UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 for the quarterly period ended March 31, 2005
or
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the transition period from _______ to________
Commission File Number: 333-33134
HYBRID FUEL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Georgia 58-2267238
------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
12409 Telecom Drive, Tampa, Florida 33637
-----------------------------------------
(Address of principal executive offices) (Zip Code)
(813)-979-9222
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
At May 12, 2005, the Company had 42,215 Series A Preferred Shares and 195,209
Series B Preferred Shares outstanding. At May 12, 2005, the Company had
83,354,981 of its $0.001 par value common shares outstanding.
Transitional Small Business Issuer Format (Check One): Yes |_| No |X|
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HYBRID FUEL SYSTEMS, INC.
MARCH 31, 2005 QUARTERLY REPORT ON FORM 10-QSB/A
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
Statements of Operations
Statements of Cash Flows
Notes to Financial Statements
Special Note Regarding Forward Looking Statements
Item 2. Management's Discussion and Analysis or Plan of Operations
Item 3. Controls and Procedures
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits
SIGNATURES
2
PART I - FINANCIAL INFORMATION
HYBRID FUEL SYSTEMS, INC.
Consolidated Balance Sheets
For the three month period ended March 31, 2005 (unaudited)
and the annual period ended December 31, 2004 (audited)
March 31, December 31,
2005 2004
ASSETS (Unaudited) (Audited)
----------- -----------
Current Assets
Cash-Operating $ 3,831 $ 2,025
Accounts Receivable net of
$10,000 allowance, respectively 33,760 $ 27,005
Prepaid expenses and deposits 83,287 $ 7,845
Inventory 42,694 $ 36,623
----------- -----------
Total current assets 163,572 $ 73,498
Property Plant & Equipment, net 68,019 $ 8,507
----------- -----------
Total assets $ 231,591 $ 82,005
=========== ===========
LIABILITIES
Accounts Payable $ 133,418 $ 120,980
Accounts Payable in Settlement 121,956 $ 121,956
Debt in Litigation 109,868 $ 109,868
Due to Related Parties 7,000 $ 7,197
Due to Related Parties - Convertible Debt -- $ 18,866
Debt in Default 103,272 $ 123,272
Convertible Debt in Default 78,200 $ 78,200
Sales and Payroll taxes payable 122,427 $ 130,094
Other current Liabilities 41,940 $ 42,824
----------- -----------
Total current liabilities $ 718,081 $ 753,257
SHAREHOLDERS' DEFICIT
Preferred Stock - A (.01 par value) 42,215
shares authorized; 42,215 issued and
outstanding (liquidation preference $8,021) 422 $ 422
Preferred Stock - B (.01 par value) 954,563
shares authorized; 195,209 shares issued
and outstanding. (liquidation preference
$1,002,291) 1,952 $ 1,952
Common Stock ( .001 par value) 150,000,000
shares authorized; 83,354,981 and 65,509,843
shares issued and outstanding, respectively 83,355 $ 65,510
Additional Paid-in Capital 8,378,781 $ 7,582,270
Deferred Compensation (425,000) (500,000)
Receivable - Related Parties (72,248) --
Accumulated Deficit (8,453,752) $(7,821,406)
----------- -----------
Total Shareholders' Deficit $ (486,490) $ (671,252)
----------- -----------
Total liabilities and Shareholders' Equity $ 231,591 $ 82,005
=========== ===========
3
HYBRID FUEL SYSTEMS, INC.
Statement of Operations
For the three months period ended
March 31, 2005 and March 31, 2004
(unaudited)
March 31, 2005 March 31, 2004
(Unaudited) (Unaudited)
------------ ------------
REVENUES
Product Sales
Revenue $ 18,163 $ 80,092
Cost of sales $ (10,832) $ (19,487)
------------ ------------
Gross Profit $ 7,331 $ 60,605
EXPENSES
Operating Expenses
Consulting $ 168,187 $ 43,457
Research and Development $ 41,647 $ 16,090
Compensation $ 362,830 $ 70,199
Other $ 67,424 $ 36,086
------------ ------------
Total expenses $ 640,088 $ 165,832
------------ ------------
Loss from operations $ (632,746) $ (105,227)
============ ============
Other expenses (income)
Interest expense $ 2,226 $ 2,315
Other income $ (2,637) $ 0
Other income $ (411) $ 2,315
------------ ------------
Net (loss) $ (632,346) $ (107,542)
Preferred stock dividends $ 0 $ 0
Net loss available to common shares $ (632,346) $ (107,542)
Basic and diluted weighted
average common shares outstanding 75,893,482 12,163,646
Basic and diluted (loss) per share $ (0.01) $ (0.01)
============ ============
4
HYBRID FUEL SYSTEMS, INC.
