As filed with the Securities and Exchange Commission on May 10, 2005
Registration Number 333-____________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
HYBRID FUEL SYSTEMS, INC.
(Name of Small Business Issuer in its Charter)
GEORGIA 3714 58-2267238
------- ---- ----------
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer) Identification No.
incorporation or organization) Classification Code Number)
12409 Telecom Drive
Tampa, Florida 33637
(813) 979-9222
(Address and telephone number of principal executive offices)
261 Tiger Way
Peachtree City, Georgia
(Address of principal place of business or intended principal place of business)
Mark Clancy
President
Hybrid Fuel Systems, Inc.
12409 Telecom Drive
Tampa, Florida 33637
(813) 979-9222
(Name, address and telephone number of agent for service)
Copies to:
Darrin M. Ocasio, Esq.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas, 21st Floor
New York, New York 10018
(212) 930-9700
Approximate date of commencement of proposed sale to the public: From time to
time after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, please check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ______
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ] ________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
Proposed Maximum
Title of Each Class of Securities to Amount To Be Proposed Maximum Aggregate Offering Amount of
be Registered Registered Offering Price Per Share (1) Price Registration Fee
------------------------------------------------------------------------------------------------------ -----------------------------
Common Stock, $.001 par value per 2,372,727 $0.53 $1,257,545.31 $148.01
share, issuable upon conversion of
convertible notes
------------------------------------ ------------------ --------------------------- ------------------------------------------------
Common Stock, $.001 par value per 3,403,732 $0.53 $1,803,977.96 $212.33
share, issuable upon exercise of
common stock purchase warrants
------------------------------------ ------------------ --------------------------- ------------------------------------------------
Common Stock, $.001 par value per 196,362 $0.53 $ 104,071.86 $ 12.25
share
------------------------------------ ------------------ --------------------------- ------------------------------------------------
Total 5,972,821 $3,165,595.13 $372.59
------------------------------------ ------------------ --------------------------- ------------------------------------------------
(1) Estimated solely for purposes of calculating the registration fee
to Rule 457(c) under the Securities Act of 1933, as amended. The average of the
high and low price per share of the Registrant's Common Stock on the Over the
Counter Bulletin Board as of May 5, 2005 was $0.53 per share.
The registrant hereby amends this registration statement on such date or date(s)
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the registration statement shall
become effective on such date as the commission acting pursuant to said Section
8(a) may determine.
The information in this prospectus is not complete and may be changed. The
securities may not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
PROSPECTUS
Subject to Completion, Dated May 10, 2005
HYBRID FUEL SYSTEMS, INC.
5,972,821 Shares of Common Stock
The selling stockholders named in this prospectus are offering to sell up
to 2,372,727 shares of common stock of Hybrid Fuel Systems, Inc. issuable upon
conversion of our secured convertible notes, 3,403,732 shares of common stock
underlying warrants to purchase common stock, and 196,362 shares of common stock
currently issued and outstanding which were previously issued by us to the
selling stockholders in private transactions. We will not receive any proceeds
from the resale of shares of our common stock.
Our common stock currently trades on the Over the Counter Bulletin Board
("OTC Bulletin Board") under the symbol "HYFS".
On May 2, 2005, the last reported sale price for our common stock on the
OTC Bulletin Board was $0.65 per share.
The securities offered in this prospectus involve a high degree of risk.
See "Risk Factors" beginning on page 5 of this prospectus to read about factors
you should consider before buying shares of our common stock.
The selling stockholders are offering these shares of common stock. The
selling stockholders may sell all or a portion of these shares from time to time
in market transactions through any market on which our common stock is then
traded, in negotiated transactions or otherwise, and at prices and on terms that
will be determined by the then prevailing market price or at negotiated prices
directly or through a broker or brokers, who may act as agent or as principal or
by a combination of such methods of sale. The selling stockholders will receive
all proceeds from the sale of the common stock. For additional information on
the methods of sale, you should refer to the section entitled "Plan of
Distribution."
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined whether
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this Prospectus is May 10, 2005
TABLE OF CONTENTS
Page
Prospectus Summary...................................................... 1
Risk Factors............................................................ 2
Forward Looking Statements.............................................. 5
Use of Proceeds......................................................... 5
Management's Discussion and Analysis of
Financial Condition or Plan of Operation................................ 6
Description of Business................................................. 8
Description of Property................................................. 16
Legal Proceedings....................................................... 17
Directors and Executive Officers........................................ 18
Executive Compensation.................................................. 19
Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure..................................... 19
Market for Common Equity and Related
Stockholder Disclosure.................................................. 19
Security Ownership of Certain Beneficial Owners
and Management.......................................................... 21
Selling Shareholders.................................................... 22
Certain Relationships and Related Transactions.......................... 22
Description of Securities............................................... 23
Plan of Distribution.................................................... 26
Legal Matters........................................................... 27
Experts................................................................. 27
Where You Can Find More Information..................................... 27
Disclosure of Commission Position on Indemnification
for Securities Act Liabilities.......................................... 28
Index to Consolidated Financial Statements.............................. F-1
You may only rely on the information contained in this prospectus or that we
have referred you to. We have not authorized anyone to provide you with
different information. This prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the common stock
offered by this prospectus. This prospectus does not constitute an offer to sell
or a solicitation of an offer to buy any common stock in any circumstances in
which such offer or solicitation is unlawful. Neither the delivery of this
prospectus nor any sale made in connection with this prospectus shall, under any
circumstances, create any implication that there has been no change in our
affairs since the date of this prospectus or that the information contained by
reference to this prospectus is correct as of any time after its date.
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. You should read the entire prospectus carefully, including, the
section entitled "Risk Factors" before deciding to invest in our common stock.
Hybrid Fuel Systems, Inc. is referred to throughout this prospectus as "Hybrid"
"we" or "us."
GENERAL
We were incorporated in the State of Georgia in 1996 to manufacture and
market retrofit systems for the conversion of gasoline and diesel engines,
stationary or vehicular, to non-petroleum based fuels such as compressed natural
gas and liquefied natural gas. We hold a world-wide exclusive license to
commercialize the technology embodied in five issued and one pending US patent.
Since 1998, we have dedicated our research and development exclusively to
conversion kits for diesel-powered engines. We currently offer the Fuel 2(TM)
dual-fuel conversion system designed to convert medium and heavy duty mobile
diesel engines to operate in a natural gas/diesel dual-fuel mode.
We maintain our principal executive offices at 12409 Telecom Drive, Tampa,
Florida 33637 and our phone number is (813)-979-9222 and our facsimile number is
(813)-979-9224. We conduct our operations from a 12,000 square foot facility in
PeachTree City, Georgia and our phone number at that location is 770-716-1440.
We maintain an internet web site at www.hybridfuelsystems.com. The information
on our web site is not part of this Prospectus. You can review our periodic
public filings including financial statements at the Securities and Exchange
("SEC") internet web site at www.sec.gov.
Summary Historical Financial Data
2004 2003 2002
---- ---- ----
Statement of Operations
Revenue $ 138,724 $ 231,269 $ 123,702
Net Loss $ (2,012,473) $ (413,820) $ (741,575)
Net Loss Per Share $ (0.08) $ (0.03) $ (0.06)
Weighted Average Basic and
Diluted Shares 23,857,093 12,054,742 11,741,317
Balance Sheet
Cash and equivalents $ 2,025 $ 6 $ 147
Total Assets $ 582,005 $ 44,515 $ 57,898
Total Liabilities $ 753,257 $ 1,986,198 $ 1,605,761
Shareholders' Equity $ (171,252) $ (1,941,683) $ (1,547,863)
THIS OFFERING
Shares offered by Selling
Stockholders......................................... Up to 5,972,821 shares of common stock, including
2,372,726 shares of common stock issuable upon
conversion of secured convertible notes and 3,403,732
shares of common stock issuable upon the exercise of
warrants.
Common Stock to be outstanding after the offering.... 89,214,051*
Use of Proceeds...................................... We will not receive any proceeds from the sale of the
common stock. However, we will receive the exercise
price of any common stock we sell to the selling
stockholders upon exercise of the warrants. We expect to
use the proceeds received from the exercise of their
warrants, if any, for general working capital purposes.
Risk Factors......................................... The purchase of our common stock involves a high degree
of risk. You should carefully review and consider "Risk
Factors" beginning on page 2. OTC Bulletin Board
Trading Symbol....................................... HYFS
* The above information regarding common stock to be outstanding after the
offering is based on 83,241,230 shares of common stock outstanding as of May 2,
2005. Further, the Company previously issued Series A and Series B Preferred
Shares which are convertible into 2,798,542 of our common shares.
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RISK FACTORS
An investment in our shares involves a high degree of risk. Before making
an investment decision, you should carefully consider all of the risks described
in this prospectus. If any of the risks discussed in this prospectus actually
occur, our business, financial condition and results of operations could be
materially and adversely affected. If this were to happen, the price of our
shares could decline significantly and you may lose all or a part of your
investment. The risk factors described below are not the only ones that may
affect us. Additional risks and uncertainties that we do not currently know
about or that we currently deem immaterial may also adversely affect our
business, financial condition and results of operations. Our forward-looking
statements in this prospectus are subject to the following risks and
uncertainties. Our actual results could differ materially from those anticipated
by our forward-looking statements as a result of the risk factors below. See
"Forward-Looking Statements."
RISKS RELATED TO OUR BUSINESS
WE HAVE HAD A HISTORY OF LOSSES AND MAY NEVER COMMERCIALIZE ANY OF OUR PRODUCTS
OR SERVICES OR EARN A PROFIT.
We have incurred losses since we were formed. At December 31, 2004, our
accumulated deficit was $(7,821,406). Our losses to date have resulted
principally from expenses incurred in our research and development programs,
including beta testing, and from general and administrative and sales and
marketing expenses. We currently have our Fuel2(TM) conversion system ready for
commercialization. To date, we have not generated any significant revenue from
operations and expect to incur substantial net losses for the foreseeable future
to further develop and commercialize our products. We cannot predict the extent
of these future net losses, or when we may attain profitability, if at all. If
we are unable to generate significant revenue from our products or attain
profitability, we will not be able to sustain operations.
OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM HAS EXPRESSED SUBSTANTIAL
DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN, WHICH MAY HINDER OUR
ABILITY TO OBTAIN FUTURE FINANCING.
In Note 1 to our financial statements, our registered public accounting
firm stated that our financial statements were prepared assuming that we would
continue as a going concern. Our ability to continue as a going concern is an
issue raised due to our negative working capital as of December 31, 2004 and our
loss from operations for the 2004 fiscal year. Our ability to continue as a
going concern is subject to our ability to generate revenue from our operations
and/or obtain necessary funding from outside sources, including obtaining
additional funding from the sale of our securities or obtaining loans from
financial institutions where possible. We cannot assure you that we will be able
to generate a profit or obtain necessary additional funding.
WE WILL NEED TO RAISE SUBSTANTIAL ADDITIONAL CAPITAL TO FUND OUR OPERATIONS, AND
OUR FAILURE TO OBTAIN FUNDING WHEN NEEDED MAY FORCE US TO DELAY, REDUCE OR
ELIMINATE OUR PRODUCT DEVELOPMENT PROGRAMS OR COLLABORATION EFFORTS.
To date, our sources of cash have been primarily limited to the sale of
our equity securities. We currently have no credit facility or committed sources
of capital. If our capital resources are insufficient to meet future
requirements, we will have to raise additional funds to continue the development
and commercialization of our technologies.
We cannot be certain that additional funding will be available on
acceptable terms, or at all. To the extent that we raise additional funds by
issuing equity securities, our stockholders may experience significant dilution.
Any debt financing, if available, may involve restrictive covenants that impact
our ability to conduct our business. If we are unable to raise additional
capital when required or on acceptable terms, we may have to significantly
delay, scale back or discontinue the development and/or commercialization of one
or more of our product candidates, restrict our operations or obtain funds by
entering into agreements on unattractive terms.
WE CANNOT ENGAGE IN SALES OF OUR FUEL 2(TM) SYSTEM IN THE UNITED STATES UNTIL WE
HAVE RECEIVED VERIFICATION FROM THE U.S. ENVIRONMENTAL PROTECTION
AGENCY/CALIFORNIA AIR RESOURCE BOARD.
If we are unable to successfully receive a Verification of our technology,
we will be unable to sell our Fuel 2(TM) system within the United States.
Further, the lack of Verification will significantly impede our ability to sell
our Fuel 2(TM) system overseas. Failure to obtain a verification would have a
material adverse impact on our business.
WE HAVE A LIMITED OPERATING HISTORY WHICH MAKES IT DIFFICULT TO ANALYZE OUR
FUTURE PROSPECTS.
We were organized on April 1, 1996 and have conducted only limited
operations to date, consisting of negotiating the license to use the patents,
further research and development, including beta testing, and limited sales
efforts. No assurances can be given that we will develop a marketing and sales
program which will generate significant revenues from the sales of our dual fuel
conversion systems. The likelihood of our success must be viewed in light of the
delays, expenses, problems and difficulties frequently encountered by an
enterprise in its development stage, many of which are beyond our control. We
are subject to all the risks inherent in the development and marketing of new
products.
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IMPROVEMENTS OR CHANGES IN TECHNOLOGY MAY MAKE OUR PRODUCTS OBSOLETE OR
DIFFICULT TO SELL AT A PROFIT OR AT ALL.
To date, the market for alternative fuel technology systems and equipment
has not, to our knowledge, been characterized by rapid changes in technology.
However, there can be no assurance that new products or technologies, presently
unknown to management, will not, at any time in the future and without warning,
render our dual fuel technology less competitive or even obsolete. Major
automobile and truck companies, academic and research institutions, or others,
for example, could develop new fuels or new devices which could be installed at
the original equipment manufacturer level and which could potentially render our
systems obsolete. Moreover, the technology upon which our dual fuel systems are
based could be susceptible to being analyzed and reconstructed by an existing or
potential competitor. Although we hold licenses to certain United States patents
and a patent application respecting our proprietary dual fuel system, we may not
have the financial resources to successfully defend such patents, were it to
become necessary, by bringing patent infringement suits against parties that
have substantially greater resources than those available to us.
In addition, competitors may develop technology and systems that can be
sold and installed at a lower per unit cost. There can be no assurance that we
will have the capital resources available to undertake the research which may be
necessary to upgrade our equipment or develop new devices to meet the
efficiencies of changing technologies. Our inability to adapt to technological
change could have a materially adverse effect on our results of operations.
WE LICENSE OUR PROPRIETARY TECHNOLOGY FROM A RELATED THIRD PARTY AND SUCH
TECHNOLOGY MAY NOT BE ADEQUATELY PROTECTED FROM UNAUTHORIZED USE BY OTHERS,
WHICH COULD INCREASE OUR LITIGATION COSTS.
Our success depends to a great extent on our ability to protect our
intellectual property. We license our core intellectual property pursuant to a
license agreement between us and Electronic Controls Technology LLC. Our ability
to compete effectively will depend in part on our ability to develop and
maintain proprietary aspects of our technology and either to operate without
infringing the proprietary rights of others or to obtain rights to technology
owned by third parties. We cannot assure you that any of our licensed technology
rights will offer protection against competitors with similar technology. We
also cannot assure you that the patents covered by our license agreement with
Electronic Controls Technology will not be challenged, invalidated or
circumvented in the future or that the rights created by those patents will
provide a competitive advantage. We also rely on trade secrets, technical
know-how and continuing invention to develop and maintain our competitive
position. We cannot assure you that others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to our trade secrets.
We cannot assure you that we will not become subject to patent
infringement claims and litigation in the United States or other countries or
interference proceedings conducted in the United States Patent and Trademark
Office to determine the priority of inventions. The defense and prosecution of
intellectual property suits, interference proceedings, and related legal and
administrative proceedings are costly, time-consuming and distracting. We may
also need to pursue litigation to enforce any patents issued to us or our
collaborative partners, to protect trade secrets or know-how owned by us or our
collaborative partners, or to determine the enforceability, scope and validity
of the proprietary rights of others. Any litigation or interference proceeding
will result in substantial expense to us and significant diversion of the
efforts of our technical and management personnel. Any adverse determination in
litigation or interference proceedings could subject us to significant
liabilities to third parties. Further, as a result of litigation or other
proceedings, we may be required to seek licenses from third parties which may
not be available on commercially reasonable terms, if at all.
