upon the estimated future proved reserves related to the Company's current proved properties and, to a lesser extent, certain future net cash flows related to operating and  related fees due the Company related to its management of various partnerships.  The Company follows U.S. GAAP in Accounting for Impairments.
 
On sale or abandonment of an entire interest in an unproved property, gain or loss is recognized, taking into consideration the amount of any recorded impairment.  If a partial interest in an unproved property is sold, the amount received is treated as a reduction of the cost of the interest retained.

Revenue Recognition

Revenue from product sales is recognized when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) the price is fixed or determinable, (3) collectability is reasonably assured, and (4) delivery has occurred.

Stock-Based Compensation

Stock-based compensation is accounted for at fair value in accordance with U.S. GAAP.
 
Income Taxes

Income taxes are accounted for under the assets and liability method.  Current income taxes are provided in accordance with the laws of the respective taxing authorities.  Deferred income taxes are provided for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards.  Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.  Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is not more likely than not that some portion or all of the deferred tax assets will be realized.

Net Income (Loss) per Common Share

Basic net income (loss) per common share is computed based on the weighted average number of common shares outstanding during the period.

Diluted net income (loss) per common share is computed based on the weighted average number of common shares and dilutive securities (such as stock options, warrants, and convertible securities) outstanding.  Dilutive securities having an anti-dilutive effect on diluted net income (loss) per share and are excluded from the calculation.

At September 30, 2011, diluted weighted average common shares outstanding exclude 63,613,415 shares issuable on exercise of the 63,613,415 warrants outstanding at September 30, 2011.
 

 
F-14

 
 
US NATURAL GAS CORP
(Formerly Adventure Energy, Inc.)
 (A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
From Inception (March 28, 2008) through September 30, 2011 (Unaudited)
 

NOTE B - ACQUISITION OF WILON RESOURCES, INC.

On May 28, 2010, the Company received notification from the appropriate state agencies that the acquisition of Wilon Resources by the Company was effective. On June 3, 2010, final approval was given by FINRA for the share exchange between the Company and Wilon Resources.  The Company issued one share of common stock for each share of Wilon stock outstanding (49,207,973 shares) plus one warrant to purchase an additional share exercisable for a period of 5 years from the issue date.  In July 2010, the Company canceled 1,000,000 shares of common stock relating to the Wilon acquisition.  These shares were owned by the Company.  The Company's common stock at June 3, 2010 had a value of $.035 per share making the acquisition price $1,687,279.

The Company accounted for the business combination using the purchase method.  The estimated fair market value of Wilon's net assets (assets less liabilities) was recorded at the value of the acquisition price of $1,687,279.  Management reduced its original estimate of the fair market value.  This reduction in the estimate had no effect on the recorded amount of the transaction as the excess fair market value over the acquisition price reduced the recorded value of oil and gas properties and equipment.  The oil and gas properties consist of 115 natural gas wells, 12,000 acres of mineral rights leases and the gathering system interconnecting the wells.  The Company intends to retain a third party to complete a Reserve Report covering the 12,000 acres located in Wayne County, West Virginia substantiating proven and unproven wells.  The estimates used by the Company in recording the acquisition could change significantly pending the valuation results of the third party.

NOTE C - GOING CONCERN

The Company is a development stage enterprise and although it has commenced planned principal business operations, there are insignificant revenues there from.  The Company has incurred losses of $3,171,543 for the period March 28, 2008 (inception) through September 30, 2011 and has negative working capital balance aggregating $1,679,077.  These factors raise substantial doubt about the Company’s ability to continue as a going concern.

There can be no assurance that sufficient funds required during the next year, or thereafter, will be generated from operations or that funds will be available from external sources such as debt or equity financings or other potential sources.  The lack of additional capital resulting from the inability to generate cash flow from operations or to raise capital from external sources would force the Company to substantially curtail or cease operations and therefore would have a material adverse effect on its business.  Furthermore, there can be no assurance that any such required funds, if available, will be available on attractive terms or that they will not have a significant dilutive effect on the Company’s existing stockholders.

The Company intends to overcome the circumstances that affect its ability to remain a going concern through a combination of the commencement of revenues, with interim cash flow deficiencies being addressed through additional equity and debt financing.  The Company anticipates raising additional funds through public or private financing, strategic relationships or other arrangements in the near future to support its business operations; however the Company may not have commitments from third parties for a sufficient amount of additional capital.  The Company cannot be certain that any such financing will be available on acceptable terms, or at all, and its failure to raise capital when needed could limit its ability to continue its operations.  The Company’s ability to obtain additional funding will determine its ability to continue as a going concern.  Failure to secure additional financing in a timely manner and on favorable terms would have a material adverse effect on the Company’s financial performance, results of operations and stock price and require it to curtail or cease operations, sell off its assets, seek protection from its creditors through bankruptcy proceedings, or otherwise.  Furthermore, additional equity financing may be dilutive to the holders of the Company’s common stock, and debt financing, if available, may involve restrictive covenants, and strategic relationships, if necessary to raise additional funds, and may require that the Company relinquish valuable rights.
 
The accompanying financial statements do not include any adjustments related to the recoverability or classification of asset-carrying amounts or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern.
 
 
 
F-15

 
 
US NATURAL GAS CORP
(Formerly Adventure Energy, Inc.)
 (A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
From Inception (March 28, 2008) through September 30, 2011 (Unaudited)


NOTE D - MARKETABLE EQUITY SECURITIES

At September 30, 2011 and December 31, 2010, marketable equity securities consisted of equity securities held with a cost and fair market value of $2,265 and $6,793, respectively.  From inception (March 28, 2008) to September 30, 2011, the net gain from the sale of marketable equity securities was $579,218.

NOTE E – PROPERTY AND EQUIPMENT

Property and equipment consists of the following at:
 
                                                                                                          
 
9/30/2011
   
12/31/2010
 
Land and mineral rights
 
$
206,772
   
$
180,602
 
Computer Software
   
33,000
     
13,000
 
Field Equipment
   
35,260
     
22,660
 
Transportation Equipment 
   
136,890
     
111,290
 
Oil and Gas Properties
   
4,516,093
     
4,289,658
 
Accumulated depreciation and depletion
   
(182,025
)
   
(59,549
)
                 
Net property and equipment
 
$
4,745,990
   
$
4,557,661
 

The Company uses the straight-line method of depreciation for computer software and field and transportation equipment with an estimated useful life ranging from three to twenty years. The Company uses the straight-line method of depletion for oil and gas properties with an estimated useful life ranging from seven to twenty-five years. Included in the September 30, 2011 balances are the estimated fair market values of property and equipment acquired from Wilon Resources during 2010.  These estimates could change significantly pending a valuation by third parties. (See Note B - Acquisition of Wilon Resources, Inc.)

NOTE F - NOTES RECEIVABLE
 
Notes receivable consist of the following at:
 
                                                                                                                              
 
9/30/2011
   
12/31/2010
 
Note receivable, interest at 1%, ,
               
   balance to be deducted from gas revenue distributions
 
$
200,000
   
$
300,000
 
Note receivable, interest at 3%, due September 2014, collateralized
               
   by Series B preferred stock
   
300,000
     
300,000
 
Non-interest bearing note due on demand
 
 
13,500
   
 
13,500
 
Note receivable, interest at 9%, $605 due monthly through December 2025
   
58,542
     
59,700
 
Less current portion                                                                                         
   
(15,500
)
   
(115,474
)
                 
Notes receivable long-term
 
$
556,542
   
$
557,726
 

Current maturities of notes receivable at September 30, 2011 are $15,500 in 2011, $2,160 in 2012, $2,360 in 2013, $302,580 in 2014, $2,825 in 2015, and $246,617 thereafter.

  
 
F-16

 
 
 
US NATURAL GAS CORP
(Formerly Adventure Energy, Inc.)
 (A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
From Inception (March 28, 2008) through September 30, 2011 (Unaudited)


NOTE G - MISCELLANEOUS
 
Miscellaneous assets consist of the following at:
 
  
 
9/30/2011
   
12/31/2010
 
Loan commitment fee
 
$
169,683
   
$
169,683
 
Accumulated amortization
   
(169,683
)
   
( 106,052
)
Deposits
   
7,993
     
-
 
Operating bonds
   
85,008
     
87,279
 
                 
Total Other Assets
 
$
93,001
     
150,910
 
  
Loan commitment fee is amortized over the life of the agreement using a straight line method.
 
NOTE H – LOANS PAYABLE-OTHER
 
Loans payable with no interest to potential investors aggregated $2,441 and $5,985 at September 30, 2011 and December 31, 2010, respectively.

NOTE I - CONVERTIBLE DEBENTURE PAYABLE

Convertible debentures payable consist of the following at:
 
                                                                                                                             
 
9/30/2011
   
12/31/2010
 
Caesar Capital
 
$
49,000
   
$
100,000
 
ARRG
   
-
     
25,000
 
Asher
   
70,000
     
130,000
 
Tangiers
   
117,500
     
25,000
 
                 
Total convertible debenture payable
 
$
236,500
   
$
280,000
 

On September 8, 2011, the Company entered into a Convertible Promissory Note ("Promissory Note") with Asher Enterprises, Inc. ("Asher") in the amount of Forty Thousand Dollars ($40,000) and a Securities Purchase Agreement. The Promissory Note was fully funded on September 14, 2011. The Promissory Note is convertible, in whole or in part, at any time from time to time before maturity at the option of the holder at the Variable Conversion Price which shall mean 58% of the Market Price. The Market Price is defined as the average of the three (3) lowest Trading Prices for the common stock during the ten (10) Trading Day period ending one Trading Day prior to the date the Conversion Notice is sent. The Promissory Note has a term of nine (9) months and accrues interest at a rate equal to eight percent (8%) per year. The balance owed at September 30, 2011 is $40,000.

On August 23, 2011, the Company entered into a Convertible Promissory Note ("Promissory Note") with Tangiers Investors, LP ("Tangiers") in the amount of Twenty Five Thousand Dollars ($25,000) and a Security Agreement. The Promissory Note was fully funded on August 24, 2011. The Promissory Note is convertible, in whole or in part, at any time from time to time before maturity at the option of the holder at the Variable Conversion Price which shall mean 60% of the Market Price. The Market Price is defined as the lowest Trading Price for the common stock during the five (5) Trading Day period ending one Trading Day prior to the date the Conversion Notice is sent. The Promissory Note has a term of one (1) year and accrues interest at a rate equal to nine percent (9%) per year. The balance owed at September 30, 2011 is $25,000.

On August 5, 2011, the Company entered into a Convertible Promissory Note ("Promissory Note") with Asher Enterprises, Inc. ("Asher") in the amount of Thirty Thousand Dollars ($30,000) and a Securities Purchase Agreement. The Promissory Note was fully funded on August 12, 2011 The Promissory Note is convertible, in whole or in part, at any time from time to time before maturity at the option of the holder at the Variable Conversion Price which shall mean 58% of the Market Price. The Market Price is defined as the average of the three (3) lowest Trading Prices for the common stock during the ten (10) Trading Day period ending one Trading Day prior to the date the Conversion Notice is sent. The Promissory Note has a term of nine (9) months and accrues interest at a rate equal to eight percent (8%) per year. The balance owed at September 30, 2011 is $30,000. 
 
 
 
 
F-17

 

 
US NATURAL GAS CORP
(Formerly Adventure Energy, Inc.)
 (A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
From Inception (March 28, 2008) through September 30, 2011 (Unaudited)


NOTE I - CONVERTIBLE DEBENTURE PAYABLE (continued)

On August 4, 2011, the Company entered into a Convertible Promissory Note ("Promissory Note") with Tangiers Investors, LP ("Tangiers") in the amount of Fifteen Thousand Dollars ($15,000) and a Security Agreement. The Promissory Note was fully funded on August 4, 2011. The Promissory Note is convertible, in whole or in part, at any time from time to time before maturity at the option of the holder at the Variable Conversion Price which shall mean 60% of the Market Price. The Market Price is defined as the lowest Trading Price for the common stock during the five (5) Trading Day period ending one Trading Day prior to the date the Conversion Notice is sent. The Promissory Note has a term of one (1) year and accrues interest at a rate equal to nine percent (9%) per year. The balance owed at September 30, 2011 is $15,000.

On July 21, 2011, the Company entered into a Convertible Promissory Note ("Promissory Note") with Tangiers Investors, LP ("Tangiers") in the amount of Fifteen Thousand Dollars ($15,000) and a Security Agreement. The Promissory Note was fully funded on July 21, 2011. The Promissory Note is convertible, in whole or in part, at any time from time to time before maturity at the option of the holder at the Variable Conversion Price which shall mean 60% of the Market Price. The Market Price is defined as the lowest Trading Price for the common stock during the five (5) Trading Day period ending one Trading Day prior to the date the Conversion Notice is sent. The Promissory Note has a term of one (1) year and accrues interest at a rate equal to nine percent (9%) per year. The balance owed at September 30, 2011 is $15,000.

On July 11, 2011, the Company entered into a Convertible Promissory Note ("Promissory Note") with Tangiers Investors, LP ("Tangiers") in the amount of Ten Thousand Dollars ($10,000) and a Security Agreement. The Promissory Note was fully funded on July 11, 2011. The Promissory Note is convertible, in whole or in part, at any time from time to time before maturity at the option of the holder at the Variable Conversion Price which shall mean 60% of the Market Price. The Market Price is defined as the lowest Trading Price for the common stock during the five (5) Trading Day period ending one Trading Day prior to the date the Conversion Notice is sent. The Promissory Note has a term of one (1) year and accrues interest at a rate equal to nine percent (9%) per year. The balance owed at September 30, 2011 is $10,000.

On May 3, 2011, the Company entered into a Convertible Promissory Note ("Promissory Note") with Tangiers Investors, LP ("Tangiers") in the amount of Fifty Two Thousand Five Hundred Dollars ($52,500) and a Security Agreement. The Promissory Note was fully funded on May 3, 2011. The Promissory Note is convertible, in whole or in part, at any time from time to time before maturity at the option of the holder at the Variable Conversion Price which shall mean 60% of the Market Price. The Market Price is defined as the lowest Trading Price for the common stock during the five (5) Trading Day period ending one Trading Day prior to the date the Conversion Notice is sent. The Promissory Note has a term of one (1) year and accrues interest at a rate equal to nine percent (9%) per year. The balance owed at September 30, 2011 is $52,500

On November 16, 2010, the Company entered into a Convertible Promissory Note ("Promissory Note") with Caesar Capital Group, LLC, ("Caesar Capital") in the amount of Twenty Five Thousand Dollars ($25,000) and a Securities Purchase Agreement.  The Promissory Note was fully funded on November 19, 2010.  The Promissory Note is convertible, in whole or in part, at any time from time to time before maturity at the option of the holder at a per share price equal to Sixty Percent (60%) of the average of the last Five (5) trading days closing volume weighted average price.  The Promissory Note has a term of six (6) months and accrues interest at a rate equal to twelve percent (12%) per year.  The balance owed at September 30, 2011 and December 31, 2010 is $25,000.

