As filed with the Securities and Exchange Commission on November 28, 2005
Registration Number 333-129928
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment No. 1 to
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 (Primary Standard (I.R.S.
Of incorporation or Industrial Classification Employer
organization) Code Number) Identification
No.)
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
Fax: (212) 930-9725
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
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. |_|
1
CALCULATION OF REGISTRATION FEE
---------------------------------------------------------------------------------------------------------------
Proposed Maximum Proposed Maximum Amount of
Title of Each Class of Amount to be Offering Price Aggregate Registration
Securities to be Registered Registered Per Share(1) Offering Price Fee
---------------------------------------------------------------------------------------------------------------
Common Stock, par value $.001(2) 314,815 $.30 $94,444.50 $11.12
---------------------------------------------------------------------------------------------------------------
Common Stock, par value $.001(3) 17,921,147 $.30 $5,376,344.10 $632.80
---------------------------------------------------------------------------------------------------------------
Common Stock, par value $.001(4) 1,259,259 $.30 $377,777.70 $44.46
---------------------------------------------------------------------------------------------------------------
Total 19,495,221 $5,848,566.30 $688.38
---------------------------------------------------------------------------------------------------------------
(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 November 22, 2005 was $0.30 per share.
(2) Represents shares issuable upon exercise of warrants.
(3) Represents shares issuable upon sales under the Investment Agreement.
(4) Represents shares issuable upon conversion of the Debenture.
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.
2
PROSPECTUS
Subject to Completion, Dated November 28, 2005
HYBRID FUEL SYSTEMS, INC.
19,495,221 Shares of Common Stock
This prospectus relates to the resale by the selling stockholders of up to
19,495,221 shares of our common stock. We will not receive any proceeds from
the resale of shares of our common stock.
The total number of shares sold herewith includes the following shares owned by
or to be issued to Dutchess Private Equities Fund II, LP ("Dutchess"): (i) up to
1,259,259 shares issuable upon conversion of convertible debentures, (ii)
314,815 shares issuable upon exercise of warrants, and (ii) up to 17,921,147
shares of common stock issuable pursuant to a "put right" under the Investment
Agreement, also referred to as an Equity Line of Credit with Dutchess Private
Equities Fund II, LP. We are not selling any shares of common stock in this
offering and therefore will not receive any proceeds from this offering. We
will, however, receive proceeds from the sale of the 17,921,147 shares of common
stock under the Investment Agreement with Dutchess Private Equities, LLP and the
exercise of warrants issued to Dutchess to purchase an aggregate of 314,815
shares of common stock. All costs associated with this registration will be
borne by us.
A "put right" permits us to require Dutchess to buy shares of our common stock
pursuant to the terms of the Investment Agreement. That Investment Agreement
permits us to "put" up to an aggregate of $5,000,000 in shares of our common
stock to Dutchess. Dutchess will pay us 93% of the lowest closing Best Bid price
(highest posted bid price) of our common stock during the five trading day
period immediately following the date of our notice to them of our election to
put shares pursuant to the Equity Line of Credit.
With the exception of Dutchess, which is an "underwriter" within the meaning of
the Securities Act of 1933, no other underwriter or person has been engaged to
facilitate the sale of shares of common stock in this offering.
Our common stock currently trades on the Over the Counter Bulletin Board ("OTC
Bulletin Board") under the symbol "HYFS". On November 22, 2005, the last
reported sale price for our common stock on the OTC Bulletin Board was $0.30 per
share.
The securities offered in this prospectus involve a high degree of risk. See
"Risk Factors" beginning on page 7 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 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.
The date of this Prospectus is November __, 2005
3
TABLE OF CONTENTS
Page
Prospectus Summary 3
Risk Factors 7
Forward Looking Statements 13
Use of Proceeds 13
The Investment Agreement 13
The Debenture Agreement 16
Management's Discussion and Analysis of
Financial Condition or Plan of Operation 17
Description of Business 22
Description of Property 30
Legal Proceedings 30
Directors and Executive Officers 30
Executive Compensation 31
Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure 31
Market for Common Equity and Related
Stockholder Disclosure 31
Security Ownership of Certain Beneficial Owners
and Management 32
Selling Shareholders 33
Certain Relationships and Related Transactions 34
Description of Securities 34
Plan of Distribution 36
Legal Matters 37
Experts 37
Where You Can Find More Information 37
Disclosure of Commission Position on Indemnification
for Securities Act Liabilities 38
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.
4
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 $ (2,972,473) $ (548,821) $ (741,575)
Net Loss Per Share $ (0.12) $ (0.05) $ (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 $ 82,005 $ 44,515 $ 57,898
Total Liabilities $ 753,258 $ 1,986,199 $ 1,605,761
Shareholders' Equity $ (671,253) $ (1,941,684) $ (1,547,863)
THIS OFFERING
Shares offered by Selling
Stockholders......................................... Up to 19,495,221 shares, including 1,259,259
shares issuable upon conversion of a debenture; up
to 17,921,147 shares issuable under the Investment
Agreement; and an aggregate of 314,815 shares
issuable upon exercise of warrants*
Common Stock to be outstanding after the offering.... 120,502,175
Use of Proceeds...................................... We will not receive any proceeds from the sale of
the common stock hereunder. We will, however,
receive proceeds from the sale of our common stock
pursuant to the Investment Agreement and the
exercise of warrants to purchase shares of our
common stock. See "Use of Proceeds" for a complete
description.
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 7.
OTC Bulletin Board
Trading Symbol....................................... HYFS
* The above information regarding common stock to be outstanding after the
offering is based on 101,006,954 shares of common stock outstanding as of
November 21, 2005 and assuming issuance of all shares registered herewith, the
number of shares offered herewith represents approximately 19.3% of the total
issued and outstanding shares of common stock.
5
November 2005 Subscription and Investment Agreements
On November 4, 2005, we sold $340,000 in principal amount of our five-year
convertible debentures to Dutchess Private Equities Fund, II, L.P. (the
"Investor"). These debentures bear interest at 12% per annum. The first $190,000
(less expenses) has been funded with an additional $150,000 to be funded
immediately upon filing of a registration statement with the Securities and
Exchange Commission ("SEC"). Our obligation to repay the investor is secured by
a security agreement which we have granted the Investor. We have pledged all of
our assets to insure repayment of this obligation.
Subject to adjustment as more fully set forth in the Debenture Agreement, the
fixed conversion price of the debenture is $.27 per share.
We also issued to the Investor a warrant to purchase up to total of $85,000
Worth of shares of common stock with a strike price equal to the fixed
Conversion price of the debenture, as set forth above, on the date of exercise.
The warrant may be exercised for a period of five years and the strike price is
subject to adjustment upon the occurrence of certain events, including, without
limitation, upon our consolidation, merger or sale of all of substantially all
of our assets, a reclassification of our common stock, or any stock splits,
combinations or dividends with respect to our common stock.
We are obligated to file a registration statement within 21 days after the
closing date and are obligated to use our best efforts to cause the SEC to
declare the registration statement effective within 90 days after the filing
date. If we do not file a registration statement with the SEC within 21 days
of the closing date, we are obligated to pay liquidated damages to the Investor
in an amount equal to 2% of the principal amount of the debenture outstanding,
pro rata, for every 15 days which such registration statement has not been
filed. In addition, if the registration statement is not filed by the filing
date, the conversion price of the debenture will decrease by 10% of and continue
to decrease by 10% for each 15 day calendar period the registration statement
goes without filing. If the registration statement is not declared effective
within 90 days of the filing date, we are obligated to pay liquidated damages to
the Investor in an amount equal to 2% of the principal amount of the debenture
outstanding, pro rata, for every 30 days which such registration statement has
not been declared effective by the SEC.
Further, on November 4, 2005, we entered into an Investment Agreement with the
Investor. Pursuant to this Agreement, the Investor shall commit to purchase up
to $5,000,000 of our common stock over the course of 36 months ("Line Period"),
after the registration statement (as described below) has been declared
effective by the SEC. The amount that we shall be entitled to request from each
purchase ("Puts"), shall be equal to, at our election, either (i) $100,000 or;
(ii) 200% of the averaged daily volume (U.S market only) ("ADV") of our common
stock for the three (3) trading days prior to the applicable put notice date,
multiplied by the average of the 3 daily closing bid prices immediately
preceding the put date. The put date shall be the date that the Investor
receives a put notice of draw down by us of a portion of the Line. The purchase
price shall be set at 93% of the lowest closing highest posted bid price of the
common stock during the pricing period. The pricing period shall be the five (5)
consecutive trading days immediately after the put date. There are put
restrictions applied on days between the put date and the closing date with
respect to that particular Put. During this time, we shall not be entitled to
deliver another put notice. We shall automatically withdraw that portion of the
put notice amount, if the purchase price with respect to that Put does not meet
the Minimum Acceptable Price. The Minimum Acceptable Price is defined as 75% of
the closing bid price of the common stock for the ten (10) trading days prior to
the put notice date.
We are obligated to file a registration statement covering the shares of common
stock underlying the Investment Agreement within 15 days after the filing of our
Annual Report on Form 10-KSB for the year ended December 31, 2005. In addition,
we are obligated to use reasonable efforts to have the registration statement
declared effective by the SEC within 90 days after the filing date.
We claim an exemption from the registration requirements of the Act for the
private placement of these securities pursuant to Section 4(2) of the Act and/or
Regulation D promulgated thereunder since, among other things, the transaction
did not involve a public offering, the investors were accredited investors
and/or qualified institutional buyers, the investors had access to information
about the company and their investment, the investors took the securities for
investment and not resale, and we took appropriate measures to restrict the
transfer of the securities.
6
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.
IMPROVEMENTS OR CHANGES IN TECHNOLOGY MAY MAKE OUR PRODUCTS OBSOLETE OR
DIFFICULT TO SELL AT A PROFIT OR AT ALL.
7
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.
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.
8
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.
RISKS RELATING TO THE DEBENTURE AGREEMENT:
DUTCHESS, THE HOLDER OF A CONVERTIBLE DEBENTURE ISSUED BY US ON NOVEMBER 4, 2005
HAS THE OPTION OF CONVERTING THE DEBENTURE INTO SHARES OF OUR COMMON STOCK.
DUTCHESS MAY ALSO EXERCISE THEIR COMMON STOCK PURCHASE WARRANTS. IF THE
DEBENTURE IS CONVERTED OR THE WARRANTS EXERCISED, THERE WILL BE DILUTION OF YOUR
SHARES OF OUR COMMON STOCK.
The issuance of shares of our common stock upon conversion of the Debenture will
result in the dilution to the interests of other holders of our common stock,
since Dutchess may sell all of the resulting shares into the public market.
The principal amount of the Debenture plus accrued interest may be converted at
the option of the Dutchess into shares of our common stock at a fixed conversion
price equal to $.27 per share.
The following table sets forth the number and percentage of our common stock
that would be issuable if the entire principal amount of the Debenture is
converted at the fixed conversion price of $.27.
Number of Shares (1) Percentage of Class (2)(3)
Debenture in the principal
amount of $340,000 at a fixed price
of $.27. 1,259,259 1.25%
(1) Represents the number of shares issuable if all of the outstanding principal
under the Debenture were converted at the indicated fixed conversion price. For
ease of reference, any shares of common stock that may be issued upon conversion
of interest under the Debenture have been excluded. The outstanding principal
under the Debenture bears interest at the rate of 12% per annum, calculated
on the basis of a 360-day year.
(2) Based on 101,006,954 common shares issued and outstanding on November 21,
2005.
(3) Percentage of the total outstanding common stock represented by the shares
issuable on conversion of Debenture without regard to any contractual or other
restriction on the number of securities the selling stockholders may own at any
point in time.
9
IF WE FAIL TO TIMELY DELIVER CERTIFICATES EVIDENCING THE NUMBER OF SHARES WHICH
DUTCHESS REQUESTS CONVERSION, WE ARE REQUIRED TO PAY LIQUIDATED DAMAGES TO
DUTCHESS.
