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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[ ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2005
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____ to _______
Commission file number 000-50542
HYDROGEN ENGINE CENTER, INC.
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(Name of small business issuer in its charter)
Nevada 82-0497807
--------------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
602 East Fair Street, Algona, Iowa 50511
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (515) 295- 3178
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Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange
on which registered
Securities registered under Section 12(g) of the Exchange Act:
$0.001 par value Common Stock
(Title of class)
Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act.
Note - Checking the box above will not relieve any registrant required to file
reports pursuant to Section 13 or 15(d) of the Exchange Act from their
obligations under those Sections.
---------------- --------------------------------------------------------------
SEC 2337 (12-05) Persons who are to respond to the collection of information
contained in this form are not required to respond unless the
form displays a currently valid OMB control number.
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [ ] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [x]
State issuer's revenues for its most recent fiscal year. $24,100
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked price of such common
equity, as of a specified date within the past 60 days. (See definition of
affiliate in Rule 12b-2 of the Exchange Act.)
As of March 7, 2006, we had 8,377,889 shares held by persons not
considered affiliates of the Company. The average of the closing bid and ask
prices on that date was $7.35 for an aggregate market value of shares held by
non-affiliates of $61,577,484
Note: If determining whether a person is an affiliate will involve an
unreasonable effort and expense, the issuer may calculate the aggregate market
value of the common equity held by non-affiliates on the basis of reasonable
assumptions, if the assumptions are stated.
(ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Check whether the issuer has filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court. Yes [ ] No [ ]
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
25,157,905 shares of Common Stock, par value $.001 outstanding
at March 7, 2006.
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly
describe them and identify the part of the Form 10-KSB (e.g., Part I, Part II,
etc.) into which the document is incorporated: (1) any annual report to security
holders; (2) any proxy or information statement; and (3) any prospectus filed
pursuant to Rule 424(b) or (c) of the Securities Act of 1933 ("Securities Act").
The listed documents should be clearly described for identification purposes
(e.g., annual report to security holders for fiscal year ended December 24,
1990).
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
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TABLE OF CONTENTS
Page
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PART I.
ITEM 1. DESCRIPTION OF BUSINESS ..................................... 5
Business Development ........................................ 5
Corporate History ........................................... 5
Principal Products and Markets .............................. 6
4.9L Oxx Power Engine .............................. 6
Oxx Boxx Engine Controller ......................... 7
6.8L/7.5L Oxx Power Engine ......................... 7
Hydrogen Fueled Engines ............................ 7
Potential Commercial Applications .................. 9
Other Applications ................................. 9
Distribution Methods for our Products and Services .......... 9
New Products and Services ................................... 9
2.45 Mini Oxx Engine ............................... 9
4+1 Genset ......................................... 10
Oxx Works .......................................... 10
Competition ................................................. 10
Principal Suppliers ......................................... 10
Dependence on One of Few Major Customers .................... 11
Intellectual Property and Patent Protection ................. 11
Research and Development .................................... 12
Issues Related to Government Approvals
or Governmental Regulations ............................... 12
Cost of Compliance with Environmental Laws .................. 12
Employees ................................................... 13
Risk Factors ................................................ 13
ITEM 2. DESCRIPTION OF PROPERTY ..................................... 21
ITEM 3. LEGAL PROCEEDINGS ........................................... 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ......... 22
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS ...................................... 23
Market Information .......................................... 23
Securities Authorized for Issuance
Under Equity Compensation Plans ........................... 24
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS ........................ 25
Going Concern ............................................... 25
Merger ...................................................... 25
Overview .................................................... 26
Results of Operations ....................................... 26
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Critical Accounting Policies ................................ 27
Merger and Stock-based Compensation ................ 27
Liquidity and Capital Resources ............................. 27
Short-term and Long-term Debt Sources .............. 27
Plan of Operation .................................. 28
Grants and Government Programs ..................... 29
Employees .......................................... 30
Net Operating Loss ................................. 30
Inflation ................................................... 30
Off-Balance Sheet Arrangements .............................. 30
ITEM 7. FINANCIAL STATEMENTS ........................................ 31
ITEM 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE ...................... 51
ITEM 8a. CONTROLS AND PROCEDURES .................................... 51
PART III
ITEM 9. DIRECTORS, EXECUTIVES, OFFICERS, PROMOTERS, AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT 52
ITEM 10. EXECUTIVE COMPENSATION ..................................... 54
Summary Compensation Table .................................. 54
Option/SAR Grants in Last Fiscal Year ....................... 54
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS .............. 55
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ............. 57
ITEM 13. EXHIBITS ................................................... 57
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES ..................... 59
EXHIBITS .............................................................
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Business Development
Hydrogen Engine Center, Inc., a Nevada corporation (the "Company,"
"HYEG," "us," "we," or "our") designs, manufactures and distributes flex-fuel
internal combustion engines for the industrial and power generation markets. The
engines run efficiently, with minor adjustments, on hydrogen, gasoline, propane,
natural gas or ethanol interchangeably or, with the addition of a fuel reformer,
on biodiesel ("flex-fuels"). The engines can run on regular grade hydrogen, or
on mixed gases such as natural gas and hydrogen. When using hydrogen fuel,
emissions are near-zero.
The Company intends to support the industrial engine market with
"Generation II" (remanufactured engines) and a product line of new engines, all
of which run on flex-fuels. HEC plans to offer end users the flexibility to
convert to hydrogen or other flex-fuels in the future without having to replace
the engine.
The Company manufactures new industrial engines and converts certain
industrial engines to run on flex fuels, including the Ford 7.5L V8 and the 4.9L
used in the F300. HEC utilizes five (4+1) of the 4.9L engines to produce a 250
KW generator set that can be fueled by hydrogen or other fuels for use in the
distributed power market. Additional gensets with varying capability are being
developed. Industrial engine applications include, but are not limited to,
airport vehicles, forklifts, mining vehicles, buses and an increasing number of
green electric power projects.
The Company's products are being marketed under the brand name "Oxx
Power". HEC plans to distribute its engines through direct sales as well as
through an existing network of industrial engine distributors.
Hydrogen Engine Center, Inc., an Iowa corporation ("HEC Iowa") was
incorporated on May 19, 2003 by Theodore G. Hollinger, formerly Director of
Engineering at Ford Motor Company and Vice President of the Power Conversion
Group at Ballard Power Systems responsible for development of hydrogen engine
gensets. Operations commenced with the lease of the facilities in Algona, Iowa.
Mr. Hollinger, left Ballard with the ultimate intention of continuing the
commercialization of hydrogen engines. His employment contract with Ballard
contained a one year, non-compete clause related to internal combustion engines,
which expired on May 29, 2003. HEC Iowa was founded with the goal of
establishing a "hydrogen engine center of excellence" to foster the development
of hydrogen engines.
On August 25, 2005, we incorporated Hydrogen Engine Center (HEC)
Canada, Inc. ("HEC Canada"). HEC Canada is located in Quebec and works with
Universite Du Quebec at Trois-Rivieres (a Canadian Corporation) on matters
related to hydrogen research. HEC Canada was founded with the goal of
establishing a research and development center to assist in the development of
alternative fuel and hydrogen engines. The actual development and assembly of
our products is completed in the United States. The engine controller used to
program the engines to run on alternative fuels and hydrogen is manufactured in
small quantities at the Universite Du Quebec a Trois-Rivieres in Canada.
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Corporate History
The Company (then known as Green Mt. Labs, Inc.) was originally
organized in Idaho on July 12, 1983 to acquire and develop mining claims. The
Company initially acquired certain unpatented mineral claims located in the
Miller Mountain Mining District near Idaho City, but the claims were eventually
written off in 1997. Corporate records do not indicate the extent to which the
Company developed the property. Because the Company did not have any available
funds, it was unable to continue to pay the necessary assessment fees related to
the claims and, in 1997, the claims were abandoned and written off because
management was unable to determine the future value of the claims.
In January 1996, the Company effected a one share for 10 shares reverse
stock split of its 10,000,000 shares of common stock then issued and
outstanding. This reverse split resulted in 1,000,000 shares being issued and
outstanding.
In August 2000, the Company formed a new Nevada corporation for the
purpose of transferring the Company's domicile from Idaho to Nevada. In March
2001, the Company implemented the change of domicile by effecting a merger
between the Idaho and Nevada corporations, resulting in the Nevada corporation
being the surviving entity and the Idaho corporation being dissolved.
On August 30, 2005, we completed the acquisition of HEC Iowa. The
acquisition was made pursuant to an agreement and plan of merger entered into on
June 3, 2005, and revised on July 6, 2005 and July 29, 2005. To accomplish the
acquisition we merged our newly created, wholly-owned subsidiary, Green Mt.
Acquisitions, Inc., with and into HEC Iowa with HEC Iowa being the surviving
entity. Just prior to the acquisition we had completed a 3.8 shares for 1 share
forward stock split of our issued and outstanding common stock. As a result of
the forward stock split, our outstanding shares of common stock increased from
1,006,000 shares to approximately 3,822,800 shares, representing 19% of the
total outstanding shares following consummation of the acquisition. Under the
terms of the acquisition agreement, we issued 16,297,200 shares of our
post-split common stock (representing 81% of our total outstanding shares
(post-split) immediately following the transaction) to Ted Hollinger, who was
the sole stockholder of HEC Iowa, in exchange for 100% of HEC Iowa's outstanding
capital stock. HEC Iowa has become our wholly-owned subsidiary. In connection
with the acquisition, we have changed our name from Green Mt. Labs, Inc. to
Hydrogen Engine Center, Inc.
On October 11, 2005, we closed a private placement of our common stock.
We sold 3,948,500 shares of our common stock, $.001 par value, for a total of
$3,948,500 to 93 investors, which represents 15.69% of the now 25,157,905 issued
and outstanding shares of our common stock. We sold the shares in a private
transaction at $1.00 per share and we relied on an exemption from registration
pursuant to Regulation D, Rules Governing the Limited Offer and Sale of
Securities without Registration under the Securities Act of 1933.
As a result of the merger transaction and acquisition of HEC Iowa, we
have assumed all of the operations, assets and liabilities of HEC Iowa and HEC
Canada. HEC Iowa and HEC Canada are both development stage companies engaged in
designing, developing and manufacturing internal combustion engines that use
alternative fuels.
Principal Products and Markets
4.9L Oxx Power Engine - We started re-manufacturing Ford F-300 engines to
specifications that were intended to increase durability and reduce emissions,
while maintaining the form, fit and function of the original engine. To
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accomplish this we entered into a business relationship with an engine parts and
machining vendor and a Ford Power Products distributor. We used Ford parts and
product guidance based on their 40+ years of experience with industrial engines.
From June of 2003 until March of 2005 we concentrated on developing parts for
the F300, 4.9L, inline 6 cylinder, engine. We built 37 re-manufactured engines
to the new specifications, tested them, and proceeded to sell a few engines to
make sure the customer base was going to accept the product. We then turned our
attention to building the new parts necessary for an entirely new engine. We
acquired a trademark on the name Oxx Power. There are 81 parts that make up a
4.9L engine long block. We have replaced 45 of the parts for this engine. We
currently offer for sale a Generation II re-manufactured 4.9L engine containing
77 new parts (95%). Most of these parts carry the Oxx Power name. We expect to
have our new Oxx Power crank shafts, engine blocks and rods during 2006. Only
when these parts arrive and meet all of our requirements will we have completed
the transition from all Ford parts to an all Oxx Power engine and have available
an all new 4.9L Oxx Power engine. The 4.9L Oxx Power engine is not yet certified
to meet the 2007 emission standards. Failure to meet these standards could
adversely affect sales of mobile engines (stationary engines are not affected).
The Oxx Power engine blocks have not yet passed quality testing. Delays of
scheduled shipments for May 2006 could be as much as 90 days, if the molds for
the blocks need to be recast.
We also expect to supply the market with replacement engine parts. We
anticipate being the sole supplier of many new parts for remanufactured 4.9L
engines. We hope to be the one-stop shop for both the 4.9L new Oxx PowerTM
engine and its replacement parts.
Oxx Boxx Engine Controller - The design and availability of an engine controller
for these engines is critical for hydrogen and flex fuel capability. We have
established a business relationship with the University of Quebec (Universite Du
Quebec a Trois-Rivieres) to use their facilities and expertise in developing a
controller. We are in the process of trademarking Oxx Boxx as a brand name for
the controllers. The new controllers were developed and made available in the
fall of 2005. We established HEC Canada for the continued development of engine
controllers and their supporting software. In addition, HEC Canada has test and
calibration capabilities that allow parallel path development of flex fuel
engine controls. We anticipate that the first new Oxx Boxx controllers will be
available in 2006. The Oxx Boxx and Oxx Power engine combination will make us
the only industrial engine supplier with both engine controllers and internal
combustion engines as proprietary products. The controller is capable of
supporting multi-fuel applications. HEC Canada expects to file several patents
on engine controls in 2006.
6.8L/7.5L Oxx Power Engine - We have also produced and shipped one 6.8L V10
engine to a bus company. It has been running in the field for over a year. We
shipped a second engine in March of 2006 for another bus application. We
anticipate converting several more of these engines in 2006 with the intent of
replacing them in the market with a 7.5L V8 Oxx Power engine, a form, fit and
function replacement for the Ford 460 cubic inch V8. We believe the 7.5L Oxx
Power engine will meet or exceed the hydrogen fuel performance of the 6.8L. We
also anticipate that this will allow us to compete in the higher power portion
of the market that includes irrigation, gensets and buses. We expect the new
7.5L engine to eliminate our dependence on Ford Motor Company for engines and
allow us to `tailor' the 7.5L engine for hydrogen. We have not begun the process
of purchasing parts for the 7.5L Oxx Power engine and do not plan to do so until
full production has begun on the 4.9L engine. We anticipate production of the
7.5L Oxx Power engine to begin in early 2007.
Hydrogen Fueled Engines
-----------------------
Our engines are designed to run on a variety of fuels, including
hydrogen. We believe that one of the key attributes of hydrogen engines is that
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a standard production internal combustion engine can be modified to achieve
near-zero emissions. Therefore, we have established a process for converting
certain internal combustion engines to operate efficiently with hydrogen as a
fuel. The engines are the 4.9L internal combustion engine, formerly used in the
Ford F-150 pickup and currently being used in about 90,000 airport ground
support equipment vehicles, and the Ford 7.5L V8 previously used in vehicles and
industrial applications. We believe that this conversion process could apply to
any internal combustion engine.
We estimate that the efficiency of the hydrogen engine is about 36%
and equal to that of today's fuel cells. Using hydrogen fuel in Ford engines, we
have achieved near zero NOx emissions. The projected cost of a hydrogen internal
combustion engine is as much as 10 times lower than a fuel cell. A further
advantage of the hydrogen engine is that it can run on regular welding grade
hydrogen, or on mixed gases such as natural gas and hydrogen, versus the ultra
pure hydrogen, typically required for fuel cells, or on mixed gases such as
natural gas and hydrogen. When produced renewably it has the potential to
completely eliminate carbon based emissions.
The hydrogen internal combustion engine has the benefit of being
understood by an experienced engine technician with only a few minutes of study.
It can then be serviced by these technicians using the tools they already
possess. There is no need to change the transmission or any other part of the
power train to use a hydrogen engine. Oil changes and other servicing is the
same as for gasoline engines with few exceptions. There is no need for a
catalytic converter nor is there a danger from the exhaust fumes. Special spark
plugs, engine tuning, engine control system and a crank case ventilation system
are required, but they appear merely as a brand change to the service
technician.
When a hydrogen engine is installed in a vehicle it looks like a
standard gasoline engine. There is no need to change the motor mounts, radiator
or any other part of the vehicle infrastructure except the fuel storage and
delivery system. We intend to ultimately assist the end users in choosing the
proper fueling system and to be involved in providing training in hydrogen
safety.
We expect that our hydrogen engines will be initially used to replace
existing internal combustion engines in ground support applications and for
power generation systems. We anticipate that our initial revenue will come from
the sale of 4.9 liter engines to the airport ground support business, from
government contracts for the engines, and from federally subsidized programs
requiring hydrogen power for green industrial vehicles. We also anticipate
revenues from distributed power generation systems as well as from the sale of
remanufactured engines and engine parts.
We expect to file core technology patents covering the use of hydrogen
fuel in any internal combustion engine with zero or near zero emissions.
Possible near-term applications for alternative fuel and hydrogen engines
include, but are not limited to, airport vehicles, forklifts, mining vehicles
and buses, as well as green electric power generation. Long-term applications
could include hybrid buses and boats, water generation and large-scale power
generation through the parallel operation of electric generators.
Although hydrogen as an alternative fuel can be readily extracted from
water, any hydrocarbon fuel or biomass, we believe that acceptance of hydrogen
engines, and securing a consistent and dependable supply of hydrogen, will take
time. We are cognizant of the fact that the hydrogen fuel infrastructure is not
in place in the United States and that it could take a number of years before it
is developed, therefore we expect to sell more gasoline, propane, natural gas
and ethanol engines than hydrogen fueled engines in the near future.