On October 8, 2010, the Company entered into a Convertible Promissory Note ("Promissory Note") with Asher Enterprises, ("Asher") in the amount of Forty Thousand Dollars ($40,000) and a Securities Purchase Agreement.  The Promissory Note was fully funded on October 14, 2010.  The Promissory Note is convertible, in whole or in part, at any time from time to time before maturity at the option of the holder at the Variable Conversion Price which shall mean 58% of the Market Price.  The Market Price is defined as the average of the three (3) lowest Trading Prices for the common stock during the ten (10) Trading Day period ending one Trading Day prior to the date the Conversion Notice is sent.  The Promissory Note has a term of nine (9) months and accrues interest at a rate equal to eight percent (8%) per year.  In May 2011, the convertible debenture was paid in full through the issuance of common stock of the Company. The balance owed at December 31, 2010 was $40,000.


 
F-18

 

 

US NATURAL GAS CORP
(Formerly Adventure Energy, Inc.)
 (A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
From Inception (March 28, 2008) through September 30, 2011 (Unaudited)


NOTE I – CONVERTIBLE DEBENTURE PAYABLE (continued)

On September 7, 2010, the Company entered into a Convertible Promissory Note ("Promissory Note") with Caesar Capital Group, LLC, ("Caesar Capital") in the amount of Fifty Thousand Dollars ($50,000) and a Securities Purchase Agreement.  The Promissory Note was fully funded on September 10, 2010.  The Promissory Note is convertible, in whole or in part, at any time from time to time before maturity at the option of the holder at a per share price equal to Sixty Percent (60%) of the average of the last Five (5) trading days closing volume weighted average price.  The Promissory Note has a term of six (6) months and accrues interest at a rate equal to twelve percent (12%) per year.  The balance owed at September 30, 2011 and December 31, 2010 is $24,000 and $50,000, respectively.

On August 6, 2010, the Company entered into a Convertible Promissory Note (“Promissory Note”) with Caesar Capital Group, LLC, (“Caesar”) in the amount of Twenty Five Thousand Dollars ($25,000).  The Promissory Note was fully funded on August 10, 2010.  The Promissory Note is convertible, in whole or in part, at any time and from time to time before maturity at the option of the holder at a price per share equal to Sixty Percent (60%) of the average of the last Five (5) trading days closing volume weighted average price ("VWAP").  The Promissory Note has a term of six (6) months and accrues interest at a rate equal to twelve percent (12%) per year.  In addition, the Company issued to Caesar a Common Stock Purchase Warrant Agreement granting the holder the right to purchase up to 500,000 shares of the Company's common stock at an Exercise price of Five cents ($0.05).  The warrant is exercisable at anytime commencing six months after the date of issuance until February 6, 2014.  In February 2011, the convertible debenture was paid in full through the issuance of common stock of the Company. The balance owed at December 31, 2010 was $25,000.
 
On August 6, 2010, the Company entered into a Convertible Promissory Note (“Promissory Note”) with ARRG Corp, (“ARRG”) in the amount of Twenty Five Thousand Dollars ($25,000).  The Promissory Note was fully funded on August 10, 2010.  The Promissory Note is convertible, in whole or in part, at any time and from time to time before maturity at the option of the holder at a price per share equal to Sixty Percent (60%) of the average of the last Five (5) trading days closing volume weighted average price ("VWAP").  The Promissory Note has a term of six (6) months and accrues interest at a rate equal to twelve percent (12%) per year.  In addition, the Company issued to ARRG a Common Stock Purchase Warrant Agreement granting the holder the right to purchase up to 500,000 shares of the Company's common stock at an Exercise price of Five cents ($0.05).  The warrant is exercisable at anytime commencing six months after the date of issuance until February 6, 2014.  In February 2011, the convertible debenture was paid in full through the issuance of common stock of the Company. The balance owed at December 31, 2010 was $25,000.
 
On July 30, 2010, the Company entered into a Convertible Promissory Note ("Promissory Note") with Asher Enterprises, ("Asher") in the amount of Forty Thousand Dollars ($40,000) and a Securities Purchase Agreement.  The Promissory Note was fully funded on August 6, 2010.  The Promissory Note is convertible, in whole or in part, at any time from time to time before maturity at the option of the holder at the Variable Conversion Price which shall mean 58% of the Market Price.  The Market Price is defined as the average of the three (3) lowest Trading Prices for the common stock during the ten (10) Trading Day period ending one Trading Day prior to the date the Conversion Notice is sent.  The Promissory Note has a term of nine (9) months and accrues interest at a rate equal to eight percent (8%) per year.  In March 2011, the convertible debenture was paid in full through the issuance of common stock of the Company. The balance owed at December 31, 2010 was $40,000.

On June 18, 2010, the Company entered into a Convertible Promissory Note (“Promissory Note”) with Asher Enterprises, (“Asher”) in the amount of Fifty Thousand Dollars ($50,000) and a Securities Purchase Agreement.  The Promissory Note was fully funded on June 18, 2010.  The Promissory Note is convertible, in whole or in part, at any time and from time to time before maturity at the option of the holder at the Variable Conversion Price, which shall mean 58% of the Market Price.  The Market Price is defined as the average of the three (3) lowest Trading Prices for the common stock during the 10 (ten) Trading Day period ending one Trading Day prior to the date the Conversion Notice is sent.  The Promissory Note has a term of nine (9) months and accrues interest at a rate equal to eight percent (8%) per year.  In January 2011, the convertible debenture was paid in full through the issuance of common stock of the Company. The balance owed at December 31, 2010 was $50,000.

 
F-19

 
 

US NATURAL GAS CORP
(Formerly Adventure Energy, Inc.)
 (A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
From Inception (March 28, 2008) through September 30, 2011 (Unaudited)


NOTE I – CONVERTIBLE DEBENTURE PAYABLE (continued)

On September 25, 2009, the Company entered into a Debenture Securities Purchase Agreement (“Debenture Agreement”) with Atlas Capital Partners, LLC, (“Atlas”) pursuant to which the Company issued to Atlas Fifty Thousand Dollars ($50,000) in secured convertible debentures (the “Debentures”) dated of even date with the Debenture Agreement.  The Debentures were fully funded on September 25, 2009.  The Debentures are convertible, in whole or in part, at any time and from time to time before maturity at the option of the holder at the lower of (a) $0.25 or (b) seventy percent (70%) of the two lowest volume weighted average prices of common stock for ten (10) trading days immediately preceding the conversion date.  The Debentures have a term of nine (9) months, piggyback registration rights and accrue interest at a rate equal to seven percent (7%) per year.  The Debentures are secured by certain pledged assets of the Company.  The Parties have also entered into an Investor Registration Rights Agreement, pursuant to which the Company has agreed, if required by Atlas, to provide certain registration rights under the Securities Act of 1933, as amended, and the rules and regulations thereunder, and applicable state securities laws.  In July 2010, Tangiers Investors, LP acquired the debenture from Atlas and received 1,187,092 shares of common stock, at $.021 per share, as partial payment towards the debenture.  In March 2011, the convertible debenture was paid in full through the issuance of common stock of the Company. The balance owed at December 31, 2010 was $25,000.

NOTE J - NOTES PAYABLE

Notes payable consist of the following at: 
 
  
 
9/30/2011
   
12/31/2010
 
Note payable, interest at 1% per annum, due in 2011
 
$
100,000
   
$
100,000
 
Note payable, interest at 3% per annum, due in annual installments of $250,000
               
through September 2013
   
980,000
     
980,000
 
Notes payable, non-interest bearing, due in January 2011
   
10,000
     
  10,000
 
Notes payable, interest at 100% through maturity date, interest at maximum rate
               
    allowable by law thereafter, due July 2010
   
325,000
     
400,000
 
Note payable, interest at 3%, due on demand
   
59,767
     
262,926
 
Note payable, interest at 4%, due on demand
   
-
     
21,944
 
Note payable, principle plus $1,500 interest due October 2011
   
11,500
     
-
 
Note payable, interest at 4%, effective May 2011 payable in monthly installments
               
    based upon 1.5% of gas revenues received
   
26,000
     
-
 
                 
Less current portion
   
(962,267
)
   
 (1,224,870
)
Notes payable long term
 
$
550,000
   
$
550,000
 

Current maturities of long-term debt at September 30, 2011 are $962,267 in 2011, $300,000 in 2012, $250,000 in 2013.
 
NOTE K - INCOME TAXES
 
The Company accounts for income taxes using the asset and liability method described in SFAS No. 109, “Accounting For Income Taxes”, the objective of which is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting and the tax basis of the Company’s assets and liabilities at the enacted tax rates expected to be in effect when such amounts are realized or settled.  A valuation allowance related to deferred tax assets is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized.  In recognition of the uncertainty regarding the ultimate amount of income tax benefits to be derived, the Company has recorded a full valuation allowance at September 30, 2011 and December 31, 2010.
 
 
 
F-20

 

 
US NATURAL GAS CORP
(Formerly Adventure Energy, Inc.)
 (A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
From Inception (March 28, 2008) through September 30, 2011 (Unaudited)


NOTE K - INCOME TAXES (continued)

The provision (benefit) for income taxes includes income taxes currently payable and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities.  The provision (benefit) for income taxes consists of the following at:
 
                                                                                                                             
 
9/30/2011
   
12/31/2010
 
Federal income taxes:
               
    Current
 
$
(67,273
)
 
$
(511,745
)
    Deferred
   
67,273
     
511,745
 
     
-
     
-
 
State income taxes:
               
    Current
 
$
(26,909
)
 
$
(204,698
)
    Deferred
   
26,909
     
204,698
 
     
-
     
-
 
Total
 
$
-
   
$
-
 
 
Significant components of the Company's deferred tax assets and liabilities calculated at an estimated effective tax rate of 21% are as follows:
 
  
 
9/30/2011
   
12/31/2010
 
Noncurrent deferred tax assets (liabilities):
               
                 
Accrued wages deducted for financial purposes not deducted for tax purposes
 
$
54,600
   
$
54,600
 
                 
Capital losses deducted for financial purposes carried over to future years for
               
   tax purposes (expiring in years through 2014)
   
-
     
39,416
 
                 
Well costs deducted for financial purposes capitalized for tax purposes
   
2,520
     
2,520
 
                 
Excess depletion on oil and gas properties taken for tax purposes over
               
   financial purposes
   
(2,011
)
   
(4,342
)
                 
Excess depreciation on oil and gas properties taken for tax purposes over financial purposes
   
(36,844
)
   
-
 
                 
Excess loss on sale of investments taken for tax purposes over financial purposes
               
   over financial purposes
   
  -
     
 (86,960
)
                 
NOL from the acquisition of Wilon Resources (subject to potential I.R.C.
               
   Section 382 limitations)
   
601,000
     
 588,000
 
                 
NOL remaining not attributable to timing differences (expiring in years through 2020)
   
305,359
     
237,208
 
                 
Deferred noncurrent tax asset, net
   
924,624
     
830,442
 
Valuation allowance
   
(924,624
)
   
(830,442
)
   
$
-
   
$
-
 
  

 
F-21

 


US NATURAL GAS CORP
(Formerly Adventure Energy, Inc.)
 (A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
From Inception (March 28, 2008) through September 30, 2011 (Unaudited)


NOTE L - COMMON STOCK ISSUANCES/WARRANTS

During the past four years, the Company had the following unregistered sale of its securities:
 
On March 28, 2008, the Company sold a total of 10,000,000 post split shares (6,000,000 shares to Around the Clock Partners, LP (“ACP”), 3,000,000 shares to Jim Anderson, and 1,000,000 shares to Around the Clock Trading & Capital Management, LLC (“ACT”)) at a price of $.001 per share, or $10,000 total. Wayne Anderson, a director and chief executive officer of the Company, owns ACT and ACT is the general partner of ACP. Jim Anderson is a director and secretary of the Company.
 
On April 1, 2008, the Company amended its certificate of incorporation to increase the authorized number of shares to 50,000,000 shares of common stock at $0.001 par value and 5,000,000 shares of preferred stock at $0.001 par value and also affected a 1,000:1 forward stock split. All shares and per share amounts have been revised to retroactively reflect this stock split.
 
In June 2008, the Company issued a total of 900 shares of common stock to nine landowners in exchange for seven leases for mineral rights and two rights of way for a pipeline.
 
In July 2008, the Company sold 40,000 shares of common stock to Jim Anderson at a price of $.25 per share, or $10,000.
 
In July 2008, the Company issued a total of 76,837 shares of common stock (52,473 shares to Wayne Anderson and 24,364 shares to Jim Anderson) valued at $.25 per share in reimbursement of expenses totaling $19,209.
 
From June 2008 to December 2008, the Company issued a total of 776,499 shares of common stock to a number of consultants and service providers (including 10,000 shares to Wayne Anderson and 10,000 shares to Jim Anderson for director services) for services rendered. The 776,499 shares were valued at $.35 per share, or $271,775 total.
 
In July 2008, the Company issued 1,250,000 shares of common stock to its law firm for legal services rendered. The 1,250,000 shares were valued at $.35 per share, or $437,500 total.

In June and July 2008, the Company sold a total of 28,572 shares of common stock to four investors at a price of $.35 per share, or $10,000 total. In October 2008, the Company sold a total of 30,000 shares to three investors at a price of $.35 per share, or $10,500 total. In December 2008, the Company sold 37,143 shares of common stock at a price of $.35 per share and a warrant to purchase 15,000 shares exercisable at $.50 per share with an expiration date of December 2, 2013 to an investor, or $13,000.
 
In April 2009, the Company issued an aggregate of 170,100 shares for consulting services.

In April 2009, the Company issued warrants to Wayne Anderson to purchase 1,250,000 at an average price of $.55 as per the executed employment agreement.

In April 2009, the Company issued warrants to Jim Anderson to purchase 625,000 at an average price of $.55 as per the executed employment agreement.

In May 2009, the Company issued 162,400 shares to an accredited investor at a price of $0.25 per share.
 
In May 2009, the Company issued an aggregate of 2,005,000 to its President and 1,005,000 shares to its Vice-President as compensation pursuant to the employment agreements and for board service. The stock was $.30 per share upon issuance.
 
In August, 2009 the Company issued 50,000 shares of our common stock at $.11 per share to John Richardson for the purchase of a generator.

In August 2009, the Company issued an aggregate of 30,000 shares of common stock at a per share price of $0.11 to two participants who purchased a working interest in one of the Company’s wells.
 
