United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 QSB
(Mark One)
[XX] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
or
[__] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 000-51789
US ENERGY INITIATIVES CORPORATION
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(Exact name of registrant as specified in its charter)
GEORGIA 58 2267238
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2701 North Rocky Point Drive, Suite 325, Tampa, Florida 33607
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(Address of principal executive offices) (Zip Code)
(813) 287 5787
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [XX] No [__]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [__] No [__]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. At April 30, 2006, the Company
had 42,215 Series A Preferred Shares and 195,209 Series B Preferred Shares
outstanding and 110,143,319 of its $0.001 par value common shares outstanding.
1
HYBRID FUEL SYSTEMS
Report on Form 10QSB
for the period ended March 31, 2006
PART I
Item 1 - Financial Statements
Consolidated Balance Sheet for the three month period ended March 31,
2006 and the annual period ended December 31, 2005
Statement of Operations for the three month period ended
March 31, 2006 and 2005
Statement of Cash Flows for the three month period ended
March 31, 2006 and 2005
Notes to Financial Statements
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3 - Controls and Procedures
PART II
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits
2
US ENERGY INITIATIVES CORPORATION
CONSOLIDATED BALANCE SHEET
For the Three Months Period Ended March 31, 2006 (unaudited) and
annual period ended December 31, 2005 (audited)
MARCH 31, DECEMBER 31,
2006 2005
(UNAUDITED) (AUDITED)
ASSETS
Current Assets
Cash $ 393,803 $ 818,557
Accounts Receivable, net of $12,000 allowance
in 2006 and 2005, respectively 304,257 370,777
Other receivables 2,200 -
Prepaid expenses and deposits 84,751 32,286
Inventories 136,381 162,690
Deferred consulting 422,259 576,258
Deferred debt costs 659,006 397,671
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Total current assets 2,002,657 2,358,239
Property plant & equipment, net 564,250 565,415
Goodwill 61,820 61,820
Intellectual property certifications, net 850,360 873,342
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Total Assets 3,479,087 3,858,816
============= ==============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Accounts Payable $ 457,688 $ 526,001
Debt in litigation 109,868 109,868
Advanced deposits 58,633 58,133
Due to related parties 26,540 176,540
Due to related parties, convertible debt 1,148,752 1,080,752
Notes payable 2,196,639 1,630,293
Discount on Debt (563,360) (650,630)
Derivative liability 1,464,335 841,010
Debt in default 106,593 106,593
Convertible debt in default 75,700 75,700
Sales and payroll taxes payable 109,428 113,552
Other current liabilities 62,361 62,581
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Total current liabilities 5,253,177 4,130,393
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Total Liabilities 5,253,177 4,130,393
SHAREHOLDERS DEFICIT
Shareholders' deficit
Preferred A stock (.01 par value; 42,215 shares authorized; 422 422
42,215 shares issued and outstanding)
Preferred B stock (.01 par value; 954,563 shares authorized; 1,952 1,952
195,209 shares issued and outstanding)
Common stock (.001 par value; 150,000,000 shares authorized 109,854 105,905
respectively; 109,854,116 and 105,905,433 shares issued and
outstanding, respectively)
Additional paid-in capital 17,447,663 16,997,922
Deferred Compensation (125,000) (200,000)
Accumulated deficit (19,208,981) (17,177,778)
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Total shareholders' deficit (1,774,090) (271,577)
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Total liabilities and shareholders' deficit $ 3,479,087 $ 3,858,816
============= ==============
3
US ENERGY INITIATIVES CORPORATION
STATEMENT OF OPERATIONS
For the Three Months Ended March 31, 2006 and 2005(unaudited)
MARCH 31 MARCH 31
2006 2005
(UNAUDITED) (AUDITED)
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REVENUES
Revenues from product sales and related income $ 168,100 $ 18,163
Cost of product sales (159,091) (10,832)
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GROSS PROFIT 9,009 7,331
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EXPENSES
Operating expenses
Consulting and professional fees 360,397 168,187
Research & development 9,469 41,647
Compensation 414,213 362,830
Amortization & Depreciation 44,918 3,107
Rent 28,380 15,171
Insurance 65,278 710
Other operating expenses 88,520 48,436
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Total expenses 1,011,175 640,088
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Loss from operations (1,002,166) (632,757)
