[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 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 88 0384399 (State or other jurisdiction of incorporation or organization) (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 [X] No
The number of shares outstanding of the registrant's common stock as of November 13, 2001 was 21,053,600.
The number of shares issued of the registrant's common stock as of November 13, 2001 was 21,286,353.
Transitional Small Business Disclosure Format (Check one): Yes  No[X]
For the quarter ended September 30, 2001
Part I - Financial Information Item 1. Financial Statements Page Balance sheet as of September 30, 2001..........................F-3 Statements of operations for the quarters ended September 30, 2001 and 2000.....................................F-4 Statements of cash flows for the three months ended September 30, 2001 and 2000.....................................F-5 Notes to Financial Statements...................................F-6-F-10 Item 2. Management's Discussion and Analysis or Plan of Operation.................................................11 Part II - Other Information..............................................16 Signature............................................................... 16
Hybrid Fuels, Inc.
(formerly Polo Equities, Inc.)
(A Development Stage Company)
Consolidated Balance Sheets
September June 30, 30, 2001 2001 $ $ (unaudited) (audited) -------------------------------------------------------------------------------- ASSETS Current Assets Cash 5 2 Total Assets 5 2 -------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable 22,692 14,807 Accrued liabilities (Note 6(d)) 6,600 15,000 Note payable (Note 4) 33,638 33,638 Shareholder loan payable (Note 6(a)) 197,745 196,255 Amounts owing to a Director (Note 6(b)) 168,106 152,111 Total Current Liabilities 428,781 411,811 Temporary Equity (Note 7(d)) 223,000 223,000 Stockholders' Deficit Common Stock (Note 7): $0.001 par value; 20,824 20,624 50,000,000 shares authorized 20,823,600 and 20,623,600 shares are issued and outstanding respectively Additional Paid-in Capital 295,642 285,842 Common Stock paid for but unissued 6,300 - (representing 130,000 shares) Donated Capital - Imputed Interest (Notes 5 and 123,249 115,937 6) Deficit Accumulated During the Development Stage (1,097,791)(1,057,212) Total Stockholders' Deficit (651,776) (634,809) Total Liabilities and Stockholders' Equity 5 2
Nature of Operations and Continuance of Business (Note 1) Other 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
Accumulated Three Three from Months Months February 26, Ended Ended 1960 (Date of September September Inception) 30, 30, to September 30, 2001 2000 2001 $ $ $ -------------------------------------------------------------------------------- Revenue - - - -------------------------------------------------------------------------------- Expenses Advances written-off (Note 84,951 - 42,076 3) Consulting fees 5,473 5,473 - Deposit on plant written-off 170,561 - - (Note 3) Disputed compensation (Note 243,463 - - 8(b)) Executive compensation (Note 162,000 18,000 18,000 6(b)) Filing and regulatory fees 17,091 1,561 2,242 General and administration 58,982 33 240 Imputed interest (Notes 5 123,249 7,312 12,102 and 6) Interest 4,173 2,044 110 Investor relations 16,698 - 1,518 Professional fees 147,170 5,802 17,250 Rent and telephone 42,059 137 1,641 Research and development 8,000 - - Travel and promotion 13,921 217 486 1,097,791 40,579 95,665 Net Loss (1,097,791) (40,579) (95,665) Net Loss Per Share (.01) (.01) Weighted Average Shares 20,657,0 19,524,0 Outstanding 00 00
(See Accompanying Notes to the Consolidated Financial Statements)
Hybrid Fuels, Inc.
(formerly Polo Equities, Inc.)
(A Development Stage Company)
Consolidated Statements of Cash Flows
Three Three Months Months Ended Ended September September 30, 30, 2001 2000 $ $ -------------------------------------------------------------------------------- Cash Flows To Operating Activities Net loss (40,579) (95,665) Non-cash item Imputed interest 7,312 12,102 Adjustment to reconcile net loss to cash Accounts payable and accrued liabilities 9,485 7,034 Net Cash Used In Operating Activities (23,782) (76,529) Net Cash Used By Investing Activities - - Cash Flows From Financing Activities Common stock subscribed for 6,300 - Proceeds from notes payable - 33,638 Advances payable - 9,733 Amounts owing to a Director 15,995 18,808 Shareholder loans payable 1,490 14,350 Net Cash Provided By Financing 23,785 76,529 Activities Net Increase (Decrease) in Cash 3 - Cash - Beginning of Period 2 485 Cash - End of Period 5 485 Non-Cash Financing Activities Value of common shares issued for 10,000 - settlement of debt Supplemental Disclosures Interest paid in cash - - Taxes paid in cash - -
(See Accompanying 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, B.C., Canada after the Calgary, Alberta, Canada office was shut down on May 3, 2001.