 
 
F-22

 
 
 
US NATURAL GAS CORP
(Formerly Adventure Energy, Inc.)
 (A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
From Inception (March 28, 2008) through September 30, 2011 (Unaudited)


NOTE L - COMMON STOCK ISSUANCES/WARRANTS (continued)
 
In August, 2009 the Company issued 25,000 shares of our common stock of $0.11 to Republic Exploration in exchange for consulting services
 
In September, 2009 the Company issued 1,500,000 shares of our common stock of $0.06 to SLMI Holdings, LLC in connection with the acquisition of SLMI Options, LLC
 
In September 2009, the Company issued an aggregate of 950,000 shares of common stock at an average per share price of $0.12 in exchange for consulting services.

In September 2009, the Company issued 1,209,628 shares of common stock at a per share price of $0.08 to Tangiers, LP as collateral for the Debenture
 
In September 2009, the Company issued 1,696,833 shares of common stock at a per share price of $0.10 to Tangiers, LP as a commitment fee for a financing transaction.

In September 2009, the Company issued warrants to Del Mar Corporate Consulting to purchase 300,000 at an average price of $.18 with an expiration date of September 23, 2012.

In December 2009, the Company issued 300,000 shares of common stock at a per share price of $0.07 to SLMI Holdings, LLC for a financing transaction.

In December 2009, the Company issued 200,000 shares of common stock at $.07 per share to White Oak Land and Minerals Development, LLC in exchange for consulting services.

In December 2009, the Company issued 100,000 shares of common stock at $.07 per share to Valvasone Trust in exchange for consulting services.

In January 2010, the Company issued 453,000 shares of common stock at $.06 per share to Chris Davies on behalf of Atlas Capital Holdings in exchange for legal services. 

In January 2010, the Company issued 900,000 shares of common stock at $.06 per share to Around the Clock Partners, LP for reimbursement of expenses paid on behalf of the company.

In January 2010, the Company issued 350,000 shares of common stock at $.05 per share to Chris Davies on behalf of Atlas Capital Holdings in exchange for legal services.

In February 2010, the Company issued 200,000 shares of common stock at $.04 per share to Around the Clock Partners, LP for reimbursement of expenses paid on behalf of the company.

In March 2010, the Company issued 350,000 shares of common stock at $.10 per share to Chris Davies on behalf of Atlas Capital Holdings in exchange for legal services.

In April 2010, the Company issued 175,000 shares of common stock at $.05 per share to Ron Ferlisi in exchange for satisfaction of notes payable.

In April 2010, the Company issued 825,000 shares of common stock at $.05 per share to BuzzBahn in exchange for satisfaction of notes payable.
 
 
 
 
 
F-23

 

 
US NATURAL GAS CORP
(Formerly Adventure Energy, Inc.)
 (A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
From Inception (March 28, 2008) through September 30, 2011 (Unaudited)


NOTE L - COMMON STOCK ISSUANCES/WARRANTS (continued)
 
In April 2010, the Company issued 250,000 shares of common stock at $.05 per share to BuzzBahn in exchange for investor relation services.

In April 2010, the Company issued 120,000 shares of common stock at $.05 per share to Jody Samuels in exchange for legal services.

In April 2010, the Company issued 98,766 shares of common stock at $.069 per share to Tangiers Investors LP for equity funding.

In April 2010, the Company issued 100,000 shares of common stock at $.04 per share to KYTX, LLC in exchange for an extension on a note payment.

In May 2010, the Company issued 300,926 shares of common stock at $.04 per share and 169,263 shares of common stock at $.033 per share to Tangiers Investors LP for equity funding.

In May 2010, the Company issued 300,000 shares of common stock at $.04 per share to SLMI Holdings, LLC in exchange for an extension on a note payment.

In May 2010, the Company issued 412,698 shares of common stock at $.04 per share to Cassel Family Trust as per the stock purchase agreement.

In May 2010, the Company issued 100,000 shares of common stock at $.04 per share to White Oak Land and Minerals Development, LLC for consulting services.
 
In May 2010, the Company issued 800,000 shares of common stock at $.01 per share to Ron Ferlisi in exchange for satisfaction of notes payable.

In May 2010, the Company issued 500,000 shares of common stock at $.01 per share to Rui Figueiredo in exchange for satisfaction of notes payable.

In May 2010, the Company issued 500,000 shares of common stock at $.01 per share to Maria Rothman in exchange for satisfaction of notes payable.

In May 2010, the Company issued 200,000 shares of common stock at $.01 per share to Jody Samuels in exchange for satisfaction of notes payable.

In May 2010, the Company issued 500,000 shares of common stock at $.01 per share to Faith Capital NY LLC in exchange for satisfaction of notes payable.

In May 2010, the Company issued 1,000,000 shares of common stock at $.01 per share to Jeff Schwartz in exchange for satisfaction of notes payable.

In May 2010, the Company issued 500,000 shares of common stock at $.01 per share to Steven Reiss in exchange for satisfaction of notes payable.
 
In May 2010, the Company issued 333,333 shares of common stock at $.03 per share to Charles and Mary Crum as per the stock purchase agreement.

In June 2010, the Company issued 150,000 shares of common stock at $.05 per share to Jeff Parker in exchange for consulting services.

In June 2010, the Company issued 500,000 shares of common stock at $.05 per share to Jim Anderson as a reduction of debt for expenses paid on behalf of the company.
 
 
 
 
 
F-24

 
 

 
US NATURAL GAS CORP
(Formerly Adventure Energy, Inc.)
 (A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
From Inception (March 28, 2008) through September 30, 2011 (Unaudited)


NOTE L - COMMON STOCK ISSUANCES/WARRANTS (continued)
 
In June 2010, the Company issued 348,189 shares of common stock at $.03 per share to Tangiers Investors LP for equity funding.

In June 2010, the Company issued 833,333 shares of common stock at $.03 per share to Wayne Anderson as payment towards accrued wages.

In June 2010, the Company issued 666,667 shares of common stock at $.03 per share to Cassel Family Trust as per the stock purchase agreement.

In July 2010, the Company issued 25,000 shares of common stock at $.03 per share to James Crum for a lease bonus payment.

In July 2010, the Company issued 25,000 shares of common stock at $.03 per share to Charles and Mary Crum for a lease bonus payment.

In July 2010, the Company issued 500,000 shares of common stock at $.03 per share to Del Mar Corporate Consulting, LLC for consulting and marketing services.

In July 2010, the Company issued 625,000 shares of common stock at $.04 per share to Wayne Anderson as payment towards accrued wages.

In July 2010, the Company issued 476,191 shares of common stock at $.02 per share to Tangiers Investors LP as payment towards a convertible debenture.

In July 2010, the Company issued 714,285 shares of common stock at $.07 per share to Chris Davies on behalf of Atlas Capital Holdings for legal services.

In July 2010, the Company issued 710,901 shares of common stock at $.02 per share to Tangiers Investors LP as payment towards a convertible debenture.

In July 2010, the Company issued 170,940 shares of common stock at $.06 per share to Tangiers Investors LP for equity funding.

In July 2010, the Company issued 130,000 shares of common stock at $.09 per share to White Oak Land and Minerals Development, LLC for consulting services.

In July 2010, the Company issued 1,000,000 shares of common stock at $.001 per share to Bull In Advantage.  The shares were returned to the Company and retired due to failure of the shareholder to satisfy the terms of the debt transaction.

In August 2010, the Company issued 395,061 shares of common stock at $.04 per share to Tangiers Investors LP for equity funding.

In August 2010, the Company issued 2,423,311 shares of common stock at $.015 per share to ARRG Corp as payment towards a note.

In August 2010, the Company issued 2,423,311 shares of common stock at $.015 per share to Caesar Capital Group, LLC as payment towards a note.

In August 2010, the Company issued 2,300,000 shares of common stock at $.01 per share to Mazuma Funding Corp as payment towards a note.

In August 2010, the Company issued 1,225 shares of common stock at $.25 per share to Horace Womack as per the Common Stock Purchase Warrant subscription agreement.
 
 
 
 
F-25

 
 
US NATURAL GAS CORP
(Formerly Adventure Energy, Inc.)
 (A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
From Inception (March 28, 2008) through September 30, 2011 (Unaudited)


NOTE L - COMMON STOCK ISSUANCES/WARRANTS (continued)

In September 2010, the Company issued 4,500,000 shares of common stock at $.01 per share to Caesar Capital Group, LLC as payment towards a note.

In September 2010, the Company issued 100,000 shares of common stock at $.02 per share to Ron Ferlisi as per the stock purchase agreement.

In September 2010, the Company issued 800,000 shares of common stock at $.01 per share to Doug Miglino as payment towards a note.

In September 2010, the Company issued 200,000 shares of common stock at $.025 per share to Brian Feingold for financing services.

In September 2010, the Company issued 380,518 shares of common stock at $.02 per share to Tangiers Investors LP for equity funding.

In September 2010, the Company issued 765,000 shares of common stock at $.01 per share to Ron Ferlisi as payment towards a note.

In September 2010, the Company issued 765,000 shares of common stock at $.01 per share to Vincent Bardong as payment towards a note.

In September 2010, the Company issued 300,000 shares of common stock at $.01 per share to SLMI Holdings LLC for extending a note due date.

In September 2010, the Company issued 1,500,000 shares of common stock at $.015 per share to Rui Figueiredo as payment towards a note.

In September 2010, the Company issued 1,500,000 shares of common stock at $.015 per share to First Barrington Group as payment towards a note.
 
In October 2010, the Company issued 380,518 shares of common stock at $.02 per share to Tangiers Investors LP for equity funding.

In October 2010, the Company issued 1,100,000 shares of common stock at $.0135 per share to John R. Rogers as per the stock purchase agreement.

In October 2010, the Company issued 1,100,000 shares of common stock at $.0135 per share to John R. Rogers as per the stock purchase agreement.

In October 2010, the Company issued 750,000 shares of common stock at $.01 per share to First Barrington Group as payment towards a note.

In October 2010, the Company issued 750,000 shares of common stock at $.01 per share to Rui Figueiredo as payment towards a note.

In November 2010, the Company issued 1,190,476 shares of common stock at $.02 per share to Tangiers Investors LP for equity funding.

In November 2010, the Company issued 4,325,000 shares of common stock at $.01 per share to Mazuma Funding Corp as payment towards a note.

In November 2010, the Company issued 2,500 shares of common stock at $.02 per share to Matthew Holden for participation in drilling/re-work program.
 
 
 
 
F-26

 

 
US NATURAL GAS CORP
(Formerly Adventure Energy, Inc.)
 (A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
From Inception (March 28, 2008) through September 30, 2011 (Unaudited)


NOTE L - COMMON STOCK ISSUANCES/WARRANTS (continued)

In November 2010, the Company issued 2,500 shares of common stock at $.02 per share to Adam Holden for participation in drilling/re-work program.

In November 2010, the Company issued 50,000 shares of common stock at $.02 per share to Brian Warshaw as per the terms of a promissory note dated January 2010.
 
In November 2010, the Company issued 50,000 shares of common stock at $.02 per share to Jim Gallucio as per the terms of a promissory note dated January 2010.

In November 2010, the Company issued 2,500,000 shares of common stock at $.01 per share to Rui Figueiredo as payment towards a note.

In November 2010, the Company issued 2,500,000 shares of common stock at $.01 per share to Dave Miller as payment towards a note.

In November 2010, the Company issued 600,000 shares of common stock at $.02 per share to Dave Matheny as per the Common Stock Purchase Warrant subscription agreement.

In November 2010, the Company issued 4,000,000 shares of common stock at $.01 per share to Dave Matheny as payment towards a note.

In November 2010, the Company issued 1,000,000 shares of common stock at $.01 per share to Howard Matheny as payment towards a note.

In November 2010, the Company issued 5,340,909 shares of common stock at $.015 per share to Caesar Capital Group, LLC as payment towards a note.

In November 2010, the Company issued 300,000 shares of common stock at $.01 per share to SLMI Holdings LLC for extending a note due date.
 
In November 2010, the Company issued 1,169,590 shares of common stock at $.02 per share to Tangiers Investors LP for equity funding.

In December 2010, the Company issued 35,000 shares of common stock at $.01 per share to Wayne Anderson as compensation as a Director.

In December 2010, the Company issued 35,000 shares of common stock at $.01 per share to Jim Anderson as compensation as a Director.

In December 2010, the Company issued 6,500,000 shares of common stock at $.01 per share to Mazuma Funding Corp as payment towards a note.

In December 2010, the Company issued 7,041,158 shares of common stock at $.01 per share to Jim Anderson as a reduction of debt for expenses paid on behalf of the company.

In December 2010, the Company issued 2,000,000 shares of common stock at $.01 per share to White Oak Land and Minerals Development, LLC for consulting services.

In January 2011, the Company issued 892,891 shares of common stock at $.009 per share to Wayne Anderson for compensation.
 
In January 2011, the Company issued 2,400,000 shares of common stock at $.005 per share to Asher Enterprises, Inc. for a partial reduction of a convertible debenture.
 
In January 2011, the Company issued 1,971,608 shares of common stock at $.006 per share to Tangiers Investors, LP for a partial reduction of a convertible debenture.
 
 
 
F-27

 
 
US NATURAL GAS CORP
(Formerly Adventure Energy, Inc.)
 (A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
From Inception (March 28, 2008) through September 30, 2011 (Unaudited)


NOTE L - COMMON STOCK ISSUANCES/WARRANTS (continued)

In January 2011, the Company issued 2,222,222 shares of common stock at $.005 per share to Asher Enterprises, Inc. for a partial reduction of a convertible debenture.
 
In January 2011, the Company issued 1,000,000 shares of common stock at $.015 per share to Blair Scanlon as per the stock purchase agreement.
 
In January 2011, the Company issued 1,764,706 shares of common stock at $.007 per share to Asher Enterprises, Inc. for a partial reduction of a convertible debenture.
 
In January 2011, the Company issued 1,500,000 shares of common stock at $.01 per share to Rui Figueiredo for consulting services.
 
In January 2011, the Company issued 2,500,000 shares of common stock at $.006 per share to Asher Enterprises, Inc. for a final reduction of a convertible debenture plus accrued interest.
 
In January 2011, the Company issued 845,897 shares of common stock at $.01 per share to Wayne Anderson for compensation.
 
In February 2011, the Company issued 58,000 shares of common stock at $.01 per share to Deborah Crum for an extension on a lease.
 
In February 2011, the Company issued 25,000 shares of common stock at $.01 per share to James Crum for an extension on a lease.
 
In February 2011, the Company issued 50,000 shares of common stock at $.01 per share to Marshall Garland for an extension on a note agreement.
 
In February 2011, the Company issued 1,818,182 shares of common stock at $.006 per share to Asher Enterprises, Inc. for a partial reduction of a convertible debenture.
 