Other Expenses (income)
Interest expense 330,051 513,182
Other income (529) (2,637)
Derivative Expenses 699,430 -
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(Income) loss from other expenses 1,028,952 510,545
Net loss 2,031,118 (1,143,302)
Basic and diluted loss per share $ 0.02 $ (0.02)
Basic and diluted weighted average number of
common shares outstanding 106,709,351 75,893,482
4
US ENERGY INITIATIVES CORPORATION
STATEMENT OF CASH FLOWS
For the Three Months Ended March 31, 2006 and 2005 (unaudited)
MARCH 31, MARCH 31,
2006 2005
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss (2,031,118) (1,143,302)
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation 21,935 3,106
Amortization of deferred consulting expense 153,999
Amortization of deferred debt costs (111,165)
Amortization of debt discount 78,296 510,957
Amortization of intangibles 22,983
Common stock issued for professional services 52,813 151,000
Conversion benefit on related party advance 68,000
Amortization of deferred compensation related party 75,000 75,000
Derivative Income or expense 914,509
Change in operating assets and liabilities
Accounts receivable 66,494 (6,755)
Inventory 26,310 (6,071)
Accounts payable (57,450) (4,112)
Related party payable (150,000)
Sales and payroll taxes payable (4,122)
Prepaid and deposits (57,385) (75,442)
Other current liabilities 142,522 (8,553)
----------- -----------
Net cash provided (used) by operating activities (851,093) (504,172)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (20,771) (46,067)
----------- -----------
Net cash provided (used) by investing activities (20,771) (46,067)
CASH FLOWS FROM FINANCING ACTIVITIES:
Loans to employees (2,200)
Loans from related party 68,000 551,895
Payments on notes payable (852,537)
Payments on settlement
Payments on tax settlement
Proceeds from convertible debt - Dutchess 1,040,000
Proceeds from sale of common stock 223,847
Proceeds from exercise of warrants -- 150
----------- -----------
Net cash provided (used) by financing activities 447,110 552,045
Net decrease in cash and cash equivalents (424,754) 1,806
Beginning cash and cash equivalents 818,557 2,025
----------- -----------
Ending cash and cash equivalents 393,803 3,831
Supplemental Disclosure of Cash Flow Information
Cash Paid during the year for interest 30,900
Amortization of common stock issued for deferred 75,000 75,000
compensation
Amortization of Debt Discount 78,296 510,987
Common Stock issued for discount on debt 366,026
Common Stock issued for conversion of convertible note 341,765
5
US ENERGY INITIATIVES CORPORATION
Notes to Unaudited Financial Statements
For the Three Month period ended March 31, 2006 and 2005
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 month periods ended March 31, 2006 and 2005 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2006.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
US Energy Initiatives Corporation (formerly Hybrid Fuel Systems, Inc.) (the "
Company.") manufactures systems for the conversion of diesel engines to
non-petroleum based fuels such as compressed natural gas. The Company
manufactures and sells 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.
Intangible Assets
Intangible assets consist primarily of goodwill and intellectual property.
Effective April 1, 2002 with the adoption of Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangibles" (SFAS 142), intangible
assets with an indefinite life, namely goodwill, are not amortized. Intangible
assets with a definite life are amortized on a straight-line basis over their
estimated useful lives of ten years. Intangible assets with indefinite lives
will be tested for impairment annually and when an event occurs that would
indicate that the carrying amount may be impaired.
6
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 non discounted cash flows. A deficiency in these cash
flows relative to the carrying amounts is an indication of the need for a
write-down due to impairment. The impairment write-down would be the difference
between the carrying amounts and the fair value of these assets. Losses on
impairment are recognized by a charge to earnings. Factors considered in the
valuation include current operating results, trends and anticipated undiscounted
future cash flows.
Income Taxes
The Company utilizes the guidance provided by Statement of Financial Accounting
Standards No. 109, " Accounting for Income Taxes." (SFAS 109). Under the
liability method specified by SFAS 109, deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax bases
of assets and liabilities as measured by the enacted tax rates which will be in
effect when these differences reverse. Deferred tax expense is the result of
changes in deferred tax assets and liabilities. Valuation allowances are
provided if necessary to reduce deferred tax assets to the amount expected to be
realized.
