Note
1 – BASIS OF PRESENTATION
The
accompanying unaudited consolidated financial statements have been prepared
in
accordance with U.S. generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Article
10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by U.S. generally accepted accounting principles for complete
consolidated financial statements. In the opinion of management, all adjustments
(consisting only of those of a normal recurring nature) considered necessary
for
a fair presentation have been included. Operating results for the nine month
periods ended September 30, 2007 and 2006 are not necessarily indicative of
the
results that may be expected for the year ending December 31, 2007.
Note
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a.
Principles of Consolidation
The
consolidated financial statements include the accounts and operations of US
Energy Corporation and its wholly-owned subsidiaries. All significant
inter-company balances and transactions have been eliminated in preparing the
consolidated financial statements.
b.
Use of Accounting Estimates
Management
is required to make estimates and assumptions during the preparation of the
consolidated financial statements and accompanying notes in conformity with
accounting principles generally accepted in the United States of America. These
estimates and assumptions affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the dates of the
consolidated financial statements. They also affect the reported amounts of
net
income. Actual results could differ materially from these estimates and
assumptions.
c.
Cash and Cash Equivalents
The
Company considers all highly liquid debt instruments purchased with a maturity
of three months or less to be cash equivalents.
d.
Accounts Receivable
Accounts
receivable are stated at estimated net realizable value. Accounts receivable
are
comprised of balances due from customers.
e
Inventories
Inventories
are stated at the lower of cost or market first-in, first-out (FIFO)
method.
f.
Property, Plant and Equipment Net
Property,
plant and equipment is capitalized at cost and depreciated using the
straight-line depreciation method over the estimated useful lives of the
respective assets. Leasehold Improvements are amortized using
the straight-line depreciation method over the live of the respective lease
or
the service lives of the improvements, whichever is shorter.
g.
Goodwill and other Intangible Assets
The
Company accounts for goodwill and other intangible assets in accordance with
Statement of Financial Accounting Standards
"Goodwill and Other
Intangibles"
(SFAS 142), intangible assets with an indefinite life, namely
goodwill, are not amortized. Intangible assets with a definite life are
amortized on a straight-line basis over their estimated useful lives of ten
years. Intangible assets with indefinite lives will be tested for impairment
annually and when an event occurs that would indicate that the carrying amount
may be impaired.
h.
Impairment of Assets
In
accordance with Statement of Financial Accounting Standards No. 144 "Accounting
for Impairment or Disposal of long-lived Assets" ("SFAS 144") long-lived assets,
such as property and equipment, and purchased intangibles subject to
amortization, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. When factors indicate that the assets should be evaluated for
possible impairment, the Company uses an estimate of related non discounted
cash
flows. A deficiency in these cash flows relative to the carrying amounts is
an
indication of the need for a write-down due to impairment. Losses on impairment
are recognized by a charge to earnings.
i.
Income Taxes
The
Company accounts for income taxes in accordance with the Statement of Financial
Accounting Standards
"Accounting for Income Taxes"
("SFAS 109"). Under
the liability method specified by SFAS 109, deferred tax assets and liabilities
are determined based on the difference between the financial statement and
tax
bases of assets and liabilities as measured by the enacted tax rates which
will
be in effect when these differences reverse. Deferred tax expense is the result
of changes in deferred tax assets and liabilities. Valuation allowances are
provided if necessary to reduce deferred tax assets to the amount expected
to be
realized.
j.
Earnings (Loss) Per Common Share
Earnings
(loss) per share are computed using the basic and diluted calculations on the
face of the statement of operations. Basic earnings (loss) per share are
calculated by dividing net income (loss) by the weighted average number of
shares of common stock outstanding for the period. Diluted earnings (loss)
per
share is calculated by dividing net income (loss) by the weighted average number
of shares of common stock outstanding for the period, adjusted for the dilutive
effect of common stock equivalents, using the treasury stock method. The
warrants outstanding were determined to be antidilutive and therefore do not
affect earnings per share.
k.
