United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549FORM 10-Q
(Mark One)
[AX] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to________
Commission File Number: 333-33134
HYBRID FUEL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)Georgia 58-2267238
(State or other jurisdiction of incorporation or organization) (I.E.. Employer Identification No.)12409 Telecom Drive, Tampa, Florida 33637
(Address of principal executive offices) (Zip Code)(813)-979-9222
(Registrant's telephone number, including area code)Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes AX No ___
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ___ No X
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d)
of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ___ No ___APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. At November 15, 2004,
the Company had 42,215 Series A Preferred Shares and 195,209 Series B Preferred Shares outstanding. At November 15, 2004, the Company had 48,031,580 of its $0.001 par value common shares outstanding.Item 1 - Financial Statements
Consolidated Balance Sheets for the nine-months ended September 30, 2004 and 2003
Statement of Operations for the three and nine months ended September 30, 2004 and 2003
Statement of Changes in Stockholders' Equity for the period ended September 30, 2004
Statement of Cash Flows for the three and nine month periods ended September 30, 2004 and 2003
Notes to unedited financial statementsItem 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 6 - Exhibits and Reports on Form 8-KItem 7 - Litigation
Signatures
PART I - FINANCIAL INFORMATION
HYBRID FUEL SYSTEMS, INC.
Consolidated Balance SheetsSeptember 30, December 31, 2004 2003 (Unedited) (Audited) ASSETS Current Assets Cash $ 111 $ 6 Accounts Receivable $ 38,547 $ 10,953 Inventories $ 12,584 $ 12,584 Other Receivables $ 5,395 $ 5,395 Total Current Assets $ 56,637 $ 29,938 Property Plant & Equipment, Net $ 8,367 $ 15,577 Total Assets $ 65,004 $ 44,515 LIABILITIES Current Liabilities Accounts Payable $ 368,095 $ 398,558 Due to Related Parties $ - $ 157,528 Due to Related Parties Convertible Debt $ - $ 179,746 Sales and Payroll Taxes Payable $ 175,515 $ 245,245 Debt in Default $ 123,272 $ 123,272 Convertible Debt in Default $ 283,200 $ 283,200 Other Current Liabilities $ 37,325 $ 68,649 Total Current Liabilities $ 987,407 $ 1,456,198 Long Term Liabilities Redeemable Securities $ - $ 530,000 Total Liabilities $ 987,407 $ 1,986,198 SHAREHOLDERS' DEFICIT Preferred Stock - A ($.01 par value; 42,215
authorized, 42,215 issued; liquidation
preference $8,021 $ 422 $ 422 Preferred Stock - B ($.01 par value; 954,563
shares authorized; 195,209 shares
issued;liquidation preference $1,002,291) $ 1,952 $ 1,952 Common Stock ($.001 par value; 95,000,000
shares authorized; 48,031,580 and
11,963,646 shares issued, respectively) $ 2,009,337 $ 12,164 Additional paid-in capital $ 4,382,713 $ 3,852,712 Accumulated Deficit $ (7,316,827) $ (5,808,933) Total Shareholders Equity (Deficit) $ (922,404) $ (1,942,683) Total Liabilities and Shareholders Equity $ 65,004 $ 44,515(see Notes to unedited Financial Statements)
HYBRID FUEL SYSTEMS, INC.
