Item 1.

Financial Statements

UNITED ECOENERGY CORP.

STATEMENTS OF ASSETS AND LIABILITIES

 

		September 30,  2009					December 31, 2008
			(unaudited)
Assets
Investments in portfolio companies
Non-controlled investments, at fair value (cost $450,000 and $250,000, respectively)		$	180,000			$	250,000
Controlled investments, at fair value (cost—$514,500 - 2009)			514,500				-
Cash			367				383
Interest receivable			3,658				8,190
Due from affiliate			3,550				3,550
Total assets			702,075				262,123
Liabilities
Accounts payable			50,456				25,698
Due to affiliates			175,781				175,781
Notes payable – including interest of $13,438 and $11,298 respectively			57,304				30,163
Note payable to related party – including interest of $5,178 and $2,135			56,519				27,135
Liability for unissued shares			22,951				-
Total liabilities			363,011				258,777
Net Assets		$	339,064			$	3,346
Analysis of Net Assets
Common stock, par value $.001 per share, 150,000,000 shares authorized, and 66,124,415 (2009) and 34,710,537 (2008) issued and outstanding		$	66,124			$	34,710

Additional paid-in capital			1,529,496				690,839
Accumulated deficit			(1,256,556	)			(722,203	)
Total Net Assets		$	339,064			$	3,346
Net Asset Value Per Share		$	.01			$	-

 

See notes to financial statements.

 

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UNITED ECOENERGY CORP.

STATEMENTS OF OPERATIONS

(unaudited)

 

			Three months ended September 30,								Nine months ended September 30,
			2009				2008				2009				2008
Investment Income
Interest		$	367			$	691			$	22,377			$	691
Expenses
Administrative			54,976				106,103				304,022				155,098
Interest			41,496				2,247				43,645				6,732
Transfer agent			2,295				1,645				9,015				1,835
Professional fees			10,555				17,583				34,388				23,166
Reversal of unpaid administrative fees			(131,250	)			-				(131,250	)
Total expenses			(21,928	)			127,578				259,820				186,831
Net investment gain/(loss)			22,295				(126,887	)			(237,443	)			(186,140	)
Unrealized gain (loss) on investments
Net change in unrealized (loss)			(20,000	)							(296,910	)
Net increase (decrease) in net assets resulting from operations		$	2,295			$	(126,887	)		$	(534,353	)		$	(186,140	)
Net increase (decrease) in net assets resulting from operations per share
Basic			-				-				(.01	)			(.01	)
Dilutive			-				-				(.01	)			(.01	)
Weighted number of common shares outstanding – basic and dilutive
Basic			46,124,415				32,915,597				39,000,369				32,915,597
Dilutive			46,400,189				32,915,597				39,000,369				32,915,597

 

See notes to financial statements.

 

 

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UNITED ECOENERGY CORP.

STATEMENTS OF CHANGES IN NET ASSETS

 

		Nine months ended  September 30, 2009				Year ended  December 31, 2008
		(unaudited)
Increase (decrease) in net assets from operations:
Net investment (loss)		$	(237,443	)		$	(276,689	)
Net change in unrealized (loss)			(296,910	)			-
Net (decrease) in net assets resulting from operations			(534,353	)			(276,689	)
Capital share transactions:
Proceeds from shares sold			346,400				569,025
Investment in portfolio company			500,000				-
Warrants issued in connection with notes payables			23,671				-
Net increase in net assets from capital share transactions			870,071				569,025
Total increase (decrease) in net assets:			335,718				292,336
Net assets at beginning of period			3,346				(288,990	)
Net assets at end of period		$	339,064			$	3,346
Capital share activity
Shares sold			1,413,878				1,928,898
Shares issued from conversion of preferred stock			-				4,000,000
Shares issued in connection with investment in portfolio company (including 20,000,000 shares held in escrow)			30,000,000				-
Net increase in capital share activity			31,413,878				5,928,898

 

See notes to financial statements.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

              The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our financial statements and the related notes and schedules thereto.

