UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
[ ] 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 Identification No.)
incorporation or organization)
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 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 August 16, 2004
----- ---------------------------------
Common Stock, $.01 par value 22,255,270 shares
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated balance sheets June 30, 2004 (Unaudited) and
March 31, 2004 ..........................................................3-4
Consolidated statements of operations for
the three months ended June 30, 2004
(Unaudited) and 2003 (Unaudited) ........................................5
Consolidated statement of stockholders' equity for the three
months ended June 30, 2004 (Unaudited) ..................................6
Consolidated statements of cash flows for the three
months ended June 30, 2004 (Unaudited) and 2003 (Unaudited) .............7
Notes to consolidated financial statements ..............................8
Item 2. Management's Discussion and Analysis or Plan of Operation. ..............13
Item 3. Controls and Procedures. ................................................17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. ......................................................19
Item 2. Changes in Securities and Small Business Issuer Purchases
of Equity Securities. ...................................................19
Item 3. Defaults upon Senior Securities. ........................................19
Item 4. Submission of Matters to a Vote of Security Holders. ....................19
Item 5. Other Information. ......................................................19
Item 6. Exhibits and Reports on Form 8-K. .......................................19
Signatures ...........................................................................20
Certifications .......................................................................21
2
UNITED ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 AND MARCH 31, 2004
JUNE 30, MARCH 31,
2004 2004
---- ----
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
$ 990,103 $ 1,518,025
Accounts receivable, net of allowance for doubtful
accounts of $33,531 and $45,736, respectively 201,438 393,941
Inventory, net of allowance of $16,290 and
$16,290, respectively 244,007 176,487
Note receivable, net of reserve of $31,350 and
$31,350, respectively 53,650 63,650
Prepaid expenses and other current assets 132,737 80,296
------- ------
Total current assets 1,621,935 2,232,399
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization of $235,293 and
$225,543, respectively 214,346 243,313
OTHER ASSETS:
Goodwill, net 17,509 17,509
Patents, net of accumulated amortization of $73,315
and $67,032, respectively 303,896 309,424
Loans receivable 1,262 1,538
Deposits 1,385 76,385
Deferred financing costs, net of accumulated
amortization of $28,075 and $2,000, respectively 284,818 310,893
------- -------
Total assets $ 2,445,151 $ 3,191,461
============ ============
The accompanying notes are an integral part of these consolidated balance sheets
3
UNITED ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 AND MARCH 31, 2004
JUNE 30, MARCH 31,
2004 2004
---- ----
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 214,619 $ 276,115
Accrued expenses 88,090 379,098
Convertible term note payable 524,997 349,998
Due to related parties 244,141 244,141
------- -------
Total current liabilities 1,071,847 1,249,352
LONG TERM LIABILITIES:
Convertible term note payable 968,607 1,120,133
------- ---------
Total liabilities 2,040,454 2,369,485
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock: $0.01 par value 100,000,000 shares
authorized; 22,255,270 and 22,180,270 shares
issued and outstanding as of June 30, 2004
and March 31, 2004, respectively 222,552 221,802
Additional paid-in capital 11,321,256 11,143,266
Accumulated deficit (11,139,111) (10,543,092)
----------- -----------
Total stockholders' equity 404,697 821,976
------- -------
Total liabilities and stockholders' equity $ 2,445,151 $ 3,191,461
============ ============
The accompanying notes are an integral part of these consolidated balance sheets
4
UNITED ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2004 AND 2003
FOR THE THREE MONTHS
ENDED JUNE 30,
2004 2003
---- ----
(UNAUDITED)
REVENUES, net $ 268,637 $ 628,741
COST OF GOODS SOLD 104,609 325,922
------- -------
Gross profit 164,028 302,819
------- -------
OPERATING EXPENSES:
Selling, general and administrative 668,316 673,604
Oil well operating and maintenance cost-net - 57,995
Depreciation, amortization and depletion 28,037 37,283
------ ------
Total operating expenses 696,353 768,882
------- -------
Loss from operations (532,325) (466,063)
-------- --------
OTHER INCOME (EXPENSE), net:
Interest income 5,698 4,631
Interest expense (69,392) (893)
------- ----
Total other income (expense), net (63,694) 3,738
------- -----
Net loss $ (596,019) $ (462,325)
============= ==========
BASIC AND DILUTED LOSS PER SHARE:
Total basic and diluted loss per share $ (0.03) $ (0.02)
============= ==========
WEIGHTED AVERAGE NUMBER OF SHARES,
OUTSTANDING, basic and diluted 22,216,534 22,180,270
========== ==========
The accompanying notes are an integral part of these consolidated statements.
