UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2004
[_] 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
NEVADA 88 0384399 ------ ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization)
237 Main Street, Box 880, Niverville, Manitoba R0A 1E0
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (888) 550-2333
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 issued and outstanding shares of the registrant's common stock as of November 10, 2004 was 23,679,733.
Transitional Small Business Disclosure Format (Check one): Yes [_] No [X]
TABLE OF CONTENTS PART-I FINANCIAL INFORMATION PAGE Item 1 Financial Statements............................................... 3 Item 2 Plan of Operation................................................. 12 Item 3 Controls and Procedures........................................... 16 PART-II OTHER INFORMATION PAGE Item 1 Legal Proceedings................................................. 17 Item 2 Unregistered Sales of Equity Securities and Use of Proceeds ...... 17 Item 3 Defaults Upon Senior Securities................................... 17 Item 4 Submission of Matters to a Vote of Security Holders............... 17 Item 5 Other Information................................................. 17 Item 6 Exhibits and Reports on Form 8-K.................................. 17 Signature......................................................... 17
Hybrid Fuels, Inc.
(A Development Stage Company)
September 30, 2004
Consolidated Balance Sheets................................................ F-1 Consolidated Statements of Operations...................................... F-2 Consolidated Statements of Cash Flows...................................... F-3 Notes to the Consolidated Financial Statements............................. F-4
Hybrid Fuels, Inc.
(A Development Stage Company)
Consolidated Balance Sheets
(expressed in U.S. dollars)
September 30, June 30, 2004 2004 $ $ (unaudited) (audited) ASSETS Current Assets Cash 291 7,907 ---------- ---------- Total Assets 291 7,907 ========== ========== LIABILITIES AND STOCKHOLDERS' DEFICIT Current Liabilities Accounts payable 48,296 50,265 Accrued liabilities 5,550 3,250 Note payable and other advances (Note 3) 41,742 39,432 Amounts owing to related parties (Note 4) 209,309 205,050 Amounts owing to a former director (Note 5) 326,701 326,701 ---------- ---------- Total Liabilities 631,598 624,698 ---------- ---------- Redeemable and Restricted Common Stock (Note 7(c)) 223,000 223,000 ---------- ---------- Commitments and Contingencies (Notes 1 and 7) Stockholders' Deficit Common Stock: $0.001 par value (Note 6) 50,000,000 shares authorized 23,446,980 and 23,371,980 shares issued and outstanding respectively 23,447 23,372 Additional Paid-in Capital 631,450 625,828 Donated Capital 356,781 329,554 Deferred Compensation (13,649) (27,299) Deficit Accumulated During the Development Stage (1,852,336) (1,791,246) ---------- ---------- Total Stockholders' Deficit (854,307) (839,791) ---------- ---------- Total Liabilities and Stockholders' Deficit 291 7,907 ========== ==========
(The Accompanying Notes are an Integral Part of the Financial Statements)
Hybrid Fuels, Inc.
(A Development Stage Company)
Consolidated Statements of Operations
(expressed in U.S. dollars)
Accumulated from February 16, 1960 Three Months Ended (Date of Inception) ------------------------------ to September 30, September 30, September 30, 2004 2004 2003 $ $ $ Revenue -- -- -- ---------- ---------- ---------- Expenses Deposits and advances written-off 255,512 -- -- Consulting fees 171,066 13,649 3,750 Donated services (Note 4) 15,000 7,500 -- Executive compensation (Note 5) 337,670 -- 18,000 Filing and regulatory fees 26,662 532 60 General and administration 72,625 3,958 18 Imputed interest (Notes 4 and 5) 341,781 19,727 19,076 Interest and bank charges 15,302 925 1,098 Investor relations 80,716 11,044 -- Disputed compensation (Note 7(b)) 243,463 -- -- Professional fees 200,421 3,300 534 Rent and telephone 45,736 441 131 Research and development 16,925 -- -- Travel and promotion 29,457 14 -- ---------- ---------- ---------- 1,852,336 61,090 42,667 ---------- ---------- ---------- Net Loss for the Period (1,852,336) (61,090) (42,667) ========== ========== ========== Net Loss Per Share - Basic and Diluted -- -- ========== ========== Weighted Average Shares Outstanding 23,397,000 21,978,000 ========== ==========
(The Accompanying Notes are an Integral Part of the Financial Statements)
Hybrid Fuels, Inc.