We will supply both new and rebuilt engines that are capable of being
fueled with gasoline and alternative fuels including hydrogen. Consequently, the
end user will have the flexibility to convert a gasoline engine to ethanol,
propane, natural gas or hydrogen in the future without having to replace the
engine.
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Potential Commercial Applications
---------------------------------
Readily accessible commercial applications for the hydrogen engine
exist in various industrial applications, including distributed power
generation; ground support equipment such as aircraft tugs, baggage loaders,
baggage tugs and de-icing equipment; and a variety of other industrial uses.
These applications use the Ford 4.9L engine, which is no longer available from
Ford. The aviation industry standardized that engine several years ago and most
of the equipment was designed around the engine. To the best of our knowledge,
no engine of the same size and shape is being offered by automotive engine
manufacturers. A secondary market also exists for military ground support
equipment applications using traditional engines. One available option is to
convert these engines to use hydrogen fuel, thereby addressing a serious
emissions issue facing airports. With emissions regulations becoming more
stringent in some countries hydrogen-fueled generators (gensets) could become
very attractive for standby and peak-shaving applications.
Other Applications
------------------
Any application that currently uses gasoline-fueled engines, and many
applications that use diesel engines, are likely future users of our engines. We
believe that locales under strict emissions restrictions will be receptive to
hydrogen engines. Other uses for our engines could include high performance
engines, boats, mining equipment, on-road buses, wood-chippers, irrigation
pumping, aircraft propulsion, farm tractors, farm equipment, delivery vehicles,
yard tractors, cranes, construction equipment and military gensets. Although we
believe these potential markets to be viable, we have not established any future
definitive marketing strategy or plan.
Distribution Methods for our Products and Services
--------------------------------------------------
We plan to distribute our engines through a network of distributors. We
anticipate having eight distributors in the US to cover the US market. The US
distributor network we are using is primarily the same network that Ford Power
Products had used prior to their end of operations in September 2005. We also
expect to have two distributors in Canada and may have distributors in other
locations around the world.
Although our engine sales will be made through distributors we
anticipate that our distributed power generation sales will be direct sales.
Distributed power generation is a new concept that we have developed and offered
to companies interested in sharing an alpha concept.
We have also developed marketing strategy through participation in
government programs developed under Kyoto protocol. We are participating in a
program called "Carbon Saver Project" in which we have developed and supplied on
December 21, 2005, a hydrogen-natural gas generator of 5 kW to Atlantic Hydrogen
in New Brunswick.
New Products and Services
-------------------------
2.45L Mini Oxx Engine - In March 2006, we developed a 3 cylinder version of the
4.9L engine that will be called the Mini Oxx. This is our most ambitious project
to date. This will be the first engine that is totally unique to HEC. The
prototype engine was ready for testing in March 2006. Seventy two of the eighty
one parts used in the 4.9L engine are the same for the new three cylinder
engine. The finished engine should out-perform a four cylinder engine of the
same displacement. This engine will eliminate the need for us to develop a four
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cylinder engine to compete in the lower power sector of the market. We will be
the sole source of this engine. We anticipate that this engine will complete our
line of spark ignited engines and may not be ready for production until the
first quarter of 2007.
4+1 genset - The four plus one genset features four (4) engine/generator
combinations (genset) running and generating power while the fifth one is
waiting in standby, should it be needed. The combination of high power through
paralleled operation and system redundancy is unique to the genset business. We
anticipate that the market for distributed generation (DG) could be
approximately $70B in the US alone. We expect that our first two patents will be
for this market. The engines and controls had to come first as they are required
components of the final genset product. We expect to enter the DG market in mid
2006 and expand the product offering to cover 30kW to 250kW and possibly higher
power. On March 17, 2006 we entered into an agreement with the Department of
Natural Resources, Canada to supply a 250 kW hydrogen-fueled genset (4+1).
Natural Resources Canada is working on a project to add hydrogen technologies to
the Ramea Island wind-diesel demonstration project in Newfoundland. See Note 14
in the Consolidated Financial Statements. Although we currently have our first
order for a 4+1 genset, distributed power generation is in the alpha stage.
Significant delays, perhaps several months, could occur if the initial design is
flawed.
Oxx Works - We are in the process of developing an advanced engineering group
who will be responsible for the development of alternative fuel systems. We
refer to this part of our business as Oxx Works. Oxx Works is in the process of
developing the 4+1 genset. Oxx Works is working on ammonia-fueled engines,
variable speed generators and a hydrogen hybrid electric boat. In addition, Oxx
Works has developed a working relationship with Pacific Northwest National Lab
in relation to the potential use of ammonia as a fuel for internal combustion
industrial engines.
Competition
Although there are several companies developing and/or marketing
hydrogen engines, we are not aware of any significant production of alternative
fueled industrial engines as of this date. We believe that the companies
targeting production of hydrogen-fueled engines are automotive engine builders,
such as Ford, GM, Honda, BMW. We further believe that those engines will
initially be used for automobiles and then for industrial applications. The
gasoline-fueled industrial engine market has in the past been served by GM and
Ford. We expect to enter the market initially with the only industrial designs
in the 30 to150 kilowatt range.
Fuel cells may be perceived to be competition to the hydrogen engine,
but we believe they are not at this time. Fuel cells cannot be currently
manufactured in sufficient quantity to compete with hydrogen-fueled internal
combustion engines. Also, fuel cells are more costly than the hydrogen internal
combustion engine.
Our direct competition in the 4.9L "Generation II" gasoline engine
market, will be other engine remanufacturers. Our Generation II engines are
built to Company specifications and are dressed with sheet metal, dampers and
water pumps. Our competition does not offer a new engine with the same form, fit
and function. We have designed and tooled new engines to eliminate dependence on
other engine manufactures for supplies of component parts.
Principal Suppliers
Currently we purchase parts for our 4.9L remanufactured engine from
several different industrial engine parts suppliers. However, the majority of
the parts we will purchase for our new 4.9L engine will initially be purchased
from one major supplier. As of December 31, 2005 we have issued purchase orders
to this vendor totaling approximately $1.4 million. This vendor in turn, has
placed orders to purchase some of our parts from other companies, both inside
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and outside the United States. We have no direct contact with any of the
suppliers used by our major supplier. There are risks and uncertainties with
respect to the supply of certain component parts that could impact availability
in sufficient quantities to meet our needs. We have launched a search for
alternative suppliers that could allow us to avoid the risk associated with our
reliance on this major supplier. We anticipate that our total purchases from
this vendor could total in excess of $3 million in 2006.
Dependence on One or Few Major Customers
We do not anticipate dependence on one or few major customers at this
time.
Intellectual Property and Patent Protection
We plan to aggressively protect our intellectual property and
technology by applying for patent and/or copyright protection. We intend to
establish comprehensive intellectual property coverage in the United States and
in the most relevant foreign markets in anticipation of future commercialization
opportunities. We have one patent pending related to engine alignment and we
intend to file approximately five more core technology patents covering the use
of hydrogen fuel in any internal combustion engine. Future patent applications
will apply to any internal combustion engine regardless of manufacturer or
application. We also rely on trade secrets, common law trademark rights and
trademark registrations. We intend to protect our intellectual property via
non-disclosure agreements, license agreements and limited information
distribution. The current status of our patents and federal trademarks is
summarized below:
Federal Trademarks
------------------
Mark Goods/Services Reg./Serial No. Status
---- -------------- --------------- ------
HEC Engines and generators 78/7519,79 Pending
OXXPOWER Engines and engine parts 78,537,731 Pending
MINI OXX Engines 78/807,591 Pending
4 +1 Engines, distributed power 78/807,600 Pending
generation systems
OXX WORKS Research and development in the 78/807,587 Pending
field of engines, hydrogen engines,
alternative fuel internal combustion
engines, and distributed power
generation systems
OXX CART Vehicles 78/812,253 Pending
OXX BOXX Engines, engine parts, engine 78/846909
controllers
OXX Engines, engine parts 78/841069 Pending
Patents
-------
Alignment Fixture - A patent has been filed and is pending covering a
method and apparatus for aligning a generator and an engine of a generator set,
wherein the invention comprises an alignment hub for defining an alignment
position between an engine and a single bearing generator and maintaining the
alignment within a predetermined tolerance.
PMG Cooling - A patent application is under review, but not yet filed,
covering a method and apparatus for more efficient heat distribution and
dissipation for use with an electrical generator.
-11-
Research and Development
We have spent a total of $453,712 on research and development
activities with $418,070 being spent during calendar year 2005. As we are a
development stage company, the costs of our research and development are not at
this time borne directly by customers.
Issues Related to Government Approvals or Governmental Regulations
Our facilities will be subject to health and safety regulations,
building codes, and other regulations, customary in any manufacturing enterprise
in the United States.
153 countries, including all industrialized countries other than the
United States and Australia, have signed the Kyoto Protocol. We believe the
Kyoto Protocol could have substantial impact on the Company.
Demand for alternative fuel technology abroad and in the United States
could be influenced by the long-term acceptance of the Kyoto Treaty. This treaty
requires many of the large industrialized nations of the world to reduce
emissions of greenhouse gases. Any weakening of this treaty or its symbolic
value could have a negative impact on the demand for our products.
As discussed below, we will also be affected by governmental
regulations relating to environmental matters.
Cost of Compliance with Environmental Laws
We out-source all manufactured parts and bring them into our production
facility as components ready for the assembly line. We then assemble all
components to produce our products. The assembly process does not use any
hazardous materials nor do they create any hazardous waste. Our engine testing
facility hot tests all engines on a dynamometer to ensure it meets our
specifications. This process is subject to air and water environmental laws and
regulations. These laws and regulations will vary with the fuel choice that the
testing procedure requires.
We have designed our buildings and have written our procedures to meet
or exceed current environmental and fire code laws. Any changes in the laws at
the state or federal level could require us to modify our testing procedures to
comply with future environmental regulations.
The Environmental Protection Agency and the California Air Resources
Board have both adopted and implemented regulations which govern the control of
exhaust emissions from large spark ignited (LSI) engines (engines greater than
25 HP). Both regulations came into effect on January 1, 2004 and require that
engine manufacturers make available LSI emission compliant engines in order that
original equipment manufacturers (OEM) can comply with these regulations. The
regulations, which specifically identify tailpipe emissions, apply to gasoline
and liquid propane gas (LPG) powered engines, call for longer warranty periods
to ensure long-term compliance with emissions standards to and to protect the
end users.
To certify an engine to meet the LSI regulations, the engine
manufacturer or the equipment OEM must demonstrate that the engine has
successfully passed stringent third party testing to ensure compliance with the
emissions guidelines. Upon successful completion of the testing process a
submission for certification is filed which includes the following:
o Test data and results;
o OEM part numbers;
o Recommended maintenance;
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o Service or repair manuals;
o Parts manuals;
o End user warranty statement;
o Recall and campaign processes;
o Warranty reporting process;
o Record retention process.
A successful application is granted executive order numbers from both
agencies which identify the engine as part of a certified engine family. The
engine manufacturer will then be required to place an engine emission label on
the engine that clearly identifies the engine. We need to comply with these
regulations so that our customers who are manufacturers of equipment using our
engines will also be in compliance. We plan to have our engines certified and
expect that cost to be approximately $960,000 per certified engine design as
follows:
Emissions Paperwork/Calibration $ 110,000
Durability Testing:
o 3500 hours @ $150./hr 525,000
o 1500 hours @ $150./hr 225,000
o Fuel cost est. $2.5/gal x 8 gal/hr 100,000
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Total $ 960,000
Employees
As of December 31, 2005, HEC Iowa has 10 employees, all of whom are full
time. As of December 31, 2005, HEC Canada has one full-time employee. Our
employees are not members of any union, and they have not entered into any
collective bargaining agreements. We believe that our relationship with our
employees is good.
RISK FACTORS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION
WITH THE OTHER FINANCIAL INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND
RELATED NOTES APPEARING IN THIS FORM 10-KSB. THIS DISCUSSION CONTAINS FORWARD
LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS WILL
DEPEND UPON A NUMBER OF FACTORS BEYOND OUR CONTROL AND COULD DIFFER MATERIALLY
FROM THOSE ANTICIPATED IN THE FORWARD LOOKING STATEMENTS. SOME OF THESE FACTORS
ARE DISCUSSED UNDER "RISK FACTORS" AND ELSEWHERE IN THIS FORM 10-KSB.
We have a limited operating history and have not recorded an operating
profit since our inception. Continuing losses may exhaust our capital
resources and force us to discontinue operations.
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HEC Iowa was incorporated on May 19, 2003 and has a limited operating
history and has incurred net losses since inception. Prior to the Merger, the
Company (then known as "Green Mt. Labs, Inc.") had been inactive for several
years. The potential for us to generate profits depends on many factors,
including the following:
o the size and timing of future customer orders, milestone
achievement, product delivery and customer acceptance, if
required;
o success in maintaining and enhancing existing strategic
relationships and developing new strategic relationships with
potential customers;
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o our ability to protect our intellectual property;
o the reliability of our suppliers;
o actions taken by competitors, including suppliers of traditional
engines, hydrogen fuel cells and new
product introductions and pricing changes;
o the costs of building, maintaining, and expanding our facilities
and our operations; and
o our ability to attract and retain a qualified work force in a
small town.
We cannot assure you we will achieve any of the foregoing factors or
realize profitability in the immediate future or at any time.
Additional financing to proceed with our anticipated business activities
will likely be required. There can be no assurance that financing will be
available on terms beneficial to us, or at all.
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In order to proceed with our anticipated business activities we will
need to obtain additional financing. If we raise additional capital by selling
equity or equity-linked securities, these securities would dilute the ownership
percentage of our existing stockholders. Also, these securities could also have
rights, preferences or privileges senior to those of our common stock.
Similarly, if we raise additional capital by issuing debt securities, those
securities may contain covenants that restrict us in terms of how we operate our
business, which could also affect the value of our common stock. We have
financed our operations since inception primarily through equity and debt
financings and loans from our officers, directors and stockholders. Although we
expect to offer securities of the Company for sale during 2006, there can be no
assurance that we will successfully complete such an offering or that the
proceeds of the offering, if completed, would be sufficient to satisfy our
capital requirements.
We anticipate that we can produce 10,000 base 4.9L engines at full
capacity, in our 30,000 square foot manufacturing facility. Initial contact with
our distributor network, has given us indications that we may not have the
capacity to meet their demands. We anticipate that if we are successful in
obtaining funds through private or public sources, we plan to explore the
expansion of our present facilities. An expansion will be necessary to provide
needed space for the assembly of our 7.5L engines and our 2.45L engines. We
anticipate the cost for an expansion of our facilities, including equipment, to
be approximately $1 million. We anticipate our capital expenditures for 2006
will be approximately $2.0 million, if we include an expansion.
Reliance on principal supplier and contract manufacturer.
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We contract the manufacture of our products to third parties. In
certain cases, we do not have an alternative source of manufacturing, and a
suitable replacement would be time-consuming and expensive to obtain. If, for
any reason, one of our third party manufacturers is unable or refuses to produce
our products, our business, financial condition and results of operations would
be materially and adversely affected
-14-
We are presently dependent on one vendor to supply a majority of the
components for our 4.9L engine. We have issued blanket purchase orders totaling
approximately $1.4 million to this vendor for engine parts, and mold and tooling
fees. We anticipate that we will purchase approximately $3 million in component
parts from this vendor in 2006. Delivery of final products may not be realized
until June or July 2006, or later, thus delaying sales of new 4.9 liter engines
to our distributor network and delaying our ability to generate revenue.
We may experience significant and rapid growth if we are able to capitalize
on the expansion of the industrial engine and genset markets. If we are
unable to hire and train staff to produce our products, handle sales and
marketing of our products and manage our operations, such growth could
materially and adversely affect us.
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We intend to proceed with initiatives intended to capitalize on the
need for more efficient industrial engines, engines that use alternative fuels
and the interest in more environmentally friendly sources of power. This could
potentially lead to significant and rapid growth in the scope and complexity of
our business. Any inability on our part to manage such growth effectively will
have a material adverse effect on our product development, business, financial
condition and results of operations. Our ability to manage and sustain growth
effectively will depend, in part, on the ability of our relatively small
management team to implement appropriate management, operational and financial
systems and controls and to successfully hire, train, motivate and manage
employees.
We may not be able to manage our growth effectively, which could adversely
affect our operations and financial performance.
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The ability to manage and operate our business as we execute our
development and growth strategy will require effective planning. Significant
rapid growth could strain our management and other resources, leading to
increased cost of operations, an inability to ship enough product to meet
customer demand and other problems that could adversely affect our financial
performance. We expect that our efforts to grow will place a significant strain
on personnel, management systems, infrastructure and other resources. Our
ability to manage future growth effectively will also require us to successfully
attract, train, motivate, retain and manage new employees and continue to update
and improve our operational, financial and management controls and procedures.
If we do not manage our growth effectively, our operations could be adversely
affected, resulting in slower growth and a failure to achieve or sustain
profitability.
If we are unable to effectively and efficiently implement the necessary
internal controls and procedures, there could be an adverse effect on our
operations or financial results.