In February 2011, the Company issued 4,426,940 shares of common stock at $.006 per share to Caesar Capital Group, LLC for a full reduction of a convertible debenture and accrued interest.
 
In February 2011, the Company issued 4,426,940 shares of common stock at $.006 per share to ARRG Corp for a full reduction of a convertible debenture and accrued interest.
 
In February 2011, the Company issued 2,448,980 shares of common stock at $.005 per share to Asher Enterprises, Inc. for a partial reduction of a convertible debenture.
 
In February 2011, the Company issued 2,790,698 shares of common stock at $.004 per share to Asher Enterprises, Inc. for a partial reduction of a convertible debenture.
 
In March 2011, the Company issued 1,853,659 shares of common stock at $.004 per share to Asher Enterprises, Inc. for a final reduction of a convertible debenture and accrued interest.
 
In March 2011, the Company issued 3,000,000 shares of common stock @ $.008 per share to David Matheny as payment towards a note.
 
In March 2011, the Company issued 2,261,655 shares of common stock @ $.01 per share to J. Paxton Barnett as payment towards a note.
 
In March 2011, the Company issued 2,261,655 shares of common stock @ $.01 per share to Charlotte Van Ness Trust as payment towards a note.
 
 
 
 
F-28

 
 
US NATURAL GAS CORP
(Formerly Adventure Energy, Inc.)
 (A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
From Inception (March 28, 2008) through September 30, 2011 (Unaudited)


NOTE L - COMMON STOCK ISSUANCES/WARRANTS (continued)

In March 2011, the Company issued 3,753,807 shares of common stock at $.004 per share to Tangiers Investors, LP for a final reduction of a convertible debenture and accrued interest.
 
In April 2011, the Company canceled 1,209,628 shares of common stock which were held in escrow upon repayment of a convertible debenture dated May 24, 2009.

In April 2011, the Company issued 9,815,849 shares of common stock at $.006 per share to Prolific Group LLC  as payment towards a note.

In April 2011, the Company issued 2,000,000 shares of common stock at $.01 per share to David Miller for cash.

In April 2011, the Company issued 631,313 shares of common stock at $.008 per share to Tangiers Investors LP for equity funding.

In April 2011, the Company issued 4,166,666 shares of common stock at $.006 per share to Redwood Management LLC  as payment towards a note.

In April 2011, the Company issued 2,000,000 shares of common stock at $.005 per share to Asher Enterprises, Inc. for a partial reduction of a convertible debenture.

In April 2011, the Company issued 5,294,118 shares of common stock at $.0085 per share to White Oak Land and Minerals Development, LLC as a payment towards a note.  This transaction was canceled and the shares are to be returned.

In April 2011, the Company issued 2,564,103 shares of common stock at $.0039 per share to Asher Enterprises, Inc. for a partial reduction of a convertible debenture.

In May 2011, the Company issued 2,500,000 shares of common stock at $.006 per share to David Miller as payment towards a note.

In May 2011, the Company issued 2,857,143 shares of common stock at $.0035 per share to Asher Enterprises, Inc. for a partial reduction of a convertible debenture.

In May 2011, the Company issued 1,000,000 shares of common stock at $.007 per share to John Delladonna for tax services.

In May 2011, the Company issued 3,515,152 shares of common stock at $.0033 per share to Asher Enterprises, Inc. for a final reduction of a convertible debenture and accrued interest.

In May 2011, the Company issued 5,0000,000 shares of common stock at $.005 per share to David Miller as payment towards a note.

In June 2011, the Company issued 5,000,000 shares of common stock at $.005 per share to David Matheny as payment towards a note.

In June 2011, the Company issued 5,000,000 shares of common stock at $.004 per share to Wayne Anderson as payment towards accrued wages.

In June 2011, the Company issued 4,832,594 shares of common stock at $.004 per share to Jim Anderson as payment towards accrued wages.

In June 2011, the Company issued 4,324,183 shares of common stock at $.0025 per share to Tangiers Investors LP as payment towards accounts payable.

In June 2011, the Company canceled 12,880,344 shares of common stock held by Wayne Anderson in exchange for 322,008.6 shares of Series C Preferred stock.

In June 2011, the Company canceled 18,629,253 shares of common stock held by Jim Anderson in exchange for 465,731.33 shares of Series C Preferred stock.
 
 
 

 
 
F-29

 
 
 
US NATURAL GAS CORP
(Formerly Adventure Energy, Inc.)
 (A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
From Inception (March 28, 2008) through September 30, 2011 (Unaudited)


NOTE L - COMMON STOCK ISSUANCES/WARRANTS (continued)

In July 2011, the Company issued 8,000,000 shares of common stock at $.003 per share to Sarah Speno for consulting services.

In July 2011, the Company issued 17,857,143 shares of common stock at $.0025 per share to Tangiers Investors LP as payment towards a note.

In July 2011, the Company issued 2,000,000 shares of common stock at $.005 per share to White Oak Land and Minerals Development, LLC  for consulting services.

In July 2011, the Company issued 4,166,667 shares of common stock at $.0024 per share to Asher Enterprises, Inc. for a partial reduction of a convertible debenture.

In July 2011, the Company issued 6,000,000 shares of common stock at $.0025 per share to Asher Enterprises, Inc. for a partial reduction of a convertible debenture.

In July 2011, the Company issued 12,224,071 shares of common stock at $.0028 per share to Caesar Capital Group, LLC for a partial reduction of a convertible debenture and accrued interest.

In July 2011, the Company issued 6,640,000 shares of common stock at $.0025 per share to Asher Enterprises, Inc. for a final reduction of a convertible debenture and accrued interest.

In August 2011, the Company issued 684,151 shares of common stock at $.006 per share to Prolific Group LLC as payment towards a note.

In August 2011, the Company issued 12,000,000 shares of common stock at $.003 per share to Sarah Speno for consulting services.

In August 2011, the Company issued 7,500,000 shares of common stock at $.0016 per share to Asher Enterprises, Inc. for a partial reduction of a convertible debenture.

In August 2011, the Company issued 12,464,308 shares of common stock at $.0018 per share to Around the Clock Partners, LP as payment towards a note and accrued interest.

In September 2011, the Company issued 11,428,572 shares of common stock at $.0013 per share to Tangiers Investors LP as payment towards accounts payable.

In September 2011, the Company issued 9,333,333 shares of common stock at $.0015 per share to Asher Enterprises, Inc. for a partial reduction of a convertible debenture.

In September 2011, the Company issued 11,142,857 shares of common stock at $.0014 per share to Asher Enterprises, Inc. for a partial reduction of a convertible debenture.

In September 2011, the Company issued 4,000,000 shares of common stock at $.002 per share to Sarah Speno for consulting services.

In September 2011, the Company issued 13,791,209 shares of common stock at $.0013 per share to Tangiers Investors LP as payment towards accounts payable.

Warrants outstanding at September 30, 2011 and December 31, 2010 are 63,613,415 and 61,113,415, respectively.  Each warrant enables the holder to acquire one share of the Company's common stock at a specified exercise price for a term of three to five years.  Warrants outstanding at September 30, 2011 have vesting dates through May 2012 and expiration dates through May 2017.
 
Warrants issued for the nine months ending September 30, 2011 are 2,500,000. There were no warrants exercised or canceled for the nine months ending September 30, 2011.


 
F-30

 

US NATURAL GAS CORP
(Formerly Adventure Energy, Inc.)
 (A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
From Inception (March 28, 2008) through September 30, 2011 (Unaudited)


NOTE L - COMMON STOCK ISSUANCES/WARRANTS (continued)

On June 3, 2010 in consideration for the acquisition of Wilon Resources, Inc. (see Note B) each Wilon shareholder received one share of the Company's common stock plus one warrant to purchase one additional share of common stock of the Company at an exercise price of $.25 per share to be exercisable for a period of 5 years from the date of issue.  The total shares of common stock and warrants issued for the acquisition were 49,207,973 each.  In July 2010, the Company canceled 1,000,000 shares of common stock and 1,000,000 warrants it obtained through the Wilon acquisition.  The cancelation of common stock was accounted for as a reduction in the acquisition price for Wilon.

NOTE M – STOCKHOLDERS' EQUITY
 
On April 14, 2011, the Board of Directors unanimously approved the designation of a series of preferred stock to be known as "Series C Preferred Stock".  The designations, powers, preferences and rights, and the qualifications, limitations or restrictions hereof, in respect of the Series C Preferred Stock shall be as hereinafter described. The holders of Series C Preferred Stock shall not be entitled to receive dividends nor shall dividends be paid on common stock or any other Series Preferred Stock while Series C Preferred shares are outstanding.  The holders of Series C Preferred Stock shall be entitled to vote on all matters submitted to a vote of the Shareholders of the Company and shall have such number of votes equal to the number of shares of Series C Preferred Stock held on a forty votes per one share basis.  Upon the availability of a sufficient number of authorized but unissued and unreserved shares of common stock, the holders of Series C Preferred Stock may at their election convert such shares in to fully paid and non-assessable shares of common stock at the rate of forty shares of common stock for each share of series C Preferred Stock. The Board of directors of the Company, pursuant to authority granted in the Articles of Incorporation, created a series of preferred stock designated as Series C Preferred Stock (the "Series C Preferred Stock") with a stated value of $0.001 per share. The number of authorized shares constituting the Series C Preferred Stock was One Million (1,000,000) shares. At September 30, 2011, there are 828,649 shares issued and outstanding.

On September 2, 2009, the Board of Directors unanimously approved the designation of a series of preferred stock to be known as “Series A Preferred Stock”.  The designations, powers, preferences and rights, and the qualifications, limitations or restrictions hereof, in respect of the Series A Preferred Stock shall be as hereinafter described. The holders of Series A Preferred Stock shall not be entitled to receive dividends nor shall dividends be paid on common stock or any other Series Preferred Stock while Series A Preferred shares are outstanding. The holders of Series A Preferred Stock shall be entitled to vote on all matters submitted to a vote of the Shareholders of the Company and shall have such number of votes equal to the number of shares of Series A Preferred Stock held on a one per one share basis. Upon the availability of a sufficient number of authorized but unissued and unreserved shares of common stock, the holders of any Series A Preferred Stock shall be entitled to convert such shares in to fully paid and non-assessable shares of common stock at the rate of 7.8 shares of common stock for each share of Series A Preferred Stock only if the Company has failed to satisfy all financial obligations by the designated time inclusive of the cure period. The Board of Directors of the Company, pursuant to authority granted in the Articles of Incorporation, created a series of preferred stock designated as Series A Preferred Stock (the “Series A Preferred Stock”) with a stated value of $0.001 per share.  The number of authorized shares constituting the Series A Preferred Stock was Three Million (3,000,000) shares.  At September 30, 2011 and December 31, 2010, there are 1,000,000 shares issued and outstanding.
 
On September 2, 2009, the Board of Directors unanimously approved the designation of a series of preferred stock to be known as “Series B Preferred Stock”.  The designations, powers, preferences and rights, and the qualifications, limitations or restrictions hereof, in respect of the Series B Preferred Stock shall be as hereinafter described.  The holders of Series B Preferred Stock shall not be entitled to receive dividends. The holders of Series B Preferred Stock shall not be entitled to vote on any matters submitted to a vote of the Shareholders of the Company. Upon the availability of a sufficient number of authorized but unissued and unreserved shares of common stock, the holders of Series B Preferred Stock may at their election convert such shares in to fully paid and non-assessable shares of common stock at the rate of ten shares of common stock for each share of series B Preferred Stock. The Board of Directors of the Company, pursuant to authority granted in the Articles of Incorporation, created a series of preferred stock designated as Series B Preferred Stock (the “Series B Preferred Stock”) with a stated value of $0.001 per share. The number of authorized shares constituting the Series B Preferred Stock was Two Million (2,000,000) shares.  At September 30, 2011 and December 31, 2010, there are 300,000 shares issued and outstanding.

The number of common shares authorized with a stated value of $0.001 per share at September 30, 2011 and December 31, 2010 is 500,000,000 and 200,000,000, respectively.  At September 30, 2011 and December 31, 2010, there are 360,918,576 and 148,947,378 shares of common stock issued and outstanding, respectively.
 
 

 
 
F-31

 
 
 
US NATURAL GAS CORP
(Formerly Adventure Energy, Inc.)
 (A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
From Inception (March 28, 2008) through September 30, 2011 (Unaudited)
 

NOTE N – RELATED PARTY TRANSACTIONS

Notes receivable, shareholder totals $142,158 and $110,597 at September 30, 2011 and December 31, 2010, respectively.  Interest receivable on the notes total $1,351 and $2,832 at September 30, 2011 and December 31, 2010, respectively. The notes are due on demand with a 4% interest rate.

Included within accounts payable and accrued expenses are wages due officers and shareholders of $276,965 and $260,000 as of September 30, 2011 and December 31, 2010, respectively.

NOTE O -COMMITMENTS AND CONTINGENCIES

The Company has an operating lease for office premises in St. Petersburg.  The three-year lease was entered into on February 1, 2008 and commenced on April 1, 2008.  The Company amended the original lease in December 2009 increasing the monthly rent from $600 to $1,353 monthly.  The Company renewed the lease through November 2011. Effective December 1, 2010 the monthly rent increased to $1,404.
  
On March 1, 2011, the Company entered into an operating lease for office space. The lease term is for two years with monthly rent totaling $888 in year one and $963 in year two.

Rent expense on all operating leases for the period of March 28, 2008 (inception) to September 30, 2011 was $61,539.  Future minimum rental obligations at September 30, 2011 are $5,474 in 2011, $11,406 in 2012, and $1,926 in 2013.
 
On July 15, 2010 the Company entered into an employment agreement with Mr. Chuck Kretchman to serve as the Company’s Chief Financial Officer upon the terms and provisions and, subject to the conditions set forth in the Agreement, for a term, commencing on July 15, 2010, and terminating on December 31, 2011 unless earlier terminated as provided in the Agreement.  The Agreement included options to the Chief Financial Officer to purchase 600,000 shares of common stock at an average price of $.15 per share. The Executive agrees to accept compensation of $90,000 from January 1, to December 31, 2011. The Agreement contains a six month non-solicitation  clause and a confidentiality clause.
 
On April 1, 2009, the Company executed employment agreements for the offices of President, Vice-President, Treasurer, and Secretary of the Company upon the terms and provisions and, subject to the conditions set forth in the Agreement, for a term of three (3) years, commencing on April 1, 2009, and terminating on March 31, 2012, unless earlier terminated as provided in the Agreement. The Agreement included options to the President to purchase 500,000 shares of common stock at an average price of $.75 per share and 250,000 shares to the Vice-President.  In addition, the Vice-President can be issued annual grants of 125,000 options on May 1 of each year of employment throughout the duration of the term at an average price of $.75.