5
UNITED ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED JUNE 30, 2004 (UNAUDITED)
Additional
Common Stock Paid-In Accumulated
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
BALANCE, April 1, 2004 $22,180,270 $ 221,802 $ 11,143,266 $ (10,543,092) $ 821,976
Options issued for conversion of
balance due to former employee -- -- 75,000 -- 75,000
Common stock issued in
consideration for services 75,000 750 54,750 -- 55,500
Warrants granted in
consideration for services -- -- 48,240 -- 48,240
Net loss -- -- -- (596,019) (596,019)
---------- ----------- ------------ ------------- ---------
BALANCE, June 30, 2004 $22,255,270 $ 222,552 $ 11,321,256 $ (11,139,111) $ 404,697
=========== =========== ============ ============== =========
The accompanying notes are an integral part of this consolidated statement.
6
UNITED ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 2004 AND 2003
2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(596,019) $ (462,325)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation, amortization and depletion 77,585 37,283
Stock granted in consideration for services 55,500 -
Warrants granted in consideration for services 48,240 -
Options granted in consideration for services - 9,700
Changes in operating assets and liabilities
Decrease (increase) in accounts receivable, net 192,503 (293,099)
(Increase) decrease in inventory, net (67,520) 12,656
Decrease in note receivable, net 10,000 57,373
Increase in prepaid expenses (52,441) (3,123)
Decrease (increase) in deposits 75,000 (45,000)
(Decrease) increase in accounts payable and accrued
expenses (277,504) 129,078
-------- -------
Net cash used in operating activities (534,656) (557,457)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for loans receivable-net 276 700
Proceeds from the sale of oil well leases 15,000 -
Payments for acquisition of property and equipment (7,787) (121,506)
Payments for patents (755) (37,916)
---- -------
Net cash provided by (used in) investing activities 6,734 (158,722)
----- --------
Net decrease in cash and cash equivalents
(527,922) (716,179)
CASH AND CASH EQUIVALENTS, beginning of period 1,518,025 2,120,942
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 990,103 $ 1,404,763
========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period
Interest $ 14,011 $ 893
========== ===========
Income taxes $ 1,110 $ 1,780
========== ===========
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Conversion of balance due to former employee into options $ 75,000 $ -
========== ===========
The accompanying notes are an integral part of these consolidated statements.
7
UNITED ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004 (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-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 June 30, 2004 (unaudited) and the results of
its operations for the three months ended June 30, 2004 and 2003 (unaudited) and
cash flows for the three months ended June 30, 2004 and 2003(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 ended June 30,
2004 are not necessarily indicative of the operating results that may be
expected for the year ending March 31, 2005.
The consolidated balance sheet as of March 31, 2004 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, 2004
and 2003, the Company has recorded aggregate losses from operations of
$5,398,098 and has incurred total negative cash flow from operations of
$4,911,943 for the same two-year period. During the three months ended June 30,
2004 the Company experienced a net loss from operations of $596,019 and negative
cash flow from operating activities of $534,656. 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. 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.
8
UNITED ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 ended June 30, 2004 and 2003.