 

Overview

               The Company was incorporated under the Nevada General Corporation Law, in February 1997, and was a development stage company through the end of 2005, and until it filed an election with the SEC to be treated as a business development company in February 2006. At the same time the Company changed its name to United EcoEnergy Corp., to reflect its new business model and plan. 

              We intend to invest principally in equity securities, including convertible preferred securities and debt securities convertible into equity securities, of primarily non-public U.S.-based companies.  Our investment objective is to maximize our portfolio’s capital appreciation while generating current income from our portfolio investments.   In accordance with our investment objective, we intend to provide capital principally to U.S.-based, private companies with an equity value of less than $250 million, which we refer to as “micro-cap companies.”  Our primary emphasis will be to attempt to generate capital gains through our equity investments in micro-cap companies, including through the conversion of the convertible debt or convertible preferred securities we will seek to acquire in such companies.  

               We may also make investments on an opportunistic basis in U.S.-based publicly-traded companies with market capitalizations of less than $250 million, as well as foreign companies that otherwise meet our investment criteria, subject to certain limitations imposed under the 1940 Act. At the present time, we do not expect our investments in foreign companies to exceed more than 10% of our total investment portfolio on a cost basis, however.

  

               Any subsequent follow-on investment will be contingent upon the portfolio company satisfying pre-established milestones towards the filing of a registration statement under the Securities Act of 1933, as amended (“Securities Act”) or the Exchange Act.  Where appropriate, we may also negotiate to receive warrants, either as part of our initial or follow-on investments in our portfolio companies.

 

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               We intend to maximize our potential for capital appreciation by taking advantage of the premium we believe is generally associated with having a more liquid asset, such as a publicly traded security.  Specifically, we believe that a “going-public”, will generally provide our portfolio companies with greater visibility, marketability, and liquidity than they would otherwise be able to achieve.  Since we intend to be more patient investors, we believe that our portfolio companies may have an even greater potential for capital appreciation if they are able to demonstrate sustained earnings growth and are correspondingly rewarded by the public markets with a price-to-earnings (P/E) multiple appropriately linked to earnings performance.  We can provide no assurance, however, that the micro-cap companies in which we may invest will be able to achieve such sustained earnings growth necessary, or that the public markets will recognize such growth, if any, with an appropriate market premium.

 

              The convertible debt instruments we expect to receive in connection with our initial investments will likely be unsecured or subordinated debt securities.  These convertible debt instruments will in nearly all cases not be rated by a national rating agency.  If such debt securities were rated, however, we would expect them to fall below investment grade, which are sometimes referred to as “junk bonds,” meaning that they are more speculative in nature with respect to the issuer’s capacity to pay interest and repay principal, and are therefore subject to greater risk of default than other debt securities that qualify as investment grade. The equity investments we expect to receive in connection with our follow-on investments will typically be non-controlling investments, meaning we will not be in a position to control the management, operation and strategic decision-making of the companies in which we invest.   In the near term, we expect that our total initial and follow-on investments in each portfolio company will typically range from $250,000 to $600,000, although we may invest more than this threshold in certain opportunistic situations.  We expect the size of our individual investments to increase if and to the extent our capital base increases in the future.

 

               We expect that our capital will primarily be used by our portfolio companies to finance organic growth.  To a lesser extent, our capital may be used to finance acquisitions and recapitalizations. Our investment decisions will be based on an analysis of potential portfolio companies’ management teams and business operations supported by industry and competitive research, an understanding of the quality of their revenues and cash flow, variability of costs and the inherent value of their assets, including proprietary intangible assets and intellectual property.  We will also assess each potential portfolio company as to its appeal in the public markets and its suitability for achieving and maintaining public company status.

               As a business development company, we are required to comply with certain regulatory requirements. For example, to the extent provided by the 1940 Act, we are required to invest at least 70% of our total assets in eligible portfolio companies.