(A Development Stage Company
Consolidated Statements of Cash Flows
(expressed in U.S. dollars)
Three Months Ended ----------------------------- September 30, September 30, 2004 2003 $ $ Cash Flows Used In Operating Activities Net loss (61,090) (42,667) Adjustments to reconcile net loss to net cash Common shares issued for services -- 3,750 Deferred executive compensation -- 18,000 Imputed interest 19,727 19,076 Donated services 7,500 -- Deferred compensation 13,650 -- Change in operating assets and liabilities Accounts payable and accrued liabilities 331 (766) ------- ------- Net Cash Used In Operating Activities (19,882) (2,607) ------- ------- Cash Flows From Financing Activities Proceeds from advances 2,310 -- Advances from related parties 4,259 2,256 Proceeds from issuance of common stock 5,697 -- ------- ------- Net Cash Provided By Financing Activities 12,266 2,256 ------- ------- Net Decrease in Cash (7,616) (351) Cash - Beginning of Period 7,907 1,247 ------- ------- Cash - End of Period 291 896 ======= ======= Non-Cash Financing Activities Common shares issued for services -- 3,750 Common shares issued to settle debt -- 10,000 ======= ======= Supplemental Disclosures Interest paid -- -- Income taxes paid -- -- ======= =======
(The Accompanying Notes are an Integral Part of the 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. All historical financial statements are those of Hybrid Fuels, USA, Inc. and Hybrid Fuels (Canada) Inc. As part of the acquisition, three shareholders holding 12,000,000 previously issued shares returned their shares for cancellation. For accounting purposes the acquisition was treated as a reverse merger business purchase of Polo Equities Inc. by 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.
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". The Company was re-listed on the OTC Bulletin Board in March 2003 and received "active" status in April 2003.
Pursuant to the above acquisition, the Company acquired a number of proprietary technologies with the primary objective of the business being to build small farm-scale ethanol facilities that involves a number of proprietary technologies exclusively owned by the Company. Other proprietary technology involves the use of a bio-gas burner that 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 that 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 a development stage company with management devoting most of its activities in investigating business opportunities and further advancing its technologies. The ability of the Company to emerge from the development stage with respect to any planned principal business activity is dependent upon its successful efforts to raise additional equity financing and/or attain profitable operations. There is no guarantee that the Company will be able to complete any of the above objectives. At September 30, 2004, the Company had a working capital deficit of $631,307 and an accumulated deficit of $1,852,336. These factors cause substantial doubt about the continuance of the Company as a going concern.
The Company expects that future capital requirements for developing and expanding technologies will be met through stock offerings by way of private placements.
2. Summary of Significant Accounting Policies
(a) Consolidated Financial Statements
These consolidated financial statements represent the consolidation of the Company and its wholly-owned subsidiary, Hybrid Fuels (Canada) Inc. The Company's subsidiary is currently inactive and has no material assets, liabilities or operations, other than the verbal agreement as disclosed in Note 7(d).
2. Summary of Significant Accounting Policies (continued)
(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 statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods. Actual results could differ from those estimates.
(d) Basic and Diluted Net Income (Loss) per Share
The Company computes net income (loss) per share in accordance with SFAS No. 128, "Earnings per Share" (SFAS 128). SFAS 128 requires presentation of both basic and diluted earnings per shares (EPS) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including stock options, using the treasury stock method, and convertible preferred stock, using the if-converted method. In computing Diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential common shares if their effect is anti-dilutive.
(e) Foreign Currency Translation
The Company's functional currency is the Canadian dollar. Foreign currency transactions are primarily undertaken in Canadian dollars and are translated into United States dollars using exchange rates at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are re-measured at each balance sheet date at the exchange rate prevailing at the balance sheet date. Foreign currency exchange gains and losses are charged to operations. The Company has not, to the date of these financial statements, entered into derivative instruments to offset the impact of foreign currency fluctuations.
(f) Comprehensive Loss
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for the reporting and display of comprehensive loss and its components in the financial statements. As at September 30, 2004, the Company has no items that represent a comprehensive loss and, therefore, has not included a schedule of comprehensive loss in the financial statements.