In the event that we fail to deliver certificates for the number of shares into
which Dutchess has requested conversion, for any reason other than the
unavailability of the authorized but unissiued shares of our common stock, we
are required to pay to Dutchess 3% of the dollar value of the Debentures being
converted, compounded daily, per each day after the 3rd business day following
the conversion date that the common stock is not delivered to Dutchess. There is
no guarantee that we will have cash readily available to make such payments in
the event of our failure to timely deliver certificates in accordance with a
conversion request by Dutchess. In addition, such payments may leave us with
little or no capital in our business. This would have an adverse effect on our
continuing operations.
SALES OF A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK INTO THE PUBLIC
MARKET BY THE HOLDER OF OUR CONVERTIBLE DEBENTURE MAY RESULT IN SIGNIFICANT
DOWNWARD PRESSURE ON THE PRICE OF OUR COMMON STOCK AND COULD AFFECT THE ABILITY
OF OUR STOCKHOLDERS TO REALIZE THE CURRENT TRADING PRICE OF OUR STOCK.
If Dutchess converts the Convertible Debenture and any accrued interest,
Dutchess may acquire and resell up to 1,259,259 shares of our common stock. The
issuance of the shares of our common stock upon conversion of the convertible
Debenture will result in dilution to the interests of the other holders of our
common stock. The resale of our common stock will increase the number of
publicly traded shares which could depress the market price of our common stock
and thereby affect the ability of our shareholders to realize the current price
of our common stock. In addition, as all of the shares we issue to Dutchess will
be available for resale, he mere prospect of our sales to them could depress the
market price of our common stock.
RISKS RELATING TO THE INVESTMENT AGREEMENT:
THERE ARE A LARGE NUMBER OF SHARES UNDERLYING OUR PERIODIC EQUITY INVESTMENT
AGREEMENT THAT ARE BEING REGISTERED IN THIS PROSPECTUS AND THE SALE OF THESE
SHARES MAY DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.
The issuance and sale of shares upon delivery of an advance by Dutchess Private
Equities Fund II, LP ("Dutchess") pursuant to the Investment Agreement in the
amount up to $5,000,000 and the conversion of the Debenture and exercise of
warrants by Dutchess are likely to result in substantial dilution to the
interests of other stockholders. As of November 21, 2005, we had 101,006,954
shares of common stock issued and outstanding. We are registering 19,495,221
shares of common stock pursuant to this registration statement, of which up to
17,921,147 are reserved for issuance pursuant to the Investment Agreement with
Dutchess Private Equities Fund II, LP.
ASSUMING THE ISSUANCE OF 17,921,147 SHARES UNDER THE INVESTMENT AGREEMENT,
EXISTING SHAREHOLDERS WILL EXPERIENCE SUBSTANTIAL DILUTION OF OUR SHARES OF
COMMON STOCK.
Our Investment Agreement with Dutchess contemplates the potential future
issuance and sales of up to $5,000,000 of our Common Stock to Dutchess subject
to certain restrictions and obligations. Given out current capital needs and the
market price of our common stock, we presently have no intention of drawing down
the entire amount available to us unless the market price of our common stock
increases.
The following is an example of the shares of our common stock that are issuable
upon the entire drawdown of $5,000,000 on our equity line based on prices at
25%, 50% and 75% below $.279.
------------------------------------------------------------------------------------------------------------------------------
% Below price Price per share Number of shares issuable Shares outstanding (2) % of Outstanding stock(3)
(1)
------------------------------------------------------------------------------------------------------------------------------
Purchase price (4) $.279 17,921,147 118,927,501 17.74%
------------------------------------------------------------------------------------------------------------------------------
25% $.209 23,923,445 124,930,399 23.69%
------------------------------------------------------------------------------------------------------------------------------
50% $.140 35,714,286 136,721,240 35.36%
------------------------------------------------------------------------------------------------------------------------------
75% $.070 71,428,571 172,435,525 70.72%
------------------------------------------------------------------------------------------------------------------------------
(1) Represents the number of shares issuable if all the entire $5,000,000 under
the equity line of credit, was drawn down at the indicated price.
(2) Based on 101,006,954 common shares issued and outstanding on November 21,
2005.
(3) Percentage of the total outstanding common stock represented by the shares
issuable on draw down on the equity line of credit without regard to any
contractual or other restriction on the number of securities the selling
stockholders may own at any point in time.
(4) Based on a price of $.279 which is 93% of the lowest closing price of our
common stock during the five day period commencing November 16, 2005 through
November 22, 2005.
10
THE LOWER THE STOCK PRICE, THE GREATER THE NUMBER OF SHARES ISSUABLE UNDER THE
INVESTMENT AGREEMENT WHICH COULD CONTRIBUTE TO THE FUTURE DECLINE OF OUR STOCK
PRICE AND MATERIALLY DILUTE EXISTING STOCKHOLDERS' EQUITY AND VOTING RIGHTS.
The number of shares that Dutchess will receive under its agreement with us is
calculated based upon the market price of our common stock prevailing at the
time of each "put". The lower the market price, the greater the number of shares
issuable under the agreement. Upon issuance of the shares, to the extent that
Dutchess will attempt to sell the shares into the market, these sales may
further reduce the market price of our common stock. This in turn will increase
the number of shares issuable under the agreement. This may lead to an
escalation of lower market prices and ever greater numbers of shares to be
issued. A larger number of shares issuable at a discount to a continuously
declining stock price will expose our shareholders to greater dilution and a
reduction of the value of their investment.
THE SALE OF OUR STOCK UNDER THE DUTCHESS AGREEMENT COULD ENCOURAGE SHORT SALES
BY THIRD PARTIES, WHICH COULD CONTRIBUTE TO THE FUTURE DECLINE OF OUR STOCK
PRICE AND MATERIALLY DILUTE EXISTING STOCKHOLDERS' EQUITY AND VOTING RIGHTS.
Neither the Investment Agreement or the Debenture Agreement contain restrictions
on short selling. Accordingly, any significant downward pressure on the price of
our common stock can encourage short sales by them or others, subject to
applicable securities laws. This is particularly the case if the shares being
placed into the market exceed the market's ability to absorb the increased
number of shares of stock or if we have not performed in such a manner to show
that the equity funds raised will be used by us to grow. Such an event could
place further downward pressure on the price of our common stock. Even if we use
the proceeds under the agreement to grow our revenues and profits or invest in
assets, which are materially beneficial to us, the opportunity exists for short
sellers and others to contribute to the future decline of our stock price. If
there are significant short sales of our stock, the price decline that would
result from this activity will cause the share price to decline more so, which,
in turn, may cause long holders of the stock to sell their shares thereby
contributing to sales of stock in the market. If there is an imbalance on the
sell side of the market for the stock, our stock price will decline. If this
occurs, the number of shares of our common stock that is issuable pursuant to
the Investment Agreement will increase, which will materially dilute existing
stockholders' equity and voting rights.
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;
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.
11
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.
12
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.
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered and
sold from time to time by the Selling Stockholders. We will receive proceeds
from the sale of shares of our common stock to Dutchess under the Investment
Agreement. The purchase price of the shares purchased under that agreement will
be equal to 93% of the lowest closing Best Bid (highest posted bid price of our
common stock) for the five trading days following the day that we submit a Put
Notice to Dutchess that we intend to sell shares to it. We may also receive
proceeds from the exercise of the warrants issued to Dutchess, if exercised.
For illustrative purposes, we have set forth below our intended use of proceeds
for the range of net proceeds indicated below to be received under the
Investment Agreement assuming a sale of 10%, 25%, 50% and 100% of the shares
issuable under that agreement. We have the ability to draw down the full
$5,000,000 pursuant to the agreement, however we may draw down less than that
amount. The table assumes estimated offering expenses and fees of $55,688.38
(includes (a) estimated legal fees and expenses of $45,000, (b) estimated
accounting fees and expense of $10,000 and (c) SEC filing fees of $688.38).
10% 25% 50% 100%
---------- ---------- ---------- -----------
Gross Proceeds $500,000 $1,250,000 $2,500,000 $5,000,000
Net Proceeds after offering
expenses and fees $444,311.62 $1,194,311.62 $2,444,311.62 $4,944,311.62
Use of proceeds:
General Working Capital $444,311.62 $1,194,311.62 $2,444,311.62 $4,944,311.62
=========== ============= ============= =============
Investment Agreement
On November 4, 2005, we entered into an Investment Agreement with Dutchess
Private Equities Fund II, LP, ("Dutchess") a Delaware limited partnership, for
the future issuance and purchase of shares of our common stock. This Investment
Agreement establishes what is sometimes termed an equity line of credit or an
equity drawdown facility.
In general, the drawdown facility operates as follows: Dutchess, has committed
to provide us up to $5,000,000 as we request it over a 36 month period, in
return for common stock we issue to Dutchess. We, in our sole discretion, may
during the Open Period deliver a "put notice" (the "Put Notice") to Duchess
which states the dollar amount which we intend to sell to Dutchess on the
Closing Date. The Open Period is the period beginning on the trading after this
Registration Statement is declared effective (the "Effective Date") and which
ends on the earlier to occur of 36 months from the Effective Date or termination
of the Investment Agreement in accordance with its terms. The Closing Date shall
mean no more than 7 trading days following the Put Notice Date. The Put Notice
Date shall mean the Trading Day immediately following the day on which Dutchess
receives a Put Notice, however a Put Notice shall be deemed delivered on (a) the
Trading Day it is received by facsimile or otherwise by Dutchess if such notice
is received prior to 9:00 am EST, or (b) the immediately succeeding Trading Day
if it is received by facsimile or otherwise after 9:00 am EST on a Trading Day.
The amount that we shall be entitled to Put to Dutchess shall be equal to, at
our election, either: (A) Two Hundred percent (200%) of the average daily volume
(U.S. market only) of the Common Stock for the three (3) Trading Days prior to
the applicable Put Notice Date, multiplied by the average of the three (3) daily
closing bid prices immediately preceding the Put Date, or (B) One Hundred
Thousand dollars ($100,000). During the Open Period, we shall not be entitled to
submit a Put Notice until after the previous Closing has been completed. The
Purchase Price for the Common Stock identified in the Put Notice shall be equal
to ninety-three percent (93)% of the lowest closing Best Bid price of the Common
Stock during the Pricing Period. The Pricing Period is the period beginning on
the Put Notice Date and ending on and including the date that is 5 trading days
after such Put Notice Date.
Dutchess' Obligation to Purchase Shares
Upon the receipt by Dutchess of a validly delivered Put Notice, Dutchess shall
be required to purchase from us, during the period beginning on the Put Notice
Date and ending on and including the date that is 5 Trading days after such Put
Notice, that number of shares having an aggregate purchase price equal to the
lesser of (a) the Put Amount set forth in the Put Notice and (b) 20% of the
aggregate trading volume of our common stock during the applicable Pricing
Period times (x) the lowest closing bid price of our common stock during the
specified Pricing period, but only if such said shares bear no restrictive
legend and are not subject to stop transfer instructions, prior to the
applicable Closing Date.
13
Conditions to Dutchess' obligation to purchase shares
We shall not be entitled to deliver a Put Notice and Dutchess shall not be
obligated to purchase any shares at a closing unless each of the following
conditions are satisfied:
A. a Registration Statement shall have been declared effective and shall remain
effective and available at all times until the Closing with respect to the
subject Put Notice for the resale of all the common stock issuable pursuant to
the Investment Agreement;
B. at all times during the period beginning on the related Put Notice Date and
ending on and including the related Closing Date, the Common Stock shall have
been listed on the Principal Market and shall not have been suspended from
trading thereon for a period of two (2) consecutive Trading Days during the Open
Period and we shall not have been notified of any pending or threatened
proceeding or other action to suspend the trading of our Common Stock;
C. we have complied with our obligations and are otherwise not in breach of a
material provision of, or in default under, the Investment Agreement and the
Registration Rights Agreement or any other agreement executed in connection with
the Investment Agreement, which has not been corrected prior to delivery of the
Put Notice Date;
D. no injunction shall have been issued and remain in force, or action commenced
by a governmental authority which has not been stayed or abandoned, prohibiting
the purchase or the issuance of the Securities; and
E. the issuance of the Securities will not violate any shareholder approval
requirements of the Principal Market.