Statement of Cash Flows
For the three months period ended
March 31, 2005 and March 31, 2004 (unaudited)
March 31, December 31,
2005 2004
(Unaudited) (Unaudited)
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(632,346) $(107,542)
Adjustments to reconcile net income to net
cash provided (used) by operating activities
Common stock issued for services $ 151,000 $ 0
Depreciation $ 3,106 $ 2,404
Deferred compensation $ 75,000 $ --
change in operating assets and liabilities
Accounts Receivable $ (6,755) $ (58,346)
Inventory $ (6,071) $ (6,555)
Prepaid expenses $ (75,442) $ --
Accounts payable $ (4,112) $ (29,805)
Accrued liabilities $ (8,552) $ (5,661)
--------- ---------
Net cash provided (used) by operating activates $(504,172) $(205,505)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Equipment $ (46,067) $ --
--------- ---------
Net cash provided (used) by investing activities $ (46,067) $ --
CASH FLOWS FROM FINANCING ACTIVITIES
Loans from related parties $ 551,895 $ 249,052
Proceeds from exercise of warrants $ 150 $ --
--------- ---------
Net cash provided (used) by financing activities $ 552,045 $ 249,052
Cash Balance End of Period $ 3,831 $ 43,553
Cash Balance at Beg of Period $ 2,025 $ 6
--------- ---------
Net increase (decrease) in cash $ 1,806 $ 43,547
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for interest $ -- $ --
========= =========
Common stock inssued for services and
conversion of debt to related parties $ 151,000 $ --
========= =========
Amortization of Common Stock issued
for deferred compensation $ 75,000 $ --
========= =========
5
HYBRID FUEL SYSTEMS, INC.
Notes to Unaudited Financial Statements
for the three months period ended
March 31, 2005 and March 31, 2004
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Hybrid Fuel Systems, Inc. (the "Company") licenses the worldwide exclusive
rights to a combustion engine fuel delivery system embodied in five US patents
and one patent pending. The Company's current commercial application of the
licensed technology is referred to as Fuel 2(TM), a device for the conversion of
medium and heavy duty diesel engines to non-petroleum based fuels such as
natural gas.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
Accounts Receivable
Accounts receivable, are stated at estimated net realizable value. Accounts
receivable are comprised of balances due from customers. In determining
collectibility, historical trends are evaluated and specific customer issues are
reviewed to arrive at appropriate allowances.
Inventories
Inventories, are stated at the lower of cost or market. Cost is determined using
the first-in, first-out method. Inventories consist of component parts used in
the manufacture and assembly of retrofit systems for the conversion of gasoline
and diesel engines to non-petroleum based fuels such as compressed natural gas.
Property, Plant and Equipment
Depreciation is provided for using the straight-line method, in amounts
sufficient to relate the cost of depreciable assets to operations over their
estimated service lives (asset categories range from three to seven years).
Leasehold improvements are amortized using the straight-line method over the
lives of the respective leases or the service lives of the improvements,
whichever is shorter. Leased equipment under capital leases is amortized using
the straight-line method over the lives of the respective leases or over the
service lives of the assets for those leases that substantially transfer
ownership. Accelerated methods are used for tax depreciation.
Impairment of Assets
The Company's policy is to evaluate whether there has been a permanent
impairment in the value of long-lived assets, certain identifiable intangibles
and goodwill when certain events have taken place that indicate that the
remaining balance may not be recoverable. When factors indicate that the
intangible assets should be evaluated for possible impairment, the Company uses
an estimate of related undiscounted cash flows. A deficiency in these cash flows
relative to the carrying amounts is an indication of the need for a write-down
due to impairment. The impairment write-down would be the difference between the
carrying amounts and the fair value of these assets. Losses on impairment are
recognized by a charge to earnings. Factors considered in the valuation include
current operating results, trends and anticipated undiscounted future cash
flows.