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.
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
Inspection Agency of the Government of Canada, Department of Agriculture for the 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 Ltd., 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 $4,148 has been accrued at September 30, 2001 and is included in 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 in June 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 $Nil (2001 - $13,326) 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 $64,276 on behalf of the Company. The balance of $197,745 is currently owing without interest or specific repayment terms. Imputed interest of $3,950 (2001 - $29,041) 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 $14,799 of which
$8,693 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 $162,000 at September 30, 2001. These amounts are unsecured,
non-interest bearing and due on demand. Imputed interest of $3,362 (2001
- $16,835) was charged to operations and treated as donated capital.
(c) See Note 3 for advances to Blue Mountain Packers Ltd.
(d) Pursuant to a directors' consent, dated June 11, 2001, a total of 200,000 shares was issued on September 19, 2001 to a director/officer of the Company to settle a $10,000 debt.
7. Stockholders' Equity
7. Stockholders' Equity (continued)
(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.
(d) Between October 1998 and June 1999, the previous administration sold a total of 351,120 common shares of the Company to 34 subscribers on the basis of an Offering Memorandum that contained a significant number of inaccuracies. A total of $223,000 was raised pursuant to this Offering. The current administration has concerns regarding possible misstatements, omissions and misleading statements. On the advice of legal counsel, the Company offered these 34 subscribers the option of receiving restricted stock as the Company did not and does not have the funds to repay these subscribers. Those who opted to receive restricted stock were also given an undertaking that they would receive a rescission offer when the Company was in a position to repay their money plus appropriate interest, in return for a return of the restricted stock, or they could elect to retain the stock. To date, 23 subscribers, have, pursuant to this offer received 237,753 shares, representing $158,000. These shares are issued but not considered outstanding. The remaining 11 subscribers, who paid $65,000 for 113,367 shares, have not responded to the offer. These subscriptions are recorded as temporary equity until rescission rights have been revoked.
7. Stockholders' Equity (continued)
(e) See Note 5 for 1,000,000 restricted common shares issued to a non-related company to settle debt of $119,468.
(f) 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.
(g) On September 19, 2001, 200,000 shares were issued to settle debt referred to in Note 6(d).
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 351,120 shares of the Company.
9. Subsequent Events
On October 18, 2001 130,000 shares were issued for cash proceeds of $6,300 and 100,000 shares were issued to settle debt of $5,000.
Item 2. Management's Discussion and Analysis or Plan of Operation
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, 2002. 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 intended business has been researched and developed over more than a decade. A plant that integrated the process described below was constructed and operated near Dalum, Alberta from 1994 to 1996. That facility was designed to prove the concepts and included all of the ethanol-making and cattle-feeding features of a full-scale commercial operation. That operation is the source of the actual operating results that are referred to later in this report.
After that plant was closed in 1996, further research, development and construction enabled us modify construction materials and layout to improve the buildings and equipment and refine the process, which is now ready for market.
The Company's intended business is to sell and build farm scale plants that produce ethanol 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 contain nutrients and are therefore used as feed and water for livestock. By using the distillers grain and stillage water on site the animals get the benefit of the nutrients in these byproducts. In addition, the plants do not incur the costs of drying the distillers grain and transporting it as would be necessary if it was to be used at another site. A further benefit is that no costs are incurred to dispose of the stillage water. Rather than it being something that is costly to be disposed of, it becomes a valuable feed product.
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. From discussions with the gasifier manufacturer, management believes that there will be sufficient heat leftover to operate a greenhouse, if the operator so desires.
The ethanol is mixed with a proprietary emulsifier and diesel. When this emulsion was tested at The British Columbia Institute of Technology in June, 1996, 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 facilities" or "MEFFs", because of the small amount of energy from outside sources that is necessary to operate them. Although there are no operating plants at the moment, the Company is expecting to have the first one operating in the spring of 2002, as described below.
The Company intends to sell these facilities (except the column and spinner) to farm operators, preferably those who grow or have access to sufficient grain to supply the plant. Management believes this would be about 40,000 bushels of barley or other suitable grain for a plant which would feed 200 head of cattle on a continually rotating basis. Hybrid plans to earn revenue from the sale and operation of these facilities in the following manner:
1. profit on the sale of each MEFF;
2. royalties and service fees that each operator will pay;
3. the lease of the column and spinner to each operator;
4. the marketing of the finished animals and
5. the purchase of the ethanol mixture from the operator at 80% of wholesale value and the sale to distributors or end-users.