If any of the foregoing events occurs during a Pricing Period, then Dutchess
shall have no obligation to purchase the Put Amount of Common Stock set forth in
the applicable Put Notice.
Mechanics of Purchase of shares by Dutchess
The closing of the purchase by Dutchess of Shares (a "Closing") shall occur on
the date which is no later than seven (7) Trading Days following the applicable
Put Notice Date (each a "Closing Date"). Prior to each Closing Date, (I) we
shall be required to deliver to Dutchess pursuant to the Investment Agreement,
certificates representing the Shares to be issued to Dutchess on such date and
registered in the name of Dutchess; and (II) Dutchess shall deliver to us the
purchase price to be paid for such Shares.
As compensation to Dutchess for a delay in issuance of the Shares beyond the
Closing Date, we have agreed to pay late payments to Dutchess for late issuance
of the Shares (delivery of the Shares after the applicable Closing Date) in
accordance with the following schedule (where "No. of Days Late" is defined as
the number of trading days beyond the Closing Date. The Amounts are
cumulative.):
LATE PAYMENT FOR EACH
NO. OF DAYS LATE $10,000 OF COMMON STOCK
1 $100
2 $200
3 $300
4 $400
5 $500
6 $600
7 $700
8 $800
9 $900
10 $1,000
Over 10 $1,000 + $200 for each Business Day late beyond 10 days
We shall pay any late payments in immediately available funds upon demand by
Dutchess.
Overall Limit on Common Stock Issuable.
If during the Open Period we become listed on an exchange that limits the number
of shares of our common stock that may be issued without shareholder approval,
then the number of Shares issuable by us and purchasable by Dutchess, including
the shares of Common Stock issuable to Dutchess, shall not exceed that number of
the shares of Common Stock that may be issuable without shareholder approval,
subject to appropriate adjustment for stock splits, stock dividends,
combinations or other similar recapitalization affecting the Common Stock (the
"Maximum Common Stock Issuance"), in excess of the Maximum Common Stock Issuance
shall first be approved by our shareholders in accordance with applicable law
and our By-laws and Amended and Restated Certificate of Incorporation, if such
issuance of shares of Common Stock could cause a delisting on the Principal
Market. Our failure to seek or obtain such shareholder approval shall in no way
adversely affect the validity and due authorization of the issuance and sale of
Securities or Dutchess' obligation in accordance with the terms and conditions
of the Investment Agreement to purchase a number of Shares in the aggregate up
to the Maximum Common Stock Issuance limitation, and that such approval pertains
only to the applicability of the Maximum Common Stock Issuance limitation.
14
Term
The Investment Agreement shall expire (a) when Dutchess has purchased an
aggregate of $5,000,000 of our Common Stock or (b) 36 months after the Effective
Date of the registration statement of which this prospectus forms a part,
whichever occurs earlier.
Suspension
The Investment Agreement shall be suspended upon any of the following events and
shall remain suspended until such event has been rectified:
A. the trading of our Common Stock is suspended by the SEC, the Principal Market
or the NASD for a period of two (2) consecutive Trading Days during the Open
Period; or,
B. Our Common Stock ceases to be registered under the 1934 Act or listed or
traded on the Principal Market.
Upon the occurrence of one of the above-described events, the Company shall send
written notice of such event to the Investor.
Sample Calculation of Stock Purchases
The following is an example of the calculation of the drawdown amount and the
number of shares we would issue to Dutchess in connection with that drawdown
based on the assumptions noted in the discussion below.
Sample Put Amount Calculation
The Put amount may at our election be either (i) $100,000 or; (ii) 200% of the
averaged daily volume (U.S market only) of our common stock for the three (3)
trading days prior to the applicable put notice date, multiplied by the average
of the 3 daily closing bid prices immediately preceding the put date.
The calculation below is based upon average daily volume of our common stock
prior to a Put Notice Date of November 15, 2005
Set forth below is a trading summary of our Common Stock for the period from
November 10 through November 22, 2005.
Date Open High Low Close Volume
---------------------------------------------------------------------
10-Nov-05 0.35 0.35 0.34 0.34 1,585
11-Nov-05 0.28 0.34 0.28 0.31 10,985
14-Nov-05 0.34 0.35 0.29 0.31 53,308
15-Nov-05 0.40 0.40 0.28 0.32 52,300
16-Nov-05 0.32 0.39 0.32 0.39 13,000
17-Nov-05 0.38 0.40 0.35 0.39 92,140
18-Nov-05 0.39 0.50 0.39 0.50 103,380
21-Nov-05 0.50 0.50 0.36 0.36 355,069
22-Nov-05 0.37 0.37 0.27 0.30 351,161
The average daily volume for the 3 trading days prior to November 15, 2005 based
upon the foregoing table is 21,959. 200% of the average daily volume is 43,918.
The average of the 3 daily closing bid prices immediately preceding the Put Date
of November 15, 2005 ($.31 + $.31 + $.34 divided by 3) is $.32. The total Put
Amount based upon the assumptions set forth above is $14,053.76 (200% of the
average daily volume of the Common Stock for the three (3) trading days prior to
the applicable put notice date (43,918), multiplied by the average of the three
(3) daily closing bid prices immediately preceding the Put Date ($.32)).
Sample Calculation of Purchase Price
The Purchase Price shall be equal to ninety-five percent (93%) of the lowest
closing highest posted bid price of our common stock during the Pricing Period.
The Pricing Period is the period beginning on the Put Notice Date and ending on
and including the date that is five (5) Trading Days after such Put Notice Date.
Using the same hypothetical set forth above, the pricing period is November 16,
2005 through November 22, 2005. The lowest closing highest posted bid price of
the Common Stock during this period is $.30. The Purchase Price per share is
$.279 (93% of the lowest highest posted bid price of $.30).
15
Debenture Agreement
On November 4, 2005 we issued a Debenture to Dutchess in the principal amount of
$340,000 with a maturity date of November 4, 2010.
Interest and Payments
We will pay 12% annual coupon on the unpaid face amount of the Debenture. We are
required to make payments as set forth on the table below.
Convertible
Amount Interest Rate Redemption
$340,000.00 12% 125%
Amount with
Accrued
Interest Applied to Applied to Applied to
Amount Due for Period Payment Principal Interest Redemption
8/1/2005 $340,000.00 $343,369.46 $ 3,369.46 ($0.00) $ 3,369.46 ($0.00)
9/1/2005 $340,000.00 $343,369.46 $ 3,369.46 ($0.00) $ 3,369.46 ($0.00)
10/1/2005 $340,000.00 $343,369.46 $ 3,369.46 ($0.00) $ 3,369.46 ($0.00)
11/1/2005 $340,000.00 $343,369.46 $40,498.44 $ 29,703.18 $ 3,369.46 $ 37,128.98
12/1/2005 $310,296.82 $313,371.91 $40,498.44 $ 29,938.67 $ 3,075.10 $ 37,423.34
1/1/2006 $280,358.15 $283,136.54 $40,498.44 $ 30,176.03 $ 2,778.40 $ 37,720.04
2/1/2006 $250,182.11 $252,661.46 $40,498.44 $ 30,415.27 $ 2,479.35 $ 38,019.09
3/1/2006 $219,766.84 $221,944.77 $40,498.44 $ 30,656.41 $ 2,177.93 $ 38,320.51
4/1/2006 $189,110.44 $190,984.55 $40,498.44 $ 30,899.46 $ 1,874.12 $ 38,624.32
5/1/2006 $158,210.98 $159,778.88 $40,498.44 $ 31,144.43 $ 1,567.90 $ 38,930.54
6/1/2006 $127,066.55 $128,325.80 $40,498.44 $ 31,391.35 $ 1,259.25 $ 39,239.19
7/1/2006 $ 95,675.20 $ 96,623.36 $40,498.44 $ 31,640.22 $ 948.16 $ 39,550.28
8/1/2006 $ 64,034.98 $ 64,669.58 $40,498.44 $ 31,891.07 $ 634.60 $ 39,863.84
9/1/2006 $ 32,143.91 $ 32,462.46 $40,498.44 $ 32,143.91 $ 318.55 $ 40,179.89
10/1/2006 $ 0.00 $ 0.00 $40,498.44 $ 32,398.75 $ 0.00 $ 40,498.44
Subsequent to the Effective Date, Dutchess can either request a payment as set
forth in the table above to elect to convert a portion of the Debenture in an
amount equal to the payment amount.
Conversion
Dutchess may convert the face amount of the Debenture, plus accrued interest, in
whole or in part by giving us written notice. The fixed conversion price is
$.27 per share. No fractional or scrip shares will be issued on conversion. In
addition, in the event that any portion of the Debenture remains outstanding
on the Maturity Date, such outstanding amount shall be automatically converted
into shares of our common stock. In the event that we do not make delivery of
the common stock as instructed by Dutchess, we shall be obligated to pay to
Dutchess 3% in cash of the dollar value of the Debentures being converted,
Compounded daily, per each day after the 3rd business day following the
conversion date that the Common Stock is not delivered to Dutchess.
The number of shares included in this Registration Statement with respect to the
Debenture is 1,259,259. This is based upon the fixed conversion price of $.27
per share.
Events of Default
We will be considered in default if any of the following events occurs:
(a) we do not make a Payment of the principal of the Debenture by conversion
into Common Stock within five (5) business days of the Maturity Date, upon
redemption or otherwise;
16
(b) we do not make a payment, other than a payment of principal, for a period of
three (3) business days thereafter;
(c) any of our representations or warranties contained in the Subscription
Agreement (executed in connection with the Debenture Agreement) or the Debenture
were false when made or we fail to comply with any of our the agreements
executed in connection with Debenture and such failure continues for a period of
five (5) business days, and such default in not cured within five (5) business
days after the receipt of notice from Dutchess;
(d) we, pursuant to or within the meaning of any Bankruptcy Law; (i) commences a
voluntary case; (ii) consents to the entry of an order for relief against us in
an involuntary case; (iii) consents to the appointment of a Custodian on our
behalf or for all or substantially all of our property or (iv) makes a general
assignment for the benefit of our creditors or (v) a court of competent
jurisdiction enters an order or decree under any Bankruptcy Law that: (A) is for
relief against us in an involuntary case; (B) appoints a Custodian on our behalf
or for all or substantially all of our property or (C) orders our liquidation,
and the order or decree remains unstayed and in effect for sixty (60) calendar
days;
(e) our Common Stock is suspended or no longer listed on any recognized exchange
including electronic over-the-counter bulletin board for in excess of five (5)
consecutive Trading Days;
(e) we violate any terms and conditions of the Registration Rights Agreement
executed by us in connection with the Debenture Agreement;
(f) the Registration Statement, of which this Prospectus forms a part,
underlying the Debenture is not declared effective by the SEC within twelve (12)
months of the Issuance Date.
In the Event of Default, Dutchess may among other things:
(a) elect to secure a portion of our assets not to exceed 200% of the Face
Amount of the Note, in Pledged Collateral;
(b) elect to garnish Revenue from us in an amount that will repay the Holder on
the payment schedule set forth above;
(c) exercise its right to increase the Face Amount of the Debenture by ten
percent (10%) as an initial penalty and for each Event of Default under the
Debenture;
(d) elect to increase the Face Amount by two and one-half percent (2.5%) per
month (pro-rata for partial periods) paid as a penalty for liquated damages
which will be compounded daily;
If the Registration Statement, of which this Prospectus forms a part, underlying
the Debenture is not declared effective by the SEC within twelve (12) months of
the Issuance Date. Dutchess may elect to switch the Conversion Price to such
amount as shall be equal to the lesser of a) $.27 or b) seventy percent (70%) of
the lowest closing bid price of the Common Stock during the fifteen (15) trading
days prior to conversion.