               Research shows that publically traded companies are potentially valued higher than comparable private company peers because market participants may pay a premium for liquidity.  Investors willing to accept illiquidity in the form of a private, pre-IPO investment can attempt to capture this potential valuation differential once a company becomes publicly traded.

 

               We intend to provide an opportunity to participate in the potential increase in value that can occur as portfolio companies transition from private to public status and potential accelerated earnings growth following an infusion of capital. We believe that this process could result in risk-adjusted excess returns that have the potential to generate capital gains on each investment over an average 3-year anticipated holding period.  We intend to distribute current income from our portfolio to investors in the form of quarterly dividends, to the extent available.

 

Current Economic Environment

 

              The U.S. economy is currently in a recession, which could be long-term. Consumer confidence continued to deteriorate and unemployment figures continued to increase during the first half of 2009.  However, in recent months, certain economic indicators have shown modest improvements. The generally deteriorating economic situation, together with the limited availability of debt and equity capital, including through bank financing, will likely have a disproportionate impact on the micro-cap companies we intend to target for investment.  As a result, we may experience a reduction in attractive investment opportunities in prospective portfolio companies that fit our investment criteria.  In addition, micro-cap companies in which we ultimately invest may be unable to pay us the interest or dividends on their convertible securities or repay their debt obligations to us, and the common stock which we may receive upon conversion of the convertible securities may have little or no value, resulting in the loss of all or substantially all of our investment in such micro-cap companies.

 

Going Concern

               Our financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate the continuation of the Company as a going concern.  This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of liabilities in the normal course of business. The Company elected to be a BDC in 2006 but has not as yet attained a level of operations which allows it to meet its current overhead and may not attain profitable operations within next few business operating cycles, nor is there any assurance that such an operating level can ever be achieved. The Company is dependent upon obtaining additional financing adequate to fund its commitments to its portfolio companies. The report of our auditors on our financial statements included a reference to going concern risks.  While the Company has funded its initial operations with private placements, became a publicly owned entity and secured loans from a related party, there can be no assurance that adequate financing will continue to be available to the Company and, if available, on terms that are favorable to the Company.   Our ability to continue as a going concern is also dependent on many events outside of our direct control, including, among other things, our portfolio companies’ ability to achieve their business goals and objectives, as well as improvement in the economic climate.  The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

 

Investment Portfolio and Activities

 

               During 2009, the Company’s management has been replaced and in December 2009, a majority of the Board will be new members. It is the intention of the new management to review more investment opportunities that meet the Company’s investment criteria while at the same time develop funding sources, principally equity, if available on terms that are favorable to the Company,  in addition to the Company’s present lender.  The consummation of each investment will depend upon satisfactory completion of our due diligence investigation of the prospective portfolio company, our confirmation and acceptance of the investment terms, structure and financial covenants, the execution and delivery of final binding agreements in form mutually satisfactory to the parties, the absence of any material adverse change and the receipt of any necessary consents.  We can provide no assurance that we will be able to both find appropriate candidates for investment and if found, conclude a transaction as well as to find adequate financing for our operations including amounts necessary to fund the operations of our portfolio companies.

 

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Results of Operations

We commenced operations as a BDC in February 2006; however, much of the time since that date was devoted to fund raising and  extensive efforts devoted to identifying investment candidates; negotiation of transactions and due diligence efforts, etc. Set forth below are the results of operations for the three and six months ended September 30, 2009 and 2008.

Investment income   We currently have limited investment income and amounts accrued in accordance with the terms of the related loans have not been received.  The Company has stopped accruing income on loans for which the Company established the loans were impaired.  Our equity investments are not expected to pay dividends. We may also generate revenue in the form of commitment, origination, structuring or diligence fees, fees for providing significant managerial assistance and possibly consulting fees. Any such fees will be generated in connection with our investments and recognized as earned.  In all likelihood we will be required to make future expenditures in connection with our due diligence efforts along with general and administrative expenses before we will earn any material investment income.