WE HAVE LIMITED MANUFACTURING EXPERIENCE AND WILL RELY UPON THIRD PARTY CONTRACT
MANUFACTURERS WHO HAVE NOT YET BEEN CONTRACTUALLY SECURED.
To be successful, we must manufacture, or contract with a third party for
the manufacture of, our current and future products in sufficient quantities and
on a timely basis, while maintaining product quality and acceptable
manufacturing costs. Should we not timely secure a contract manufacturer, or for
some reason we are no longer able to obtain key elements from a supplier, we
will not be able to produce or will be delayed in producing conversion systems
for sale or distribution, which could cause delays in our operation or sales or
make continued operation or sales unprofitable.
SALES OF OUR PRODUCTS ARE DEPENDENT UPON PRICING, AVAILABILITY OR DELIVERY OF
THIRD PARTY COMPONENTS REQUIRED FOR THE USE IN CONJUNCTION OF OUR FUEL 2(TM)
SYSTEM.
The conversion of a medium or heavy duty mobile diesel engine requires
three primary components: (i) our Fuel 2(TM) conversion system; (ii) fuel
storage tanks, and; (iii) a specialized catalytic converter (for sales as an
Emission Control Device). While we can control the pricing and delivery of our
Fuel 2(TM) systems, we have no control over pricing, availability or delivery of
fuel storage tanks or specialized catalytic converters. The costs of these items
can potentially prevent us from selling our Fuel 2(TM) system either because the
costs of these additional components make the conversion of a vehicle
uneconomical or the due to lack of availability of either additional component.
3
We believe fuel storage tanks are readily available on the open market at prices
that will allow us to commercialize our Fuel 2(TM) system and we believe the
specialized catalytic converters can be likewise acquired on the open market at
prices that will allow us to commercialize our Fuel 2(TM) system. However, there
can be no assurance given that our customers will be able to acquire these
components at prices that permit us to sell our Fuel 2(TM) system as a fuel
savings device because the upfront costs to acquire and install these
components.
THE LIMITED AVAILABILITY OF ALTERNATIVE FUELS CAN HINDER OUR ABILITY TO MARKET
OUR PRODUCTS.
Alternative fuel engines have been commercially available in the past;
however, the most significant impediment to the growth in the market for
alternative fuel vehicles traditionally has been the limited availability of
alternative fuel sources, such as natural gas and propane. The success of
engines based on alternative fuels will probably be directly effected by the
development of the infrastructure of the natural gas industry and the widespread
availability of such fuel sources. To some degree, this problem will remain at
the forefront of, and be an impediment to, the success of alternative fuel power
sources. However, we believe that with the development of the dual fuel
conversion system, vehicles will not be tied exclusively to alternative fuels,
but will have the option and ability to operate on standard diesel fuel alone.
In all events, our business and the market for alternative fuel vehicles would
benefit substantially from the growth of the infrastructure of the natural gas
industry and the more widespread availability of alternative fuels. Conversely,
our business and the market for alternative fuel vehicles would be substantially
hurt by a diminished or lack of growth of the infrastructure of the natural gas
industry and the less widespread availability of alternative fuels.
THE NATURE OF OUR PRODUCTS SUBJECTS US TO PRODUCT LIABILITY RISKS.
Our product and services relate to fuel system components which handle or
come into contact with natural gas which is highly combustible. A malfunction of
or design defect in certain of our products or improper design, construction,
installation or servicing of facility and equipment infrastructure could result
in liability, tort or warranty claims. Although we attempt to reduce the risk of
exposure from such claims through warranty disclaimers and liability limitation
clauses in our sales agreements and by maintaining product liability insurance,
we cannot assure you that these measures will be effective in limiting our
liability for any damages. Any liability for damages resulting from product
malfunctions or services provided could be substantial and could have a material
adverse effect on our business and operating results. In addition, a
well-publicized actual or perceived malfunction or impropriety involving our
products or service could adversely affect the market's perception of our
products in general, regardless of whether any malfunction or impropriety is
attributable to our products or services. This could result in a decline in
demand for our products and services, which would have a material adverse effect
on our business and operating results.
COMPETITION FROM COMPANIES WITH ALREADY ESTABLISHED MARKETING LINKS TO OUR
POTENTIAL CUSTOMERS MAY ADVERSELY EFFECT OUR ABILITY TO MARKET OUR PRODUCTS.
Current and potential competitors have longer operating histories, larger
customer bases, greater brand name recognition and significantly greater
financial, marketing and other resources than we have. Certain of our
competitors may be able to secure product from vendors on more favorable terms,
devote greater resources to marketing and promotional campaigns, and adopt more
aggressive pricing or inventory availability policies, than we will. There can
be no assurance that we will be able to compete successfully against current and
future competitors, and competitive pressures faced by us are likely to have a
materially adverse affect on our business, results of operations, financial
condition and prospects.
THE FOLLOWING RISKS RELATE PRINCIPALLY TO OUR COMMON STOCK AND ITS MARKET VALUE:
THERE IS A LIMITED MARKET FOR OUR COMMON STOCK.
Our common stock is quoted on the OTC Bulletin Board under the symbol
"HFSC.OB." There is a limited trading market for our common stock. Accordingly,
there can be no assurance as to the liquidity of any markets that may develop
for our common stock, the ability of holders of our common stock to sell our
common stock, or the prices at which holders may be able to sell our common
stock.
OUR STOCK PRICE MAY BE VOLATILE.
The market price of our common stock is likely to be highly volatile and
could fluctuate widely in price in response to various factors, many of which
are beyond our control, including:
o technological innovations or new products and services by us or our
competitors;
o intellectual property disputes;
o additions or departures of key personnel;
o sales of our common stock
o our ability to integrate operations, technology, products and
services;
o our ability to execute our business plan;
4
o operating results below expectations;
o loss of any strategic relationship;
o industry developments;
o economic and other external factors; and
o period-to-period fluctuations in our financial results.
Because we are a development stage company with no revenues to date, you
may consider any one of these factors to be material. Our stock price may
fluctuate widely as a result of any of the above.
In addition, the securities markets have from time to time experienced
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies. These market fluctuations may also
materially and adversely affect the market price of our common stock.
WE HAVE NOT PAID DIVIDENDS IN THE PAST AND DO NOT EXPECT TO PAY DIVIDENDS IN THE
FUTURE. ANY RETURN ON INVESTMENT MAY BE LIMITED TO THE VALUE OF OUR COMMON
STOCK.
We have never paid cash dividends on our common stock and do not
anticipate paying cash dividends in the foreseeable future. The payment of
dividends on our common stock will depend on earnings, financial condition and
other business and economic factors affecting it at such time as the board of
directors may consider relevant. If we do not pay dividends, our common stock
may be less valuable because a return on your investment will only occur if its
stock price appreciates.
OUR COMMON STOCK MAY BE DEEMED PENNY STOCK WITH A LIMITED TRADING MARKET.
Our common stock is currently listed for trading on the OTC Bulletin Board
which is generally considered to be a less efficient market than markets such as
NASDAQ or other national exchanges, and which may cause difficulty in conducting
trades and difficulty in obtaining future financing. Further, our securities are
subject to the "penny stock rules" adopted pursuant to Section 15 (g) of the
Securities Exchange Act of 1934, as amended, or Exchange Act. The penny stock
rules apply to non-NASDAQ companies whose common stock trades at less than $5.00
per share or which have tangible net worth of less than $5,000,000 ($2,000,000
if the company has been operating for three or more years). Such rules require,
among other things, that brokers who trade "penny stock" to persons other than
"established customers" complete certain documentation, make suitability
inquiries of investors and provide investors with certain information concerning
trading in the security, including a risk disclosure document and quote
information under certain circumstances. Many brokers have decided not to trade
"penny stock" because of the requirements of the penny stock rules and, as a
result, the number of broker-dealers willing to act as market makers in such
securities is limited. In the event that we remain subject to the "penny stock
rules" for any significant period, there may develop an adverse impact on the
market, if any, for our securities. Because our securities are subject to the
"penny stock rules," investors will find it more difficult to dispose of our
securities. Further, for companies whose securities are traded in the OTC
Bulletin Board, it is more difficult: (i) to obtain accurate quotations, (ii) to
obtain coverage for significant news events because major wire services, such as
the Dow Jones News Service, generally do not publish press releases about such
companies, and (iii) to obtain needed capital.
A SALE OF A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK MAY CAUSE THE PRICE
OF OUR COMMON STOCK TO DECLINE.
If our stockholders sell substantial amounts of our common stock in the
public market, including shares issued upon the exercise of outstanding options
or warrants, the market price of our common stock could fall. These sales also
may make it more difficult for us to sell equity or equity-related securities in
the future at a time and price that we deem reasonable or appropriate.
Approximately 9,000,000 million shares of our restricted common stock is
eligible for sale pursuant to Rule 144. In addition, the 5,972,821 shares of
common stock to be registered under this registration statement will be freely
tradeable upon effectiveness of this registration statement.
FORWARD-LOOKING STATEMENTS
Statements contained in this prospectus include "forward-looking
statements", which involve known and unknown risks, uncertainties and other
factors which could cause actual financial or operating results, performances or
achievements expressed or implied by such forward-looking statements not to
occur or be realized. These forward-looking statements generally are based on
our best estimates of future results, performances or achievements, based upon
current conditions and assumptions. Forward-looking statements may be identified
by the use of forward-looking terminology such as "may," "can," "could,"
"project," "expect," "believe," "plan," "predict," "estimate," "anticipate,"
"intend," "continue," "potential," "would," "should," "aim," "opportunity" or
similar terms, variations of those terms or the negative of those terms or other
variations of those terms or comparable words or expressions.
5
USE OF PROCEEDS
We will not receive any proceeds from the sale of the common stock.
However, we will receive the exercise price of any common stock we sell to the
selling stockholders upon exercise of the warrants. We expect to use the
proceeds received from the exercise of their warrants, if any, for general
working capital purposes.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with our condensed
consolidated financial statements and notes to those statements. In addition to
historical information, the following discussion and other parts of this
quarterly report contain forward-looking information that involves risks and
uncertainties.
OVERVIEW
We were incorporated in the State of Georgia in 1996 to manufacture and
market retrofit systems for the conversion of gasoline and diesel engines,
stationary or vehicular, to non-petroleum based fuels such as compressed natural
gas and liquefied natural gas. We hold a world-wide exclusive license to
commercialize the technology embodied in five issued and one pending US patent.
Since 1998, we have dedicated our research and development exclusively to
conversion kits for diesel-powered engines. We currently offer the Fuel 2(TM)
dual-fuel conversion system designed to convert medium and heavy duty mobile
diesel engines to operate in a natural gas/diesel dual-fuel mode.
Since 1996, we have sought to commercialize our dual-fuel technology with
limited success. Between 2001 and the year ended December 31 2003, we
experienced a substantial slow-down in our operations due principally to under
capitalization. We engaged White Knight on December 23, 2003 as a crisis finance
and management company. Since that date, the principals of White Knight have
arranged for all our financing and our Chief Executive Officer, Chairman of our
Board of Directors and a Director serve similar capacities with White Knight.
White Knight's executives also served as our interim Chief Financial Officer and
financial administrator.
The following compares our financial statements for the years ended
December 31, 2003 and 2004. During the year ended December 31, 2004, we
reengineered our principal product and addressed a number of legal and financial
matters which had been created over a period from our inception in 1996 through
December 2003. Therefore, the following may not be indicative of our future
operating results.
RESULTS OF OPERATIONS
COMPARISON OF FISCAL YEAR ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2004
Revenues. Revenues decreased approximately 40% to $138,724 for the year
ended December 31, 2004, from $231,269 for the year ended December 31, 2003.
During 2004, we dedicated our resources to reengineering the technology and to
pursuing the EPA/CARB technology verification described elsewhere in this
report.
Gross Profit. Gross profit decreased approximately 49% to $79,336 for the
year ended December 31, 2004 as compared to gross profit of $155,354 for the
year ended December 31, 2003.
Expenses. Total expenses for the year ended December 31, 2004 increased to
$2,113,045 from $515,689 for the year ended December 31, 2003. Total expenses
for the year ended December 31, 2004, less a one-time charge of $1,200,000 for
the issuance of stock were $913,045. Our net loss increased from $413,820 at
year ended December 31, 2003 to $2,012,473 for the year ended December 31, 2004.
However, excluding the one-time charge for the issuance of stock, for the year
ended December 31, 2004, our net loss increased to $812,473.
The increase in expenses for the year ended December 31, 2004, resulted
from an increase in our consulting fees paid from $203,859 for the year ended
December 31, 2003 to $410,183 for the year ended December 31, 2004 and also an
increase in our research and development costs from $0 for the year ended
December 31, 2003 to $130,814 for the year ended December 31, 2004. The majority
of the research and development costs were incurred in connection with our
EPA/CARB verification application. Compensation during this period increased
from $110,013 at year ended December 31, 2003 to $1,415,576 at year ended
December 31, 2004. However, approximately $1,200,000 or 84.7% of the
compensation expenses were one-time issuances of stock to our employees and
consultants. The cash compensation was approximately $216,000.
Basic and diluted loss per share increased from $(0.03) at the year ended
December 31, 2003 to $(0.08). Taking into account the one-time charge for the
issuance of stock, during the 12 month period ended December 31, 2004, the basic
and diluted loss per share would have been approximately $(0.03) which is the
same basic and diluted loss per share posted at the year ended December 31,
2003.
In summary, during the twelve month period ended December 31, 2004, our
revenues and gross profit decreased by 40% and 49% respectively and expenses
including the one-time charge for the issuance of stock increased 309.8%,
research and development increased by 100% and compensation increased by
1,186.7% and the basic and diluted loss per share increased by 166.5%. Excluding
the one time charge for the issuance of common stock, total expenses increased
by 77%, compensation increased by 96.3% and there was approximately no change to
our loss per common share for the periods ended December 31, 2003 compared to
the same period ended December 31, 2004.
7
Liquidity and Capital Resources
Since December 2003, White Knight SST has provided for all our capital
needs in exchange for shares of our Common Stock. We believe during the fourth
quarter 2005 we will derive sufficient revenue to meet our obligations. This
registration statement relates to our recent financing which provided us
approximately $513,000 on April 1, 2005 and we anticipate receiving a net of
approximately $540,000 following the effective date of this registration. We
estimate that of the approximate $1,053,000 dollars received through the
financing, we will allocate approximately 40% to capital expenses and 60% to
general working capital. Based on our current rate of operations, we believe
this financing will provide for our needs through the end of calendar 2005. If
we are unsuccessful in generating sufficient revenues to meet our needs by the
fourth quarter, we may be required to raise additional financing through the
sale of our common stock, debt or convertible debt.
On April 1, 2005 we received $600,000 minus fees and expenses and we
anticipate receiving $600,000 following the effective date of this registration
statement in exchange for Secured Convertible Notes and Class A Common Stock
Purchase Warrants. The terms and conditions of our financing are embodied in the
Subscription Agreement; the Note, Warrant and a Collateral Agent Agreement
(collectively the "Financing Agreements"). The following summarizes the
Financing Agreements which are available in their entirety as Exhibits to a Form
8-K filing filed on April 4, 2005.
In addition, during the first quarter 2005, we arranged for the purchase
of various Horiba emission testing equipment for $40,000. In addition, we
acquired a new Taylor dynometer at a cost of approximately $232,000. We intend
to locate the equipment in our new 12,000 square-foot facility in PeachTree
City, Georgia.
During the year ended December 31, 2004, we reduced our convertible debt
in default by 72.4% from $283,200 at year ended December 31, 2003 to $78,200 at
year ended December 31, 2004. In addition, during the year ended 2004, we repaid
amounts owed to the Internal Revenue Service since 1999. In addition, we reduced
our sales and payroll taxes payable by $115,151 or 47% from $245,245 at year
ended December 31, 2003 to $130,094 at the year ended December 31, 2004.