Executives agree to accept, for the first year of the Employment Term a salary at an annual rate of $120,000 for the President and $60,000 for the Vice-President, payable in accordance with the Company's regular payroll practices as from time to time in effect, less all withholdings and other deductions required to be deducted in accordance with any applicable federal, state, local or foreign law, rule or regulation.  After the first year during the Employment Term, the annual salary for each successive year will be increased by the lesser of (i) 10% or (ii) the percentage increase, if any, in the CPI for each year just completed measured for the entire twelve (12) month period, plus three percent (3%). 
 
NOTE P- LENDER ACQUISITION AGREEMENT

A lender acquisition agreement was entered into on September 4, 2009 by US Natural Gas Corp and SLMI Holdings, LLC.  Through the agreement, US Natural Gas Corp acquired SLMI Options, LLC, a Nevada Limited Liability Company.  SLMI Options, LLC is the secured lender of the three commercial notes defined below. 

This Agreement is made with respect to loans made by SLMI Holdings, LLC to Harry Thompson (“Thompson”), Harlis Trust (“Trust”), Wilon Resources Inc. (“Wilon”) and/or Wilon Gathering System Inc. Purchase Price.  US Natural Gas Corp agrees to pay the following consideration herewith in return for conveyance of the Lender Units.
 
 
 
F-32

 
 
 
US NATURAL GAS CORP
(Formerly Adventure Energy, Inc.)
 (A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
From Inception (March 28, 2008) through September 30, 2011 (Unaudited)


NOTE P- LENDER ACQUISITION AGREEMENT (continued)

$500,000 in financing given May 6, 2005 for construction of a natural gas gathering system in Kentucky (the “Gathering System Loan”), $300,000 mortgage on the Wilon business offices given October 13, 2005 (the “Office Loan”), $175,000 in financing given on October 24, 2006 to finance 176 acres of land in West Virginia and to finance the placement of a natural gas treatment station (the “WV Loan”); these loans include that certain Amendment to Loan Agreements dated August 2, 2006, that certain Receipt for Shares Pledged as Collateral dated December 8, 2007 and that certain Second Amendment to Loan Agreements dated January 27, 2009 (with 7.8 million Wilon shares attached and pledged as additional collateral). Further, the Borrowers and SLMI have agreed to special terms for assignment of loan rights by SLMI and subsequent holders of the loans pursuant to that Acknowledgment by Borrowers delivered Jan. 5, 2009.  At December 31, 2010 the notes receivable balance was eliminated through consolidation.
 
$1,000,000 in financing was made payable by secured promissory note.  By December 31, 2010, US Natural Gas Corp shall have paid at least $250,000 in cash toward the Secured Note.  By December 31, 2011, US Natural Gas Corp shall have paid at least $250,000 more.  By December 31, 2012, US Natural Gas Corp shall have paid at least $250,000 more.  All unpaid principal and interest shall be due no later than December 31, 2013.  To the extent, US Natural Gas Corp tenders proceeds from dispositions of real estate collateral on the SLMI Loans (which dispositions shall require the written consent of Owner), said payments shall be applied toward the Secured Note, but they shall not reduce the minimum installments required for years 2010 through 2012.  From January 2010 to December 2013, a minimum monthly cash installment of $4,000 shall be paid by US Natural Gas Corp on the Secured Note until it is paid in full.  Additional Security and Collateral for the Secured Note and the covenants hereunder:  At September 30, 2011 and December 31, 2010 the notes payable balances were $980,000 (See Note J).

NOTE Q – SUBSEQUENT EVENTS

On May 3, 2011, the Company received a Letter of Intent (“LOI”) from Northwest Florida Operations, Inc. (“Buyer”) for the purchase of certain assets and assumption of certain liabilities under control by US Natural Gas Corp WV. Under the terms of the LOI, the Company is to receive consideration in the amount of Two Million Dollars ($2,000,000) with Six Hundred Thousand Dollars ($600,000) to be paid at closing and the balance over a five year period and the Buyer is to assume approximately Two Million Dollars ($2,000,000) in liabilities. The transaction is scheduled to close on or before June 15, 2011. On June 15, 2011, the Buyer requested an extension for closing to on or before July 29, 2011 so that sufficient due diligence could be completed. On July 29, 2011, the Buyer requested an additional thirty days to close the transaction. As of the date of this filing, the Company has not agreed to the second extension nor agreed to close upon the original terms. There are no guarantees that the transaction will close. On October 31, 2011, the Company notified the Buyer that it was terminating further discussions pertaining to the asset acquisition due to failure of the Buyer to close on the agreed upon date. The Company is currently in discussion with several parties interested in a joint venture, farm-out agreement, or acquisition of the Company's West Virginia Subsidiary.
 
 
 
 
F-33

 
 
ITEM 2:  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Special Note on Forward-Looking Statements

Certain statements in “Management’s Discussion and Analysis or Plan of Operation” below, and elsewhere in this quarterly report, are not related to historical results, and are forward-looking statements.  Forward-looking statements present our expectations or forecasts of future events.  You can identify these statements by the fact that they do not relate strictly to historical or current facts.  These statements involve known and unknown risks, uncertainties and other factors 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.  Forward-looking statements frequently are accompanied by such words such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” or the negative of such terms or other words and terms of similar meaning.  Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, achievements, or timeliness of such results.  Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of such forward-looking statements.  We are under no duty to update any of the forward-looking statements after the date of this quarterly report.  Subsequent written and oral forward-looking statements attributable to us or to persons acting in our behalf are expressly qualified in their entirety by the cautionary statements and risk factors set forth below and elsewhere in this quarterly report, and in other reports filed by us with the SEC.

You should read the following description of our financial condition and results of operations in conjunction with the financial statements and accompanying notes included in this report.
 
Overview
 
US Natural Gas Corp (“US Natural Gas”, the “Company”, “we”, “us”, or “our”) was organized as a Florida Corporation on March 28, 2008 under the name of Adventure Energy, Inc.
 
US Natural Gas is in the oil and natural gas industry and is engaged in exploration, development and production activities in the Appalachian Basin, particularly in the states of Kentucky and West Virginia. Our business activities focus primarily on the drilling and acquisition of proven developed and underdeveloped proprieties and on the enhancement and development of these properties.

Our operations are currently divided amongst two wholly owned subsidiaries, US Natural Gas Corp KY (“KY”) and US Natural Gas Corp WV (“WV”) (formerly Wilon Resources, Inc.). We maintain leaseholds on mineral rights covering approximately 5,700 acres in addition to rights of way in Kentucky and 12,000 acres in West Virginia.  We also own, through a wholly owned subsidiary, approximately 320 acres of mineral rights in Wayne County, West Virginia and 182 acres of mineral rights in Edmonson County, Kentucky.  In addition, we own 199 acres of surface in Wayne County, West Virginia which houses our operational facilities. Our first revenue from production was generated in July 2009.  

       
Acres
   
Total Wells
   
Producing
   
Not in Production
 
West Virginia - Wayne County (c)
   
12,320
(a,b)
   
122
     
67
     
55
 
 
a
)
12,000 acres of mineral rights under lease
                               
 
b
)
320 acres of mineral rights owned by subsidiary,
E 2 Investments, LLC
                               
 
c
)
Most wells located in West Virginia were originally operated by B.T.U. Pipeline, Inc. ("BTU"), a wholly owned subsidiary acquired in the
Wilon Resources, Inc. acquisition.  
                               
 
d
)
On May 5, 2010, the Company entered into an agreed order with the West Virginia Department of Environmental Protection to settle all prior violations with a set fine and the transfer of all wells from BTU to E 3 Petroleum Corp ("E 3"), a wholly owned subsidiary of the Company.
                               
Kentucky - multiple counties (e)
   
5,700
 (e,f)
   
58
     
27
     
31
 
 
e
)
Counties:  Hart, Adair, Russell, Allen Monroe, Green, Edmonson
                               
 
f
 
)
 
182 acres of mineral rights owned by subsidiary,
E 2 Investments, LLC
                               
 
 
 
 
3

 

 
 US Natural Gas Corp WV’s ("WV") operations are based in Wayne County, West Virginia and are primarily concentrated on the production of commercially viable natural gas. The wells operated and owned by WV are held under the bond of E 3 Petroleum Corp ("E 3"). Through E 3, WV operates 122 natural gas wells that were previously shut-in from June 2005 to April 2010 due to a delivery constraint. WV has entered into an agreement with a third party to allow for the purchase of its natural gas production on a firm capacity basis which management believes will remedy the prior transmission constraint. A list of all wells operated by E 3 in Wayne County, WV can be found below.
 
During the second calendar quarter of 2011, our operations in West Virginia were negatively affected by compressor issues. Prior to the beginning of the quarter, the Company purchased a Knox Western compressor to replace a previously leased compressor. The newly acquired compressor failed to maintain the required pressure for delivery to Columbia Gas Transmission. The Company elected to disconnect this compressor and enter into a new lease agreement for a natural gas powered compressor. The new natural gas powered compressor was installed and started during August with sales resuming simultaneously.
 
WAYNE COUNTY, WEST VIRGINIA WELLS
WELL NAME
TOTAL DEPTH (a)
STATUS (b)
PRODUCT (c)
MINNIE LYCAN #2
1987
PL
NG
E. LALONDE #1-711
1905
PR
O/NG
H. LYCAN #1
2153
PR
NG
H. LYCAN #2 
2163
SI
NG
CHARLES DAVIS #1
1947
SI
NG
LAFAYETTE FERGUSON #2
1876
SI
NG
B.T. LESTER #1
1912
SI
NG
T. FRASHER #2-702
1986
PR
O/NG
O.P. BELCHER #1
1755
PR
NG
J.D. PEMBERTON #1
1890
PR
NG
GENTRY & DOROTHY BELCHER #1
1816
PR
NG
B.R. PRICHARD #1
1978
SI
NG
MYRTLE CRUM #1
1903
PR
NG
R&E WELLMAN #642 
1953
SI
NG
PARSLEY #1-706
1994
PR
NG
M. HOOSIER #2
2030
PR
NG
CABELL MASSIE #1
2061
SI
NG
SHANNON HEIRS-M. CRUM #1
1983
PR
NG
CARDWELL #1
2170
SI
NG
WELLMAN #645
1986
SI
NG
M. HOOSER #1 
2125
PR
NG
SPENCER #1-703
1955
PR
NG
SKEENS #1
1852
PR
NG
TONEY PEARL #1
2063
SI
NG
SPENCER #2-704
2074
SI
NG
OKEY BARTRAM #3  
2172
SI
NG
MYRTLE VICARS #1
2220
PR
NG
J. LAKIN #2
2823
PR
NG
BASIL NAPIER #B-4
2950
SI
NG
KIZZIE VINSON #1
2092
PR
NG
PARSLEY #2-707
1910
PR
NG
R. SHANNON #5
2086
PR
NG
ARNOLD CYRUS (UNITED FUEL) #6
2066
SI
NG
T.L. BLACK #7
2180
PR
NG
T.L. BLACK #8
2172
SI
NG
FERGUSON - TL BLACK #9
2097
PR
NG
T.L. BLACK-LESTER #10
2224
SI
NG
PELFREY FARM #11
1997
SI
NG
NELLIE & OTHERS RAYBURN #1
1867
PR
NG
KIZZIE VINSON #2
2115
SI
NG
 
 
 
4

 
 
 
J. FRAZIER, FERGUSON #1
2125
SI
NG
T.L. BLACK #12
2140
PR
NG
JOSEPHINE BELCHER #1-705
1959
SI
NG
GLENN RIGGS #653
2102
PR
NG
T.L. BLACK-LYCAN #13
2128
PR
NG
W. MICHAEL #1
1993
SI
NG
ALBERT ROSS #1
2127
PR
NG
S. D. McGEE #654
3610
PR
NG
L. FERGUSON #2 
2120
SI
NG
MYRTLE CRUM #3
1978
PR
NG
E. PYLES #699 
1955
PR
NG
ALBERT ROSS #2
1940
SI
NG
R. SHANNON #14
2083
PR
NG
MYRTLE VICARS #2
2138
PR
NG
MATOVICH #656
1913
PR
O/NG
C. C. HATTEN, ETAL #658
1858
PR
NG
PETERS #15
2025
PR
NG
TUCKER HEIRS (UNITED FUEL 1) #17
2176
PR
NG
L. L. LYCAN- ESTATE #1
2102
SI
NG
SUSIE JOHNSON #1
2981
PR
NG
U. G. BARTRAM #19
2193
SI
NG
F. PRICE #1-S-18
2118
PR
NG
T.L. BLACK 14 - #1
1778
PR
NG
HOWARD BELLOMY #660
1733
SI
NG
C. ROBERTS #1
850
PR
NG
BLANKENSHIP #2 
1989
SI
NG
WALTER BOYS #1 
1850
PR
NG
T.L. BLACK #21
2252
SI
NG
T.L. BLACK #20
1896
PR
NG
MAXIE McGEE #662
3944
SI
NG
LYCAN/MILLS #1
1929
SI
NG
ERIE SMITH #22
2020
PR
NG
GRACIE  FERGUSON #23
2045
SI
NG
T. PETERS #F-1-S-24
2147
PR
NG
RAY STALEY #666
1839
PR
NG
S. FERGUSON #1 
1910
SI
NG
MATOVICH #667
2068
SI
NG
DEWEY WATTS #1
2069
SI
NG
DAVIS #1
2030
PR
NG
R. SHANNON #25
2030
SI
NG
P.D. BECKLEY #1
1075
SI
NG
FLOYD ROBERTS #P-26
2648
PR
NG
JOHN BOYES #1
2041
PR
NG
L. B. SMITH #1
1094
SI
NG
A. W. JORDAN, JR. 31
1920
PR
NG
T. J. HATTEN ETAL #677
2113
PR
NG
MYRTIE  CRUM #27
1936
SI
NG
ROBERT DAVIS #1
2045
SI
NG
ERIE LAKIN #1
3491
PL
NG
L. BILLUPS #1(684) 
2152
PR
NG
BILLUPS #685 
1759
PR
NG
FREELAND THOMPSON #F-1
 
SI
NG
L. BILLUPS #686 
1774
PR
NG
L. BILLUPS #687
2868
SI
NG
L. BILLUPS #689
1898
PR
NG
L. BILLUPS #690
1787
PR
NG
ARTHUR B. FULLER #691
3608
SI
NG
ERIE LAKIN #2 
1787
PR
NG
BUTLER DAVIS #1 (719)
3103
PR
O/NG
I. BOWLING #1 
2084
SI
NG
HURRICANE 1
2735
SI
NG
HURRICANE 2
 
SI
NG
HURRICANE 3
 
SI
NG
I. BOWLING 2 
3010
PR
NG
I. BOWLING 3R 
3060
PR
NG
I. BOWLING 4 
2995
PR
NG
I. BOWLING 5 
3030
PR
NG
I. BOWLING 6 
3104
PR
NG
HURRICANE 4
 
SI
NG
HURRICANE 5
 
SI
NG
HURRICANE 6
 
SI
NG
HURRICANE 7
 
SI
NG
BUTLER DAVIS 2 
3028
PR
NG
S. FERGUSON 2 
2970
PR
NG
BUTLER DAVIS 3 
3050
PR
NG
BUTLER DAVIS 5 
2800
PR
NG
BUTLER DAVIS 4R 
2899
PR
NG
BOWLING 7 
5200
PR
NG
BUTLER DAVIS 9S 
5080
PR
NG
SUSIE JOHNSON 2 
4800
SI
NG
CHIARENZELLI 1 
4800
SI
NG
M CRUM 4 
4200
SI
NG
 
 
 
 
5

 
 
       
(a) - Total Depth as per completion report
   
(b) - Status
     
       i) PR -  In Production
     
      ii) PL  -  Plugged
     
     iii) SI   -  Shut-In
     
(c) - Product
     
       i) O      -  Oil production
     
      ii) NG    -  Natural Gas production
   
     iii) O/NG -  Both Oil & Natural Gas production
   
 

US Natural Gas Corp KY ("KY"), a wholly owned subsidiary, concentrates on oil producing activities mainly in the counties of Green, Hart, Adair, Russell, Edmonson, and Monroe in Kentucky.  E 3 acts as the bonding and operating entity for all wells in Kentucky in which KY maintains a working interest.  On average, KY maintains a 95% working interest and 83% net revenue interest in each well.  To date, E 3 has 58 wells under bond of which 27 are currently producing commercially viable crude with minimal revenue.  It is KY's intentions to continue to drill new wells on the current leasehold base as well as acquire previously drilled wells for re-entering and placing into production.
 