Three Months Ended
Statement of Operations
September 30, 2004
(Unedited) Three Months Ended
September 30, 2004
(Unedited) Nine Months Ended
September 30, 2004
(Unedited) Nine Months Ended
September 30, 2003
(Unedited) REVENUES Revenue from product sales $ 33,417 $ 20,529 $ 122,588 $ 80,096 Cost of product sales $ 30,669 $ 29,817 $ 63,296 $ 59,569 Forgiveness of Debt $ 22,289 $ - $ 22,289 $ - Total Revenues $ 25,038 $ (9,288) $ 81,582 $ 20,527 EXPENSES Operating Expenses Shipping $ 337 $ 784 $ 2,914 $ 3,097 Auto $ 1,555 $ 1,100 $ 4,897 $ 5,385 Rents & Leases $ 4,782 $ 11,021 $ 13,912 $ 30,246 Utilities $ 3,888 $ 6,427 $ 15,360 $ 17,151 Insurance $ 426 $ - $ 2,454 $ 51,514 Travel $ 12,766 $ 5,467 $ 48,155 $ 22,873 Compensation $ 129,612 $ - $ 321,074 $ 13,794 Legal & Accounting $ 33,350 $ 944 $ 80,467 $ 18,444 Professional Fees $ 1,424 $ - $ 5,363 $ 4,440 Research & Development $ 2,750 $ - $ 52,203 $ 5,030 Other Operating Expenses $ 21,430 $ 7,177 $ 31,060 $ 16,394 Interest $ 5,965 $ - $ 5,965 $ 13,481 Consulting Fees $ 984,860 $ 3,104 $ 1,005,860 $ 60,179 Sales and Use Tax $ - $ 237 $ - $ 237 Total Expenses $ 1,203,147 $ 36,262 $ 1,589,686 $ 262,266 Net Loss $ (1,178,109) $ (45,549) $ (1,508,104) $ (241,738) Basic and diluted
loss per share $ (0.02) $ (0.01) $ (0.03) $ (0.02) Weighted common shares 48,031,580 11,963,646 48,031,580 11,963,646(see Notes to unedited Financial Statements)
HYBRID FUEL SYSTEMS, INC.
Preferred Stock Common Stock Stock Total Shares Amount Shares Amount Paid-In Accumulated Subscription Shareholders' Series A Series A Series B Series B Shares Amount Capital deficit receivable deficit Balance at December 31. 2001 11,313,646 $ 11,314 $ 3,412,981 ($4,653,538) $ (200,000) ($1,429,243) Sale of Preferred A 45,215 $ 422 99,563 99,985 Sale of Preferred B 195,209 $ 1,952 203,018 204,970 Payment of stock subscription recvbl 200,000 200,000 Sale of common 650,000 650 117,350 118,000 stock for cash Net loss (741,575) -741,575 Balance at December 31, 2002 45,215 $ 422 195,209 $ 1,952 11,963,646 $11,964 $3,832,912 $(5,395,113) $ - $ (1,547,863)) Stock issued for 100,000 100 9,900 10,000 legal settlement Issuance of stock for conversion of note 100,000 100 9,900 10,000 Net loss (413,820) (413,820) Balance at December 31, 2003 45,215 $ 422 195,209 $ 1,952 12,163,646 $12,164 $3,852,712 $(5,808,933) $ - $(1,941,683) Net loss ($98,904) ($98,904) Balance at March 31, 2004 45,215 $ 422 195,209 $ 1,952 12,163,646 $12,164 $3,852,712 $(5,907,837) $ - $(2,040,587) Net loss ($231,091) ($231,091) Balance at June 30, 2004 45,215 $ 422 195,209 $ 1,952 12,163,646 $12,164 $3,852,712 $(6,138,928) $ - $(2,271,678) Net Loss ($1,178,109) ($1,178,109) Common Shares issued 35,716,684 $1,997,173 $1,997,173 Redeemable Securities $ 530,210 $530,210 Balance at September 30, 2004 45,215 $ 422 195,209 $ 1,952 47,880,330 $2,009,337 $ 4,382,922 ($7,317,037) $0 ($922,404)
Statement of Changes in Stockholders' EquityThree Months Ended Three Months Ended Nine-Months Ended Nine Months Ended September 30, 2004 September 30, 2003 September 30, 2004 September 30, 2003 (Unedited) (Unedited) (Unaudited) (Unedited) Cash Flows from operating activities Net Income $ (1,178,109) $ (45,549) $ (1,409,200) $ (241,738) Adjustments to reconcile net income to net cash provided by operating activities Depreciation $ 7,210 $ - $ 7,210 $ - Accounts Receivable $ 40,603 $ (7,839) $ 36,753 $ (10,520) Accounts Payable $ (4,733) $ 10,348 $ 19,734 $ 68,553 Employee loans $ - $ (48,650) $ - $ (98,250) Other current liabilities $ - $ - $ - $ (2,913) Notes Payable - White Knight $ - $ - $ 230,922 $ - Notes and Loans Payable $ - $ 27,000 $ - $ 19,000 Line of Credit $ - $ - $ - $ (13,681) Federal PR Tax Settlement Pymt $ - $ - $ (15,000) $ - Federal Tax Payable $ - $ (2,040) $ - $ (2,040) Sales Tax Payable $ - $ 611 $ (14,927) $ 1,035 Accrued Expenses $ (21,078) $ - $ (21,078) $ - Total Adjustments $ 22,001 $ (20,569) $ 243,613 $ (38,815) Net Cash provided by Operations $ (1,156,108) $ (66,118) $ (1,165,588) $ (280,553) Cash Flows from financing activities Notes & Loans Payable II $ - $ (16,500) $ - $ (23,000) Additional Paid-In Capital $ - $ 82,675 $ - $ (314,106) Loans from related parties $ (659,720) $ - $ (659,720) $ - Notes Payable $ (37,289) $ - $ (37,289) $ - Due to Related Parties $ (157,526) $ - $ (157,526) $ - Redeemable Securities $ (530,000) $ - $ (530,000) $ - Paid in Capital $ 530,000 $ - $ 530,000 $ - Common Stock $ 1,997,173 $ - $ 1,997,173 $ - Net cash provided by financing activities $ 1,142,638 $ 66,175 $ 1,142,638 $ 291,106 Net increase <decrease> in cash $ (13,470) 57 $ (22,950) 10,553 Summary Cash Balance at End of Period $ 111 $ (5,216) $ 31,061 $ (14,718) Cash Balance at Beg of Period $ (30,581) $ (2,620) $ (37,709) $ (9,631) Net Increase <Decrease> in Cash $ (30,470) $ (7,836) $ (6,759) $ (46,142)(see Notes to unedited Financial Statements)
HYBRID FUEL SYSTEMS, INC.
Statement of Cash Flows
(see Notes to unedited Financial Statements)
HYBRID FUEL SYSTEMS, INC.
Notes to Unedited Financial StatementsNOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Hybrid Fuel Systems, Inc. (the "Company") licenses the worldwide exclusive rights to a combustion engine fuel delivery system embodied in five US patents and one patent pending. The Company's current commercial application of the licensed technology is referred to as Fuel2, an aftermarket device for the conversion of medium and heavy duty diesel engines to non-petroleum based fuels such as natural gas.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
Accounts Receivable
Accounts receivable, are stated at estimated net realizable value. Accounts receivable are comprised of balances due from customers. In determining collectibility, historical trends are evaluated and specific customer issues are reviewed to arrive at appropriate allowances.
Inventories
Inventories, are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Inventories consist of component parts used in the manufacture and assembly of retrofit systems for the conversion of gasoline and diesel engines to non-petroleum based fuels such as compressed natural gas.
Property, Plant and Equipment
Depreciation is provided for using the straight-line method, in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives (asset categories range from three to seven years). Leasehold improvements are amortized using the straight-line method over the lives of the respective leases or the service lives of the improvements, whichever is shorter. Leased equipment under capital leases is amortized using the straight-line method over the lives of the respective leases or over the service lives of the assets for those leases that substantially transfer ownership. Accelerated methods are used for tax depreciation.
Impairment of Assets
The Company's policy is to evaluate whether there has been a permanent impairment in the value of long-lived assets, certain identifiable intangibles and goodwill when certain events have taken place that indicate that the remaining balance may not be recoverable. When factors indicate that the intangible assets should be evaluated for possible impairment, the Company uses an estimate of related undiscounted 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. The impairment write-down would be the difference between the carrying amounts and the fair value of these assets. Losses on impairment are recognized by a charge to earnings. Factors considered in the valuation include current operating results, trends and anticipated undiscounted future cash flows.