Revenue Recognition
In
the
sale of our dual-fuel conversion systems, if we install the system, revenues
are
recognized when the finished vehicle is retrieved by the customer. If our system
is installed by a third-party, we recognize revenues on our dual-fuel system
when the merchandise is shipped to the customer, which is when title and risk
of
loss has passed to the customer.
In
the
sale of our custom electronic manufacturing products and services, we recognize
revenues when the merchandise is shipped to the customer, which is when title
and risk of loss has passed to the customer.
l.
Stock Based Compensation
The
Company has adopted SFAS No. 123R,
"Accounting for Stock Based
Compensation"
as of January 1, 2006. For the period ended September 30,
2005, the Company applied Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for options issued to employees. Under Opinion
No.
25, the intrinsic method is used to determine compensation expense when the
fair
market value of the stock exceeds the exercise price on the date of grant.
As of
September 30, 2007 and 2006, no options had been granted under the plan and
therefore no compensation expense has been recognized.
m.
Research and Development Costs
The
Company charges research and development costs to expense as
incurred.
n.
Fair Value of Financial Instruments
The
Company, in estimating its fair value disclosures for financial instruments,
uses the following methods and assumptions:
Cash,
Accounts Receivable, Accounts Payable and Accrued Expenses
: The carrying
amounts reported in the balance sheet for cash, accounts receivable, accounts
payable and accrued expenses approximate their fair value due to their
relatively short maturity.
Long-Term
Obligations
: The fair value of the Company's fixed-rate long-term
obligations is estimated using discounted cash flow analyses, based on the
Company's current incremental borrowing rates for similar types of borrowing
arrangements. At September 30, 2007 and 2006, the Company did not have any
long-term obligations.
o.
Accounting For Financial Instruments
In
May
2003, the FASB issued Statement of financial Accounting Standards No. 150,
"Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity" (SFAS 150). SFAS 150 requires that certain financial
instruments, which under previous guidance were accounted for as equity, must
now be accounted for as liabilities. The financial instruments affected include
mandatory redeemable stock certain financial instruments that require or may
require the issuer to buy back some of its shares in exchange for cash or other
assets and certain obligations that can be settled with shares of
stock.
p.
Reclassifications
Certain
reclassifications have been made to the financial statements for the three
and nine months ended September 30, 2006 to conform to the presentation for
the three and nine months ended September 30, 2007
q.
Going concern:
The accompanying financial statements have been prepared assuming the
company will continue as a going concern. As reflected in the financial
statements, the Company has negative working capital for the period ended
September 30, 2007 and a loss from operations. These conditions raise
substantial doubt about the Company’s ability to continue as a going concern.
The company believes it will have adequate financing in place.
The
Company has entered into an agreement with a certain accredited investor
relating to a $5,000,000 equity line which was registered with the Securities
and Exchange Commission and declared effective during December 2005. Under
the
terms of the equity line, the company may draw up to $100,000 per
put.
The
company also has an agreement in place with White Knight a Related Party who
continues to provide financing to date.
The
available funding from these agreements is expected to be sufficient for the
Company to continue operations for the next year.
Note
3 - Related Party Transactions
White
Knight (WK) is a major stockholder, per our agreement with WK, any
funding provided by WK is to be repaid in common stock at a conversion price
of
$0.04 per share. The conversion price was agreed upon in December, 2003, when
the Company's common stock was at $0.03 per share.
As
of
September 30, 2007, $787,955 is outstanding debt due to WK. Through the three
month period ended September 30, 2007 WK advanced a total of
$162,500.
Vital
Trust Business Development Corporation , of which John Stanton is the
Chief Executive Officer and Mark Clancy is the Chief Operating Officer has
provided financing of $168,658. As of September 30, 2007 the Company
has not repaid any debt to Vital Trust Business Development. Vital
Trust Business Development Corporation will be repaid in common stock at 100%
of
the price per share.
As
of the
3rd quarter 2007 the Company has not entered into a formal finance agreement
with Vital Trust Business Development. John Stanton Chief Executive
Officer and Chairman of the Board of Vital Trust is also the Chairman of the
Company's Board of Directors and Mark Clancy Chief Operating Officer and
Director of Vital Trust is also a Director of U.S. Energy Initiatives
Corporation.
