UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO __________
COMMISSION FILE NO. 000-30841
______________________
UNITED ENERGY CORP.
(Exact name of registrant as specified in its charter)
NEVADA 22-3342379
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
600 MEADOWLANDS PARKWAY #20, SECAUCUS, N.J. 07094
(Address of principal executive offices) (Zip Code)
(800) 327-3456
(Registrant's telephone number, including area code)
Indicate by check mark whether the Issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the Issuer
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding as of December 31, 2003
----- -----------------------------------
Common Stock, $.01 par value 22,180,270 shares
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated balance sheets December 31, 2003 (Unaudited) and 3
March 31, 2003
Consolidated statements of operations for the three months and nine 4
months ended December 31, 2003 (Unaudited) and 2002 (Unaudited)
Consolidated statement of stockholders' equity for the nine months 5
ended December 31, 2003 (Unaudited)
Consolidated statements of cash flows for the nine months ended 6
December 31, 2003 (Unaudited) and 2002 (Unaudited)
Notes to consolidated financial statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and 14
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4 Controls and Procedures 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K. 20
Signatures 21
Certifications 22
2
UNITED ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003
AND MARCH 31, 2003
DECEMBER 31, MARCH 31,
2003 2003
-----------------------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 277,607 $ 2,120,942
Accounts receivable, net of allowance for doubtful accounts 420,943 496,715
of $66,488 and $48,113, respectively
Inventory, net of allowance of $16,290 and $16,290, respectively 222,252 211,344
Note receivable, net of reserve of $40,857 and $30,000, 64,808 149,034
respectively
Prepaid expenses and other current assets 67,115 104,527
-----------------------------
Total current assets 1,052,725 3,082,562
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization of $191,744 and $93,032, respectively 377,729 268,597
OTHER ASSETS:
Goodwill, net of accumulated amortization of $17,704 and 68,819 68,819
$17,704, respectively
Patents, net of accumulated amortization of $59,944 and 310,877 229,508
$44,253, respectively
Loans receivable, net of reserve of $107,705 and 3,238 2,076
$107,705, respectively
Deposits 76,385 31,385
-----------------------------
Total assets $ 1,889,773 $ 3,682,947
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 320,621 $ 158,048
Accrued expenses 184,978 334,198
Due to related party 244,141 244,141
-----------------------------
Total current liabilities 749,740 736,387
Asset retirement obligation 30,000 --
-----------------------------
Total liabilities 779,740 736,387
-----------------------------
STOCKHOLDERS' EQUITY:
Common stock; 100,000,000 shares authorized of $0.01 par value,
22,180,270 shares issued and outstanding 221,802 221,802
as of December 31, 2003 and March 31, 2003
Additional paid-in capital 10,708,453 10,698,752
Accumulated deficit (9,820,222) (7,973,994)
-----------------------------
Total stockholders' equity 1,110,033 2,946,560
-----------------------------
Total liabilities and stockholders' equity $ 1,889,773 $ 3,682,947
=============================
The accompanying notes are an integral part of these consolidated balance sheets
3
UNITED ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED
DECEMBER 31, 2003 AND 2002
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
ENDED DECEMBER 31, ENDED DECEMBER 31,
2003 2002 2003 2002
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
REVENUES, net $ 91,120 $ 792,092 $ 786,262 $ 2,156,701
COST OF GOODS SOLD 38,054 431,383 396,380 1,284,503
------------ ---------- ----------- ------------
Gross profit 53,066 360,709 389,882 872,198
------------ ---------- ----------- ------------
OPERATING EXPENSES:
General and administrative 558,453 901,681 2,025,278 2,388,853
Oil well operating and maintenance cost-net 11,795 - 102,662 -
Depreciation, amortization and depletion 39,447 24,780 114,403 57,817
------------ ---------- ----------- ------------
Total operating expenses 609,695 926,461 2,242,343 2,446,670
------------ ---------- ----------- ------------
Loss from operations (556,629) (565,752) (1,852,461) (1,574,472)
------------ ---------- ----------- ------------
OTHER INCOME (EXPENSE), net:
Interest income 1,254 15,250 8,523 51,374
Interest expense (588) (144) (2,290) (1,312)
------------ ---------- ----------- ------------
Total other income (expense), net 666 15,106 6,233 50,062
------------ ---------- ----------- ------------
Net loss $ (555,963) $ (550,646) $(1,846,228) $ (1,524,410)
============ ========== =========== ============
BASIC AND DILUTED LOSS PER SHARE $ (0.03) $ (0.02) $ (0.08) $ (0.07)
============ ========== =========== ============
WEIGHTED AVERAGE NUMBER OF SHARES,
basic and diluted 22,180,270 22,180,270 22,180,270 21,220,270
============ ========== =========== ============
The accompanying notes are an integral part of these consolidated statements.