(g) Financial Instruments
The fair values of cash, accounts payable, accrued liabilities, notes and advances payable, and amounts due to related parties approximate their carrying values due to the immediate or short-term maturity of these financial instruments.
(h) Income Taxes
Potential benefits of income tax losses are not recognized in the accounts until realization is more likely than not. The Company has adopted SFAS No. 109 as of its inception. Pursuant to SFAS No. 109 the Company is required to compute tax asset benefits for net operating losses carried forward. Potential benefit of net operating losses have not been recognized in these financial statements because the Company cannot be assured it is more likely than not it will utilize the net operating losses carried forward in future years.
2. Summary of Significant Accounting Policies (continued) (i) Stock-Based Compensation The Company has elected to apply the intrinsic value principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related interpretations in accounting for its stock options granted to employees and directors. Under APB 25, compensation expense is only recorded to the extent that the exercise price is less than the market value of the underlying stock on the measurement date, which is usually the date of grant. Stock-based compensation for employees is recognized on an accelerated basis over the vesting period of the individual options. Stock options granted to non-employees are accounted for under SFAS No. 123 "Accounting for Stock-Based Compensation" and are recognized as compensation expense based on the fair market value of the stock award or fair market value of the goods and services received, whichever is more reliably measurable. (j) 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. (k) Recent Accounting Pronouncements In December 2003, the United States Securities and Exchange Commission issued Staff Accounting Bulletin No. 104, "Revenue Recognition" ("SAB 104"), which supersedes SAB 101, "Revenue Recognition in Financial Statements." The primary purpose of SAB 104 is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, which was superseded as a result of the issuance of EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The adoption of SAB 104 did not have a material impact on the Company's financial statements. 3. Note Payable and Other Advances (a) On September 15, 2000, the Company issued a note for CAD $50,000 (US$33,638) payable on or before September 15, 2001 plus 8% interest. The Company extended repayment of the note until the completion of a financing arrangement. Interest expense of $901 has been accrued for the quarter ended September 30, 2004 (2003 - $833). Accrued interest of $12,323 is included in accounts payable. The note payable was $39,380 after translation into US dollars at September 30, 2004. The Company incurred a foreign currency translation loss of $2,180 that was charged to operations. (b) A cash advance of CAD$3,000 from an unrelated party is non-interest bearing, unsecured and due on demand. 4 Related Party Transactions/Balances (a) The controlling shareholder is owed $199,371 (2003 - $197,115) for payment of rent, office expenses and professional fees on behalf of the Company. This amount is non-interest bearing, unsecured and without specific terms of repayment. Imputed interest of $7,476 (2003 - $7,500), calculated at a rate of 15% per annum, was charged to operations and treated as donated capital. An amount of $1,890 is owing to another shareholder. This amount is unsecured, non-interest bearing, with no specific terms of repayment.
4. Summary of Significant Accounting Policies (continued)
(b) The current President loaned the Company $2,300 and is also due $1,576 for office and other expenses paid for on behalf of the Company. These amounts are unsecured, non-interest bearing and due on demand. During the quarter ended September 30, 2004, the Company recognized a total of $7,500 for donated services provided by the President of the Company.
(c) The current Vice-President is due $4,172 for office and other expenses paid for on behalf of the Company. These amounts are unsecured, non-interest bearing and due on demand.
5. Amounts Owing to a Former Director
The former President, who was also a Director of the Company, was paid office and related expenses from personal funds in the amount of $16,486 of which $13,785 has been reimbursed with cash. Effective July 1, 1999 the President was entitled to a deferred salary of US$6,000 per month or $324,000 in total and was owed a total of $326,701 at September 30, 2004. These amounts are unsecured, non-interest bearing and due on demand. Imputed interest of $12,251 (2003 - $11,596), calculated at a rate of 15% per annum, was charged to operations and treated as donated capital. The Company does not have a written employment contract with the former President.
6. Common Shares
(a) During the year ended June 30, 2003, 40,000 shares were issued for cash of $3,793 at an average price of $0.095 per share and 10,000 shares were issued for cash of $1,890 at an average price of $0.19 per share.
(b) On January 23, 2003, 600,000 shares of common stock were issued to settle debt referred to in note 4(c).