Income Taxes
The Company utilizes the guidance provided by Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes (SFAS 109). Under the liability
method specified by SFAS 109, deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax bases of assets
and liabilities as measured by the enacted tax rates which will be in effect
when these differences reverse. Deferred tax expense is the result of changes in
deferred tax assets and liabilities. Valuation allowances are provided if
necessary to reduce deferred tax assets to the amount expected to be realized.
Earnings (Loss) Per Common Share
Earnings (loss) per share are computed using the basic and diluted calculations
on the face of the statement of operations. Basic earnings (loss) per share are
calculated by dividing net income (loss) by the weighted average number of
shares of common stock outstanding for the period. Diluted earnings (loss) per
share is calculated by dividing net income (loss) by the weighted average number
of shares of common stock outstanding for the period, adjusted for the dilutive
effect of common stock equivalents, using the treasury stock method. The
warrants outstanding were determined to be antidilutive and therefore do not
affect earnings per share.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles, requires management to make estimates
6
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities, as well as the reported
amounts of revenues and expenses for the period then ended. The actual outcome
of the estimates could differ from the estimates made in the preparation of the
financial statements.
Revenue Recognition
Revenues are recognized when the merchandise is shipped to the customer, which
is when title and risk of loss has passed to the customer.
Stock Based Compensation
The Company has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock Based Compensation, but applies Accounting Principles Board
Opinion No. 25 and related interpretations in accounting for options issued to
employees. Under Opinion No. 25, the intrinsic method is used to determine
compensation expense when the fair market value of the stock exceeds the
exercise price on the date of grant. As of the date of this report, no options
had been granted under the plan and therefore no compensation expense has been
recognized.
Research and Development Costs
The Company charges research and development costs to expense as incurred.
Fair Value of Financial Instruments
The Company, in estimating its fair value disclosures for financial instruments,
uses the following methods and assumptions:
Cash, Accounts Receivable, Accounts Payable and Accrued Expenses:
The carrying amounts reported in the balance sheet for cash, accounts
receivable, accounts payable and accrued expenses approximate their fair value
due to their relatively short maturity.
Long-Term Obligations:
The fair value of the Company's fixed-rate long-term obligations is estimated
using discounted cash flow analyses, based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements. At December 31,
2003 and 2002, the Company did not have any long-term obligations.
NOTE 2 - DEBT IN DEFAULT
The Company did not meet the payment terms on the note payable to Peachtree
National Bank through March 31, 2005. On April 1, 2005, we paid $20,000 to begin
a payment plan with Peachtree National Bank which requires us to remit
approximately $10,000 a month until the debt is fully repaid.
NOTE 3 - COMMITMENTS AND CONTINGENCIES
The Company is delinquent in the payment of payroll and state sales taxes. The
Company is currently following payment schedules, developed after negotiations
with the taxing authorities. Amounts in arrears for delinquent taxes, along with
estimated penalties and interest assessed by the taxing authorities are as
follows, as of March 31, 2005 and 2004.
2005 2004
---------- ----------
Payroll and sales taxes $ 92,537 $ 162,739
Penalties and interest 29,890 82,506
---------- ----------
Total $ 122,427 $ 245,245
During June, 2004, the Company entered a negotiated settlement with the IRS and
began making monthly payments including an initial payment of $15,000 plus
$5,000 a month through such date as the obligation is repaid in full.
NOTE 4 - SHAREHOLDERS' EQUITY
Preferred Stock
Effective February 1, 2002, the Company designated 999,779 shares of previously
undesignated preferred stock as Series A Preferred Stock,
7
for which 45,216 shares are authorized and Series B Preferred Stock, for 954,563
shares are authorized.
Series A Preferred Stock is convertible, at the option of the holder, at any
time, into shares of the Company's common stock as determined by dividing $.19
by a conversion price determined on the date the related certificate is
surrendered. The conversion price is subject to periodic adjustment and is
initially established at $.01632. Series A Preferred Stock is automatically
convertible into shares of the Company's common stock upon (i) the date
specified by vote or written consent or agreement of holders of at least three
quarters of the shares of Series A Preferred outstanding, or (ii) upon the
closing of the sale of the company's common stock in a firm commitment,
underwritten public offering registered under the Securities Act in which the
Company receives gross proceeds of no less than $20 million. Series A Preferred
Stock has a liquidation preference of the greater of $.19 per share or the
amount that such share would be entitled to upon liquidation or distribution.