The Company's total revenues and net loss by segment for the three
months period ended June 30, 2004 and identifiable assets as of June 30, 2004
are as follows:
Specialty
Graphic Arts Chemicals Corporate Total
------------ --------- --------- -----
Revenues $ 70,699 $ 197,938 $ -- $ 268,637
=========== ============ ========= ==========
Gross profit $ 31,801 $ 132,227 $ -- $ 164,028
General and administrative 23,110 361,660 283,546 668,316
Depreciation, amortization and depletion -- 25,982 2,055 28,037
Interest income -- -- 5,698 5,698
Interest expense -- -- 69,392 69,392
----------- ------------ --------- -----------
Net income (loss) $ 8,691 $ (255,415) $(349,295) $ (596,019)
=========== ============ ========= ==========
Cash and cash equivalents $ -- $ -- $ 990,103 $ 990,103
Accounts receivable, net 73,464 127,974 -- 201,438
Inventory, net 107,070 136,937 -- 244,007
Note receivable, net 53,650 -- -- 53,650
Prepaid expenses -- 45,700 87,037 132,737
Property and equipment, net -- 184,580 29,766 214,346
Goodwill, net -- 17,509 -- 17,509
Patents, net -- 303,896 -- 303,896
Loans receivable, net -- -- 1,262 1,262
Deferred note costs -- -- 284,818 284,818
Deposits -- -- 1,385 1,385
----------- ------------ --------- -----------
Total assets $ 234,184 $ 816,596 $ 1,394,371 $ 2,445,151
=========== ============ =========== ===========
Capital Expenditures $ -- $ 7,787 $ -- $ 7,787
=========== ============ =========== ===========
9
UNITED ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company's total revenues and net income (loss) by segment for the
three months period ended June 30, 2003 and identifiable assets as of June 30,
2003 are as follows:
Specialty
Graphic Arts Chemicals Corporate Total
------------ --------- --------- -----
Revenues $ 483,547 $ 145,194 $ -- $ 628,741
=========== ============ ========= ==========
Gross profit $ 243,554 $ 59,265 $ -- $ 302,819
General and administrative 45,233 286,693 341,678 673,604
Oil well operating and maintenance cost-net -- 57,995 -- 57,995
Depreciation and amortization -- 32,895 4,388 37,283
Interest income -- -- 4,631 4,631
Interest expense -- -- 893 893
----------- ------------ --------- -----------
Net income (loss) $ 198,321 $ (318,318) $(342,328) $ (462,325)
=========== ============ ========= ===========
Cash and cash equivalents $ -- $ -- $1,404,763 $ 1,404,763
Accounts receivable, net 674,717 115,097 -- 789,814
Inventory, net 26,162 172,526 -- 198,688
Loans receivable, net 91,661 -- -- 91,661
Prepaid expenses -- -- 107,650 107,650
Property and equipment, net -- 341,941 45,984 387,925
Goodwill, net -- 68,819 -- 68,819
Patents, net -- 262,319 -- 262,319
Loan receivable -- -- 1,376 1,376
Other assets -- -- 76,385 76,385
----------- ------------ --------- -----------
Total assets $ 792,540 $ 960,702 $1,636,158 $ 3,389,400
=========== ============ ========== ===========
Capital Expenditures $ -- $ 119,616 $ 1,890 $ 121,506
=========== ============ ========== ===========
GEOGRAPHICAL INFORMATION REVENUE
2004 2003
---- ----
U.S. $ 127,649 $ 628,741
Non U.S. 140,988 --
----------- ---------
Total revenue $ 268,637 $ 628,741
=========== =========
3. SALE OF OIL WELL LEASES
In April 2004, the company sold their oil well leases located in
Laramie County, Wyoming for $15,000 and a 4.5% royalty on all future oil sales
from these wells. The Company recognized no gain or loss on the sale of the oil
well leases. In May 2004, the State of Wyoming returned the $75,000 deposit made
by the Company at the time the oil leases were purchased.
10
UNITED ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4. RELATED-PARTY TRANSACTIONS
The Company had an amount due to Robert Seaman, a major shareholder and
former director of the Company. Amounts due to the related party as of June 30,
2004 and 2003 are $244,141. These amounts are unsecured, non-interest bearing
and due upon demand.