The Company expects to earn a profit and recognize revenue on the sale of each plant. The Company intends to sell each MEFF at a profit that is sufficient to cover overhead and operating costs and the costs of screening applicants, training them and assisting them until they are able to operate on their own. The profit on the sale of each plant is expected to be sufficient to cover all of the operating expenses the Company will incur until revenues are received from royalties.
Once they are operating, it is intended that the operator of each plant will pay royalties for the license to use the technology. Initially this royalty is expected to be $2500US per month per plant starting when each MEFF begins operation. The Company is considering offering incentives in the form of reduced royalties to the first operators who make early commitments to purchase plants.
In addition, the Company anticipates that it will charge each operator a service fee to cover the Company's costs of regular visits for ongoing training, service, technical support, and quality control. These fees are expected to be in the $150 to $250 US per month range.
The column and spinner, which are the most sensitive parts of the technology, will not be sold. The Company will lease these parts of the technology to the operators on a permanent basis to protect the secrecy of the design and operation of these most vital pieces of the technology. These leases are expected to create another source of revenue for the Company.
Other revenue for the Company is expected to come from obtaining premium prices for the beef. The Company anticipates entering into an agreement with its operators to 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.
The Dalum test trials demonstrated the quality of the beef produced by this process. As a result, Cargill Foods, which purchased the first lot, agreed to pay a premium of $0.10 per pound for all of the beef that could be produced by this process. They also agreed to pick up subsequent lots at the plant, which eliminated freight and auction costs. The Company anticipates that the beef produced by the process will be top quality, which the Company will be able to market at premium prices.
premium prices from that sale of the beef and earn revenue from doing so.
Management has recognized that premium prices would be most likely if the Company were 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, known as Blue Mountain Packers, 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. At the date of this report, the packing plant is still available, although we do not have an agreement to purchase it at this time, and are not negotiating to acquire it.
There is no relationship between the Company, its officers, directors and affiliates and the packing plant, its officers, directors or beneficial owners.
The Company also believes that it has a workable business plan to operate the packing plant profitably by custom processing finished beef and bison until the MEFFs begin producing. We have contacts with an Alberta company, Canadian Rangeland Beef and Bison Inc., that deals in hormone free beef and bison. The Company and its officers, directors and affiliates are not related to Canadian Rangeland or any of its Officers, Directors or beneficial owners. That company has assured us that they are able to supply the packing plant with sufficient animals for custom processing to keep it operating at full capacity until sufficient MEFFs are operating. We do not have any agreement that would obligate them to supply us with hormone free beef. We anticipate we would enter into such an agreement as part of the process of acquiring the packing plant, if and when we are able to raise the money to purchase it. If we are able to acquire the packing plant, the Company's intention is to sell enough MEFFs to be built in close proximity to the packing plant to keep it operating at full capacity. From discussions which we have had with ranchers, cattle brokers and others that grow or market hormone free beef, the Company believes that it will be able to obtain enough hormone free feeder cattle to keep the MEFFs and the packing plant running at full capacity.
As a consequence, the Company continues to search for money to acquire the packing 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. The Company anticipates that the packing plant would begin to produce cash flow within 30 to 60 days after operations begin and is projected to achieve positive cash flow in six to nine months.
A small amount of diesel is added to the ethanol in the distillation column to "de-nature" it so that no pure ethanol is detectable or accessible in the MEFF. This mixture is then stored on site in an appropriate tank and then picked like bulk milk and transported to a mixing facility to be further mixed into the appropriate ratio. The Company intends to generate revenue by purchasing the fuel mixture from the operators at a discount from wholesale value, and selling the end product to end users and distributors after mixing is completed.
In the beginning, with the small quantities from the first MEFF, the plan is to mix locally and use the fuel for testing and evaluation by local users. Two local firms have agreed to evaluate the fuel made by the first plant as soon as we produce it. This is expected to generate some revenue.
a contract basis. The plan is for the Company to purchase the chemical mixture from each MEFF, and transport it to mixing plants for further mixing to achieve the appropriate ratio. The availability of an end user to take the finished fuel will be a consideration in choosing the mixing facility.
When a larger number of plants are operating and are producing sufficient quantities, the Company plans to sell the mixed fuel to end users and diesel fuel distributors encompassing all industries. The Company estimates it will be more than a year after completion of the second plant before we get to that stage, at which time the Company intends to target the trucking and railway industries. Ultimately the Company may consider building and operating its own mixing facilities, if that becomes economically feasible.
Because the hybrid fuel can be used in an unaltered diesel engine, it can be used economically where it is available and no modifications or changes need be made to engines to switch back to regular diesel fuel when the hybrid fuel is not available.