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Our President and our Board of Directors are currently in the process
of working with our Chief Financial Officer to complete the design and
implementation of internal controls and disclosure controls and procedures in
accordance with Sarbanes Oxley 404. Although this process, has not been
formalized we believe that the controls and procedures in place during the
fourth quarter have allowed us to secure information required to be disclosed,
within the time periods specified in the SEC's rules for the preparation of this
report.
Our future success depends on retaining our existing key employees and
hiring and assimilating new key employees. The loss of key employees or the
inability to attract new key employees could limit our ability to execute
our growth strategy, resulting in lost sales and a slower rate of growth.
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Our future success depends in part on our ability to retain key
employees including our executive officers and, in particular, our founder Ted
Hollinger. We currently do not carry, "key man" insurance on our executives;
however, we are in the process of securing such insurance. It would be difficult
for us to replace any one of these individuals. In addition, as we grow we may
need to hire additional key personnel. We may not be able to identify and
attract high quality employees or successfully assimilate new employees into our
existing management structure.
We may experience labor shortages.
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Our production facilities are located in Algona, Iowa, a town with a
population of approximately 5,500 people. We may find it difficult to hire and
retain a workforce sufficient to meet our production needs and allow for
sustained growth of our operations. Our ability to hire and retain qualified
employees for our production facilities will be key to our success. Our
inability to do this may have a materially adverse effect on our future results.
We may experience production gaps or delays in the transition to our new
production facilities and our commencement of production, which could
materially and adversely impact our sales and financial results and the
ultimate acceptance of our products.
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We are in the process of transitioning to production in our newly
constructed facility. Because all of the production procedures and processes, as
well as the facility, are new to us and all of our employees, we could
experience unexpected delay in production during fiscal year 2006. Additionally,
it is possible that we could experience unforeseen quality control issues as we
ramp up to full production. Should any such delay or disruption occur in
transitioning to production, our anticipated sales will likely be materially and
adversely affected.
The products produced in our new facility could contain undetected
design faults despite our testing. We may not discover these faults or errors
until after a product has been used by our customers. Any faults or errors in
our products may cause delays in product introduction and shipments, require
design modifications or harm customer relationships, any of which could
adversely affect our business and competitive position.
We cannot assure you that there will be an active trading market for our
common stock.
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Even though our common stock is quoted on the OTC Bulletin Board, most
shares outstanding, including those issued pursuant to the Merger, are
"restricted securities" within the meaning of Rule 144 promulgated by the SEC
and are therefore subject to certain limitations on the ability of holders to
resell such shares. Restricted shares may not be sold or otherwise transferred
without registration or reliance upon a valid exemption from registration. Thus,
holders of restricted shares of our common stock may be required to retain their
shares for a long period of time.
If we cannot achieve commercial application of our hydrogen engine and
other products and technologies, we may not achieve profitability.
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Members of the public may be wary of hydrogen because hydrogen, as
compared to all other fuel, has the largest flammability limit (4% to 77% of
hydrogen in air). This means you need very little hydrogen to start a fire. On
the other hand, hydrogen is a light gas. As such, if there is a hydrogen leak,
-16-
it will immediately diffuse into the surrounding air. With proper precaution
hydrogen could be as safe as any other fuel. The main benefit of hydrogen as a
fuel is that it produces no pollution or greenhouse gases when it is used in an
internal combustion engine. The development of a market for our engines is
dependent in part upon the development of a market for hydrogen as a fuel, which
may be impacted by many factors, including:
o the cost competitiveness of hydrogen as a fuel relative to other
fuels;
o the future availability of hydrogen as a fuel;
o consumer perception of the safety of hydrogen and willingness to
use engines powered by hydrogen;
o adverse regulatory developments, including the adoption of onerous
regulations regarding hydrogen use or storage;
o barriers to entry created by existing energy providers; and
o the emergence of new competitive technologies and products.
Certain government regulations concerning electrical and hydrogen
generation, delivery and storage of fuels and other related matters may
negatively impact our business.
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Our business is subject to and effected by federal, state, local and
foreign laws and regulations. These may include state and local ordinances
relating to building codes, public safety, electrical and hydrogen production,
delivery and refueling infrastructure, hydrogen storage and related matters. The
use of hydrogen inside a building will require architectural and engineering
changes in the building to allow the hydrogen to be handled safely. As our
engines and other new products are introduced into the market commercially,
governments may impose new regulations. We do not know the extent to which any
such regulations may impact our business or the businesses of our customers'
businesses. Any new regulation may increase costs and could reduce our potential
to be profitable.
The industry in which we operate is highly competitive and such competition
could affect our results of operations, which would make profitability even
more difficult to achieve and sustain.
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The power generation and alternative fuel industry is highly
competitive and is marked by rapid technological growth. Other competitors and
potential competitors include Ford Power Products, H2Car Co., Cummins, Daimler
Chrysler, General Motors, Mazda, Koehler and Generac. Many existing and
potential competitors have greater financial resources, larger market share, and
larger production and technology research capability, which may enable them to
establish a stronger competitive position than we have, in part through greater
marketing opportunities. The governments of the United States, Canada, Japan and
certain European countries have provided funding to promote the development and
use of fuel cells. Tax incentives have also been initiated in Japan, and have
been proposed in the United States and other countries, to stimulate the growth
of the fuel cell market by reducing the cost of these fuel cell systems to
consumers. Our business does not currently enjoy any such advantages and, for
that reason, may be at a competitive disadvantage to the fuel cell industry. If
we fail to address competitive developments quickly and effectively, we will not
be able to grow.
-17-
Our business could be adversely affected by any adverse economic
developments in the power generation industry and/or the economy in
general.
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We depend on the perceived demand for the application of our technology
and resulting products. These products are focused on reducing gas emissions and
upon the use of alternative fuels for the Ground Support Equipment (GSE)
business and for the power generation business. Therefore, our business is
susceptible to downturns in the airline industry and the genset portion of the
distributed power industry and the economy in general. Any significant downturn
in the market or in general economic conditions would likely hurt our business.
We carry a reasonable amount of insurance. However there can be no
assurance that our existing insurance coverage would be adequate in term
and scope to protect us against material financial effects in the event of
a successful claim.
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We could be subject to claims in connection with the products that we
sell. There can be no assurance that we would have sufficient resources to
satisfy any liability resulting from any such claim, or that we would be able to
have our customers indemnify or insure us against any such liability. There can
be no assurance that our insurance coverage would be adequate in term and scope
to protect us against material financial effects in the event of a successful.
claim. We currently do not carry directors and officers insurance. We may in the
future obtain such insurance, provided it can be obtained at reasonable prices.
However, there can be no assurance that such coverage, if obtained, would be
adequate in term and scope to protect us.
If we fail to keep up with changes affecting our technology and the markets
that we will ultimately service, we will become less competitive and future
financial performance would be adversely affected.
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In order to remain competitive and serve our potential customers
effectively, we must respond on a timely and cost-efficient basis to changes in
technology, industry standards and procedures and customer preferences. We need
to continuously develop new technology, products and services to address new
technological developments. In some cases these changes may be significant and
the cost to comply with these changes may be substantial. We cannot assure you
that we will be able to adapt to any changes in the future or that we will have
the financial resources to keep up with changes in the marketplace. Also, the
cost of adapting our technology, products and services may have a material and
adverse effect on our operating results.
Our business could be adversely affected by local, state, national, and
international laws or regulations.
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Our future success depends in part on laws and regulations that exist,
or are expected to be enacted around the world. Should these laws or regulations
take an adverse turn, this could negatively affect our business and anticipated
revenues. We cannot guarantee a positive outcome in direction, timing, or scope
of laws and regulations that may be enacted which will affect our business.
Our distributors will not be able to offer our engines for sale to
Original Equipment Manufacturers ("OEM") for mobile applications until the
engines have passed U.S. Emissions Regulations which are defined and enforced by
the Environmental Protection Agency ("EPA") and California Air Resources Board
("CARB"). Stand-by and replacement engines are not subject to those
requirements. We anticipate beginning the emissions certification process of our
4.9L engine during 2006. It will cost approximately $960,000 to certify each
engine in our product line. We also anticipate beginning the certification
process for our 7.5L and 2.45L engines in 2007. -18-
The hydrogen and power generation business may expose us to certain safety
risks and potential liability claims.
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Our business will expose us to potential product liability claims that
are inherent in hydrogen and products that use hydrogen. Hydrogen is a flammable
gas and therefore a potentially dangerous product. Any accidents involving our
engines or other hydrogen-using products could materially impede widespread
market acceptance and demand for our hydrogen-fueled engines. In addition, we
might be held responsible for damages beyond the scope of our insurance
coverage. We also cannot predict whether we will be able to maintain our
insurance coverage on acceptable terms, or at all.
We may be unable to protect our intellectual property adequately or cost
effectively, which may cause us to lose market share or reduce prices.
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Our future success depends in part on our ability to protect and
preserve our proprietary rights related to our technology and resulting
products. We cannot assure you that we will be able to prevent third parties
from using our intellectual property rights and technology without our
authorization. We do not currently own any patents, although one patent is
pending related to our technology. We anticipate making patent applications in
the future. We rely on trade secrets, common law trademark rights and trademark
registrations. We intend to protect our intellectual property via non-disclosure
agreements, contracts, and limited information distribution, as well as
confidentiality and work for hire, development, assignment and license
agreements with our employees, consultants, third party developers, licensees
and customers. However, these measures afford only limited protection and may be
flawed or inadequate. Also, enforcing intellectual property rights could be
costly and time-consuming and could distract management's attention from
operating business matters.
Our intellectual property may infringe on the rights of others, resulting
in costly litigation.
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In recent years, there has been significant litigation in the United
States involving patents and other intellectual property rights. In particular,
there has been an increase in the filing of suits alleging infringement of
intellectual property rights, which pressure defendants into entering settlement
arrangements quickly to dispose of such suits, regardless of their merits. Other
companies or individuals may allege that we infringe on their intellectual
property rights. Litigation, particularly in the area of intellectual property
rights, is costly and the outcome is inherently uncertain. In the event of an
adverse result, we could be liable for substantial damages and we may be forced
to discontinue our use of the subject matter in question or obtain a license to
use those rights or develop non-infringing alternatives. Any of these results
would increase our cash expenditures, adversely affecting our financial
condition.
Being a public company involves increased administrative costs, which could
result in lower net income and make it more difficult for us to attract and
retain key personnel.
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As a public company, we incur significant legal, accounting and other
expenses that HEC Iowa did not incur as a private company. In addition, the
Sarbanes-Oxley Act of 2002, as well as new rules subsequently implemented by the
SEC, have required changes in corporate governance practices of public
companies. We expect that these new rules and regulations will increase our
legal and financial compliance costs and make some activities more time
-19-
consuming. For example, in connection with being a public company, we may have
to create several board committees, implement additional internal controls and
disclose controls and procedures, retain a transfer agent and financial printer,
adopt an insider trading policy and incur costs relating to preparing and
distributing periodic public reports in compliance with our obligations under
securities laws. These new rules and regulations could also make it more
difficult for us to attract and retain qualified members of our board of
directors, particularly to serve on our audit committee, and qualified executive
officers.
We do not anticipate paying dividends in the foreseeable future. This could
make our stock less attractive to potential investors.
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We anticipate that we will retain any future earnings and other cash
resources for future operation and development of our business and do not intend
to declare or pay any cash dividends in the foreseeable future. Any future
payment of cash dividends will be at the discretion of our board of directors
after taking into account many factors, including our operating results,
financial condition and capital requirements. Corporations that pay dividends
may be viewed as a better investment than corporations that do not.
Future sales or the potential for sale of a substantial number of shares of
our common stock could cause our market value to decline and could impair
our ability to raise capital through subsequent equity offerings.
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Sales of a substantial number of shares of our common stock in the
public markets, or the perception that these sales may occur, could cause the
market price of our common stock to decline and could materially impair our
ability to raise capital through the sale of additional equity securities. In
addition to the shares of our common stock actually issued and outstanding,
there will be another 720,000 shares reserved for issuance under our new
incentive compensation plan, subject to shareholder approval.
The authorization and issuance of blank-check preferred stock may prevent
or discourage a change in our management.
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Our amended certificate of incorporation authorizes the board of
directors to issue up to 10 million shares of preferred stock without
stockholder approval having terms, conditions, rights, preferences and
designations as the board may determine. The rights of the holders of our common
stock will be subject to, and may be adversely affected by, the rights of the
holders of any preferred stock that may be issued in the future. The issuance of
preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
discouraging a person from acquiring a majority of our outstanding common stock.
It may be difficult for a third party to acquire us, and this could depress
our stock price.
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Nevada corporate law includes provisions that could delay, defer or
prevent a change in control of our company or our management. These provisions
could discourage information contests and make it more difficult for you and
other stockholders to elect directors and take other corporate actions. As a
result, these provisions could limit the price that investors are willing to pay
in the future for shares of our common stock. For example:
-20-
o Without prior stockholder approval, the board of directors has the
authority to issue one or more classes of preferred stock with
rights senior to those of common stock and to determine the
rights, privileges and preferences of that preferred stock;
o There is no cumulative voting in the election of directors, which
would otherwise allow less than a majority of stockholders to
elect director candidates; and
o Stockholders cannot call a special meeting of stockholders.
ITEM 2. DESCRIPTION OF PROPERTY.
We presently occupy a 12,000 square foot armory building located at 602
Fair Street in Algona, Iowa. This lease requires monthly rental payments of $600
and expires on May 30, 2006. At the option of the Company, the lease can be
extended for two (2) additional terms at $650 per month for the first year and
$700 per month for the second year. This facility was built in approximately
1949 and is owned by the Kossuth County Agricultural Association. It was
adequate for our initial needs and will continue to serve us as the Oxx Works
research and testing facility.
On June 27, 2005 we purchased Lots 3, 4 and 5 of the Snap-on Industrial
Park on Poplar Street in Algona, Iowa. The land was purchased from the Algona
Area Economic Development Corporation using proceeds of a loan from that entity,
the terms of which are described below. Our plans for this site include the
construction of a manufacturing facility, a dyno room and executive offices.
The first phase of this construction project (the manufacturing
facility) is substantially completed. In March 2006 production of the 4.9L
remanufactured engine began in our new 30,000 square foot manufacturing facility
on that site. We anticipate construction costs on the new manufacturing building
will total approximately $1,600,000. This quadruples the production space we can
use for assembly of our engines. We plan to implement an `Engine Cell'
production method in the new facility that will speed production and reduce
work-in-process inventory. Under this method, each Engine Cell is designed to
match the assembly time of the next cell to eliminate inventory between cells,
and minimize overall assembly time. We believe we can reach a production rate of
10,000 base engines per year in this new building, depending upon a number of
factors, including availability of parts and labor.
To reduce engine assembly contaminants introduced by forced-air
heating, the new building has over 5 miles of PEX radiant heat pipe in the
production floor. It also has a unique mono-roof design that allows planned
building expansion without production line shut-down. We anticipate that
additional expansions will be required and this 30,000 square foot building is
the first phase in our plans to build more than 100,000 square feet of
production space on this site. The new building can be observed at our Internet
web site at www.hydrogenenginecenter.com.
Late in December of 2005 we acquired an existing 30,000 square foot
building shell located on Lot #1 of the Snap-on Industrial Park in Algona, Iowa
for a purchase price of $332,901. The building is located across the street from
the new manufacturing building on Poplar Street. We expect to use this building
for parts distribution and distributed power generation manufacturing. We may
finish a portion of the building to provide office space. The building is
currently only a shell and some interior construction will be necessary to make
the building useful to us. Plans for the work are being finalized and we
anticipate construction costs to do this would be approximately $350,000. A
photo of the building can be viewed on our web site.
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Our facilities are subject to mortgages in favor of Iowa State Bank in
the amount of $500,000; Algona Area Development Corporation in the amounts of
approximately $146,000 and $117,500 and the City of Algona in the amount of
$200,000. The mortgages to Algona Area Development Corporation include a
subordination in favor of Iowa State Bank.
The $146,124 note payable to the Algona Area Economic Development
Corporation was incurred for purchase of, and is secured by a mortgage on, the
land (Lots 3, 4 and 5 of Snap-on Industrial Park) upon which we have constructed
the new manufacturing facility. The loan is a ten year partially forgivable loan
with interest at 8%, conditioned upon the Company achieving performance targets
as follows:
o $67,650 of principal and interest will be forgiven if the Company
has certified that it has created 50 new full-time equivalent jobs
by June 1, 2010 and continuously retained those jobs in Algona,
Iowa until June 1, 2015.
o $67,650 of principal and interest will be forgiven if the Company
has certified that it has created and continuously retained 50
additional new full-time equivalent jobs by June 1, 2015.
o Balance of $10,824 due on June 1, 2015 without interest if paid by
that date.
o Payment of a wage for the retained jobs that is equal to or
greater than the average hourly wage for workers in Kossuth
County, Iowa as determined annually by Iowa Workforce Development.
The note payable to the City of Algona in the amount of $200,000 is
secured by a mortgage Lots 3, 4 and 5 of Snap-on Industrial Park. This note
requires quarterly payments of $5,000 starting January 1, 2006 and a final
payment due October 1, 2015. The interest on this loan is 0%, subject to certain
job creation and retention requirements. If such requirements are not met,
interest on the loan will be payable at 10% per annum.