Earnings (Loss) Per Common Share
Earnings (loss) per share are computed using the basic and diluted calculations
on the face of the statement of operations. Basic earnings (loss) per share are
calculated by dividing net income (loss) by the weighted average number of
shares of common stock outstanding for the period. Diluted earnings (loss) per
share is calculated by dividing net income (loss) by the weighted average number
of shares of common stock outstanding for the period, adjusted for the dilutive
effect of common stock equivalents, using the treasury stock method. The
warrants outstanding were determined to be antidilutive and therefore do not
affect earnings per share.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles, requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at March 31, 2006 and 2005, 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 SFAS No. 123R, "Accounting for Stock Based Compensation"
as of January 1, 2006. For the period ended March 31, 2005, the Company
applied 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 March
31, 2005 and 2006, 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:
7
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 March 31, 2006 and 2005, the Company did not have any long-term
obligations.
Accounting For Financial Instruments
In May 2003, the FASB issued Statement of financial Accounting Standards No.
150, "Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity" (SFAS 150). SFAS 150 requires that certain financial
instruments, which under previous guidance were accounted for as equity, must
now be accounted for as liabilities. The financial instruments affected include
mandatory redeemable stock, certain financial instruments that require or may
require the issuer to buy back some of its shares in exchange for cash or other
assets and certain obligations that can be settled with shares of stock. SFAS
150 is effective for all financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003.
Recently issued Accounting Standards
Below is a listing of the most recent accounting standards and their effect on
the Company.
In December 2004, the Financial Accounting Standards Board ("FASB") issued a
revision to SFAS No. 123, SFAS 123R Share-Based Payment. SFAS No. 123R requires
all companies to measure compensation costs for all share based payments,
including stock options, at fair value and expense such payments over the
service period. SFAS No. 123R specifies that companies must use an
option-pricing model to estimate fair value, although it does not specifically
require the use of a particular model. The new standard is effective for annual
periods beginning after December 15, 2005 and, therefore, was effective for the
Company beginning with the first quarter of 2006. Under the provisions of FAS
123R, companies can select from three transition methods for the implementation
of this standard. The modified prospective method would require all new awards
that are granted after the effective date to use the provisions of FAS 123R.
Under this method, for vested awards that are outstanding on the effective date
of FAS 123R, a company would not have to record any additional compensation
expense. For unvested awards that are outstanding on the effective date of FAS
123R and were previously included as part of pro forma net income and earnings
per share under the provisions of FAS 123 would be charged to expense over the
remaining vesting period, without any changes in measurement. The second
alternative is a variation of the modified prospective method, which would allow
companies to restate earlier interim periods in the year that FAS 123R is
adopted using the applicable FAS 123 pro forma amounts. Under the third
alternative, the modified retrospective method, companies would apply the
modified prospective method and also restate their prior financial statements to
include the amounts that were previously recognized in their pro forma
disclosures under the original provisions of FAS 123. As of the adoption of
SFAS 123R, on January 1, 2006, the company did not have any unvested outstanding
options and therefore did not need to select or apply a transition method as of
March 31, 2006.
Principles of Consolidation
The consolidated financial statements for the quarter ended March 31, 2006
include the accounts of the principally wholly-owned subsidiary DRV Energy
(collectively the "Company"). Significant intercompany balances and
transactions have been eliminated in consolidation. The period ended March 31,
2005 did not include the accounts of the principally wholly-owned subsidiary DRV
Energy, as the Company had not acquired the subsidiary at that time.
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 period ended March 31, 2006 and a loss from operations. 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, 2005 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
investor relating to a $5,000,000 equity line which was registered with the
Securities and Exchange Commission and declared effective during December 2005.
Under the terms of the equity line, the Company may draw down up to $100,000 per
Put.
8
NOTE 3 RELATED PARTY TRANSACTIONS
White Knight (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.
As of the period ended March 31, 2006 , $1,148,752 is outstanding debt due to
WK. Through the quarter ended March 31, 2006 WK advanced a total of $68,000.
The company has an employment agreement with White Knight SST, Inc. (WK) to
provide executive management services to the company. 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 is 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 March 31, 2006, the Company had amortized $75,000 of
the deferred related party compensation to compensation expense.