Limitation on Amount of Conversion and Ownership
The Debenture provides that Dutchess shall not be entitled to convert that
amount of Debenture into common stock, which when added with the sum of the
number of shares beneficially owned by Dutchess would exceed 4.99% of the number
of shares of our common stock outstanding on the conversion date.
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
Hybrid Fuel Systems is engaged in the automotive aftermarket through developing
and commercializing systems which convert diesel and gasoline engines to operate
on natural gas and propane. The Company's principal technology is embodied in
five US Patents and several foreign patents pending licensed to Hybrid on a
world-wide exclusive basis. The Company also resells medium and light-weight
vehicle conversion systems under an agreement with ECO Fuels, Inc. and we
resell and service fuel filling stations. We have sought to insert our
technology into the marketplace through original equipment manufacturers (OEM)
parallel with expanding our direct-to-consumer activities.
We conduct our operations from locations in Florida, Georgia and Oklahoma. We
have established a network of trained installation partners in approximately 14
states. Our facilities in Georgia comprise 12,000 square feet in which we
operate two fully equipped engine rooms, control room and house various Horiba
emission testing equipment. We completed the build-out of our engine rooms
during September 2005 and we are engaged in finalizing the footprint and
calibration of the Horiba emission testing equipment.
17
The following discussion provides insights into our commercialization progress,
state of operations and liquidity. In our opinion, we are positioned to show
meaningful revenue growth in the fourth quarter and to enter 2006 in the most
favorable position in the life of our Company.
To increase an understanding of our business plan, a summary of recent industry
changes is helpful. The domestic alternative fuels segment of the automotive
aftermarket was primarily born out of the need to comply with EPA and worldwide
mandates relating to emissions discharge. Previously, there was little or no
price differential between gas or diesel and natural gas or propane. The sale of
systems similar to our dual fuel approach were sold without regard to the
economic consequences of the buyer. In the course of implementing the EPA plan,
federal and state authorities made available financing through grants in that
each grant was designed to seek out technologies which could bring vehicles into
EPA compliance. Since there was no economic factor involved in the sale, i.e.,
the product didn't have to promise a return on investment, these systems were
priced at rates inconsistent with an economic based sale. As the granting
authority was concerned with emissions and not profits, there was no incentive
to offer systems at conventional rates. As a result, conversion systems were not
appealing to either the OEM or the general consumer.
The pricing of fuels worldwide has changed that dynamic and in so doing, has
resulted in a paradign shift in the economic appeal of our product line.
Typically, domestic gas or diesel costs on average $1 to $2 a gallon more than
either natural gas or propane. Worldwide in places like China and South America,
natural gas is even more attractive with price differentials in the $2 to $4 per
gallon range for natural gas over either diesel or gasoline. For the first time
in the life of our product line, there is a strong economic incentive to convert
a vehicle. The fact that natural gas is inherently cleaner to burn than either
diesel or gasoline is now perceived as an added bonus but not the justification
for the purchase. We consider this a major industry change that holds the
potential to expand our market share. With this industry backdrop, we now
briefly discuss the progress of our market penetration strategy beginning with
the OEM.
To provide for our OEM development activities, we invested approximately
$300,000 into a state-of-the-art facility including two fully equipped engine
rooms, a control room and various emission testing equipment. We completed this
important facility during September and have been actively developing OEM
systems since June 2005. Presently:
- We are developing an electronic system to convert a 2.5L and 3.0L vehicle
to a dual fuel vehicle for a Thailand-based arm of a domestic OEM. This client
shipped a vehicle to our facility during the first quarter of 2005 and we
completed and delivered a prototype system during July 2005. During September,
this client ordered four additional systems to continue their evaluation
process. We will hand-deliver and aid in the installation of these four systems
during the last week November, first week of December 2005.
- We are developing a mechanical system to covert a bus/truck engine to a
dual-fuel engine for a China-based OEM. In this case, the client shipped an
engine to our facility in Georgia. We have developed this system in one of our
development engine rooms and we anticipate shipping a prototype to China during
late November, early December 2005.
- We have proposed to develop a system at the request of a domestic OEM
primarily engaged in the manufacturing of buses and recreational vehicles. The
terms of our proposal require the delivery of a bus to our facility in Georgia
and we estimate a preliminary development period of four to six weeks.
- Although not an OEM, we are finalizing a mechanical system for light and
medium weight vehicles in Thailand on behalf of a regional distributor.
Challenges that we have met in pursuing our OEM pathway principally relate to
price and to a lessor degree, the bureaucratic nature of the large OEM and the
distance between our company and these prospective clients. Our most promising
near term OEM opportunities are in commercializing our systems in foreign
markets, particularly Thailand and China.
- In those markets, costs to produce items such as our system are
substantially lower than the costs we currently pay for domestically
manufactured parts and components. If we are unable to reduce the costs of our
system through in-country manufacturing, it is unlikely we can successfully sell
our system in those markets. We are currently in discussion with several
manufacturers in Thailand and Malaysia and we are confident our system can be
manufactured at competitive rates at those locations.
- The process typically engaged by OEM's begins with a technology evaluation
on an individual and competitive basis. As this is a documented procedure, it
typically must follow a series of steps which can take an extended period of
time. We have no control over this process or the length of time each OEM may
dedicate to their respective evaluation.
- The physical separation between Thailand, China and our facilities in
Georgia as well as interacting with technicians fluent in a foreign language has
worked to slow down the pace of development. While we have not encountered any
serious complications based on this geographic separation, what normally would
take a day or so can extend into a week or longer. We anticipate that as we
develop our foreign relationships and move from a development to a vendor
status, the distance between our companies will not cause a meaningful problem.
We are unable at this time to predict what sales will result from this
developmental activity. However, we believe that any sales through an OEM
pipeline will provide a strong position from which to expand within that segment
of our marketing strategy. Our parallel pathway into the marketplace is through
an expansion of our domestic direct commercialization program. Presently:
18
- We currently hold EPA Certifications for five engine platforms which
encompass approximately 35 specific vehicle models. A complete list of the
vehicle models which are compatible with our EPA Certified systems is available
through our Internet website at hybridfuelsystems.com.
- We are completing fleet conversions with the Dallas County School system
and recently completed converting a portion of a taxi fleet in Arizona.
- We have trained (which includes the sale of a system/conversion of a
vehicle) to 11 installation partners located in approximately 14 states.
Against this backdrop, we intend to establish a sales office in four to six of
these markets during 2006. This coast-to-coast network is an essential part of
our retail selling program.
- We have executed a sub-license with WITCO Intl. WITCO Intl is owned by
WITCO Systems, a Wisconsin-based company which is the largest Dae Woo forklift
distributor in North America. WITCO's territory includes China and India and we
are in discussions now with WITCO to expand their license throughout Asia.
- We have executed a sub-license with McCooey Engineering based in the
United Kingdom. McCooey Engineering, among other things, provides all field
service support for John Deere equipment in the United Kingdom. We have worked
with McCooey for over a year and they are now installing systems at the
approximate rate of 5 per month.
Challenges that we have encountered in establishing and expanding our direct
selling program include:
- Availability of parts, particularly the specialized injectors which are
necessary for our propane systems. While we haven't experienced a shortage of
injectors for our CNG systems. However, we experienced a severe slow down in
the conversion of the Dallas County School system as our supplier was unable to
purchase propane injectors. The back order problem has been solved and we are
receiving injectors once again. We have also taken this opportunity to evaluate
a second injector which, once modified, will provide us a backup source.
- Sufficient skilled labor to complete our installations. While we have
been able to hire three additional qualified mechanics for our Oklahoma
operations, locating individuals skilled with mechanics as well as working
around compressed gases has worked to create a modest backlog in our
installation scheduling. We believe this problem is being alleviated
principally through establishing our coast-to-coast network of qualified
installation centers as well as continuing to interview and hire qualified
employees.
While we are unable at this time to forecast our revenues for the retail
component of our marketing strategy, we are completing a year where we have sold
and installed more systems than any previous four year period combined. Our
outlook for 2006 indicates we should outperform 2005 on a quarter by quarter
basis. Further, we believe establishing four to six new sales offices during
2006 will work to substantially compliment our existing efforts.
Liquidity
We believe we are on track to become profitable during the first quarter 2006.
If we are correct, our need for financing will be limited to capital
improvements or product development. During November 2005, we concluded a round
of financing with Dutchess Fund which, when our registration is declared
effective, provides up to $5,000,000 in equity financing. We believe that our
earnings from anticipated revenues together with access to our equity line
provides for all our capital needs for the foreseeable future.
Calculating the comparisons between our reporting periods
Providing meaningful insight into our product and manufacturing costs as well as
expenses incurred in delivering our technology have been difficult because we
have previously sold our systems at the rate of one or two a month under federal
and/or state grants. We have not had the ability for our product to take
advantage of quantity discounts in our raw materials and component parts.
Further, our labor costs in our present environment would appear unusually high
given our revenues. However, in order for us to position our company to
maximize opportunities, we have found it necessary to engage professionals and
mechanics in sufficient number to complete the build-out of our facility in
Atlanta as well as developing new systems.
We have attempted in the following two sections to provide some insight into the
changes in our financial results on a three month and nine month basis.
However, given the factors sited above, we don't believe these comparisons are
indicative of our future operating performance.
Three Months Ended September 30, 2005 Compared to Nine Months Ended September
30, 2004
Our current assets increased 636% from $73,498 at the year ended December 31,
2004 to $541,186 for the period ended September 30, 2005 and during this same
period our total assets increased by approximately 6031% from $82,005 to
$5,028,093. Total liabilities during this period increased by 200% from $753,258
at the year ended December 31, 2004 to $2,256,488 at September 30, 2005. Our
Shareholders' Deficit decreased during this nine month period from $(671,253) at
the year ended December 31, 2004 to $ 2,771,605 at September 30, 2005.
19
In comparing profit and loss during the three month period ended September 30,
2004 and 2005, our revenue and gross profits increased by 571% and (38%),
respectively from $33,418 and $10,681 to $224,299 and $6,619. The increase in
revenues during this period were principally due to our acquisition of DRV
Energy and the EPA certified systems which were a part of that acquisition.
Comparing these two periods, our operating expenses decreased to 1% from $
665,054 for the three months period ended September 30, 2004 to $657,141 for the
period ended September 30, 2005. Our net loss for the three months period
increased approximately 10% from $(1,286,037) for the three months ended
September 30, 2004 to $(1,413,903) for the three month period ended September
30, 2005.
Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30,
2004
In comparing profit and loss during the nine month period ended September 30,
2004 and 2005, our revenue and gross profits increased by 127% and (54%),
respectively from $122,589 and $71,743 to $278,035 and $33,058. The increase in
revenues during this period were principally due to our acquisition of DRV
Energy and the EPA certified systems which were a part of that acquisition.
Comparing these two periods, our operating expenses increased to 85% from
$1,058,672 for the nine months period ended September 30, 2004 to $1,955,964 for
the period ended September 30, 2005. Our net loss for the nine months period
increased approximately 109% from $(1,627,605) for the three months ended
September 30, 2004 to $(3,397,244) for the three month period ended September
30, 2005.
RESULTS OF OPERATIONS
COMPARISON OF FISCAL YEAR ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2004
Balance Sheet
Assets
For the year ended December 31, 2003, we had current assets of $28,938 and total
assets of $44,515. For the year ended December 31, 2004, current assets
increased 153% to $73,498 and total assets increased 84.2% to $82,005. The
increase of approximately $44,500 was the result of acquiring certain minor
equipment and the accumulation of various parts required to continue our
research and development. However, in the future, we may acquire more or less
equipment and parts and this purchase should not be taken as a standard in our
operating condition.