On July 25, 2011, the Company closed its Asset Purchase Agreement with Madison Brothers Investments, LLC. At closing, the Company had advanced the Seller the sum of Ninety Five Thousand Dollars ($95,000.00) in addition to a Promissory Note in the amount of One Hundred Five Thousand Dollars ($105,000.00). The Company paid the remaining balance due of One Hundred Five Thousand Dollars ($105,000.00) during the month of September 2011. The Company has initiated work on the Pine Grove Project and has placed 10 of the 25 wells back into production. The Company will continue to place the remaining wells into production over the next 90 days.

To place each well into production, the Company is inspecting, repairing, and/or replacing flow-lines, electrical, above ground completion components and tank batteries. If required, the Company will insert 4 1/2" casing down-hole to shut off any excess water production. The initial production from the wells which have been addressed is equal to if not better than management's expectations.

PINE GROVE PROJECT
EDMONSON COUNTY, KENTUCKY WELLS
WELL NAME
TOTAL DEPTH (a)
STATUS (b)
PRODUCT (c)
Romie Constant #247
1382
PR
O
Robo Enterprises, Inc. Unit #275
1418
SI
O
Elizabeth Graham #231
1335
SI
O
Elizabeth Graham #237
1355
SI
O
Elizabeth Graham #240
1357
PR
O
Elizabeth Graham #241
1340
PR
O
Elizabeth Graham #245
1380
SI
O
Elizabeth Graham #250
1355
SI
O
Elizabeth Graham #251
1318
SI
O
Elizabeth Graham #253
1380
PR
O
Elizabeth Graham #259
1306
SI
O
Elizabeth Graham #261
1408
PR
O
Elizabeth Graham #262
1380
PR
O
W.A. Vincent #276
1407
SI
O
W.A. Vincent #248
1404
PR
O
W.A. Vincent #267
1382
 
Water Injection Well
Gus Parsley #264
1284
PR
O
Gus Parsley #268
1338
SI
O
Gus Parsley #269
1307
SI
O
Gus Parsley #270
1284
PR
O
Ward Watt #278
1256
PR
O
Ward Watt #2
1272
SI
O
Ward Watt #265
1290
SI
O
Ward Watt #273
1248
PR
O
Guy Wilson #293
1400
 
Water Injection Well
Guy Wilson #1
1357
SI
O
Guy Wilson #2
1355
SI
O
 
 
 
6

 

 
In July, the Company announced the initiation of a new natural gas development project in Whitley County, Kentucky. To date, the Company has acquired two wells capable of producing natural gas and is in discussions to acquire five to seven additional wells. The Company has reached an agreement with Magnum Hunter Production for the transmission of the Company's produced natural gas to its sales point.

WHITLEY COUNTY, KENTUCKY WELLS
WELL NAME
TOTAL DEPTH (a)
STATUS (b)
PRODUCT (c)
HOBERT WHITE #1
1303
SI
O
MILTON HARMON #1
1758
PR
O
 
SOUTH CENTRAL KENTUCKY OIL WELLS
WELL NAME
COUNTY
TOTAL DEPTH (a)
STATUS (b)
PRODUCT (c)
EUGENE ANTLE #1
RUSSELL
1030
PR
O
EUGENE ANTLE #1A
RUSSELL
242
SI
O
EUGENE ANTLE #3
RUSSELL
1220
SI
O
JAMES BRUMMETT #1
ADAIR
1562
PR
O
JAMES BRUMMETT #2
ADAIR
1439
PR
O
ALLEN & LAURA BYLER #2
HART
782
PL
O
ROBERT CALDWELL #1
ADAIR
1481
PR
O
JASON CAMFIELD #1
ADAIR
750
SI
O
PAT FAULKNER #1
GREEN
1836
SI
O
PAT FAULKNER #2
GREEN
1801
SI
O
ERNEST HAMMOND #1
RUSSELL
1740
PR
O
LARRY HARDIN #1
MONROE
404
PR
O
J.C. LASLEY #1
ADAIR
1620
PR
O
J.C. LASLEY #1A
ADAIR
1565
PR
O
J.C. LASLEY #2
ADAIR
1574
PR
O
J.C. LASLEY #3
ADAIR
1566
PR
O
J.C. LASLEY #4
ADAIR
1521
PR
O
J.C. LASLEY #5
ADAIR
1657
PR
O
SALLIE MACKIE #3
CUMBERLAND
442
SI
O
FLORENCE & ELSIE REYNOLDS #1
ALLEN
464
PR
O
FLORENCE & ELSIE REYNOLDS #2
ALLEN
462
PR
O
COLBY SMITH #1
ADAIR
1680
SI
O
D&M FARMS #1
HART
2250
SI
O
GERALDINE TURNER #1
GREEN
1905
PL
O
DETWEILER #1
HART
1025
PR
O
DETWEILER #2
HART
1000
PR
O
DETWEILER #3
HART
900
SI
O
DETWEILER #4
HART
950
SI
O
DETWEILER #5
HART
950
SI
O
DETWEILER #6
HART
900
SI
O
RALPH THOMPSON #1
HART
1225
PR
O
RALPH THOMPSON #2
HART
1100
SI
O
RALPH THOMPSON #3
HART
1200
SI
O
RALPH THOMPSON #4
HART
1100
SI
O
RALPH THOMPSON #5
HART
1000
SI
O
RALPH THOMPSON #6
HART
1000
SI
O
RANDY HATCHER #1
ADAIR
1574
SI
O
 
(a) - Total Depth as per completion report
   
(b) - Status
     
       i) PR -  In Production
     
      ii) PL  -  Plugged
     
     iii) SI   -  Shut-In
     
(c) - Product
     
       i) O      -  Oil production
     
      ii) NG    -  Natural Gas production
   
     iii) O/NG -  Both Oil & Natural Gas production
   
 
 
 
7

 
 
We expect to generate long-term reserve and production growth through drilling activities and further acquisitions.  We believe that our management’s experience and expertise will enable it to identify, evaluate, and develop our oil and natural gas projects.  
 
We continue to seek to identify oil and natural gas leaseholds and wells for possible acquisition. However, there can be no assurance that we will be able to enter into agreements for the acquisition of these wells upon terms that are satisfactory to the Company.
 
While we anticipate the majority of future capital expenditures will be expended on the acquisition of previously drilled wells, reworking of wells, repair and maintenance to our gathering system, and drilling of wells, we intend to use our experience and regional expertise to add leasehold interests to the inventory of leases for future drilling activities, as well as property acquisitions.

Recent Developments

On August 2, 2011, the Board of Directors authorized and shareholders holding a majority of our outstanding voting capital stock (the “Majority Shareholders”) of US Natural Gas Corp (the “Company”) have approved the attached amendment to the Articles of Incorporation (the “Amendment”) with the Secretary of State of Florida. Pursuant to the Amendment, the Company increased its authorized capital to authorize the issuance of 500,000,000 shares of common stock, par value $0.001.

On July 12, 2011, US Natural Gas Corp (the “Company”) issued a press release stating that the upcoming Shareholder Meeting scheduled for July 15, 2011 would be rescheduled. The Company cited the delay in the closing date of the previously announced asset sale as cause for the meeting to be rescheduled. Reference is made to the asset sale in the Company’s quarterly report filed on Form 10-Q with the Securities and Exchange Commission on May 23, 2011. Further reference is made to the asset sale in Item 5 of Part II- Other Information.

On June 24, 2011, US Natural Gas Corp (the “Company”) adopted its 2011 Employee and Consultant Stock Compensation Plan (the “Plan”). The number of shares of common stock of the Company that are available for issuance under the Plan are 36,000,000 shares of the Company’s Common Stock, $0.001 par value. This Registration Statement on Form S-8 was filed with the Securities and Exchange Commission (the “Commission”) for the purposes of registering the 36,000,000 shares of the Company’s Common Stock issuable under the Plan.

On May 3, 2011, the Company received a Letter of Intent (“LOI”) from Northwest Florida Operations, Inc. (“Buyer”) for the purchase of certain assets and assumption of certain liabilities under control by US Natural Gas Corp WV. Under the terms of the LOI, the Company is to receive consideration in the amount of Two Million Dollars ($2,000,000) with Six Hundred Thousand Dollars ($600,000) to be paid at closing and the balance over a five year period and the Buyer is to assume approximately Two Million Dollars ($2,000,000) in liabilities. The transaction was scheduled to close on or before June 15, 2011. On June 15, 2011, the Buyer requested an extension for closing to on or before July 29, 2011 so that sufficient due diligence could be completed. On July 29, 2011, the Buyer requested an additional thirty days to close the transaction. As of the date of this filing, the Company has not agreed to the second extension nor agreed to close upon the original terms. There are no guarantees that the transaction will close.
 
On April 14, 2011, the Board of Directors authorized and shareholders holding a majority of our outstanding voting capital stock (the “Majority Shareholders”) of US Natural Gas Corp (the “Company”) have approved the attached amendment to the Articles of Incorporation (the “Amendment”) with the Secretary of State of Florida. Pursuant to the Amendment, the Company increased its authorized capital to authorize the issuance of 300,000,000 shares of common stock, par value $0.001 and 5,000,000 shares of preferred stock, par value $0.001, of which 3,000,000 shares remained designated as Series A Preferred Stock, 300,000 remained designated as Series B Preferred Stock, and 1,000,000 shares were newly designated as Series C Preferred Stock.
 
On March 16, 2011, US Natural Gas Corp KY, a wholly owned subsidiary of the Company, executed a term sheet for the acquisition of certain assets of Madison Brothers Investments, LLC located in Edmonson County, Kentucky. Under the terms, the Company is to receive, via deed, assignment, and transfer, approximately 182 acres of mineral rights, twenty five equipped oil wells, two water injection wells, and five oil and gas leases. The purchase price for the transaction is Two Hundred Thousand Dollars ($200,000.00) of which the Company has paid Ninety Five Thousand Dollars ($95,000.00) to the Seller. The Company issued a Promissory Note in the amount of One Hundred Five Thousand Dollars ($105,000.00) to the Seller Upon Closing. The transaction was originally scheduled to close on or before April 30, 2011, but was delayed until July 25, 2011 so that the Company could complete its final due diligence.
 
On February 23, 2011, the Company’s stock quotation platform changed from the OTC Bulletin Board (“OTCBB”) and OTCQB to solely the OTCQB. The change in stock quotation to strictly the OTCQB was caused by the dynamic changes within the OTCBB itself and the market makers who elect to quote on this platform. The change will in no way affect, nor is it a reflection upon, the Company's operations, financials, or business plan. The OTCQB is one of three tiers established by OTC Markets Group, Inc., which operates one of the world's largest electronic interdealer quotation systems for broker-dealers to trade securities not listed on a national exchange. The OTCQB designation is meant to identify companies that are reporting with the SEC or a U.S. banking regulator, making it easy for investors to identify companies that are current in their reporting obligations. Quotes and company information can be viewed at www.otcmarkets.com.
 
 
 
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On January 24, 2011, E 2 Investments, LLC ("E 2"), a wholly owned subsidiary of the Company, entered into an agreement with FITT Highway Products, Inc., whereby E 2 would provide consulting services related to joint ventures, acquisitions, and financing. Pursuant to the Agreement, unless terminated by written notice from either party, the E 2 will receive Four Hundred Thousand free trading shares of the Company’s common stock from a third party non-affiliate and Three Hundred Thousand shares of the Company’s common stock issued by the Company currently valued at $35,000.00. The agreement has a term of eight weeks.

On January 11, 2011, the Company’s Board of Directors adopted a stock repurchase program permitting the Company to repurchase up to $250,000 in shares of its outstanding common stock, par value $.001 per share, over the next 12 months. The shares of common stock may be repurchased from time to time in open market transactions or privately negotiated transactions at the Company’s discretion. An 8-K was filed with the Securities and Exchange Commission on January 12, 2011.

On January 11, 2011, the Board of Directors of B.T.U. Pipeline, Inc. ("BTU"), a wholly owned subsidiary of the Company, elected to dissolve the corporation. BTU was organized under the state of Tennessee and was acquired in the Wilon Resources, Inc. acquisition in 2010. BTU's sole purpose of existence was to serve as the bonding company and operator of the Company's West Virginia natural gas wells. Any remaining assets of BTU were assigned to US Natural Gas Corp WV on January 11, 2011 and appropriate documentation filed with the County Clerk of Wayne County, West Virginia. The Articles of Dissolution and Articles of Termination were filed with the State of Tennessee Department of State on March 4, 2011 after the Company's Certificate of Tax Clearance was received from the Tennessee Department of Revenue. The corporation was effectively terminated and dissolved on March 15, 2011 with the Tennessee Secretary of State.

On August 31, 2010, the Company filed an S-1 Registration to register the common shares and shares to be issued upon exercise of the warrants as per the Plan of Share Exchange between the Company and Wilon. On September 13, 2010, the S-1 Registration was deemed effective by the Securities and Exchange Commission.
 