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 provide
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.
NOTE 4 GOODWILL, NET
At March 31, 2006 and 2005, goodwill, net, consists of the following:
3/31/2006 3/31/2005
--------- ---------
Goodwill $ 61,820 $ -
Less accumulated amortization - -
--------- ---------
Total $ 61,820 $ 0.00
========= =========
As of March 31, 2006 goodwill represented an intangible asset resulting from the
acquisition of DRV Energy. Goodwill was analyzed on March 31, 2006 for
impairment as it has an indeterminant life. Based on the Company's analysis
performed, no impairment loss was required to be recorded during the period
ended March 31, 2006. For income tax purposes, no deductible expense is
anticipated for the acquisition Goodwill.
9
NOTE 5 INTANGIBLE ASSETS, NET
As of March 31, 2006 and 2005, intangible assets, net, consist of the following:
3/31/2006 3/31/2005
--------- ---------
Intellectual Property - Certifications $1,146,925 $ -
Less accumulated amortization (296,565) -
--------- ---------
Total $ 850,360 $ 0.00
========= =========
Amortization expense charged to operations was $22,982 and $0 for the period
ended March 31, 2006 and 2005, respectively.
Based on the Company's year end analysis for impairment losses of $2,724,738
were required to be recorded as of December 31, 2005. The impairment was
determined based on the loss of a significant contract related to one of the
certifications.
NOTE 6 - SHAREHOLDERS' EQUITY
Preferred Stock
Effective February 1, 2002, the Company designated 999,779 shares of
previously undesignated preferred stock as Series A Preferred Stock, for which
45,216 shares are authorized and Series B Preferred Stock, for 954,563 shares
are authorized.
Series A Preferred Stock is convertible, at the option of the holder, at any
time, into shares of the Company's common stock as determined by dividing $.19
by a conversion price determined on the date the related certificate is
surrendered. The conversion price is subject to periodic adjustment and is
initially established at $.01632. Series A Preferred Stock is automatically
convertible into shares of the Company's common stock upon (i) the date
specified by vote or written consent or agreement of holders of at least three
quarters of the shares of Series A Preferred outstanding, or (ii) upon the
closing of the sale of the company's common stock in a firm commitment,
underwritten public offering registered under the Securities Act in which the
Company receives gross proceeds of no less than $20 million. Series A Preferred
Stock has a liquidation preference of the greater of $.19 per share or the
amount that such share would be entitled to upon liquidation or distribution.
The Series A Preferred Stock has voting rights, except as to the election of
debtors, equal to the number of shares of common stock into which the Series A
Preferred Stock is convertible. The Series A preferred Stockholders have the
right to elect one director of the Company.
Series B Preferred Stock is convertible, at the option of the holder at anytime,
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.
10
NOTE 7 DEBT IN DEFAULT
The Company did not meet the payment terms on the note payable to Peachtree
National Bank through March 31, 2006. 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 March 31, 2006, the full balance of the note has
been reclassified as a current liability for both years. The remaining
principal balance as of 03/31/06 was approximately $44,000.
The Company is delinquent in the payment of payroll taxes. The Company is
currently following payment schedules, developed after negotiations with the
taxing authorities. Amounts in arrears for delinquent taxes, along with
estimated penalties and interest assessed by the taxing authorities are as
follows, as of March 31, 2006 and 2005
2006 2005
----------- -----------
Payroll and sales
taxes $ 51,410 $ 92,537
Penalties and
interest $ 8,388 $ 29,890
----------- -----------
$ 59,798 $ 122,427
NOTE 8 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 March 31, 2006 and
2005 should have a material adverse impact on its financial condition or results
of operations.
NOTE 9 STOCK OPTIONS AND WARRANTS
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, 2005 and 2004, no options had been granted
under the plan.
Warrants
The Company grants warrants for purchase of 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. During the quarters
ended March 31, 2006 and 2005, no warrants were granted.
NOTE 10 DERIVATIVE FINANCIAL INSTRUMENTS
The captions derivative financial instruments consist of (a) the embedded
conversion feature bifurcated from the Convertible Debentures, (b) the Warrants
issued in connection with the Convertible Debts, (c) interest rate index, and
(d) put options. These derivative financial instruments are indexed to an
aggregate of 6,921,991 shares at March 31, 2006 and are carried at fair value.