4
UNITED ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED DECEMBER 31, 2003 (UNAUDITED)
Common Stock Additional
------------------------------- Paid-In Accumulated
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
BALANCE, March 31, 2003 22,180,270 $ 221,802 $ 10,698,753 $(7,973,994) $ 2,946,561
Options granted in
consideration for services -- -- 9,700 -- 9,700
Net loss -- -- -- (1,846,228) (1,846,228)
-------------------------------------------------------------------------------------
BALANCE, December 31, 2003 22,180,270 $ 221,802 $ 10,708,453 $(9,820,222) $ 1,110,033
=====================================================================================
The accompanying notes are an integral part of this consolidated statement.
5
UNITED ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
DECEMBER 31, 2003 AND 2002
FOR THE NINE MONTHS
ENDED DECEMBER 31,
------------------
2003 2002
---- ----
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,846,228) $ (1,524,410)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization 114,403 57,817
Options granted in consideration for services 9,700 -
Changes in operating assets and liabilities
Decrease (increase) in accounts receivable, net 75,772 (681,547)
(Increase) decrease in inventory, net (10,908) 91,015
Decrease in note receivable, net 84,226 -
Decrease in prepaid expenses 37,412 3,952
Increase in deposits (45,000) (1,041)
Increase in related party payable - 102,654
Increase (decrease) in accounts payable and accrued expenses 13,353 (193,904)
---------------------------------------
Net cash used in operating activities (1,567,270) (2,145,464)
---------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments on loans receivable (1,162) (119,255)
Payments for patents (97,060) (84,987)
Payments for acquisition of property and equipment (177,843) (317,542)
---------------------------------------
Net cash used in investing activities (276,065) (521,784)
---------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of line of credit - (150,000)
Payments of private placement costs - (484,200)
Proceeds from issuance of common stock - 6,000,000
---------------------------------------
Net cash provided by financing activities - 5,365,800
---------------------------------------
Net (decrease) increase in cash and cash equivalents (1,843,335) 2,698,552
CASH AND CASH EQUIVALENTS, beginning of period 2,120,942 198,412
---------------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 277,607 $2,896,964
================ =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period
Interest $ 2,290 $ 1,926
================ =========
Income taxes $ 2,154 $ 800
================ =========
The accompanying notes are an integral part of these consolidated statements.
6
UNITED ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 (UNAUDITED)
1. BASIS OF PRESENTATION AND GOING CONCERN
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. 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 December 31, 2003
(unaudited) and the results of its operations for the three months and nine
months ended December 31, 2003 and 2002 (unaudited) and cash flows for the nine
months ended December 31, 2003 and 2002(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 nine months ended December 31, 2003 are not
necessarily indicative of the operating results that may be expected for the
year ending March 31, 2004.
The consolidated balance sheet as of March 31, 2003 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-K, as amended.
Going Concern - During the past two fiscal years ended March 31, 2003 and
2002, the Company has recorded aggregate losses from operations of $4,193,576
and has incurred total negative cash flow from operations of $3,033,650 for the
same two-year period. During the nine months ended December 31, 2003 the Company
experienced a net loss from operations of $1,846,228 and negative cash flow from
operating activities of $1,567,270. These matters raise substantial doubt about
the Company's ability to continue as a going concern. The Company's consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Liquidity - The Company's continued existence is dependent upon several
factors, including increased sales volume, collection of existing receivables
and the ability to achieve profitability from the sale of the Company's product
lines. The Company is seeking additional sources of equity or debt financing and
expects to complete and fund a transaction in the next month. In order to
increase its cash flow, the Company is continuing its efforts to stimulate sales
and cut back expenses not directly supporting its sales and marketing efforts.
2. SEGMENT INFORMATION
Under the provision of SFAS No. 131, the Company's activities fall within
two operating segments: Graphic Arts and Specialty Chemicals. The following
tables set forth the Company's industry segment information for the three months
and nine months ended December 31, 2003 and 2002.