Martin Rappaport, a major shareholder and director of the Company, owns
the property from which United Energy leases the 9,600 square foot facility it
occupies in Secaucus, New Jersey. The Company pays approximately $108,000 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.
5. STOCK-BASED COMPENSATION
At June 30, 2004, the Company has stock based compensation plans. 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. Compensations 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 three months ended
June 30, 2004 and 2003. 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 $67,100 and $9,700 for the quarters ended
June 30, 2004 and 2003.
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 Quarter
Ended June 30,
2004 2003
Net Loss as reported $(596,019) $(462,325)
Deduct:
Total stock based employee compensation
Expense determined under fair value based
method for all awards (45,954) (23,250)
------- -------
Pro forma loss $(641,973) $(485,575)
========= =========
Basic and diluted loss per common share
As reported $(0.03) $(0.02)
Pro forma $(0.03) $(0.02)
11
UNITED ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
6. COMMITMENTS AND CONTINGENCIES
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, 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 yet 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.
12
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 the Company from time to time. The
discussion of the Company's 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 the Company's
operations. Accordingly, actual results could differ materially from those
projected in the forward-looking statements as a results of a number of factors,
including those identified herein. This item should be read in conjunction with
the financial statements and other items contained elsewhere in the report.
OVERVIEW
We develop and distribute environmentally friendly specialty chemical
products with applications in several industries and markets. Our current line
of products includes:
o KH-30 paraffin dispersant for the oil industry and related products
KH-30S and KX-91;
o Uniproof specialty-coated proofing paper for the printing industry;
and
o following additional testing, "Slick Barrier" underwater protective
coatings for use in marine applications.
Through our wholly-owned subsidiary, Green Globe Industries, Inc., we
provide the U.S. military with a variety of environmentally friendly,
non-hazardous, biodegradable solvents 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.
We have developed and patented a system referred to as our "S2 system,"
to work with our environmentally-friendly paraffin dispersants products. This
patented 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 KH-30 and its related products for the oil industry
and for other potential applications.
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 KH-30 product line to the worldwide
marketplace for refinery, tank and pipeline cleaning services. We are currently
negotiating potential working arrangements with several companies, including
Altena Cleaning B.V., one of Europe's leading refinery cleaning organizations,
and Petroleos de Venezuela S.A., the state-owned oil company, and have set up
small sales offices in The Netherlands and Venezuela to assist with proposed
joint projects.
Business Operations and Principal Products
KH-30, KH-30S AND KX-91 CHEMICALS
KH-30 is a mixture of modified oils, dispersants and oil-based
surfactants designed to control paraffin and asphaltene deposits in oil wells.
When applied in accordance with our recommended procedures, KH-30 has resulted
in substantial production increases of between two and five times in
paraffin-affected oil and gas wells by allowing for a faster penetration of
paraffin and asphaltene deposits. KH-30 disperses and suspends paraffin and
asphaltene in a free-flowing state and prevents solids from sticking to each
other or to oil well equipment. KH-30 is patented in the United States,
Australia, Russia, Nigeria, Venezuela, Vietnam and the OAPI (the Africa
Intellectual Property Organization, which includes the countries of
Burkina-Faso, Benin, Central African Republic, Congo, Ivory Coast, Cameroon,
Gabon, Guinea, Guinea-Bissau, Mali, Mauritania, Niger, Senegal, Chad and Togo).
We have 12 additional country patent applications pending in most of the major
oil-producing countries around the world (including the European Union and
Canada).
13
Although we believe that the application of KH-30 on a continuous basis
will result in higher production and lower lease operating costs in oil wells,
the introduction of KH-30 into the oil and gas producing industry has been
difficult. Many entrenched players such as the "hot oilers" and the major oil
service companies who benefit from high mark-ups on their proprietary products
have no incentive to promote the use of KH-30. Moreover, oil production
engineers are reluctant to risk damage to a well from a product that does not
have the endorsement and backing of a major enterprise. Consequently, the pace
of introduction of KH-30 has been much slower than we initially anticipated. We
believe that this situation has begun to change as a result of our marketing
efforts with several oil service companies and well owners beginning to use our
products after successful trials.