The $117,500 note payable to the Algona Area Economic Development
Corporation was incurred for purchase of, and is secured by a mortgage on, the
shell building on Lot 1 of Snap-on Industrial Park in Algona. The loan requires
quarterly payments of $2,500 beginning on January 1, 2006. This note was
recorded at fair value of future payments using an interest rate of 10%. The
fair value of the note was $70,401.
The note payable to Iowa State Bank is secured by a mortgage on Lot 1
of Snap-on Industrial Park in Algona and is in the maximum amount of $500,000.
As of December 31, 2005, $262,647 has been drawn on the note. The Note carries
interest at the annual rate of 5.890%. Interest is payable monthly and the note
will mature on December 16, 2006. We anticipate that this note will be rolled
over into permanent financing upon maturity, but cannot provide assurance that
such financing will be available.
We believe that all of our properties are adequately insured.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the year ended December 31, 2005, the Board of Directors
approved for submission to the Company's shareholders an amendment to the
-22-
Company's Articles of Incorporation to: (i) change the name of the corporation
from Green Mt. Labs, Inc. to Hydrogen Engine Center, Inc. and (ii) increase the
authorized number of shares of common stock to 100,000,000 and authorize
10,000,000 shares of "blank check" preferred stock. The Company did not solicit
proxies and made the proposal as of June 3, 2005 to shareholders holding at
least a majority of the outstanding shares. As of June 3, 2005, the Company
received written consent representing approximately 82.72 percent, or 832,180
shares of common stock, out of 1,006,000 shares then issued and outstanding. The
Certificate of Amendment to our Articles of Incorporation was filed with the
Nevada Secretary of State on August 30, 2005.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Information
------------------
Our common stock is quoted on the OTC Bulletin Board under the trading
symbol "HYEG.OB." Inclusion on the OTC Bulletin Board permits price quotations
for our shares to be published by such service. Prior to September 2, 2005 our
shares traded under the symbol "GMTL.OB." There was not an active market for our
shares prior to that date. Accordingly, we are not including a history of
reported trades in the public market prior to September 2, 2005.
The following table sets forth the high and low bid quotations for our
common stock for the period from September 2, 2005 through December 31, 2005.
High Bid Low Bid
-------- -------
2005
Third Quarter, September 2 - September 30, 2005 $8.25 $1.50
Fourth Quarter ended December 31, 2005 9.00 5.50
The foregoing quotations represent inter-dealer prices without retail
mark-up, mark-down, or commission, and may not represent actual transactions.
As of March 7, 2006, there were 157 holders of record of the company's
common stock, including broker-dealers and clearing firms holding shares on
behalf of their clients, as reported by our transfer agent. This figure does not
take into account those individual shareholders whose certificates are held in
the name of broker-dealers or other nominees.
As of March 7, 2006, we had 25,157,905 shares of common stock issued
and outstanding. Of the total outstanding shares, 1,598,500 may be sold,
transferred or otherwise traded in the public market without restriction, unless
held by an affiliate or controlling shareholder. Of these 1,598,500 shares, we
have not identified any shares as being held by affiliates. A total of
23,559,405 shares are considered restricted securities.
Under Rule 144 as currently in effect, a person (or persons whose
shares are aggregated) who has beneficially owned restricted shares for at least
one year, including any person who may be deemed to be an "affiliate" as defined
under the Act, is entitled to sell, within any three-month period, an amount of
shares that does not exceed the greater of (i) the average weekly trading volume
in the security as reported through the automated quotation system of a
registered securities association, during the four calendar weeks preceding such
sale or (ii) 1% of the shares then outstanding. A person who is not deemed to be
an "affiliate" and has not been an affiliate for the most recent three months,
and who has held restricted shares for at least two years would be entitled to
sell such shares without regard to the resale limitations of Rule 144.
-23-
We have never paid cash dividends on our common stock and do not
anticipate paying cash dividends in the foreseeable future.
Securities authorized for issuance under equity compensation plans
------------------------------------------------------------------
We have granted employees qualified incentive options under our
incentive compensation plan to purchase 414,000 shares of our common stock at
$1.00 per share and 60,000 shares at $5.875 per share. We have granted under our
incentive compensation plan nonqualified options to purchase 380,000 shares of
our common stock at $1.00 per share and 426,000 shares of restricted stock,
304,000 of which remain subject to forfeiture.
As permitted by SFAS No. 123, "Accounting for Stock-Based
Compensation," we have elected to follow APB Opinion No. 25, "Accounting for
Stock Issued to Employees," ("APB No. 25") and related interpretations for our
employee stock-based compensation. Under APB No. 25, no compensation expense is
recognized at the time of option grant if the exercise price of the employee
stock option is fixed and equals or exceeds the fair value of the underlying
common stock on the date of grant and the number of shares to be issued pursuant
to the exercise of such option are known and fixed at the date of grant. The
Board of Directors determines the fair value of common stock.
We account for options issued to non-employees under SFAS No. 123 and
Emerging Issues Task Force Issue ("EITF") No. 96-18, "Accounting for Equity
Instruments that are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods, or Services." Therefore, the fair value of
options issued to non-employees is recorded as an expense and periodically
remeasured over the vesting terms.
We record restricted stock awards at the fair value at the date of the
grant and amortize the expense over the vesting period as services are
performed.
Number of securities remaining
Number of Securities to Weighted-average available for future issuance
be issued upon exercise exercise price of under equity compensation plans
of outstanding options, outstanding options, (excluding securities reflected
warrants and rights warrants and rights in column (a))
Plan Category (a) (b) (c)
Equity compensation plans
approved by security
holders -- -- --
Equity compensation plans
not approved by security
holders 923,400(1) $1.32 720,000(2)
Total 923,400(1) $1.32 720,000
(1) Includes 474,000 incentive stock options and 380,000 nonqualified
stock options issued under the company's Incentive Compensation Plan
and warrants to certain finders in the Private Offering (as here and
after defined), entitling the finders to purchase 69,640 shares. Does
not include 426,000 shares of restricted stock issued under the
company's Incentive Compensation Plan, 304,000 of which remain subject
to forfeiture.
(2)This amount equals the number of shares remaining to be issued under
the company's Incentive Compensation Plan, which plan will be presented
to shareholders for approval at the annual meeting.
-24-
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS.
Going Concern
Our accompanying consolidated financial statements have been
prepared on a going concern basis, which contemplates our continuation of
operations, realization of assets and liquidation of liabilities in the ordinary
course of business. Since inception, we have incurred substantial operating
losses and expect to incur additional operating losses over the next several
months. As of December 31, 2005, we had an accumulated deficit of approximately
$1.4 million. Our accompanying financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
We have financed our operations since inception primarily through
equity and debt financings and loans from our officers, directors and
stockholders. Continuing our operations is dependent upon obtaining further
financing. Although we intend to either register securities of the Company to be
offered for sale or enter into another private placement, there can be no
assurance that we will successfully complete this registration and offering or
that the proceeds of either offering if completed, would be sufficient to
satisfy our capital requirements. These conditions raise substantial doubt about
our ability to continue as a going concern.
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION
WITH THE OTHER FINANCIAL INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND
RELATED NOTES APPEARING IN THIS FORM 10-KSB. THIS DISCUSSION CONTAINS FORWARD
LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS WILL
DEPEND UPON A NUMBER OF FACTORS BEYOND OUR CONTROL AND COULD DIFFER MATERIALLY
FROM THOSE ANTICIPATED IN THE FORWARD LOOKING STATEMENTS. SOME OF THESE FACTORS
ARE DISCUSSED UNDER "RISK FACTORS" AND ELSEWHERE IN THIS FORM 10-KSB.
Merger
On August 30, 2005, Hydrogen Engine Center, Inc, an Iowa corporation
("HEC Iowa") merged with our newly formed subsidiary (the "Merger"). The Merger
was made pursuant to an agreement entered into on June 3, 2005, whereby we
agreed to merge our newly created, wholly-owned subsidiary, Green Mt.
Acquisitions, Inc., with and into HEC Iowa, with HEC Iowa being the surviving
entity. Following the Merger, we changed our name from Green Mt. Labs, Inc. to
Hydrogen Engine Center, Inc.
On July 6, 2005, we revised certain terms of the proposed Merger and,
accordingly, executed a revised and amended agreement and plan of merger. On
July 29, 2005, we added an addendum to the agreement. The revised agreement
provided for effecting a 3.8 shares for 1 share forward stock split of our
issued and outstanding common stock, instead of the previously announced 1.5
shares for 1 share split. The split was payable August 17, 2005 to stockholders
of record on August 16, 2005. As a result of the revised forward stock split,
our outstanding shares of common stock increased from 1,006,000 shares to
approximately 3,822,804 shares, representing 19% of the total outstanding shares
following consummation of the Merger. Under the terms of the merger agreement,
we issued 16,297,200 shares of post-split common stock (representing 81% of our
total outstanding shares (post-split) following the transaction) to Ted
Hollinger, who was prior to the Merger HEC Iowa's sole stockholder, in exchange
for 100% of HEC Iowa's then outstanding capital stock, and HEC Iowa has become
our wholly-owned subsidiary. In connection with the Merger, we have changed our
name to Hydrogen Engine Center, Inc.
We also commenced a private placement of up to four million shares of
our common stock at the offering price of $1.00 per share, which offering was
closed as of October 11, 2005 (the "Private Offering"). We sold 3,948,500 shares
of our common stock, $.001 par value, for a total of $3,948,500 to 93 investors,
-25-
which represents 15.69% of the 25,157,905 issued and outstanding shares of
common stock of the Company as of March 7, 2006. The shares were sold in
reliance upon an exemption from registration pursuant to Regulation D, Rules
Governing the Limited Offer and Sale of Securities without Registration under
the Securities Act of 1933.
The accompanying consolidated balance sheets as of December 31, 2005
and 2004 and the consolidated statements of operations, consolidated statement
of stockholders equity, and the consolidated statements of cash flows for the
years ended December 31, 2005 and 2004 and for the period from inception (May
19, 2003) to December 31, 2005 respectively, consolidate the historical
financial statements of the company with HEC Iowa after giving effect to the
Merger where HEC Iowa is the accounting acquirer and after giving effect to the
Private Offering.
Overview
As a result of the Merger, we own all of the issued and outstanding
shares of HEC Iowa. HEC Iowa is a development stage company engaged in
designing, developing and manufacturing internal combustion engines that may be
fueled either by hydrogen, gasoline, natural gas, propane and ethanol for the
industrial and power generation markets. HEC Iowa has established a process for
converting certain internal combustion engines to run efficiently on hydrogen
fuel. Hydrogen as a fuel can be readily extracted from water, any hydrocarbon
fuel or biomass. HEC Iowa expects to file core technology patents covering the
use of hydrogen fuel in any internal combustion engine with zero or near zero
emissions.
We also own all of the issued and outstanding shares of HEC Canada. HEC
Iowa has funded its operations from inception through December 31, 2005 through
a series of financing transactions, including an investment of $151,487 by Ted
Hollinger; $3,948,500 in gross proceeds from the Private Offering, and
convertible loans in the amount of $557,051.
Results of Operations
Historical information prior to the Merger is that of HEC Iowa.
Because HEC Iowa is still developing its flexible fuel powered internal
combustion engines and related products and had not completed its manufacturing
facility as of December 31, 2005, we have not realized significant revenues to
date. During 2004 we realized $19,460 from the sale of one engine and partial
payments on two gensets. During 2005 we realized $24,100 from the sale of two
gensets and 9 engines. Management believes that we may begin to realize
increased sales revenues by the third quarter of 2006, subject to timely receipt
of parts ordered from suppliers.
We are in the process of accelerating our efforts toward full
commencement of operations. The manufacturing portion of our new building was
substantially completed in January 2006, however the dynamometer room will not
be complete until April 2006 or later. We are now in the process of hiring new
personnel and purchasing the inventory of parts we will need to manufacture
engines in our new building. The sales and marketing expense for the years ended
2005 and 2004 were $114,473 and $7,101 respectively and the total expense from
inception to date (May 19, 2003) is $121,574. We expect this number to increase
significantly during 2006 as we pursue national and international sales
opportunities.
General and administrative expenses increased $89,864 from $63,342 for
the year ended December 31, 2003 to $153,206 for the year ended December 31,
2004. General and administrative expenses increased $433,749 from $153,206 for
the year ended December 31, 2004 to $586,955 for the year ended December 31,
-26-
2004. General and administrative expenses from inception (May 19, 2003) through
December 31, 2005 are $803,503. Management expects similar or greater increases
for the year ending December 31, 2006 in general and administrative expenses due
to the anticipated hiring of additional personnel, purchase of inventory, costs
related to the new facility and other efforts related to the commencement and
expansion of our operations.
Costs related to research and development increased from $2,300 in 2003
to $33,342 for 2004, and $418,070 for 2005. This total expense from inception
(May 19, 2003) to December 31, 2005 is $453,712. Management believes that with
funding provided by the Private Offering, research and development expenses will
increase significantly during 2006.
We recorded a net loss of $1,122,570 for 2005 compared to a net loss of
$65,642 for 2003 and a net loss of $192,476 for 2004. We recorded a net loss of
$1,380,688 from inception (May 19, 2003) through December 31, 2005. We expect to
continue to operate at a net loss until such time as we can complete
construction of our facilities and development of our initial engines and begin
to realize increased sales.
Critical Accounting Policies
Our discussion and analysis of our financial position and results of
operations are based upon our condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these condensed consolidated
financial statements requires us to make estimates and assumptions that affect
the reported amounts of assets and liabilities, and the disclosure of contingent
assets and liabilities at the date of the condensed consolidated financial
statements and the reported revenues and expenses during the period.
Merger and Stock-based Compensation
-----------------------------------
We consider certain accounting policies related to the recapitalization
of the Company and stock-based compensation to be critical to our business
operations and the understanding of our results of operations.
Liquidity and Capital Resources
Short-Term and Long-Term Debt Sources
-------------------------------------
From inception through December 31, 2005, we have used $964,090 in cash
in our operating activities and $1,339,396 in capital expenditures. Cash for our
operations came from various financing transactions, including $3,948,500 in
gross proceeds from the Private Offering and convertible loans in the amount of
$557,051. We also received $300,000 of the $400,000 in forgivable loans from the
Iowa Department of Economic Development, $200,000 from the City of Algona
revolving loan fund and $262,647 from bank financing. We incurred expenses in
connection with the private placement of $353,611. Our aggregated net loss from
inception was $1,380,688. Our cumulative net loss has resulted principally from
expenditures related to the commencement of operations.
At December 31, 2005, we had cash on hand of $2,346,248, compared to
$19,808 at December 31, 2004; and $49,857 as of December 31, 2003.
We have available credit with Iowa State Bank, secured by a mortgage on
Lot 1 of Snap-on Industrial Park in Algona, and represented by a promissory note
in the maximum amount of $500,000. As of December 31, 2005, $262,647 has been
drawn on the note. The note carries interest at the annual rate of 5.890%.
Interest is payable monthly and the note will mature on December 16, 2006. We
anticipate that this note will be rolled over into permanent financing upon
maturity, but cannot provide assurance that such financing will be available.
-27-
We have available credit with Farmers State Bank in Algona, Iowa in the
maximum amount of $600,000 at an annual adjustable rate of 6.75%. The interest
rate cannot increase or decrease by more than 2% at each adjustment and has a
lifetime cap of 12.75%. The note would have a 20 year term and the manufacturing
facility would serve as collateral. We have not made any draws on this credit.
Inventories increased from $19,452 at December 31, 2003 to $102,124 at
December 31, 2004; and $206,091 at December 31, 2005 due to the purchase of
engines and parts.
Our accounts payable increased from $1,022 at December 31, 2004 to
$236,341 on December 31, 2005 primarily because of inventory and supply costs
associated with the start up.
We had accrued expenses of $69,768 at December 31, 2005 compared to
$17,130 at December 31, 2004 compared to no accrued expenses at December 31,
2003.
At December 31, 2005, we had total assets of $4,822,022 and a
stockholders' equity of $3,204,533, compared to total assets of $186,438 and
total a stockholders' deficit of $118,766 at December 31, 2004 and total assets
of $128,934 and total a stockholders' equity of $34,523 at December 31, 2003.
Plan of Operation
-----------------
We anticipate that our expenses will continue to increase significantly
as we commence operations in our new manufacturing facility, including
additional personnel, product development, inventory purchases, and construction
costs. Accordingly, management believes that current cash on hand will only be
sufficient to satisfy our cash requirements through June 2006. We expect to be
required to raise significant amounts of additional capital resources during
2006. We anticipate that increased sales of our products could commence the
second quarter of 2006, subject to timely receipt of parts ordered from
suppliers and timely completion of our new facilities, which may add to cash
reserves. Additional cash will be needed to sustain operations, or if management
determines to accelerate the expansion of our operations, we may seek additional
funds through private or public sources and/or the sale of securities. We
anticipate offering shares of our Common Stock or debt securities under a
registered offering or a private placement during fiscal year 2006. There is no
assurance that we will be able to raise the necessary capital from such an
offering, that funds will be available from any other source, or, that even if
they are available, that they will be available on terms that will be acceptable
to us.