Some potential users may be concerned about using this product. Ethanol-diesel mixes are presently being evaluated by Archer Midland Daniels, The Chicago Transit Authority and The University of Illinois. Their reports either are or are expected to be available on The University of Illinois website. In addition, the City of Winnipeg Transit Authority and Husky Oil are conducting an evaluation of an ethanol-diesel mix to see how it performs in very cold weather. The Company plans to provide end users with access to all of these and subsequent evaluation reports in order to help alleviate potential users concerns about the safety and performance of the fuel.
As regulators work to decrease engine emissions and users look for less expensive fuels that burn cleaner, the Company believes it will be able to attract users for the hybrid fuel.
Until such time as the Company sells and constructs MEFFs and recognizes revenue, the Company is likely to continue to experience a cash shortage. Because the Company is a developmental stage company, it is unlikely to be able to borrow money from banks and other traditional financial institutions. The lack of 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 develop operational activities and to continue as a going concern in the long term. For the coming quarter, management anticipates spending most of its energies on raising money for the purpose of developing operating activities and complying with public reporting requirements.
To solve the cash shortage problem, the Company entered into discussions to sell a license to use the technology in the Province of Quebec, Canada. The discussions contemplated payment of an up-front fee plus royalties for the use of the technology.
Although the parties signed a letter of intent, no definitive agreement was signed and no money changed hands. At the time of filing this amended report, it had become apparent that we would be unable to complete a deal with the proposed licensee, so on March 28, 2002, we broke off negotiations.
If the Company is unable to realize income by selling a license to use the technology, the Company may need to raise money in some other way. To do so, the Company may 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 $500 per month, exclusive of executive compensation, which is deferred, and professional fees for legal and accounting services. At May 31, 2002, the Company had over $8,900.00 in cash reserves which should be sufficient to meet our cash requirements for the next 12 months, barring any significant unforeseen cash expenses.
Management believes 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 so that the Company can begin to develop operating activities.
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 MEFFs. 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.
The Company has found a suitable location for its first MEFF, which will be located near Kelowna, B.C., Canada. This first MEFF was to be built by an outside contractor who was to arrange all of the financing, complete the construction and deliver an operational plant to our operating subsidiary, Hybrid Fuels (Canada) Inc., to be used as a demonstration and training facility. Neither we nor Hybrid (Canada) were to have any liability for the MEFF until it was operational.
Unfortunately, the Contractor who was to do the building, ran into difficulties on another project that had nothing to do with us, and was unable to keep his commitment to build the MEFF for Hybrid Fuels (Canada) Inc. Hybrid (Canada) has made preliminary contact with a new contractor to construct this first MEFF. No agreement has been reached as of the date of this report.
We anticipate it will take approximately two to four 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 sought is expected to 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.
We have also approached Farm Credit Corporation, which has recently approved a program to provide leasing to farmers for the acquisition or upgrading of buildings and equipment. At this time we are in the very preliminary stages of discussion to determine the best way to obtain approval for lease financing to construct the first MEFF and subsequent MEFFs. As a result of slow-downs that are showing up throughout the economy, there seems to be a willingness to assist in the furthering of this new process which could contribute greatly to farm income. It is likely to take two to three months to complete the "due diligence" process with FCC.
The institution that finances the construction of each MEFF is expected to be given security on the plant in return for the financing. No financing has been committed as at the date of this report.
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.
investor to raise money to pay professional fees and other operating expenses. These shares were issued after the end of the quarter. In addition, the Company authorized the issuance of 100,000 restricted shares to pay an independent consultant for services rendered to the end of September, 2001. These shares were also issued after the end of the quarter.
The loss for the present quarter is $40,759 compared to $95,665 for the comparable quarter last year. The loss for the same quarter last year was higher largely due to advances written, which is not likely to reoccur, plus higher imputed interest and professional fees. The loss for this quarter is made up of consulting fees for filings with the SEC, which have been paid by cash of $473 and the issuance of shares for a value of $5,000. Another $18,000 is salary for the President which is deferred until money is available, and does not represent a cash outlay. Other items not requiring cash are interest which is accrued and imputed interest. All of these non-cash items total $32,829.
The working capital deficiency of roughly $8,000 was made up from cash from the sale of shares and by a major shareholder or the President. If no revenue is received from the sale of a license as discussed above, or from operating activities, it is anticipated that a major shareholder or the President will continue to fund the Company's working capital deficiency for the foreseeable future. Operating expenses will be kept to a minimum until revenue is generated.
PART II Other Information
Item 6. Exhibits and Reports on Form 8K
(a) Exhibits None
(b) Reports on Form 8-K None Signatures 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.
Dated: May 23, 2002
HYBRID FUELS, INC.
By: /s/ Clay Larson By: /s/ John Morrison Director, CEO & President Director & CFO