To increase sales of our KH-30 product we are currently expanding our
marketing efforts by producing a marketing brochure and supplemental sales
material. We have also developed two products, KH-30S and KX-91, as extensions
of our original KH-30. We expect to continue developing additional applications
for our KH-30 product.
KX-91 is a patent-pending chemical blend specifically developed for the
rapid removal of paraffin and asphaltene deposits from oil wells. It has been
effective for the removal of heavy deposits due to its wetting ability,
dispersability and solvency. KX-91 works to rapidly dissolve deposits at low
concentrations with limited contact time and can perform in extreme (-400F to
2300F) temperature ranges. It also has low emulsifying tendencies with brine
water. In laboratory tests, KX-91 has been effective at low concentrations to
enhance the flow of very heavy crude oil (low API gravity).
KH-30S is a proprietary chemical composition, specifically developed as
a drag reducer to reduce flow impairment caused by paraffin and asphaltene
depositions and high viscosity crude oil. KH-30S lowers the viscosity of very
heavy crude oil (low API gravity) with flow enhancement in pipelines and oil
wells at low concentrations. It provides an inhibitive thin barrier film on
various metal surfaces and exhibits good compatibility with most commonly used
materials of construction.
UNIPROOF PROOFING PAPER
We have developed 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. We developed this formulation over several years of testing. The
formulation is technically in the public domain as being within the scope of an
expired patent of duPont. However, the exact formulation utilized by us, to the
best of our knowledge, has not been duplicated by other companies and we protect
it as a trade secret.
SLICK BARRIER
Slick Barrier is an underwater protective coating which prevents the
adherence of barnacles to boat hulls. The product is environmentally friendly
and biodegradable, which we believe to be particularly appealing in fresh water
marine applications. The product is currently being tested on pleasure boats
throughout the United States and Europe. A patent application for "Slick
Barrier" was filed in 2003, and we are applying for trademark protection both
nationally and internationally. We expect to release this product in 2005,
although no specific date has been set.
GREENGLOBE INDUSTRIES
In November 1998, we acquired all of the outstanding shares of Green
Globe in exchange for 30,000 shares of our common stock. Green Globe is operated
as a separate subsidiary and sells its products under the tradename
Qualchem.(TM) The acquisition of Green Globe has given us 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. Of particular note in the Green Globe line was 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, and have received U.S. military approval, for the cleaning
of the instrument panels of combat aircraft.
14
PROPRIETARY TECHNOLOGIES
With respect to our formulations which are proprietary, we have
patented our KH-30 oil well cleaner patented in the United States, Australia,
Russia, Nigeria, Venezuela, Vietnam and OAPI. We also have 12 additional country
patent applications pending in most of the major oil-producing countries around
the world (including the European Union and Canada). We believe our patent is
strong and will help our competitive position. However, we are aware that others
may try to imitate our product or invalidate our patents. We have in the past
vigorously enforced our trade secrets such as the one relating to our Uniproof
proofing paper, and intend to continue to do so in the future. However, we
recognize that intellectual property rights provide less than complete
protection. We believe that no other company is currently producing a product
similar to KH-30.
In addition to applying for patent protection on our KH-30 product, we
have also registered "KH-30" as a trademark. Trademark protection has also been
obtained for the "Uniproof" name for our proofing paper. We anticipate applying
for both patent and trademark protection for our other products in those
jurisdictions where we deem such protection to be beneficial.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2003
Revenues. Revenues for the three months ended June 30, 2004 were
$268,637, a $360,104 or 57% decrease from revenues of $628,741 in the comparable
three months of 2003. The decrease in revenues was primarily due to a $412,848
decrease of our Uniproof proofing paper due to lower level of orders from our
primary customer. Specialty Chemicals, which includes sales of our KH-30
products and Green Globe/Qualchem military sales, increased by $52,744 to
$197,938, or 36% compared to $145,194 in the comparable three months in the
previous year. This increase was due primarily to an increase in sales of our
KH-30 products partially offset by a decrease in Green Globe/Qualchem military
sales.