On July 15, 2010, the Company entered into an employment agreement with Mr. Chuck Kretchman to serve as the Company’s Chief Financial Officer upon the terms and provisions and, subject to the conditions set forth in the Agreement, for a term, commencing on July 15, 2010, and terminating on December 31, 2011 unless earlier terminated as provided in the Agreement.  The Agreement included options to the Chief Financial Officer to purchase 600,000 shares of common stock at an average price of $.15 per share. The Executive agrees to accept $50,000 until September 30, 2010, then $65,000 from September 30, 2010, then $90,000 from January 1, to December 31, 2011. The Agreement contains a six month non-solicitation  clause and a confidentiality clause.
 
On May 28, 2010, the Company received notification from the appropriate state agencies that the acquisition of Wilon Resources, Inc. was effective.  Subsequently on June 3, 2010, the Company received notification from FINRA that Wilon Resources, Inc. shall no longer trade as a standalone entity.  Since this date, the Company has worked with DTCC (the Depository Trust & Clearing Corporation) to help facilitate a smooth transition in the exchange of shares and issuance of warrants as per a share exchange agreement between the two companies.  
 
On May 5, 2010, E 3 Petroleum Corp, a wholly owned subsidiary, entered into an Agreed Consent Order with the West Virginia Department of Environmental Protection Office of Oil & Gas, whereby E 3 provided to the Office of Oil & Gas a schedule to abate all current violations and bring non-producing wells into production.  In addition, E 3 agreed to pay a civil administrative penalty in the amount of Twenty Five Thousand Dollars ($25,000) prior to April 1, 2011.

On March 25, 2010, Wilon Resources, Inc filed an amendment to its Articles of Incorporation to change its name to US Natural Gas Corp WV.

On March 22, 2010, the Company amended the Articles of Incorporation for US Natural Gas Corp, a wholly owned subsidiary, to change the name of US Natural Gas Corp to US Natural Gas Corp KY.

On March 19, 2010, the Company's shareholders approved with 16,611,138 votes "for" and zero votes "against" to a share exchange between the Company and Wilon Resources, Inc. (Wilon, now US Natural Gas Corp WV), a Tennessee corporation wherein the Company acquired all of the outstanding shares of Wilon and hold Wilon as a wholly owned subsidiary.  For each share of common stock of Wilon exchanged, the Company issued one share of the Company's common stock plus one warrant to purchase one additional share of common stock of the Company at an exercise price of  $.25 (25 cents) per share to be exercisable for a period of 5 years from the date of issue.  The shareholders for Wilon approved the share exchange with 27,843,109 votes "for" and zero votes "against". 
 
On March 19, 2010, the Company's shareholders approved an amendment to its Articles of Incorporation changing the name of the Company to US Natural Gas Corp.  Simultaneously, a majority of the shareholders of Wilon approved an amendment to its Articles of Incorporation changing its name to US Natural Gas Corp WV.  In addition, Wilon's shareholders approved an amendment to its Articles of Incorporation deleting Article 8 thereof eliminating reference to a non-existent "Shareholders' Restrictive Agreement."

On February 28, 2010, the Company and Wilon executed a plan of share exchange between the two companies that was placed before the shareholders for a vote on March 19, 2010.
 
 
 
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The Company spent the majority of the 1st quarter of 2010 repairing the gathering system, repairing roads leading to wells, installing components to the Company’s meter run, fabricating a Hydrogen Sulfide detection facility, installing a Glycol unit, and concentrating on the infrastructure in preparation of delivery.  From late March through the present, the focus has been on swabbing wells, replacing completion components, hooking up previously drilled wells, and placing the wells into production.  Over the course of the next 6-9 months, the Company’s efforts will stay on course to increase production by focusing on individual wells.
 
RESULTS OF OPERATIONS – NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

This discussion should be read in conjunction with our financial statements included elsewhere in this report.
 
Revenues  for the nine months ended September 30, 2011 and 2010 were $118,829 and $201,029, respectively.  The decrease in revenues results from a decrease in gains incurred from the sale of oil and gas properties and equipment and the disassembling of our compressor station and installing a new compressor. The compressor station was shut down from mid March 2011 through Mid August, 2011. The Company had revenues of $707,858 for the period March 28, 2008 (inception) through September 30, 2011.  Over the next twelve months the Company anticipates an increase in revenues as it reworks, reopens and drills new wells through its wholly owned subsidiaries US Natural Gas Corp WV and US Natural Gas Corp KY.

Operating Expenses for the nine months ended September 30, 2011 and 2010 were $876,079 and $829,622, respectively. Operating expenses for the period from March 28, 2008 (inception) through September 30, 2011 were $4,328,493.  The Company anticipates that its operating expenses will increase over the next twelve months as it brings additional wells into production.

Net Loss for the nine months ended September 30, 2011 and 2010 was $441,652 and $473,625, respectively.  Net loss for the period from March 28, 2008 (inception)through September 30, 2011 was $3,171,543.

LIQUIDITY AND CAPITAL RESOURCES
 
At September 30, 2011 and December 31, 2010 cash and cash equivalents were $11,474 and $ 1, respectively.

For the nine months ended September 30, 2011 and 2010 net cash used by operating activities was $351,411 and $520,010, respectively.  For the period from March 28, 2008 (inception) through September 30, 2011 net cash used by operating activities was $1,142,007.

For the nine months ended September 30, 2011 and 2010 net cash provided by investing activities was $32,268 and $244,339, respectively.  For the period March 28, 2008 (inception) through June 30, 2011 net cash used from investing activities was $94,484.

For the nine months ended September 30, 2011 and 2010 net cash provided by financing activities was $330,616 and $254,443, respectively.  For the period from March 28, 2008 (inception) through September 30, 2011 net cash provided by financing activities was $1,247,965
 
 PLAN OF OPERATION AND FINANCING NEEDS

We intend to focus on our wells under operation in the states of West Virginia and Kentucky.  In West Virginia, our plan is to place each well capable of delivering commercially viable natural gas back into production after each well is inspected, flow lines are replaced or repaired, completion components are replaced including but not limited to check valves, regulators, well heads, Barton recorders, and the wells are swabbed to remove water from the well bores and producing formations.  At the Company’s election and with successful financing arrangements, we may elect to stimulate via acid or nitrogen frac certain wells or deepen wells to new producing formations after e-logs are completed.  The Company anticipates that the majority of the previously producing wells will be placed back into production during this period.
 
In addition, the Company operates nine gas deep wells which were drilled from 2004-2007, but not completed. The Company has completed three of these wells and has placed them into production. The remaining six wells will be addressed during the course of the second half of 2011. 

In Kentucky, our plan is concentrate on the newly acquired Pine Grove Project located in Edmonson County, Kentucky. To date, we have placed 10 of the 25 wells capable of producing crude and/or natural gas into production with minimal work. We intend to address the remaining 15 wells and will completed the required work necessary to place these into production. The work required will vary on a well by well case and may include inspecting, repairing, and/or replacing flow lines, electrical, above ground completion components and tank batteries. If required, the Company will insert 4 1/2" casing down-hole to shut off any excess water production.
 
We will continue to place those previously producing wells acquired during 2009-2011 into production after following similar steps as stated above. Our emphasis will be placed on the Thompson and Detweiler leases once the work on the Pine Grove Project is completed. With the addition of our work-over rig, we believe we can more economically address each well to allow us to operate our wells and increase our oil production.
 
We have elected to cease any development of our leasehold base in Morgan, Kentucky. With natural gas prices remaining constant below $5.00/mcf, we believe it is in the Company's best interest to concentrate our funds on oil producing properties located in South Central Kentucky.

 
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With the addition of our new natural gas development project in Whitley County, Kentucky, the Company will selectively seek  to acquire additional leaseholds and previously producing wells. In the future, the Company may elect to drill on the acquired leaseholds for further development.
 
We intend to acquire producing oil and gas properties where we believe significant additional value can be created.  Management is primarily interested in developmental properties where some combination of these factors exist: (1) opportunities for long production life with stable production levels; (2) geological formations with multiple producing horizons; (3) substantial exploitation potential; and (4) relatively low capital investment production costs.
 
We intend to acquire additional mineral rights leaseholds in Kentucky and West Virginia to further expand our block of acreage for development. Currently, the rate to acquire mineral rights leases in the states of Kentucky and West Virginia ranges from $5.00-$25.00 per acre.  In addition, the Lessor is given a 12.5% royalty from gross production.
 
We intend to maximize the value of properties through a combination of re-entry into previously producing wells, new drilling, increasing recoverable reserves and reducing operating costs.  We have at our disposal the use of the latest technology such as directional and horizontal drilling.  These methods have historically produced oil and gas at faster rates and with lower operating costs basis than traditional vertical drilling. To date, we have not attempted any horizontal drilling on new wells or on our re-entry projects.
 
We intend to maintain a highly competitive team of experienced and technically proficient employees and motivate them through a positive work environment and stock ownership.  We believe that employee ownership, which may be encouraged through a stock option plan, is essential for attracting, retaining and motivating qualified personnel.  While we have not yet adopted a stock option plan, we may elect to do so in the near future.
 
In order to fund our current drilling and completion programs, as well as future drilling programs, we rely upon partnerships and joint ventures with accredited investors.  Once we become profitable, we intend to drill wells in which we will maintain 100% of the net revenue.
 
Including the net proceeds from the 2008 stock offering, we only have sufficient funds to conduct our operations for three to six months.  There can be no assurance that additional financing will be available in amounts or on terms acceptable to us, if at all.
 
If we are not successful in generating sufficient liquidity from our operations or in raising sufficient capital resources, on terms acceptable to us, this could have a material adverse effect on our business, results of operations liquidity and financial condition.
 
We presently do not have any available credit, bank financing or other external sources of liquidity, other than the net proceeds from the offering.  Due to our brief history and historical operating losses, our operations have not been a source of liquidity.  We will need to obtain additional capital in order to expand operations and become profitable.  In order to obtain capital, we may need to sell additional shares of our common stock or borrow funds from private lenders.  There can be no assurance that we will be successful in obtaining additional funding.

We will need additional investments in order to continue operations, but we cannot offer any assurance that we will be able to obtain such investments.  Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms.  The recent downturn in the U.S. stock and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities.  Even if we are able to raise the funds required, it is possible that it could incur unexpected costs and expenses, fail to collect significant amounts owed to it, or experience unexpected cash requirements that would force it to seek alternative financing.  Further, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock.  If additional financing is not available or is not available on acceptable terms, we will have to curtail our operations.
 
Recent Financings
 
For the nine months ended September 30, 2011, the Company raised $40,000 in private financing from accredited investors.  These funds were utilized for the daily operating activities of the company.  The investors purchased shares from the Company at a price of $.015 to $.01 per share.
 
See Notes I - Convertible Debenture Payable and L- Common Stock Issuances/Warrants located in Part 1: Financial Information for a detailed listing of unregistered sales of equity securities and use of proceeds.
 
Critical Accounting 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 contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ significantly from those estimates.
 
 
 
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Effect of Recently Issued Accounting Pronouncements
 
Management does not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the accompanying financial statements.
 
Application of Critical Accounting Policies
 
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities.  On an ongoing basis, we evaluate our estimates, including those related to impairment of property, plant and equipment, intangible assets, deferred tax assets and fair value computation using the Black Scholes option-pricing model.  We base our estimates on historical experience and on various other assumptions, such as the trading value of our common stock and estimated future undiscounted cash flows, that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions; however, we believe that our estimates, including those for the above-described items, are reasonable.
   
Use of Estimates

In accordance with accounting principles generally accepted in the United States, management utilizes 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 as well as the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  These estimates and assumptions relate to recording net revenue, collectability of accounts receivable, useful lives and impairment of tangible and intangible assets, accruals, income taxes, inventory realization, stock-based compensation expense and other factors.  Management believes it has exercised reasonable judgment in deriving these estimates.  Therefore, a change in conditions could affect these estimates.
 
Recently Issued Accounting Pronouncements

See Notes to the Consolidated Financial Statements, Note A – Basis of Presentation and Summary of Significant Accounting Policies for a list of recently enacted accounting standards.
 
Off-Balance Sheet Arrangements
 
We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, results of operations, liquidity or capital expenditures. 

 
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
n/a
 
ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures
 
As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our President and chief financial officer of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, our President and chief financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is: (1) accumulated and communicated to our management, including our President and chief financial officer, as are appropriate to allow timely decisions regarding required disclosure; and (2) recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms.

Changes in Internal Control over Financial Reporting
 
There was no change to our internal controls or in other factors that could affect these controls during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
 
 
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PART II - OTHER INFORMATION

  
ITEM 1. LEGAL PROCEEDINGS
 
There are no current legal proceedings against US Natural Gas Corp or any of its wholly owned subsidiaries.

We are involved in litigation arising in the normal course of our business. While, from time to time, claims are asserted that make demands, we do not believe that contingent liabilities related to these matters, either individually or in the aggregate, will materially affect our financial position, results of our operations, or cash flows.
 
ITEM 1A. RISK FACTORS
 
There are no material changes from the risk factors previously disclosed in the Registrant’s Form 10-K/A filed on May 19, 2010.
 
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
See Note L - Common Stock Issuances/Warrants located in Part 1: Financial Information for a detailed listing of unregistered sales of equity securities and use of proceeds.

The above issuances were made pursuant to Rule 506 and Section 4(2) of the Securities Act of 1933, as amended.
 
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
None
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
The Company's 2011 Annual Meeting of Shareholders originally scheduled for July 15, 2011 has been postponed to a date yet to be determined. The postponement was previously announced in a press release dated July 12, 2011 and in a filing with the Securities and Exchange Commission dated July 13, 2011. The meeting will be held at the Company's headquarters at 1717 Dr. Martin Luther King Jr St N, St. Petersburg, FL 33704. Shareholders will receive, via electronic or regular mail, a Proxy of the upcoming items to be submitted before shareholders for a vote approximately 30 days prior to the upcoming Shareholders meeting.
 
Previous items submitted before shareholders for vote:

Proposals
 
1. To approve a share exchange between the Company and Wilon Resources, Inc., a Tennessee corporation (“Wilon”) whereby the Company would acquire all of the outstanding shares of Wilon and hold Wilon as a wholly owned subsidiary.  For each share of common stock of Wilon to be exchanged, the Company would issue one share of the Company’s common stock plus one warrant to purchase one additional share of common stock of the Company at an exercise price of $.25 (25 cents) per share to be exercisable for a period of 5 years from the date of issue.
 
2. To approve an amendment to the Company’s Articles of Incorporation to change the name of the Company to US Natural Gas Corp.
 
