For so long as the investors hold 1,500,000 shares of common stock equivalents (meaning shares of common stock and other securities convertible to or exercisable for common stock), Sherleigh shall have the right to designate a majority of the members of our Board of Directors in the event of any of the following, referred to as triggering events:
On March 24, 2006, we raised $5,100,000 in gross cash proceeds from the sale in a private placement of 4,250,000 shares of our common stock at a price of $1.20 per share.
We failed to have gross revenues of at least $5,000,000 for the six months ended September 30, 2006 and therefore, Sherleigh has the right to designate a majority of the members of our Board of Directors. To date, Sherleigh has not elected to designate a majority of the members of our Board of Directors and there is no assurance that Sherleigh will not elect to designate a majority of the members of our Board of Directors. If Sherleigh decides to designate a majority of the members of our Board of Directors, such directors will have the authority to exercise control over matters relating to us, including without limitation, (i) discretion over our day to day affairs and our management and (ii) decisions relating or affecting our capital structure, including the issuance of additional capital stock, debt and the declaration of dividends.
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.
RESULTS OF OPERATIONS
Three Months Ended December 31, 2006 Compared to the Three Months Ended December 31, 2005
Revenues. Revenues for the three months ended December 31, 2006 were $113,459, a $111,761, or 50% decrease from revenues of $225,220 in the comparable three months of 2005. The decrease in revenues was due to no sales of our Uniproof proofing paper during the three months ended December 31, 2006 as compared to $106,259 in the comparable three months ended December 31, 2005. Specialty Chemicals revenues, which includes sales of our KH-30 products and Green Globe/Qualchem military sales, slightly decreased by $6,118 to $112,843, or 5% from the comparable three months of 2005 compared to $118,961 in the comparable three months in 2005. This decrease was due primarily to lower sales of our KH-30 family of oil field dispersant products.
Cost of Goods Sold. Cost of goods sold decreased $45,842, or 40% to $67,863 or 60% of revenues, for the three months ended December 31, 2006 from $113,705, or 50% of revenues for the three months ended December 31, 2005. The decrease in cost of goods sold (which accounted for higher percentage of revenues) was due to the lower sales levels in the period compared to the comparable period in 2005.
Gross Profit. Gross profit for the three months ended December 31, 2006, decreased by $65,919, or 59% to $45,596 or 40% of revenues compared with $111,515 or 50% of sales in the prior period. The decrease in gross profit and gross profit percentage reflects the lower levels of sales of Specialty Chemicals and no sales of our Uniproof proofing paper during the three months ended December 31, 2006.
Operating Costs and Expenses
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $100,980 to $716,979 or 632% of sales for the three months ended December 31, 2006 compared with $615,999 for the three months ended December 31, 2005. The increase in selling, general and administrative expenses was primarily related to higher salaries due to increased payroll and the expensing of options, and higher professional fees, partially offset by a decrease in bad debts.
Depreciation and Amortization. Depreciation and amortization remained relatively constant for the three months ended December 31, 2006 as compared to December 31, 2005.
Interest Income. The Company had interest income of $41,157 for the three months ended December 31, 2006 compared with $9 in the corresponding period in 2005. The increase was due to the increased cash level in connection with the private placement completed in March 2006.
Interest Expense. Interest expense remained relatively constant for the three months ended December 31, 2006 as compared to December 31, 2005.
Net Loss. The three months ended December 31, 2006 resulted in a net loss of $650,395 or $0.02 per share as compared to a net loss of $522,527 or $0.02 per share for the three months ended December 31, 2005. The average number of shares of common stock used in calculating net loss per share increased 5,247,874 shares to 31,030,115 as a result of 2,000,000 shares issued for the conversion of the note payable, 312,500 shares issued in connection with the exercise of stock options and 5,450,000 shares issued in connection with the private placements.
Nine months Ended December 31, 2006 Compared to the Nine months Ended December 31, 2005
Revenues. Revenues for the nine months ended December 31, 2006 were $637,811, a $247,516 or 63% increase from revenues of $390,295 in the comparable nine months ended December 31, 2005. The increase in revenues was due to higher sales of Specialty Chemicals, primarily to three customers, Petrobras America Inc., Interchem Limited and Castor Petroleum LTD. Specialty Chemicals revenues, which include sales of our KH-30 products and Green Globe/Qualchem products, increased by $353,130 to $636,684, or 125% compared to $283,554 in the comparable nine months ended December 31, 2005. This increase was primarily related to higher sales of our KH-30 family of oil field dispersant products. There were no sales of our Uniproof proofing paper during the nine months ended December 31, 2006 as compared to $106,741 in the comparable nine months ended December 31, 2005.
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Cost of Goods Sold. Cost of goods sold increased $26,616, or 11% to $277,120 or 43% of revenues, for the nine months ended December 31, 2006 from $250,504 or 64% of revenues, for the nine months ended December 31, 2005. The increase in cost of goods sold (which accounted for a lower percentage of revenues) was due to the higher sales level in the period compared to the comparable period in 2005.
