As of October 2007 US Energy is operating in 3 segments due to its recent acquisition of Seaspray Aerosol, Inc.
The alternative fuels market segment through the design and sale of our patent dual-fuel, diesel-natural gas conversion systems. In June of this year General Motors announced that our dual fuel kit had successfully completed the 100,000 km and that further development was not needed. The next step is to commence kit sales and conversion of GM vehicles in Thailand. Having the GM certification in hand, it was decided to cancel all further R&D expenses and to shut down the Atlanta Facility and sell all R&D equipment and excess Inventory. The Atlanta facility did not support the manufacture of kits and AEC was already producing all of the electrical components and has successfully outsourced all of the mechanical components. This decision dramatically reduced the expenses of USEI.
The electronic manufacturing segment through the operations of our subsidiary Automated Engineering Corporation (AEC). AEC is an ISO 9001 certified, nineteen year-old company providing electronic design, prototype and production of electronic systems and components. We conduct our electronics design and manufacturing at our facility in Tampa, Florida. We also house our executive offices in our Tampa, Florida facility.
The specialty aerosol filling segment, through the operations of our recently acquired subsidiary, Advanced Aerosol Technologies, Inc. (AATI). AATI is a ten year old company currently undergoing ISO 9001 certification, that formulates and sells its own proprietary products as well as providing private labeling services to a variety of companies.
We offer our Aerosol filling capabilities primarily to clients requiring smaller production quantities that would not be economicable feasable for large aerosol concerns. The company is fully staffed with management, sales, and quality personnel. The USEI CEO overseas this company and assists in contract acquisition.
We have sought to insert our dual-fuel technology into the marketplace through original equipment manufacturers (OEMs) parallel with expanding our direct-to-consumer activities.
We offer our electronic design and manufacturing services primarily to clients that require smaller production runs that would not be economically feasible for larger production facilities.
Calculating the comparisons between our reporting periods
Providing meaningful insight into our product and manufacturing costs as well as expenses incurred in delivering our technology have been difficult because we have previously sold our systems at the rate of one or two a month under federal and/or state grants. We have not had the ability for our product to take advantage of quantity discounts in our raw materials and component parts. Further, our labor costs in our present environment would appear unusually high given our revenues. However, in order for us to position our company to maximize opportunities, we have found it necessary to engage professionals and mechanics in sufficient number to complete the build-out of our facility in Atlanta as well as developing new systems.
In the case of our electronic manufacturing, we acquired AEC during June 2006 and have sought to make improvements in manufacturing efficiencies, procurement and to expand our design and prototyping services. As a result, the following annual and quarter comparisons may not be indicative of future operating results.
Discussion of Operations for 2006:
We executed our Memorandum of Understanding with General Motors Thailand (GMTh) in support of their C190 Colorado Pick-Up Program for model years 2007 through 2009. During the third and fourth quarter 2006 into the first quarter 2007, we continued durability testing and engineering analysis with GMTh. We completed a number of new installations for GMTh during the fourth quarter 2006 and early 2007. GMTh notified the Company during March 2007 they had completed their durability testing to their satisfaction and they are now prepared to proceed by offering our dual-fuel system as an option through their dealerships beginning in Thailand. We completed the acquisition of Automated Engineering Corporation ("AEC"). We acquired AEC to manufacture in-house the electronic control unit component. The core of our system is incorporated into our electronic control unit. Our ability to manufacture the device in-house has resulted in a lower cost of goods and allowed us to ensure our system is manufactured under the highest quality standards. With the current equipment, machinery and facilities we now have, the Company can manufacture approximately 2,000 systems per month. We believe this provides us ample capacity to react to the potential sales we are pursuing .
We executed an agreement with PS Gas Company ("PSGas") in Thailand for the conversion of diesel powered buses over a five year period. During the first quarter 2007, we successfully field-tested a system in a bus provided by PSGas in Thailand. The converted bus was taken on a 100 kilometer road test. We are now working with PSGas to schedule the intial roll-out of our dual-fuel systems through their fleet. We expanded our exclusive fulfillment license with WITCO Intl for a host of countries including China, India, Malaysia, Korea and several other Asian countries. WITCO has now opened a field office in China and during the first quarter 2007, we shipped the ten production units to WeiChai Peterson Motors in China . We realized an increase in revenues from $652,400 at the year ended December 31, 2005 to $1,375,418 at the year-end 2006. Our loss to operations during the same periods were $(8,261,371) for the year ended 2005 and $(11,029,040) for the year ended 2006.