License
Agreement
The
Company entered into a licensing agreement with Frank Davis, our Chief
Technology Officer, a Director and significant shareholder and Engine Control
Technology LLC (ECT). The license gives the Company the exclusive world-wide
rights, to utilize and exploit five issued and one pending patents including
marketing and selling products. The underlying patents were developed by Frank
Davis and other family members who are employees of the Company and the patents
have since been assigned to ECT, the owner of which is Patricia Davis. Patricia
Davis is the wife of Frank Davis.
In
addition, the Company has a consulting agreement with Frank Davis to provide
various technical consulting services. The agreement expires in 2009 but is
automatically renewable annually thereafter, if not terminated by written
notice. During the term of the agreement, the consultant shall receive health
and dental insurance for himself and his immediate family which includes his
wife, the use of a vehicle and reimbursement of certain related
expenses.
On
August
6, 2007 Engine Control Technologies cancelled the licensing agreement with
U.S.
Energy Initiatives. In a decision made by the Company to close the
research and development facility located in Peachtree City Georgia the U.S.
Energy Initiatives cancelled its consulting agreement with Engine Control
Technology and Frank Davis. The company recorded all expenses
incurred related to the agreement through September 30, 2007.
Note
4- Shareholders' Equity
Preferred
Stock
Effective December 6, 2006, the Company increased its designated shares of
previously undesignated preferred stock to 5,000,000. At June 30,
2007 the company had 42,215 Series A Preferred Shares and 23,431 Series B
Preferred Shares outstanding.
Series
A
Preferred Stock is convertible, at the option of the holder, at any time, into
shares of the Company's common stock as determined by dividing $.19 by a
conversion price determined on the date the related certificate is surrendered.
The conversion price is subject to periodic adjustment and is initially
established at $.01632. Series A Preferred Stock is automatically convertible
into shares of the Company's common stock upon (i) the date specified by vote
or
written consent or agreement of holders of at least three quarters of the shares
of Series A Preferred outstanding, or (ii) upon the closing of the sale of
the
company's common stock in a firm commitment, underwritten public offering
registered under the Securities Act in which the Company receives gross proceeds
of no less than $20 million. Series A Preferred Stock has a liquidation
preference of the greater of $.19 per share or the amount that such share would
be entitled to upon liquidation or distribution. The Series A Preferred Stock
has voting rights, except as to the election of debtors, equal to the number
of
shares of common stock into which the Series A Preferred Stock is convertible.
The Series A preferred Stockholders have the right to elect one director of
the
Company.
Series
B
Preferred Stock is convertible, at the option of the holder at anytime, into
shares of the Company's common stock as determined by dividing the lower of
$.09
or the price per share paid by the holder of the Series B Preferred Stock by
a
conversion price determined on the date the related certificate is surrendered.
The conversion price is subject to periodic adjustment and is initially
established at $.00773. Series B Preferred Stock is automatically convertible
into shares of the Company's common stock upon (i) the date specified by vote
or
written consent or agreement of holders of at least three quarters of the shares
of Series B Preferred Stock outstanding, or (ii) upon the closing of the sale
of
Company's common stock in a firm commitment, Underwritten public offering
registered under the Securities Act in which the Company receives gross proceeds
of no less than $20 Million. Series B Preferred Stock has a liquidation
preference of the greater of $.09 per share or the amount that such share would
be entitled to upon liquidation or distribution. The Series B Preferred Stock
has voting rights, except as to the election of directors, equal to the number
of shares of common stock into which the Series B Preferred Stock is
convertible. The Series B Preferred Stockholders have the right to elect one
director of the Company.