In addition, during the first quarter 2005, we arranged for the purchase of
various Horiba and other emission testing equipment for $40,000. The seller
which is a utility operating in Georgia had been active in the alternative fuels
industry in the late 1990s and had since curtailed that portion of their
business and stored all the idle equipment. As our operations are located in
Atlanta, Georgia when we began to set up our new facilities in PeachTree City,
Georgia, we informally inquired the availablility of this equipment. We were
informed that we could purchase the entire room of equipment for a one-time
payment of $40,000. We did not purchase any other assets or liabilities and
there are no further obligations. The seller of the equipment is not a related
party to our Company. In addition, during February 2005 we made a $76,000
deposit toward the purchase of a new Taylor dynometer at a total cost of
approximately $232,000. Final delivery is expected during September 2005. We
intend to locate the equipment in our new 12,000 square-foot facility in
PeachTree City, Georgia.
Liabilities
For the year ended December 31, 2003, we had current liabilities of $1,456,199
and total liabilities of $1,986,199 including $530,000 of redeemable securities.
For the year ended December 31, 2004, current liabilities had been reduced by
$702,941 or 48.3% to $753,258 and total liabilities had been reduced by
$1,232,941 to $753,258 or 61.9%. The significant reduction in our current and
total liabilities was made possible solely by the cash investments made by White
Knight. These liabilities were created over an extended period of time from
approximately 1999 through 2003.
During this period, convertible debt in default was reduced by 72.4% from
$283,200 at year ended December 31, 2003 to $78,200 at year ended December 31,
2004 through a negotiated settlement with a series of note holders and the
issuance of our common stock. During the 2004, we repaid amounts owed to the
Internal Revenue Service since 1999. In addition, we reduced the 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. The negotiated
settlement with the note holders, the payment of past due federal payroll taxes
are both one-time events which we believe will not occur again. These reductions
in significantly past due federal taxes were made possible by infusions of cash
by White Knight and were not repaid from our operational revenue.
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.
Stockholders' Deficit
For the period ended December 31, 2003, we reflected $3,987,712 in paid-in
capital and $12,164 of common stock and a shareholder deficit totaling
$(1,941,684). For the period ended December 31, 2004, paid-in capital increased
by approximately 117.6% to $8,916,407 and the common stock had increased by
438.5% to $65,510. During the 2004 fiscal year, total shareholders' deficit was
reduced 65.4% from $(1,941,684) at the year end December 31, 2003 to $(671,253)
at year ended 2004.
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In summary, during the twelve months ended December 31, 2004, we increased
current assets by 84.2% and total assets by 12% while reducing current
liabilities by 48.3% and total liabilities by 72.4%. During this period, we
increased paid-in capital by 117.6% and common stock by 438.5% while reducing
shareholders' deficit by 65.4% and increasing shareholders' equity by
$1,270,431. These reductions in liabilities and increases in assets were the
direct result of the negotiated settlements and direct payments made by White
Knight on our behalf. As these changes to our financial condition were the
result of capital provided and not derived, it is impossible to associate these
changes with our prospective future operating results except to observe they
represent an improvement in our financial condition over the previous reporting
period.
Statement of Operations
For the year ended December 31, 2003, we posted revenues of $231,269 and gross
profit of $155,354. During 2004, we dedicated our resources to reengineering the
technology and to pursuing the EPA/CARB technology verification described
elsewhere in this report. As a result, revenues during 2004 decreased by
approximately 40.1% to $138,724 and gross profit decreased by 49% to $79,336.
Previously, all our revenue were derived exclusively through selling our systems
to certain governmental entities and municipalities who had received grant funds
for the purpose of converting vehicles to achieve an emissions target. The
reduction in sales is a function of grant availability and the abilities of our
sub-licensee to aquire such grant projects. A major thrust of our marketing
strategy going forward is to pursue the commercial marketplace as predicating
our business success on the realibilty of consistent grant financing is
unreliable.
During the 12 month period ended December 31, 2004, our consulting fees
increased by approximately 101% from $203,859 to $410,183 and our research and
development costs increased from $0 at year ended 2003 to $130,814 at year ended
December 31, 2004. The majority of the research and development costs were
incurred in connection with 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.
Total operating expenses during the 12 months ended December 31, 2004 increased
from $515,689 to $2,113,045. Total operating expenses minus the one-time charge
for the issuance of stock was $913,045. This increase in our cash expenses
during this period was because we had the available cash (provided by White
Knight) to meet a number of our past due obligations. Many of these expenses
were incurred prior to 2004. Our net loss increased from $548,821 at year ended
December 31, 2003 to $2,972,473 at year ended December 31, 2004. Our overall net
loss for this period is principally the result of White Knight providing capital
to meet our obligations created prior to January 2004 and our efforts to
re-engineer our technology.
Basic and diluted loss per share increased from $(0.05) at the year ended
December 31, 2003 to $(0.12). 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 $(0.09).
In summary, during the twelve month period ended December 31, 2004, our revenues
and gross profit decreased by 40% and 49% respectively and operating 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 140%. Excluding
the one time charge for the issuance of common stock, total operating expenses
increased by 77%, compensation increased by 96.3% for the periods ended December
31, 2003 compared to the same period ended December 31, 2004. However, the
change in revenues and gross profit are incidental in that during this fiscal
period we sold a total of less than approximately 12 dual fuel systems. Lacking
any meaningful sales at all, the changes we encountered in our operating
posture, consulting fees, compensation and our net loss to operations are the
result of rebuilding our enterprise and not as a result of our operations.
Further, we don't believe the majority of these expenses will recur and thus, we
don't believe a comparison between these two fiscal periods is in any way
indicative of our anticipated future operating performance.
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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.
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;
22
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.
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
23
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.
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%
---------------------------------------------------------------------- -------------------------
24
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
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.
25
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.
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.
26
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%.
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%.
27
Our technology, by contrast, reduces PM emissions by avoiding making soot in the
first placeMoreover, 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.
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.
28
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.
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.
29
EMPLOYEES
As of November 21, 2005, the Company had 22 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, 2 were engaged in sales and marketing and 12 are engaged as
mechanics. 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 after which we will operate
our new leased facility in PeachTree City, Georgia.
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.
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, IncMr. 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.
30
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.
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 $100,000 or more.
Summary Compensation Table
Long Term Compensation
Annual Compensation Awards Payouts All
Other Annual Other
Name and Principal Position Year Salary Bonus Compensation Compensation
($) ($) ($)
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
During August 2005 the Board of Directors amended the agreement with our Chief
Executive Officer and interim Chief Financial Officer Mark Clancy to Authorize
cash compensation at the rate of $20,000 per month. The Board and Mr. Clancy
intend to negociate a new employment agreement to replace the agreement which is
scheduled to expire in December 2005.
EMPLOYMENT AGREEMENTS
Effective August 30, 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 with our accountants on accounting or financial
disclosure.
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
2005 Bid Ask
--- ---
1st Qtr $0.40 $0.90
2nd Qtr $0.28 $0.80
3rd Qtr $0.20 $0.40
4th Qtr* $0.28 $0.50
* Through November 21, 2005
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NUMBER OF STOCKHOLDERS
As of November 21, 2005, there were approximately 494 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.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table indicates beneficial ownership of our common stock as of
November 21, 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 19.20%
Mark Clancy 11,101,035 10.90%
All Directors and Executive
Officers as a group (2 persons) 30,572,983 30.10%
Other 5% Stockholders:
White Knight SST, Inc.(2) 20,000,000 19.80%
(1) Applicable percentage ownership as of November 21, 2005 is based upon
101,006,954 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.
32
SELLING SHAREHOLDERS
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."
-----------------------------------------------------------------------------------------------------------------------------------
Common Shares Percentage of Common Shares Issuable Shares Beneficial Ownership
Name of Selling Shareholder Beneficially Owned Outstanding upon Exercise of Registered in after this Offering(2)
by Selling Shares Securities forming this Offering
Shareholder Before Beneficially part of this Offering
Offering (1) owned Before
Offering
-----------------------------------------------------------------------------------------------------------------------------------
Number of Percent(3)
Shares
-----------------------------------------------------------------------------------------------------------------------------------
Dutchess Private Equities 5,040,247 4.99% 19,495,221 (5) 19,495,221 None 0.0%
Fund II, LLP (4)
312 Stuart Street
Boston, MA 02116
(1) Ownership as of November 21, 2005, for the selling stockholders based on
information provided by the selling stockholders or known to us.
(2) Because the selling stockholders may offer all or only some portion of the
shares of common stock to be registered, no estimate can be given as to the
amount or percentage of these shares of common stock that will be held by the
selling shareholder upon termination of the offering. Accordingly, it is assumed
that all of the shares of common stock offered pursuant to this prospectus will
be sold, although the selling stockholders are under no obligation known to us
to sell any shares of common stock at this time.
(3) A total of 101,006,954 shares of common stock were issued and outstanding as
of November 21, 2005.
(4) Michael Novielli and Douglas Leighton, the managing members of Dutchess
Capital Management, LLC, the general partner of Dutchess Private Equities Fund
II, LLP share dispositive and voting power with respect to shares held by
Dutchess Private Equities Fund II, LLP.
(5) Represents (i) all of the common stock that potentially may be issued upon
the draw down of $5,000,000 on our equity line at $0.279 per share in an
aggregate amount of 17,921,147 shares, (ii) all of the common stock that
potentially may be issued upon the conversion of $340,000 convertible debenture
at a fixed conversion price of $0.27 per share in an aggregate of 1,259,259
shares, and (iii) all of the common stock that potentially may be issued upon
the exercise of 314,815 common share purchase warrants issued to the named
selling stockholder. The Debenture Agreement contains contractual restrictions
on beneficial share ownership limiting Dutchess' beneficial ownership to 4.99%.
The following is a description of the selling shareholders relationship to us
and how each the selling shareholder acquired the shares to be sold in this
offering:
(A) On November 4, 2005, we entered into an Investment Agreement with Dutchess
Private Equities Fund II, LLP ("Dutchess") providing for the sale of up to
$5,000,000 of our common stock over a period of up to 36 months after the
effective of the registration statement of which this prospectus forms a part.
Under the agreement, Dutchess is required to purchase "Puts" which shall be
equal to either (i) $100,000 or; (ii) 200% of the averaged daily volume (U.S
market only) of our common stock for the three (3) trading days prior to the
applicable put notice date, multiplied by the average of the 3 daily closing bid
prices immediately preceding the put date.
In connection with the Investment Agreement we entered into a Debenture
Agreement providing for the sale of $340,000 in principal amount of our five
year convertible debentures to Dutchess. These debentures bear interest at 12%
per annum (payable in cash or stock at Dutchess' option). The first $190,000
(less expenses) has been funded with an additional $150,000 to be funded
immediately upon filing of the registration statement of which this prospectus
forms a part. Our obligation to repay Dutchess is secured by a security
agreement, which we have entered into with Dutchess. We have pledged all of our
assets to insure repayment of this obligation. Dutchess' security interest in
our assets will be subject to any claims by our bank, which provides us with a
line of credit. Subject to adjustment as more fully set forth in the Debenture
Agreement, the fixed conversion price of the debenture is $.27 per share.
We also issued to Dutchess a warrant to purchase 314,815 shares of common stock
with a strike price of $.27 per share. The warrant may be exercised for a
period of five years and the strike price is subject to adjustment if certain
conditions are not met.
33
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.
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 150,000,000
shares of common stock, par value $.001 per share and 5,000,000 shares of
preferred stock, par value $.001 per share. As of November 21, 2005, there are
101,006,954 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.
34
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.
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.
35
PLAN OF DISTRIBUTION
The selling stockholder, or its pledgees, donees, transferees, or any of its
successors in interest selling shares received from the 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 a selling
stockholder) 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 stockholder 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.
The selling stockholders and any underwriters, brokers, dealers or agents that
participate in the distribution of the common stock are "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.
36
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 those 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 have agreed to indemnify the selling stockholder and any brokers, dealers and
agents who may be deemed to be underwriters, if any, of the common stock offered
by this prospectus, against specified liabilities, including liabilities under
the Securities Act. The selling stockholder has agreed to indemnify us against
specified liabilities.
The issued and outstanding common stock, as well as the common stock to be
issued offered by this prospectus was originally, or will be, issued to the
selling stockholders pursuant to an exemption from the registration requirements
of the Securities Act, as amended. We agreed to register the common stock issued
or to be issued to the selling stockholders under the Securities Act, and to
keep the registration statement of which this prospectus is a part effective
until all of the securities registered under this registration statement have
been sold. We have agreed to pay all expenses incident to the registration of
the common stock held by the selling stockholders in connection with this
offering, but all selling expenses related to the securities registered shall be
borne by the individual holders of such securities pro rata on the basis of the
number of shares of securities so registered on their behalf.
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.
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 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.
37
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.
38
PART I - FINANCIAL INFORMATION
HYBRID FUEL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
For the Nine Months Period Ended
September 30, 2005 (unaudited) and annual period ended December 31, 2004
(audited)
ASSETS
September 30, 2005 December 31, 2004
-------------------- -------------------
ASSETS (unaudited) (audited)
Current Assets
---------------------------------------------------
Cash. . . . . . . . . . . . . . . . . . . . . . . . $ 9,343 $ 2,025
Accounts Receivable, net. . . . . . . . . . . . . . $ 273,770 $ 27,005
Prepaid expenses and deposits . . . . . . . . . . . $ 105,688 $ 7,845
Inventory . . . . . . . . . . . . . . . . . . . . . $ 152,385 $ 36,623
-------------------- -------------------
Total current assets. . . . . . . . . . . . . . . . $ 541,186 $ 73,498
-------------------- -------------------
Property, plant & equipment, net. . . . . . . . . . $ 353,423 $ 8,507
Goodwill. . . . . . . . . . . . . . . . . . . . . . $ 4,133,484 $ -
-------------------- -------------------
Total assets. . . . . . . . . . . . . . . . . . . . $ 5,028,093 $ 82,005
-------------------- -------------------
LIABILITIES
Current Liabilities
---------------------------------------------------
Accounts payable. . . . . . . . . . . . . . . . . . $ 404,168 $ 120,980
Accounts payable in settlement. . . . . . . . . . . $ 81,956 $ 121,956
Debt in litigation. . . . . . . . . . . . . . . . . $ 109,868 $ 109,868
Advanced Deposits . . . . . . . . . . . . . . . . . $ 123,564 $
Due to related parties. . . . . . . . . . . . . . . $ 752,752 $ 26,063
Notes payable - Coppermark Bank . . . . . . . . . . $ 270,182 $ -
Notes payable - current portion . . . . . . . . . . $ 300,000 $ -
Notes payable Discount on Debt. . . . . . . . . . . $ (225,000) $ -
Debts in default. . . . . . . . . . . . . . . . . . $ 113,963 $ 123,272
Convertible debt in default . . . . . . . . . . . . $ 78,200 $ 78,200
Sales and payroll taxes payable . . . . . . . . . . $ 95,681 $ 130,094
Other current liabilities . . . . . . . . . . . . . $ 76,154 $ 42,825
-------------------- -------------------
Total current liabilities . . . . . . . . . . . . . $ 2,181,488 $ 753,258
-------------------- -------------------
Long-Term Liabilities
Notes payable - Long Term . . . . . . . . . . . . . $ 300,000 $ -
Discount on debt $ (225,000) $ -
-------------------- -------------------
Total long-term liabilities $ 75,000 $ -
-------------------
Total liabilities . . . . . . . . . . . . . . . . . $ 2,256,488 $ 753,258
Shareholders' Deficit
---------------------------------------------------
Preferred Stock A - (.01 par value) 42,215 shares . $ 422 $ 422
authorized; 42215 issued (liquidation
preference $8,021)
Preferred stock B - (.01 par value) 954,563 shares. $ 1,952 $ 1,952
authorized; 195,209 shares issued (liquidation
Preference $0.09
Common stock (.001 par value) 150,000,000 shares. . $ 101,422 $ 65,510
authorized; 101,422,065 and 65,509,843 shares
outstanding, respectively
Additional paid-in capital. . . . . . . . . . . . . $ 15,256,542 $ 8,677,270
Deferred Compensation . . . . . . . . . . . . . . . $ (275,000) $ (500,000)
Accumulated Deficit . . . . . . . . . . . . . . . . $ (12,313,733) $ (8,916,407)
-------------------- -------------------
Total shareholders'equity (deficit) . . . . . . . . $ 2,771,605 $ (671,253)
-------------------- -------------------
Total Liabilities and Shareholders' Deficit . . . . $ 5,028,093 $ 82,005
==================== ===================
Please Read Accompanying Notes to Financial Statements
39
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40
YBRID FUEL SYSTEMS, INC.
STATEMENT OF OPERATIONS
For the Three and Nine Months Periods Ended September 30, 2005 and 2004
(unaudited)
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
30-SEP 30-SEP 30-SEP 30-SEP
2005 2004 2005 2004
-------------- -------------- ------------- -------------
Revenue . . . . . . . . . . . . . . $ 224,298 $ 33,418 $ 278,035 $ 122,589
Cost of sales . . . . . . . . . . . (219,001) (22,737) (248,008) ( 50,846)
-------------- -------------- ------------- -------------
Gross Profit. . . . . . . . . . . . $ 5,297 $ 10,681 $ 30,027 $ 71,743
Expenses
Professional & Consulting Fees. . . $ 218,514 $ 77,774 $ 624,398 $ 201,427
Research & Development. . . . . . . $ 18,168 $ 2,751 $ 98,022 $ 680,492
Compensation. . . . . . . . . . . . $ 295,710 $ 542,128 $ 867,214 $ 52,489
Other Operating Expenses. . . . . . $ 123,456 $ 42,401 $ 266,438 $ 124,264
-------------- -------------- ------------- -------------
Total Operating Expenses. . . . . . $ 655,848 $ 665,054 $ 1,856,072 $ 1,058,672
Loss from Operations. . . . . . . . $ (650,551) $ (654,373) $ (1,826,045) $ (986,929)
-------------- -------------- ------------- -------------
Interest Expense. . . . . . . . . . $ 763,353 $ 636,953 $ 1,571,199 $ 645,965
Settlements . . . . . . . . . . . . $ $ (5,289) $ (5,289)
-------------- -------------- ------------- -------------
Loss from Other Expenses. . . . . . $ (763,353) $ (631,664) $ (1,571,199) $ (640,676)
-------------- -------------- ------------- -------------
Net Loss. . . . . . . . . . . . . . $ (1,413,904) $ (1,286,037) $ (3,397,244) $(1,627,605)
Basic and diluted loss per share. . $ (0.02) $ (0.06) $ (0.04) $ (0.11)
Basic and diluted weighted average.
Number of common shares outstanding 93,683,058 20,490,389 86,095,715 14,939,227
Please Read Accompanying Notes to Financial Statements
41
HYBRID FUEL SYSTEMS, INC.
STATEMENT OF CASH FLOWS
For the Three and Nine Months Periods Ended September 30, 2005 and 2004
(unaudited)
NINE MONTHS NINE MONTHS
ENDED ENDED
SEP 30, SEP 30,
2005 2004
------------- -------------
Cash flows from operating activities
Net Loss. . . . . . . . . . . . . . . . . . . . . . . $ (3,397,244) $ (1,627,605)
Adjustments to reconcile net income to
net cash provided (used) by operating activities)
Common stock issued for services . . . . . . . . 206,000
Depreciation . . . . . . . . . . . . . . . . . . 16,857 7,212
Amortization of Deferred Compensation. . . . . . 225,000 25,000
Amortization of debt discount. . . . . . . . . . 1,527,957 640,000
Common stock issued for legal services 18,000
Common stock issued for compensation 431,439
Change in operating assets and liabilities
Accounts Receivable . . . . . . . . . . . . . . . . . (111,870) (21,594)
Inventory . . . . . . . . . . . . . . . . . . . . . . (68,330) (13,429)
Accounts Payable. . . . . . . . . . . . . . . . . . . 145,711 (13,462)
Accrued expenses & other current liabilities. . . . . (93,701) (96,056)
------------- -------------
Net Cash Provided (used) by operating activities. . . (1,549,620) (650,495)
Cash flows from Investing Activities
Purchase of Equipment. . . . . . . . . . . . . . (243,841)
Investment in DRV. . . . . . . . . . . . . . . . (200,000) -
------------- -------------
Net cash provided (used) by investing activities. . . (443,841)
Cash flows from Financing Activities
Loans from Related Parties . . . . . . . . . . . 1,469,094 600,600
Proceeds from sale of common stock 50,000
Proceeds from exercise of warrants . . . . . . . 150
Payments on accounts payable in settlement . . . (40,000)
Proceeds from notes payable. . . . . . . . . . . 600,000
Payments on Notes Payable. . . . . . . . . . . . (28,465) -
------------- -------------
Net cash provided (used) by financing activities. . . 2,000,779 650,600
------------- -------------
Net increase (decrease) in cash and cash equivalents. 7,318 105
Beginning cash and cash equivalents . . . . . . . . . 2,025 6
------------- -------------
Ending cash and cash equivalents. . . . . . . . . . . $ 9,343 $ 111
Supplement disclosure of cash flow information
Cash paid during the year for interest. . . . . . . . $ 20,063 $ 2,751
Non cash financing activities
Expiration of redeemable securities. . . . . . . . . $ 530,000 $ -
Please Read Accompanying Notes to Financial Statements
42
HYBRID FUEL SYSTEMS, INC.
Notes to Unaudited Financial
Statements for the three and nine months periods ended September 30, 2005 and
September 30, 2004
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with U.S. generally accepted accounting principles for interim
financial information and with the instruction to Form 10-QSB and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by U.S. generally accepted accounting principles for complete
consolidated financial statements. In the opinion of management, all adjustments
(consisting only of those of a normal recurring nature) considered necessary for
a fair presentation have been included. Operating results for the three and
nine month periods ended September 30, 2005 and 2004 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2005. For further information, refer to the consolidated financial statements
and footnotes included in the Company's Form 10-KSB as of and for the year ended
December 2004 as filed with the Securities and Exchange Commission.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Hybrid Fuel Systems, Inc. (the "Company") is a small-scale manufacturer of
systems which convert mobile gasoline and diesel engines to operate on
alternative fuels such as natural gas and propane.
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 two 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.
43
Earnings (Loss) Per Common Share
Earnings (loss) per share are computed using the basic and diluted calculations
on the face of the statement of operations. Basic earnings (loss) per share are
calculated by dividing net income (loss) by the weighted average number of
shares of common stock outstanding for the period. Diluted earnings (loss) per
share is calculated by dividing net income (loss) by the weighted average number
of shares of common stock outstanding for the period, adjusted for the dilutive
effect of common stock equivalents, using the treasury stock method. The
warrants outstanding were determined to be antidilutive and therefore do not
affect earnings per share.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles, requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities, as well as the reported amounts of revenues
and expenses for the period then ended. The actual outcome of the estimates
could differ from the estimates made in the preparation of the financial
statements.
Revenue Recognition
Revenues are recognized when the merchandise is shipped to the customer, which
is when title and risk of loss has passed to the customer.
Stock Based Compensation
The Company has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock Based Compensation, but applies Accounting Principles Board
Opinion No. 25 and related interpretations in accounting for options issued to
employees. Under Opinion No. 25, the intrinsic method is used to determine
compensation expense when the fair market value of the stock exceeds the
exercise price on the date of grant. As of the date of this report, no options
had been granted under the plan and therefore no compensation expense has been
recognized.