At March 31, 2006 the following derivative liabilities related to common stock
options and warrants and embedded derivative instruments were outstanding:
Exercise Value Value
Expiration Price Per at Issue at
Issue Date Date Instrument Share Date 03/31/06
10/15/2005 10/5/2010 1,200,000 warrants issued to
Membrado $0.40 $330,000 $216,000
3/05/2005 3/5/2010 1,600,000 warrants issued to
Alpha Capital $0.19 $928,000 $298,199
11/4/2005 11/4/2010 314,815 warrants issued to
Dutchess Private Equities $0.27 $ 85,000 $ 59,815
----------
Fair value of freestanding derivative instrument liabilities for options and warrants $ 574,014
----------
----------
Exercise Value Value
Expiration Price Per at Issue at
Issue Date Date Instrument Share Date 03/31/06
11/4/2005 11/4/2010 Dutchess $340,000 term note $0.27 $340,000 $83,068
12/20/2005 12/21/2006 Dutchess $1,362,500 term note $0.27 $1,647,000 $336,420
3/23/2006 3/23/2007 Dutchess $1,412,500 term note $0.27 $1,778,526 $470,833
Fair value of freestanding derivative instrument liabilities for term notes $ 890,321
11
NOTE 11 DEBT FINANCING
On March 28, 2006, we completed an offering of our $1,412,500 principal amount
one-year promissory note (the "Note") to Dutchess Private Equity Fund, L.P. (the
"Investor") for aggregate gross proceeds of $1,130,000. The Note bears no
interest. Payments made by us in satisfaction of the Note shall be made from
each put from the Equity Line of Credit with the Investor given by us to the
Investor under that certain Investment Agreement dated as of November 4, 2005
which we entered into with the Investor (the "Investment Agreement"). We shall
make payments to the Investor in an amount equal to the greater of (1) 100% of
each put to the Investor from us, or (2) $117,708.33 until the face amount is
paid in full. Our initial payment will be due on May 1, 2006 and all subsequent
payments will be made at the closing of every put to the Investor thereafter
until the Note is paid in full, with a minimum amount of $117,708.33 per month.
In the event that on the maturity date we have any remaining amounts unpaid on
the Note, the Investor can exercise its right to increase the face amount by 10%
and an additional 2.5% per month, pro rata for partial periods, as liquated
damages. In addition, our obligation to repay the principal and accrued interest
under the Note, as well as our $1,362,500 principal amount one-year promissory
note which we issued to the Investor and Dutchess Private Equities Fund, II,
L.P. on December 20, 2005, is secured by all of our assets pursuant to a certain
Security Agreement which we entered into with the Lender on March 23,2006.
We used a portion the proceeds from the Note to repay our outstanding principal
amount promissory notes, inclusive of accrued and unpaid interest and liquidated
damages in the aggregate amount of $541,542, issued pursuant to that certain
Subscription Agreement dated March 31, 2005 (the "Subscription Agreement"). In
addition, we entered into a Settlement Agreement and Release (the "Settlement
Agreement")with the holders of the promissory notes on March 24, 2006 pursuant
to which the holders and we agreed to release and discharge each other, and our
respective officers, directors, principals, control persons, past and present
employees, insurers, successors, agents and assigns from any and all actions,
damages, judgments, claims, and demands existing or claimed to exist between the
parties in connection with the promissory notes or the Subscription Agreement.
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 there under 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.
On March 28, 2006, the Company rendered full satisfaction of the Remaining
Debentures with ALPHA CAPITAL AKTIENGESELLSCHAFT, WHALEHAVEN CAPITAL FUND
LIMITED, and ELLIS INTERNATIONAL LTD.through the payment of $541,542.00 (the
"Funds") by wire transfer to the bank and account. The agreement also reduces
the exercise price to $0.19 per share for the warrants. Each Investor,
individually, hereby agrees that they will not exercise or sell more than
sixty-seven thousand five hundred (67,500) shares underlying the Warrant in any
thirty (30) day period unless the Company's common stock is trading above forty
cents ($0.40) per share. Upon receipt of the Funds, the Investors shall return,
via overnight delivery, the Remaining Debentures to the company. The Company
agrees to file all necessary paperwork with the SEC, including any
post-effective amendments, for the Investors within seven (7) days. The
Company shall agree to abide by all terms and conditions in the original
Warrant with respect to registration and issuance of shares underlying the
Warrant.