We are a development stage enterprise and, as such, our continued
existence is dependent upon our ability to resolve our liquidity problems,
principally by obtaining additional debt or equity financing. We have yet to
generate a positive internal cash flow, and until meaningful sales of our
products begin, we are totally dependent upon debt and equity funding.
In the event that we are unable to obtain debt or equity financing or
we are unable to obtain financing on terms and conditions that are acceptable to
us, we may have to cease or severely curtail our operations. These factors raise
substantial doubt about our ability to continue as a going concern. So far, we
have been able to raise the capital necessary to reach this stage of product
development and have been able to obtain funding for operating requirements, but
there can be no assurance that we will be able to continue to do so.
-28-
We anticipate that we can produce 10,000 base 4.9L engines at full
capacity, in our 30,000 square foot manufacturing facility. Initial contact with
our distributor network, has given us indications that we may not have the
capacity to meet their demands. We anticipate that if we are successful in
obtaining funds through private or public sources, we plan to explore the
expansion of our present facilities. An expansion will be necessary to provide
needed space for the assembly of our 7.5L engines and our 2.45L engines. We
anticipate the cost for an expansion of our production facilities, including
equipment, to be approximately $1 million. We anticipate our capital
expenditures for 2006 will be approximately $2.0 million, if we include the
expansion.
Once all of the components for our 4.9L engine have been received and
validated for form and fit, we will begin a durability validation process. We
anticipate testing the durability of our engines by running them on a
dynamometer for a minimum of three hundred hours before they are offered to our
distributors for sale into the industrial engine market. Typically, durability
testing would be considered a success, once the stated production warranty hours
are surpassed. We anticipate the warranty on our 4.9L engines will be 3 years or
3,000 hours, whichever comes first.
Our distributors will not be able to offer our engines for sale to
Original Equipment Manufacturers ("OEM") for mobile applications until the
engines have passed U.S. Emissions Regulations which are defined and enforced by
the Environmental Protection Agency ("EPA") and California Air Resources Board
("CARB"). Stand-by and re placement engines are not subject to these
requirements. We anticipate beginning the emissions certification process of our
4.9L engine in the second quarter of 2006. It will cost approximately $960,000
to certify each engine in our product line. We also anticipate beginning the
certification process for our 7.5L and 2.45L engines in 2007. This testing
procedure will be an expense of research and development. We anticipate that our
research and development costs could be approximately $1.5 million in 2006.
We are presently dependent on one vendor to supply a majority of the
components for our 4.9L engine. We have issued blanket purchase orders totaling
approximately $1.4 million to this vendor for engine parts, and mold and tooling
fees. We anticipate that we will purchase approximately $3 million in component
parts from this vendor in 2006. Delivery of final products may not be realized
until June or July 2006, or later, thus delaying sales of new 4.9 liter engines
to our distributor network
We are expanding our search for vendors who can manufacture component
parts to our specifications. We anticipate having other sources for our engine
parts by the end of 2006.
Grants and Government Programs
------------------------------
On July 7, 2005, we were notified by the Iowa Department of Economic
Development the following funding assistance:
o Community Economic Betterment Account
("CEBA") Forgivable Loan $ 250,000
o Physical Infrastructure Assistance Program
(PIAP) Forgivable Loan $ 150,000
o Enterprise Zone
("EZ") (estimated value) $ 142,715
These awards were provided to assist us in the acquisition of machinery
and equipment for our new 30,000 square foot manufacturing building. As a
result, we have agreed to make an investment of $1,543,316 in our Algona
location and create 49 full-time equivalent positions. The awards have an
effective date of June 28, 2005. We have received the CEBA award and have also
received the PIAP award. More information regarding these forgivable loans can
be found in Note 5 to the Consolidated Financial Statements.
-29-
The Iowa Department of Economic Development has approved us for
participation in the Enterprise Zone Program. Under the Program, we are eligible
for the following benefits provided we continue to meet certain Program
requirements:
o Funding for training new employees through a supplemental new jobs
withholding credit equal to 1.5% of gross wages of the new jobs
created;
o A refund of 100% of the sales, service and use taxes paid to
contractors and subcontractors during the construction phase of
the plant (excluding local option taxes);
o A 6.5% research activities tax credit based on increasing research
activities within the State of Iowa;
o An investment tax credit equal to 10% of our capital investment.
This Iowa tax credit may be carried forward for up to seven years.
In order to receive these benefits, we must create 41 new full-time
equivalent jobs at the project site within three years of the date of the
agreement, which was June 28, 2005. We must also pay an average median wage for
of $23.89 per hour and pay 80% of our employees' medical and dental insurance.
Within three years of the effective date of the agreement, we must also make a
capital investment of at least $943,316 within the Enterprise Zone. If we do not
meet these requirements, we will have to repay all or a portion of the
incentives and assistance we have received.
We received a partially forgivable loan from the Algona Area Economic
Development Corporation ("AAEDC"), in exchange for land received and used to
construct our manufacturing facility. If we create 50 new jobs in Algona, Iowa
by June 1, 2010 and retain those jobs through June 1, 2015, $67,650 of this loan
will be forgiven. If we create and retain 50 additional new jobs in Algona, Iowa
(total of 100 jobs) by June 1, 2015 another $67,650 of this loan will be
forgiven. The balance of $10,824 will be the only amount we repay to AAEDC, if
we are successful in creating 100 new jobs. A wage must be paid equal to or
greater than the average hourly wage for workers in Kossuth County, Iowa, as
determined annually by Iowa Workforce Development. If we are unsuccessful we
must repay the loan with 8% interest. We are accruing interest on this loan
until we meet the terms.
Employees
---------
We anticipate that we will create approximately 30 new jobs in 2006.
Net Operating Loss
------------------
We have accumulated approximately $1,150,000 of net operating loss and
research and development carryforwards as of December 31, 2005, which may be
offset against taxable income and income taxes in future years. The use of these
losses to reduce future income taxes will depend on the generation of sufficient
taxable income prior to the expiration of the net operating loss carryforwards.
The carry-forwards will begin to expire in the year 2018. The amount and
availability of the net operating loss carryforwards may be subject to annual
limitations set forth by the Internal Revenue Code. Factors such as the number
of shares ultimately issued within a three-year look-back period; whether there
is a deemed more than 50 percent change in control; the applicable long-term tax
exempt bond rate; continuity of historical business; and subsequent income of
the Company all enter into the annual computation of allowable annual
utilization of the carryforwards.
Inflation
In our opinion, inflation has not and will not have a material effect
on our operations in the immediate future. Management will continue to monitor
inflation and evaluate the possible future effects of inflation on our business
and operations.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
-30-
ITEM 7. FINANCIAL STATEMENTS.
Report of Independent Registered Public Accounting Firm
The Board of Directors
Hydrogen Engine Center, Inc. and Subsidiaries
We have audited the accompanying balance sheets of Hydrogen Engine Center, Inc.
and Subsidiaries (a corporation in the development stage) as of December 31,
2005 and 2004, and the related statements of operations, stockholders' equity
(deficit), and cash flows for the years then ended and for the period from May
19, 2003 (inception date) to December 31, 2005. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit on the Company's internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hydrogen Engine Center, Inc.
and Subsidiaries (a corporation in the development stage) as of December 31,
2005 and 2004 and the results of its operations and its cash flows for the years
then ended, and for the period from May 19, 2003 (inception date) to December
31, 2005, in conformity with accounting principles generally accepted in the
United States of America.
The accompanying financial statements have been prepared assuming that Hydrogen
Engine Center, Inc. and Subsidiaries (a corporation in the development stage)
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has significant debt and operating obligations and is
dependent on significant additional financing which creates substantial doubt
about the Company's ability to continue as a going concern. Management's plans
regarding its operations are also discussed in Note 1. The financial statements
do not contain any adjustments that might result from the outcome of these
uncertainties.
/s/ LWBJ, LLP
----------------------------------
West Des Moines, Iowa
March 30, 2006
-31-
HYDROGEN ENGINE CENTER, INC. AND SUBSIDIARIES
(a corporation in the development stage)
Consolidated Balance Sheets
December 31, December 31,
ASSETS 2005 2004
----------- -----------
Current Assets
Cash and cash equivalents $ 2,346,248 $ 19,808
Accounts receivable 3,200 --
Related parties receivable 26,257 --
Other receivables 103,695 --
Inventories 206,091 102,124
Prepaid expenses 77,723 3,163
----------- -----------
Total current assets 2,763,214 125,095
Property, Plant and Equipment
Land 196,124 --
Building 282,901 --
Equipment 280,780 69,453
Leasehold improvements 16,023 13,772
Construction in progress 1,322,798 --
----------- -----------
2,098,626 83,225
Less accumulated depreciation 39,818 21,882
----------- -----------
Net property and equipment 2,058,808 61,343
----------- -----------
Total Assets $ 4,822,022 $ 186,438
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Current portion long-term debt $ 24,984 $ --
Note payable, bank 262,647 --
Accounts payable 236,341 1,022
Accrued expenses 69,768 17,130
Construction payable 232,208 --
----------- -----------
Total current liabilities 825,948 18,152
Long-term Debt, net of current maturities 791,541 287,052
Commitments and Contingencies
Stockholders' Equity (Deficit)
Preferred stock, $.001 par value; 10,000,000 shares authorized, none issued -- --
Common stock, $.001 par value; 100,000,000 shares authorized, 25,157,905
(2,000,000 in December 2004) shares issued and outstanding 25,158 2,000
Additional paid-in capital 4,837,602 137,352
Unearned stock-based compensation
(275,332) --
Accumulated other comprehensive loss - foreign currency (2,207) --
Deficit accumulated during the development stage (1,380,688) (258,118)
----------- -----------
Total stockholders' equity (deficit) 3,204,533 (118,766)
----------- -----------
Total Liabilities and Stockholders' Equity (Deficit) $ 4,822,022 $ 186,438
=========== ===========
See accompanying notes.
-32-
HYDROGEN ENGINE CENTER, INC. AND SUBSIDIARIES
(a corporation in the development stage)
Consolidated Statements of Operations
----------------------------------------------------------------------------------------
Deficit Accumulated
During the
Development Stage
Year Ended from Inception
December 31, (May 19, 2003)
2005 2004 to December 31, 2005
----------------------------------------------------------------------------------------
Sales $ 24,100 $ 19,460 $ 43,560
Cost of sales 19,444 4,100 23,544
------------ ------------ ------------
Gross Profit 4,656 15,360 20,016
------------ ------------ ------------
Operating Expenses
Sales and marketing 114,473 7,101 121,574
General and administrative 586,955 153,206 803,503
Research and development 418,070 33,342 453,712
------------ ------------ ------------
Total 1,119,498 193,649 1,378,789
------------ ------------ ------------
Operating Loss (1,114,842) (178,289) (1,358,773)
Other Income (Expense)
Interest income
31,280 743 32,023
Interest expense (39,008) (14,930) (53,938)
------------ ------------ ------------
Total (7,728) (14,187) (21,915)
------------ ------------ ------------
Net Loss $ (1,122,570) $ (192,476) $ (1,380,688)
============ ============ ============
Weighted average shares outstanding 19,154,753 16,297,200 17,387,071
Basic and diluted net loss per share $ (0.06) $ (0.01) $ (0.08)
See accompanying notes.
-33-
HYDROGEN ENGINE CENTER, INC. AND SUBSIDIARIES
(a corporation in the development stage)
Consolidated Statements of Stockholders' Equity (Deficit)
Accumulated Deficit Accum.
Common Stock Additional Unearned Other During the
------------------------- Paid-in Stock-Based Comprehensive Development
Shares Amount Capital Compensation Loss Stage Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
Issuance of common stock to
founder in exch. for equipment
& expenses incurred by founder 2,000,000 $ 2,000 $ 98,165 $ -- $ -- $ -- $ 100,165
-----------
Net loss -- -- -- -- -- (65,642) (65,642)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2003 2,000,000 2,000 98,165 -- -- (65,642) 34,523
Company-related expenses paid
by founder -- -- 39,187 -- -- -- 39,187
Net loss -- -- -- -- -- (192,476) (192,476)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2004 2,000,000 2,000 137,352 -- -- (258,118) (118,766)
Company-related expenses paid
by founder -- -- 12,135 -- -- -- 12,135
Exchange of previous shares by
sole shareholder of HEC Iowa (2,000,000) -- -- -- -- -- --
Shares in Green Mt. Labs
acquired in reverse merger 1,006,000 1,006 (1,006) -- -- -- --
Stock split of 3.8 to 1 prior
to the merger 2,816,804 2,817 (2,817) -- -- -- --
Issuance of common stock to
sole shareholder of HEC Iowa 16,297,200 14,297 (14,297) -- -- -- --
Issuance of restricted common
stock to employees & directors 426,000 426 425,574 (275,332) -- -- 150,688
Issuance of common stock in
connection with the private
placement, net of expenses 3,948,500 3,949 3,590,940 -- -- -- 3,594,989
Issuance of common stock in
connection with conversion of
debt 663,401 663 556,388 -- -- -- 557,051
Consultants compensation
associated with stock options -- -- 133,333 -- -- -- 133,333
-----------
4,329,310
-----------
Comprehensive Loss
Foreign currency translation -- -- -- -- (2,207) -- (2,207)
Net Loss -- -- -- -- -- (1,122,570) (1,122,570)
-----------
Total Comprehensive Loss -- -- -- -- -- -- (1,124,777)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2005 25,157,905 $ 25,158 $ 4,837,602 $ (275,332) $ (2,207) $(1,380,688) $ 3,204,533
=========== =========== =========== =========== =========== =========== ===========
See accompanying notes.
-34-
HYDROGEN ENGINE CENTER, INC. AND SUBSIDIARIES
(a corporation in the development stage)
Consolidated Statements of Cash Flow
Year Ended From Inception
December 31, (May 19, 2003)
-------------------------- to December 31,
2005 2004 2005
----------- ----------- -----------
Cash Flows from Operating Activities
Net loss $(1,122,570) $ (192,476) $(1,380,688)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 17,936 15,923 39,818
Compensation to directors and employees from restricted stock 150,668 -- 150,668
Compensation to consultants from stock options 133,333 -- 133,333
Change in assets and liabilities:
Accounts receivable (3,200) -- (3,200)
Related party receivable (26,257) -- (26,257)
Other receivable (3,695) -- (3,695)
Inventory (103,967) (82,673) (206,091)
Prepaid expenses (74,560) (2,563) (77,723)
Accounts payable 247,454 21,079 339,977
Accrued expenses 52,638 17,130 69,768
----------- ----------- -----------
Net cash used in operating activities (732,220) (223,580) (964,090)
----------- ----------- -----------
Cash Flows from Investing Activities
Purchases of property, plant, and equipment (213,432) (18,241) (248,806)
Payments for construction in progress (1,090,590) -- (1,090,590)
----------- ----------- -----------
Net cash used in investing activities (1,304,022) (18,241) (1,339,396)
----------- ----------- -----------
Cash Flows from Financing Activities
Proceeds from note payable, bank 650,000 -- 650,000
Proceeds from long-term debt 780,000 216,772 1,072,052
Payment on note payable, bank (650,000) -- (650,000)
Payments on long-term debt (10,000) (5,000) (15,000)
Issuance of common stock in private placement 3,948,500 -- 3,948,500
Payments of expense in connection with private placement (353,611) -- (353,611)
----------- ----------- -----------
Net cash provided by financing activities 4,364,889 211,772 4,651,941
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents 2,328,647 (30,049) 2,348,455
Effect of Exchange Rates on Cash and Cash Equivalents (2,207) -- (2,207)
Cash and Cash Equivalents - Beginning of Period 19,808 49,857 --
----------- ----------- -----------
Cash and Cash Equivalents - End of Period $ 2,346,248 $ 19,808 $ 2,346,248
=========== =========== ===========
Supplemental Cash Flow Information
Interest paid $ 37,747 $ 200 $ 37,947
Supplemental Disclosure of Noncash Investing and Financing Activities
Additional paid-in capital contribution for expenses
paid by founder $ 12,135 $ 39,187 $ 103,636
Issuance of common stock for equipment $ -- $ -- $ 47,851
Issuance of common stock for conversion of debt $ 557,051 $ -- $ 557,051
Acquisition of land and building through financing $ 479,171 $ -- $ 479,171
Payables for construction in progress $ 232,208 $ -- $ 232,208
Receivable for state loan $ 100,000 $ -- $ 100,000
See accompanying notes.
-35-
HYDROGEN ENGINE CENTER, INC. AND SUBSIDIARIES
(a corporation in the development stage)
Notes to Consolidated Financial Statements
December 31, 2005
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Overview of Companies
---------------------
Hydrogen Engine Center, Inc., formerly known as Green Mountain Labs, Inc.