Since the year ended December 31, 2004, we have reached a settlement with
the item listed as accounts payable in settlement which relates to debts
incurred during 2001 and 2002 and we have negotiated a settlement with PeachTree
National Bank which is listed as debt in default. We anticipate both these items
will be liquidated by the year ended December 31, 2005.
8
BUSINESS
We were incorporated in the State of Georgia in 1996 to manufacture and
market retrofit systems for the conversion of gasoline and diesel engines,
stationary or vehicular, to non-petroleum based fuels such as compressed natural
gas and liquefied natural gas. We hold a world-wide exclusive license to
commercialize the technology embodied in five issued and one pending US patent.
Since 1998, we have dedicated our research and development exclusively to
conversion systems for diesel-powered engines. We currently offer the Fuel 2(TM)
dual-fuel conversion system designed to convert medium and heavy duty mobile
diesel engines to operate in a natural gas/diesel dual-fuel mode.
During the first quarter 2005 we completed the acquisition of various
Horiba emission testing equipment so that we could accelerate our internal
research and development and offer emission testing services for other
companies. During the first quarter 2005 we expanded the number of parts and
components we offer for resale.
Research and Development
Our licensed technology was introduced into the marketplace throughout the
1980's and 1990's through the conversion of gasoline and diesel engines to
operate in a dual fuel mode. During this period, commercial versions of the fuel
delivery system were developed to fit many older, naturally aspirated, diesel
engine types and placed conversion units into engines all around the world. The
experiences gained during this period, including conversions on a wide array of
engines operating under different conditions with varying fuel requirements,
contributed significantly to the subsequent four patents and our first market
application referred to as the Fuel2(TM) conversion system.
During the first six months of 2004, we rededicated our development
efforts and re-engineered our primary system designed to convert medium and
heavy duty diesel engines to operate in a dual-fuel, natural gas and diesel mode
for the electronic version of our Fuel2 system. We refer to the commercial
version of our dual-fuel system as the Fuel2(TM) system.
Our Technology License
All of the technology, know-how, devices and apparatus embodied in the
patents and incorporated into the various products sold by us were developed and
patented by Frank Davis or Frank Davis and Robby E. Davis. Previously we
licensed the worldwide rights to commercialize the dual-fuel technology from a
Trust established for the Davis family. In the course of reorganizing our
enterprise, we have negotiated a new license agreement with Electronic Control
Units, LLP, which we refer to as Electronic Control, to embody all of our
technology and know how into one comprehensive, world-wide exclusive agreement.
We executed our license agreement with Electronic Control on August 31, 2004.
Electronic Control is owned by Frank Davis the technology inventor and holder of
the patents.
Under the terms of our license agreement with Electronic Control, we have
the worldwide exclusive right to use, manufacture, lease and/or sell products
and/or systems embodying the following patents and related technical know-how:
1. U.S. Patent Serial No. 5,083,547, dated January 28, 1992 for a
natural gas and air mixing device;
2. U.S. Patent Serial No. 5,408,978, dated April 25, 1995, for a
natural gas and air mixing device;
3. U.S. Patent Serial No. 5,370,097, dated December 6, 1994, for a dual
fuel control system which controls the flow of liquid fuel alone or
in combination with a gaseous fuel;
4. U.S. Patent Serial No. 5,103,795, dated April 14, 1992 for a natural
gas and air mixing device;
5. U.S. Patent Serial No. 4,479,466, dated October 30, 1984 for a
natural gas and air mixing device; and
6. U.S. Non-Provisional Application No. 10/668,589, methods and
apparatus for operation of multiple fuel engines, filed September
23, 2003.
Our license agreement with Electronic Control will expire upon the later
of (i) the expiration of the last-expiring patent covered, including any
extensions, or (ii) August 31, 2014. In exchange for the worldwide exclusive
license rights described above, we are required to make a one-time license
acquisition payment of $250,000 which is due and payable on the earlier to occur
of: (i) August 31, 2005, (ii) our closing on an equity or debt financing, or a
combination thereof, in which we receive gross aggregate proceeds in an amount
no less than USD$1 million, or (iii) the sale of the 100th unit.
9
In addition to the one-time fee, we are required to pay $250.00 per unit
sold (we estimate at this time our units will range in price from $3,500 to
$4,500 each) with a minimum royalty of $250.00 and maximum royalty of $1,000 for
each unit. We are further obligated to pay a royalty rate of 3.5% for any items
which are not included in the per system royalty calculation, such as spare
parts and consulting services. Under the terms of the license agreement, we are
obligated to sell a minimum of 750 units during 2005 and 2,500 units during 2006
and for each subsequent year during the term of the license.
Electronic Control shall have the right to immediately terminate the
license agreement by giving written notice to us in the event we:
1. are adjudicated bankrupt or insolvent, enters into a composition
with creditors, makes an assignment of all or substantially all of
its assets for the benefit of its creditors, or if a receiver is
appointed for its assets;
2. fail to produce, manufacture, sell, market, or distribute or cause
to be produced, manufactured, sold, marketed, or distributed the
Units;
3. or our affiliates, agents, distributors or sublicensees is in
material breach or default of any provision of the Proposed License
Agreement which default or breach is not cured within the applicable
time period;
4. fail to pay the royalty when and as it becomes due and payable;
5. or our affiliates, agents, distributors or sublicensees pledge,
lien, mortgage, secure or otherwise encumber the Licensed Patents in
any manner, whether arising by contract, as a matter of law, by
judicial process or otherwise;
6. experiences a material adverse effect in the financial condition,
operations, assets, business, properties or prospects of the
Company. " Material adverse effect." means any event, change,
violation, inaccuracy, circumstance or effect that is or is
reasonably likely to be, individually or in the aggregate,
materially adverse to the condition (financial or otherwise),
capitalization, operations or business of the Company;
7. fail to maintain our status as a public company.
Our Chief Technology Consulting Agreement
In order to provide us with continued access to the technology inventor
Mr. Frank Davis, we have entered a consulting agreement with Electronic
Controls. Under the terms of the consulting agreement, we are to compensate
Electronic Fuel Technology LLC $7,000 per month until we complete our current
verification after which our payments will increase to $12,000 per month. We
opted to increase the monthly payment from $7,000 to $12,000 effective January
1, 2005. Under the terms of the consulting agreement we are also required to
provide health insurance to Mr. Frank Davis and his wife, effective January 1,
2005. In exchange for such payments, we receive, among other services, the
following consulting services:
1. general advice, guidance and counsel to, and consultation with, our
senior management with respect to all aspects of our business,
including with respect to operating, financial and organizational
matters; manufacturing, marketing, planning and other activities;
and
2. technical assistance with respect to inventions, patents, patent
applications, and other intellectual property rights and interests;
and
3. maintain a regular, ongoing and routine physical presence at our
Atlanta area research, development, and distribution center.
Our Product
We are currently engaged in commercializing the Fuel 2(TM) system that
allows a medium or heavy duty diesel engine to operate in a dual-fuel,
diesel/natural gas mode. There are three main components to our Fuel 2(TM)
system:
(i) the Electronic Control Unit or ECU,
(ii) the gas air mixing device and
(iii) the measuring, monitoring and reporting devices.
Our system can typically be installed in a day by two qualified
technicians. In addition to the installation of our system, our customers must
also mount fuel storage tanks and linkage. Typically, it takes approximately one
day to install fuel storage tanks and linkage.
10
The conversion of a vehicle to a dual fuel mode requires our Fuel 2(TM)
system together with a catalytic converter, fuel storage tanks and linkage. The
catalytic converter must be purchased from an approved vendor. The fuel storage
tanks and linkage can be purchased by our customers on the open market. We do
not provide the catalytic converter or fuel storage tanks.
Product/technology development
Prior to December 2003, we had been unable to conduct any meaningful
product development due to lack of capital. As a result, since inception in
1996, we have been unsuccessful in any meaningful sales of its technology.
Between January and June 2004, we spent six months re-engineering the electronic
version of our Fuel2 system. As discussed elsewhere in this report, during June
2004, we commenced the independent testing required in order for our Fuel2
system to receive EPA/CARB verification.
Sales and Marketing
Facilities
Prior to December 2003, we shared our office and work space with the
technology inventor. This facility had no meaningful testing or research and
development equipment. The research and development we conducted during the
first six months of 2004 required us to make use of our licensee's facility in
Texas.
During December 2004, we negotiated a lease for a 12,000 square foot
facility in PeachTree City, Georgia. During the first quarter 2005, we acquired
a variety of Horiba emission testing equipment. Further during 2005, we acquired
a Taylor dynamemter designed to handle heavier vehicles. Our new facility, when
fully installed and calibrated, will have two engines rooms and a
state-of-the-art emission testing lab. We believe this asset will allow us to
substantially accelerate the development of future products as well as permit us
to offer the greatest degree of efficiency for our customers.
We have no off-balance sheet items connected with our Company or our
operations.
Certain expectations for 2005
We believe our dual-fuel technology has immediate market potential outside
of the United States with particular emphasis on areas with a significant
differential between the cost of diesel and natural gas. We will continue our
primary objective to complete the EPA/CARB verification.
The Company is also pursuing the use of its technology with stationary
diesel engines and on new vehicles manufactured after 2004. We are also
exploring the use of our technology in bio-diesel and synthetic field
applications.
Technology Verification
Our Fuel 2(TM) system is designed to operate with medium or heavy duty
diesel engines in a dual-fuel, diesel/natural gas mode. Vehicle emissions are
regulated by federal and state agencies with respect to the output of certain
atmospheric pollutants. A technology which impacts vehicle emissions, such as
our Fuel 2(TM) system, must be independently evaluated followed by formal
recognition that the use of our technology is not likely to cause a vehicle to
operate in violation of emission limitations. Federal and State agencies have
developed a series of programs designed to verify the emission output of a
particular technology. Without such verification, we will not be unable to sell
our Fuel 2(TM) system within the United States.
The EPA and California Air Resource Board (CARB) have both signed a
"memorandum of agreement" to establish reciprocity and coordination of their
efforts to evaluate and verify emission reduction technologies and products.
Under the agreement CARB conducts the verification of technologies such as our
Fuel2(TM) system under a program titled "Diesel Emission Control Strategies
Verification" which involves different paths depending on the type of emission
reduction technology.
Essentially, the protocol to receive verification includes:
o Step 1: three hot starts and three cold starts conducted in a
controlled environment at a certified independent lab and those
results are submitted to the CARB together with a proposed protocol
to conduct a 1,000 hour durability test;
o Step 2: a 1,000 hour durability test is required together with 200
hours of field operation;
o Step 3: upon completion of the durability cycle, a second series of
three hot starts and three cold start emission tests are conducted
by the certified lab.
11
If the emission report provided in step 3 demonstrates reductions in NOx
and PM in keeping with published goals, the technology will become verified. To
receive a verification of our technology as an emission control device, we must
demonstrate the ability to reduce nitrogen oxides or NOx by at least 15% and
particulates or PM by at least 50%.
Our Fuel2(TM) system Verification
We are pursuing sales of our Fuel 2(TM) system in the United States as
well as certain foreign markets. During the fourth quarter, 2004, we actively
began the verification process for our Fuel 2(TM) technology. During October, we
received our first round of emission measurements. We repeated the first portion
of the testing protocol in order to achieve at least a 25% reduction in NOx. A
25% reduction in NOx would make us eligible for various federal and state
grants. We have not yet been successful in achieving a 25% reduction in NOx. The
following table details the results of our three official test results relating
to the first component of the protocol detailed above:
---------------------------------------------------------------------- -------------------------
NOx PM
---------------------------------------------------------------------- -------------------------
Required minimum emission reductions for verification 15% 50%
---------------------------------------------------------------------- -------------------------
Hybrid's Fuel2 October 2004 results 19.3% 73%
---------------------------------------------------------------------- -------------------------
Hybrid's Fuel2 January 2005 results 22.9% 78.9%
---------------------------------------------------------------------- -------------------------
Hybrid's Fuel2 February 2005 results 17.9% 56.5%
---------------------------------------------------------------------- -------------------------
We will continue to report on our progress for this essential component to
our business as soon as results are available.
Our Emissions Lab
Among the equipment we've acquired and located in our Atlanta, Georgia
facility include:
7 Rack Horiba Gas Analyzers
2 Rack Horiba Constant Volume Samplers
1 Horiba Air Sampler
2 Horiba Air Sampler Hang Racks
1 Horiba 48" Chassis Dyno w/controller & Power Rack
1 Horiba CDC 900 Dyno Controller
1 Horiba Power Converter 2 Horiba Rack NOx Analyzers
1 Horiba Exhaust Analyzer
1 Varian Star Gas Analyzer
1 Zeo Air Supply
1 Zeo Air Generator
1 Horiba Infrared Gas Analyzer
2 Clayton Dynamometers
In addition, we have also purchased a Taylor 535 horsepower dynometer to
address heavy-duty vehicles. Once the above listed equipment is installed,
upgraded and calibrated, we can offer services as an independent emissions lab.
We estimate our emission lab will be ready to offer services as an
emission testing facility after August 1, 2005.
The Fuel 2(TM) Marketplace
The universe for our Fuel 2(TM) conversion system encompasses all medium
and heavy duty diesel powered trucks and buses. The number of vehicles which are
eligible for our technology represent an estimated 3% or 3,660,000 units of the
total population of medium and heavy duty trucks and buses operating within the
United States.
According to the United States Department of Transportation, Federal
Highway Administration (FHA) and the 2000 US Census there are a total of
83,800,000 trucks and buses in the United States. The FHA further defines this
segment to consist of 92% "light trucks" (74,000,000); 8% "medium trucks and
buses" (4,400,000), and; 2% "heavy trucks and buses" (1,700,000). The vehicle
manufacturers truck classifications defines light trucks" as those with a weight
of 0 - 14,000 lbs; "medium trucks and buses" as those with a weight of 14,001 -
33,000, and; "heavy trucks and buses" as those with a weight of 33,001 and
higher.
The population of vehicles available for our Fuel 2(TM) technology based
on size consists of approximately 6,100,000 units or 8% of the total population
of trucks and buses. We have no reliable data which provides an estimate about
what percent of the 6,100,000 units are diesel or which operate on a host of
12
other fuels such as gasoline, dedicated natural gas and hybrid vehicles.
However, our experiences indicate that more than 60% or 6 out of ten medium and
heavy duty trucks and buses are dedicated diesel vehicles and therefore,
immediately eligible for our technology.
As a result of the foregoing factors, we estimate the number of trucks and
buses operating within the United State which are immediately eligible to
benefit from our Fuel 2(TM) technology are approximately 3,660,000 or 3% of the
total US truck and bus population.
Our Marketing Strategy
We offer our Fuel 2(TM) system to parties interested in lowering their
transportation costs through the use of fuels that are less costly than diesel
or to achieve a certain reduction in emission pollutants or both. We believe our
Fuel 2(TM) system differentiates from competitive technologies in respect to
price, universal applications, ease of installation and fuel displacement.
Successful verification of our Fuel 2(TM) system as an Emission Control Device
would enhance our competitive position.
We are currently engaged in introducing our Fuel 2(TM) to the marketplace
through a strategy that:
o Positions our Fuel 2(TM) system as means to take advantage of lower
priced natural gas verse diesel as a fuel source. The US Department
of Energy publishes a report approximately every six months titled
Alternative Fuel Price Report. The first report was published during
the year 2000. To date, there have been 13 issues of the Alternative
Fuels Price Report issued approximately every six months except
during 2002 when four reports were issued. According to the report,
the average price of a gallon of diesel over a five year period was
$1.52. The average cost of an equivalent gallon of Compressed
Natural Gas or CNG during the same five year period is $1.18.