(c) On September 10, 2003, 40,000 shares of common stock were issued at a price of $0.25 per share to settle outstanding debt.
(d) On September 10, 2003, 7,500 shares of common stock were issued at a price of $0.25 per share in consideration of services rendered.
(e) On September 23, 2003, 7,500 shares of common stock were issued at a price of $0.25 per share in consideration of services rendered.
(f) On October 23, 2003, 7,500 shares of common stock were issued at a price of $0.14 per share in consideration of services rendered.
(g) On March 29, 2004, 27,778 shares of common stock were issued at a price of $0.14 per share to settle outstanding debt.
(h) On March 29, 2004, 600,000 shares of common stock were issued to two directors at a price of $0.14 per share in consideration of services rendered. 400,000 of these shares relate to future services for the period from January 1 - December 31, 2004. As a result $27,299 has been charged to operations and the remaining balance of $27,299 has been set up as deferred compensation.
(i) On March 29, 2004, 431,106 shares of common stock were issued for cash at a price of $0.14 per share.
(j) On April 1, 2004, 133,333 shares of common stock were issued at $0.23 per share in consideration of services rendered.
(k) On April 1, 2004, 166,663 shares of common stock were issued for cash at a price of $0.14 per share.
(l) On September 1, 2004, 25,000 shares of common stock were issued for cash at a price of $0.08 per share.
(m) On August 31, 2004, 50,000 shares of common stock were issued for cash at a price of $0.08 per share.
7. Commitments and Contingencies
Although the Company is not involved in any legal proceedings, several issues may eventually lead to the Company instituting legal action as follows:
(a) 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 that may incur arising out of the cancellation of such shares. 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.
(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 President of the Company during that time. All amounts that were unauthorized by the Board of Directors at the time or amounts that were not properly documented with invoices and receipts have been accounted for as disputed executive compensation. 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) Between October 1998 and June 1999, the administration at that time sold a total of 361,120 common shares of the Company to 34 subscribers on the basis of an Offering Memorandum ("Offering") that contained a significant number of inaccuracies. A total of $223,000 was raised pursuant to this Offering. Management had 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 232,753 shares, representing $158,000. These shares are issued but not considered outstanding. The remaining 11 subscribers, who paid $65,000 for 128,367 shares, have not responded to the offer. These subscriptions are recorded as redeemable and restricted common shares until rescission rights have been revoked.
(d) The Company's subsidiary, Hybrid Fuels (Canada) Inc., entered into a verbal agreement with an independent third party that will construct a fully operational facility at Oyama, B.C. Part of the agreement will make the facility availability to the Company for training and demonstration purposes, through a lease or an operating agreement. The terms under which this facility will be operated are to be finalized when the construction is complete and all of the construction and start-up costs are known.
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, 2004. Actual results could differ materially from the results discussed in the forward-looking statements. The Company assumes no responsibility to correct or update the forward looking statements as circumstances change and therefore, the forward looking statements should be assumed to speak only as at the date of the filing of this report.
Hybrid Fuels Inc. 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 quarter ending December 31, 2004.
In their opinion on our June 30, 2004 financial statements, our independent auditors raised doubt regarding our ability to continue as a going concern because we have not generated any revenues and have conducted operations at a loss since inception.
Management recognizes the importance of not only developing existing technologies but creating new opportunities as well. The current Board, together with several members of the Technical Advisory Committee, has been aggressively pursuing the expansion of the Hybrid Fuels technology to meet the changing demands of the agricultural industry and to create additional economic and renewable energy opportunities.
Although the Company is in the developmental stages, the process behind Hybrid Fuels' intended business has been researched and developed over more than a decade. A facility 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-producing 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 the Dalum facility was closed in 1996, further research, development and construction enabled us to modify the construction material requirements and facility layout to improve the buildings and equipment and refine the process, which is now ready for market.
Currently, the Company's intended principal business is to market farm-scale facilities that integrate beef operations with the production of ethanol. The main source of revenue for the Company is expected to come from the resale of the fuel and from a portion of any premium that the Company can obtain from the sale of the beef.
An operating facility includes the cattle barn, the ethanol-producing equipment, the bio-furnace or gasifier, "Greener Pastures" grass growing system, and the right to use the proprietary information and technology.