("Green Mt. Labs"), is a Nevada corporation. Green Mt. Labs was a
public-reporting shell company and, in connection with the Transactions
described below, changed its name to Hydrogen Engine Center, Inc. (the
"Company"). Also, as a result of the Transactions described below, the Company's
operations are those of its wholly owned subsidiaries, Hydrogen Engine Center,
Inc., an Iowa corporation ("HEC Iowa"), and Hydrogen Engine (HEC) Center Canada
Inc. ("HEC Canada").
HEC Iowa was incorporated on May 19, 2003 (inception date) for the ultimate
purpose of commercializing internal combustion industrial engines. HEC Iowa's
operations are located in Algona, Iowa.
HEC Canada was incorporated as a Canadian corporation on August 25, 2005 with
the goal of establishing a research and development center to assist in the
development of alternative fuel and hydrogen engines. HEC Canada is located in
Quebec, Canada and works with Universite Du Quebec a Trois-Rivieras.
Green Mt. Labs was originally organized to acquire and develop mining claims;
however, these operations were discontinued in 1997.
Description of Business - A Corporation in the Development Stage
----------------------------------------------------------------
The Company is a manufacturer of engines and generators for use in the
industrial and power generation markets. These engines are designed to run on
alternative fuels including but not limited to gasoline, propane, natural gas,
ethanol and hydrogen. The engines and engine products are sold under the brand
name Oxx Power TM. Through December 31, 2005, the Company remains in the
development stage. This stage is characterized by minimal revenues with efforts
focused on fund raising and significant expenditures for the design and
development of the Company's products and manufacturing processes, and for the
construction of the Company's new facilities.
The Company is in the process of establishing a distribution system to sell its
products. It is anticipated that the distribution system will be comprised of
eight US distributors and two Canadian distributors. Distributed generation
systems requiring advanced technology are sold direct.
Merger and Private Placement (the "Transactions")
-------------------------------------------------
On August 30, 2005, Green Mt. Labs completed the acquisition of HEC Iowa. The
acquisition was made pursuant to an agreement and plan of merger entered into on
June 3, 2005, and revised on July 6, 2005 and July 29, 2005 (the "Merger
Agreement"). To accomplish the acquisition, Green Mt. Labs merged its newly
created, wholly-owned subsidiary, Green Mt. Acquisitions, Inc., with and into
HEC Iowa, with HEC Iowa being the surviving entity. As part of the acquisition,
Green Mt. Labs had completed a 3.8 share to 1 share stock split which increased
outstanding shares of common stock from 1,006,000 to 3,822,804. Also under the
terms of the Merger Agreement, the Company issued 16,297,200 shares of
post-split common stock (representing 81% of the total outstanding shares
immediately following the transaction) to Theodore G. Hollinger, who was the
sole stockholder of HEC Iowa, in exchange for 100% of HEC Iowa's outstanding
capital stock (2,000,000 shares). As stated above, in connection with the
Transactions, Green Mt. Labs changed it name to Hydrogen Engine Center, Inc.
-36-
The Transactions have been accounted for as a recapitalization, which is
accounted for similar to the issuance of stock by HEC Iowa for the net assets of
Green Mt. Labs with no goodwill or other intangibles being recorded.
On October 11, 2005, the Company closed a private placement of the common stock.
The Company sold 3,948,500 shares of common stock, $.001 par value, for a total
of $3,948,500. Costs related to this offering amounted to $353,611. The Company
sold the shares in a private transaction at $1.00 per share, and the Company
relied on an exemption from registration pursuant to Regulation D, Rules
Governing the Limited Offer and Sale of Securities without Registration under
the Securities Act of 1933.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries HEC Iowa and HEC Canada. All intercompany balances
and transactions have been eliminated in consolidation.
Going Concern
-------------
The financial statements have been prepared on the basis of accounting
principles applicable to a going concern. As a result, they do not include
adjustments that would be necessary if the Company was unable to continue as a
going concern and was therefore obligated to realize assets and discharge its
liabilities other than in the normal course of operations.
Since inception, the Company has incurred substantial operating losses and
expects to incur additional operating losses into the foreseeable future. The
Company has financed operations since inception, primarily through equity and
debt financings. At December 31, 2005, the Company has reported accumulated
losses of $1,380,688 and has cash and cash equivalents available to fund future
losses and developments of $2,346,248. The Company anticipates its expenses will
significantly increase as it commences operations in its new manufacturing
facility, including additional personnel, product development, inventory
purchases, and additional construction costs. Based on current projections,
existing capital will fund the Company's operations until June 2006. This
timeframe may be shorter if events occur which negatively effect the Company's
operations.
Sales of the Company's products through December 31, 2005 have amounted to
$43,560 and consisted of customized engines and parts. The Company is in the
process of completing Phase 1 of its manufacturing facility, and completion of
this facility is needed before production begins. Currently, the facility is
scheduled to be completed in April 2006; however, delays may occur. Even if the
Company is able to manufacture its products, there are no assurances they will
be accepted by the market place. Also, the Company estimates it may cost
approximately $1 million per engine type to certify its engines to meet certain
laws and regulations. Currently there are three engines the Company plans to
certify.
As the Company continues to ramp up its operations, it has entered into
significant commitments as described in Notes 3, 13, and 14. The Company has
entered into several research and development arrangements with other
organizations as described in Note 13. Each research and development agreement
requires the Company to incur upfront costs prior to receiving reimbursements
from the other organizations.
-37-
Continuing operations is dependent upon obtaining significant further financing.
Although the Company plans to offer its common stock or debt securities for sale
in 2006, there can be no assurance that the Company will successfully complete
an offering or that these proceeds, if completed, would be sufficient to satisfy
capital requirements. Also, there are no assurances that additional funding will
be available at terms acceptable to the Company. These conditions raise
substantial doubt about the ability to continue as a going concern.
Foreign Currency Translation
----------------------------
Results of operations and cash flows of foreign subsidiaries are translated to
U.S. dollars at average period currency exchange rates. Assets and liabilities
are translated at end-of-period exchange rates.
Foreign currency translation adjustments related to foreign subsidiaries using
the local currency as their functional currency are included in Other
comprehensive income (loss). Net adjustments for the period ending December 31,
2005 are $2,207. There were no foreign currency translations at December 31,
2004.
Cash and Cash Equivalents
-------------------------
The Company considers highly-liquid investments with a original maturity of
ninety days or less to be cash equivalents. The Company maintains its cash
balances in three institutions. At times throughout the year, the Company's cash
and cash equivalents balances may exceed amounts insured by the Federal Deposit
Insurance Corporation. The Company believes it is not exposed to any significant
credit risk on cash and cash equivalents.
Accounts Receivable
-------------------
Accounts receivable are recorded at their estimated net realizable value. The
Company plans to follow a policy of providing an allowance for doubtful
accounts. However, based on the evaluation of receivables at December 31, 2005,
the Company believes that such accounts will be collectible and thus an
allowance is not necessary. Accounts are considered past due if payment is not
made on a timely basis in accordance with the Company's credit policy. Accounts
considered uncollectible are written off. Credit terms are extended to customers
in the normal course of business. The Company performs ongoing credit
evaluations of its customers' financial condition and, generally, requires no
collateral.
Inventories
-----------
Inventories consist mainly of parts, finished engines and gensets that are
stated at the lower of cost (determined by the first-in, first-out method) or
market value.
Property, Plant and Equipment
-----------------------------
Property, plant and equipment are recorded at cost. Once assets are placed in
service, depreciation is provided over estimated useful lives by use of the
straight-line method. Leasehold improvements are depreciated over the life of
the lease (Note 6). Depreciation expense was $17,936 and $15,923 for the years
ended December 31, 2005 and 2004, respectively, and $39,818 from inception (May
19, 2003) to December 31, 2005. Maintenance and repairs are expensed as
incurred; major improvements and betterments are capitalized.
-38-
Long-Lived Assets
-----------------
The Company reviews property, plant, and equipment for indicators of impairment
when events or changes in circumstances indicate that the carrying value may not
be recoverable. Cash flows expected to be generated by the related assets are
estimated over the asset's useful life based on updated projections. If the
evaluation indicates that the carrying amount of the asset may not be
recoverable, the potential impairment is measured based on a projected
discounted cash flow model. If an impairment loss exists, the amount of the loss
will be recorded in the consolidated statements of income. The Company has not
incurred any impairment losses.
Revenue Recognition
-------------------
Revenue from the sale of the Company's products is recognized at the time title
and risk of ownership transfer to customers. This generally occurs upon shipment
to the customer or when the customer picks up the goods.
Sales and Marketing Costs
-------------------------
Sales and marketing expenses include payroll, employee benefits, stock-based
compensation, and other costs associated with sales and marketing personnel and
advertising, promotions, tradeshows, seminars, and other marketing-related
programs. Sales and marketing expenses for the years ended 2005 and 2004 were
$114,473 and $7,101 respectively. There were a total of $121,574 in sales and
marketing costs for the period from inception (May 19, 2003) to December 31,
2005. The Company expenses advertising costs as they are incurred.
Research and Development Costs
------------------------------
The Company's research and development expenses include payroll, employee
benefits, stock-based compensation, and other costs associated with product
development. The Company has determined that technological feasibility for the
engines is reached shortly before the products are released to manufacturing.
Research and development costs were $418,070 and $33,342 for the years ended
December 31, 2005 and 2004 respectively, and $453,712 from inception (May 19,
2003) to December 31, 2005.
Income Taxes
------------
The Company recognizes deferred taxes by the asset and liability method. Under
this method, deferred income taxes are recognized for differences between the
financial statement and tax bases of assets and liabilities at enacted statutory
tax rates in effect for the years in which the differences are expected to
reverse. The effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date. In addition, valuation
allowances are established, when necessary, to reduce deferred tax assets to the
amounts expected to be realized. The primary sources of temporary differences
are depreciation and net operating loss carryforwards.
Net Loss Per Share
------------------
The Company computes net loss per share under the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), and
Securities and Exchange Commission Staff Accounting Bulletin No. 98 ("SAB 98").
-39-
Under the provisions of SFAS 128 and SAB 98, basic loss per share is computed by
dividing the Company's net loss for the period by the weighted-average number of
shares of common stock outstanding during the period. Diluted net loss per share
excludes potential common shares since the effect is anti-dilutive.
The Company assumed the effects of the recapitalization, described in Note 1,
were effective at the beginning of the earliest reporting period when
calculating weighted average shares outstanding.
Use of Estimates
----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 revenue and expenses during
the reporting periods. Actual results could differ from those estimates.
Fair Value of Financial Instruments
-----------------------------------
The carrying amounts reported in the balance sheet for cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses
approximate their fair value due to the short-term nature of these instruments.
Stock-Based Compensation
------------------------
As permitted by SFAS No. 123, Accounting for Stock-Based Compensation, the
Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, ("APB No. 25") and related
interpretations for its employee stock-based compensation. Under APB No. 25, no
compensation expense is recognized at the time of option grant if the exercise
price of the employee stock option is fixed and equals or exceeds the fair value
of the underlying common stock on the date of grant and the number of shares to
be issued pursuant to the exercise of such option are known and fixed at the
date of grant. The Board of Directors determines the fair value of common stock.
The Company accounts for options issued to non-employees under SFAS No. 123 and
Emerging Issues Task Force Issue ("EITF") No. 96-18, Accounting for Equity
Instruments that are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods, or Services. Therefore, the fair value of
options issued to non-employees is recorded as an expense and periodically
remeasured over the vesting terms.
The Company records restricted stock awards at the fair value at the date of
grant and amortizes the expense over the vesting period as services are
performed.
The following table illustrates the effect on net loss as if the Company had
applied the fair value recognition provisions for stock-based employee
compensation of SFAS No. 123, as amended by SFAS No. 148, Accounting for
Stock-Based Compensation -- Transition and Disclosure.
-40-
Period from
Year Ended Inception
December 31, (May 19, 2003)
---------------------------- to December 31
2005 2004 2005
------------ ------------ ------------
Net loss, as reported $ (1,122,570) $ (192,476) $ (1,380,688)
Deduct: stock-based employee
compensation expense determined
under fair value based method (185,802) -- (185,802)
------------ ------------ ------------
Pro forma net loss $ (1,308,372) $ (192,476) $ (1,566,490)
============ ============ ============
Weighted average number of common
shares outstanding 19,154,753 16,297,200 17,387,071
Net loss per common share:
Basic and diluted as reported $ (.06) $ (.01) $ (.08)
Net loss per common share:
Basic and diluted pro forma $ (.07) $ (.01) $ (.09)
For purposes of pro forma disclosures, the estimated fair value of the options
granted is amortized to expense over the option vesting periods as services are
performed.
The Company has determined, based on the Black-Scholes option pricing formula,
the weighted average fair value of stock options granted at December 31, 2005
was $1.61 per share, using a risk-free interest rate of 3.89%, expected life of
9.7 years, zero expected dividends and estimated volatility of 189%. The
volatility was estimated using the Company's stock price from September 2005
through January 2006.
In addition, the option valuation models require input of highly subjective
assumptions. Because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of stock
options. The pro forma net loss may not be representative of future disclosure
since the estimated fair value of stock options is amortized to expense over the
vesting period and additional options may be granted in future years.
Warrants
--------
As described in Note 11, the Company has granted warrants to certain finders in
the private placement, entitling the finders to purchase 69,640 shares at $1.00
per share. Based on EITF 00-19, Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settle in, a Company's Own Stock, the sale of the
warrants was reported in permanent equity and accordingly, there is no impact on
the Company's financial position and results of operation. Subsequent changes in
fair value will not be recognized as long as the warrants continue to be
classified as an equity instrument.
-41-
Recent Accounting Pronouncements
--------------------------------
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
123(R), Share-Based Payment. The Statement requires all entities to recognize
compensation expense in an amount equal to the fair value of share-based
payments granted to employees. The Statement eliminates the alternative method
of accounting for employee share-based payments previously available under APB
Opinion No. 25 and SFAS 123. In April 2005, the Securities and Exchange
Commission amended the compliance dates to allow small business issuers to
implement SFAS 123(R) at the beginning of 2006. The Company plans to implement
SFAS 123(R) in the first quarter of 2006.
In November 2004, the FASB issued SFAS 151, Inventory Costs. The Statement
requires that abnormal amounts of idle facility expense, freight, handling
costs, wasted materials and overhead expense be recognized as period costs. The
primary basis of accounting for inventory is cost. This Statement standardizes
the amount of idle facility expense that could be classified as inventory and
requires these expenses be recognized as period costs. The Company plans to
implement SFAS 151 in the first quarter of 2006.
Reclassifications
-----------------
Certain amounts in the Consolidated Statements of Operations for the year ended
December 31, 2004 and period from inception (May 19, 2003) to December 31, 2005
have been reclassified to conform to classifications during the year ended
December 31, 2005. These reclassifications had no effect on net loss as
previously reported.
2. INVENTORY
Inventory consists of the following at December 31, 2005 and 2004:
December 31, December 31,
2005 2004
------------ ------------
Component parts $ 109,351 $ 55,941
Work in process 12,302 --
Finished goods 84,438 46,183
------------ ------------
Total $ 206,091 $ 102,124
============ ============
3. CONSTRUCTION IN PROGRESS
The Company has entered into a contract for construction of a 30,000 square foot
manufacturing facility. Costs incurred with change orders through March 30, 2006
total $1,530,310. At December 31, 2005, $1,090,590 had been paid, with an
additional $232,208 in construction payable. The Company anticipates that there
will be additional costs for a fire alarm system and an exhaust system in the
approximate amount of $30,000. Phase II is planned to be an administrative
building and the contract price for that phase is currently estimated to be
approximately $700,000.
4. NOTES PAYABLE, BANK
On December 19, 2005, the Company obtained a short-term note for $500,000 from a
bank, of which $262,647 was used for the purchase of a building located adjacent
to the manufacturing building site. The additional available funds are required
to be used for building improvements. Borrowings on this short-term note mature
December 16, 2006 and accrue interest at 5.89% with monthly interest payments
until maturity. The building serves as collateral for this note.
-42-
In May 2005, the Company executed a note payable agreement with a bank for
$650,000 as part of the application process for an Iowa Economic Development
Grant. The note accrued interest at 4.2% through November 2005, at which time
the balance became due. The Company paid the note in full in September 2005. A
certificate of deposit held at the bank was collateral for this note.
5. LONG-TERM DEBT
Long-term debt consists of the following at December 31:
2005 2004
-------- --------
Note payable to City of Algona. See (a) $200,000 $ --
Note payable to Algona Area Economic Development Corporation. See (b) 146,124 --
Note payable to Algona Area Economic Development Corporation. See (c) 70,401 --
Notes payable to Iowa Department of Economic Development. See (d) 400,000 --
Convertible debt to stockholder and various other parties. See (e) -- 287,052
-------- --------
816,525 287,052
Less amounts due within one year 24,984 --
-------- --------
Totals $791,541 $287,052
======== ========
Future maturities of long-term debt at December 31, 2005 are as follows:
Years ending December 31:
2007 $ 23,590
2008 23,963
2009 24,375
2010 165,395
2011 200,330
Thereafter 353,888
-----------
Total long-term debt $ 791,541
===========
(a) The Company obtained $200,000 from the City of Algona in September
2005. The note requires quarterly payments of $5,000 starting January
1, 2006 with the final payment due October 1, 2015. There is no
interest on this loan provided the Company creates and retains at least
42 new full-time positions for five years. If such requirements are not
met, interest on the loan will be payable at 10% per annum. The Company
is and will accrue interest on this note until the terms of the note
have been met. The loan is collateralized by land and building.