The Series A Preferred Stock has voting rights, except as to the election of
debtors, equal to the number of shares of common stock into which the Series A
Preferred Stock is convertible. The Series A preferred Stockholders have the
right to elect one director of the Company.
Series B Preferred Stock is convertible, at the option of the holder at any
time, into shares of the Company's common stock as determined by dividing the
lower of $.09 or the price per share paid by the holder of the Series B
Preferred Stock by a conversion price determined on the date the related
certificate is surrendered. The conversion price is subject to periodic
adjustment and is initially established at $.00773. Series B Preferred Stock is
automatically convertible into shares of the Company's common stock upon (i) the
date specified by vote or written consent or agreement of holders of at least
three quarters of the shares of Series B Preferred Stock outstanding, or (ii)
upon the closing of the sale of Company's common stock in a firm commitment,
underwritten public offering registered under the Securities Act in which the
Company receives gross proceeds of no less than $20 Million. Series B Preferred
Stock has a liquidation preference of the greater of $.09 per share or the
amount that such share would be entitled to upon liquidation or distribution.
The Series B Preferred Stock has voting rights, except as to the election of
directors, equal to the number of shares of common stock into which the Series B
Preferred Stock is convertible. The Series B Preferred Stockholders have the
right to elect one director of the Company.
NOTE 5 - RELATED PARTY
The Company has received financing from White Knight SST, Inc. (WK) a major
stockholder and had converted $510,958 into 12,773,942 common shares as of March
31, 2005. WK had advanced funds to the Company in 2004 and provided management
services to the Company for which it was compensated by issuance of 26,438,508
shares of common stock for the loans and approximately 3,004,338 shares of
common stock for management services.
As of March 31, 2005 the Company had issued an additional 1,806,196 common
shares to WK in advance of funding received. A Related Party Receivable of
$72,248 had been recorded as of March 31, 2005 for this issuance.
NOTE 6 - SUBSEQUENT EVENTS
On April 1, 2005, we held our first closing pursuant to a Subscription Agreement
we entered into with several accredited investors dated as of March 31, 2005,
pursuant to which the investors subscribed to purchase an aggregate principal
amount of $1,200,000 in secured convertible promissory notes, and Class A common
stock purchase warrants which would be issued on each closing date assuming full
conversion of the convertible notes issued on each such closing date. We issued
the aforementioned securities to the investors pursuant to Rule 506 of
Regulation D as promulgated under the Securities Act of 1933, as amended (the
"Act"), and/or Section 4(2) of the Act.
$600,000 of the purchase price was paid to us by the investors on the initial
closing date of April 1, 2005 and $600,000 of the purchase price will be paid to
us pursuant to the second closing, which will take place on the 5th day after
the actual effectiveness of the registration statement which we are required to
file with the Securities and Exchange Commission registering the shares of our
common stock, par value $.001 per share, issuable upon conversion of the
convertible notes and exercise of the warrants.
The convertible notes bear simple interest at rate equal to the "prime rate" as
published in the Wall Street Journal from time to time plus 3% per annum,
provided however that the interest shall not be less than 8% per annum. Interest
is calculated on the basis of a 360 day year and is payable monthly, in arrears
commencing on August 1, 2005. The principal amount of the convertible notes
shall be amortized over a two-year period with payments commencing on August 1,
2005. Each investor shall have the right to convert the convertible notes after
the date of issuance and at any time, until paid in full, at the election of the
investor into fully paid and nonassessable shares of our common stock at a
conversion price of $0.55 per share. The conversion price is adjustable in the
event of any stock split or reverse stock split, stock dividend,
reclassification of common stock, recapitalization, merger or consolidation. In
addition, the conversion price of the convertible notes will be adjusted in the
event that we spin off or otherwise divest ourselves of a material part of our
business or operations or dispose all or a portion of our assets. The
convertible notes are secured by all of our assets, pursuant to the terms of a
Security Agreement, dated as of March 31, 2005 between us and Barbara Mittman,
who is acting as collateral agent pursuant to the terms of a collateral agent
agreement dated as of March 31, 2005.