In these facilities, grain, corn or other feedstock is fermented and then distilled to make the ethanol. The ethanol production process also generates a high protein mash, called "distillers grain" and water, called "stillage water". These contain nutrients and are used as feed and water for livestock. By using the distillers grain and stillage water on site the animals receive the benefit of the nutrients in these byproducts. In addition, the facilities do not incur the costs of drying the distillers grain and transporting it as would be necessary if it were to be used at another site. A further benefit is that no costs are incurred to dispose of the stillage water. Rather than the stillage water being something that is costly to be disposed of, it instead 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. This waste material will be 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 a surplus of sufficient heat will enable the operation of a greenhouse, if the operator so desires.
The ethanol is intended to be mixed with a proprietary emulsifier and diesel fuel. 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 engine power.
The cost of building this facility is anticipated to be approximately $350,000. Approximately $220,000 of this cost is for foundations and flooring, buildings, the gasifier, the ethanol-producing equipment, tanks and machinery. Soft costs, for such items as permits, engineering and other professional fees, survey and layout costs, site preparation, delivery of buildings and materials, equipment rentals, tools and miscellaneous items, are estimated to cost $60,000. We estimate we will also spend approximately $70,000 for construction labour and supervision.
The completion and operation of the first beef and ethanol facility will enable the Company to demonstrate to potential operators and investors that the technology works as described. The ability of the Company to emerge from the development stage with respect to any planned principal business activity is dependent upon raising capital through private placements and achieving profitable operations. We do not have any long-term commitments for financing at this time.
In the quarter ending September 30, 2003 our subsidiary, Hybrid Fuels (Canada) Inc., entered into a verbal agreement with an independent third party to construct a fully operational facility at Oyama, B.C. Part of the agreement will make the facility available to the Company for training and demonstration purposes, through a lease or an operating agreement. The terms under which this facility will be operated are to be finalized when the construction is complete and all of the construction and start-up costs are known.
After the end of the most recent quarter, the concrete flooring and the building exterior for both the ethanol facility and cattle barn had been completed at Oyama, BC, Canada. This site at Oyama, on approximately six acres of farmland, was chosen because it provides the company with good site control and supervisory ability that is important to the completion of the first facility.
Once we have a demonstration facility which has proven our technology and processes, we intend that our subsidiary, Hybrid Fuels (Canada) Inc., will operate it and the Company will earn revenue from the sale of cattle and ethanol.
The primary goal of placing the first facility in service is to demonstrate the economic feasibility of the system. Once this first facility is operating, we plan to use it as a demonstration and training facility and to earn revenue from its operation. Assuming that it will be necessary to pay market price for grain, bedding and other supplies and that we will receive no more than market price for the finished animals, our projections indicate that the facility should generate sufficient revenue to pay all of our operating costs, plus a small surplus that may be used toward development of operating activities. Third parties that have expressed interest in financing subsequent facilities through private placements want to see this firstfacility generate sufficient cash flow to pay all operating costs and debt service. We anticipate that the facility will show sufficient cash flow to make it possible for us to finance subsequent facilities.
We have designed the barn to accommodate 200 head of cattle. As we near the end of testing the facility, we plan to begin the finishing operation for the cattle, with an initial group of 20 to 25 head of cattle. The finishing operation is designed to function on a staggered basis, so that every two weeks (initially) we will bring in an additional 20 to 25 head of cattle. We will sell the cattle on the same staggered basis as they complete the finishing process. As we gain experience with the facility, we intend to bring cattle in at the rate of 40 to 50 head at a time on three to five-week intervals to take maximum advantage of the size of the trucks that will be used to transport the cattle.
The cattle will begin the finishing operation in quieting pens where they will spend approximately two weeks being transitioned from their prior diet to the wet distillers grains diet. After completing the diet transition, the cattle will be moved into the barn, where, on average, they will spend approximately 100 days being fed the finishing diet. At the end of the finishing operation, our plans for this demonstration facility call for the cattle to be sold at auction. As one group of cattle is sold, another takes its place, as both the finishing operation and our staggered acquisition scheme are scheduled to take approximately three to four months, depending on the duration of the finishing process. As a result of using this staggered acquisition scheme, we will not run the facility at full capacity until approximately four months have passed from the facility becoming operational. As a result the cattle we begin selling during the fourth month, which will generate our initial revenues, will bear a disproportionate amount of fixed costs compared to cattle sold beginning in the eighth month. We believe, however, that at the end of the fourth month, when we sell the first group of finished cattle, we will have an initial set of data from which to prepare pro forma information for purposes of estimating cash flows to prospective financiers of future facilities, rather than having to wait until the end of the eighth month, to present this information.