12
NOTE 12 SUBSEQUENT EVENTS
- On March 28, 2006, we issued a Term Sheet and May 15th we drafted final
closing documents to acquire a custom electronic manufacturing enterprise. The
most expensive component in our dual fuel system is the electronic control unit.
Through this acquisition, we will realize a meaningful reduction in our cost of
goods as well as a heighten degree of control over timing and quality. This
acquisition, if successful, would also allow us to keep exclusively in-house all
of our proprietary codes and confidential information. We will also engage this
enterprise in assignments outside of our needs thereby expanding our overall
revenue model with a business highly complimentary to our core purpose.
- On March 27, 2006, we were notified that our dual fuel technology has been
awarded an annual contract by a significant international automotive original
equipment manufacturer (OEM) for initial use of our system in Asian markets. On
May 18th we finalized components of the final contracting agreement. We believe
this annual contract will begin to impact our revenues during the fourth quarter
2006.
- On March 26, 2006, we announced completion of a dual fuel system for a
major Chinese OEM. During April we completed a field installation in western
China and during May, we began fuel consumption trials.
- During April 2006, we finalized a dual fuel system and finalized an
installation in Korea for an international automotive OEM. This OEM has informed
us they are developing an after-treatment system so that our dual fuel kit, when
used on their engine platform, can meet or exceed EU 3 and 4 emission standards.
- On May 17th 2006, we finalized a new dual fuel system for a domestic
governmental entity in Ohio and conducted training at our facility in PeachTree
City, Georgia. The finalized system will now undergo a minimum three month
field trial.
- On May 10, 2006, we acquired a world wide non-exclusive license agreement
for the Catalytic Activated Vacuum Distillation (CAVD) technology from
EarthFirst Technologies, Inc., (OTCBB: EFTI) Under the terms of the license, US
Energy shall issue 1,000,000 restricted common shares to be held by EFTI or
distributed amongst the EFTI shareholders of record. In addition, US Energy
shall pay a fee of 5% of revenues of all sales related to the licensed
technology. The license grants to HYFS a world-wide non-exclusive right to
commercialize the CAVD technology and to manage the previous agreement with
Internal Hydro International. In our opinion, the CAVD technology has shown
great promise in the biofuel space. For example, we have completed initial runs
of Dried Distillers Grains with Solids (DDGS) producing a gas with over 700 Btus
per cubic foot. DDGS is a coproduct of the ethanol production process also used
as a high nutrient feed valued by the livestock industry. We believe we can
employ this technology to launch our biofuels initiative to develop our
signature biofuel which, when used in conjunction with our dual-fuel conversion
systems, allows a diesel engine to exceed Environmental Protection Agency 2010
emission standards. A second aspect to our development path is to render the
equipment scaleable so that a fleet can locate a small production unit on-site
and produce their own biofuel using our feedstock.
- On May 10, 2006 we received the second installment from Internal Hydro
International, Inc. (OTCBB: IHDR) ("Hydro") relating to sub-licensing rights for
the Catalytic Activated Vacuum Distillation (CAVD) technology. A final payment
due relating to the licensing of two US states is payable in approximately ten
days. Under the terms of the sub-license Internal Hydro has agreed to enter
into a definitive agreement, pursuant to which it shall pay a one-time license
fee of $500,000 for exclusive rights to deploy the CAVD technology in the
European Union. A $100,000 down payment on the initial licensing fee has been
paid by Internal Hydro. The payment received today marks the second of three
payments relating to one-time licensing fees for the States of Minnesota and
Iowa. The agreement will also provide for HYFS to be paid a royalty of $100,000
for each European country in which Internal Hydro intends to establish an
operational CAVD plant. In addition, Internal Hydro will pay HYFS a one-time
license fee of $250,000 per state for rights to deploy the technology as well as
a royalty stream equal to 5% of gross revenue per plant excluding carbon credits
and tire tipping fees. Further, Internal Hydro will maintain the right of first
refusal to Tennessee, Illinois, Louisiana and Minnesota at a predetermined
license arrangement of $250,000 per state.
13
Item 2 - Management's Discussion and Analysis or Plan of Operations
This Report contains forward-looking statements, within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended, which reflect our
expectation or belief concerning future events that involve risks and
uncertainties. Our actions and performance could differ materially from what is
contemplated by the forward-looking statements contained in this Report. Factors
that might cause differences from the forward-looking statements include those
referred to or identified under "Risk Factors" in our Annual Report on Form
10-KSB for the year ended December 31, 2005 and other factors that may be
identified elsewhere in this Report. Reference should be made to such factors
and all forward-looking statements are qualified in their entirety by the above
cautionary statements.
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the results of our
operations and financial condition. The discussion should be read in conjunction
with the financial statements and notes thereto.
Overview
US Energy Initiatives Corporation is engaged in the automotive aftermarket
principally through developing and commercializing systems which convert diesel
engines to operate on natural gas. The Company's principal technology is
embodied in five US Patents and several foreign patents pending licensed to US
Energy on a world-wide exclusive basis. We have sought to insert our technology
into the marketplace through original equipment manufacturers (OEM) parallel
with expanding our direct-to-consumer activities.
During the first quarter 2006 we changed our name from Hybrid Fuel Systems, Inc.
to US Energy Initiatives Corporation. On February 22, 2006, we obtained the
written consent of a majority of our shareholders to change our corporate name
from Hybrid Fuel Systems, Inc. to US Energy Initiatives Corporation. On March 1,
2006, we filed a certificate of amendment to our certificate of incorporation
with the Secretary of State of the State of Georgia, effective on March 6, 2006.
We intend to ratify the aforementioned actions taken by our Board of Directors
and a majority of our shareholders with the filing of a proxy statement.
Simultaneously we announced the formation of our Biofuels Division and our
Energy Technology Incubation Division.
Three Months Ended March 31, 2006 Compared to Three Months Ended March 31, 2005
Our current assets decreased approximately 15% from $2,358,239 at the year ended
December 31, 2005 to $2,002,657 for the period ended March 31, 2006 and during
this same period our total assets decreased by approximately 10% from $3,858,816
to $3,479,087. Total liabilities during this period increased by approximately
27% from $4,130,393 at the year ended December 31, 2005 to $5,253,177 at March
31, 2006. Our Shareholders' Deficit increased during this three month period
from $(271,577) at the year ended December 31, 2005 to $(1,774,090) at March 31,
2006.
In comparing profit and loss during the three month period ended March 31, 2005
and 2006, our revenue and gross profits increased by 826% and 23%, respectively
from $18,163 and 7,331 to $168,100 and $9,009. 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 58% from $ 640,088 for the three
months period ended March 31, 2005 to $1,011,175 for the period ended March 31,
2006. Our net loss for the three months period increased approximately 78% from
$(1,143,302) for the three months ended March 31, 2005 to $(2,031,118) for the
three month period ended March 31, 2006.
Certain expectations for 2006
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.
14
Item 3 Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. As of the end of the
period covered by this report, we conducted an evaluation, under the supervision
and with the participation of our Chief Executive Officer and Chief Financial
Officer of our disclosure controls and procedures (as defined in Rule 13a-15(e)
and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the Commission's rules and forms.
(b) Changes in internal controls. There was no change in our internal controls
or in other factors that could affect these controls during our last fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3 - Defaults Upon Senior Securities
The Company did not meet the payment terms on the note payable to Peachtree
National Bank through March 31, 2006. 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 March 31, 2006, the full balance of the note has
been reclassified as a current liability for both years. The remaining
principal balance as of March 31, 2006 was approximately $44,000.
Item 4 - Submission of Matters to a Vote of Security Holders
None.
Item 5 - Other Information
None.
Item 6. Exhibits
No. Description of Exhibit
31.1 Chief Executive Officer and Chief Financial Officer Section 302
Certification
32.1 Chief Executive Officer and Chief Financial Officer Certification
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
US ENERGY INITIATIVES CORPORATION
By: /s/ MARK CLANCY
----------------
Mark Clancy
Chief Executive Officer
(Principal Executive Officer),
Chief Financial Officer
(Principal Accounting Officer)
Date: May 22, 2006
16