NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007 (Unaudited)
1
.
BASIS
OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis
of presentation
The
accompanying unaudited consolidated financial statements of United Energy Corp.
(the “Company”) have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-QSB of Regulation S-B. Accordingly, they do not include
all of the information and notes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
the
unaudited interim financial statements furnished herein include all adjustments
necessary for a fair presentation of the Company's financial position at
September 30, 2007 (unaudited) and the results of its operations for the three
months and six months ended September 30, 2007 and 2006 (unaudited) and cash
flows for the three months and six months ended September 30, 2007 and 2006
(unaudited). All such adjustments are of a normal and recurring nature. Interim
financial statements are prepared on a basis consistent with the Company's
annual financial statements. Results of operations for the three months and
six
months ended September 30, 2007 are not necessarily indicative of the operating
results that may be expected for the year ending March 31, 2008.
The
consolidated balance sheet as of March 31, 2007 has been derived from the
audited financial statements at that date but does not include all of the
information and notes required by accounting principles generally accepted
in
the United States for complete financial statements.
For
further information, refer to the consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-KSB for the fiscal
year ended March 31, 2007.
The
Company currently anticipates that its available cash in hand and cash resources
from expected revenues will be sufficient to meet its anticipated working
capital and capital expenditure requirements for at least the next twelve
months.
Our
continued existence is dependent upon several factors, including increased
sales
volumes, collection of existing receivables and the ability to achieve
profitability from the sale of our product lines. In order to increase our
cash
flow, we are continuing our efforts to stimulate sales and cut back expenses
not
directly supporting our sales and marketing efforts.
UNITED
ENERGY CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2.
USE
OF ESTIMATES
The
preparation of consolidated financial statements in accordance with accounting
principals generally accepted in the United States of America requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities.
On
an
on-going basis, the Company evaluates its estimates, including those related
to
option and warrant values, bad debts, inventories, intangible assets,
contingencies and litigation. The Company bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
3.
DISCONTINUED
OPERATIONS
During
the fiscal year ended March 31, 2007, the Company discontinued the sale of its
Uniproof proofing paper as a result the graphic arts segment became discontinued
operations.
The
financial position and results of operations described above are presented
as
assets and liabilities of discontinued operations in the consolidated balance
sheets for all periods presented in accordance with SFAS No. 144
.
A
summary
of discontinued operations for the six months ended September 30, 2007 and
2006
is as follows:
|
|
2007
|
|
2006
|
|
Revenues
|
|
$
|
-
|
|
$
|
511
|
|
Cost
of goods sold
|
|
|
-
|
|
|
478
|
|
Gross
profit
|
|
|
-
|
|
|
33
|
|
Operating
expenses
|
|
|
-
|
|
|
|
|
Selling,
general and administrative
|
|
|
-
|
|
|
15,968
|
|
Loss
from discontinued operations
|
|
$
|
-
|
|
$
|
(15,935
|
)
|
A
summary
of assets and liabilities of discontinued operations as of September 30, 2007
and March 31, 2007 is as follows:
|
|
September
30,
|
|
March
31,
|
|
|
|
2007
|
|
2007
|
|
Accounts
receivable
|
|
$
|
-
|
|
$
|
31
|
|
Notes
receivable
|
|
|
-
|
|
|
4,476
|
|
Assets
of discontinued operations
|
|
$
|
-
|
|
$
|
4,507
|
|
4.
INVENTORY
Inventory
consists of the following:
|
|
September
30,
|
|
March
31,
|
|
|
|
2007
|
|
2007
|
|
Blended
chemicals
|
|
$
|
143,109
|
|
$
|
93,814
|
|
Raw
materials
|
|
|
55,101
|
|
|
44,984
|
|
Total
inventory
|
|
$
|
198,210
|
|
$
|
138,798
|
|
UNITED
ENERGY CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5.
RELATED-PARTY TRANSACTIONS
The
Company has an amount due to Robert Seaman, a shareholder and former director
of
the Company. Amount due to the related party as of September 30, 2007 and 2006
is $244,141. This amount is unsecured, non-interest bearing and due upon demand.
Martin
Rappaport, a major shareholder and director of the Company, owned the property
through September 2007 from which the Company leases the 9,600 square foot
facility it occupies in Secaucus, New Jersey. The Company pays approximately
$115,200 per year under the lease, excluding real estate taxes. The Company
believes that the lease is at fair market value with leases for similar
facilities.