7
UNITED ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company's total revenues and net loss by segment for the three month
period ended December 31, 2003 and identifiable assets as of December 31, 2003
are as follows:
Specialty
Graphic Arts Chemicals Corporate Total
------------ --------- --------- -----
Revenues $ 310 $ 90,810 $ -- $ 91,120
============= ========== =========== ==========
Gross profit $ 133 $ 52,933 $ -- 53,066
General and administrative 42,963 208,459 307,031 558,453
Oil well operating and maintenance cost-net -- 11,795 -- 11,795
Depreciation, amortization and depletion -- 35,058 4,389 39,447
Interest income -- -- (1,254) (1,254)
Interest expense -- 36 552 588
------------- ---------- ------------ -----------
Net loss $ (42,830) $ (202,415) $ (310,718) $ (555,963)
============= ========== ============ ===========
Cash and cash equivalents $ -- $ -- $ 277,607 $ 277,607
Accounts receivable, net 363,020 57,923 -- 420,943
Inventory, net 26,162 196,090 -- 222,252
Note receivable, net 64,808 -- -- 64,808
Prepaid expenses -- -- 67,115 67,115
Property and equipment, net -- 341,520 36,209 377,729
Goodwill, net -- 68,819 -- 68,819
Patents, net -- 310,877 -- 310,877
Loans receivable, net -- -- 3,238 3,238
Deposits -- -- 76,385 76,385
------------- ---------- ------------ -----------
Total assets $ 453,990 $ 975,229 $ 460,554 $ 1,889,773
============= =========== ============ ===========
The Company's total revenues and net income (loss) by segment for the nine month period ended December 31, 2003,
are as follows:
Specialty
Graphic Arts Chemicals Corporate Total
------------ --------- --------- -----
Revenues $ 485,667 $ 300,595 $ -- $ 786,262
============== ========== =========== ===========
Gross profit $ 244,363 $ 145,519 $ -- $ 389,882
General and administrative 153,038 848,825 1,023,415 2,025,278
Oil well operating and maintenance cost-net 102,662 -- 102,662
Depreciation, amortization and depletion -- 101,239 13,164 114,403
Interest income -- -- (8,523) (8,523)
Interest expense -- 149 2,141 2,290
-------------- ---------- ------------ -----------
Net income (loss) $ 91,325 $ (907,356) $(1,030,197) $(1,846,228)
============== ========== =========== ===========
8
UNITED ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company's total revenues and net income (loss) by segment for the three month period ended December 31, 2002 and
identifiable assets as of December 31, 2002, are as follows:
Specialty
Graphic Arts Chemicals Corporate Total
------------ --------- --------- -----
Revenues $ 709,237 $ 82,855 $ -- $ 792,092
============== ========== =========== ===========
Gross profit $ 316,048 $ 44,661 $ -- $ 360,709
General and administrative 42,196 430,973 428,512 901,681
Depreciation and amortization -- 21,385 3,395 24,780
Interest income -- (15,250) (15,250)
Interest expense 144 -- -- 144
-------------- ---------- ------------ -----------
Net income (loss) $ 273,708 $ (407,697) $ (416,657) $ (550,646)
============== ========== =========== ===========
Cash and cash equivalents $ -- $ -- $ 2,896,964 $ 2,896,964
Accounts receivable, net 833,113 66,538 -- 899,651
Inventory, net 41,333 155,509 -- 196,842
Loans receivable, net -- 108,447 10,808 119,255
Prepaid expenses -- 80,884 32,291 113,175
Property and equipment, net -- 236,223 50,484 286,707
Goodwill, net -- 68,819 -- 68,819
Patents, net -- 203,796 -- 203,796
Other assets -- -- 2,903 2,903
-------------- ---------- ------------ -----------
Total assets $ 874,446 $ 920,216 $ 2,993,450 $ 4,788,112
============== ========== =========== ===========
The Company's total revenues and net income (loss) by segment for the nine month period ended December 31, 2002, are as
follows:
Specialty
Graphic Arts Chemicals Corporate Total
------------ --------- --------- -----
Revenues $ 1,699,159 $ 457,542 $ -- $ 2,156,701
============== ========== =========== ===========
Gross profit $ 647,469 $ 224,729 $ -- $ 872,198
General and administrative 138,279 1,238,563 1,012,011 2,388,853
Depreciation and amortization -- 49,619 8,198 57,817
Interest income -- -- (51,374) (51,374)
Interest expense 1,312 -- -- 1,312
-------------- ---------- ------------ -----------
Net income (loss) $ 507,878 $(1,063,453) $ (968,835) $(1,524,410)
============== ========== =========== ===========
3. ACQUISITION OF OIL WELL LEASES
On April 4, 2003, the Company purchased oil leases for six oil wells in
Laramie County, Wyoming (the "Wyoming Wells") for an aggregate purchase price of
$97,616. In addition to operating the wells, the Company used the wells to test
its products. During the nine months ended December 31, 2003, the Wyoming Wells
produced oil which generated $34,636 in revenues and incurred operating costs
and start-up maintenance and repair costs of $137,298, much of which is expected
to be non-recurring. The Company has capitalized $17,419 for the oil leases and
$71,429 for equipment, net of depreciation, amortization and depletion at
December 31, 2003. The Company recorded an asset retirement obligation of
$30,000 to cover the cost of capping the wells in accordance with SFAS No. 143,
"Accounting for Asset Retirement Obligations." The Company maintains a
refundable, interest-bearing deposit of $75,000 with the State of Wyoming to
cover the costs of eventual capping the wells in the event they are no longer
operated or abandoned.
9
UNITED ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4. NEW ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for
Exit or Disposal Activities." SFAS No. 146 requires that the liability for costs
associated with an exit or disposal activity be recognized at their fair values
when the liabilities are incurred. Under previous guidance, liabilities for
certain exit costs were recognized at the date that management committed to an
exit plan, which is generally before the actual liabilities are incurred. SFAS
No. 146 is effective prospectively for exit or disposal activities initiated
after December 31, 2002. This statement had no effect on the Company's
consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure." This statement amends the disclosure
and certain transition provisions of Statement 123, "Accounting for Stock-Based
Compensation." Its disclosure provisions, which apply to all entities with
employee stock-based compensation, are effective for fiscal years ending after
December 15, 2002. SFAS 148:
o requires all entities with stock-based employee compensation
arrangements to provide additional disclosures in their summary of
significant accounting policies note for entities that use the
intrinsic value method of APB No. 25, "Accounting for Stock Issued to
Employees", to account for employee stock compensation for any period
presented, their accounting policies note should include a tabular
presentation of pro forma net income and earnings per share using the
fair value method.