Expenses.   Our primary operating expenses include the payment of: (i) consulting fees under current and former arrangements to fund the costs related to personnel  and advisors and other administrative obligations for identifying, evaluating, negotiating, closing; monitoring and servicing our investments; (ii) interest on borrowings; and (ii) professional services including legal, accounting and transfer agent.   In the quarter ended September 30, 2009, the Company and its former administrative service provider agreed to the termination of the service agreement and any unpaid amounts were cancelled.  Accordingly, the Company recognized income of $131,250 from the reversal of these unpaid amounts.

 

Financial Condition, Liquidity and Capital Resources

 

As of September 30, 2009 and December 31, 2008, the Company had negative working capital of approximately $333,00 and $88,000, respectively.   Since implementing the BDC business plan, we generated net cash proceeds of $1.1 million from equity placements and borrowed $205,000, principally from a related party. During this period we invested $464,000 in cash and issued common stock in one additional transaction. The Company elected to be a BDC in 2006 but has not as yet attained a level of operations which allows it to meet its current overhead and may not attain profitable operations within next few business operating cycles, nor is there any assurance that such an operating level can ever be achieved. The Company is dependent upon obtaining additional financing adequate to fund its commitments to its portfolio companies. The report of our auditors on our financial statements included a reference to going concern risks.  While the Company has funded its initial operations with private placements, became a publicly owned entity and secured loans from a related party, there can be no assurance that adequate financing will continue to be available to the Company and, if available, on terms that are favorable to the Company.   Our ability to continue as a going concern is also dependent on many events outside of our direct control, including, among other things, our portfolio companies’ ability to achieve their business goals and objectives, as well as improvement in the economic climate.  The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

Our primary use of funds will be investments in portfolio companies, cash distributions to holders of our common stock, and the payment of operating expenses.

As of September 30, 2009, we had net assets of $339,000 and, based on 46,124,231 shares of common stock outstanding (exclusive of 20 million shares held in escrow), a net asset value per common share of approximately $. 01 As of December 31, 2008, we had net assets of $3,346 and, based on 34,710,577 shares of common stock outstanding, a net asset value per common share of approximately $nil.

Distribution Policy

 

 

Although our primary emphasis will be to generate capital gains through the common stock we expect to receive upon conversion of the convertible debt and convertible preferred securities issued to us in the initial and follow-on investments in our portfolio companies, we also expect to generate current income from the interest and preferred dividends on the debt and convertible preferred securities, respectively, prior to their conversion.

 

The timing of any capital gains generated from the appreciation and sale of common stock we expect to receive in our portfolio companies upon conversion of the convertible debt and convertible preferred equity securities cannot be predicted.  Although we expect to be able to pay dividends from the interest and preferred dividends we receive from our initial and follow-on investments prior to our conversion thereof, we do not expect to generate capital gains from the sale of our portfolio investments on a level or uniform basis from quarter to quarter.  This may result in substantial fluctuations in our quarterly dividend payments to stockholders.  In addition, since we expect to have an average holding period for our portfolio company investments of two to three years, it is unlikely we will generate any capital gains during our initial years of operations and thus we are likely to pay dividends in our initial years of operation principally from interest and preferred dividends we receive from our initial and follow-on investments prior to our conversion thereof.  However, our ability to pay dividends in our initial years of operation will be based on our ability to invest our capital in suitable portfolio companies in a timely manner.

In addition, although we currently intend to distribute realized net capital gains, if any, at least annually, we may in the future decide to retain such capital gains for investment and elect to treat such gains as deemed distributions to our stockholders. If this happens, our stockholders will be treated as if they had received an actual distribution of the capital gains we retain and reinvested the net after-tax proceeds in us. In this situation, our stockholders would be eligible to claim a tax credit (or, in certain circumstances, a tax refund) equal to their allocable share of the tax we paid on the capital gains deemed distributed to them.  We can offer no assurance that we will achieve results that will permit the payment of any cash distributions and, to the extent that we issue senior securities, we will be prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if distributions are limited by the terms of any of our borrowings.

 

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We can offer no assurance that we will achieve results that will permit the payment of any cash distributions and, if we issue senior securities, we will be prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if distributions are limited by the terms of any of our borrowings.