During
April 2007, the Company entered into an employment agreement with the Chairman
of the Board, Ron Wilen. See note 6 for additional information.
During
August 2005, Ron Wilen and the Chief Executive Officer, Brian King, each loaned
the Company $100,000. The loans were both unsecured, non-interest bearing and
due upon demand. These loans were repaid in April 2006.
6.
EMPLOYEE
BENEFITS PLAN
Stock
Option Plans
In
August
2001, the Company’s stockholders approved the 2001 Equity Incentive Plan (the
“2001 Plan”), which provides for the grant of stock options to purchase up to
2,000,000 shares of common stock to any employee, non-employee director, or
consultant at the Board’s discretion. Under the 2001 Plan, these options may be
exercised for a period up to ten years from the date of grant. Options issued
to
employees are exercisable upon vesting, which can range between the dates of
the
grant to up to 5 years
.
An
amendment and restatement of the 2001 Equity Incentive Plan increasing the
number of shares for a total of 4,000,000 was approved by the Board of Directors
on May 29, 2002 and was
approved
by the
shareholders at the annual meeting.
Under
the
2001 Plan, options are granted to non-employee directors upon election at the
annual meeting of stockholders at a purchase price equal to the fair market
value on the date of grant. In addition, the non-employee director stock options
shall be exercisable in full twelve months after the date of grant unless
determined otherwise by the compensation committee.
UNITED
ENERGY CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Fair
Value of Stock Options
For
disclosure purposes under SFAS No. 123 and SFAS No. 123(R), the fair value
of
each option grant is estimated on the date of grant using the Black-Scholes
option valuation model with the following weighted-average
assumptions:
|
|
2007
|
|
2006
|
|
Expected
life (in years)
|
|
|
10
|
|
|
10
|
|
Risk-free
interest rate
|
|
|
4.54
|
%
|
|
4.54
|
%
|
|
|
|
84.4
|
|
|
102.5
|
|
Dividend
yield
|
|
|
0
|
%
|
|
0
|
%
|
Utilizing
these assumptions, the weighted average fair value of options granted with
an
exercise price equal to their fair market value at the date of the grant is
$1.16 for the six months ended September 30, 2007.
Summary
Stock Option Activity
The
following table summarizes stock option information with respect to all stock
options for the six months ended September 30, 2007:
|
|
Number
of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
Aggregate
Intrinsic
Value
|
|
Options
outstanding April 1, 2007
|
|
|
3,502,500
|
|
$
|
1.17
|
|
|
7.16
|
|
|
|
|
Granted
|
|
|
250,000
|
|
$
|
1.00
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding September 30, 2007
|
|
|
3,752,500
|
|
$
|
1.16
|
|
|
6.49
|
|
|
|
|
Vested
and expected to vest-end of quarter
|
|
|
3,752,500
|
|
$
|
1.16
|
|
|
6.49
|
|
$
|
—
|
|
Exercisable-end
of quarter
|
|
|
3,399,015
|
|
$
|
1.17
|
|
|
6.57
|
|
$
|
—
|
|
During
the six months ended September 30, 2007, pursuant to the terms of an employment
agreement with Ronald Wilen, Chairman of the Board, Secretary, and Executive
Vice President of Research and Development dated April 17, 2007, for each of
the
next five (5) years of the term of the agreement (commencing with April 17,
2008), Mr. Wilen will receive an option to purchase fifty thousand (50,000)
shares of common stock of the Company. The exercise price with respect to any
option granted pursuant to the employment agreement shall be the fair market
value of the common stock underlying such option on the date such option was
granted. The initial grant of 50,000 stock options will be granted out of the
2001 Equity Incentive Plan at the one year anniversary. In addition, the stock
option to purchase 135,000 shares has been reserved for Mr. Wilen out of the
2001 Equity
Incentive
Plan. After the reservation described in the immediately preceding sentence,
no
shares remain available for grant out of the 2001 Equity Incentive Plan. Thus,
the remaining stock options to purchase 65,000 shares granted to Mr. Wilen
will
be non-qualified stock options, unless the Company amends the 2001 Equity
Incentive Plan in order to increase the number of shares that may be granted
pursuant to such plan or adopts a new stock option plan.