Note
5 – Goodwill
At
September 30, 2007, goodwill consists of the following:
|
|
|
September
30, 2007
|
|
|
Goodwill
|
|
$
|
683,877
|
|
|
Less
accumulated amortization
|
|
|
|
|
|
Less
Impairment
|
|
$
|
|
|
|
Total
|
|
$
|
683,877
|
|
Goodwill
was analyzed on December 31, 2006 for impairment as it has an indeterminant
life. Based on the Company's analysis performed, an impairment loss
of $61,820 was required to be recorded during the years ended December 31,
2006.
The
impairment was determined in part by the company closing its Oklahoma Facility
acquired with the DRV Energy Acquisition. The facility performed
installation and service of gasoline conversion systems.
Note
6 – Intangible Assets
Amortization
expense charged to operations was $0 and $68,948 for the period ended September
30, 2007 and 2006, respectively.
Based on
the Company's analysis for impairment as
of December 31, 2006, impairment losses of
$781,411which was the remaining unamortized balance required to be
recorded. The impairment was determined by the analysis of our
current operating results, trends and undiscounted future cash
flows.
Due
to
analysis of the companies gross profit for the certified gasoline systems the
company revised it business model in 2006. The new model reflected
the closing of the Installation and service facility in Oklahoma a selling
and
installing the gasoline conversions systems through our dealer network across
the United States. After a further analysis of the operating results
in 2006 the company determined it did not achieve the sales from the certified
systems it expected through our dealer network.
In
2007
the company has changed its plan for the sales of these certified
systems. Due to the operating results from 2006 and the unknown
result of our plan for 2007 management has been unable to forecast projected
profits, therefore we have recorded the impairment on the assets as of December
31, 2006. The Company will continue to analyze and review sales and
will try to improve on revenues and profits generated from these
certifications.
Note
7 - Debt in Default
The
Company did not meet the payment terms on the note payable to Peachtree National
Bank through September 30, 2007. The Company did remit $5,000 of the PeachTree
debt during May 2007. The note is secured by the common stock owned
by Robby Davis and Ricky Davis, both employees of the Company during the quarter
ended September 30, 2007. The provisions of the note allow for the note to
become immediately and fully payable upon default of payments. While the bank
had not initiated any remedy actions for the default as of September 30, 2007,
the full balance of the note has been reclassified as a current liability.
The
remaining principal balance as of September 30, 2007 was approximately
$46,000.
The Company is delinquent in payment of payroll taxes. The Company finalized
payments in May 2006 on a payment schedule for the federal payroll tax
delinquencies prior to 2004. Current estimated delinquency along with
accrued penalties and interest are as follows, as of September 30,
2007.
|
|
|
September
30, 2007
|
|
|
Payroll
and sales taxes
|
|
$
|
371,453
|
|
|
Accrued
penalties and interest
|
|
|
32,753
|
|
|
|
|
$
|
404,206
|
|
Note
8 – Litigation
On
November 14, 2003, Ambac International Corporation filed a lawsuit seeking
$109,915 together with interest at the rate of 15% per annum. The suits stems
from a contract for delivery of certain parts for use in the manufacturing
of
our systems from 2002. We maintain the parts were delivered substantially past
the date of anticipated delivery and that the parts when received were
defective. During the first quarter, 2007, the Arbitrator awarded AMBAC a total
of $ 259,440 including interest and court costs. Ambac and U.S.
Energy Initiatives entered into a repayment agreement as of September 2007
for
total payments of $350,361. The agreement allows the company to make
monthly payments with interest to satisfy the debt. As of September
30, 2007, the Company had not remitted any payments towards the arrangement.
As
of September 30th 2007 no penalties or actions have been taken.
On
February 21, 2007, Boonville Natural Gas Corporation filed an action seeking
$112,071. The suit alleges the Company breached it Contract to sell
and install three Diesel/CNG conversion systems for use on
Boonville’s specially purchased vehicles. The suit seeks
reimbursement for damages of the cost for 3 specialized vehicles, cost of tanks
and employee labor and travel expenses. The Warrick Superior Court
No. 2 in the State of Indiana ordered in favor of Booneville gas for the
principal amount of $73,642, attorney fees and expenses of $6,974 and
pre-judgment interest and post-judgment interest at the highest rate allowed
by
law. On August 7, 2007 a foreign judgment was filed in Hillsborough
County Clerk of the Circuit Court 13
th
Judicial
Circuit.