Research and Development Costs
The Company charges research and development costs to expense as incurred.
Fair Value of Financial Instruments
The Company, in estimating its fair value disclosures for financial instruments,
uses the following methods and assumptions:
Cash, Accounts Receivable, Accounts Payable and Accrued Expenses:
The carrying amounts reported in the balance sheet for cash, accounts
receivable, account 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.
Restatement of comparative financial information
White Knight (WK) has provided financing to the Company starting with the last
quarter of 2003. The financing is to be repaid in common shares at a conversion
rate of $0.04 per share. The conversion rate was set at the time that the
Company's stock was trading at $0.03 per share, in December 2003.
Since the financing includes an embedded conversion feature, the Company has
restated the comparative financial statements for the amortization of the
resulting debt discount for the quarters ended September 30, 2004, pursuant to
EITF 00-27 and EITF 98-5. The debt has no stated redemption date therefore, the
discount is amortized at the time of the advances using the average price per
share of the common stock for the quarter within which the advances were made
versus the conversion price or $0.04 per share. Previously, it was determined
that the instrument was a financial derivative pursuant to EITF 00-19 and FAS
133 which basically required valuation, but not interest expense treatment.
Concentrations
During the quarter ending September 30, 2005 the Company had one significant
Vendor. Eco Fuel Systems which makes up approximately 34.7% of purchases for
the third quarter.
44
NOTE 3 - DEBT IN DEFAULT
The Company did not meet the original payment terms on the note payable to
Peachtree National Bank through June 30, 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. During June 2005,
we reached agreement with Peachtree National Bank to pay off the outstanding
amount of approximately $69,000 upon receipt of the proceeds from the second
traunch of financing.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
The Company is delinquent in the payment of payroll and state sales taxes. The
Company is currently following payment schedules, developed after negotiations
with the taxing authorities. Amounts in arrears for delinquent taxes, along
with estimated penalties and interest assessed by the taxing authorities
are as follows, as of September 30, 2005 and 2004.
2005 2004
-------- --------
Payroll and sales taxes $ 71,897 $142,058
Penalties and interest. 21,896 60,881
-------- --------
Total $ 93,793 $202,939
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 5 - SHAREHOLDERS' EQUITY
Preferred Stock
Effective February 1, 2002, the Company designated 999,779 shares of previously
undesignated preferred stock as Series A Preferred Stock, for which 45,216
shares are authorized and Series B Preferred Stock, for 954,563 shares are
authorized.
Series A Preferred Stock is convertible, at the option of the holder, at any
time, into shares of the Company's common stock as determined by dividing $.19
by a conversion price determined on the date the related certificate is
surrendered. The conversion price is subject to periodic adjustment and is
initially established at $.01632. Series A Preferred Stock is automatically
convertible into shares of the Company's common stock upon (i) the date
specified by vote or written consent or agreement of holders of at least three
quarters of the shares of Series A Preferred outstanding, or (ii) upon the
closing of the sale of the Company's common stock in a firm commitment,
underwritten public offering registered under the Securities Act in which the
Company receives gross proceeds of no less than $20 million. Series A Preferred
Stock has a liquidation preference of the greater of $.19 per share or the
amount that such share would be entitled to upon liquidation or distribution.
The Series A Preferred Stock has voting rights, except as to the election of
debtors, equal to the number of shares of common stock into which the Series A
Preferred Stock is convertible. The Series A preferred Stockholders have the
right to elect one director of the Company.
Series B Preferred Stock is convertible, at the option of the holder at any
time, into shares of the Company's common stock as determined by dividing the
lower of $.09 or the price per share paid by the holder of the Series B
Preferred Stock by a conversion price determined on the date the related
certificate is surrendered. The conversion price is subject to periodic
adjustment and is initially established at $.00773. Series B Preferred Stock is
automatically convertible into shares of the Company's common stock upon (i) the
date specified by vote or written consent or agreement of holders of at least
three quarters of the shares of Series B Preferred Stock outstanding, or (ii)
upon the closing of the sale of Company's common stock in a firm commitment,
underwritten public offering registered under the Securities Act in which the
Company receives gross proceeds of no less than $20 Million. Series B Preferred
Stock has a liquidation preference of the greater of $.09 per share or the
amount that such share would be entitled to upon liquidation or distribution.
The Series B Preferred Stock has voting rights, except as to the election of
directors, equal to the number of shares of common stock into which the Series B
Preferred Stock is convertible. The Series B Preferred Stockholders have the
right to elect one director of the Company.
NOTE 6 - RELATED PARTY
The Company receives financing from White Knight SST, Inc. (WK). WK is a major
stockholder and has officers who serve in management positions for the Company.
Per our agreement with WK, any funding provided by WK is to be repaid in common
shares of stock at a conversion price of $0.04 per share. The conversion price
was agreed upon in December, 2003, when the Company's stock was at $0.03 per
share.
45
During the quarter ended September 30, 2005, $242,000 of the outstanding debt
due to WK had been converted into common stock. Through the quarter ended
September 30, 2005, WK advanced a total of approximately $1,400,000 to the
Company.
Due to the convertible nature of the advances, the Company has calculated the
embedded conversion benefit for each period of advances of financing and
recorded a debt discount applicable to that period, in accordance with EITF
00-27 and EITF 98-5. For the nine months ended September 30, 2005, the Company
calculated the intrinsic value between the per share conversion price of $0.04
and the average stocks closing price for the quarter. The calculated debt
discount exceeded the current period advances and therefore, in accordance with
EITF 00-27, was limited to the actual debt financing received. Since there is no
stated redemption date, the Company amortized a total debt discount of
approximately $1,400,000 for the nine months ended September 30, 2005, which
represented the debt financing received from WK during that period.
The Company also has an employment agreement with WK to provide executive
management services to the Company. WK's two principal executive officers serve
as the Company's President, CEO, Director and as Chairman of the Board for a
period two years. Compensation is paid exclusively through the issuance of
restricted common stock equal to a cash value of $25,000 per month total for the
services of both executives. The common stock issued pursuant to the agreement
vests on a quarterly basis in advance. During the year ended December 31, 2004,
the Company issued approximately 12,000,000 shares of common stock for the total
$600,000 compensation due. As of December 31, 2004, the Company had amortized
$100,000 of the deferred related party compensation to compensation expense. For
the nine months ended September 30, 2005, the Company amortized $ 225,000 of
deferred related party compensation related to this amount.
NOTE 7 - DEBT FINANCING
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 as of June 30, 2005, the Company has recorded a discount to the debt in
the amount of $600,000 and will record an additional $600,000 debt discount when
the Company receives the additional $600,000 of funding, in accordance with EITF
Issue No. 98-5 "Accounting For Convertible Securities With 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 (assuming
both draws were made on the financing) 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 the warrants and the
embedded conversion feature the warrants are 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. As of September 30th 2005 the company received
600,000 of the $1,200,000 where the company amortized $150,000 for the nine
months ended.
46
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. That
registration statement was declared effective on October 4, 2005.
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.
NOTE 8 - ACQUISITION OF DRV ENERGY
On August 11, 2005 Hybrid Fuel Systems completed the closing of a Share Exchange
Agreement (the "Agreement") with DRV Energy, Inc., an Oklahoma corporation
("DRV") and the sole shareholder of DRV, Sheri Vanhooser (the "DRV Shareholder")
that was entered into on June 29, 2005. Hybrid issued an aggregate of 11,612,903
unregistered shares of HYFS common stock, par value $0.001 per share, and
payment of $400,000 in cash with $200,000 of such payment due at or prior to the
closing date and $200,000 due payable January 1, 2006. Pursuant to the
Agreement, we acquired all of the outstanding equity stock of DRV from the DRV
Shareholder.
DRV Energy, Inc., an Oklahoma corporation ("DRV") was formed November 30, 1994
to engage in the alternative fuels industry through the sales and services of
vehicle conversion system. DRV is a small volume manufacturer of EPA
Certified bi-fuel and dedicated natural gas and propane turnkey conversion
systems. DRV Energy also has a full service alternative fuels center with
slow/fast fill stations as well as compressor installation and maintenance
capabilities
Hybrid Fuel Systems DRV Energy Proforma
1/1/2005-9/30/2005 1/1/2005-6/30/2005 Combined Results
------------------- ------------------ ----------------
Revenue $ 278,035 $ 584,031 $ 862,066
------------------- ------------------ ----------------
Net Income (Loss) $(3,397,244) $ (92,682) $(3,489,926)
------------------- ------------------ ----------------
EPS $ (0.04) $ (1.85) $ (0.04)
NOTE 9 - MANAGEMENT PLANS
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplates continuation of Hybrid Fuel systems, Inc. (HYFS) as a going
concern. However, HFS has sustained operating losses in recent years. Further
for the nine months ended September 30, 2005, HFS had negative working capital
of approximately (1,640,304) and a net loss of (3,397,244). The Company has
incurred losses in previous years resulting in an accumulated deficit of
approximately (12,313,733). These factors raise substantial doubt about the
ability of Hybrid Fuel Systems, Inc. to continue as a going concern.
Included in (HYFS) net loss of (3,397,244) for the nine months ending 2005
includes a non cash loss of approximately $1,527,957 for amortization of debt
discount for the embedded beneficial conversion feature on the related party
convertible note for White Knight and the Debt Financing Agreement with Alpha.
However, in addition to the financial support provided by White Knight, during
November, 2005, the Company secured a $5,000,000 equity line with Dutchess
Advisors LLC. The details of the financing transaction are embodied in a recent
Form 8-K.
NOTE 10 - SUBSEQUENT EVENTS
- During September, we completed the build-out of our 12,000 square foot
facility in PeachTree City Georgia including two state-of-the-art engine rooms.
We are now installing, calibrating and activating our Horiba emission testing
equipment slated for completion at the end of the fourth quarter.
- During the third quarter, we received our second development order from a
major domestic OEM for use in Thailand. The OEM has shipped a vehicle to our
PeachTree City development facilities and we developed an electronic conversion
system for their lightweight diesel vehicle. We shipped a beta version of our
system to Thailand during July and during September the OEM ordered four
additional systems which had been further developed. We anticipate entering a
formal development agreement with this OEM during the fourth quarter 2005 or
first quarter 2006.
- During July a China-based OEM shipped a bus engine to our PeachTree City
development facility. We anticipate completing development of the mechanical
system during November 2005 after which we will hand-deliver a prototype version
of the new system during late November, early December 2005.
47
- During September, we received EPA certifications for an additional four
engine families
- During November, we closed with Dutchess Fund to provide a $340,000
Convertible Loan and a $5,000,000 equity line.
- During October, we executed a sub-license agreement with McCooey
Engineering based in the United Kingdom. Under the terms of the sub-license,
McCooey shall have the exclusive rights to commercialize our technology. McCooey
is currently ordering and installing systems at the rate of approximately five
per month.
- During October, Hybrid guaranteed and combined three short term notes of
DRV's totaling $75,604.
48
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.
The financial statements referred to above have been restated for the correction
of an error. The statements did not originally include an amortization of
embedded discount for a conversion feature of convertible debt which has been
reflected in the restated financial statements. See footnote 2.