We plan to add, on average, between 400 and 500 pounds per head of cattle during the finishing operation. The weight per head when we acquire the cattle will vary, principally due to the time of year when the cattle are acquired (most calves are born in the spring and are ready to be sold as feeder cattle seven months to a year later). One of our fundamental assumptions is that the facility will have the potential to break even if we can sell finished cattle at prices per pound that are less than the prices per pound at which we purchase them. Generally, in the cattle industry, feeder cattle sell at a higher price per pound than finished cattle. The increase in weight during the finishing operation provides the potential for generating a profit or at least breaking even when selling finished cattle at a lower price per pound. For example, assume we purchase a 600-pound animal for $0.90 per pound (or $540) and that we finish the animal to 1000 pounds and sell at $0.85 per pound, or $850. The $310 difference between our purchase price and the sale price would have to cover the consumables purchased to prepare wet distillers grains for the animal and a pro rata share of the facility's operating costs, including debt service.
At this time we do not have financial data to support the breakeven pricing spread for the facility. Developing this relationship between the facility's cost structure and tolerable price differentials will provide critical information for prospective financiers of future facilities.
Farmers with integrated operations who grow their own consumables could have greater price flexibility on the cattle finishing operation if their cost of producing the consumables is less than the market price for consumables. We do not plan to have an integrated operation at the first facility, so we will have to pay market prices for our consumables.
We do not plan to sell the ethanol produced by the first facility during at least the first two to three months of its operation. We have discussed an arrangement with a local owner of a sawmill and trucking company to give him the ethanol during this two to three-month period, with a view toward charging him for the ethanol in the future once he has determined that he can use the ethanol economically without harm to his equipment. Once the ethanol facility is operating at full capacity, we project that the facility will produce approximately 240 US gallons of ethanol per day, that could be sold at market prices slightly below the price of the diesel fuel with which it will be blended. The price of ethanol will vary, usually in tandem with the price of diesel. For example, assuming a price of $0.70 per gallon for ethanol, monthly sales of ethanol would be approximately $5,000.
Once we have operated the facility for four months, we believe that the actual financial results for the finishing operation and ethanol sales will provide us with the data needed to prepare pro forma financial information assessing the economic feasibility of the facility. If the data establishes the economic feasibility of the facility, we will then be able to implement our business plan, which is based on identifying third parties who will work with us to construct and operate their own facilities. If our assumptions prove wrong or we encounter unforeseen obstacles, our ability to demonstrate the facility's economic feasibility may be delayed.
We intend to license our technology and provide our expertise to third parties that want to construct facilities. We expect to earn a profit and recognize revenue on the sale of each facility. We plan to charge fees in connection with the sale of each facility, based on the value to the operator of having us organize and supervise the construction of the facility and train the operator. We expect the fees from the sale of the facilities to be sufficient to cover all of the operating costs we will incur in qualifying candidates, training operators, supervising construction and start-up, etc., until royalties are received. It should be recognized that once the first facility is operational, that may lead to modifications of the planned methods of operation.
Once we have demonstrated our demonstration facility's economic feasibility for purposes of obtaining financing for subsequent facilities, we expect to have selected four operators. After operators have been selected, based on a screening process to select suitable candidates, we plan to train them and assist in constructing facilities.
We intend to lease to the operators, on a permanent basis, the separation column, that is used to distill the ethanol, and the spinner, that is used to separate the mash from the water after the fermentation process. These two items are integral parts of the facilities, and leasing them is designed to protect the secrecy of these most vital pieces of the technology. The lease payments will generate revenue for us and will be payable monthly in amounts yet to be finalized.
We plan to charge a royalty for the use of the trade secrets and proprietary information. The royalty, which is expected to be $2500US per month, per facility, based on the projected benefits of the use of trade secrets to the operator, will begin when each facility begins operation. Incentives in the form of reduced royalties may be offered to the first 10 to 20 operators who make early commitments to purchase facilities.