We issued an aggregate of 1,636,364 Class A common stock purchase warrants to
the investors and will issue an additional 1,636,364 Class A common stock
purchase warrants at the second closing. The Class A warrants are exercisable
until five years from the initial closing date at an exercise price equal to the
lower of $0.81 per share or 101% of the closing bid price of our common stock on
the last trading day preceding the initial closing. The exercise price of the
Class A warrants will be adjusted in the event of any stock split or reverse
stock split, stock dividend, reclassification of common stock, recapitalization,
merger or consolidation. In addition, the exercise price of the warrants will be
adjusted in the event that we spin off or otherwise divest ourselves of a
material part of our business or operations or dispose all or a portion of our
assets.
Due to there being detachable warrants and a beneficial convertible feature of
the note, the Company will record a discount to the debt in the amount of
$1,200,000 (assuming both draws are made), in accordance with EITF Issue No.
98-5 "Accounting For Convertible Securities With
8
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios",
and EITF 00-27 "Application of EITF Issue No. 98-5 To Certain Convertible
Instruments". The value of the detachable warrants was determined to be
$1,945,594 using the Black Scholes option pricing model with a volatility of
234.42 % and risk free interest rate of 4.13%. In accordance with EITF
00-27,when the calculated value of the detachable warrants exceeds the amount of
the debt, the discount is limited to the amount of the debt. Since the debt is
$1,200,000, the discount associated with the warrants would be limited to that
amount. In the calculation of discount for the warrants and the embedded
conversion feature with the warrants to be calculated first, the entire discount
is being allocated to the warrants since that exceeds the maximum discount
allowed. Therefore, there is no allocation of the discount to the embedded
conversion feature of the debt. The discount of $1,200,000 will then be
amortized over the life of the debt which is twenty eight months or
approximately $43,000 per month.
We filed a registration statement registering the shares of our common stock
issuable upon conversion of the convertible notes and exercise of the Class A
warrants on May 10, 2005 and we are obligated to cause it to be effective within
90 days after the initial closing date or approximately August 1, 2005. If we do
not meet the aforementioned filing and effectiveness deadlines, we shall pay to
each investor an amount equal to 1% for the first 30 days or part thereof of the
pendency of such non-registration event and 2% for each 30 days or part thereof,
thereafter of the purchase price of the notes remaining unconverted and purchase
price of the shares of our common stock issued upon conversion of the notes.
The above descriptions of the convertible note, the Class A common stock
purchase warrants, the Subscription Agreement and the Security Agreement are not
complete and are qualified in their entirety by the full text of such documents
which are included as exhibits to our Form 8-K Report filed April 5, 2005.
9
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Report contains forward-looking statements, within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended, which reflect our
expectation or belief concerning future events that involve risks and
uncertainties. Our actions and performance could differ materially from what is
contemplated by the forward-looking statements contained in this Report. Factors
that might cause differences from the forward-looking statements include those
referred to or identified under "Risk Factors" in our Annual Report on Form
10-KSB for the year ended December 31, 2004 and other factors that may be
identified elsewhere in this Report. Reference should be made to such factors
and all forward-looking statements are qualified in their entirety by the above
cautionary statements.
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the results of our
operations and financial condition. The discussion should be read in conjunction
with the financial statements and notes thereto.
Overview
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 operational state 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 the majority of 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.
Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004
The following compares our financial statements for the three months period
ended March 31, 2004 and 2005. However, 2004 was a period of reengineering our
principal product as well as addressing a number of legal and financial matters
which had been created over a period from our inception in 1996 through December
2003. We therefore believe the following may not be indicative of our future
operating results.
Our current assets increased 122% from $73,498 at the year ended December 31,
2003 to $163,572 for the three months period ended March 31, 2005 and during
this same period our total assets increased by approximately 182% from $82,005
to $231,591. Current and total liabilities during this period decreased by 5%
from $753,257 at the year ended December 31, 2004 to $718,081 at March 31, 2005.
The decrease in liabilities is principally the result of a conversion of debt
financing provided by White Knight. Our Shareholders' Deficit decreased during
this three month period from $(671,252) at the year ended December 31, 2004 to
(486,490) at March 31, 2005 primarily due to a 7% increase in additional paid in
capital.