Consumers utilizing CNG during this five year period could reduce
their fuel costs by an annual average of 22%. We believe this
annualized savings can offset the purchase price of conversion. The
ability to recoup investment through fuel savings would be primarily
a function of mileage.
o Market our Fuel 2(TM) system as an Emission Control Device. As
discussed elsewhere in this report under the heading Our
Verification Progress, the use of our Fuel 2(TM) system together
with a specialized catalytic converter has been demonstrated to
lower the emissions an average of NOx by 20.03% and PM by 69.46%.
o Our Fuel 2(TM) system at a price point substantially less than the
cost of alternative dedicated-engine dual-fuel technologies. The
added cost to acquire a new natural gas powered medium and heavy
duty engine instead of a conventional diesel engine is approximately
$20,000 to $30,000. The cost to convert an existing diesel engine to
operate in a dual-fuel mode is approximately $40,000. The retail
cost of our Fuel 2(TM) system is $4,500. In the case of all three
approaches, the user would also have to purchase fuel storage tanks
and a catalytic converter at a cost of approximately $5,000 per
vehicle. We believe this system price differential is a significant
competitive factor.
o Position our Fuel 2(TM) system as an economic and efficient
improvement over diesel catalysts and emission traps. As discussed
elsewhere in this report under the head Competition, as an Emission
Control Device, our Fuel 2(TM) system is a superior means of
reducing harmful atmospheric pollutants over Diesel Oxidation
Catalysts and Diesel Particulate Filters.
To aid in the market introduction of our Fuel 2(TM) system, we have
adopted a marketing program including:
o Our Vice President, Sales and Marketing makes direct contact with
prospective customers in the private sector worldwide;
o We have a license agreement with BAF Technologies to facilitate the
sale of our Fuel 2(TM) system to various municipalities and
governmental entities in the States of New York and Texas;
o We have a license agreement with DRV Energy to facilitate the sale
of our Fuel 2(TM) system throughout the mid-United States
marketplace;
o We have a license agreement with Civic Group based in Brazil to
facilitate the sale of our Fuel 2(TM) system throughout South
America.
o We have entered a Memorandum of Understanding with WITCO, Inc. to
commercialize our technology in China and India;
o We have created a program trademarked No School Bus Left Behind
Initiative(TM) which seeks the direct sale of our system to school
systems throughout the continental United States.
13
Competition
We face competition from two different types of competitors. The first,
which we refer to as technology competitors, produce and sell catalysts and
traps, and the second, which we refer to as conversion competitors, that produce
and sell dedicated natural gas engines and technologies to convert existing
diesel engines.
Technology Competitors
Our primary technology competition will come from producers of certain
catalytic converters, emission traps and filters which are referred to as:
Diesel Oxidation Catalysts and Diesel Particulate Filters. We believe our Fuel
2(TM) system is superior to both of these technologies.
Diesel Oxidation Catalysts
Diesel Oxidation Catalysts or DOC's look like an automotive catalytic
converter and they act in a similar manner. A typical DOC has a ceramic
honeycomb cylinder that fits inside a standard-sized truck muffler. The exhaust
passes over the layers of the catalyst bed and comes into contact with a coating
of platinum-based or other catalysts.
DOC's are a proven technology for controlling emissions of carbon
monoxide, volatile hydrocarbons, and other pollutants that are in gaseous or
liquid phases in diesel exhaust. A wide variety of catalytic coatings, sizes and
configurations are available from many manufacturers, each one tailored to
exhaust flows from particular engines and designed to optimize removal of
specific substances. The Fuel2(TM) system uses a DOC to control hydrocarbons and
CO.
DOC's can only remove about 20% of a typical engine's PM emissions. What
is called "Particulate Matter" is actually a complex and changeable mix of solid
carbon particles, sulfate particles and liquids and heavy gases. DOC's can only
act upon the liquids and gases of PM, solids and adsorbed liquids pass over the
catalytic bed unchanged.
Diesel Particulate Filters
Outwardly, Diesel Particulate Filders, or DPF's, resemble DOC's. A typical
trap is a ceramic catalyst coated matrix that fits inside of a standard sized
muffler. The exhaust passes through a bed of ceramic material, or several of
these layers.
The path of the exhaust in a DPF, however, is very different than in a
DOC. The DPF forces the smoke through channels of porous ceramic that are
deliberately dead-ended; the solid soot particles remain behind in the dead end
while the gas is forced through the pores.
If carbon particles continue to accumulate in the traps, the engine
exhaust back pressure becomes excessive causing the engine shut down. To prevent
such clogging, traps are designed to burn away the accumulated carbon and renew
the air flow and cleaning action. This burning away of accumulated carbon is
referred to as a regeneration cycle, which may be either continuous or periodic.
The key to successful trap regeneration is temperature: the hotter, the
better. Traps have a successful history of operation, particularly in Europe, in
engines that operate under high loads and thus have exhaust temperatures
exceeding 300 degrees Celsius, a temperature at which regeneration is continual
and reliable.
School buses, or any engine that operates in stop-start mode, are more
difficult for traps. There have been a series of failed installations of traps
on fleets of school buses, particularly in urban areas where frequent stops and
low speeds prevent the engines from attaining the temperatures required for
successful regeneration. Drivers are alerted to the clogging of the trap by a
backpressure sensor, which eventually shuts the engine down or does not allow it
to start. (DPF systems are typically sold with a backpressure metering device).
Other disadvantages of traps, particularly on school buses, include:
o Traps don't work on older buses. Engines older than 1994, which are
often a large part of a school bus fleet, are not suitable for
traps;
o Traps require the use of ultralow (15 ppm) sulfur diesel fuel, which
will not be generally available until 2006 and will cost 5-10 cents
per gallon more than conventional fuel;
o Trap warranties are voided if engine oil consumption is higher than
specified for a new engine and if suitably high exhaust temperatures
are not maintained; and
o Traps are more expensive, typically $8-10 thousand per vehicle and
they increase fuel consumption by about 2%.
14
Despite the disadvantages, traps are a popular technology even for school
bus operation. More sophisticated school bus fleet operators have learned to
monitor exhaust temperatures for several seasons before purchasing traps for
their fleets. The results of this kind of data logging can show that the
particular fleets are not suitable for traps.
Our emission control technology vs. competitive technologies
As the hazards of diesel particulate matter (PM) emissions are more widely
understood, environmental regulators, interest groups and parents will press to
reduce emissions from the trucks and buses that are now on the road. Newer
vehicles are cleaner, but diesel trucks and buses are typically in use 20 years
or more. Hybrid Fuel Systems allows a conventional truck or bus engine to burn
up to 80% natural gas, an inherently soot-free fuel. Independent tests confirm
that the Hybrid system reduces PM emissions by 60-80%, making the system an
effective particulate control technology.
The following compares the capabilities of the Hybrid Fuel System with
conventional catalyst-based retrofit technologies for reducing diesel PM
emissions: Diesel Oxidation Catalysts (DOC's) and Diesel Particulate Filters
("DPF's" or "traps").
How our technology compares with catalyst technologies:
o Diesel Oxidation Catalysts (DOC's) are reliable and inexpensive, but
can reduce PM by only about 20%;
o Diesel Particulate Filters (DPF's or "traps") are more expensive and
can reduce PM by as much as 90%, but have several disadvantages:
o They may clog with soot if exhaust temperature is not high
enough to burn off the accumulated carbon;
o Urban stop-start driving, typical school bus operation, is
more likely to clog DPF's with soot;
o DPF's are sensitive to contamination; they require ultralow
sulfur diesel fuel and cannot tolerate oil combustion from an
old engine;
o DPF's increase fuel consumption by about 2%.
Our technology, by contrast, reduces PM emissions by avoiding making soot
in the first place.. Moreover, Hybrid technology uses cheaper fuel that offsets
system costs and can be used with older engines throughout their service lives.
Our technology takes a different approach to controlling particulates.
Instead of filtering, trapping, and burning off soot particles, an engine using
the HFS system does not make PM in first place.
Natural gas, the fuel that our technology allows diesel engines to burn,
is inherently cleaner burning because natural gas is composed of smaller simpler
molecules like methane. Methane forms no soot when it burns. Diesel fuel, on the
other hand, is a mixture of different sizes of molecules and some amount of
these will be very large compounds that are closer to what is found in asphalt.
These larger molecules, the aromatic compounds that give diesel fuel its
distinctive smell, are difficult to burn.
Because the low PM emissions originate in the fuel itself, the low-PM
emissions of the Hybrid system are inherently more durable in the real world of
school bus operation.
Other advantages of our fuel system dual fuel technology for PM control
include:
o Fuel Cost Savings, Not Increases - Unlike ultralow sulfur diesel
fuel, natural gas is less expensive, producing an operating cost
savings which pays for the system installation and operation.
o Works With Older Buses - HFS technology may be used for pre-1994 bus
engines, which often make up a large part of the fleet. Although
these older buses often have a long remaining life, they are the
dirtiest engines and pose the greatest health risk.
o Works Consistently - Unlike traps, HFS systems will continue to work
as engines wear and more oil is used. Also, the HFS system does not
compromise the reliability of the transportation service; the system
can be bypassed and the bus operated on diesel mode, instead of
stranding the vehicle.
15
Conversion competitors
There are relatively few alternative systems for converting medium and
heavy-duty diesel engines to natural gas. The competing systems offered by
competitors described below are more expensive than our technology or are
limited in their application to specific engine lines.
o IMPCO Technologies, Inc. IMPCO, which has headquarters in Cerritos,
California, is one of the largest and oldest designers and
manufacturers of hardware for converting internal combustion engines
to natural gas and propane. As of July, 2002, the company had 510
employees, of which 354 were directly involved in the design,
manufacture and sale of conversion technologies.
o IMPCO has developed a system for converting diesel engines to
natural gas which it is marketing, principally in Europe, as "
Eclipse". This system differs from our system in that the internal
components of the engine are extensively modified and conversion
systems are available for relatively few engines. The " Eclipse"
system conversion costs for a typical truck are reported to exceed
$50,000.
o Clean Air Power formerly " Clean Air Partners.", is a San Diego,
California-based joint venture, operating since 1991, which develops
systems which enable diesel engines to use natural gas in a dual
fuel mode. The company has a " dual fuel" system which shares
several features with our technology. The Clean Air Power systems
are marketed and serviced through the distributorships and service
facilities of Caterpillar, Inc.
Like the IMPCO Eclipse technology, the Clean Air Power
system technology has the advantages of a capable corporate
technological development effort and an extensive marketing and
servicing network. However, these systems require extensive internal
engine modifications, are available only for certain Caterpillar
engines series, and are more expensive than most customers can
justify on the basis of immediate fuel savings. We believe the
decision to change the entity name to Clean Air Power in part
reflects a change in emphasis toward stationary engine power
generation systems, where more expensive conversion systems are more
easily justified.
o Westport Innovations Inc. Westport is a publicly traded company
based in Vancouver, British Columbia, which develops natural gas
operating systems for Cummins diesel engines. The company's "
Westport-Cycle." engines are not designed for retrofit markets and
like the IMPCO and Clean Air Power systems, are currently out of the
price range of most prospective customers
o The Innovative Technology Group, Corp. (ITG) located in Fort
Lauderdale Florida offers an open loop conversion system retrofit
for all brands of diesel engines, any size, at any location, without
spark plugs, to fumigation natural gas/diesel dual fuel operation.
Diesel fuel is reduced by as much as 80% to become a pilot ignition
source for low pressure natural gas which enters the engine with
combustion air. Diesel engines can be retrofitted, in the field. If
gas is lost, the engine automatically reverts to full diesel fuel
until gas is restored. ITG does not sell engines but converts
engines sold by others. We are unable to locate any information
relating to the ITG system. However, from a review of ITG's internet
web site, it appears they focus primarily in on the stationary
diesel market.
Manufacturing & Inventory
We currently utilize contract manufacturers for key components of Fuel
2(TM) system and assemble the components in-house. In order to operate converted
vehicles on natural gas, natural gas storage tanks must be installed on the
converted vehicle. We do not include gas storage tanks in our conversion system.
The customer purchases these separately from a number of companies who
manufacture them, or from us at the customer's request.
During December 2004 we leased a 12,000 square foot facility in Atlanta, Georgia
to house our engine room, emission lab, stock room, assembly, quality
inspection/testing, service and installation management. We intend to outsource
the manufacturing of our components and to conduct final assembly and shipping
at our new facility.
Regulatory Environment
Environmental Legislation Effecting the Demand for Natural Gas Vehicles
Within the United States, we must qualify as an Emission Control Device.
In addition to the fact that diesel gas is generally more expensive than
natural gas, one of the primary disadvantage of a diesel engine is that it emits
far more pollutants than its gasoline-fueled counterpart. Diesel exhaust
contains particulate matter, visible as soot that contains unburned and
partially burned fuel. These hydrocarbon emissions are a significant contributor
to air pollution and to human respiratory difficulties. Also of significance is
the fact that diesel fuel combustion produces Nitrogen Oxides (NOx), a toxin
that is harmful to humans and the environment. NOx is a major known contributor
to greenhouse gas formation resulting in global warming.
16
Increasingly, federal, state and local environmental legislation is being
enacted which either require, or provide incentives, for the reduction of
vehicle pollutants. For example, the Federal Clean Air Act was amended in 1990
(the "1990 Amendments") to, among other things, set emissions standards for
stationary and mobile pollutant sources and establish targets, standards and
procedures for reducing human and environmental exposure to a range of
pollutants generated by industry in general and transportation in particular.
Among other mandates, the 1990 Amendments require businesses that maintain
centrally fueled fleets of 10 or more vehicles in certain heavy smog locations
to convert, either through new vehicle purchases or by converting existing
vehicles, a portion of their fleet to clean burning alternative fuels. These
laws specifically include the diesel and natural gas dual fuel system as an
alternative fuel and specify actions that fleet operators must take in order to
comply and timetables for doing so.
Similarly, the Energy Policy Act of 1992 (the "Energy Act") was created to
accelerate the use of alternative fuels in the transportation sector. The Energy
Act mandates the schedule by which Federal, state and municipal vehicle fleets
must incorporate alternative fueled vehicles into their overall vehicle mix.
This has significant ramifications for the military, which operates thousands of
diesel vehicles, and for the state departments of transportation, which operate
tens of thousands of diesel powered dump trucks and related highway service and
repair vehicles, plus the tens of thousands of vehicles operated by the private
contractors who support these agencies.
In addition to the foregoing, a variety of legislative and related incentive
programs relating to alternative fuel vehicle programs have been created,
including:
o Clean Cities Program. Created by the Department of Energy, the Clean
Cities Program coordinates voluntary efforts between locally based
government and industry to accelerate the use of alternative fuels
and expand the alternative fuel vehicle refueling infrastructure.
Grants are available for natural gas fueling stations and vehicle
conversions to natural gas. Typical grants offset the cost of
conversion by as much as 80%.
o Alternative Fuel Vehicle Credits Program. Congress created this
credits program to encourage fleets to increase the number of
alternative fuel vehicles in their fleets early and aggressively.
Credits are allocated to state fleet operators and cover alternative
fuel provider fleet operators when alternative fuel vehicles are
acquired over and above the amount required, or earlier than
expected. Since credits can be traded and sold, fleets have the
flexibility to acquire alternative fuel vehicles on the most
cost-effective schedule.
o State Energy Program. States will promote the conservation of
energy,reduce the rate of growth of energy consumption, and reduce
dependence on imported oil through the development and
implementation of a comprehensive State Energy Program. The State
Energy Program is the result of the consolidation of two Federal
formula-based grant programs - the State Energy Conservation Program
and the Institutional Conservation Program. The State Energy Program
includes provisions for financial assistance for a number of
state-oriented special project activities. These activities
specifically include programs to accelerate the use of alternative
transportation fuels for government vehicles, fleet vehicles, taxis,
mass transit, and individuals' privately owned vehicles.
EPA's Clean School Bus USA, a program designed to reduce both children's
exposure to diesel exhaust and the amount of air pollution created by diesel
school buses.
EMPLOYEES
As of December 31, 2004, the Company had 9 employees and one technical
consultant on a full-time basis, of which 4 were engaged in research and
development and 4 were engaged in administrative, clerical and accounting
functions and 2 were engaged in sales and marketing. We believe that our
relationship with our employees is good and we are not a party to any collective
bargaining agreement.