 

All distributions will be paid at the discretion of our Board of Directors and will depend on our earnings, our financial condition, maintenance of our RIC status, compliance with applicable business development company regulations and such other factors as our Board of Directors may deem relevant from time to time. We cannot assure that we will pay distributions to our stockholders in the future. In the event that we encounter delays in locating suitable investment opportunities, we may pay all or a substantial portion of our distributions from the proceeds of the sales of our common stock in anticipation of future cash flow, which may constitute a return of our stockholders’ capital. Distributions from the proceeds of the sales of our common stock also could reduce the amount of capital we ultimately invest in interests of portfolio companies.  Our distributions may exceed our earnings, especially during the period before we have substantially invested the proceeds from the sale of our common stock.

Contractual Obligations

 

As of September 30, 2009, our investment agreements with our portfolio companies provide that we will provide if the portfolio companies attain certain benchmarks we are to provide financing of up to $150,000.

Off-Balance Sheet Arrangements

 

As of September 30, 2009, we have no off-balance sheet arrangements.

 

Related Parties

  

Information concerning related party transactions is included in the financial statements and related notes, appearing elsewhere in this quarterly report on Form 10-Q. In addition, we have adopted a formal Code of Ethics that governs the conduct of our officers and directors. Our officers and directors also remain subject to the fiduciary obligations imposed by both the 1940 Act and applicable state corporate law.

Critical Accounting Policies

 

The preparation of financial statements and related disclosures in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified the following items as critical accounting policies.

 

Valuation of Portfolio Investments.   We will determine the net asset value per share of our common stock quarterly, or more frequently to the extent circumstances together with our obligations under the 1940 Act require us to do so. The net asset value per share is equal to the value of our total assets minus liabilities and any preferred stock outstanding divided by the total number of shares of common stock outstanding. At present, we do not have any preferred stock authorized or outstanding.

 

Value, as defined in Section 2(a)(41) of the 1940 Act, is (i) the market price for those securities for which a market quotation is readily available, and (ii) for all other securities and assets, fair value is as determined in good faith by our Board of Directors.

 

 

Origination, closing and/or commitment fees associated with debt investments in portfolio companies are accreted into interest income over the respective terms of the applicable loans.  Upon the prepayment of a loan or debt security, we record any prepayment penalties and unamortized loan origination, closing and commitment fees part of interest income.

We place loans on non-accrual status when principal or interest payments are past due 60 days or more or when there is reasonable doubt that principal or interest will be collected. Accrued interest is generally reversed when a loan is placed on non-accrual status. We may recognize as income or apply to principal, interest payments received on non-accrual loans, depending upon management’s judgment. We restore non-accrual loans to accrual status when past due principal and interest is paid and, in management’s judgment, are likely to remain current.

Other Income.   Other income includes closing fees, or origination fees, associated with equity investments in portfolio companies. Such fees are normally paid at closing of our investments, are fully earned and non-refundable, and are generally non-recurring.

 

The 1940 Act requires that a business development company offer managerial assistance to its portfolio companies. We offer and provide managerial assistance to our portfolio companies in connection with our investments and may receive fees for our services. These fees are typically included in other income.

 

Federal Income Taxes.   We intend to elect to be treated, and intend to qualify annually thereafter, as a RIC under Subchapter M of the Code.  If we do not meet the criteria to qualify as a RIC for our 2009 taxable year, we will be taxed as a regular corporation under Subchapter C of the Code. We intend to operate so as to qualify to be taxed as a RIC under Subchapter M of the Code and, as such, to not be subject to federal income tax on the portion of our taxable income and gains distributed to stockholders. To qualify for RIC tax treatment, we are required to distribute at least 90% of our investment company taxable income, as defined by the Code.

 

Because federal income tax regulations differ from accounting principles generally accepted in the United States, distributions in accordance with tax regulations may differ from net investment income and realized gains recognized for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain or loss are recognized at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk.