FORM 10-QSB/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2001
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From _______ to _______
Commission File Number 0-29351
HYBRID FUELS, INC.
(Exact name of registrant as specified in its charter)
NEVADA
(State or other jurisdiction of incorporation or organization)
88 0384399
(I.R.S. Employer Identification No.)
PO Box 41118 RPOS Winfield, B.C., V1V 1Z7
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 250-868-0600
Indicate by check mark whether 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 shorter period that registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. Yes No [X]
The number of shares outstanding of the registrant's common stock as of November 5, 2001 was 20,853,600.
The number of shares issued of the registrant's common stock as of November 5, 2001 was 21,286,353.
Transitional Small Business Disclosure Format (Check one): Yes [] No [X]
HYBRID FUELS, INC.
FORM 10-QSB
For the quarter ended March 31, 2001
INDEX
Part I - Financial Information Page Item 1. Financial Statements.....................................F3-F10 Balance sheet as of March 31, 2001...........................F-3 Statements of operations for the quarters and the nine months ended March 31, 2001 and 2000................F-4 Statements of cash flows for the nine months ended March 31, 2001 and 2000................................F-5 Notes to Financial Statements................................F-6 Item 2. Management's Discussion and Analysis or Plan of Operation.........................................11 Part II - Other Information............................................15 Item 6. Exhibits and Reports on Form 8-K..........................15 |
Hybrid Fuels, Inc.
(formerly Polo Equities, Inc.)
(A Development Stage Company)
Consolidated Balance Sheets
March 31, June 30, 2001 2000 $ $ (unaudited) (audited) ------------------------------------------------------------------------------- ASSETS Current Assets Cash 15 485 ------------------------------------------------------------------------------- Total Assets 15 485 ------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' DEFICIT Current Liabilities Accounts payable 9,872 3,111 Accrued liabilities (Note 6(d)) 14,000 - Advances payable (Note 5) 119,356 42,013 Note payable (Note 5) 33,638 - Shareholder loan payable (Note 6(a)) 195,751 163,748 Amounts owing to a Director (Note 6(b)) 130,326 74,432 ------------------------------------------------------------------------------- Total Current Liabilities 502,943 283,304 ------------------------------------------------------------------------------- Temporary Equity (Note 7(d)) 223,000 223,000 ------------------------------------------------------------------------------- Stockholders' Deficit Common Stock (Note 7): $0.001 par value; 50,000,000 shares authorized 19,523,600, shares are issued and outstanding 19,524 19,524 Additional Paid-in Capital 162,474 162,474 Donated Capital - Imputed Interest (Notes 5 and 6) 98,817 56,735 Deficit Accumulated During the Development Stage (1,006,743) (744,552) ------------------------------------------------------------------------------- Total Stockholders' Deficit (725,928) (505,819) ------------------------------------------------------------------------------- Total Liabilities and Stockholders' Deficit 15 485 ------------------------------------------------------------------------------- |
Nature of Operations and Continuance of Business (Note 1)
Contingencies (Note 8)
(See Accompanying Notes to the Consolidated Financial Statements)
Hybrid Fuels, Inc.
(formerly Polo Equities, Inc.)
(A Development Stage Company)
Consolidated Statements of Operations
(unaudited)
Accumulated from Three months Nine Months February 26, 1960 Ended Ended (Date of Inception) March 31, March 31, to March 31, 2001 2001 2000 2001 2000 $ $ $ $ $ ------------------------------------------------------------------------------- |
Advances to Blue Mountain Packers Ltd.
written-off (Note 4) 84,951 27,999 - 84,951 - Deposit on plant written-off (Note 3) 170,561 - - - - Disputed compensation (Note 8(b)) 243,463 - - - - Executive compensation (Note 6(b)) 126,000 18,000 18,000 54,000 54,000 Filing and regulatory fees 14,246 141 - 3,808 1,915 General and administration 57,345 298 765 1,369 1,719 Imputed interest (Notes 5 and 6) 98,817 16,307 8,192 42,082 21,436 Interest 1,456 673 - 1,456 - Investor relations 16,698 - 6,188 4,092 9,669 Professional fees 133,174 7,725 127 64,225 13,381 Rent and telephone 40,304 1,798 1,913 5,080 4,621 Research and development 8,000 - - - - Travel and promotion 11,728 155 95 1,128 285 ------------------------------------------------------------------------------- 1,006,743 73,096 35,280 262,191 107,026 ------------------------------------------------------------------------------- Net Loss (1,006,743) (73,096)(35,280)(262,191)(107,026) ------------------------------------------------------------------------------- Net Loss Per Share (.01) (.01) (.01) (.01) ------------------------------------------------------------------------------- Weighted Average Shares Outstanding 19,457,000 19,100,000 19,457,000 15,609,000 ------------------------------------------------------------------------------- |
(See Accompanying Notes to the Consolidated Financial Statements)
Hybrid Fuels, Inc.
(formerly Polo Equities, Inc.)
(A Development Stage Company)
Consolidated Statements of Cash Flows
(unaudited)
Nine Months Ended March 31, 2001 2000 $ $ ------------------------------------------------------------------------------- Cash Flows To Operating Activities Net loss (262,191) (107,026) Non-cash items Imputed interest 42,082 21,436 Advances written-off 84,952 - Adjustment to reconcile net loss to cash Accounts payable and accrued liabilities 20,761 - ------------------------------------------------------------------------------- Net Cash Used In Operating Activities (114,396) (85,590) ------------------------------------------------------------------------------- Cash Flows To Investing Activities Advances to Blue Mountain Packers Ltd. (84,952) - ------------------------------------------------------------------------------- Net Cash Used By Investing Activities (84,952) - ------------------------------------------------------------------------------- Cash Flows From Financing Activities Advances payable 77,343 27,967 Amounts owing to a Director 55,894 55,823 Shareholder loans payable 32,003 1,800 Proceeds from note payable 33,638 - ------------------------------------------------------------------------------- Net Cash Provided By Financing Activities 198,878 85,590 ------------------------------------------------------------------------------- Net Decrease in Cash (470) - Cash - Beginning of Period 485 - ------------------------------------------------------------------------------- Cash - End of Period 15 - ------------------------------------------------------------------------------- Non-Cash Financing Activities - - ------------------------------------------------------------------------------- Supplemental Disclosures Interest paid in cash - - Taxes paid in cash - - ------------------------------------------------------------------------------- |
(See Accompanying Notes to the Consolidated Financial Statements)
Notes to the Consolidated Financial Statements
1. Nature of Operations and Continuance of Business The Company was originally incorporated in the State of Florida on February 16, 1960. After a number of name changes the Company changed its name to Polo Equities, Inc. on June 3, 1993. Prior to May, 1998 the Company had no business operations.
In May 1998, the Company caused a Nevada corporation to be formed under the name Polo Equities, Inc., (Polo) (a Nevada corporation), with authorized capital of 50,000,000 common shares of $.001 par value. The two companies then merged pursuant to Articles of Merger adopted May 28, 1998 and filed with the State of Nevada on June 10, 1998, which changed its domicile to Nevada.
On May 28, 1998, the Company acquired, by issuing 12,000,000 shares, Hybrid Fuels, USA, Inc. and 330420 B.C. Ltd., which changed its name to Hybrid Fuels (Canada) Inc. This acquisition was accounted for as a reverse merger whereby the shareholder of Hybrid Fuels, USA, Inc. and Hybrid Fuels (Canada) Inc. gained control of Polo Equities Inc. which changed its name to Hybrid Fuels, Inc. As part of the acquisition, three shareholders representing 12,000,000 previously issued shares returned their shares for cancellation. For accounting purposes the acquisition was treated as a business purchase by Hybrid Fuels, Inc. of Hybrid Fuels, USA, Inc. and Hybrid Fuels (Canada) Inc. No amount was allocated to the intellectual asset as it was acquired from a related party and the transfer had no cost basis associated with it. There was no public market for the shares of Polo Equities, Inc. at the time of the reverse merger. The Company operates through these two wholly-owned subsidiaries.
On May 29, 1998 the Company changed its name to Hybrid Fuels, Inc., herein "the Company". On June 10, 1998 the Company began trading on the OTC Bulletin Board under the symbol "HRID" and in December, 1999 was moved to the "Pink Sheets". From May 1998 to June 1999 the Company operated out of an office in California which was set up for investor relations and to raise additional capital. This office was shut down in June and the new President and directors are operating out of Kelowna, BC, Canada and Calgary, Alberta, Canada.
Pursuant to the acquisition, the Company acquired a number of proprietary technologies with the primary objective of the business being to build small farm scale ethanol facilities which involves a number of proprietary technologies exclusively owned by the Company. Other proprietary technology involves the use of a bio-gas burner which burns manure and bedding straw. This technology eliminates ground and ground-water contamination and produces most of the energy required for the facility by supplying heat for fermentation and vaporization and for the operation of a greenhouse, if desired. Another exclusive proprietary technology is a vegetable based formula which allows diesel and ethanol to emulsify. This hybrid fuel reduces particulate emissions without reduction in power when used in an unaltered diesel engine.
The Company is in the early development stage. In a development stage company, management devotes most of its activities in investigating business opportunities and further advancing its technologies. Because of a deficiency in working capital and other current commitments and significant operating losses, there is substantial doubt about the ability of the Company to continue in existence unless additional working capital is obtained.
1. Nature of Operations and Continuance of Business (con't)
front non-refundable fee which will be recognized as revenue when received and the balance will be paid over time. The Company will also need to rely on the forbearance of some creditors and related parties have agreed to continue to fund working capital as needed. The Company has entered into discussions with third parties to directly finance a facility in which the Company will then commence with its business plan.
2. Summary of Significant Accounting Policies
(a) Consolidated Financial Statements These consolidated financial statements represent the consolidation of the Company and its two subsidiaries Hybrid Fuels, U.S.A., Inc, and Hybrid Fuels (Canada) Inc.
(b) Cash and Cash Equivalents The Company considers all highly liquid instruments with a maturity of three months or less at the time of issuance to be cash equivalents.
(c) Use of Estimates The preparation of financial statement in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.
(d) Accounting for Stock-Based Compensation SFAS No. 123, "Accounting for Stock-Based Compensation," requires that stock awards granted be recognized as compensation expense based on fair values at the date of grant. Alternatively, a company may account for stock awards granted under Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," and disclose pro forma income amounts which would have resulted from recognizing such awards at their fair value. The Company has elected to account for stock-based compensation for employees under APB No. 25 and make the required pro forma disclosures for compensation expense. Stock based compensation for non-employees are accounted for using SFAS No. 123.
(e) Interim Financial Statements These interim unaudited financial statements have been prepared on the same basis as the annual financial statements and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company's financial position, results of operations and cash flows for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for a full year or for any future period.
3. Deposit on Plant (con't)
processing of Canadian beef. Blue Mountain Packers is a related party due to having one common director. The Company advanced $84,951 to Blue Mountain Packers for plant refurbishing. These advances bear interest at 8%. Due to the termination of the option agreement these advances are considered uncollectible and have been charged to operations.
4. Note Payable On September 15, 2000, the Company issued a note for Cnd$50,000 ($33,638) due and payable on or before September 15, 2001 plus 8% interest. Repayment of the note has been extended until completion of a financing. Interest of $2,129 has been accrued at June 30, 2001 and included in the accounts payable.
5. Advances Payable A non-related company coordinated investor relations services for the Company and paid expenses of $69,248 on behalf of the Company and loaned the Company Cnd$78,000 ($50,220) for a total amount owing of $119,468. This debt was settled on June 29, 2001 by the issuance of 1,000,000 restricted common shares of the Company. These advances were non-interest bearing and unsecured until the settlement date. Imputed interest of $8,856 (2000 - $1,654) was charged to operations and treated as donated capital.
6. Related Party Transactions/Balances
(a) Cash loans of $499,059 were advanced to the Company by the major shareholder. A total of $365,590 was repaid with cash. The controlling shareholder also paid office, rent and professional fees totalling $62,786 on behalf of the Company. The balance of $196,255 is owing without interest or specific repayment terms. Imputed interest of $21,691 (2000 - $15,600) was charged to operations and treated as donated capital.
(b) The President who is also a Director of the Company, has paid office and related expenses from personal funds in the amount of $10,626 of which $6,300 has been reimbursed with cash. Effective July 1, 1999 the President is entitled to a deferred salary of US$6,000 per month and was owed a total of $126,000 at March 31, 2001. These amounts are unsecured, non-interest bearing and due on demand. Imputed interest of $11,535 (2000 - $4,182) was charged to operations and treated as donated capital.
(c) See Note 3 for advances to Blue Mountain Packers Ltd.
7. Stockholders' Equity
(a) On May 28, 1998, the Company acquired, by issuing 12,000,000 shares, Hybrid Fuels, USA, Inc. and 330420 B.C. Ltd., which changed its name to Hybrid Fuels (Canada) Inc. This acquisition was accounted for as a reverse merger whereby the shareholder of Hybrid Fuels, USA, Inc. gained control of Polo Equities Inc. As part of the acquisition three shareholders representing 12,000,000 previously issued shares returned their shares for cancellation. For accounting purposes the acquisition was treated as a business purchase by Hybrid Fuels USA Inc. of Polo Equities, Inc. No amount was allocated to the intellectual asset as it was acquired from a related party and the transfer had no cost basis associated with it. There was no public market for the shares of Polo Equities, Inc. at the time of the reverse merger.
7. Stockholders' Equity (con't)
(b) On August 4, 1998 and March 23, 1999, the Company's former Board of Directors authorized the issuance of 1,000,000 and 900,000 shares respectively to individuals without consideration. On August 21, 1999, the current Board of Directors resolved that share certificates representing ownership of these 1,900,000 shares were issued without adequate consideration being paid to the Company and were therefore not fully paid and non-assessable. The Company cancelled the share certificates and indemnified the transfer agent, for any costs or liability it may incur in any way arising out of the cancellation of such shares and the transfer agent removed the 1,900,000 shares from the stockholder list effectively reversing the issuance. Six of the cancelled certificates, totalling 550,000 shares, have been endorsed and returned to the Company for cancellation. The contingencies regarding the cancelled shares relate to anyone who may have subsequent holder rights, and possibly the individuals who were issued those shares who may claim that they were issued for due consideration. The Company has determined that there is no amount to be accrued for future liabilities associated with claims by subsequent shareholders. To date when these shares are delivered to a broker for possible resale the broker phones the Company or the transfer agent and the shares are kept and cancelled. The Company will continue to monitor this issue. No other contingent liabilities have been included as some of the previous directors have been informed verbally of the cancellation. No formal legal demand has been made as the former administration has failed to provide addresses despite a number of requests.
(c) On May 17, 2000 the Company issued 1,500,000 shares pursuant to a subscription agreement for $150,000 dated February 17, 2000. On February 17 and 18, 2000, the Company accepted subscription agreements and notes whereby the Company would receive $300,000 for 3,000,000 shares. The 3,000,000 shares were issued and were then held in escrow. These shares were subsequently released from escrow to the investors to facilitate financing. The notes were to bear interest at 8% and were to be paid within 60 days or at the discretion of the President. In June 2000 the President extended the time for repayment to one week of the Company being re-listed on the Over-The-Counter Bulletin Board or other suitable exchange. When it became apparent there were going to be long delays the notes were demanded to be repaid by February 21, 2001. The notes were not paid as demanded, and the 3,000,000 shares have since been sold by the investors to innocent third parties. The investors did not and have not paid the Company for these shares, despite demands. Since these shares have been resold to innocent third parties they must be considered outstanding. The Company intends to sue the investors for the balance due on the notes, however the Company believes the balance is uncollectible.
8. Legal Issues Although the Company is not involved in any legal proceedings, several issues may eventually lead to the Company instituting legal action as follows:
(a) See Note 7(b) for contingencies relating to improperly issued shares that were later cancelled.
(b) Unauthorized and/or unsupported payments in the amount of $243,463 were made from Company funds by past officers of the Company during the period May, 1998 to June, 1999. The Company has requested a full accounting from the past president. All amounts that were unauthorized by the board of directors or amounts that are not properly documented with invoices and receipts have been accounted for as disputed executive compensation. Actions of the previous administration have been reported to the Securities and Exchange Commission. At such time as Company resources permit, the Company will seek legal advice to determine whether or not it is possible to recover all such disputed and unauthorized amounts from the previous administration.
(c) See Note 7(d) for temporary equity and related rescission rights for subscribers of 361,120 shares of the Company.
9. Subsequent Events
(a) On September 19, 2001 a total of 200,000 shares were issued to a director/officer of the Company to settle $10,000 owing as at June 30, 2001.
(b) See Note 5 for 1,000,000 restricted common shares issued to a non-related company to settle debt of $119,468. (c) A total of 100,000 restricted common shares, valued at $5,000, were issued to the plant manager of Blue Mountain Packers Ltd. for plant refurbishing work to March 15, 2001.
Item 2. Management's Discussion and Analysis or Plan of Operation
This Form 10-QSB contains forward-looking statements. The words "anticipate", "believe", "expect", "plan", "intend", "estimate", "project", "could", "may", "foresee", and similar expressions identify forward-looking statements that involve risks and uncertainties. You should not place undue reliance on forward- looking statements in this Form 10-QSB because of their inherent uncertainty. The following discussion and analysis should be read in conjunction with the Financial Statements and Notes thereto and other financial information included in this Form 10-QSB and our Form 10-KSB for the year ended June 30, 2000. Actual results could differ materially from the results discussed in the forward-looking statements.
The Company is a developmental stage company and has had no income since the acquisition of the hybrid fuels technology in June 1998, nor is it likely to have any significant cash flow until after the end of its current fiscal period ending June 30, 2001. If the Company is unable to obtain funds from external sources, it is probable that it will be unable to continue to operate in the long term.
Although the Company is in the developmental stages, the process behind Hybrid's business has been researched and developed over more than a decade. A plant that integrated the process described below was constructed and operated near Dalem, Alberta during 1994 and 1995. That operation is the source of the actual operating results that are referred to later in this report.
After that plant was closed in 1995, further research, development and construction helped us discover ways to improve the buildings and equipment and refine the process, which is now ready for market.
The Company's business plan is to sell and build farm scale plants that produce ethanol and are integrated with a cattle finishing operation. Grain, corn or other feedstock is fermented and then distilled to make the ethanol. Left over from the ethanol production process are a high protein mash, called "distillers grain" and water, called "stillage water". These are used as feed and water for beef animals because they contain nutrients. In addition, the fermentation process plus an enrichment process that is used free a higher percentage of the total food value from the feedstock and make it more "available" to the animals digestive system. The result is higher than average weight gains for the animals without the use of hormones. By using the distillers grain and stillage water on site the animals get the benefit of the nutrients in these byproducts and the plants save the energy it would otherwise require to dry and transport the distillers grain.
The manure and used bedding straw are cleaned up frequently, thus removing the media in which disease would otherwise grow. They are burned in a gasifier and the heat produced is used in the fermentation and distillation processes, with leftover heat being available to operate a greenhouse. The ethanol is mixed with a proprietary emulsifier and diesel. When this emulsion was tested at The British Columbia Institute of Technology, in an unaltered diesel engine, it reduced the particulate (black smoke) emissions by over 62% and the NOx emissions by over 22%, without any loss of power.
These plants are referred to as "micro energy food factories" or "MEFFs", because of the small amount of energy from outside sources that is necessary to operate them.
Item 2. Management's Discussion and Analysis or Plan of Operation (con't)
Hybrid plans to earn revenue from several streams:
1. profit on the sale of each MEFF;
2. the royalties and service fees that each operator will pay;
3. the purchase of the ethanol mixture from the operator at 80 % of
wholesale value and the sale to distributors or end-users;
4. the marketing of the finished animals.
Royalties and service fees will be payable monthly in amounts yet to be determined. Incentives in the form of reduced royalties may be offered to the first 10 to 20 operators who make early commitments to purchase plants. Service fees to cover the cost of ongoing training, service, technical support, and quality control are expected to be in the $150 to $250 per month range.
Initially it is anticipated that most of the finished beef will be sold at auction until the Company develops specialty markets. In the test trials at the prototype plant, the purchaser of the first lot of beef agreed to pick up subsequent lots at the plant and pay a premium of $0.10 per pound for all of the beef that could be produced by this process. The Company believes that it will be able to generate premium prices for the beef because of its high quality and taste. The Company anticipates entering into an agreement with its operators which will pay the Company an incentive for obtaining premium prices for the sale of the beef. We anticipate this will be in the form of a percentage of the premium realized.
Possible sources of premium prices that the Company has investigated include markets in Europe and the Far East, high-end restaurants, cruise ships and specialty meat markets that sell organic and hormone free meat to concerned consumers.
Management has recognized that it would be advantageous to be able to control the processing, marketing and distribution of the finished beef. A number of possibilities have been considered with the most promising being Company operated or sponsored retail outlets, development of foreign markets and specialty markets. The first, and perhaps the most important, obstacle encountered was the lack of meat processing facilities that could and would process the beef to our specifications.
In the second quarter of 2000, Hybrid found a packing plant that was within a two-hour drive of our head office and was not operating. This plant seemed to be perfect for our needs because of its size and the fact that it was constructed to meet the specifications necessary in order to process beef for shipment to Europe and the Far East. The Company negotiated an agreement with the owners to take possession of the plant, get it operating and obtain an operating certificate from the Canadian Food Inspection Agency (CFIA). The agreement contemplated the Company operating the plant for several months before the balance of the purchase price was due to be paid. That operating period was necessary in order to satisfy the financial institutions who were to advance the money to pay the balance of the purchase price of our ability to generate cash flow from the operation.
Relying on written commitments of equity financing from investors, the Company made the deposit on the packing plant just prior to the end of last fiscal year. For financing reasons, a new company, Blue Mountain Packers LTD., was incorporated. This company was intended to be the operating company and it did the work to get the plant operating. It was further intended that Hybrid would acquire all of the shares of Blue Mountain Packers LTD., for a nominal amount and operate it as a wholly owned subsidiary. Hybrid borrowed money and advanced it to Blue Mountain to pay start-up costs.
Item 2. Management's Discussion and Analysis or Plan of Operation (con't)
By mid-October 2000 the plant was approved by CFIA and ready to operate. However, the investors failed to deliver the balance of money as promised. The result was that we were unable to commence operations and create the cash flow that would have enabled us to raise the money to purchase the plant.
During the quarter ended March 31st, 2001, the deadline for purchasing the meat packing plant expired. As the Company was unable to obtain the financing to close the purchase, the deposit was forfeited and the money which was loaned to Blue Mountain Packers Ltd., and spent on preparing the plant for operations is unlikely to be recovered. As such the deposit has been removed as an asset, and the amounts loaned to Blue Mountain Packers Ltd., have been classified as bad debts, in the financial statements. See Notes 3 & 4 to the financial statements.
The Company has discussed its failure to exercise the option with the owners of the packing plant. The owners have verbally agreed that they will sell the plant to the Company at any time that we are able to pay the purchase price for the plant, assuming that it has not already been sold. There is no agreement with the owners concerning whether or not the deposit would be subtracted from the purchase price.
The meat packing plant is unlikely to sell quickly because of its size and location. Any prospective purchaser will need to have a supply of animals and a market to make the plant profitable. At present that is a problem because meat prices have increased dramatically and finished animal supplies have been committed much earlier than normal as a result of "mad cow" and hoof and mouth disease. The Company is satisfied that it has a workable business plan to make the packing plant operate profitably by building the MEFFs in close proximity to the packing plant. To ensure that a supply of enough hormone free feeders for finishing are committed to keep the MEFFs and the packing plant running at full capacity, a premium would be paid to the cow/calf ranchers. On the marketing side, the Company believes it is possible to generate higher than industry average returns because the process produces high quality meat which the Company would market to high-end specialty restaurants, cruise ships and markets in Europe and the far east.
As a consequence, the Company and Blue Mountain Packers Ltd., continue to search for money to acquire the plant. No commitment will be made to purchase the plant until sufficient money is committed to pay the purchase price and cover operating expenses, until positive cash flow is achieved. Cash flow would begin within 30 to 60 days after operations begin and it would take about six to nine months to achieve positive cash flow.
At the beginning of the quarter, the Company was the holder and payee of two outstanding promissory notes from two investors for shares that had been issued pursuant to an Offering under Rule 504. At their request, the makers of the notes were granted several extensions of time to pay and the shares were delivered to the Investors to facilitate the raising of money. On February 6, 2001, the Company demanded payment of those notes by February 21, 2001. The notes were not paid as demanded, and the shares have not been returned. It is unlikely that the Company will be able to collect the balance that is due on the promissory notes and that legal proceedings will need to be commenced to recover the shares. At this time, the Company does not have the financial resources to retain attorneys to commence those legal proceedings. The money owing pursuant to the promissory notes is disclosed as a reduction of shareholders equity in the financial statements.