(b) On June 27, 2005, the Company executed a note payable of $146,124
from the Algona Area Economic Development Corporation in exchange for
land received to be used for the construction of the new facility. The
loan is a ten-year partially forgivable loan with interest at 8%,
conditioned upon the Company achieving performance targets as follows:
-43-
o $67,650 of principal and interest will be forgiven if the Company
has certified that it has created 50 new full-time equivalent jobs
by June 1, 2010 and continuously retained those jobs in Algona,
Iowa until June 1, 2015.
o $67,650 of principal and interest will be forgiven if the Company
has certified that it has created and continuously retained 50
additional new full-time equivalent jobs by June 1, 2015.
o Balance of $10,824 due on June 1, 2015 without interest if paid by
that date.
o Payment of a wage for the retained jobs that is equal to or
greater than the average hourly wage for workers in Kossuth
County, Iowa as determined annually by Iowa Workforce Development.
The Company is accruing interest on this note until the terms of the
note have been met. The loan is secured by the real estate.
(c) On December 16, 2005, the Company assumed a no interest note
provided by the Algona Area Economic Development Corporation in the
amount of $117,500 in conjunction with the purchase of land and
building as described in note 4. This note was recorded at the fair
value of future payments using an interest rate of 10% which amounted
to $70,401 resulting in a total purchase price of the land and building
of $332,901. This note is secondary and subordinate to a short-term
note held by a bank (Note 4). The note requires quarterly payments of
$2,500 starting January 1, 2006 with the final payment due July 1,
2017. The Company plans to use this building for parts distribution and
for distributed power generation manufacturing. The Company must
maintain the building, provide adequate insurance and is responsible
for the payment of property taxes.
(d) On June 28, 2005, the Iowa Department of Economic Development
("IDED") awarded the Company a Physical Infrastructure Assistance
Program ("PIAP") grant in the amount of $150,000. This is a five-year
forgivable loan and proceeds are to be used for the construction and
equipping of the 30,000 square foot manufacturing facility. The Company
received payment of this award in December 2005. Other terms of the
loan include a minimum contribution of $1,543,316 for building
construction, machinery and equipment, and working capital. In
addition, the Company must create 49 full-time equivalent positions,
with 38 positions at a starting wage exceeding $11.76 per hour, and an
average wage for all positions of $24.94 per hour. In order to qualify
for the job count, employees must be Iowa residents. The Company is
required to maintain the minimum employment level through the
thirteenth week after the project completion date. If requirements are
not met, the balance of the forgivable loan determined by IDED as due
and payable will be amortized over three years from the agreement
expiration date of July 31, 2010 at 6% interest per annum with equal
quarterly payments. IDED requires mid-year and end-of-year status
reports to ensure compliance. The Company is accruing interest on this
note until the terms of the note have been met. The note is secured by
a security agreement on its assets.
Also on June 28, 2005, IDED awarded the Company a Community Economic
Betterment Account ("CEBA") forgivable loan in the amount of $250,000.
This is a three-year forgivable loan and proceeds are to be used for
the construction of the plant. The Company received $150,000 of this
award in December 2005. The balance of the award, $100,000, was
received in January 2006. The terms of this award are the same as the
PIAP award explained in the previous paragraph. At the project
completion date, if the Company has fulfilled at least 50% of its job
creation/retention and wage obligation, $6,579 will be forgiven for
each new full-time equivalent job created and retained and maintained
for at least ninety days past the project completion date. The project
-44-
completion date of this award is July 30, 2010. Any balance (shortfall)
will be amortized over a two-year period, beginning at the project
completion date at 6% per annum from the date of the first CEBA
disbursement on the shortfall amount with that amount accrued as of the
project completion date, being due and payable immediately. If the
Company has a current loan balance, the shortfall balance and existing
balance will be combined to reflect a single monthly payment. The
Company is accruing interest on this note until the terms of the note
have been met. The note is secured by a security agreement on its
assets.
(e) Unsecured convertible long-term debt payable to a stockholder and
various other parties required annual payments of interest at 6% and
were payable after five (5) years. The note holders had the right to
convert the initial loan value to Company stock at a price ranging from
80% to 100% of the share price paid by the outside investors. The note
holders could have elected to be paid in full within thirty (30) days
after the closing of the first outside round of equity funding. The
notes totaled $17,280 from stockholder and $539,771 borrowings from
others from inception (May 19, 2003) to August 31, 2005. These notes
were all converted to 663,401 shares of common stock retroactive to
September 1, 2005, thus satisfying the debt requirements. The Company
paid interest to note holders on these notes through August 31, 2005.
6. OPERATING LEASES
The Company leases a building which is used for production, storage and office
space. The Company is responsible for insurance and repairs. This lease requires
monthly rental payments of $600 and expires on May 30, 2006. At the option of
the Company, the lease can be extended for two additional terms at $650 per
month for the first year and $700 per month for the second year. Rent expense
under this lease was $7,200 for the years ending December 31, 2005 and 2004, and
$19,200 for the period from inception (May 19, 2003) to December 31, 2005,
respectively. The Company has notified the lessor of its intent to extend the
lease.
The following is a schedule of future non-cancelable lease obligations for the
building:
Year ending December 31:
2007 $ 7,550
2008 8,150
2009 3,500
-----------
$ 19,200
The Company also leases storage sheds on a month-to-month lease for various
amounts. Rent expense under this lease was $420 and $1,170 for the years ended
December 31, 2005 and 2004 and $1,590 for the period from inception (May 19,
2003) to December 31, 2005, respectively.
7. RELATED PARTY TRANSACTIONS
On December 31, 2005, the Company had receivables from employees in the amount
of $19,257 resulting from advances for payroll taxes incurred from restricted
stock awards. The Company also had a receivable of $7,000 for amount due from an
officer. These amounts were reimbursed in full to the Company prior to March 31,
2006.
The Company issued stock in exchange for equipment and company-related expenses
paid by the founder. The amount of stock issued for these expenses at December
31, 2005 and 2004 were $12,135 and $39,187, respectively, and $151,487 from
inception (May 19, 2003) to December 31, 2005.
-45-
In 2004, the former employer of an officer and director of the Company loaned
$100,000 to the Company under the terms of a convertible promissory note that
was converted into 125,000 shares of stock as of September 1, 2005.
One of the members of the Company's Board of Directors is the manager of an
engine parts distributor from which the Company purchased engine parts.
Purchases from this company totaled $8,454 and $26,921 for the years ending
December 31, 2005 and 2004, respectively and $46,370 for the period from
inception (May 19, 2003) to December 31, 2005. The Company also has a payable of
$943 at December 31, 2005 and has recorded sales in 2005 of $7,250 to this
company. Another member of the Board of Directors was a senior partner in a
parts distribution company prior to his employment with HEC. The Company has
made purchases of $32,290 and $10,030 for the years ended December 31, 2005 and
2004, respectively and $73,791 for the period from inception (May 19, 2003) to
December 31, 2005. As of December 31, 2005, $3,019 was payable to this parts
company. The Company also purchased materials totaling $2,000 from a third board
member during the year ended December 31, 2005.
8. INCOME TAXES
The tax effects of significant items comprising the Company's net deferred tax
asset and the related valuation allowance as of December 31, 2005 and 2004 are
as follows:
2005 2004
----------- -----------
Deferred tax assets:
Net operating loss carryforward $ 480,000 $ 100,000
Other -- --
----------- -----------
480,000 100,000
Valuation allowance (480,000) (100,000)
----------- -----------
Net deferred tax asset recognized $ -- --
=========== ===========
Due to the Company's operating loss and lack of operating experience, a
valuation allowance was provided for the Company's net deferred tax assets at
December 31, 2005 and 2004.
As of December 31, 2005, the Company has net operating loss and research and
development carryforwards for federal and state income tax purposes of
approximately $1,150,000, which will begin to expire in 2018. The amount and
availability of the net operating loss carryforwards may be subject to annual
limitations set forth by the Internal Revenue Code. Factors such as the number
of shares ultimately issued within a three-year look-back period; whether there
is a deemed more than 50 percent change in control; the applicable long-term tax
exempt bond rate; continuity of historical business; and subsequent income of
the Company all enter into the annual computation of allowable annual
utilization of the carryforwards.
The effective tax rate differs from the statutory rate of 34% primarily due to
certain stock-based compensation and merger-related costs not being deductible
for tax purposes and the increase in the deferred tax asset valuation allowance.
9. PREFERRED STOCK
The Company is authorized to issue 10,000,000 shares of preferred stock with
such designations, voting and other rights and preferences, as may be determined
from time to time by the Board of Directors.
-46-
10. COMMON STOCK
Prior to the merger of Green Mt. Labs with HEC Iowa, Green Mt. Labs amended its
Articles of Incorporation to increase its authorized shares from 10,000,000 to
100,000,000 and effected a 3.8 to 1 stock split which increased outstanding
shares of common stock from 1,006,000 shares to 3,822,804 shares.
In connection with the merger, Green Mt. Labs issued 16,297,200 shares to the
sole shareholder of the HEC Iowa in exchange for all outstanding HEC Iowa stock.
On September 1, 2005, the Company issued 426,000 shares of restricted stock to
directors and employees. 122,000 shares vested immediately, 86,000 shares vest
September 1, 2006, 86,000 shares vest September 1, 2007, 66,000 shares vest
September 1, 2008, and 66,000 shares vest September 1, 2009. All unvested shares
of restricted stock are subject to a risk of forfeiture upon termination of the
participant's service as a full-time consultant or employee prior to vesting.
During September 2005, the Company issued 3,948,500 shares in connection with a
private offering.
Unsecured convertible long-term debt payable to a stockholder and various other
parties totaling $557,051 was converted to 663,401 shares of common stock on
November 15, 2005, thus satisfying the debt requirements.
At December 31, 2005, of the 25,157,905 outstanding shares, 23,559,405 are
restricted.
11. WARRANTS
In August 2005, the Company issued warrants to purchase up to a total of 69,640
shares, for services rendered in connection with the private offering of stock.
These are warrants to purchase Company stock, for $1 per share for the first
three years, and $1.50 for years four, and five. The warrants expire on the
fifth anniversary date from issuance.
12. STOCK-BASED COMPENSATION
The Company has an incentive stock-based compensation plan under which
participants may be granted options to purchase shares of the Company's common
stock or receive restricted stock. Restricted stock and options may be granted
with respect to 2,000,000 shares. On September 1, 2005, grants were made under
the plan for a total of 1,220,000 shares, and on December 14, 2005, an
additional 60,000 shares were granted, leaving 720,000 shares available for
future grants. Of the shares which were the subject of these grants, 426,000
were restricted stock, 474,000 were qualified incentive stock options ("ISOs")
and 380,000 were non qualified stock options (`NSOs"). The shares of restricted
stock vest as described above in Note 10. The ISOs that have been granted under
the Company's plan vested immediately as 96,000 shares, and will vest as to
97,000 shares in 2006, as to 97,000 shares in 2007, as to 92,000 shares in 2008
and as to 92,000 shares in 2009 and expire ten years from the date of grant. The
NSOs vested immediately as 100,000 shares, and will vest as to 80,000 shares in
2006, as to 60,000 shares in 2007, as to 60,000 shares in 2008 and as to 60,000
shares in 2009. NSOs as to 20,000 shares have been terminated. All options were
granted at exercise prices that either equaled or exceeded fair market value at
the respective dates of grant.
The Company recorded stock-based compensation charges of $150,668 and $133,333
for restricted stock grants and stock option grants to non-employees for
services performed, respectively, during the year ended December 31, 2005.
A summary of ISOs and NSOs granted to employees and consultants under the
Company's incentive compensation plan at December 31, 2005 is presented below:
-47-
Weighted
Average
Exercise Price
Option Shares Per Share
------------- --------------
Options granted September 1, 2005 794,000 $ 1.00
Options granted during the three months ended
December 31, 2005 60,000 $ 5.88
---------
Options outstanding December 31, 2005 854,000 $ 1.34
=========
The following table summarizes information about stock options outstanding and
exercisable as of December 31, 2005:
Options Outstanding Options Exercisable
-------------------------------------- -------------------------
Weighted Average
Options Remaining Weighted Average Shares Weighted Average
Exercise Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
-------------- ----------- ---------------- -------------- ----------- ----------------
$1.00 794,000 9.7 $1.00 184,000 $1.00
$5.88 60,000 10.0 $5.88 12,000 $5.88
-------- --------
854,000 9.7 $1.34 196,000 $1.34
======== ========
13. COMMITMENTS AND CONTINGENCIES
Engine Certification
The Company plans to begin the certification of the 4.9 liter engine in 2006. To
certify an engine to meet regulations for exhaust emissions, an engine must
successfully pass stringent third-party testing. The Company anticipates the
cost of the testing to be approximately $1,000,000 per engine. The Company
expects to begin the certification process for the 7.5 liter engine and the 2.45
liter engine in late 2006 or 2007.
Although engine certification is necessary for the Company to sell engines to
original equipment manufacturers, certification is not necessary for existing
equipment applications.
Product Performance - Warranty
------------------------------
Estimated warranty costs and additional service actions will be accrued at the
time an engine is sold to a distributor or end-user customer. Included in
warranty cost accruals will be costs for basic warranty coverage on engines
sold. The Company has not accrued warranty costs at December 31, 2005 because of
the limited number of sales to date.
-48-
Component Parts Procurement
---------------------------
In November 2005, the Company issued purchase orders totaling approximately $1.4
million to an unrelated party for engine parts and mold and tooling fees. The
Company agreed to take shipments of parts over the next twelve months. Once
parts meet Company specifications, delivery requirements begin. At December 31,
2005, the Company had taken its first shipment. The invoice totaled
approximately $34,000. The Company paid $82,450 to this same vendor for mold
fees, some of which are anticipated to be refunded as purchasing quantities are
reached.
The Company is dependent on this vendor for delivery of parts for its 4.9 liter
new engine program. Delivery of final products may not be realized until June or
July 2006 or later, thus delaying sales of new 4.9 liter engines to its
distributor network.
Equipment Procurement Agreements
--------------------------------
On December 20, 2005, the Company entered into a purchase agreement for a
compressed air system. The total cost of the purchase agreement is $51,096. The
agreement calls for twenty-four monthly payments of $2,129.
On December 9, 2005, the Company issued purchase orders for network computer
equipment totaling $72,561. A down payment of $56,850 was given to the vendor
for price protection. The installation is an ongoing process where total
expenditures are anticipated to be approximately $130,000.
Software, Maintenance and Service Agreements
--------------------------------------------
On December 23, 2005, the Company entered into an agreement with a software
company for the purchase of accounting, manufacturing and customer resource
management software. The agreement includes employee training services and
software support. The cost of the software is $47,430 and the cost of annual
software support is anticipated to be $18,000. The cost of the software and
support services was paid in March 2006. It is anticipated training cost will be
approximately $30,000. The Company anticipates the software implementation will
be phased in over a six-month period of time. Implementation began in February
2006. The Company plans to submit for reimbursement of training expenses under
the Industrial New Jobs Training Program awarded August 23, 2005. The total
amount of the training award available is $160,000.
Consortium Agreement
--------------------
On May 1, 2005, the Company entered into consortium agreement with a company to
work on a project in Canada. The project requires HEC Canada to provide a 5kW,
10kW, and 50kW generator sets at various times through the third quarter of
2007. HEC Canada is also required to provide technical assistance throughout the
project. The total cost of the project is anticipated to be $319,243 ($372,078
Canadian currency ("CN")) of which the Company expects to be reimbursed $159,621
($186,039 CN). On February 22, 2006, HEC Canada received an advance in the
amount of $49,764 ($58,000 CN) against the first delivery milestone.
Research and Development Agreement
----------------------------------
On November 29, 2005, the Company entered into a research and development
agreement with the University of Quebec in which the University will provide HEC
Iowa with an Engine Controller Design which will be used in the production of
-49-
hydrogen engines and generator sets. The agreement took effect on October 1,
2005 and ended March 2, 2006. The total cost of the project was $94,380
($110,000 CN). The agreement calls for installments according to the following
schedule:
o $28,314 ($33,000 CN) upon the Agreements execution;
o on December 15, 2005, $28,314 ($33,000 CN);
o and $37,752 ($44,000 CN) upon the completion of the project and
delivery of the final report and prototypes of the controller.
At December 31, 2005, $56,628 ($66,000 CN) had been paid to the University of
Quebec for shared research and development expenses.
14. SUBSEQUENT EVENTS
Participation Agreement
-----------------------
The Company entered into a participation agreement with a television group to
complete certain marketing activities for the Company, and the Company must
complete participant questionnaires and provide editing assistance activities.
As a participant, the Company is required to pay a licensing fee of $28,700. The
licensing fee was paid in February 2006. Film production is anticipated to begin
sometime during April 2006.