UNITED
ENERGY CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Options
outstanding at September 30, 2007 have an exercise price ranging between $0.70
to $2.05.
The
aggregate intrinsic value in the table above represents the total intrinsic
value (the difference between the Company’s closing stock price on September 30,
2007 and the exercise price, multiplied by the number of in-the-money options)
that would have been received by the option holders had vested option holders
exercised their options on September 30, 2007. This amount changes based upon
changes in the fair market value of the Company’s stock. As of September 30,
2007, $187,026 of the total unrecognized compensation costs related to stock
options is expected to be recognized over a period of one year and six
months.
7.
COMMITMENTS
AND CONTINGENCIES
Litigation
Sales
Commission Claim
In
July
2002, an action was commenced against us in the Court of Common Pleas of South
Carolina, Pickens County, brought by Quantum International Technology, LLC
and
Richard J. Barrett. Plaintiffs allege that they were retained as a sales
representative of ours and in that capacity made sales of our products to the
United States government and to commercial entities. Plaintiffs further allege
that we failed to pay to plaintiffs agreed commissions at the rate of 20% of
gross sales of our products made by plaintiffs. The complaint seeks an
accounting, compensatory damages in the amount of all unpaid commissions plus
interest thereon, and punitive damages in an amount triple the compensatory
damages, plus legal fees and costs. Plaintiffs maintain that they are entitled
to receive an aggregate of approximately $350,000 in compensatory and punitive
damages, interest and costs. In September 2003, the action was transferred
from
the court in Pickens County to a Master in Equity sitting in Greenville, South
Carolina and was removed from the trial docket. The action, if tried, will
be
tried without a jury. No trial date has been scheduled. We believe, based on
the
advice of counsel, we have meritorious defenses to the claims asserted in the
action and intend to vigorously defend the case. The outcome of this matter
cannot be determined at this time.
In
March
2007, the Company commenced an action against Applied Force and Samuel Miller
III in the Superior Court of New Jersey, Law Division - Bergen County for the
recovery of two of the Company’s vehicles and certain additional claims. The
defendants, Applied Force and Samuel Miller III, have filed a counterclaim
for
recovery of alleged storage fees in the amount of $126,784 and certain alleged
service fees in the amount of $1,275. A settlement agreement and mutual release
was entered into during August 2007 and the action was dismissed on September
18, 2007. As part of the settlement the Company transferred title of a truck
to
the defendant.
Item
2
Management's
Discussion and Analysis or Plan of Operation
CAUTIONARY
STATEMENT RELATING TO FORWARD-LOOKING STATEMENTS
The
matters discussed in this Form 10-QSB contain certain forward-looking statements
and involve risks and uncertainties (including changing market conditions,
competitive and regulatory matters, etc.) detailed in the disclosure contained
in this Form 10-QSB and the other filings with the Securities and Exchange
Commission made by us from time to time. The discussion of our liquidity,
capital resources and results of operations, including forward-looking
statements pertaining to such matters, does not take into account the effects
of
any changes to our operations. Accordingly, actual results could differ
materially from those projected in the forward-looking statements as a result
of
a number of factors, including those identified herein and those discussed
under
the heading “Risk Factors” in the Company’s 10-KSB for the fiscal year ended
March 31, 2007. This item should be read in conjunction with the financial
statements and other items contained elsewhere in the report. Unless the context
otherwise requires, “we”, “our”, “us”, the “Company” and similar phrases refer
to United Energy Corp.
Overview
We
develop and distribute environmentally friendly specialty chemical products
with
applications in several industries and markets. Our current line of products
includes our K-Line of Chemical Products for the oil industry and related
products.
Through our wholly owned subsidiary, Green Globe Industries, Inc., we provide
the U.S. military with a variety of solvents, paint strippers and cleaners
under
our trade name “Qualchem.” Green Globe is a qualified supplier for the U.S.
military and has sales contracts currently in place with no minimum purchase
requirements which are renewable at the option of the U.S. Military.
We have developed a system referred to as our “S2 system,” to work with our
environmentally friendly paraffin dispersants products. This technology produces
high volumes of steam and heat at variable pressures and temperatures to
completely dissolve most deposits of paraffin and asphaltene within oil wells,
pipelines or storage tanks. The S2 system apparatus is portable, compact and
easy to use. We are further developing the process to enhance and support sales
of K-Line of Chemical Products for the oil industry and for other potential
applications. Our patent on the S2 system expired in January 2007; however,
we
have filed a patent application with respect to certain improvements,
modifications and enhancements to the S2 system.