3. To approve an amendment to the Company’s Articles of Incorporation to delete Article 8 thereof, which states, “all of the shares of the Company may be subject to a Shareholders’ Restrictive Agreement.”  No such agreement was ever entered into by the shareholders and there is no current intent to enter into any such agreement at the present time.
 
The Company’s shareholders approved each of the Proposals with 16,611,138 votes "for" and zero votes "against". The shareholders for Wilon approved Proposal #1 with 27,843,109 votes "for" and zero votes "against".


 
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ITEM 5. OTHER INFORMATION
 
On May 3, 2011, the Company received a Letter of Intent (“LOI”) from Northwest Florida Operations, Inc. (“Buyer”) for the purchase of certain assets and assumption of certain liabilities under control by US Natural Gas Corp WV. Under the terms of the LOI, the Company is to receive consideration in the amount of Two Million Dollars ($2,000,000) with Six Hundred Thousand Dollars ($600,000) to be paid at closing and the balance over a five year period and the Buyer is to assume approximately Two Million Dollars ($2,000,000) in liabilities. The transaction is scheduled to close on or before June 15, 2011. On June 15, 2011, the Buyer requested an extension for closing to on or before July 29, 2011 so that sufficient due diligence could be completed. On July 29, 2011, the Buyer requested an additional thirty days to close the transaction. As of the date of this filing, the Company has not agreed to the second extension nor agreed to close upon the original terms. There are no guarantees that the transaction will close. On October 31, 2011, the Company notified the Buyer that it was terminating further discussions pertaining to the asset acquisition due to failure of the Buyer to close on the agreed upon date.  The Company is currently in discussion with several parties interested in a joint venture, farm-out agreement, or acquisition of the Company's West Virginia Subsidiary.
 
 
 
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ITEM 6. EXHIBITS
                                                                                                     
3.1
 
Articles of Incorporation (filed with Form S-1 (File No. 333-154799) on October 29, 2008 and incorporated by reference).
     
3.2
 
Articles of Incorporation (amended and restated) (filed with Form S-1/A (File No. 333-154799) on December 9, 2008 and incorporated by reference).
     
3.3
 
By-Laws (filed with Form S-1/A (File No. 333-154799) on December 9, 2008 and incorporated by reference).
     
3.4
 
Amended and Restated Articles of Incorporation filed with the Florida Department of State Division of Corporations on October 21, 2009 (Previously filed on the Current Report on Form   8-K with the SEC on October 28, 2009).
     
3.5
 
Amended Articles of Incorporation filed with the Florida Department of State Division of Corporations on March 19, 2010 (Previously filed on the Annual Report on Form 10-K with the SEC on April 8, 2011).
     
3.6
 
Articles of Merger filed with the Florida Department of State Division of Corporations on May 27, 2010 (Previously filed on the Annual Report on Form 10-K with the SEC on April 8, 2011).
     
3.7
 
Amended Articles of Incorporation filed with the Florida Department of State Division of Corporations on April 18, 2011 (Previously filed on the Quarterly Report on Form 10-Q with the SEC on May 23, 2011).
     
3.8
 
Amended Articles of Incorporation filed with the Florida Department of State Division of Corporations on August 3, 2011. (Previously filed on the Quarterly Report on Form 10-Q with the SEC on August 22, 2011).
     
10.10
 
Employment Agreement between Wayne Anderson and Adventure Energy, Inc. dated as of April 1, 2009 (Previously filed with Current Report on Form 8-K filed with the SEC on July 7, 2009).
     
10.11
 
Employment Agreement between Jim Anderson and Adventure Energy, Inc. dated as of April 1, 2009 (Previously filed with Current Report on Form 8-K filed with the SEC on July 7, 2009).
     
10.12
 
Lender Acquisition Agreement dated as of September 4, 2009 among Adventure Energy. Inc., SLMI Holdings, LLC and SLMI Options, LLC (Previously filed with Current Report on Form 8-K filed with the SEC on September 11, 2009).
     
10.13
 
Securities Purchase Agreement between Tangiers Investors, LP and Adventure Energy, Inc. dated as of September 24, 2009 (Previously filed on the Quarterly Report on Form 10-Q with the SEC on November 16, 2009).
     
10.14
 
Pledge and Escrow Agreement among Atlas Capital Partners, LLC, Adventure Energy Inc. and Atlas Capital Partners, LP, as escrow agent, dated as of September 24, 2009 (Previously filed on the Quarterly Report on Form 10-Q with the SEC on November 16, 2009).
     
10.15
 
Debenture Securities Purchase Agreement between Atlas Capital Partners, LLC and Adventure Energy, Inc. (Previously filed on the Quarterly Report on Form 10-Q with the SEC on November 16, 2009).
     
10.16
 
Securities Purchase Agreement by and among, E 2 Investments, LLC and Harlis Trust dated as of November 10, 2009. (Previously filed on the Quarterly Report on Form 10-Q with the SEC on November 16, 2009).
     
10.17
 
Secured Convertible Debenture issued to Atlas Capital Partners, LLC (Previously filed on the Quarterly Report on Form 10-Q with the SEC on November 16, 2009).
     
10.18
 
Security Agreement between Adventure Energy, Inc. and Atlas Capital Partners, LLC (Previously filed on the Quarterly Report on Form 10-Q with the SEC on November 16, 2009).
     
10.19
 
Consent Order issued to E 3 Petroleum Corp by the West Virginia Department of Environmental Protection Office of Oil & Gas dated as of May 5, 2010 (Previously filed on the Quarterly Report on Form 10-Q with the SEC on August 16, 2010).
     
10.20
 
Convertible Promissory Note between Asher Enterprises, Inc. and US Natural Gas Corp dated as of June 18, 2010 (Previously filed on the Quarterly Report on Form 10-Q with the SEC on August 16, 2010).
 
 
 
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10.21
 
Securities Purchase Agreement between Asher Enterprises, Inc. and US Natural Gas Corp dated as of June 18, 2010 (Previously filed on the Quarterly Report on Form 10-Q with the SEC on August 16, 2010).
     
10.22
 
Consulting Agreement between Del Mar Corporate Consulting, LLC and US Natural Gas Corp dated as of July 9, 2010 (Previously filed on the Quarterly Report on Form 10-Q with the SEC on August 16, 2010).
     
10.23
 
Employment Agreement between Chuck Kretchman and US Natural Gas Corp dated as of July 15, 2010 (Previously filed on the Quarterly Report on Form 10-Q with the SEC on August 16, 2010).
     
10.24
 
Convertible Promissory Note between Asher Enterprises, Inc. and US Natural Gas Corp dated as of July 30, 2010 (Previously filed on the Quarterly Report on Form 10-Q with the SEC on August 16, 2010).
     
10.25
 
Securities Purchase Agreement between Asher Enterprises, Inc. and US Natural Gas Corp dated as of July 30, 2010 (Previously filed on the Quarterly Report on Form 10-Q with the SEC on August 16, 2010).
     
10.26
 
Convertible Promissory Note between Caesar Capital Group, LLC and US Natural Gas Corp dated as of August 6, 2010 (Previously filed on the Quarterly Report on Form 10-Q with the SEC on August 16, 2010).
     
10.27
 
Amendment to Common Stock Purchase Warrant Agreement between Caesar Capital Group, LLC and US Natural Gas Corp dated as of August 6, 2010. (Previously filed on the Quarterly Report on Form 10-Q with the SEC on November 15, 2010).
     
10.28
 
Amendment to Common Stock Purchase Warrant Agreement between ARRG Corp and US Natural Gas Corp dated as of August 6, 2010 (Previously filed on the Quarterly Report on Form 10-Q with the SEC on November 15, 2010).
     
10.29
 
Convertible Promissory Note between ARRG Corp and US Natural Gas Corp dated as of August 6, 2010 (Previously filed on the Quarterly Report on Form 10-Q with the SEC on August 16, 2010).
     
10.30
 
Common Stock Purchase Warrant Agreement between Caesar Capital Group, LLC and US Natural Gas Corp dated as of August 6, 2010 (Previously filed on the Quarterly Report on Form 10-Q with the SEC on August 16, 2010).
     
10.31
 
Common Stock Purchase Warrant Agreement between ARRG Corp and US Natural Gas Corp dated as of August 6, 2010 (Previously filed on the Quarterly Report on Form 10-Q with the SEC on August 16, 2010).
     
10.32
 
Convertible Promissory Note between Caesar Capital Group, LLC and US Natural Gas Corp dated as of September 7, 2010 (Previously filed on the Quarterly Report on Form 10-Q with the SEC on November 15, 2010).
     
10.33
 
Common Stock Purchase Warrant Agreement between Caesar Capital Group, LLC and US Natural Gas Corp dated as of September 7, 2010 (Previously filed on the Quarterly Report on Form 10-Q with the SEC on November 15, 2010).
     
10.34
 
Convertible Promissory Note between Asher Enterprises, Inc. and US Natural Gas Corp dated as of October 8, 2010 (Previously filed on the Quarterly Report on Form 10-Q with the SEC on November 15, 2010).
     
10.35
 
Securities Purchase Agreement between Asher Enterprises, Inc. and US Natural Gas Corp dated as of October 8, 2010 (Previously filed on the Quarterly Report on Form 10-Q with the SEC on November 15, 2010).
     
10.36
 
Amendment to Securities Purchase Agreement dated November 10, 2009 by and between E 2 Investments, LLC and Harlis Trust dated December 20, 2010 (Previously filed with Current Report on Form 8-K filed with the SEC on December 22, 2010).

 10.37
 
Convertible Promissory Note between Asher Enterprises, Inc. and US Natural Gas Corp dated as of January 19, 2011(Previously filed on the Annual Report on Form 10-K with the SEC on April 8, 2011).
     
10.38
 
Securities Purchase Agreement between Asher Enterprises, Inc. and US Natural Gas Corp dated as of January 19, 2011(Previously filed on the Annual Report on Form 10-K with the SEC on April 8, 2011).
     
10.39
 
Consulting Agreement between E 2 Investments, LLC and Fitt Highway Products, Inc. dated as of January 24, 2011(Previously filed on the Annual Report on Form 10-K with the SEC on April 8, 2011).
     
10.40
 
Convertible Promissory Note between Asher Enterprises, Inc. and US Natural Gas Corp dated as of February 3, 2011(Previously filed on the Annual Report on Form 10-K with the SEC on April 8, 2011).
 
 
 
17

 
 
     
10.41
 
Securities Purchase Agreement between Asher Enterprises, Inc. and US Natural Gas Corp dated as of February 3, 2011(Previously filed on the Annual Report on Form 10-K with the SEC on April 8, 2011).
     
 10.42
 
Articles of Termination and Articles of Dissolution filed for B.T.U. Pipeline, Inc with the Tennessee Secretary of State dated March 4, 2011(Previously filed on the Annual Report on Form 10-K with the SEC on April 8, 2011).
     
10.43
 
Term Sheet between Madison Brothers Investments, LLC and US Natural Gas Corp dated March 16, 2011(Previously filed on the Annual Report on Form 10-K with the SEC on April 8, 2011).
     
10.44
 
Convertible Promissory Note between Tangiers Investors, LP and US Natural Gas Corp dated as of May 3, 2011. (Previously filed on the Quarterly Report on Form 10-Q with the SEC on May 23, 2011).
     
10.45
 
Security Agreement between Tangiers Investors, LP and US Natural Gas Corp dated as of May 3, 2011. (Previously filed on the Quarterly Report on Form 10-Q with the SEC on May 23, 2011).
     
10.46
 
Common Stock Purchase Warrant Agreement between Tangiers Investors, LP and US Natural Gas Corp dated as of May 3, 2011. (Previously filed on the Quarterly Report on Form 10-Q with the SEC on May 23, 2011).
     
10.47
 
Common Stock Purchase Warrant Agreement between Tangiers Investors, LP and US Natural Gas Corp dated as of May 3, 2011. (Previously filed on the Quarterly Report on Form 10-Q with the SEC on May 23, 2011).
     
10.48
 
Convertible Promissory Note between Tangiers Investors, LP and US Natural Gas Corp dated as of July 11, 2011. (Previously filed on the Quarterly Report on Form 10-Q with the SEC on August 22, 2011).
     
10.49
 
Common Stock Purchase Warrant Agreement between Tangiers Investors, LP and US Natural Gas Corp dated as of July 20, 2011. (Previously filed on the Quarterly Report on Form 10-Q with the SEC on August 22, 2011).
     
10.50
 
Convertible Promissory Note between Tangiers Investors, LP and US Natural Gas Corp dated as of August 4, 2011. (Previously filed on the Quarterly Report on Form 10-Q with the SEC on August 22, 2011).
     
10.51
 
Convertible Promissory Note between Asher Enterprises, Inc. and US Natural Gas Corp dated as of August 5, 2011. (Previously filed on the Quarterly Report on Form 10-Q with the SEC on August 22, 2011).
     
10.52
 
Securities Purchase Agreement between Asher Enterprises, Inc. and US Natural Gas Corp dated as of August 5, 2011. (Previously filed on the Quarterly Report on Form 10-Q with the SEC on August 22, 2011).
     
10.53
 
Asset Purchase Agreement between Madison Brothers Investments, LLC and US Natural Gas Corp dated May 16, 2011. (Previously filed on the Quarterly Report on Form 10-Q with the SEC on August 22, 2011).
     
10.54*
 
Convertible Promissory Note between Asher Enterprises, Inc. and US Natural Gas Corp dated as of September 8, 2011.
     
10.55*
 
Securities Purchase Agreement between Asher Enterprises, Inc. and US Natural Gas Corp dated as of September 8, 2011.
     
10.56*
 
Convertible Promissory Note between Tangiers Investors, LP and US Natural Gas Corp dated as of August 23, 2011
     
21.1  
 
List of Subsidiaries (Previously filed on the Annual Report on Form 10-K with the SEC on April 8, 2011).
     
31.1*
 
Certification of Principal Executive Officer pursuant to Section 302 the Sarbanes-Oxley Act of 2002.
     
31.2*
 
Certification of Principal Financial Officer pursuant to Section 302 the Sarbanes-Oxley Act of 2002.
     
32.1*
 
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2*
 
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
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 Labels Linkbase Document
     
101.PRE**
 
Xbrl Taxonomy Extension Presentation Linkbase Document
_______________
 
* Filed herewith
** The XBRL related information in Exhibit 101 shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.
 
 
 
 
18

 
 
SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of St. Petersburg, State of Florida, on November 14, 2011.


 
US Natural Gas Corp
       
Date: November 14, 2011
By:
/s/ Wayne Anderson
 
   
Wayne Anderson
 
   
President and Director
 
   
(Principal Executive Officer)
 
       
 
By:
/s/ Jim Anderson
 
   
Vice President and Director
 
       
 
By:
/s/ Chuck Kretchman
 
   
Chief Financial Officer
 
   
(Principal Financial Officer)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
19