Our business model is patterned around our core dual fuel diesel to natural gas conversion technology and contract electronic manufacturing. Our model was primarily developed as a result of our operating experiences, available assets and our opinion of the market place in general. We highlight certain challenges we faced during 2005 and the fundamental adjustments we've made in developing our resultant business.
Determined that pursuing the sale of our dual fuel system exclusively to government municipalities and direct to consumers was sufficiently inconsistent as to retard our ability to achieve profitable operations. The appeal of our product is tied directly to the price differential between diesel and natural gas. When municipalities allocate funds to convert a vehicle or fleet of vehicles, the objective is to clean up emissions and not necessarily to justify a return on investment. When market factors beyond our control cause the price of diesel or gasoline to temporarily rise in price elevating the differential over natural gas, we would experience a temporary increase in demand for our conversion systems. However, we are unable to predict with certainty when government funds would become available or when the price of fuels would take an extraordinary shift in price. As a result, while we continue to pursue both government and consumer sales, we are predominantly focused on delivering our technology through an original equipment manufacturer. In our opinion, the OEM tends to purchase an annual minimum quantity of products similar to our conversion system and then resells the system in tandem with their vehicle sales.
Determined that engineering and code writing for systems in a mobile setting would not allow us to achieve a level of precision and repeatability essential to maximizing our technology. Historically, we would conduct systems engineering in a mobile setting. While this technique is effective, it is time consuming, expensive and susceptible to error. As a result, we entered a ten year lease at our new 12,000 square foot facility in December 2004 and throughout 2005 into 2006, we incurred costs of approximately $750,000 in construction costs and equipment purchases. Since November, 2005, we been developing systems in a tightly controlled lab setting.
Shortly after our acquisition of AEC during June 2006, we noted a number of operating discrepancies that could have prevented us from operating at full capacity. We adjusted the methods we use in production and in ordering component parts. We also anticipated an upsurge in electronics manufacturing during the fourth quarter which is consistent with that business segment. However, given that we were the new owners of AEC and had not yet matured our own internal selling procedures, we were not able to capitalize on this annual upsurge. We have now improved our selling techniques and we've established a number of new client relationships which we believe will allow us to take advantage of annual sale cycles.
Discussion of Operations for 2007
Automated Engineering Corporation
2007 was a year of internal growth for AEC. Its developed several products for other companies which they now manufacture and it also developed 4 proprietary products for the luxury RV and Marine market places. Today's luxury RV ‘s and Yachts contain very costly, sensitive electronic units ranging from plasma Tv's to radar and communication systems. Marinas and RV parks have unregulated and unprotected power sources that may result in a power surge or groundout to anyone connecting to the system. Either condition can cause catastrophic damage to the sensitive electronic devices. The AEC products offer a full range of protection to include line conditioning and under/over voltage protection. These devices are currently under consideration by several of the largest RV Manufactures to be used as an OEM installed device. Currently the Marina Outfitter in the USA is evaluating these protective devices for use and sale. One of the other contract designs undertaken by AEC was an ultra bright strobe for use in the boating industry. This device is currently undergoing testing by the US Coast Guard and when approved, it will be required on every private and commercial vessel in US Waters.
Advanced Aerosol Technologies, Inc.
In October of this year USEI acquired Seaspray Aerosol Inc.. The name has since been changed to AATI this company is a specialty aerosol spray manufacturer with over 750 proprietary formulations as well as a growing capacity to act as a contract filler for a large variety of small and mid sized customers. Additionally two of the largest corporations of the US are currently in discussions with AATI to provide product on a very large scale. All EPA filings both federal and state are now current and all previously noted deficiencies have been corrected. Through the companies well developed sales network AATI has been approached by a world leading personal hair care product manufacturer to perform contract filling on a vast scale. Additionally AATI is actively pursuing government contracts on both the state and federal level. As an example we have been contacted by the NYC Fire Dept and the NYC Metropolitan Transit Authority for information on a variety of proprietary products.
All ISO 9001 policies, procedures, and quality manuals have been written and active training has commenced. We are scheduled to have a pre-inspection audit sometime in mid December of 2007 and are confident that our full ISO 9001 certification will be granted early in the 1st quarter of 2008.