On
April
18, 2007 Discount Enterprises Inc. filed an action against U.S. Energy
Initiatives (along with one other defendant) alleging that the defendants did
not comply with the terms of the Contract in regards to the timeliness of
installation and the vehicles that were converted had mechanical
problems. A deposition date is set for November 2007. As of September
30th 2007 the outcome of the suit can not be determined.
Mariann
Bailey and David Bailey has filed a suit against U.S. Energy Initiatives and
Automated Engineering on August 28, 2007 with the Circuit Court of the
Thirteenth Judicial Circuit in Hillsborough County in the principal amount
of
$120,398 together with court costs, attorneys fees and any expenses incurred
in
the proceedings. The Baileys claim that they as guarantors made
payment on an alleged debt owed by AEC to Platinum Bank and that the debt was
part of the stock purchase agreement entered into with U.S. Energy
Initiatives. The Company filed a motion to dismiss in October
2007. The company takes the position that the debt paid by the
Baileys was not included as a creditor on the Schedule included in the purchase
agreement.
Bud
Industries an Automated Engineering vendor field a claim with the Circuit Court
of the Thirteenth Judicial Circuit in Hillsborough County in the amount of
$30,418 for goods sold and delivered. A Judgment was issued and the
company has repaid approximately $15,049 of the outstanding debt.
Renewable
Energy Resources, Inc. the predecessor or Internal Hydro International filed
a
suit with the Circuit Court of the Thirteenth Judicial Circuit in Hillsborough
County for damages in the amount of $200,000 for a breach of
contract. The suit was filed on the 6
th
day of
August
2007. As of September 30, 2007 the outcome of the suit can not be
determined.
From
time
to time the Company is subject to litigation relating to claims arising out
of
its operations in the ordinary course of business. Such claims, if
successful, could exceed applicable insurance coverage. Other than
what is currently disclosed herein the company is not currently a party to
any
material legal proceedings.
Note
9 - Stock Options and Warrants
The
Company's Stock Option Plan ("SOP") was adopted in 2001 to provide for the
grant
to employees up to 2,000,000 incentive stock options within the meaning of
Section 422 of the Internal Revenue Code. The SOP, which is administered by
the
Company's Board of Directors, is intended to provide incentives to directors,
officers, and other key employees and enhance the Company's ability to attract
and retain qualified employees. Stock options are granted for the purchase
of
common stock at a price not less than the 100% of fair market value of the
Company's common stock on the date of the grant (110% for holders of more than
10% of the total combined voting power of all classes of capital stock then
outstanding). As of September 30, 2007 and 2006, no options had been granted
under the plan.
Note
10 - Derivative Financial Instruments
The
captions derivative financial instruments consist of (a) the embedded conversion
feature bifurcated from the Convertible Debentures, (b) the Warrants issued
in
connection with the Convertible Debts, (c) interest rate index, and (d) put
options. These derivative financial instruments are indexed to an aggregate
of
11,334,663 shares at September 30, 2006 and are carried at fair
value.
At
September 30, 2007 the following derivative liabilities related to common stock
options and warrants and embedded derivative instruments were outstanding:
(At
September 30, 2007, the closing price for the Company's securities was
$0.04.