o permits entities changing to the fair value method of accounting for
employee stock compensation to choose from one of three transition
methods - the prospective method, the modified prospective method, or
the retroactive restatement method. The prospective transition method,
however, will not be available for entities that initially apply the
fair value method in fiscal years beginning after December 15, 2003.
o requires interim-period pro forma disclosures if stock-based
compensation is accounted for under the intrinsic value method in any
period presented. The Company does not currently expect the adoption
of this statement to have a material impact on its financial
statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantors'
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guaranties of Indebtedness of Others." The Interpretation elaborates on the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. This Interpretation does not prescribe a specific approach for
subsequently measuring the guarantor's recognized liability over the term of the
related guarantee. The disclosure provisions of this Interpretation were
effective for the Company's March 31, 2003 consolidated financial statements.
The initial recognition and initial measurement provisions of this
Interpretation are applicable on a prospective basis to guarantees issued or
modified after March 31, 2003. This Interpretation had no effect on the
Company's consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." This Interpretation clarifies the application of
existing accounting pronouncements to certain entities in which equity investors
do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. The provisions of
the Interpretation are immediately effective for all variable interests in
variable interest entities created after January 31, 2003, and the Company will
need to apply its provisions to any existing variable interests in variable
interest entities no later than July 1, 2003. This Interpretation had no effect
on the Company's consolidated financial statements.
10
UNITED ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
5. RELATED-PARTY TRANSACTIONS
Martin Rappaport, a significant shareholder and director of the Company,
owns the property from which the Company leases the 9,600 square foot facility
it occupies in Secaucus, New Jersey. The Company pays approximately $100,000 per
year under the lease, excluding real estate taxes. We believe that the lease is
at fair market value with comparable leases for similar facilities.
6. STOCK-BASED COMPENSATION
At December 31, 2003, the Company has stock-based compensation plan. As
permitted by SFAS No.123, "Accounting for Stock Based Compensation", the Company
accounts for stock-based compensation arrangements with employees in accordance
with provisions of Account Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees." Compensation expense for stock options issued to
employees is based on the difference on the date of grant, between the fair
value of the Company's stock and the exercise price of the option. There was no
stock-based employee compensation charged to expense for the nine months ended
December 31, 2003 and 2002. The Company accounts for equity instruments issued
to non-employees in accordance with the provisions of SFAS No.123 and Emerging
Issues Task Force (EITF) Issue No. 96-18, "Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction With
Selling, Goods or Services." All transactions in which goods or services are the
consideration received for the issuance of equity instruments are accounted for
based on the fair value of the consideration received or the fair value of the
equity instrument issued, whichever is more reliably measurable. Stock-based
compensation for non-employees was $9,700 and $0 for the nine months ended
December 31, 2003 and 2002, respectively.
11
UNITED ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The following table illustrated the effect on net loss and loss per share if the
Company had applied the fair value recognition provisions of SFAS No. 123 to all
stock-based compensation:
For the Three Months For the Nine Months
-------------------- -------------------
Ended December 31, Ended December 31,
------------------ ------------------
2003 2002 2003 2002
----------------------- --------------------------
Net Loss as reported $ (555,963) $(550,646) $(1,846,228) $(1,524,410)
Deduct:
Total stock based employee compensation
Expense determined under fair value based
method for all awards (144,823) (23,892) (1,312,836) (1,182,658)
-------- ------- ---------- ----------
Proforma loss $ (700,786) $(574,538) $(3,159,064) $(2,707,068)
---------- --------- ----------- -----------
Basic and diluted loss per common share
As reported $ (0.03) $(0.02) $(0.08) $(0.07)
Pro forma $ (0.03) $(0.03) $(0.14) $(0.13)
7. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries, in the normal course of their respective
businesses, are parties to certain litigation. In the opinion of the Company's
management, settlements of litigation will not have a material adverse effect on
the Company's results of operations, financial position or cash flows.
Texas Oil Field Accident
On October 29, 2002, an accident occurred at an oil well site near Odessa,
Texas, where the Company's equipment and products were being used in the
treatment of an oil well. Three lawsuits were commenced against the Company in
Texas state court in Crane County, arising from this incident and one additional
claim, though not formally commenced, was asserted. The insurance companies
involved have settled all of the claims and the Company has paid only $15,000 in
legal out of pocket fees relating to these claims.
In addition to the above-described litigation, OSHA commenced an investigation
into the accident. On April 8, 2003, OSHA issued its Citation and Notification
of Penalty which found that the Company had committed violations of certain
applicable rules, including having failed to provide at or in proximity to the
site a person or persons adequately trained to render first aid with adequate
first aid supplies available and having failed to develop, implement or maintain
at the site a written hazard communication program describing how safety
criteria will be met. OSHA proposed a fine of $3,000 for these violations, which
the Company has paid.