Cost of Goods Sold. Cost of goods sold decreased $221,313 or 68% to
$104,609 or 39% of sales, for the three months ended June 30, 2004 from $325,922
or 52% of sales, for the three months ended June 30, 2003. The decrease in cost
of goods sold and lower percentage of sales was primarily due to an increase in
specialty chemical sales, which have higher margins, which were partially offset
by lower sales levels of Uniproof proofing paper.
Gross Profit. Gross profit for the three months ended June 30, 2004,
decreased by $138,791 or 46% to $164,028 or 61% of sales compared with $302,819
or 48% of sales in the prior year. The decrease in gross profit reflects the
lower level of sales of Uniproof paper. The increase in gross profit percentage
reflects the higher volume of specialty chemical sales, which have better
margins.
OPERATING COSTS AND EXPENSES
General and Administrative Expenses. General and administrative
expenses decreased $5,288 or 0.8% to $668,316 or 249% of revenues for the three
months ended June 30, 2004 compared with $673,604 or 107% of the revenues for
the three months ended June 30, 2003. The decrease in general and administrative
expenses is primarily related to lower salaries and benefits due to the
departure of certain executives, lower travel and entertainment expenses
partially offset by an increase in professional fees and marketing.
Depreciation, Amortization and Depletion. Depreciation, amortization
and depletion decreased to $28,037 from $37,283 reflecting additions to fixed
assets and capitalized legal costs related to patent filings, offset by the sale
of oil leases.
Oil Well Operating and Maintenance Cost - net. During the three months
ended June 30, 2003, the Company's wells produced oil which generated $21,204 in
revenues and incurred operating costs and maintenance and repair costs of
$79,199. In April 2004, we sold the oil well leases located in Laramie County,
Wyoming for $15,000 and a 4.5% royalty on all future oil sales from these wells.
15
Interest Expense, Net of Interest Income. The Company had net interest
expense of $63,694 for the three months ended June 30, 2004 compared with net
interest income of $3,738 in the corresponding period in 2003. The decrease was
primarily due to the payment and amortization of interest on the $1,750,000
convertible term note payable.
Net Loss. The three months ended June 30, 2004, resulted in a net loss
of $(596,019) or $(0.03) per share as compared to a net loss of $(462,325) or
$(0.02) per share for the three months ended June 30, 2003. The increase in the
loss in the quarter ended June 30, 2004 was the result of a lower level of sales
as a result of a decreased level of Uniproof paper sales, which was partially
offset by higher specialty chemical sales and by higher gross profit margins.
The average number of shares of common stock used in calculating earnings per
share increased 36,264 shares to 22,216,534 as a result of the 75,000 issued for
consulting services on May 17, 2004.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2004, the Company had $990,103 in cash and cash
equivalents, as compared to $1,518,025 at March 31, 2004.
The $527,922 decrease in cash and cash equivalents was due to net cash
used in operating activities of $534,656 and net cash provided by investing
activities of $6,734. Cash provided by investing activities consisted of
proceeds from the sale of the oil well leases of $15,000 and repayment of loans
of $276, which was partially offset by $755 related to patent applications for
KH-30 and the purchase of production equipment of $7,787.
As of June 30 2004, the Company's backlog included $265,499 of paper
sales and $139,000 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.
During the past two fiscal years ended March 31, 2004 and 2003, the
Company has recorded aggregate losses from operations of $5,398,098 and has
incurred total negative cash flow from operations of $4,911,943 for the same
two-year period. During the three months ended June 30, 2004, the Company
experienced a net loss from operations of $596,019 and negative cash flow from
operating activities of $534,656. 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.
In order to increase our cash flow, the Company is continuing its efforts to
stimulate sales and cut back expenses not directly supporting its sales and
marketing efforts.
CONCENTRATION OF RISK
The Company sells its Uniproof proofing paper to three customers. One
of these customers constitutes 98% of Graphic Arts sales and 26% of total
customer sales for the three months period ended June 30, 2004. 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 uncollectible.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk inherent in our market risk sensitive instruments and
positions are the potential losses arising from adverse changes in interest
rates.