|
Issue
Date
|
Expiration
Date
|
Instrument
|
|
Exercise
Price Per Share
|
|
|
Value
at Issue Date
|
|
|
Value
at 9/30/07
|
|
|
3/05/05
|
3/05/10
|
1,600,000
warrants issued to Alpha Capital
|
|
$
|
0.19
|
|
|
$
|
928,000
|
|
|
$
|
17,920
|
|
|
11/4/05
|
11/4/10
|
314,815
warrants issued to Dutchess Private Equity
|
|
$
|
0.27
|
|
|
$
|
85,000
|
|
|
$
|
3,683
|
|
|
Fair
value of freestanding derivative instrument liabilities for options
and
warrants
|
|
|
$
|
21,603
|
|
|
Issue
Date
|
Expiration
Date
|
Instrument
|
|
Exercise
Price Per Share
|
|
|
Value
at Issue Date
|
|
|
Value
at 9/30/07
|
|
|
12/20/05
|
12/21/06
|
Dutchess
$1,362,500 term note
|
|
$
|
0.27
|
|
|
$
|
302,778
|
|
|
$
|
294
|
|
|
3/23/06
|
3/23/07
|
Dutchess
$1,412,500 term note
|
|
$
|
0.27
|
|
|
$
|
470,833
|
|
|
$
|
394
|
|
|
7/13/06
|
10/13/07
|
Dutchess
$845,000 term note
|
|
$
|
0.27
|
|
|
$
|
338,169
|
|
|
$
|
0.00
|
|
|
Fair
value of freestanding derivative instrument liabilities for term
notes
|
|
|
$
|
688
|
|
|
Total
fair value of freestanding derivative instrument
liabilities
|
|
|
|
22,291
|
|
The
financial derivatives are accounted for as a liability according to the guidance
of EITF 00-19 and FAS 133 and the fair values have been determined using the
Black Scholes valuation model with the assumptions listed in the table
below
|
Expected
term ranging from
|
|
.25
to 3.25 years
|
|
|
Stock
Price at September 30, 2007
|
|
$
|
0.04
|
|
|
Expected
dividend yield
|
|
$
|
0.00
|
|
|
Expected
stock price volatility
|
|
|
103
|
%
|
|
Risk-free
interest rate ranging from
|
|
3.82%
to 4.09
|
%
|
The
instruments were reduced for the embedded conversion features and warrants
with
the remaining balance being accreted back to their face amount using
the effective interest rate method using an effective interest rate of
approximately 300%. The actual accretion is straight line as it approximates
the
effective interest rate amount.
The
derivative for the embedded conversion Feature of the Dutchess term note dated
July 14, 2006 is valued using the projected stock price over the term of the
instrument based on a historical weighted average stock price for a similar
term
to determine the conversion amounts and then a Black-Scholes valuation model
for
the resulting conversion share amounts.
The
Company has two notes that have matured prior to September
30, 2007, with unpaid balances. The company has decided to assume a
December 31, 2007 maturity date for the computation of the
derivative.
Note
11- Debt Financing
On
March
8, 2007, we completed an offering of our $132,000 principal amount 30 day
promissory note (the “Note”) to Dutchess Private Equity Fund, L.P. (the
“Investor”) for aggregate gross proceeds of $110,000. The note bears
no interest. The company was to make payments to the Holder in the
amount of the greater of a) one hundred percent (100%) of each put (as defined
in the Investment Agreement between the Company and the Investor dated November
4, 2005) given to the Investor from the Company, (the “Payment Amount”) until
the face amount is paid in full, minus any fees due. The First
Payment will be due at the closing of each Put (“Payment Date” or “Payment
Dates”) until this Note is paid in full. Notwithstanding any
provision to the contrary in this Note, the Company may pay in full to the
Holder the Face amount, or any balance remaining thereon, in readily available
funds at any time and from time to time with out penalty. In the
event that on the Maturity Date the company has any remaining amounts unpaid
on
this Note (the “Residual Amount”), the Holder can exercise its right to increase
the Face amount by ten percent (10%) as an initial penalty and an additional
two
and one-half percent (2.5%) per month paid, pro rata for partial periods,
compounded daily, as liquidated damages (“Liquidated Damages”). If a
Residual Amount remains, the company is in Default. As of
June 30, 2007 the company paid off this promissory note.
On
August
29
th
, 2007,
we
completed an offering of $150,000 principal amount 90 day promissory
note to an Investor . The note bears interest on the outstanding
balance at an annual rate of twelve percent. The Company shall issue
within two weeks following receipt of the loan amount 300,000 of its restricted
common shares to the holder and the company shall acquire 300,000 restricted
shares of Vital Trust Business Development Corporation and shall deliver said
shares to holder. As of the September 30, 2007 the Vital Trust shares
had not been delivered to the investor thereby resulting in a liability
$24,600. Interest shall be paid in full at the maturity
date. The company is to make weekly payments to the holder beginning
five weeks after the execution of the agreement, continuing every week for
a
period of ninety days at which time any remaining unpaid balance and all accrued
but unpaid interest shall be due and payable in full.