Income Taxes
The Company utilizes the guidance provided by Statement of Financial Accounting Standards No. 109, 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.
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.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities, as well as the reported amounts of revenues and expenses for the period then ended. The actual outcome of the estimates could differ from the estimates made in the preparation of the financial statements.
Revenue Recognition
Revenues are recognized when the merchandise is shipped to the customer, which is when title and risk of loss has passed to the customer.
Stock Based Compensation
The Company has adopted the disclosure-only provisions of SFAS No. 123, Accounting for Stock Based Compensation, but applies 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 the date of this report, no options had been granted under the plan and therefore no compensation expense has been recognized.
Research and Development Costs
The Company charges research and development costs to expense as incurred.
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 December 31, 2003 and 2002, the Company did not have any long-term obligations.NOTE 2 - RELATED PARTY TRANSACTIONS
Leases
The Company currently subleases a building from a related party on a month to month basis on the same terms and amount as the primary lease. The monthly lease amount is $1,500
NOTE 3 - DEBT IN DEFAULT
The Company did not meet the payment terms on the note payable to Peachtree National Bank through September 30, 2004. The note is secured by all assets of the Company. The provisions of the note allows for the note to become immediately and fully payable upon default of payments. Since July, the Company has been in negotiations with the bank wherein White Knight SST would stand in place of Hybrid as the guarantor of the note and Peachtree would accept a payment plan which would liquidate the full amount owed within one year.
Prior to December 31, 2003 the Company issued convertible promissory notes to various individuals and to a corporation. Following negotiations, the holders of the notes have collectively agreed to accept $233,200 as payment in full of all principal and interest and such amount is to be converted into shares of the Company's common stock at rates ranging from $.06 to $.10 per share.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
The Company is delinquent in the payment of payroll and state sales taxes. The Company is currently following payment schedules, developed after negotiations with the taxing authorities. Amounts in arrears for delinquent taxes, along with estimated penalties and interest assessed by the taxing authorities are as follows, as of September 30, 2004 and 20032004 2003 Payroll and sales taxes $175,515 $245,245 Total $175,515 $245,245During June, 2004, the Company entered a negotiated settlement with the IRS and began making monthly payments including an initial payment of $15,000 plus $5,000 a month through January, 2005. During January 2005, the Company is obligated to payoff any remaining balance.
Litigation
On November 14, 2003, Ambac International Corporation (" Ambac.") filed a lawsuit seeking $109,915.60 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 kits. We maintain the parts were delivered substantially past the date of anticipated delivery and that the parts when received were defective. On November 16, 2004, we received a Demand for Arbitration Notice and we are scheduling such Arbitration to occur during January 2005. We intend to vigorously defend our position and believe we will ultimately prevail. However, there can be no assurance that we will prevail and in the event we were to not prevail, we could be required to pay the amount of the suit, plus interest and associated fees. We do not believe the loss of this litigation will have a material effect on our ability to execute our business mission.As of September 30, 2004, the company is unaware of any claim or threat of litigation relating to Hybrid or our officers or directors.
NOTE 5 - STOCK OPTIONS
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, 2004 and 2003, no options had been granted under the plan.
Warrants
The Company has issued warrants to purchase shares of common stock to consultants and other non employees. The company uses the Black Scholes option pricing model to value warrants issued to non employees. As of October 18, 2004, all Warrants issued by the Company have expired.
NOTE 6 - SHAREHOLDERS' EQUITY
Preferred Stock
Effective February 1, 2002, the Company designated 999,779 shares of previously undesignated preferred stock as Series A Preferred Stock, for which 45,216 shares are authorized and Series B Preferred Stock, for 954,563 shares are authorized.