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 and
April 1, 2005 as to Notes 1 & 12
and September 2, 2005 as to Note 2
49
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
----------- -----------
Total assets $ 82,005 $ 44,515
=========== ===========
Please Read Accompanying Notes to Financial Statements
50
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 42,825 68,650
----------- -----------
Total current liabilities 753,258 1,456,199
Redeemable securities -- 530,000
SHAREHOLDERS' DEFICIT
Shareholders' deficit
Preferred A stock (.01 par value;
42,215 shares authorized; 42,215 shares
issued and outstanding) (liquidation
preference $ 8,021) 422 422
Preferred B stock (.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
and 95,000,000 shares authorized;
respectively 65,509,843 and 12,163,646
shares issued and outstanding, respectively) 65,510 12,164
Additional paid-in capital 8,677,270 3,987,712
Deferred Compensation (500,000)
Accumulated deficit (8,916,407) (5,943,934)
----------- -----------
Total shareholders' deficit (671,253) (1,941,684)
----------- -----------
Total liabilities and shareholders' deficit $ 82,005 $ 44,515
============ ============
Please Read Accompanying Notes to Financial Statements
51
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 968,041 169,448
Other income (11,407) (1,375)
----------- -----------
(Income) loss from other expenses 938,764 188,486
----------- -----------
Net loss (2,972,473) (548,821)
----------- -----------
Basic and diluted loss per share $ (0.12) $ (0.05)
----------- -----------
Basic and diluted weighted average number of
common shares outstanding 23,857,093 12,054,742
----------- -----------
Please Read Accompanying Notes to Financial Statements
52
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
Series A Series A Series B Series B Shares Amount
------------ ------------ ------------ ------------ ------------ ------------
Balance Dec 31, 2002 45,215 $ 422 195,209 $ 1,952 11,963,646 $ 11,964
Amorization of Debt
Discount
Stock issued for 100,000 100
legal settlement
Issuance of stock
for conversion of note 100,000 100
Net loss -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance Dec 31, 2003 45,215 $ 422 195,209 $ 1,952 12,163,646 $ 12,164
------------ ------------ ------------ ------------ ------------ ------------
Redemption termination
Amorization of Debt
Discount
Common Stock Issued:
Debt 3,450,000 3,450
Compensation 3,983,351 3,983
Services 150,000 150
Warrants 1,550,000 1,550
Cash 300,000 300
Convertible debt 2,570,000 2,570
Deferred compensation 11,900,000 11,900
Management fees 3,004,338 3,004
Related party debt 26,438,508 26,439
Net loss -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance Dec 31, 2004 $ 42,215 $ 422 $ 195,209 $ 1,952 65,509,843 $ 65,510
============ ============ ============ ============ ============ ============
Total
Paid-In Deferred Accumulated Shareholders'
Capital Compensation Deficit Deficit
------------ ------------ ------------ ------------
Balance Dec 31, 2002 $ 3,832,912 $ (5,395,113) $ (1,547,863)
Amorization of Debt
Discount 135,000 135,000
Stock issued for
legal settlement 9,900 10,000
Issuance of stock
for conversion of note 9,900 10,000
Net loss (548,821) (548,821)
------------ ------------ ------------ ------------
Balance Dec 31, 2003 $ 3,987,712 $ -- $ (5,943,934) $ (1,941,684)
------------ ------------ ------------ ------------
Amorization of Debt
Discount 960,000 960,000
Redemption termination 530,000 530,000
Common Stock Issued:
Debt 148,681 152,131
Compensation 515,853 519,836
Services 17,850 18,000
Warrants 213,900 215,450
Cash 49,700 50,000
Convertible debt 221,769 224,339
Deferred compensation 583,100 (500,000) 95,000
Management fees 417,603 420,607
Related party debt 1,031,102 1,057,541
Net Loss -- -- (2,972,473) (2,972,473)
------------ ------------ ------------ ------------
Balance Dec 31, 2004 8,677,270 $ (500,000) (8,916,407) (671,253)
Please Read Accompanying Notes to Financial Statements
53
THIS PAGE INTENTIONALLY LEFT BLANK
54
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 $(2,972,473) $ (548,821)
Adjustments to reconcile net income to net
cash provided (used) by operating
activities:
Depreciation 10,271 9,804
Amortization of Debt Discount 960,000 135,000
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) 29,296
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
55
HYBRID FUEL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
(CONTINUED)
2004 2003
----------- -----------
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
56
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.
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.
57
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.
In addition, the Company has entered into an agreement with certain accredited
investors to advance $1,200,000 to the company. The first advance of funds is
april 1, 2005 in the amount of $600,000 with the second advance to be made upon
approval of the Form SB-2 herewith being filed. The financing is in the form of
convertible debt with a conversion into stock at the rate of $0.55 per share for
a total 2,181,818 shares. In addition, the investors will be issued warrants to
purchase the common stock of the Company for $0.81 per share. The initial
advance will receive 1,636,364 warrants and the second advance will receive
1,636,364 warrants. The warrants are five year warrants and are immediately
exercisable upon issue. These additional funds are expected to allow the Company
to continue to fund its operations for the ensuring twelve months.
NOTE 2 RESTATEMENTS
Deferred related party compensation
The Company has an employment agreement with White Knight (WK) in which to
executive officers of WK will serve as the principal executive officers of the
Company for a period of two years beginning in September 2004. Compensation
related to this agreement provided for a total of $25,000 per month (inclusive
for both executives) to be paid exclusively through the issuance of restricted
common stock with an equivalent value. The common stock issued for the
compensation will vest quarterly in advance.
As of December 31, 2004, the Company had issued approximately 12,000,000 shares
of common stock related to the total compensation of $600,000. The Company
recorded an asset for the deferred related party compensation, which was reduced
by the amortization of $100,000 to compensation expense. After further analysis,
it was determined that the deferred related party compensation should be
classified as an equity transaction and was reclassified to such in the amended
filing.
58
Convertible Debt
White Knight (WK) has provided financing to the Company since the last quarter
of 2003. The agreement to this financing, in addition to WK providing management
services to our company, was that any of the debt financing provided by WK could
be repaid in common shares at a conversion rate of $0.04 per share. The
conversion rate was determined at the time the Company's stock was trading at
$0.03 per share.
Due to the conversion feature, of the debt financing, the Company has restated
the financial statements for the amortization of the calculated debt discount
for the years ended December 31, 2004 and 2003.
The effect of the restatement was to increase interest expense at December 31,
2003 by $135,000 for the amortization of the debt discount. As of December 31,
2004, the amortization of debt discount to interest expense was $960,000. The
amortization of the debt discount reflected a non-cash expense for the embedded
conversion feature of the debt agreement.
The restatement was required to correct an error. Previously, we did not include
an amortization of embedded discount for a conversion feature of convertible
debt which has been reflected in the restated financial statements. The
restatement had the effect of increasing the loss per share for December 31,
2003 and 2004 by $0.02 and $0.04, respectively.
NOTE 3 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 4 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.
59
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 receives financing from White Knight SST, Inc., (WK). WK is a major
stockholder and has officers who serve in management positions for the Company.
Per our agreement with WK, any funding provided by WK is to be repaid in common
shares of stock at a conversion price of $0.04 per share. The conversion price
was agreed upon when the Company's stock was trading at $0.03 per share.
During the year ended December 31, 2004, a total of approximately $1.1 million
was received as financing from WK and approximately 26,400,000 shares of common
stock was issued for conversion of outstanding debt due to WK during the year
then ended.
Due to the convertible nature of the advances, the Company has calculated the
embedded conversion benefit for each period of advances, in accordance with EITF
00-27 and recorded the debt discount applicable to each period. For the years
ended December 31, 2004 and 2003, the Company calculated the intrinsic value
between the per share conversion price of $0.04 and the average stock closing
price for each quarter in the year. If the calculated debt discount exceeded the
current period advances, the debt discount was limited to the actual debt
financing received for that period in accordance with EITF 00-27. The Company
amortized a total of $960,000 and $135,000 debt discount to interest expense for
the years ended December 31, 2004 and 2003, respectively. The amortization of
the debt discount reflected a non-cash expense for the embedded conversion
feature of the debt agreement. Since there is no stated redemption date, the
discount is being amortized during the periods in which the advances were made.
During the year ended December 31, 2004, the Company also had an employment
agreement with WK to provide executive management services to the Company. WK's
two principal executive officers serve as the Company's President, CEO, Director
and as Chairman of the Board for a period of two years. Compensation is paid
exclusively through the issuance of restricted common stock equal to a cash
value of $25,000 per month total for the services of both executives. The common
stock issued pursuant to the agreement vests on a quarterly basis in advance.
During the year ended December 31, 2004, the Company issued approximately
12,000,000 shares of common stock for the total $600,000 compensation due. As of
December 31, 2004, the Company had amortized $100,000 of the deferred related
party compensation to the compensation expense.
NOTE 5 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 6 - 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) $ -- $ --
------------ ------------
60
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 7 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.
NOTE 8 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 9 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.
61
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
========== ========
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 10 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.
62
The Company had previously issued common stock to an investor and had granted
taht investor a put option for the common stock in the amount of $530,000. that
option expired unexercised in June 2004 due to the lapse of time per the
agreement. That put option was recorded as a liability in the financial
statements. Upon the lapse of that agreement, the liability was reclassified to
paid in capital since it was no longer a liability.
NOTE 11 - 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 12 SUBSEQUENT EVENT
During the quarter ended June 30, 2005, the Company:
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 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
63
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.
64
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 $688.38
Accounting Fees and Expenses $10,000
Legal Fees and Expenses $45,000
Miscellaneous $311.62
Total $56,000
ITEM 26. 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.
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.
65
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.
Subsequent to March 31, 2005, we issued:
o 2,320,000 shares of common stock to a series of noteholders which we were
previously in default since 2002;
o 15,000 shares of common stock for the exercise of a warrant held since 2001,
and;
o 12,131,387 to White Knight SST for conversion of a portion of their debt.
On November 4, 2005, we have issued to Dutchess Private Equities Fund II, LLP,
warrants to purchase 314,815 shares of our common stock at an exercise price of
$.27 per share which are exercisable for a period of five years. The warrants
were issued in connection with the Investment Agreement dated November 4, 2005.
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.
66
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.
67
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.
10.14 Debenture Agreement dated as of November 4, 2005 by and between
Hybrid Fuel Systems, Inc. and Dutchess Private Equities Fund, II,
L.P., incorporated by reference to Exhibit 10.1 to the Form 8-K
filed on November 9, 2005.
10.15 Debenture Registration Rights Agreement dated as of November 4, 2005
by and between Hybrid Fuel Systems, Inc. and Dutchess Private
Equities Fund, II, L.P., incorporated by reference to Exhibit 10.2
To the Form 8-K filed on November 9, 2005.
10.16 Warrant Agreement dated as of November 4, 2005 by and between Hybrid
Fuel Systems, Inc. and Dutchess Private Equities Fund, II, L.P.,
incorporated by reference to Exhibit 10.2 to the Form 8-K filed
on November 9, 2005.
10.17 Equity Line of Credit Registration Rights Agreement dated as of
November 4, 2005 by and between Hybrid Fuel Systems, Inc. and
Dutchess Private Equities Fund, II, L.P., incorporated by
reference to Exhibit 10.2 to the Form 8-K filed on November 9,
2005.
10.18 Investment Agreement dated as of November 4, 2005 by and between
Hybrid Fuel Systems, Inc. and Dutchess Private Equities Fund, II,
L.P., incorporated by reference to Exhibit 10.2 to the Form 8-K
filed on November 9, 2005.
10.19 Security Agreement dated as of November 4,2005 by and between Hybrid
Fuel Systems, Inc. and Dutchess Private Equities Fund, II, L.P.,
incorporated by reference to Exhibit 10.2 to the Form 8-K filed
on November 9, 2005.
10.20 Subscription Agreement dated as of November 4, 2005 by and between
Hybrid Fuel Systems, Inc. and Dutchess Private Equities Fund, II,
L.P., incorporated by reference to Exhibit 10.2 to the Form 8-K
filed on November 9, 2005.
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;
68
(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.
69
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 28th day of November
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
/s/ John Stanton Chairman of the Board of Directors November 28, 2005
-------------------
John Stanton
/s/ Mark Clancy Chief Executive Officer (Principal November 28, 2005
----------------- Executive Officer) and Chief Financial
Mark Clancy Officer (Principal Financial Officer)
and Director
70