Item 2. Management's Discussion and Analysis or Plan of Operation (con't)
long term, adequate financing continues to be of great concern to management. The Company will require additional capital in the near future in order for it to continue as a going concern in the long term. For the coming quarter, management anticipates spending most of its energies on raising money and complying with public reporting requirements.
To solve the cash shortage problem, the Company is involved in discussions to sell a license to use the technology in a specified territory. Although the parties have signed a letter of intent, no definitive agreement has been signed and no money has changed hands. The discussions contemplate payment of an up-front fee plus royalties for the use of the technology. In addition, the licensee would be required to purchase certain items of equipment from the Company on an ongoing basis. If the parties are able to reach an agreement as presently being discussed, the license fee would be sufficient to pay the Company's outstanding payables and operating costs for the next 12 months. The sale of such a license is expected to be a one time event.
If the Company is unable to realize income by selling a license to use the technology in a specified territory, the Company will need to raise money in some other way to continue operating for the next 12 months. To do so, it is likely that the Company will sell additional shares of its common stock to pay operating expenses for the next 12 months. The Company's general and administrative expenses for the next 12 months are expected to be less than $1500 per month, exclusive of executive compensation, which is deferred, and professional fees for legal and accounting services. It is anticipated that related parties will continue to pay these operating expenses and advance funds to pay legal and accounting fees, but no assurances can be given.
Management is convinced that an environmentally friendly project such as ours, which produces cleaner food, cleaner air and cleaner water is a sound basis for a successful business. For this and other reasons, we believe that building and operating the first MEFF is essential to create cash flow and to demonstrate to potential operators that the technology works as advertised.
The prospective operators want to see it in operation before they commit themselves and so do the people who will approve the financing for the construction of plants.
The Company has found a suitable location for its first MEFF, which will be located near Kelowna, B.C., Canada. The Company will own this first MEFF and use it as a demonstration and training facility. The Company is presently negotiating with a private source to obtain the necessary financing to construct this first MEFF and expects to have funding committed and construction started in late May or early June 2001. The lender will be given security on the plant in return for the loan.
We anticipate it will take approximately two months from the start of construction until the plant is operational and four to five months before it is generating positive cash flow. The financing that is being negotiated will be sufficient to cover all construction and operating expenses until positive cash flow is achieved. Once the first MEFF is operating we expect to receive approval for financing subsequent plants within two to three weeks. By that time, the Company expects it will have qualified and trained two or more operators.
The Company will lease parts of the technology to the operators on a permanent basis to protect the secrecy of the most vital pieces of the technology. The Company will earn a profit and recognize revenue on the sale of each plant. The Company will also receive a royalty, which is initially expected to be
Item 2. Management's Discussion and Analysis or Plan of Operation (con't)
$2500US per month which will begin when each MEFF begins operation. The profit on the sale of each plant will be sufficient to cover all of the operating expenses the Company will incur until revenues are received from royalties.
To date, the Company has received applications from more than fifty farmers who are interested in acquiring MEFFs. The Company is currently developing a screening process to select suitable candidates and assist them in obtaining financing, if necessary, for plant construction. The intention is to have at least four candidates approved for training by the time the demonstration MEFF is operating.
We continue to make progress towards the sale of a license to operate in a specified territory, as the prospective purchaser continues their "due diligence" and organizational activities. At this stage, it appears that it will take another several months to finalize a deal with a comprehensive written agreement and payment of the license fee.
Until such time as we have succeeded in obtaining financing, the Company will not proceed with construction and will keep operating costs to a minimum. Once money is available to pursue our program, operating costs will be kept to a minimum by using paid consultants as necessary on an ad hoc basis and no new employees will be hired until the Company has sufficient revenues.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits Exhibit No. 3.1* - Articles of Incorporation 3.2* - Bylaws |
4.1~ - Specimen Stock Certificate
*Incorporated by reference from the registrant's Form 10-SB filed with the Commission on February 4, 2000.
~ Incorporated by reference from the registrant's Form 10-KSB filed for the period ended June 30, 2000 and filed with the Commission on June 12, 2001.
(b) Reports on Form 8-K. None.
SIGNATURE
In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
HYBRID FUELS, INC.
/s/Clay Larson November 5, 2001 By Clay Larson Date Its President |