Gross Profit. Gross profit for the nine months ended December 31, 2006, increased by $220,900, or 158% to $360,691 or 57% of revenues compared with $139,791 or 36% of revenues in the prior period. The increase in gross profit and gross profit percentage reflects the higher levels of sales of Specialty Chemicals.
Operating Costs and Expenses
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $202,770 to $2,206,592 or 346% of revenues for the nine months ended December 31, 2006 compared with $2,409,362 for the nine months ended December 31, 2005. The decrease in selling, general and administrative expenses was primarily related to lower salaries due to the exercise of options in the prior comparable period offset partially by an increase in payroll and the expensing of options, a decrease in professional fees, lower marketing expenses, and lower travel and entertainment expenses, partially offset by an increase in bad debts.
Depreciation and Amortization. Depreciation and amortization remained relatively constant for the nine months ended December 31, 2006 as compared to December 31, 2005.
Interest Income. The Company had interest income of $134,655 for the nine months ended December 31, 2006 compared with $32 in the corresponding period in 2005. The increase was due to the increased cash level in connection with the private placement completed in March 2006.
Interest Expense. The Company had interest expense of $1,925 for the nine months ended December 31, 2006 compared with interest expense of $576,894 in the corresponding period in 2005. The decrease was due to the lower principal amount of indebtedness outstanding as a result of the convertible term note being satisfied in August 2005.
Net Loss. The nine months ended December 31, 2006 resulted in a net loss of $1,770,052 or $0.06 per share as compared to a net loss of $2,898,419 or $0.12 per share for the nine months ended December 31, 2005. The average number of shares of common stock used in calculating earnings per share increased 6,238,045 shares to 31,029,070 as a result of 2,000,000 shares issued for the conversion of the note payable, 312,500 shares issued in connection with the exercise of stock options and 5,450,000 shares issued in connection with the private placements.
Liquidity and Capital Resources
As of December 31, 2006, the Company had $3,413,145 in cash and cash equivalents, as compared to $5,194,748 at March 31, 2006.
The $1,781,603 decrease in cash and cash equivalents at December 31, 2006 compared to March 31, 2006 was due to net cash used in operating activities of $1,550,371, net cash used in investing activities of $43,941 and net cash used in financing activities of $187,791 during the nine months ended December 31, 2006. Cash used in investing activities consisted of fixed asset purchases of $3,710 and patent purchases of $40,231. Cash used in financing activities during the nine months ended December 31, 2006 consisted of the payment of a related party payable of $200,000 and preferred stock dividends of $1,166, partially offset by the receipt from the exercise of stock options of $13,875.
As of December 31, 2006 the Company’s backlog included $80,452 of Specialty Chemical sales. Backlog represents products that the Company’s customers have committed to purchase. The Company’s backlog is subject to fluctuations and is not necessarily indicative of future sales.
We currently anticipate that our available cash in hand and cash resources from expected revenues will be sufficient to meet our anticipated working capital and capital expenditure requirements for at least the next twelve months.
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Concentration of Risk
We currently sell our Uniproof proofing paper to one customer, the Alameda Company of Anaheim, California. There were no sales to this customer during the nine months ended December 31, 2006 and $106,019 in sales during the nine months ended December 31, 2005. Revenue from sales of our proofing paper is expected to continue to decline due to the paper technology switching to a digital technology. A decision by Alameda to discontinue its relationship with us could result in a significant loss of revenue to us.
We sold our Specialty Chemicals to four customers, which comprised 74.3% of our sales of Specialty Chemicals for the nine months ended December 31, 2006. For the nine months ended December 31, 2005, we sold our Specialty Chemicals to three customers, which comprised 35.4% of our sales of Specialty Chemicals.
Off-Balance Sheet Arrangements
We do not currently have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our stockholders.
Quantitative and Qualitative Disclosures about Market Risk
There were no material changes from the information presented in the Company’s Annual Report on Form 10-KSB for the fiscal year ended March 31, 2006, with respect to the Company’s quantitative and qualitative disclosures about market risks.
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Item 3. Controls and Procedures.
As of December 31, 2006 (the end of the period covered by this report), our management carried out an evaluation, with the participation of our Chief Executive Officer and Interim Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. The evaluation process, including the inherent limitations on the effectiveness of such controls and procedures, is more fully discussed below. Based upon that evaluation, the Chief Executive Officer and Interim Chief Financial Officer concluded that as of the end of the period covered by this report, our disclosure controls were not effective due to the material weakness in our internal controls over the financial reporting process, as described below. In designing and evaluating our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended), management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurances of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
In connection with the audit by our independent registered public accounting firm of our financial statements, as of March 31, 2006 and for the year then ended, our independent registered public accounting firm notified our management and the Board of Directors that they had identified a deficiency that they considered a material weakness in our internal controls over the financial reporting process relating to the communication between the Chairman of the Board of Directors, the CEO and the interim CFO. Adjustments were identified during the audit process relating to the recording of options that the Company issued during 2006 and 2005. These adjustments were made to the consolidated financial statements for the year ended March 31, 2006 and 2005.