At March 31, 2004, the Company had a loan that had a variable interest
rate. The loan, which had a face amount of $1,750,000 at June 30, 2004, was
obtained in March 2004 and has a three-year term. The loan accrues interest at
the greater of the prime rate of interest (as published in the Wall Street
Journal) or 4% per annum. A one-percentage point increase in the prime rate of
interest affecting our loan would increase our net loss by $17,500 over a year.
16
ITEM 3. CONTROLS AND PROCEDURES.
EVALUATION OF THE COMPANY'S DISCLOSURE CONTROLS
As of the end of the period covered by this report, the Company has
evaluated the effectiveness of the design and operation of its disclosure
controls and procedures ("disclosure controls"). This evaluation (the "controls
evaluation") was done under the supervision and participation of the Company's
management, including its chief executive officer (the "CEO") and interim chief
financial officer (the "CFO"). Rules adopted by the Securities and Exchange
Commission require that in this section of the report the Company present the
conclusions of its CEO and CFO about the effectiveness of the Company's
disclosure controls based on and as of the date of the controls evaluation.
CEO AND CFO CERTIFICATIONS
Appearing as exhibits 31.1 and 31.2 to this report are "Certifications"
of the CEO and CFO. The certifications are required pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (the "Section 302 Certifications"). This section
of this report contains information concerning the controls evaluation referred
to in the Section 302 Certifications and this information should be read in
conjunction with the Section 302 Certifications for a more complete
understanding of the topics presented.
DISCLOSURE CONTROLS
Disclosure controls are procedures that are designed with the objective
of ensuring that information required to be disclosed in the Company's reports
filed under the Securities Exchange Act, such as this report, is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure controls are
also designed with the objective of ensuring that such information is
accumulated and communicated to the Company's management, including, without
limitation, the CEO and CFO, as appropriate to allow timely decisions regarding
required disclosure.
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS
The Company's management, including, without limitation, the CEO and
CFO, does not expect that the Company's disclosure controls will prevent all
error and fraud. A control system no matter how well conceived and operated can
provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Further, the design of a control system must reflect the
fact that there are resource constraints and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations of all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been
detected.
SCOPE OF CONTROLS EVALUATION
The CEO/CFO evaluation of the Company's disclosure controls included a
review of the controls' objective and design, the controls' implementation by
the Company and the effect of the controls on the information generated for use
in this report. In the course of the controls evaluation, management sought to
identify data errors, controls problems or acts of fraud and to confirm that
appropriate corrective action, including process movements, were being
undertaken. This type of evaluation will be done on a quarterly basis so that
the conclusions concerning controls effectiveness can be reported in the
Company's quarterly reports on Form 10-QSB and annual report on Form 10-KSB. The
overall goals of these various review and evaluation activities are to monitor
the Company's disclosure controls and to make modifications, as necessary. In
this regard, the Company's intent is that the disclosure controls will be
maintained as dynamic controls systems that change (including improvements and
corrections) as conditions warrant.
CONCLUSIONS
Based upon the controls evaluation, the Company's CEO and CFO have
concluded that, as of the end of the period covered by this report, the
Company's disclosure controls are effective to provide reasonable assurance that
information required to be disclosed in the Company's reports filed under the
Securities Exchange Act such as this
17
report, is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms.
There has been no change in the Company's internal controls over
financial reporting during the fiscal quarter ended June 30, 2004, that has
materially affected, or is reasonably likely to materially affect, the Company's
internal controls over financial reporting.
18
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 SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES.
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
19
UNITED ENERGY CORP.
FORM 10-Q
JUNE 30, 2004
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: August 12, 2004
UNITED ENERGY CORP.
By: /s/ Ronald Wilen
--------------------------------
Ronald Wilen,
Chief Executive Officer
(principal executive officer)
By: /s/ James McKeever
--------------------------------
James McKeever
Interim Chief Financial Officer
(principal financial and
accounting officer)
20