Since December 2003, White Knight has provided substantially all of capital
requirements. During the first quarter of 2005, we obtained financing from White
Knight SST in the amount of $492,092. We have and will periodically convert
amounts owed to White Knight at a conversion rate equal to $0.04 per share. This
conversion rate was determined in December 2003 as our trading price at that
time was $0.03 per share. White Knight does not charge interest and there is no
requirement to repay amounts owed in cash. Our Chairman and Chief Executive
Officer serve similar capacities with White Knight and both individuals are
operating under two-year employment agreements to our Company. All conversions
of White Knight debt are issued as restricted common stock and there are no
registration rights.
In comparing the periods ended March 31, 2004 and 2005, our revenue and gross
profits decreased by 77% and 88%, respectively from $80,092 and $60,605 to
$18,163 and $7,331. Pending our CARB certification which is discussed elsewhere
in this report, our systems are only eligible for sale through State and Federal
grant programs. The decrease in revenues and gross profits during this period
were principally due to a decline in grant financing. Comparing these two
periods, our expenses increased 285% from $165,832 for the three month period
ended March 31, 2004 to $640,088 for the period ended March 31, 2005. However,
approximately $151,000 or 24% are non-cash expenses relates to the issuance of
shares for services, consultants and settlements. Our net loss for the three
months period increased approximately 500% from $(107,542) for the three months
ended March 31, 2004 to $(632,346) for the three month period ended March 31,
2005.
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.
Item 3 Controls and Procedures
Evaluation of disclosure controls and procedures.
An evaluation was performed under the supervision and with the participation of
our management, including the Chief Executive Officer, of
10
the effectiveness of the design and operation of our disclosure procedures.
Based on management's evaluation as of the end of the period covered by this
Quarterly Report, our principal executive and financial officer concluded that
our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) were sufficiently effective to ensure that the information required to be
disclosed by us in the reports that the we file under the Exchange Act is
gathered, analyzed and disclosed with adequate timeliness, accuracy and
completeness.
Changes in internal controls.
There have been no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
the evaluation referred to above, nor were there any significant deficiencies or
material weaknesses in our internal controls. Accordingly, no corrective actions
were required or undertaken.
11
PART II - OTHER INFORMATION
Item 1 - legal Proceedings
On November 14, 2003, Ambac International Corporation ("Ambac.") filed a lawsuit
seeking $109,915.60 together with interest at the rate of 15% per annum. The
suits stems from a contract for delivery of certain parts for use in the
manufacturing of our kits. We maintain the parts were delivered substantially
past the date of anticipated delivery and that the parts when received were
defective. Subsequently we filed a response on December 22, 2003. Ambac
subsequently made a motion for default judgment because the statutory period to
file a response was 30 days and our response was filed in 35 days. Further, the
response was submitted by a " non-attorney." which is alleged to be a further
violation of South Carolina civil procedure. Our CFO filed the response during
2003 at the direction of our then-Chief Executive Officer.
On August 3, 2004, we filed a Motion to Dismiss or, in the Alternative, Motion
to Compel Arbitration. During October 2004, the Court issued an order to Compel
Arbitration. We are now awaiting the scheduling of the arbitration. We intend to
vigorously defend our position and believe we will ultimately prevail. However,
there can be no assurance that we will prevail and in the event we were to not
prevail, we could be required to pay the amount of the suit, plus interest and
associated fees. We do not believe the loss of this litigation will have a
material effect on our ability to execute our business mission. The full amount
of the liability has been recorded as a payable in our financial statements as
of March 31, 2005.
There is no other pending litigation or other proceedings against the Company.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3 - Defaults Upon Senior Securities
None.
Item 4 - Submission of Matters to a Vote of Security Holders
None.
Item 5 - Other Information
None.
Item 6. Exhibits
No. Description of Exhibit
31.1 Chief Executive Officer and Chief Financial Officer Section 302
Certification
32.1 Chief Executive Officer and Chief Financial Officer Certification
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Hybrid Fuel Systems, Inc.
By:/s/ MARK CLANCY
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Mark Clancy
Chief Executive Officer,
Chief Financial Officer
Date: August 10, 2005
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