Litigation Concerning A Former Employee
On or about May 16, 2003, the Company commenced an action against Jon Hebert, a
former employee of the Company in the United States District Court for the
District of New Jersey (the "Herbert Action"), seeking preliminary and permanent
12
UNITED ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
injunctive and other relief for violations by Mr. Hebert of employment and
non-disclosure agreements between him and the Company, resulting in alleged
disclosures by Hebert of the Company's confidential and proprietary information
and wrongful solicitation of the Company's customers. The Company alleges that
sales of products manufactured or distributed by Hebert's new employer may, in
addition, infringe the Company's patents. After a hearing on the Company's
motion for a preliminary injunction, the Court denied the motion, but ordered
expedited proceedings in the matter.
On or about May 27, 2003, Mr. Hebert's current employer, Fluid Sciences, L.L.C.,
commenced two actions against the Company and one of its wholly-owned
subsidiaries, Nor Industries, Inc. One of the actions was commenced in the 15th
Judicial District Court, Lafayette Parish, Louisiana ("Fluid Sciences Action
#1). This action seeks a declaratory judgment that the agreements between the
Company and Mr. Hebert are not enforceable against Fluid Sciences, L.L.C as a
matter of Louisiana's public policy and laws. In addition the action seeks
judgment that the Company's efforts to enforce its agreements with Mr. Hebert
are in restraint of trade and constitute unfair competition entitling Fluid
Sciences, L.L.C. to injunctive relief and damages. In June, 2003, the Company
removed this action to the United States District Court for the Western District
of Louisiana. In October 2003, the action was administratively stayed pending
the outcome of the action described in the preceding paragraph which was brought
in the United States District Court for the District of New Jersey by the
Company against Mr. Hebert.
On or about May 27, 2003, a second action was commenced in the United States
District Court for the Western District of Louisiana, entitled Fluid Sciences,
L.L.C. v. United Energy Corp. and Nor Industries, Inc (Fluid Sciences Action
#2). The complaint in this action alleges that Fluid Sciences is entitled to a
declaratory judgment that its products do not infringe on the patents of the
Company. The Company and its subsidiary intend vigorously to defend the
litigation brought by Fluid Sciences, L.L.C.
The parties to the Herbert Action and to Fluid Sciences Actions #1 and 2 have
orally agreed, in principle, to settle and discontinue all of the actions
without any further cost to any of the parties. While the specific terms of the
settlements have not yet been finally established, the Company does not
anticipate that any such litigation will have an adverse affect upon the
Company. Included in these settlement negotiations are clear promises from Fluid
Sciences, L.L.C. and Jon Herbert that there will be no further violations of any
company patents.
Sales Commission Claim
On or about July 26, 2002, an action was commenced against the Company 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 the sales representative to the Company and in that
capacity made sales of the Company's products to the United States government
and to commercial entities. Plaintiffs further allege that the Company failed to
pay to plaintiffs agreed commissions at the rate of 20% of gross sales of the
Company's products made by plaintiffs. The complaint seeks an accounting,
compensatory damages in the amount of all unpaid commissions plus interest
thereon, punitive damages in an amount treble 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 June 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. The Company believes it has meritorious
defenses to the claims asserted in the action and intends vigorously to defend
the case. The Company also believes that the actual amount of damages will be
under $10,000.
13
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTIONARY STATEMENT RELATING TO FORWARD-LOOKING STATEMENTS
Some of the statements contained in this Report on Form 10-Q discuss our
plans and strategies for our business or state other forward-looking statements,
as this term is defined in the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of the Company, or industry results to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
general economic and business conditions; industry capacity; marketing and other
industry trends; demographic changes; competition; the loss of any significant
customers; availability of working capital, inability to raise additional
capital, failure to achieve sales objectives, ability to control expenses,
inability to manufacture products, reliance on third parties for raw materials,
risks related to compliance to environmental laws, changes in business strategy
or development plans; retention of clients not under long-term contract; quality
and retention of management; business abilities and judgment of personnel;
availability of qualified personnel; protection of proprietary rights, patents
and trade secrets and changes in, or the failure to comply with, government
regulations.
OVERVIEW
The Company considers its primary focus to be the development, manufacture
and sale of environmentally friendly specialty chemical products. The Company
considers its leading product in terms of future earnings potential to be its
KH-30(R) multifunctional dispersant and its family of related products KX-91(R)
and KH-30S(R) used as oil and gas well, pipeline and storage tank cleaners.
KH-30(R) is an environmentally friendly, non-petroleum based product that
is biodegradable. When applied in accordance with the Company's recommended
procedures, KH-30(R) has resulted in substantial production increases of between
two and five times in paraffin and asphaltene-affected oil and gas wells. In
addition, KH-30(R) has proven effective as a "downstream application" which
results in cleaner flow lines and holding tanks. KH-30(R) has also been tested
to be refinery compatible in that it contains no materials that are harmful to
the refining process. This product has yet to achieve any significant market
penetration; however, the Company has recently received a number of requests for
promotional samples from prospective customers in several countries throughout
the world and many states in the U.S.