DESCRIPTION OF PROPERTY
We lease 1,500 square feet of manufacturing/office space from our Senior
Technical Consultant at a rate of $1,500 per month on a month-to-month basis. We
intend to continue this facility through May 2005 afterwhich we will operate our
of our new leased facility in PeachTree City, Georgia.
17
During December 2004 we subleased a 12,000 square foot stand alone
facility in PeachTree City, Georgia at the rate of $5,600 per month. We are
obligated under the terms of the sublease to a two-year period commencing March
1, 2005. We currently maintain our executive offices in Tampa, Florida. Our
executive office space in Tampa, Florida is provided at no charge by our
management company White Knight SST.
LEGAL PROCEEDINGS
On November 14, 2003, Ambac International Corporation filed a lawsuit
seeking $109,915 together with interest at the rate of 15% per annum. The suit
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. We are now scheduled to enter mediation with Ambac during January
2005. As of March 22, 2005, AMBAC has not responded to requests to schedule the
mediation.
To our knowledge, there is no other pending litigation or other proceeding
against us.
18
DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information regarding the Company's executive
officers and directors as of May 6, 2005:
Name Age Positions
John Stanton....... 56 Chairman of the Board of Directors
Mark Clancy........ 49 Director, Chief Executive Officer and Chief
Financial Officer
John Stanton has served as our Chairman of the Board of Directors since December
23, 2003. Mr. Stanton is also the Chief Executive Officer and Chairman of the
Board of Directors of White Knight. From 1987 through the present, Mr. Stanton
has served as the President and Chief Executive Officer of Florida Engineered
Construction Products Corporation. Mr. Stanton has served as Chairman and
President of several public and private companies. Since the early 1990's, Mr.
Stanton has been, and continues to be, involved in turn-around management for
financially distressed companies, providing both management guidance and
financing. Mr. Stanton worked with the international professional services firm
that is now known as Ernst & Young, LLP from 1973 through 1981. Mr. Stanton, a
Vietnam veteran of the United States Army, graduated from the University of
South Florida with a Bachelors Degree in Marketing and Accounting in 1972, and
with an MBA in 1973. Mr. Stanton earned the designation of Certified Public
Accountant in 1974 and was a Sells Award winner in the CPA examination. Mr.
Stanton is a lifetime resident of Tampa, Florida.
Mark Clancy has served as a Director and as our Chief Executive Officer and
Chief Financial Officer since December 23, 2003. Mr. Clancy is also the
President and a Director of White Knight SST, Inc., a publicly-traded company
and the Chief Executive Officer of White Knight Strategies, Inc. Mr. Clancy
founded White Knight Strategies during December 2001 and was acquired by White
Knight SST during December 2003 . Since April 2000, Mr. Clancy has participated
in turn-around management for financially distressed companies. From November
1997 through April 2000, Mr. Clancy was co-founder, Director and Executive Vice
President of publicly-traded EarthFirst Technologies, Inc.. Mr. Clancy has been
an advisor to the Chairman of the Board of EarthFirst since that company's sale
in May 2000. From 1992 through 1997, Mr. Clancy served as the Chief Compliance
Officer for a Largo, Florida based boutique investment banking firm. Mr. Clancy
was honorably discharged after six years of service with the United States
Marine Corps. Mr. Clancy was born in Massachusetts and has resided in Florida
since 1982. Mr. Clancy holds a Bachelors Degree from the University of South
Florida and is a lifetime member of various academic honor societies including
Phi Theta Kappa, Phi Alpha Theta and USF Arts and Sciences Honor Society.
AUDIT COMMITTEE
Our board of directors does not have an audit committee.
CODE OF ETHICS
The Company has adopted a Code of Ethics and has posted our Code of Ethics on
our internet web site at hybridfuelsystems.com. Our Code of Ethics applies to
all our employees and those doing business with our Company and specifically
applies to our Chief Executive Officer, Chief Financial Officer and all persons
serving in similar capacities.
19
EXECUTIVE COMPENSATION
The following summary compensation table sets forth certain information
concerning compensation paid to our Chief Executive Officer and our four most
highly paid executive officers (the "Named Executive Officers") whose total
annual salary and bonus for services rendered in all capacities for the year
ended December 31, 2004 was $100,000 or more.
Summary Compensation Table
Long Term Compensation
Annual Compensation Awards Payouts All Other
Name and Principal Position Year Salary Bonus Other Annual Compensation
($) ($) Compensation
($)
Mark Clancy 2004 0 0 335,000(1) 0 0
Chief Executive Officer, Chief 2003 0 0 0 0 0
Financial Officer
John Stanton 2004 0 0 0 335,000(1) 0 0
Chairman 2003 0 0 0 0 0 0
(1) Messrs. Clancy and Stanton each received a total of 750,000 restricted
common shares as an employee bonus and 5,950,000 restricted common shares
in fulfillment of a two year employment agreements with our Company.
We have not issued any options to our current or former officers or directors.
None of our officers or directors exercised any options during 2004
EMPLOYMENT AGREEMENTS
Effective August 30th, 2004, we entered a 24-month Employment Agreements
with each of Mr. Stanton, our Chairman and Mr. Clancy, our Chief Executive
Officer and Director.
Under the terms of the agreements, the Messrs. Stanton and Clancy are
entitled to compensation at the rate of $25,000 per month, payable exclusively
in restricted common shares. All restricted common shares due under their
respective employment agreements were issued to Messrs. Stanton and Clancy and
shall vest on a quarterly basis in advance of each quarter.
CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
We have never had a disagreement withour accountants on accountring or financial
disclosure.
20
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Our common stock is traded on the OTC Bulletin Board under the symbol
"HYFS." The Company began the public trading of our Common Stock through (i) the
placement of securities exempt from registration pursuant to Rule 504 during
1996 and; (ii) a self-underwritten offering which became effective January 16,
2001. The Company's shares initially traded on the over-the-counter Bulletin
Board (OTCBB) through May 22, 2002 when the stock was delisted for failure to
file periodic Securities and Exchange Commission (SEC) reports. Following the
subsequent filing of our delinquent reports, effective November 30, 2004, our
Common Stock was cleared to trade through the OTC Bulletin Board under the
symbol HYFS.
Set forth below are the range of high and low bid quotations for the
periods indicated. The market quotations reflect interdealer prices, without
retail mark-up, mark-down or commissions and may not necessarily represent
actual transactions.
2003 Bid Ask
--- ---
1st Qtr $0.03 $0.09
2nd Qtr $0.06 $0.09
3rd Qtr $0.05 $0.08
4th Qtr $0.06 $0.08
2004 Bid Ask
--- ---
1st Qtr $0.08 $0.12
2nd Qtr $0.10 $0.14
3rd Qtr $0.10 $0.12
4th Qtr $0.35 $0.51
NUMBER OF STOCKHOLDERS
As of March 22, 2005, there were approximately 246 record owners of our
common stock.
DIVIDEND POLICY
Holders of Common Stock are entitled to receive dividends as may be
declared by our Board of Directors and, in the event of liquidation, to share
pro rata in any distribution of assets after payment of liabilities. The Board
of Directors is not obligated to declare a dividend. Historically, we have not
paid any dividends to the holders of our common stock and we do not expect to
pay any such dividends in the foreseeable future as we expect to retain our
future earnings for use in the operation and expansion of our business.
21
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table indicates beneficial ownership of our common stock as
of May 2, 2005 by:
o Each person or entity known by us to beneficially own more than 5% of the
outstanding shares of our common stock;
o Each of our executive officers and directors; and
o All of our executive officers and directors as a group.
Except as otherwise indicated, the persons named in the table have sole
voting and investment power with respect to all shares beneficially owned,
subject to community property laws, where applicable. Unless other indicated,
the address of each beneficial owner listed below is c/o Hybrid Fuel Systems,
12409 Telecom Drive, Tampa, Florida 33637.
Percentage of Shares
Name of Beneficial Owner Number of Shares Beneficially Owned (1)
------------------------ ---------------- ----------------------
Executive officers and directors:
John Stanton 19,471,948 23.30%
Mark Clancy 11,101,035 13.30%
All Directors and Executive
Officers as a group (2 persons) 30,572,983 36.6%
Other 5% Stockholders:
White Knight SST, Inc.(2) 20,000,000 24.00%
(1) Applicable percentage ownership as of May 2, 2005 is based upon 83,241,230
shares of common stock outstanding. Beneficial ownership is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, as amended.
Under Rule 13d-3, shares issuable within 60 days upon exercise of outstanding
options, warrants, rights or conversion privileges ("Purchase Rights") are
deemed outstanding for the purpose of calculating the number and percentage
owned by the holder of such Purchase Rights, but not deemed outstanding for the
purpose of calculating the percentage owned by any other person. "Beneficial
ownership" under Rule 13d-3 includes all shares over which a person has sole or
shared dispositive or voting power.
(2) Mr. Stanton owns approximately 92% and is the Chairman and Chief Executive
and Mr. Clancy owns approximately 3% and is a Director and President of White
Knight SST, Inc.
22
SELLING SHAREHOLDERS
This prospectus only covers the 5,972,821 shares of common stock issued or
to be issued to the firms who are party to those certain Convertible Secured
Notes and Warrants. The following table lists certain information with respect
to the selling stockholders as follows: (i) each selling stockholder's name,
(ii) the number of outstanding shares of common stock beneficially owned by the
selling stockholders prior to this offering; (iii) the number of shares of
common stock to be beneficially owned by each selling stockholder after the
completion of this offering assuming the sale of all of the shares of the common
stock offered by each selling stockholder; and (iv) if one percent or more, the
percentage of outstanding shares of common stock to be beneficially owned by
each selling stockholder after the completion of this offering assuming the sale
of all of the shares of common stock offered by each selling stockholder. Except
as noted, none of the selling stockholders have had any position, office, or
other material relationship with us or any of our predecessors or affiliates
within the past three years.
The selling stockholders may sell all, or none of their shares in this offering.
See "Plan of Distribution."
Shares Beneficially Owned After
the Offering
Selling Stockholder Shares Beneficially Owned Shares Being Offered Number of Shares Percentage
Prior to Offering
Alpha Capital Aktiengesellschaft 3,443,175 3,443,175 0 *
Whalehaven Capital Fund Ltd. 2,822,727 2,822,727 0 *
Ellis International Ltd. 470,455 470,455 0 *
KMR Capital, a division of
Mid-America Financial 218,276 218,276 0 *
Services
Total 5,972,821 5,972,821 0 *
* less than 1%.
(1) Assumes (i) principal and interest from the initial closing is converted at
the initial fixed conversion rate of $0.55; (ii) that the second closing occurs
following the effective date of this registration, and; (iii) that the principal
and interest from the second closing is converted at the initial fixed
conversion rate of $0.55. Further assumes the annualized interest rate is 8.75%.
Further assumes the Selling Security Holders who participated in our Initial
Closing will participate in equal amounts at our Second Closing.
(2) Assumes all Warrants are redeemed for cash.
(3) 54,545 shares we issued in connection with our Initial Closing and we
anticipate issuing 54,545 as a part of our Second Closing.
(4) 43,636 shares were issued in connection with our Intial Closing and we
anticipate issuing 43,636 as a part of our Second Closing.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following summarizes pertinent agreements relating to our operations
including our agreement with White Knight, our Technology License Agreement and
our Chief Technical Consultant Agreement.
Our Agreement with White Knight SST, Inc. (White Knight)
Since December 2003 we have operated under an Agreement with White Knight
SST, Inc., (White Knight). Under the terms of our Agreement, White Knight was
to: provide up to $250,000 working capital and the President of White Knight was
to serve as our Chief Executive Officer. Further, the President and Chief
Executive Officers of White Knight are to be nominated to fill vacancies on our
Board of Directors until the next annual meeting of shareholders. The Agreement
further required the resignation of certain former Officers and consultants and
adoption of White Knight's proposed operating plan. The Agreement requires that
we issue 5% of our common stock as compensation for White Knight's
participation.
In connection with our Technology License Agreement, our current Chairman
of the Board John Stanton and our Chief Executive Officer Mark Clancy have
agreed to continue in executive roles for a minimum of twenty-four months
following the execution of the License Agreement.
23
DESCRIPTION OF SECURITIES
The following description of our capital stock and provisions of our
articles of incorporation and bylaws, each as amended, is only a summary. You
should also refer to the copies of our articles of incorporation and bylaws
which are included as exhibits to our Registration Statement on Form SB-2 filed
with the SEC on March 23, 2000. Our authorized capital stock consists of
95,000,000 shares of common stock, par value $.001 per share and 5,000,000
shares of preferred stock, par value $.001 per share. As of May 2, 2005, there
are 83,241,230 shares of common stock issued and outstanding and 42,215 shares
of series A preferred stock issued and outstanding and 195,209 shares of series
B preferred stock issued and outstanding.
COMMON STOCK
Holders of our common stock are entitled to one vote for each share held
on all matters submitted to a vote of our stockholders. Holders of our common
stock are entitled to receive dividends ratably, if any, as may be declared by
the board of directors out of legally available funds, subject to any
preferential dividend rights of any outstanding preferred stock. Upon our
liquidation, dissolution or winding up, the holders of our common stock are
entitled to receive ratably our net assets available after the payment of all
debts and other liabilities and subject to the prior rights of any outstanding
preferred stock. Holders of our common stock have no preemptive, subscription,
redemption or conversion rights. The outstanding shares of common stock are
fully paid and nonassessable. The rights, preferences and privileges of holders
of our common stock are subject to, and may be adversely affected by, the rights
of holders of shares of any series of preferred stock which we may designate and
issue in the future without further stockholder approval.
PREFERRED STOCK
Our board of directors is authorized without further stockholder approval,
to issue from time to time up to a total of 5,000,000 shares of preferred stock
in one or more series and to fix or alter the designations, preferences, rights
and any qualifications, limitations or restrictions of the shares of each
series, including the dividend rights, dividend rates, conversion rights, voting
rights, term of redemption, redemption price or prices, liquidation preferences
and the number of shares constituting any series or designations of these series
without further vote or action by the stockholders. The issuance of preferred
stock may have the effect of delaying, deferring or preventing a change in
control of our management without further action by the stockholders and may
adversely affect the voting and other rights of the holders of common stock. The
issuance of preferred stock with voting and conversion rights may adversely
affect the voting power of the holders of common stock, including the loss of
voting control to others.
Effective February 1, 2002, our board of directors designated 999,779
shares of previously undesignated preferred stock as Series A Preferred Stock,
for which 45,215 shares are authorized and Series B Preferred Stock, for which
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. We currently have 42,216 of our
Series A Preferred Stock outstanding.
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. We presently have 195,209 Series B
Preferred Shares issued and outstanding.
24
WARRANTS
Class A Common Stock Purchase Warrant
In connection with our financing, we agreed to issue our Class A Common
Stock Purchase Warrants (the "Warrants")
The Warrants are valid for a period of five years from the date of issue
and shall convert at the lower of $0.81 per share or 101% of the closing bid
price on the date of exercise. For example, if the Warrants were all exercised
at $0.81 we would receive an additional $2.757,021 and we would issue 3,403,732
of our common shares.
If the registration statement underlying the Warrants is effective, the
Warrants may only be exercisable, in whole or in part, for cash.
If the registration statement is not effective when required, the holder
of the Warrant may conduct a cashless exercise wherein if the market value of
one share of our common stock is greater than the Purchase Price, the holder may
elect to receive our Common Stock equal to the value of the Warrant. As an
example, if our common stock is at $1.00 and the Warrant is exercisable at $0.81
per share, the value of the Warrant would be $0.19 for each Warrant.
We may call for the exercise of up to 50% of the shares issuable upon
exercise of the Warrants (the "Call") provided
o we provide written notice during the period in which the Call may be
exercised.
o our registration statement relating to the shares underlying the
Warrants has been effective for at least thirty days;
o within ten days after our common stock has had a closing price equal
to or more than two hundred percent (200%) of the Purchase Price for
thirty (30) consecutive trading days
o we are in good standing with the OTCBB and have been in good
standing for at least 90 days prior to a Call
o we are not subject to any default provision of any of the documents
relating to our financing transaction
We have agreed to compensate the broker in our financing transaction at a
rate equal to 5% of the cash proceeds received through the exercise of our
Warrants.