The reportable conditions have been discussed in detail among management and our independent registered public accounting firm, and we are committed to resolving the issue. We have taken the appropriate steps in correcting the matter by enhancing the communications process among the members of management to ensure more timely notification of current issues, including through the institution of more regularly scheduled meetings among management.
There are no changes in our internal controls over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
Item 5 Other Information.
On March 18, 2005, we entered into a securities purchase agreement with two private investors (the "Purchasers") with the respect to the sale of shares of our common stock and warrants. The agreement provides for two types of units, designated as Series A and Series B. On January 26, 2006, the Company entered into the first amendment to the securities purchase agreement dated March 18, 2005 (the “First Amendment”). The First Amendment amended, among other provisions, the expiration date of the securities purchase agreement to the earlier of March 18, 2008 or thirty (30) days after notice of termination from the holder of a majority of the shares issued under the agreement; and, that for so long as the purchasers hold 1,500,000 shares of common stock equivalents (meaning shares of common stock and other securities convertible to or exercisable for common stock), the Majority Holder, Shereigh Associates Inc Profit Sharing Plan (“Sherleigh”), shall have the right to designate a majority of the members of our Board of Directors in the event of any of the following, referred to as triggering events:
(i) if we fail to have gross revenue of at least $5,000,000 for the six months ended September 30, 2006;
(ii) if we breach any of our representations, warranties, agreements, covenants, terms or obligations under the securities purchase agreement or ancillary agreements; or
(iii) if the investors purchase an aggregate of twenty one or more Series B Units
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On March 9, 2006, we entered into the Second Amendment to Securities Purchase Agreement dated March 18, 2005. Pursuant to the second amendment, Sherleigh agreed to purchase three-tenths of one Series B Unit, consisting of 3 shares of preferred stock and Series B Warrants to purchase 12,000 shares of our common stock, for an aggregate purchase price of $24,000. In addition, the investors agreed to waive all existing defaults under the purchase agreement, including our failure to timely file a Certificate of Designations for the Preferred Stock and to timely issue common stock certificates and warrants.
We and the investors also agreed to terminate all further obligations of the investors to purchase and our obligation to sell any remaining Series B Units. The remaining Series B Units would have consisted of 417 shares of preferred stock convertible into an aggregate of 3,336,000 shares of common stock at a conversion price of $1.00 and of warrants to purchase 1,668,000 shares of common stock at an exercise price of $1.00 per share. Instead we agreed to issue to Sherleigh Series C Warrants to purchase 5,004,000 shares of our common stock at an exercise price of $1.00. The Series C Warrant, as well as the preferred stock and the Series B Warrant, are subject to anti-dilution provisions in the event that we issue shares of common stock at a price less than the conversion price or the exercise price and contain provisions limiting the holder’s right to convert or exercise if doing so would cause such holder and its affiliates to beneficially own more than 9.99% of the outstanding common stock.
For so long as the investors hold 1,500,000 shares of common stock equivalents (meaning shares of common stock and other securities convertible to or exercisable for common stock), Sherleigh shall have the right to designate a majority of the members of our Board of Directors in the event of any of the following, referred to as triggering events:
(i) if we fail to have gross revenue of at least $5,000,000 for the six months ending September 30, 2006; or
(ii) if we breach any of our representations, warranties, agreements, covenants, terms or obligations under the securities purchase agreement or ancillary agreements.
On March 24, 2006, we raised $5,100,000 in gross cash proceeds from the sale in a private placement of 4,250,000 shares of our common stock at a price of $1.20 per share.
We failed to have gross revenues of at least $5,000,000 for the six months ended September 30, 2006 and therefore, Sherleigh has the right to designate a majority of the members of our Board of Directors. To date, Sherleigh has not elected to designate a majority of the members of our Board of Directors and there is no assurance that Sherleigh will not elect to designate a majority of the members of our Board of Directors. If Sherleigh decides to designate a majority of the members of our Board of Directors, such directors will have the authority to exercise control over matters relating to us, including without limitation, (i) discretion over our day to day affairs and our management and (ii) decisions relating or affecting our capital structure, including the issuance of additional capital stock, debt and the declaration of dividends.
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PART II
OTHER INFORMATION
| Item 6. | | Exhibits |
| | | |
| | (a) | Exhibits. |
| |
| | | 31.1 | Chief Executive Officer’s Certificate, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
| | | 31.2 | Chief Financial Officer’s Certificate, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
| | | 32.1 | Chief Executive Officer’s Certificate, pursuant to 18 U.S.C., Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| |
| | | 32.2 | Chief Financial Officer’s Certificate, pursuant to 18 U.S.C., Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the small business issuer has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
| Dated: | February 14, 2007 | | | UNITED ENERGY CORP. |
| |
| | | | By: | /s/ Brian King |
| | | | | Brian King, |
| | | | | Chief Executive Officer |
| | | | | (as principal executive officer) |
| |
| |
| | | | By: | /s/ James McKeever |
| | | | | James McKeever, |
| | | | | Interim Chief Financial Officer |
| | | | | (as principal financial and accounting |
| | | | | officer) |
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