A
key
component of our business strategy is to pursue collaborative joint working
and
marketing arrangements with established international oil and oil service
companies. We intend to enter into these relationships to more rapidly and
economically introduce our K-Line of Chemical Products to the worldwide
marketplace for refinery, tank and pipeline cleaning services. We have recently
entered into an amended and restated non-exclusive distribution agreement with
Champion Technologies Inc. for the sale and distribution of our K-Line of
patented specialty chemical solutions. The agreement is for a term of three
(3)
years and grants Champion Technologies Inc. certain rights to blend, dilute
and
utilize our products to manufacture and sell different products. We have also
recently entered into a non-exclusive Master Purchase Agreement with Petrobras
America Inc. for the sale and distribution of our K-Line of patented specialty
chemical solutions. The agreements do not provide for any minimum amounts to
be
purchased. We are also currently negotiating potential working arrangements
with
several other companies however, there can be no assurance that any of these
arrangements will be entered into or, if entered into, (as well as the
agreements with Champion Technologies and Petrobras America Inc.) will be
successful.
We
provide our K-Line of Chemical Products and our Green Globe Products to our
customers and generated revenues of $390,017 for the six month period ended
September 30, 2007 and $523,841 for the six month period ended September 30,
2006.
RESULTS
OF OPERATIONS
Three
Months Ended September 30, 2007 Compared to the Three Months Ended September
30,
2006
Revenues
.
Revenues for the three months ended September 30, 2007 were $113,777, a
$185,237, or 62% decrease from revenues of $299,014 in the comparable three
months of 2006. Revenues from our K-Line of Chemical Products decreased by
$226,564 to $43,511 or 84% compared to $270,075 in the comparable three months
ended September 30, 2006, offset by an increase of $41,327 to $70,266 or 143%
compared to $28,939 in the comparable three months ended September 30, 2006
in
our Green Globe/Qualchem military sales.
Cost
of Goods Sold
.
Cost of
goods sold decreased $35,311, or 33% to $71,608 or 63% of revenue, for the
three
months ended September 30, 2007 from $106,919, or 36% of revenues for the three
months ended September 30, 2006. The decrease in cost of goods sold was due
to
the lower sales level in the period compared to the comparable period in 2006.
The increase in cost of goods sold as a percentage of revenues was due to the
higher sales of our Green Globe/Qualchem military sales. Cost of goods sold
from
our K-Line of Chemical Products sales decreased by $48,709 to $34,898 or 58%
compared to $83,607 in the comparable three months ended September 30, 2006,
offset by an increase of $13,398 to $36,710 or 57% compared to $23,312 in the
comparable three months ended September 30, 2006 in cost of goods sold of our
Green Globe/Qualchem military
Gross
Profit
.
Gross
profit for the three months ended September 30, 2007, decreased by $149,926,
or
78% to $42,169 or 37% of revenues compared with $192,095 or 64% of revenues
in
the prior period. The decrease in gross profit and gross profit percentage
reflects the lower levels of sales.
Operating
Costs and Expenses
Selling,
general and Administrative Expenses
.
Selling, general and administrative expenses decreased $150,921 to $622,992
or
548% of sales for the three months ended September 30, 2007 compared with
$773,913 or 259% of sales for the three months ended September 30, 2006. The
decrease in selling, general and administrative expenses is primarily related
to
a decrease in professional fees and bad debts partially offset by higher travel
and entertainment expenses.
Depreciation
and Amortization
.
Depreciation and amortization remained relatively constant for the three months
ended September 30, 2007 as compared to September 30, 2006.
Interest
Income
.
The
Company had interest income of $22,765 for the three months ended September
30,
2007 compared with $48,950 in the corresponding period in 2006. The decrease
was
due to the use of cash received in connection with the private placement in
March 2006.
Interest
Expense
.
Interest expense remained relatively constant for the three months ended
September 30, 2007 as compared to September 30, 2006.
Net
Loss
.
The
three months ended September 30, 2007 resulted in a net loss of $577,417 or
$0.02 per share as compared to a net loss of $552,003 or $0.02 per share for
the
three months ended September 30, 2006. The average number of shares of common
stock used in calculating earnings per share remained the same.