CONVERTIBLE NOTES
Secured Convertible Note
On April 1, 2004, we issued a series of Notes to the Selling Stockholders.
The Notes bear interest on the outstanding principal at the Federal Prime Rate
plus 3% but no less than 8% based on a 360-day year. The Principal plus interest
shall be repaid on a monthly basis in equal amounts for 20 months commencing 90
days following the Initial Closing which was held on April 1, 2005. If the Notes
are in default, the interest due on the outstanding principal will be increased
by 15%.
Repayment in cash: If we make a payment to the Note Holder in cash, then
we are required to remit 103% of the amount due. If we choose to repay the Notes
in full prior to its maturity date, we are required to remit 120% of the
principal amount plus accrued interest.
Repayment in shares of our common stock: Provided we have an effective
registration underlying sufficient shares of our Common Stock, repayment in
Common Stock is calculated by dividing the amount of a payment by the then
applicable fixed conversion price. The initial fixed conversion price is $0.55
per common share. If we fail to meet the Conversion Criterion described below,
the fixed conversion rate may be adjusted for such repayment date by computing
eighty percent (80%) of the average of the five (5) lowest closing bid prices of
the common stock for the twenty (20) trading days preceding such repayment date.
The conversion rate would thereafter be the lower of the initial or adjusted
fixed conversion rate.
The Note Holder is required to convert a monthly payment plus interest
into shares of our common stock provided we meet the Conversion Criterion.
Conversion Criterion:
o We have an effective registration statement relating to the shares
used as repayment;
o that the average of the five lowest closing bid prices of our Common
Stock for the twenty (20) consecutive trading days immediately
preceding a repayment date shall be greater than or equal to 15%
above the Fixed Conversion Price. The initial fixed conversion price
is $0.55 and therefore, the average five lowest closing bid prices
of our common stock for the 20 consecutive trading days immediately
preceding a repayment date shall be equal to or greater than
$0.6325;
25
o that the common stock to be issued for a particular Repayment Date
would not exceed twenty percent (20%) of the aggregate daily trading
volume for the twenty trading days preceding the Repayment Date
multiplied by the lesser of (A) the closing bid price of the Common
Stock on the trading day preceding the Repayment Date, or (B) the
average volume weighted average price of the Common stock for the
twenty trading days preceding the Repayment Date.
Note Holder(s) Right to Convert
The Note Holder(s) have the right to convert any unpaid principal and
accrued interest into shares of our Common Stock provided the number of shares
of our common stock beneficially owned by such Notes Holder(s) are no greater
4.99% of the outstanding shares of our Common Stock. The Note Holder(s) may
waive this limitation by providing us 61 days prior written notice.
So long as there is an outstanding balance due the Note Holder(s),
o the rights to conversion enumerated above may not be diluted in the
event of a merger or sale of our assets; if we reclassify or
otherwise change our common stock; in the event we declare a stock
split, combination or dividend, and;
o if we sell our securities at a price below the Fixed Conversion
Rate, we must adjust the Fixed Conversion Rate such that it is equal
to the lower price.
Default
The Notes Holder(s) have the option to declare the Note in default making
all sums due thereunder immediately payable without any grace period in the
event we
o fail to make principal and interest payments as required;
o breach any material term or covenant of the Financing Agreements
o make any material misleading representations or warranty
o make an assignment for the benefit of creditors
o are the subject of a money judgment in an amount greater than
$200,000
o default on monetary obligations in aggregate greater than $200,000
for more than 45 days
o are the subject of a voluntary or involuntary bankruptcy filing
which is not dismissed within 45 days
o are delisted from the OTC Bulletin Board or we fail to maintain
OTCBB listing standards for 7 consecutive days
o are the subject of an SEC or judicial stop trade order that lasts
for more than 5 consecutive trading days.
o fail to deliver common stock certificates or replacement Note(s)
within three business days
o fail to have the common shares underlying the Notes registered
o effect a reverse split of our common stock without the written
consent of the Note Holder(s)
We granted registration rights for all the securities underlying the Notes
and Warrants and we agreed to submit such registration within 30 days of the
closing of the sale of the notes and warrants and to take all steps to have the
registration declared effective within 120 days thereafter. We further agreed to
maintain such registration until all the Notes were converted or repaid and all
Warrants issued in connection with the financing were exercised or expired. We
granted a first rights of refusal to the Subscribers for a period of one year
following the effective date of our registration. In this regard, we must
provide the Subscribers seven days advance notice of any sale of our securities
or debt. We agreed to an exclusion period which begins with our Initial Closing
and ends 180 days after our registration is declared effective or until all the
converted shares and warrants shares are sold. During the exclusion period, we
agreed not to enter any agreement nor issue any equity, convertible debt or
other securities without the written consent of the Subscribers.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Continental Stock
Registrar and Transfer, 17 Battery Place, New York, NY 10004.
26
PLAN OF DISTRIBUTION
The selling stockholders, or their pledgees, donees, transferees, or any
of their successors in interest selling shares received from a named selling
stockholder as a gift, partnership distribution or other non-sale-related
transfer after the date of this prospectus (all of whom may be selling
stockholders) may sell the common stock offered by this prospectus from time to
time on any stock exchange or automated interdealer quotation system on which
the common stock is listed or quoted at the time of sale, in the
over-the-counter market, in privately negotiated transactions or otherwise, at
fixed prices that may be changed, at market prices prevailing at the time of
sale, at prices related to prevailing market prices or at prices otherwise
negotiated. The selling stockholders may sell the common stock by one or more of
the following methods, without limitation:
o Block trades in which the broker or dealer so engaged will attempt
to sell the common stock as agent but may position and resell a
portion of the block as principal to facilitate the transaction;
o An exchange distribution in accordance with the rules of any stock
exchange on which the common stock is listed;
o Ordinary brokerage transactions and transactions in which the broker
solicits purchases;
o Privately negotiated transactions;
o In connection with short sales of company shares;
o Through the distribution of common stock by any selling stockholder
to its partners, members or stockholders;
o By pledge to secure debts of other obligations;
o In connection with the writing of non-traded and exchange-traded
call options, in hedge transactions and in settlement of other
transactions in standardized or over-the-counter options;
o Purchases by a broker-dealer as principal and resale by the
broker-dealer for its account; or
o In a combination of any of the above.
These transactions may include crosses, which are transactions in which
the same broker acts as an agent on both sides of the trade. The selling
stockholders may also transfer the common stock by gift. We do not know of any
arrangements by the selling stockholders for the sale of any of the common
stock.
The selling stockholders may engage brokers and dealers, and any brokers
or dealers may arrange for other brokers or dealers to participate in effecting
sales of the common stock. These brokers or dealers may act as principals, or as
an agent of a selling stockholder. Broker-dealers may agree with a selling
stockholder to sell a specified number of the stocks at a stipulated price per
share. If the broker-dealer is unable to sell common stock acting as agent for a
selling stockholder, it may purchase as principal any unsold shares at the
stipulated price. Broker-dealers who acquire common stock as principals may
thereafter resell the shares from time to time in transactions in any stock
exchange or automated interdealer quotation system on which the common stock is
then listed, at prices and on terms then prevailing at the time of sale, at
prices related to the then-current market price or in negotiated transactions.
Broker-dealers may use block transactions and sales to and through
broker-dealers, including transactions of the nature described above. The
selling stockholders may also sell the common stock in accordance with Rule 144
or Rule 144A under the Securities Act, rather than pursuant to this prospectus.
In order to comply with the securities laws of some states, if applicable, the
shares of common stock may be sold in these jurisdictions only through
registered or licensed brokers or dealers.
From time to time, one or more of the selling stockholders may pledge,
hypothecate or grant a security interest in some or all of the shares owned by
them. The pledgees, secured parties or person to whom the shares have been
hypothecated will, upon foreclosure in the event of default, be deemed to be
selling stockholders. The number of a selling stockholder's shares offered under
this prospectus will decrease as and when it takes such actions. The plan of
distribution for that selling stockholder's shares will otherwise remain
unchanged. In addition, a selling stockholder may, from time to time, sell the
shares short, and, in those instances, this prospectus may be delivered in
connection with the short sales and the shares offered under this prospectus may
be used to cover short sales.
To the extent required under the Securities Act, the aggregate amount of
selling stockholders' shares being offered and the terms of the offering, the
names of any agents, brokers, dealers or underwriters, any applicable commission
and other material facts with respect to a particular offer will be set forth in
an accompanying prospectus supplement or a post-effective amendment to the
registration statement of which this prospectus is a part, as appropriate. Any
underwriters, dealers, brokers or agents participating in the distribution of
the common stock may receive compensation in the form of underwriting discounts,
concessions, commissions or fees from a selling stockholder and/or purchasers of
selling stockholders' shares, for whom they may act (which compensation as to a
particular broker-dealer might be less than or in excess of customary
commissions). Neither we nor any selling stockholder can presently estimate the
amount of any such compensation.
27
The selling stockholders and any underwriters, brokers, dealers or agents
that participate in the distribution of the common stock may be deemed to be
"underwriters" within the meaning of the Securities Act, and any discounts,
concessions, commissions or fees received by them and any profit on the resale
of the securities sold by them may be deemed to be underwriting discounts and
commissions. If a selling stockholder is deemed to be an underwriter, the
selling stockholder may be subject to certain statutory liabilities including,
but not limited to Sections 11, 12 and 17 of the Securities Act and Rule 10b-5
under the Exchange Act. Selling stockholders who are deemed underwriters within
the meaning of the Securities Act will be subject to the prospectus delivery
requirements of the Securities Act. The SEC staff is of a view that selling
stockholders who are registered broker-dealers or affiliates of registered
broker-dealers may be underwriters under the Securities Act. We will not pay any
compensation or give any discounts or commissions to any underwriter in
connection with the securities being offered by this prospectus.
A selling stockholder may enter into hedging transactions with
broker-dealers and the broker-dealers may engage in short sales of the common
stock in the course of hedging the positions they assume with that selling
stockholder, including, without limitation, in connection with distributions of
the common stock by those broker-dealers. A selling stockholder may enter into
option or other transactions with broker-dealers, who may then resell or
otherwise transfer their common stock. A selling stockholder may also loan or
pledge the common stock offered hereby to a broker-dealer and the broker-dealer
may sell the common stock offered by this prospectus so loaned or upon a default
may sell or otherwise transfer the pledged common stock offered by this
prospectus.
The selling stockholders and other persons participating in the sale or
distribution of the common stock will be subject to applicable provisions of the
Exchange Act, and the rules and regulations under the Exchange Act, including
Regulation M. This regulation may limit the timing of purchases and sales of any
of the common stock by the selling stockholders and any other person. The
anti-manipulation rules under the Exchange Act may apply to sales of common
stock in the market and to the activities of the selling stockholders and their
affiliates. Regulation M may restrict the ability of any person engaged in the
distribution of the common stock to engage in market-making activities with
respect to the particular common stock being distributed for a period of up to
five business days before the distribution. These restrictions may affect the
marketability of the common stock and the ability of any person or entity to
engage in market-making activities with respect to the common stock.
We cannot assure you that the selling stockholders will sell all or any
portion of the common stock offered by this prospectus. In addition, we cannot
assure you that a selling stockholder will not transfer the shares of our common
stock by other means not described in this prospectus.
LEGAL MATTERS
The validity of the common stock has been passed upon by Sichenzia Ross Friedman
Ference LLP, New York, New York.
EXPERTS
The financial statements as of December 31, 2004 and 2003, included in
this Prospectus have been so included in reliance on the report (which contains
an explanatory paragraph relating to our ability to continue as a going concern
as described in Note 1 to the financial statements) of Brimmer, Burek & Keelan,
LLP., independent accountants, given on the authority of said firm as experts in
auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We filed with the SEC a registration statement on Form SB-2 under the
Securities Act for the common stock to be sold in this offering. This prospectus
does not contain all of the information in the registration statement and the
exhibits and schedules that were filed with the registration statement. For
further information with respect to the common stock and us, we refer you to the
registration statement and the exhibits and schedules that were filed with the
registration statement. Statements made in this prospectus regarding the
contents of any contract, agreement or other document that is filed as an
exhibit to the registration statement are not necessarily complete, and we refer
you to the full text of the contract or other document filed as an exhibit to
the registration statement. A copy of the registration statement and the
exhibits and schedules that were filed with the registration statement may be
inspected without charge at the public reference facilities maintained by the
SEC in Room 1024, 450 Fifth Street, NW, Washington, DC 20549, and at the SEC's
regional offices at 500 West Madison Street, Suite 1400, Chicago, Illinois
60661, Woolworth Building, 233 Broadway New York, New York. Copies of all or any
part of the registration statement may be obtained from the SEC upon payment of
the prescribed fee. Information regarding the operation of the public reference
rooms may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a
web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the SEC. The
address of the site is http://www.sec.gov.
28
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
Our Articles of Incorporation provide that, to the fullest extent
permitted by law, none of our directors or officers shall be personally liable
to us or our shareholders for damages for breach of any duty owed to our
shareholders or us.
In addition, we have the power, by our by-laws or in any resolution of our
stockholders or directors, to undertake to indemnify the officers and directors
of ours against any contingency or peril as may be determined to be in our best
interest and in conjunction therewith, to procure, at our expense, policies of
insurance. At this time, no statute or provision of the by-laws, any contract or
other arrangement provides for insurance or indemnification of any of our
controlling persons, directors or officers that would affect his or her
liability in that capacity.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities, other than the payment by us
of expenses incurred or paid by our directors, officers or controlling persons
in the successful defense of any action, suit or proceedings, is asserted by
such director, officer, or controlling person in connection with any securities
being registered, we will, unless in the opinion of our counsel the matter has
been settled by controlling precedent, submit to court of appropriate
jurisdiction the question whether such indemnification by us is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issues.
29
FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Hybrid Fuel Systems, Inc.
We have audited the accompanying balance sheets of Hybrid Fuel Systems,
Inc. as of December 31, 2004 and 2003 and the related statements of operations,
changes in shareholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
The Company is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hybrid Fuel Systems, Inc.
and as of December 31, 2004 and 2003 and the results of operations and cash
flows for the years ended December 31, 2004 and 2003, in conformity with
accounting principles generally accepted in the United States of America.
/s/ BRIMMER, BUREK & KEELAN LLP
Brimmer, Burek & Keelan LLP
Tampa, Florida
March 24, 2005
1
HYBRID FUEL SYSTEMS, INC.
BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
ASSETS
2004 2003
---- ----
Current assets
Cash $ 2,025 $ 6
Accounts receivable, net of $10,000 and
$0 allowance in 2004 and 2003, respectively 27,005 10,953
Other receivables -- 5,395
Prepaid expenses and deposits 7,845 --
Inventories 36,623 12,584
------ --------
Total Current Assets 73,498 28,938
Property plant & equipment, net 8,507 15,577
Deferred compensation 500,000 --
-------- --------
Total assets $582,005 $ 44,515
======== ========
Please Read Accompanying Notes to Financial Statements
2
HYBRID FUEL SYSTEMS, INC.
BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
LIABILITIES AND SHAREHOLDERS' DEFICIT
2004 2003
----------- -----------
Accounts payable $ 120,980 $ 166,734
Accounts payable in settlement 121,956 121,956
Debt in litigation 109,868 109,868
Due to related parties 7,197 157,528
Due to related parties, convertible debt 18,866 179,746
Debt in default 123,272 123,272
Convertible debt in default 78,200 283,200
Sales and payroll taxes payable 130,094 245,245
Other current liabilities 42,824 68,649
----------- -----------
Total current liabilities 753,257 1,456,198
----------- -----------
Redeemable securities -- 530,000
SHAREHOLDERS' DEFICIT
Shareholders' deficit
Preferred A stock ( .01 par value; 42,215 shares authorized; 422 422
42,215 shares issued and outstanding) (liquidation preference
$ 8,021)
Preferred B stock ( .01 par value; 954,563 shares authorized; 1,952 1,952
195,209 shares issued and outstanding) (liquidation preference
$ 1,002,291)
Common stock ($.001 par value; 95,000,000 shares authorized; 65,510 12,164
65,509,843 and 12,163,646 shares issued and outstanding,
respectively)
Additional paid-in capital 7,582,270 3,852,712
Accumulated deficit (7,821,406) (5,808,933)
----------- -----------
Total shareholders' deficit (171,252) (1,941,683)
----------- -----------
Total liabilities and shareholders' deficit $ 582,005 $ 44,515
=========== ===========
Please Read Accompanying Notes to Financial Statements
3
HYBRID FUEL SYSTEMS, INC.