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 any time, 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 7 - SUBSEQUENT EVENTS
Subsequent to September 30, 2004, the Company.
During October we received the first set of official emission measurements for our Fuel2 technology. We provide a discussion of these results in Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations.
On November 9, 2004, we granted an Exclusive Letter of Authorization to Represent Hybrid Fuel Systems, Inc. to Crescent City S. A. relating to South America excluding the nations of Bolivia and Columbia. Provided we receive confirmation of the sale of 1,000 Fuel 2 kits during the 180 day period of exclusivity granted in the Letter, the Company shall enter an exclusive License Agreement with Crescent City S. A..
During November 2004 the Company completed assembling a series of ISO 9000 compliant vendors which are able to provide Fuel 2 components in quantities of 100, 1,000 and 5,000 per month. The Company intends to conduct final assembly and quality inspections at our facilities in Fayetteville, Georgia.
During October 2004 we purchased a trademark on our No School Bus Left Behind Initiative. We briefly discuss this initiative in Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis
provides information which management believes is relevant to an assessment and
understanding of the results of our operations and financial condition. The
discussion should be read in conjunction with the unedited consolidated
financial statements and notes thereto.
For the three months period
ended September 30,
2003 and 2004
Since 1996, we have sought to commercialize our
dual-fuel technology with limited success. Through the period ended September 30, 2003
we experienced a substantial slow-down in our operational state due principally
to under capitalization. We dedicated the majority of our resources during the
nine months of 2004 on the research, development and
reengineering of our Fuel2 dual-fuel application. In addition, we have dedicated
a portion of our resources during the nine-months of 2004 in liquidating various
debts and obligations of the Company. The following compares our
performance during these periods.
During the three months ended September 30, 2003, we were in a product development stage and during the
same period during 2004, we placed a heavy emphasis on the research, development and
the reegineering
of our Fuel2 application as well as reducing our overall liabilities. During the three month period ended
September 30, 2004 our research and
development expenses increased approximately 2,750% growing from $0 during the
three months period ended September 30, 2003 to $2,750 for the same three
month period in 2004.
For the quarter ended September 30, 2003
and 2004, our revenue from product sales increased by 162% from $20,529 to
$33,417 while our cost of product sales increased only 2.86% from $29,817 to
$30,669, respectively. Overall, our total revenues during this comparative period
increased from $(9,288) to $25,038.
Overall
during this period, our net loss increased from ($45,549) at September 30, 2003
to ($1,178,109) September 30, 2004 principally through one-time charges of
$984,860 for the issuance of stock to employees and for settlements of corporate
obligations. During the three month period ended September 30 2003 and
2004 our research and development expense increased 2,750% growing from $0 to
$2,750, respectively.
We have
no off-balance sheet items connected with our Company or our
operations.
During the third quarter 2004, we reduced our outstanding liabilities from $2,415,330 at the end of June 2004 to $987,407 at the end of September 2004.
For the nine months period ended September 30, 2003 and 2004
We dedicated the majority of our resources during the nine months of 2004 on the research, development and reengineering of our Fuel2 dual-fuel application. In addition, we have dedicated a portion of our resources during the nine-months of 2004 to liquidating various debts and obligations of the Company. The following compares our performance during these periods.
During the first nine months ended
September 30, 2003 we were in a product development stage and during the first
nine months
of
2004, we placed a heavy emphasis on the research, development and reegineering
of our Fuel2 application. During the first nine months of 2004 our research and
development expenses increased approximately 1,038% growing from $5,030 during the
first nine months of 2003 to $52,203 for the same nine month period in 2004.
For the
nine months ended September 30, 2003
and 2004, our revenue from product sales increased by 153% from $80,096 to
$122,588 while our cost of product sales increased from $59,569 to $63,296, respectively. Overall, our total revenues during this
comparative period increased 397% from $20,527 to $81,582.