On October 9, 2002, the Company announced the filing of a comprehensive
patent for its new S2 System. The S2 System employs new technology to maintain
the flow of oil and gas throughout all phases of the production, transportation,
refinery and storage process in the oil and gas industry. The S2 System is a
light-weight, compact, mobile device, which can economically generate high
volumes of steam at controllable pressures and temperatures using non-petroleum
based fuel. In conjunction with the injection of KH-30(R) and its related family
of products, the S2 System will be used to melt paraffin and asphaltene
deposits, and to inhibit the formation of new blockages, maintaining peak
performance of equipment for an extended time period. The Company also believes
that this system has applications in other non-petroleum based uses where large
volumes of high temperature steam are required.
One of the Company's graphic arts products is a photo-sensitive coating
that is applied to paper to produce what is known in the printing industry as
proofing paper or "blue line" paper. The Company developed this formulation over
several years of testing. The Company's patent attorneys have informed the
Company that the formulation is technically within the public domain as being
within the scope of an expired DuPont patent. However, the exact formulation
utilized by the Company has not been able to be duplicated by others and is
protected by the Company as a trade secret. The product is marketed under the
trade name UNIPROOF(R). Most recently UNIPROOF(R) has been made in a thinner
configuration so it can now be used by book publishers as well as other
printers.
The Company has an arrangement with Alameda Company of Anaheim, California
to distribute UNIPROOF(R) proofing paper on a non-exclusive basis. The Company
seeks additional distributors to sell the UNIPROOF(R) product.
The Company's chemists have also developed an environmentally friendly
fire-retardant agent named FR-15. FR-15 begins as a concentrate which can be
mixed with varying amounts of water, depending on the anticipated use. FR-15
mixture also resists re-ignition once a fire has been extinguished. This product
can also be used to reduce odors,
14
such as those from decomposing garbage, and for soil remediation following
petroleum-based contamination. The FR-15 has been developed and successfully
tested by several municipal fire departments. The Company does not have any
current plans to market this product in the United States.
Slick Barrier is an underwater protective coating which prevents the
adherence of barnacles to boat hulls. The product is another in the Company's
line of environmentally friendly products that are biodegradable, which the
Company believes to be particularly appealing in fresh water marine
applications. The product is being tested on pleasure boats throughout the
United States and Europe. A patent application on this product has been filed.
In November 1998, the Company acquired all of the outstanding shares of
Green Globe in exchange for 30,000 shares of the Company's common stock. Green
Globe is operated as a separate subsidiary of the Company and sells its products
under the trade name Qualchem(TM). The acquisition of Green Globe gives the
Company access to the chemistry and product lines of Green Globe, which include
environmentally friendly paint strippers and cleaners, many of which have been
qualified for use by the U.S. Military. The Green Globe product line includes
the development of dual package cleaning and drying "wipes" which produce a
clear, non-reflective coating on glasses, computer screens and instrument
panels. The wipes were developed for, and have received U.S. Military approval
for, the cleaning of the instrument panels of combat aircraft.
15
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2003 COMPARED TO THE THREE MONTHS ENDED
DECEMBER 31, 2002
Revenues. Revenues for the three months ended December 31, 2003 were
$91,120, a $700,970, or 88% decrease from revenues of $792,092 in the comparable
three months of 2002. The decrease in revenues was primarily a result of no
UNIPROOF(R) sales during the quarter. UNIPROOF(R) sales tend to be seasonal with
more requests for the product in the first through third quarters of the fiscal
year. However, our largest customer did not place any orders for additional
UNIPROOF(R) paper in the second or third quarters. Specialty Chemicals, which
includes sales of our KH-30(R) products and Green Globe/Qualchem military sales,
increased by $7,955 to $90,810, or 10% compared to $82,855 in the comparable
three months in the previous year. This increase was due primarily to an
increase in Green Globe/Qualchem military sales partially offset by a decrease
in sales of our KH-30(R) products.
Cost of Goods Sold. Cost of goods sold decreased $393,329, or 91% to
$38,054 or 42% of sales, for the three months ended December 31, 2003 from
$431,383, or 54% of sales for the three months ended December 31, 2002. The
decrease in cost of goods sold and lower percentage of sales was primarily due
to the lower sales levels and margins on UNIPROOF(R) paper sales.
Gross Profit. Gross profit for the three months ended December 31, 2003,
decreased by $307,643, or 85% to $53,066 or 58% of sales compared with $360,709
or 46% of sales in the prior year. The decrease in gross profit reflects the
lower level of sales of UNIPROOF(R) paper.
OPERATING COSTS AND EXPENSES
General and Administrative Expenses. General and administrative expenses
decreased $343,228 to $558,453 or 38% for the three months ended December 31,
2003 compared with $901,681 for the three months ended December 31, 2002. The
decrease in general and administrative expenses is primarily related to lower
salaries and benefits due to the departure of certain executives, lower legal
fees and the reduction in certain marketing expenses that were incurred to
develop product branding, logos, brochures and a website in 2002.