Note
12 – Acquisitions
On
June
9, 2006 the company entered into a “Stock Purchase Agreement” for 100 percent of
the outstanding common shares of Automated Engineering
Corporation. The aggregate purchase price was $350,000, and was
consummated by a cash payment in the amount of $292,635 to the shareholders
of
83.6% of the outstanding shares. The balance of $57,365, representing
a minority interest shareholder is included in accrued expenses as of December
31, 2006.
As
this
transaction occurred in the middle of a reporting period, the Company has
designated the acquisition date for accounting purposes to be the end of the
month of June. Therefore, operational results for this acquired
entity will commence in the month of July 2006.
Note
13 - Segment Information
Commencing with the Company’s acquisition of Automated Engineering Corporation
in the second quarter of 2006 the Company operates in two business segments.
The
Natural gas vehicle conversion system segment operates development of natural
gas conversion systems for light and heavy duty vehicles. The Electronic
Manufacturing segment is electronic design, production and ability to proto-type
and produce electronic control devices.
SEGMENT
INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 IS AS
FOLLOWS:
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|
|
|
|
|
|
|
|
|
|
|
|
|
Hybrid
Fuels
|
|
|
Manufacturing
|
|
|
Total
|
|
|
Revenue
|
|
|
23,018
|
|
|
|
780,868
|
|
|
|
803,886
|
|
|
Cost
of sales
|
|
|
30,404
|
|
|
|
687,006
|
|
|
|
717,410
|
|
|
Gross
Profit
|
|
|
(7,386
|
)
|
|
|
93,862
|
|
|
|
86,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting
and professional
|
|
|
483,196
|
|
|
|
15,937
|
|
|
|
499,133
|
|
|
Research
& development
|
|
|
22,750
|
|
|
|
15,763
|
|
|
|
38,513
|
|
|
Compensation
|
|
|
1,047,633
|
|
|
|
226,956
|
|
|
|
1,274,589
|
|
|
Depreciation
and amotization
|
|
|
62,576
|
|
|
|
18,428
|
|
|
|
81,004
|
|
|
Impairment
loss
|
|
|
|
|
|
|
1,310
|
|
|
|
1,310
|
|
|
Rent
|
|
|
87,956
|
|
|
|
83,534
|
|
|
|
171,490
|
|
|
Insurance
|
|
|
137,536
|
|
|
|
45,314
|
|
|
|
182,850
|
|
|
Moving
expense
|
|
|
2,900
|
|
|
|
7,200
|
|
|
|
10,100
|
|
|
Other
operating expenses
|
|
|
180,997
|
|
|
|
45,933
|
|
|
|
226,930
|
|
|
|
|
|
2,025,544
|
|
|
|
460,375
|
|
|
|
2,485,919
|
|
|
Loss
from operations
|
|
|
(2,032,930
|
)
|
|
|
(366,513
|
)
|
|
|
(2,399,443
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative (loss)
|
|
|
274,239
|
|
|
|
|
|
|
|
274,239
|
|
|
Interest expense
|
|
|
2,069,140
|
|
|
|
14,544
|
|
|
|
2,083,684
|
|
|
Miscellaneous
|
|
|
(3
|
)
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
2,343,376
|
|
|
|
14,544
|
|
|
|
2,357,920
|
|
|
Loss
from continuing operations
|
|
|
|
)
|
|
|
|
)
|
|
|
|
)
|
|
Net
loss for reportable segments
|
|
|
(4,376,306
|
)
|
|
|
(381,057
|
)
|
|
|
(4,757,363
|
)
|
|
Total
Assets
|
|
|
1,029,844
|
|
|
|
1,010,968
|
|
|
|
2,040,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
of Segment Amounts Reported to Condensed
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues for reportable segments
|
|
|
|
803,886
|
|
|
|
|
|
|
Total consolidated revenue
|
|
|
|
|
|
|
803,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for reportable segments
|
|
|
|
4,757,363
|
|
|
|
|
|
|
Net loss consolidated
|
|
|
|
|
|
|
4,757,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 14 –Recent Accounting Pronouncements
In
February 2006, FASB issued SFAS 155. This accounting standard permits
fair value re-measurement for any hybrid financial instrument containing an
embedded derivative that otherwise would require bifurcation; clarifies which
interest-only strips and principal-only strips are not subject to the
requirements of SFAS No. 133; establishes a requirement to evaluate interests
in
securitized financial assets to identify them as freestanding derivatives or
as
hybrid financial instruments containing an embedded derivative requiring