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
---- ----
REVENUES
Revenue from product sales and related income $ 138,724 $ 231,269
Cost of product sales 59,388 75,915
------------ ------------
Gross profit 79,336 155,354
------------ ------------
EXPENSES
Operating expenses
Consulting fees 410,183 203,859
Research and development 130,814 --
Compensation 1,415,576 110,013
Other operating expenses 156,472 201,817
------------ ------------
Total expenses 2,113,045 515,689
------------ ------------
Loss from operations (2,033,709) (360,335)
Other expenses (income)
Inventory obsolescence 41 11,186
Settlements (17,911) 9,227
Interest expense 8,041 34,448
Other income (11,407) (1,376)
------------ ------------
(Income) loss from other expenses (21,236) 53,485
------------ ------------
Net loss (2,012,473) (413,820)
------------ ------------
Basic and diluted loss per share $ (0.08) $ (0.03)
------------ ------------
Basic and diluted weighted average number of
common shares outstanding 23,857,093 12,054,742
------------ ------------
Please Read Accompanying Notes to Financial Statements
4
HYBRID FUEL SYSTEMS
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
PREFERRED STOCK COMMON STOCK
--------------- ------------
SHARES AMOUNT SHARES AMOUNT PAID-IN
SERIES A SERIES A SERIES B SERIES B SHARES AMOUNT CAPITAL
-------- -------- -------- -------- ------ ------ -------
Balance Dec 31, 2002 45,215 $ 422 195,209 $ 1,952 11,963,646 $ 11,964 $ 3,832,912
Stock issued for 100,000 100 9,900
legal settlement
Issuance of stock
for conversion of note 100,000 100 9,900
Net loss
---------------------------------------------------------------------------------------------------------
Balance Dec 31, 2003 45,215 $ 422 195,209 $ 1,952 12,163,646 $ 12,164 $ 3,852,712
------------ ------------ ------------ ------------ ------------ ------------ ------------
Redemption 530,000
termination
Common Stock Issued:
Debt 3,450,000 3,450 148,681
Compensation 3,983,351 3,983 515,853
Services 150,000 150 17,850
Warrants 1,550,000 1,550 213,900
Cash 300,000 300 49,700
Convertible debt 2,570,000 2,570 221,769
Deferred compensation 11,900,000 11,900 583,100
Management fees 3,004,338 3,004 417,603
Related party debt 26,438,508 26,439 1,031,102
Net loss
---------------------------------------------------------------------------------------------------------
Balance Dec 31, 2004 $ 42,215 $ 422 $ 195,209 $ 1,952 65,509,843 $ 65,510 $ 7,582,270
============ ============ ============ ============ ============ ============ ============
TOTAL
ACCUMULATED SHAREHOLDERS'
DEFICIT DEFICIT
------- -------
Balance Dec 31, 2002 $(5,395,113) $ (1,547,863))
Stock issued for 10,000
legal settlement
Issuance of stock
for conversion of note 10,000
Net loss (413,820) (413,820)
----------------------------
Balance Dec 31, 2003 $(5,808,933) $ (1,941,683)
------------ ------------
Redemption 530,000
termination
Common Stock Issued:
Debt 152,131
Compensation 519,836
Services 18,000
Warrants 215,450
Cash 50,000
Convertible debt 224,339
Deferred compensation 595,000
Management fees 420,607
Related party debt 1,057,541
Net loss (2,012,473) (2,012,473)
----------------------------
Balance Dec 31, 2004 ($ 7,821,406) ($ 171,252)
============ ============
Please Read Accompanying Notes to Financial Statements
5
HYBRID FUEL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,012,473) $ (413,820)
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation 10,271 9,804
Warrants for services and warrant modification 213,900 --
Common stock issued for settlement of debt -- 10,000
Common stock issued for legal services 18,000 --
Common stock issued for compensation 519,836 --
Common stock issued for management fees 420,607 --
Change in operating assets and liabilities
Accounts receivable (16,052) 243
Inventory (24,039) 6,951
Accounts payable (45,753) 24,852
Accrued tax settlement 5,000 --
Accrued expenses (4,848) 29,295
Related party payable -- 106,144
Deferred compensation 100,000 --
Prepaid and deposits 7,845 --
Net cash provided (used) by operating activities (807,706) (226,531)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of leasehold improvements (3,200) --
-------- --------
Net cash provided (used) by investing activities (3,200) --
CASH FLOWS FROM FINANCING ACTIVITIES:
Loans to employees -- (3,756)
Loans from related parties 896,660 179,746
Payments on notes payable -- (49,600)
Payments on settlement (15,006) --
Proceeds from convertible debt -- 100,000
Payments on tax settlement (120,279) --
Proceeds from the sale of common stock 50,000
Proceeds from the exercise of warrants 1,550 --
-------- --------
Net cash provided (used) by financing activities 812,925 226,390
-------- --------
Net decrease in cash and cash equivalents 2,019 (141)
Beginning cash and cash equivalents 6 147
-------- --------
Ending cash and cash equivalents $ 2,025 $ 6
======== ========
Please Read Accompanying Notes to Financial Statements
6
HYBRID FUEL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
(CONTINUED)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
========== ==========
Cash paid during the year for interest $ -- $ 9,517
========== ==========
Non-Cash investing and financing activities:
Common stock issued for settlement of debt $ 152,131 $ 10,000
========== ==========
Common stock issued for conversion of convertible note $ 224,339 $ 10,000
========== ==========
Common stock issued for compensation $ 512,023 $ --
========== ==========
Common stock issued for services $ 18,000 $ --
========== ==========
Common stock issued for warrants exercised and modification $ 215,450 $ --
========== ==========
Common stock issued for deferred compensation liability $ 595,000 $ --
========== ==========
Common stock issued for related party debt $1,057,541 $ --
========== ==========
Common stock issued for management fees $ 420,607 $ --
========== ==========
Please Read Accompanying Notes to Financial Statements
7
HYBRID FUEL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2004
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Hybrid Fuel Systems, Inc. (the " Company.") manufactures retrofit systems
for the conversion of gasoline and diesel engines to non-petroleum based fuels
such as compressed natural gas. The Company manufactures and sells its systems
to customers pursuant to a license agreement originally acquired on June 1, 1996
and again on August 31, 2004 with a related party. The Company has exclusive
world-wide rights to all things which result from five issued and one pending U.
S. Patent.
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.
8
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 at December 31, 2004 and 2003,
as well as the reported amounts of revenues and expenses for the years 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 December 31, 2003 and 2004, no
options had been granted under the plan and therefore no compensation expense
has been recognized.
During October 2004, the Company modified certain outstanding warrant
rights from $.01 per share to $.001 per share and increased those warrants from
1,550 to 1,550,000. Immediately thereafter the holders exercised their warrants.
As a result the Company used the Black Scholes method of valuation of the
modified warrants and expensed the valuation as determined in the amount of
$213,900. The fair value per option (in dollars) was $0.139. The Black Scholes
calculation was based on an expected option term of less than one year,
volatility was 241.28%, risk free interest rate 2.88% and expected dividend
yield of 0.00%
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, 2004 and 2003, the Company did not have any
long-term obligations.
Going Concern: The accompanying financial statements have been prepared assuming
the Company will continue as a going concern for a reasonable period, not to
exceed one year. As reflected in the financial statements, the Company has
negative working capital for the year ended December 31, 2004 and a loss from
operations for the year 2004. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The Company has adequate
financing in place and subsequent to December 31, 2004 has completed significant
trials on its new conversion kits and has received initial potential orders for
sales so as to provide funding for the continued operations of the Company.
9
NOTE 2 OPERATING LEASES
For the year ended December 31, 2004 and the fourth quarter of the year
ended December 31, 2003, the Company subleased its building from a related party
on a month to month basis with the same terms and amounts as the primary lease.
The monthly rental payments were $1,500. Prior to September, 2003, the Company
leased a facility for monthly base rent of $2,351 plus cost of living increases,
property taxes and water fees. This lease was terminated when the Company moved
in September 2003.
In addition, in the year ended December 31, 2003 the Company had a vehicle
lease which expired during the year then ended. The Company also has a lease for
office equipment which is currently on a month to month basis.
Rent expense for the years ended December 31, 2004 and 2003 was $20,124
and $33,507, respectively.
During December 2004, the Company executed a two year lease for a 12,000
square foot facility. The monthly base rental expense is $5,230 and the lease
expires on December 31, 2006. The lease requires comprehensive coverage
insurance with minimum limits of $500,000 per person and $1,000,000 per incident
and property damage limits of $100,000 or the minimum amount of coverages
required in the master lease, whichever is greater. All applicable terms and
conditions of the master lease are incorporated into the sublease.
The following is a schedule by years of the future minimum lease payments
under this operating lease:
December 31,
------------
2005 $ 57,530
2006 62,760
2007 0
2008 0
2009 0
--------
Total minimum lease payments $120,290
NOTE 3 RELATED PARTY TRANSACTIONS
License Agreement
The Company entered into a licensing agreement collectively with Frank
Davis (a significant stockholder and consultant) 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 have since been assigned to
ECT, the owner of which is Patricia Davis. Patricia Davis is the wife of Frank
Davis our Chief Technical Consultant.
In addition, the Company has a consulting agreement with Frank Davis to
probvide 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.
Leases
The Company currently subleases a building from ECT on a month to month
basis on the same terms and amount as the primary lease. The monthly lease
amount is $1,500.
Equity
At the beginning of 2004, the Company issued 3,450,000 shares of common
stock as bonus compensation to various members of the Davis family and to Frank
Davis, all of whom are employees of our Company. During December, 2004, the
Company issued 3,004,338 shares of common stock as payment to White Knight for
fees earned pursuant to the Company's agreement.
The Company issued 11,900,000 shares in advance payment for a consulting
agreement with John Stanton and Mark Clancy at a value of $595,000. A remaining
$5,000 or 100,000 shares is still due on that agreement at December 31, 2004.
The Company issued 26,438,508 shares of common stock in payment of
approximately $1,057,541 of loans made by our Chairman and Chief Executive
Officer through White Knight SST.
10
NOTE 4 PROPERTY, PLANT AND EQUIPMENT, NET
At December 31, 2004 and 2003, property, plant and equipment, net consist of
the following:
2004 2003
---- ----
MACHINERY AND EQUIPMENT $ 63,652 $ 63,651
FURNITURE, FIXTURES AND EQUIPMENT $ 7,461 $ 7,461
VEHICLES $ 41,336 $ 46,336
LEASEHOLD IMPROVEMENTS $ 3,200 $ 5,775
LESS ACCUMULATED DEPRECIATION AND AMORTIZATION $(107,142) $(107,646)
--------- ---------
TOTAL $ 8,507 $ 15,577
--------- ---------
Depreciation expense charged to operations was $10,471 and $9,804 for the
years ended December 31, 2004 and 2003, respectively.
NOTE 5 - INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 2004 and
2003 are as follows:
2004 2003
---- ----
CURRENT INCOME TAX EXPENSE (BENEFIT) $ -- $ --
DEFERRED INCOME TAX EXPENSE (BENEFIT)
NET OPERATING LOSS CARRYFORWARD (746,834) (287,490)
--------- ---------
CHANGE IN VALUATION ALLOWANCE (746,834) (287,490)
--------- ---------
INCOME TAX EXPENSE (BENEFIT) $ -- $ --
--------- ---------
Income taxes for the years ended December 31, 2004 and 2003 differ from
the amounts computed by applying the effective income tax rate of 37% to income
before income taxes as a result of the change in the valuation allowance.
Temporary differences and carryforwards that give rise to deferred tax
assets and liabilities as of December 31, 2004 and 2003 are as follows:
As of December 31, 2004, the Company has a net operating loss carryforward
of approximately $6,658,867 available to offset taxable income through 2025
2004 2003
---- ----
Net operating loss carryforwards $2,463,780 $1,716,946
========== ==========
Valuation allowance $2,463,780 $1,716,946
========== ==========
NOTE 6 DEBT IN DEFAULT
The Company did not meet the payment terms on the note payable to
Peachtree National Bank during the years ended December 31, 2004 and 2003. The
note is secured by the common stock owned by Robby Davis and Ricky Davis, both
employees of the Company. 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 December 31, 2004 or
2003, the full balance of the note has been reclassified as a current liability
for both years.
During March, 2005, the Company negotiated a settlement with PeachTree
National Bank requiring the Company to remit $20,000 upon acceptance of the
transaction, followed by a $30,000 payment followed by a monthly payment plan of
$10,000 until the PeachTree Note is paid in full. The payment of $20,000 was
delivered to PeachTree during March 2005.
11
NOTE 7 COMMITMENTS AND CONTINGENCIES
Operating Leases
Describe new facility lease:
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 December 31, 2004 and 2003
2004 2003
---- ----
Payroll and sales taxes $ 85,588 $162,739
Penalties and interest $ 44,506 $ 82,506
-------- --------
$130,094 $245,245
======== ========
Litigation
The Company is, from time to time, involved in litigation relating to
claims arising out of its operations in the ordinary course of business. The
Company believes that none of the claims that were outstanding as of December
31, 2004 and 2003 should have a material adverse impact on its financial
condition or results of operations.
NOTE 8 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 December 31, 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.
The following table summarizes the Company's warrant activity:
Number of Weighted Average
Warrants Exercise Price
-------- --------------
Balance as of December 31, 2002 1,935,000 0.7
Additions --
Exercised --
Expirations -352,500 -0.94
---------- -----
Balance as of December 31, 2003 1,582,500 $ 0.58
========== =====
Modifications 1,395,000
==========
Exercised 1,550,000
==========
Expired (565,000)
==========
Balance as of December 31, 2004 862,500 $ 0.57
========== =====
12
Warrants Outstanding Warrants Exercisable
-------- ----------- - -------- -----------
Weighted Weighted
Average Average Weighted
Range Number Remaining Exercise Warrants Average
of Exercise Outstanding Contractual Life Price Exercisable at Exercise
Prices 12/31/2004 (years) 12/31/2004 12/31/2004 Price
------ ---------- ------- ---------- ---------- -----
$.50 - $1.00 862,500 0.90 $0.57 862,500 $0.57
NOTE 9 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
45,215 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 10 - CONCENTRATION OF CREDIT RISK
The Company has reduced its sales of conversion units during 2004 and 2003
while it conducted research on the new digital based units. It primarily has
sold a limited number of units through one sales representative. This represents
a concentration of credit risk since most sales are through that one source. If
that source were to be lost, it would have a significant detrimental affect on
the Company. The Company is currently cultivating other markets and
representatives for its old and new products which they anticipate being
successful to mitigate this concentration.
NOTE 11 SUBSEQUENT EVENT
In a special transaction between the Company and Georgia Power and Light
during March 2005, Hybrid acquired certain Horiba emission and vehicle testing
equipment. The Company paid $40,000 in cash for this equipment. The replacement
value of this equipment would be in excess of $2,000,000. The Company also
acquired a Taylor Dynamometer for approximately $213,000.
13
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS
We are organized under the laws of the State of Georgia and are governed
by the Georgia Business Corporation Code, as in effect or hereafter amended
("Corporation Code"). Section 14-2-852 of the Corporation Code requires that we
indemnify a director "who was wholly successful, on the merits or otherwise, in
the defense of any proceeding to which he or she was a party because he or she
was a director of the corporation against reasonable expenses incurred by a
director in connection with the proceeding." Section 14-2-857 of the Corporation
Code requires that a corporation indemnify officers under the same standard.