Depreciation, Amortization and Depletion. Depreciation, amortization and
depletion increased to $39,447 from $24,780 reflecting additions to fixed assets
for the manufacture of additional S2 System equipment, capitalized legal costs
related to patent filings for our S2 System and KH-30(R) family of products, and
acquisition of fixed assets related to the Company's oil wells. Depletion
expense was not material.
Oil Well Operating and Maintenance Cost - net. During the three months
ended December 31, 2003, the Company's wells produced oil which generated $8,583
in revenues and incurred operating costs and maintenance and repair costs of
$20,378.
Interest Income, Net of Interest Expense. The Company had net interest
income of $666 for the three months ended December 31, 2003 compared with net
interest income of $15,106 in the corresponding period in 2002. The decrease was
due primarily to the lower investment earnings on the reduced remaining funds
raised from the Company's private placement in May 2002.
Net Loss. The three months ended December 31, 2003 resulted in a net loss
of $(555,963) or $(0.03) per share as compared to a net loss of $(550,646) or
$(0.02) per share for the three months ended December 31, 2002. The increase in
the loss in the quarter ended December 31, 2003 was the result of a lower level
of sales as a result of a decreased level of UNIPROOF(R) paper sales, which was
partially offset by higher gross profit margins and a lower level of general and
administrative expenses. The average number of shares of common stock used in
calculating earnings per share remained the same at 22,180,270 shares.
16
NINE MONTHS ENDED DECEMBER 31, 2003 COMPARED TO THE NINE MONTHS ENDED
DECEMBER 31, 2002
Revenues. Revenues for the nine month period ended December 31, 2003 were
$786,262, a $1,370,439 or 64% decrease from revenues of $2,156,701 in the
comparable nine month period ended December 31, 2002. The decrease in revenues
was primarily due to decreased sales of UNIPROOF(R) proofing paper compared with
the nine-month period ended December 31, 2002. During 2003, there was a
substantial decline in sales of UNIPROOF(R) especially during the second and
third fiscal quarters due to a lower level of orders from the Company's primary
customer. For the nine month period ended December 31, 2003, Specialty Chemical
sales, which includes sales of our KH-30(R) products and Green Globe/Qualchem
military sales decreased 34% to $300,595 from $457,542 in the prior nine month
period ended December 31, 2002. The decline was primarily related to a 66%
decrease in Green Globe/Qualchem military sales. We believe, in 2002, the U.S.
Government stocked up on orders and then cut its orders in 2003 due to other
military priorities. The decline in Green Globe/Qualchem military sales was
partially offset by a 5% increase in sales of our KH-30(R) family of oil field
dispersant products reflecting a higher level of orders.
Cost of Goods Sold. Cost of goods sold decreased 69% to $396,380 or 50% of
sales, for the nine month period ended December 31, 2003 from $1,284,503 or 60%
of sales, for the nine month period ended December 31, 2002. The decrease in
cost of goods sold was primarily due to the reduced volume of UNIPROOF(R)
proofing paper sales and change in the mix of products sold reflecting margins
on UNIPROOF(R) paper sales compared to the prior year and increased costs
related to providing samples of KH-30(R) to prospective customers during 2002.
Gross Profit. Gross profit for the nine month period ended December 31,
2003 was 50% or $389,882, a $482,316 or 55% decrease from a 40% gross profit or
$872,198 in the corresponding period of fiscal 2002. The decrease in gross
profit and the increase in the gross profit percentage reflects the level of
UNIPROOF(R) paper sales, the higher volume but average lower gross profit level
of Green Globe/Qualchem military and KH-30(R) sales. The gross profit was also
adversely affected in 2002 by the cost of providing promotional samples of
KH-30(R) to prospective customers.
OPERATING COSTS AND EXPENSES
General and Administrative Expenses. General and administrative expenses
decreased $363,575, or 15% to $2,025,278, or 258% of revenues for the nine month
period ended December 31, 2003 from $2,388,853, or 111% of revenues for the nine
month period ended December 31, 2002. The decrease in general and administrative
expenses was primarily related to a reduction in salaries and benefits of the
new executive staff added beginning in May 2002 (four individuals left the
company from February through December 2003), a reduction in non-recurring
marketing expenses incurred in 2002 related to developing promotional brochures,
logos and product branding, design and implementation costs of a new Company
website, which was partially offset by increases in certain legal services
partially related to litigation, insurance expenses, an increased level of
travel related to meetings with potential customer, and customer trials on oil
wells and storage tanks.
Depreciation, Amortization and Depletion. Depreciation, amortization and
depletion increased to $114,403 from $57,817 reflecting additions to fixed
assets for additional S2 System equipment and capitalized legal costs related to
patent filings for our S2 System and KH-30(R) products.
Oil Well Operating and Maintenance Cost-net. During the nine months ended
December 31, 2003, the wells produced oil which generated $34,636 in revenues
and incurred operating costs and maintenance and repair costs of $137,298.
Interest Income, Net of Interest Expense. The Company had net interest
income of $6,233 for the nine month period ended December 31, 2003 compared with
net interest income of $50,062 in the corresponding period in 2002. The decrease
was due primarily to the investment earnings on the lower level of remaining
funds raised from the Company's private placement in May 2002.