Overall
during this period, our net loss increased 623% from ($241,738) at September 30, 2003
to ($1,509,104) at September 30, 2004 which encompasses a 1,671% increase in consulting
fees, a 1,038% increase in research and development and a 2,328% increase in
compensation as well as a 189% increase in other expenses.
We have
no off-balance sheet items connected with our Company or our
operations.
During the third quarter 2004, we
reduced our outstanding liabilities from $2,415,330 at the end of June 2004 to
$987,407 at the end of September 2004.
2004 and certain expectations for 2005
We recently filed our Form 10KSB for the years ended December 2002 and 2003. Since the date of that filing we can report encouraging results from our current
technology verification testing. The positive result of our verification cannot be minimized in importance relative to the success of our technology in the domestic marketplace.
During the past several years, federal and state governments have enacted ever increasing mandates
restricting harmful emission pollutants of diesel engines. In essence, according to these mandates, new vehicle manufacturers will have to ensure their product meets the minimum quantities for certain emissions. At the very least, any aftermarket product such as our
Fuel 2 dual-fuel technology must meet the statutory minimum emission standards.
In a report provided to our Company by an independent lab titled
Emission and Fuel Consumption Data Obtained in Accordance with CARB Retrofit Verification Protocol for On-Road Heavy-Duty Engine Applications to Verify Particulate and NOx Reductions When Operating with The Hybrid Dual Fuel System Using a 2001 Model E7-350 Mack Diesel Engine
- October 12, 2004 ("Summary Report") exceed the statutory emission standards as contained in the Federal Register for new vehicles. In addition, the results contained in the Summary Report exceed the statutory emission standards as contained in California Codes. The following table
summaries our results as compared with the Federal and State of California new vehicle emission standards:
Calculations are in grams per brake horsepower-hour (g/bhp-hr) Displacement
of Diesel with
Natural Gas Total
Hydrocarbons
(THC) Carbon
Monoxide
(CO) Nitrogen
Oxides
(NOx) Particulates
(PM) Hybrid's Fuel2 Certified Emissions 62%0.048
1.258
3.243 0.0275 40 CFR Parts 85 and 86 (Federal standards) No standard1.3
15.5
4 0.1 California Codes 1956.8 (State standards) No standard1.3
15.5
4 0.05
Of greater importance to our Verification process however is the percentage reduction in NOx and Particulates. In the case of the Verification program currently underway, the granting authorities have published reductions in certain emission in order to qualify as an Emission Control Device. Principally, this verification process is geared toward reductions in Nitrogen Oxides or NOx and Particulates or PM. The following chart includes the target reductions sought by the granting authority followed by the certified results achieved by our Fuel 2 dual-fuel technology. We believe these overall results position our Company to engage in meaningful sales during 2005.
NOx PM Approving authority required minimum emission reductions15%
25% Hybrid's Fuel2 Certified Emission Reductions
19.3%
73%
Should the reductions we've achieved
highlighted above remain consistent during the 1,000-hour durability cycle
followed by a final round of official results, our Company will have the first
dual-fuel technology verified as an Emission Control Device. We believe these
reductions position our Company to engage in meaningful sales during 2005.
Should the reductions we've achieved highlighted above remain consistent
following the 1,000-hour durability cycle, 200-hours on road cycle and final round of official results, our
Fuel 2 technology will be the first dual-fuel technology verified as an Emission Control Device.
We derived the information for the two charts cited above from the following three sources:
Hybrid's Fuel2Certified Emissions extracted from an independent engine testing lab Summary Report - Emission and Fuel Consumption Data Obtained in Accordance with CARB Retrofit Verification Protocol for On-Road Heavy-Duty Engine Applications To Verify Particulate and NOx Reductions When Operating With The Hybrid Dual Fuel System Using a 2001 Model E7-350 Mack Diesel Engine by the Official EPA Transient Cycle Heavy-Duty Procedure dated October 12, 2004.