Section 14-2-851 of the Corporation Code provides that we may indemnify a
director or officer who is a party to a proceeding against liability incurred in
the proceeding if (i) the director or officer conducted himself or herself in
good faith; and (ii) the director or officer reasonably believed: (A) in the
case of conduct in his or her official capacity, that such conduct was in the
best interests of the corporation; (B) in all other cases, that such conduct was
at least not opposed to the best interests of the corporation; and (C) in the
case of any criminal proceeding, that the individual had no reasonable cause to
believe such conduct was unlawful.
In addition, we have the power, in our by-laws or in any resolution of our
stockholders or directors, to undertake to indemnify our officers and directors
of ours against any contingency or peril as may be determined to be in our best
interest and in conjunction therewith, to procure, at our expense, policies of
insurance. At this time, no statute or provision of the by-laws, any contract or
other arrangement provides for insurance or indemnification of any of our
controlling persons, directors or officers that would affect his or her
liability in that capacity.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to our directors, officers, and controlling persons
pursuant to the foregoing provisions or otherwise, we have been advised that in
the opinion of the Securities Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act of 1933, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by us of expenses incurred or paid by
our director, officer, or controlling person in the successful defense of any
action, suit or proceeding) is asserted by such director, officer, or
controlling person in connection with the securities being registered hereunder,
we will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth an estimate of the costs and expenses
payable by Hybrid Fuel Systems, Inc. in connection with the offering described
in this registration statement. All of the amounts shown are estimates except
the Securities and Exchange Commission registration fee:
Securities and Exchange Commission Registration Fee $ 373
Accounting Fees and Expenses $10,000*
Legal Fees and Expenses $45,000*
Miscellaneous $ 5,000*
Total $60,373*
*Estimated
ITEM 6. RECENT SALES OF UNREGISTERED SECURITIES
On September 12, 2004, we issued 7,083,331 restricted common shares
comprised of: (i) 5,799,980 to certain employees as compensation; (ii) 683,351
to settle prior indebtedness; (iii) 100,000 shares for legal fees and (iv)
500,000 shares for consulting services.
On October 13, 2004 we issued 28,633,333 restricted common shares
comprised of: (i) 250,000 to our VP Operations; (ii) 11,900,000 shares to secure
our Chairman and Chief Executive Officer for a period of two years; (iii)
16,433,333 for conversion of debt owed to our management company for cash
investments and; (iv) 50,000 shares for legal services.
On November 1, 2004 we issued 1,750,000 restricted common shares comprised
of (i) 200,000 to certain employees as compensation; (ii) 1,550,000 shares
through the exercise of warrants which were issued in 2001.
II-1
During December 2004, we agreed to issue 300,000 to two individuals for
the sale of our restricted securities. Further during December 2004, we agreed
to issue 10,005,175 restricted common shares to White Knight for partial
conversion of their debt. We subsequently issued these shares on January 10,
2005.
During January 2005, we issued 3,150,000 restricted common shares
comprised of (i) 100,000 shares to certain employees as compensation; (ii)
2,000,000 shares for partial conversion of White Knight's debt; (iii) 1,000,000
shares for consulting services, and; (iv) 50,000 shares for legal fees.
During February 2005, we issued 13,850,000 restricted common shares
comprised of (i) 100,000 as a hiring incentive for our VP Sales and Marketing;
(ii) 11,750,000 shares for partial conversion of White Knight's debt.
During December 2004, we issued 3,004,338 shares which comprise the fees
owed to White Knight pursuant to their management agreement.
In connection with the offer and sale of securities to the Investors and
the selling agents, the Company relied on the exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act"), and Rule 506 promulgated thereunder. The Company believes
that the Investors and the selling agents are "accredited investors", as such
term is defined in Rule 501(a) promulgated under the Securities Act.
ITEM 27. EXHIBITS
Exhibit Description
2.1 Asset Purchase Agreement between the Company and New York State
Electric & Gas Corporation, dated as of October 29, 2001,
incorporated by reference to Exhibit 2.1 of the 8-K filed on
December 26, 2001.
2.2 Secured Promissory Note in favor of New York State Electric & Gas
Corporation, dated as of December 11, 2001, incorporated by
reference to Exhibit 2.2 of the 8-K filed on December 26, 2001.
2.3 Security Agreement between the Company and New York State Electric &
Gas Corporation, dated as of December 11, 2001, incorporated by
reference to Exhibit 2.3 of the 8-K filed on December 26, 2001.
2.4 Guaranty from the Company in favor of New York State Electric & Gas
Corporation, dated as of December 11, 2001, incorporated by
reference to Exhibit 2.4 of the 8-K filed on December 26, 2001.
3.1 Articles of Incorporation of Save On Energy , Inc., incorporated by
reference to Exhibit 3.1 to the SB-2 filed on March 23, 2000.
3.2 Amendment to Articles of Incorporation of Save On Energy, Inc.,
incorporated by reference to Exhibit 3.2 to the SB-2 filed on March
23, 2000.
3.3 By-laws of Save On Energy, Inc., incorporated by reference to
Exhibit 3.3 to the SB-2 filed on March 23, 2000.
4.1 Certificate of Designation of Series A Preferred Stock filed with
the Secretary of State on February 19th, 2002 [incorporated by
reference to Exhibit 4.1 to the 10-KSB filed on May 30, 2002.
4.2 Certificate of Designation of Series B Preferred Stock filed with
the Secretary of State on May 7th, 2002 [incorporated by reference
to Exhibit 4.2 to the 10-KSB filed on May 30, 2002.
4.3 Subscription Agreement, dated March 31, 2005, by and among Hybrid
Fuel Systems, Inc. and the investors named on the signature pages
thereto, incorporated by reference to Exhibit 4.1 to the 8-K filed
on April 5, 2005.
4.4 Form of Convertible Note of Hybrid Fuel Systems, Inc. issued to the
investors named on the signature pages thereto incorporated by
reference to Exhibit 4.2 to the 8-K filed on April 5, 2005.
4.5 Form of Class A Common Stock Purchase Warrant of Hybrid Fuel
Systems, Inc. issued to the investors named on the signature pages
thereto incorporated by reference to Exhibit 4.3 to the 8-K filed on
April 5, 2005.
4.6 Form of Security Agreement by and between Hybrid Fuel Systems, Inc.
and Barbara Mittman as collateral agent incorporated by reference to
Exhibit 4.4 to the 8-K filed on April 5, 2005.
4.7 Form of Collateral Agent Agreement among Barbara R. Mittman, as
collateral agent, and the Lenders as defined therein incorporated by
reference to Exhibit 4.5 to the 8-K filed on April 5, 2005.
5.1 Opinion of Sichenzia Ross Friedman Ference LLP*
10.1 License Agreement by and between the Davis Family Trust and
Electronic Fuel Control, Inc. dated May 13, 1996, incorporated by
reference to Exhibit 10.1 to the SB-2 filed on March 23, 2000.
10.2 Amendment to License Agreement by and between the Davis Family Trust
and Electronic Fuel Control, Inc, dated June 18, 1998, incorporated
by reference to Exhibit 10.2 to the SB-2 filed on March 23, 2000.
10.3 Amendment to License Agreement by and between the Davis Family Trust
and Electronic Fuel Control, Inc. dated January 3, 2000,
incorporated by reference to Exhibit 10.3 to the SB-2 filed on March
23, 2000.
10.4 Consulting Agreement between Save on Energy, Inc. and MBO, Inc.
dated November 23, 1999, Trust and Electronic Fuel Control, Inc,
incorporated by reference to Exhibit 10.4 to the SB-2 filed on March
23, 2000.
II-2
10.5 Exclusive Supply Agreement between Ambac International Corporation
and Electronic Fuel Control, Inc. dated April 29, 1996, incorporated
by reference to Exhibit 10.5 to the SB-2 filed on March 23, 2000.
10.6 Agreement re: International Fuel Systems, Inc. and Davenport, dated
January 7, 2000, incorporated by reference to Exhibit 10.6 to the
SB-2 filed on March 23, 2000.
10.7 Employment Agreement with Robert Stiles, dated July 17, 2001,
incorporated by reference to Exhibit 10.1 of the 10-QSB filed on
November 19, 2001.
10.8 2001 Stock Option Plan - Incorporated by reference to the 2001
Annual Proxy Statement filed October 1, 2001.
10.9 Stock Purchase Agreement between the Company and SWI Holdings,
Limited, dated as of December 10, 2001 (Composite Version),
incorporated by reference to Exhibit 10.1 of the 8-K filed on
December 26, 2001.
10.10 Security Agreement between the Company and SWI Holdings, Limited,
dated as of December 10, 2001, incorporated by reference to Exhibit
10.2 of the 8-K filed on December 26, 2001.
10.11 Convertible Secured Promissory Note issued to SWI Holdings, Limited,
dated April 23, 2002 incorporated by reference to Exhibit 10.11 to
the 10-KSB filed on May 30, 2002.
10.12 Security Agreement between the Company and SWI Holdings, Limited,
dated as of April 23, 2002 incorporated by reference to Exhibit
10.10 to the 10-KSB filed on May 30, 2002.
10.13 Agreement re: White Knight SST, Inc. and Hybrid Fuel Systems, Inc.
(formerly Save On Energy, Inc.) dated December 22, 2003 incorporated
by reference to Exhibit 10.13 to the 10-KSB filed on August 16,
2004.
23.1 Consent of Sichenzia Ross Friedman Ference LLP (included as part of
Exhibit 5.1)
23.2 Consent of Brimmer, Burek & Keelan, LLP.*
--------------------
* Filed herewith
ITEM 28. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate,
represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of
securities offered would not exceed that which was
registered) and any deviation from the low or high end
of the estimated maximum offering range may be reflected
in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20
percent change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table
in the effective registration statement;
(iii) To include any material information with respect
to the plan of distribution not previously disclosed in
the registration statement or any material change to
such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(c) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all the
requirements for filing on Form SB-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Tampa, State of Florida, on this 9th day of May 2005.
HYBRID FUEL SYSTEMS, INC.
By: /s/Mark Clancy
---------------------------
Mark Clancy
Chief Executive Officer
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Mark Clancy his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and any
subsequent registration statements pursuant to Rule 462 of the Securities Act of
1933 and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that each of said
attorney-in-fact or his substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
Chief Executive Officer, Chief Financial May 9, 2005
/s/ Mark Clancy Officer, Director
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Mark Clancy
/s/ John Stanton
---------------------------------- Chairman of the Board of Directors May 9, 2005
John Stanton
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INDEX TO EXHIBITS
Exhibit Description
2.1 Asset Purchase Agreement between the Company and New York State
Electric & Gas Corporation, dated as of October 29, 2001,
incorporated by reference to Exhibit 2.1 of the 8-K filed on
December 26, 2001.
2.2 Secured Promissory Note in favor of New York State Electric & Gas
Corporation, dated as of December 11, 2001, incorporated by
reference to Exhibit 2.2 of the 8-K filed on December 26, 2001.
2.3 Security Agreement between the Company and New York State Electric &
Gas Corporation, dated as of December 11, 2001, incorporated by
reference to Exhibit 2.3 of the 8-K filed on December 26, 2001.
2.4 Guaranty from the Company in favor of New York State Electric & Gas
Corporation, dated as of December 11, 2001, incorporated by
reference to Exhibit 2.4 of the 8-K filed on December 26, 2001.
3.1 Articles of Incorporation of Save On Energy , Inc., incorporated by
reference to Exhibit 3.1 to the SB-2 filed on March 23, 2000.
3.2 Amendment to Articles of Incorporation of Save On Energy, Inc.,
incorporated by reference to Exhibit 3.2 to the SB-2 filed on March
23, 2000.
3.3 By-laws of Save On Energy, Inc., incorporated by reference to
Exhibit 3.3 to the SB-2 filed on March 23, 2000.
4.1 Certificate of Designation of Series A Preferred Stock filed with
the Secretary of State on February 19th, 2002 [incorporated by
reference to Exhibit 4.1 to the 10-KSB filed on May 30, 2002.
4.2 Certificate of Designation of Series B Preferred Stock filed with
the Secretary of State on May 7th, 2002 [incorporated by reference
to Exhibit 4.2 to the 10-KSB filed on May 30, 2002.
4.3 Subscription Agreement, dated March 31, 2005, by and among Hybrid
Fuel Systems, Inc. and the investors named on the signature pages
thereto, incorporated by reference to Exhibit 4.1 to the 8-K filed
on April 5, 2005.
4.4 Form of Convertible Note of Hybrid Fuel Systems, Inc. issued to the
investors named on the signature pages thereto incorporated by
reference to Exhibit 4.2 to the 8-K filed on April 5, 2005.
4.5 Form of Class A Common Stock Purchase Warrant of Hybrid Fuel
Systems, Inc. issued to the investors named on the signature pages
thereto incorporated by reference to Exhibit 4.3 to the 8-K filed on
April 5, 2005.
4.6 Form of Security Agreement by and between Hybrid Fuel Systems, Inc.
and Barbara Mittman as collateral agent incorporated by reference to
Exhibit 4.4 to the 8-K filed on April 5, 2005.
4.7 Form of Collateral Agent Agreement among Barbara R. Mittman, as
collateral agent, and the Lenders as defined therein incorporated by
reference to Exhibit 4.5 to the 8-K filed on April 5, 2005.
5.1 Opinion of Sichenzia Ross Friedman Ference LLP*
10.1 License Agreement by and between the Davis Family Trust and
Electronic Fuel Control, Inc. dated May 13, 1996, incorporated by
reference to Exhibit 10.1 to the SB-2 filed on March 23, 2000.
10.2 Amendment to License Agreement by and between the Davis Family Trust
and Electronic Fuel Control, Inc, dated June 18, 1998, incorporated
by reference to Exhibit 10.2 to the SB-2 filed on March 23, 2000.
10.3 Amendment to License Agreement by and between the Davis Family Trust
and Electronic Fuel Control, Inc. dated January 3, 2000,
incorporated by reference to Exhibit 10.3 to the SB-2 filed on March
23, 2000.
10.4 Consulting Agreement between Save on Energy, Inc. and MBO, Inc.
dated November 23, 1999, Trust and Electronic Fuel Control, Inc,
incorporated by reference to Exhibit 10.4 to the SB-2 filed on March
23, 2000.
10.5 Exclusive Supply Agreement between Ambac International Corporation
and Electronic Fuel Control, Inc. dated April 29, 1996, incorporated
by reference to Exhibit 10.5 to the SB-2 filed on March 23, 2000.
10.6 Agreement re: International Fuel Systems, Inc. and Davenport, dated
January 7, 2000, incorporated by reference to Exhibit 10.6 to the
SB-2 filed on March 23, 2000.
10.7 Employment Agreement with Robert Stiles, dated July 17, 2001,
incorporated by reference to Exhibit 10.1 of the 10-QSB filed on
November 19, 2001.
10.8 2001 Stock Option Plan - Incorporated by reference to the 2001
Annual Proxy Statement filed October 1, 2001.
10.9 Stock Purchase Agreement between the Company and SWI Holdings,
Limited, dated as of December 10, 2001 (Composite Version),
incorporated by reference to Exhibit 10.1 of the 8-K filed on
December 26, 2001.
10.10 Security Agreement between the Company and SWI Holdings, Limited,
dated as of December 10, 2001, incorporated by reference to Exhibit
10.2 of the 8-K filed on December 26, 2001.
10.11 Convertible Secured Promissory Note issued to SWI Holdings, Limited,
dated April 23, 2002 incorporated by reference to Exhibit 10.11 to
the 10-KSB filed on May 30, 2002.
10.12 Security Agreement between the Company and SWI Holdings, Limited,
dated as of April 23, 2002 incorporated by reference to Exhibit
10.10 to the 10-KSB filed on May 30, 2002.
10.13 Agreement re: White Knight SST, Inc. and Hybrid Fuel Systems, Inc.
(formerly Save On Energy, Inc.) dated December 22, 2003 incorporated
by reference to Exhibit 10.13 to the 10-KSB filed on August 16,
2004.
23.1 Consent of Sichenzia Ross Friedman Ference LLP (included as part of
Exhibit 5.1)
23.2 Consent of Brimmer, Burek & Keelan, LLP.*
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* Filed herewith
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