Six
Months Ended September 30, 2007 Compared to the Six Months Ended September
30,
2006
Revenues
.
Revenues for the six-month period ended September 30, 2007 were $390,017, a
$133,824 or 26% decrease from revenues of $523,841 in the comparable six-month
period ended September 30, 2006. Revenues from our K-Line of Chemical Products
decreased by $285,456 to $183,841 or 61% compared to $469,297 in the comparable
six months ended September 30, 2006, offset by an increase of $151,632 to
$206,176 or 278% compared to $54,544 in the comparable six months ended
September 31, 2006 in our Green Globe/Qualchem military sales.
Cost
of Goods Sold
.
Cost of
goods sold decreased $19,681, or 9% to $189,098 or 48% of revenues, for the
six-month period ended September 30, 2007 from $208,779 or 40% of revenues,
for
the six-month period ended September 30, 2006. The decrease in cost of goods
sold was due to the lower sales level in the period compared to the comparable
period in 2006. The increase in cost of goods sold as a percentage of revenues
was due to the higher sales of our Green Globe/Qualchem military sales. Cost
of
goods sold from our K-Line of Chemical Products decreased by $76,695 to $89,802
or 46% compared to $166,497 in the comparable three months ended September
30,
2006, offset by an increase of $57,014 to $99,296 or 135% compared to $42,282
in
the comparable three months ended September 30, 2006 in cost of goods sold
of
our Green Globe/Qualchem military sales.
Gross
Profit
.
Gross
profit for the six months ended September 30, 2007, decreased by $114,143,
or
36% to $200,919 or 52% of revenues compared with $315,062 or 60% of revenues
in
the prior period. The decrease in gross profit and gross profit percentage
reflects the lower levels of sales of Specialty Chemicals.
Operating
Costs and Expenses
Selling,
General and Administrative Expenses
.
Selling, general and administrative expenses decreased $194,618 to $1,279,027
or
328% of revenues for the six months ended September 30, 2007 compared with
$1,473,645 or 281% of revenues for the six months ended September 30, 2006.
The
decrease in selling, general and administrative expenses was primarily related
to a decrease in professional fees, bad debts and lower travel and entertainment
expenses partially offset by higher salaries due to the addition of employees
offset by a reduction in option costs charged for employees.
Depreciation
and Amortization
.
Depreciation and amortization remained relatively constant for the six months
ended September 30, 2007 as compared to September 30, 2006.
Interest
Income
.
The
Company had interest income of $51,641 for the six months ended September 30,
2007 compared with $93,498 in the corresponding period in 2006. The decrease
was
due to the use of cash received in connection with the private placement in
March 2006.
Interest
Expense
.
Interest expense remained relatively constant for the six months ended September
30, 2007 as compared to September 30, 2006.
Net
Loss
.
The six
months ended September 30, 2007 resulted in a net loss of $1,065,310 or $0.03
per share as compared to a net loss of $1,119,657 or $0.04 per share for the
six
months ended September 30, 2006. The average number of shares of common stock
used in calculating earnings per share increased 1,571 shares to 31,030,115
as a
result of 12,500 shares issued in connection with the exercise of stock
options.
Liquidity
and Capital Resources
As
of
September 30, 2007, the Company had $1,870,006 in cash and cash equivalents,
as
compared to $2,863,906 at March 31, 2007.
The
$993,900 decrease in cash and cash equivalents was due to net cash used in
continuing operations of $949,488, net cash used in investing activities of
$48,199 and net cash used in financing activities of $720. Cash used in
investing activities consisted of employee loans of $4,377, fixed asset
purchases of $4,896, and patent purchases of $38,926. Cash used in financing
activities consisted of preferred stock dividends of $720.
As
of
September 30, 2007 the Company’s backlog included $297,084 of chemical sales.
Backlog represents products that the Company’s customers have committed to
purchase. The Company’s backlog is subject to fluctuations and is not
necessarily indicative of future sales.
We
currently anticipate that our available cash in hand and cash resources from
expected revenues will be sufficient to meet our anticipated working capital
and
capital expenditure requirements for at least the next twelve
months.
Concentration
of Risk
Sales
to two of our customers, accounted for approximately 71% and 70% of our sales
for the six months ending September 30, 2007 and 2006.
Off-Balance
Sheet Arrangements
We
do not
currently have any off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes
in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that are material to our
stockholders.