bifurcation; clarifies that concentrations of credit risk in form of
subordination are not embedded derivatives; and amends SFAS No. 140 to eliminate
the prohibition on a qualifying special-purpose entity from holding a derivative
financial instrument pertaining to a beneficial interest other than another
derivative financial instrument. SFAS No. 155 is effective for all
financial instruments acquired or issued after the beginning of an entity’s
first fiscal year beginning after September 15, 2006. SFAS No. 155
has not had a material effect on our results of operations and financial
position.
In
March
2006, the FASB issued SFAS No. 156, which addresses the accounting for servicing
assets and liabilities. SFAS No. 156 is effective at the beginning of
an entity’s first fiscal year beginning after September 15,
2006. SFAS No. 156 has not had a material effect on our results of
operations or financial position.
In
July
2006, the FASB issued Interpretation No. 48, “ Accounting for Uncertainty in
Income Taxes” (FIN48), effective for fiscal years beginning after
December 15, 2006. FIN 48 requires a two-step approach to determine
how to recognize tax benefits in the financial statements where recognition
and
measurement of a tax benefit must be evaluated separately. A tax
benefit will be recognized only if it meets a “more-likely-than-not” recognition
threshold. For tax positions that meet this threshold, the tax
benefit recognized is based on the largest amount of tax benefit that is greater
than 50 percent likely of being realized upon ultimate settlement with the
taxing authority. The adoption of Fin 48 did not have a material
impact on the consolidated financial statements.
In
September 2006, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (“SFAS”) No 157, “fair Value Measurements.” SFAS
No. 157 clarifies the principle that fair value should be based on the
assumptions market participants would use when pricing an asset or liability
and
establishes a fair value hierarchy that prioritizes the information
used to develop those assumptions. Under the standard, fair value
measurements would be separately disclosed by level within the fair value
hierarchy. SFAS No. 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years, with early adoption permitted. The Company does
not expect the adoption of SFAS No. 157 to materially impact its financial
statements.
In
February 2007, FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities.” This Statement permits entities to
choose to measure many financial instruments and certain other items at fair
value. This Statement is effective for fiscal years beginning after
November 15, 2007. The adoption of SFAS No. 159 is not expected to
materially impact the financial statements..
Note
15 – Subsequent Events
During
October of 2007 a licensed Hybrid Fuel Systems Distributor, Witco Systems Inc.,
cancelled their distribution agreement. They cited a lack of sales
opportunities in their sales area (Asia, South East Asia and the Middle East)
the long gestation required between the introduction of the technology and
the
actual acceptance of the product was deemed to long for them to continue to
participate. They cited excessive costs and continuing losses as
their reason for termination.
On
October 26, 2007 USEI sold the fixed assets, research and development inventory,
and all research and development tools and software to Engine Control
Technology, LLC. This sale was consummated upon the approval of
General Motors of our dual fuel technology. GM had indicated that we
were about to commence the production phase of this new product
introduction. The Board decided that since no additional R&D was
required, USEI should divest itself of all R&D personnel and developmental
equipment. Therefore at the end of October 2007 USEI sold all R&D
Inventory, and R&D Equipment to Engine Control Technology, LLC for the sum
of $200,000.