Net Loss. The nine month period ended December 31, 2003 resulted in a net
loss of $(1,846,228) or $(0.08) per share compared to a net loss of $(1,524,410)
or $(0.07) per share for the comparable period ended December 31, 2002. The
increase in the loss in the nine month period ended December 30, 2003 was the
result of a decrease in sales slightly offset by a decrease in operating
expenses. The average number of shares of common stock used in calculating
earnings per share increased by 960,000 to 22,180,270 shares at December 31,
2003 compared with 21,220,270 at December 31, 2002. The increase resulted from
6,000,000 shares issued in the Company's private placement in May 2002.
17
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2003, the Company had $277,607 in cash and cash
equivalents, as compared to $2,120,942 at March 31, 2003.
The $1,843,335 decrease in cash was due to net cash used in operating
activities of $1,567,270 and net cash used in investing activities of $276,065.
Cash used in investing activities consisted of $97,060 of legal expenses related
to patent applications for KH-30(R) and S2 System products, the purchase of
production equipment and oil wells of $177,843 and loans to employees of $1,162.
On April 4, 2003 the Company purchased oil leases for six oil wells in
Laramie County, Wyoming for an aggregate purchase price of $97,616. In addition
to operating the wells, the Company used the wells to test its products. During
the nine months ended December 31, 2003, the Wyoming Wells produced oil and
generated $34,636 in revenues and incurred operating costs and start-up
maintenance and repair costs of $137,298 much of which is expected to be
non-recurring. The Company has capitalized $17,419 for the oil leases and
$71,429 for equipment, net of depreciation, amortization and depletion at
December 31, 2003. The Company maintains a refundable, interest-bearing deposit
of $75,000 with the State of Wyoming to cover the costs of eventually capping
the wells in the event they are no longer operated or are abandoned. The Company
has no present plans for any other significant capital expenditures.
As of December 31, 2003, the Company had no backlog. 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.
During the past two fiscal years ended March 31, 2003 and 2002, the Company
has recorded aggregate losses from operations of $4,193,576 and has incurred
total negative cash flow from operations of $3,033,650 for the same two-year
period. During the nine months ended December 31, 2003, the Company experienced
a net loss from operations of $1,892,448 and negative cash flow from operating
activities of $1,613,490. These matters raise substantial doubt about the
Company's ability to continue as a going concern. The Company's consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
The Company's continued existence is dependent upon several factors,
including increased sales volume, collection of existing receivables and the
ability to achieve profitability from the sale of the Company's product lines.
The Company is seeking additional sources of equity or debt financing and
expects to complete and fund a transaction in the next month. In order to
increase its cash flow, the Company is continuing its efforts to stimulate sales
and cut back expenses not directly supporting its sales and marketing efforts.
18
CONCENTRATION OF RISK
The Company sells its UNIPROOF(R) proofing paper to three customers. One of
these customers constitutes 93% of Graphic Arts sales and 57% of total customer
sales for the nine month period ended December 31, 2003. The customer has not
placed any orders during the second and third quarters. The loss of this
customer would have adverse financial consequences to the Company. We have
provided liberal credit terms to this customer and there is a risk that a
certain amount of this receivable balance may prove to be uncollectable. The
Company believes that this customer will purchase additional product and the
Company would use that as leverage to collect any outstanding balances.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not expect its operating results, cash flows, or credit
available to be affected to any significant degree by a sudden change in market
interest rates. Further, the Company does not engage in any transactions
involving financial instruments or in hedging transactions with respect to its
operations.
ITEM 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Interim Chief Financial Officer
evaluated the effectiveness of the Company's "disclosure controls and
procedures" (as defined in the Securities Exchange Act of 1934, Rules 13a-14(c)
and 15d-14(c)) as of a date (the "Evaluation Date") within 90 days before the
filing date of this Report, and have concluded that as of the Evaluation Date,
the disclosure controls and procedures were adequate and designed to ensure that
material information relating to the Company and its consolidated subsidiaries
would be made known to them.
There were no significant changes in the Company's internal controls or, to
management's knowledge, in other factors that could significantly affect the
disclosure controls and procedures subsequent to the Evaluation Date.
19
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 7, Commitments and Contingencies to the Consolidated Financial
Statements.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
31.1 Written Statement of the Chief Executive Officer Pursuant
to 18 U.S.C. ss.1350 Sec. 302
31.2 Written Statement of the Interim Chief Financial Officer
Pursuant to 18 U.S.C.ss.1350 Sec. 302
32.1 Written Statement of the Chief Executive Officer Pursuant
to 18 U.S.C. ss.1350 Sec. 906
32.2 Written Statement of the Interim Chief Financial Officer
Pursuant to 18 U.S.C.ss.1350 Sec. 906
(b) Reports on Form 8-K.
None
20
UNITED ENERGY CORP.
FORM 10-Q
DECEMBER 31, 2003
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: February 17, 2004 UNITED ENERGY CORP.
By: /s/ Ronald Wilen
--------------------------
Ronald Wilen,
Chairman and Chief
Executive Officer