Federal Standards extracted from 40 CFR Parts 85 and 86 Emissions Control, Air Pollution From 2004 and Later Model Year Heavy-Duty Highway Engines and Vehicles; Light-Duty On-Board Diagnostics Requirements, Revision; Final Rule
State Standards extracted from California Codes 1956.8. Exhaust Emissions Standards and Test Procedures -1985 and Subsequent Model Heavy-Duty Engines and Vehicles.
We continue to be encouraged by the market potential for our technology for three principal reasons. The price of diesel fuel continues to rise as the price of oil increases while the price of natural gas appears to be somewhat stable at a lower cost than diesel. This price differential can represent a substantial economic motivator for fleet conversion. Second, the preliminary emission test results cited above could potentially open the domestic US marketplace, an arena where our Fuel 2 kit would be the only dual-fuel verified technology available for medium and heavy-duty diesel engines. Finally, while federal and state environmental regulators have long sought creative means to reduce atmospheric pollutants, during the past two years, there has been a focused effort to clean up the 400,000+/- diesel-only yellow school buses. We have developed sales strategy trademarked No School Bus Left Behind Initiative to establish a footprint for our Fuel 2 technology.
No School Bus Left Behind Initiative
We have developed a marketing strategy which positions our Fuel 2 technology as a means for diesel-dedicated yellow school buses to reduce fuel costs while achieving a meaningful reduction in atmospheric pollutants. Within our State of Florida there are approximately 18,000 diesel-dedicated yellow school buses. There are numerous studies which confirm that the emissions of a diesel-dedicated school bus contain atmospheric pollutants which are particularly hazardous to the thousands of school children who must ride the bus twice each day. Further, the recent rise in the cost of diesel fuel represents an immediate increase in transportation costs to the local school system.
In light of the independent emission analysis discussed above, we believe our Fuel 2 technology, when properly installed on a yellow school bus, can immediately reduce the amount of particulate matter by as much as 73% and reduce nitrogen oxides or NOx by as much as 19%. Further according to our information, the average cost of a gallon of diesel fuel is approximately $2.00 while the average cost of a natural gas gallon equivalent is approximately $1.25. Provided this price differential remains relatively stable, we believe our Fuel 2 technology can represent an immediate and meaningful reduction in transportation costs.
We intend to launch our No School Bus Left Behind Initiative during January 2005 initially within the State of Florida.
Liquidity
During 2003, our liquidity was limited to small amounts of financing provided on a sporadic basis principally from friends and family. During
2004, all our financing was provided by White Knight SST, Inc.. For the quarter ended
September 30 2004, White Knight has provided $830,322 and the
principals of White Knight have served as our Chief Executive, Chief Financial Officer
and Chairman of our Board of Directors since December 2003. During August 2004, we entered an employment agreement with White Knight to provide for
these positions to remain for an additional two-year period. We believe that our current and anticipated sales together with financing provided by White Knight will be sufficient to ensure we can continue our operations for the foreseeable future.
Item
6 - Exhibits and Reports on Form 8-K
None.
Item 7 - Litigation
On November 14, 2003, Ambac International Corporation (" Ambac.") filed a lawsuit seeking $109,915.60 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 kits. We maintain the parts were delivered substantially past the date of anticipated delivery and that the parts when received were defective. On November 16, 2004, we received a Demand for Arbitration Notice and we are scheduling such Arbitration to occur during January 2005. We intend to vigorously defend our position and believe we will ultimately prevail. However, there can be no assurance that we will prevail and in the event we were to not prevail, we could be required to pay the amount of the suit, plus interest and associated fees. We do not believe the loss of this litigation will have a material effect on our ability to execute our business mission.
As of September 30, 2004, the company is unaware of any claim or threat of litigation relating to Hybrid or our officers or directors.
There is no
other pending litigation or other proceedings against the
Company.
SIGNATURE
Pursuant to
the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the
undersigned thereunto
duly authorized.
Hybrid Fuel
Systems, Inc.
registrant
November 16, 2004
By: s/s MARK
CLANCY
Mark
Clancy
Chief Executive Officer