We expect to enter into contracts with our operators to act as their marketing arm for the beef and fuel. We expect this arrangement to generate revenue for us and give us control over greater quantities of both products than any individual operator would have. We believe this arrangement will provide us with the
ability to make better deals with, and provide more secure delivery to, distributors and other purchasers. We believe that operators will appreciate being relieved of these marketing responsibilities, particularly if beef sales at premium prices generate greater revenue for them.
For a more detailed description of the entire process, including sources of information and references, the reader is referred to the Company's Form 10-KSB for the year ended June 30, 2004. Although there are no operating facilities at the moment, the Company is expecting to have the first facility operating in fiscal year 2004/2005.
The loss for the present quarter is $61,090 compared to $42,667 for the comparable quarter last year. This difference is mainly attributable to an increase in consulting fees of $9,899 to $13,649 from $3750 in the comparable quarter last year and investor relations expenses of $11,044 which was nil in the comparable quarter last year.
Executive compensation was nil as compared to $18,000 for the comparable quarter last year. The monthly accrual of $6,000 in deferred salary for the quarter ended September 30, 2003 was attributed to former CEO Clay Larson who resigned in January 2004. Imputed interest, a non-cash item, on the amount owing to the former President totaled $12,251 for the current quarter compared to $11,596 for the comparable quarter last year.
Donated services in the amount of $7,500, which also does not represent a cash outlay, was attributed to CEO Paul Warkentin for the current quarter.
At the end of the quarter, the Company had cash of $291 down from $7,907 at the end of the previous quarter. During the quarter we received $2,310 from a non-related party, $4259 from a related party and $5,697 from the issuance of common stock. A total of $19,882 was used to fund our operations.
Although we currently do not have significant cash reserves, related parties have indicated a willingness to provide operating capital in exchange for restricted common shares. These related parties are under no obligation and no assurances can be given that they will continue to do so.
Based on an evaluation as of the end of the period, the Company's Principal Executive Officer and Acting Principal Financial Officer have concluded that the Company's disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act 1934 (the "Exchange Act") are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. There were no significant deficiencies or material weakness, and therefore there were no corrective actions taken.
No legal proceedings are threatened or pending against the Company or any of its officers or directors. Further, none of the Company's officers or directors or affiliates of the Company are parties against the Company or have any material interest in actions that are adverse to the Company's interests.
On September 23, 2004 the Company issued 75,000 shares of restricted common stock to two investors for operating capital. The common stock was issued at a value of $.10 per share (Cdn Funds).
The foregoing issuances of common stock were made in reliance upon the exemption from registration set forth in Regulation S promulgated under of the Securities Act of 1933 for transactions not involving a US person. No underwriters were engaged in connection with the foregoing issuances of securities.
Exhibit 31.1 Principal Executive Officer and Acting Principal Financial Officer Certification (section 302 of the Sarbanes-Oxley Act of 2002) Exhibit 32.1 Principal Executive Officer and Acting Principal Financial Officer Certification (section 906 of the Sarbanes-Oxley Act of 2002)
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.
By: /s/ Paul Warkentin ---------------------- Name: Paul Warkentin Title: President/CEO/Acting CFO Dated: February 16, 2005
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND ACTING PRINCIPAL
FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Paul Warkentin, certify that:
1. I have reviewed this report on Form 10QSB of Hybrid Fuels Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;
4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and
5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.
Date: February 16, 2005 /s/ Paul Warkentin ----------------------------------------------------- Paul Warkentin President/Principal Executive Officer/Acting Principal Financial Officer
CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER AND ACTING PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
By signing below, the Principal Executive Officer and Acting Principal Financial Officer hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge, (i) this report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in this report fairly presents, in all material respects, the financial condition and results of operations of Hybrid Fuels Inc.
Signed this 16th day of February 2005:
By: /s/ Paul Warkentin -------------------------------- Paul Warkentin President/CEO/Acting CFO (Principal Executive Officer and Acting Principal Financial Officer)
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Hybrid Fuels Inc. and will be retained by Hybrid Fuels Inc. and furnished to the Securities and Exchange Commission or its staff upon request.