Consulting and Training Agreement
---------------------------------
On February 27, 2006, the Company entered into an agreement with a consulting
company for an ISO 9000 training and implementation package. The cost of this
package is $18,570 with 40% payable in advance, 40% payable prior to the
consultant's second onsite visit and 20% payable ten days after the completion
of the ISO 9000 registration audit. Implementation is scheduled to begin March
29, 2006. The Company plans to submit for reimbursement of training expenses
under the Industrial New Jobs Training Program awarded August 23, 2005. The
total amount of the training award available is $160,000.
Contract Award
--------------
On March 17, 2006, HEC Canada was awarded a contract from Natural Resources
Canada to provide a "4+1" generator set which will be fueled by hydrogen. The
total contract price is $153,582 ($179,000 Canadian currency). The contract
calls for payments to HEC of $102,960 ($120,000 CN) upon delivery of project
specifications, and $33,462 ($39,000 CN) upon the delivery of the 4 + 1, and
training of local maintenance personnel, and $17,160 ($20,000 CN) upon
installation of 4 + 1. HEC will guarantee this purchase for one year of
operation or 6,000 hours, whichever comes first. During the first year of
operation, HEC will pay all repair costs involving personnel and parts sent to
the customer's site.
Public Relations Agreement
--------------------------
On March 15, 2006, the Company entered into an agreement with a firm to provide
public relations and strategic communication services as the Company's national
public relations agency of record. The agreement calls for a per month base
retainer of $5,000. Any hours worked above $5,000 per month are billed at the
firm's standard hourly rates. Either party may cancel this agreement with sixty
days written notice.
-50-
ITEM 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
On October 12, 2005, we dismissed Green Mt. Labs' independent
accountants, HJ & Associates, LLC and retained LWBJ, LLP of West Des Moines,
Iowa, as our independent accountants.
HJ & Associates' audit report to Green Mt. Labs' financial statements
for the years ended December 31, 2004 and 2003 includes a modification
expressing substantial doubt as to Green Mt. Labs' ability to continue as a
going concern, due to recent losses from operations, has a deficit in working
capital and a stockholders' deficit. The report contains no other adverse
opinion, disclaimer of opinion or modification as to uncertainty, audit scope or
accounting principle for either of the past two years. The decision to dismiss
HJ & Associates, LLC was related solely to the change in control of Green Mt.
Labs as reported in the Company's Form 8-K/A filed with the Securities and
Exchange Commission on September 6, 2005, as revised and filed on September 7,
2005. The Company's Board of Directors participated in and approved the decision
to change independent accountants.
In connection with its audit for the 2003 and 2004 fiscal years and
during interim periods until the date of dismissal, there have been no
disagreements with HJ & Associates, LLC, on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which disagreement, if not resolved to the satisfaction of HJ & Associates, LLC,
would have caused them to make reference thereto in their report on the
financial statements. There have been no reportable events (as defined in
regulation S-B Item 304 (a)(1)(iv)).
The Board of Directors voted to engage LWBJ, LLP on October 11, 2005 to
audit its financial statements for the year ended December 31, 2005.
ITEM 8A. CONTROLS AND PROCEDURES.
Our management, including our Chief Executive Officer (the principal
executive officer), Theodore G. Hollinger, and our Chief Financial Officer (the
principal financial officer), Sandra Batt, have reviewed and evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rule
13a-15(e) under the Securities Exchange Act of 1934, as amended) as of December
31, 2005. Based upon this review and evaluation, these officers have concluded
that our disclosure controls and procedures are effective to ensure that
information required to be disclosed in the reports that we file or submit under
the Exchange Act is recorded, processed, summarized and reported within the time
periods required by the forms and rules of the Securities and Exchange
Commission; and to ensure that the information required to be disclosed by an
issuer in the reports that it files or submits under the Exchange Act is
accumulated and communicated to our management including our principal executive
officers, or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure.
Our President and our Board of Directors are currently in the process
of working with our Chief Financial Officer to complete the design and
implementation of internal control and disclosure controls and procedures in
accordance with Sarbanes Oxley 404. Although this process, has not been
formalized we believe that the controls and procedures in place during the
fourth quarter have allowed us to secure information required to be disclosed,
within the time periods specified in the SEC's rules for the preparation of this
report.
-51-
PART III
ITEM 9. DIRECTORS, EXECUTIVES, OFFICERS, PROMOTERS, AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Our directors, executive officers and key employees of our operating groups at
the time of filing are as follows:
Name Age Position with the Company Held Since
---- --- ------------------------- ----------
Theodore G. Hollinger 64 Director, President, Chairman of the Board August 30, 2005
Rick L. Kremer 50 Director August 30, 2005
Michael A. Schiltz 44 Director, Secretary, Vice President of Operations August 30, 2005
Thomas Trimble 64 Director August 30, 2005
Tapan K. Bose 67 Director and President of HEC Canada August 30, 2005
Eugene V. Cordell 63 Director or Military & Government Contracts September 1, 2005
Sandra M. Batt 53 Chief Financial Officer December 5, 2005
Robert J. Mendlesky 60 Director of Engineering January 2, 2006
Joe E. Lewis 48 Vice President for Engine Sales February 6, 2006
Our entire board of directors is acting as the audit committee for the
company. Our board of directors does not currently have an audit committee
financial expert. We are in the process of recruiting new board members and hope
to identify one or more candidates that would qualify as a financial expert.
Forms 3, filed on behalf of Mr. Hollinger, Mr. Schiltz and Bose, were
amended to include information inadvertently omitted from the initial filing.
The Form 3 filed on behalf of Ms. Batt was filed late.
The company has not, to date, adopted a code of ethics because its
efforts have been focused upon the commencement of its operations. The Company
expects to do so during fiscal year 2006.
Theodore G. Hollinger, age 64. Ted Hollinger started his career in 1964
at Fairchild Semiconductor as a digital integrated circuit designer. In 1969, he
joined the design team at Advanced Micro Devices where he also designed
integrated circuits. In 1973 he joined Amdahl Computer to head their computer
memory system design effort. In 1975, Mr. Hollinger retired and served as a
consultant on integrated circuit design and processing to Lockheed Missiles and
Space and Linkabit Corp. In 1978, he joined Siliconix as applications manager
for all integrated circuits and in 1979, he became the Chief VMOS Engineer.
Mr. Hollinger founded Advanced Power Technology ("APT"), a power
semiconductor company in Bend, Oregon in 1984. Mr. Hollinger holds several key
power device patents now assigned to APT. In 1988, he founded Advanced Power
Controls - ONSITE as a subsidiary of Pacific Power & Light. In 1991, he moved
the company to Tennessee and incorporated it under the name APC-ONSITE. Over the
course of his career, Mr. Hollinger has been granted more that a dozen patents.
Mr. Hollinger joined Ecostar in November of 2000 as the Director of Power
Conversion Engineering, and from 2001 to 2002, he was Vice President of power
conversion at Ballard Power Systems. In 2003, Mr. Hollinger founded HEC Iowa and
presently serves as its President and Chief Technical Officer.
Rick L. Kremer, age 50. Mr. Kremer began selling and installing
electrical equipment in 1975 and subsequently founded two businesses, State Line
Agri, Inc. and State Line Equipment, Inc. He is currently President of State
Line Agri, a production hog facility. State Line Equipment, which was sold in
2001, was a manufacturer and seller of agricultural equipment. In March 2001,
Mr. Kremer became President of Stateline Power Corp., an Ohio-based manufacturer
and distributor of standby electric generators. Mr. Kremer attended Stark
Technical College in Canton, Ohio and Northeast Technical College in Lima, Ohio.
Mr. Kremer, under a verbal agreement began consulting for HEC in March 2006.
-52-
Michael A. Schiltz age 44. Mr. Schiltz was a senior partner with The
Merrill Company / Arnold Motor Supply until October 2005, initially as a
certified machinist from 1983 to 2001. In 2002, he became the division manager
of the cylinder head division and was the division manager of the engine
components division since 2004. Mr. Schiltz joined the Company as Vice President
of Operations in October of 2005.
Thomas Trimble, age 64. Mr. Trimble has worked in the industrial engine
business for 43 years while serving in various positions such as parts and
service manager, sales manager and operations general manager. For the past 42
years, he has been with Engine Center for North Coast Ford Industrial and served
as a Vice President for the past 7 years. Mr. Trimble holds an Associates Degree
in Business Administration from Wayne State University.
Tapan K. Bose, age 67. Mr. Bose received his Ph.D. in physics from the
University of Louvain, Belgium and his postdoctoral studies at the University of
Brown. Mr. Bose is a past director of the Hydrogen Research Institute and is
President of the Canadian Hydrogen Association. Currently, he is a member of the
Hydrogen Technical Advisory Group of Natural Resources Canada and past member of
the Board of Directors of the National Hydrogen Association in the United
States. Professor Bose is author and co-author of more than 140 publications, 4
books and 14 patents.
Eugene V. Cordell, age 63. Mr. Cordell joined the company in September
2005, working with government and military contracts. He graduated from Oregon
State University in 1965 with Bsci in Economics. He then served as a Captain in
the USMC where he was a pilot (Huey helicopter gunships and OV-10 Bronco
observation aircraft) and served in Vietnam in 1968-69. He later served in the
Army National Guard as a pilot, State Training Officer and Intelligence Officer.
Mr. Cordell has done considerable contract work for the military and for
military suppliers. He was the co-founder of Recon Technology a venture backed
company in Bend, Oregon.
Sandra M. Batt, age 53. Ms. Batt joined the Company on December 5, 2005
as its Chief Financial Officer. Prior to that time, she served as Chief
Financial Officer for Golden Grain Energy in Mason City, Iowa from September
2004 to December 2005. She graduated from Briar Cliff University with a B.A. in
accounting. From 1998 to 2003, Ms. Batt was employed as finance director at
Sbemco International, Inc. She is a certified public accountant.
Robert J. Mendlesky, age 60. Mr. Mendlesky, joined the Company in
January 2006 as Director of Engineering. Until January 1, 2006 he was employed
as Program Engineer for Aftermarket Engineering & Remanufacturing Operations for
Ford Motor Company. Mr. Mendlesky has been employed by Ford Motor Company in
various capacities since 1994, including the following positions with Ford Power
Products Division: Senior Special Project Coordinator; Manager - Engineering
Sales Coordination; Engineering Manager; New Product Programs Manager;
Applications Engineering Manager; and Senior Product Design Engineer. Mr.
Mendlesky earned a B.A. in Business Administration from Marian College in Fond
du Lac, Wisconsin, and an Associate Degree in Engine Technology from Moraine
Park Technical College.
Joe E. Lewis, age 48. Mr. Lewis joined the Company in February of 2006
as Vice President of Engine Sales. Prior to his employment with the company he
was the Sales Manager for Performance Product Technologies in Stillwater,
Oklahoma from 2004 to 2006. Mr. Lewis served as a training officer in the US
Navy's Sea Cadet Corp's from 2000 to 2004. From 1997, through 2004, he was the
owner and manager of CJ Worldwide Export, Inc. in Ft. Lauderdale, Florida. Mr.
Lewis' education includes an associate's degree from McFadder College, US Naval
Officer Leadership Training, John Deere Dealership Training, Marine Power EFI
School, Volvo Penta Dealership Training and was a U.S. Coast Guard Captain.
-53-
ITEM 10. EXECUTIVE COMPENSATION.
Prior to the acquisition of HEC Iowa, we did not have a bonus, profit
sharing, or deferred compensation plan for the benefit of employees, officers or
directors. We did not pay any salaries or other compensation to our officers,
directors or employees for the years ended December 31, 2004 and 2003.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-term Compensation
Awards Payouts
Securities
underlying
Restricted options/ LTIP All
Name & Principal Position Year Salary(1) Bonus Other Stock SARs Payout Other
(a) (b) (c) (d) (e) (f)(2) (g) (h) (i)
Theodore G. Hollinger,
President 2005 $81,667 -- $53,000(3) $170,000(3) -- -- --
Michael A. Schiltz, Secretary
and Vice President
of Operations 2005 18,115 -- 12,000(4) 24,000(4) 84,000 -- --
Tapan K. Bose, President and
Director of HEC Canada 2005 35,654 -- 10,000(5) 10,000(5) 180,000 -- --
(1) Effective as of September 1, 2005, Theodore G. Hollinger
has been paid an annualized salary of $125,000 as President of the
Company; Michael A. Schiltz has been paid an annualized salary of
$90,000 as Vice President of Operations and Tapan Bose has been paid an
annualized salary of $100,000 as Director of our Canadian operations.
(2) As of December 31, 2005, 206,000 shares of restricted
stock had been issued to the above individuals, valued at $204,000,
based on the stock price in the Private Offering. There was no reported
closing price for the date of grant, September 1, 2005. Although the
Company does not expect to pay any dividends in the foreseeable future,
these shares would be eligible to receive any such dividend.
(3) 50,000 of these shares of restricted stock vested on
September 1, 2005. The remaining shares will vest as to 45,000 shares
on September 1, 2006; 45,000 shares on September 1, 2007; 40,000 shares
on September 1, 2008; and 40,000 shares on September 1, 2009. The
amount in column (e) also includes 3,000 shares initially issued to
Dana Hollinger, Mr. Hollinger's deceased wife.
(4) 12,000 of these shares of restricted stock vested on
September 1, 2005. The remaining shares will vest as to 6,000 shares on
September 1, 2006; 6,000 shares on September 1, 2007; 6,000 shares on
September 1, 2008; and 6,000 shares on September 1, 2009.
(5) 10,000 of these shares of restricted stock vested on
September 1, 2005. The remaining shares will vest as to 5,000 shares on
September 1, 2006; and 5,000 shares on September 1, 2007
OPTION/SAR GRANTS IN LAST FISCAL YEAR
[Individual Grants]
Percent of Total
Options/SARs
Number of Securities Granted to
Underlying Options/ Employees in Exercise or
Name SARs Granted Fiscal Year Base Price ($/Sh) Expiration Date
(a) (b) (c) (d) (e)
Michael A. Schiltz 84,000(1,3) 9.84% $1.00 August 31, 2015
Tapan K. Bose 180,000(2,3) 21.08% $1.00 August 31, 2015
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(1) These options became exercisable as to 18,000 shares on
September 1, 2005; become exercisable as to 19,000 shares on September
1, 2006; as to 19,000 shares on September 1, 2007; as to 14,000 shares
on September 1, 2008; and as to 14,000 shares on September 1, 2009.
(2) These options became exercisable as 20% of the shares
underlying the options on September 1, 2005. The remaining options vest
on September 1, 2006 as to 20% and 20% per year thereafter on September
1 of each year until fully vested.
(3) These options have an exercise price of $1 per share,
based on the share price in the Private Offering.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
Number of securities remaining
Number of Securities to Weighted-average available for future issuance
be issued upon exercise exercise price of under equity compensation plans
of outstanding options, outstanding options, (excluding securities reflected
warrants and rights warrants and rights in column (a))
Plan Category (a) (b) (c)
Equity compensation plans
approved by security
holders -- -- --
Equity compensation plans
not approved by security
holders 923,400(1) $1.32 720,000(2)
Total 923,400(1) $1.32 720,000
(1)Includes 474,000 incentive stock options and 380,000
nonqualified stock options issued under the Company's Incentive
Compensation Plan and warrants to certain finders in the Private
Offering, entitling the finders to purchase 69,640 shares. Does not
include 426,000 shares of restricted stock issued under the Company's
Incentive Compensation Plan, 304,000 of which remain subject to
forfeiture.
(2)This amount equals the number of shares remaining to be
issued under the Company's Incentive Compensation Plan, which plan will
be presented to shareholders for approval at the annual meeting.
Security Ownership of Certain Beneficial Owners.
------------------------------------------------
The following table sets forth the security and beneficial ownership
for each class of equity securities of the Company for any person who is known
to be the beneficial owner of more than five percent of the Company and for all
executive officers and directors of the company.
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Name and Address of Amount and Nature of Percent
Title of Class Beneficial Owner Beneficial Ownership of Class
Common Theodore G. Hollinger 16,541,801(1) 65.75%
602 East Fair Street
Algona, IA 50511
Common Michael A. Schiltz 72,750(2) *
602 East Fair Street
Algona, IA 50511
Common Rick L. Kremer 120,000(3) *
9159 State Route 118
P.O. Box 248 Ansonia, OH 45303
Common Thomas Trimble 20,000(4) *
2341 Hilton Road
Ferndale, MI 58220-1593
Common Tapan K. Bose 80,465(5) *
3965 DeChateauford
Trois-Rivieres, Quebec
Canada G8Y 2A8
Common Officers and Directors as a 16,834,016 66.77%
Group(6)
* = less than 1%
(1) Mr. Hollinger received 16,297,200 shares of the Company's
common stock as a result of its acquisition on August 30, 2005 of
Hydrogen Engine Center, Inc., an Iowa corporation. Immediately prior to
the acquisition, Mr. Hollinger was the sole shareholder of the Iowa
corporation and these shares were issued in exchange for his shares in
the Iowa corporation.
Mr. Hollinger received 20,000 shares of restricted stock on
September 1, 2005 under the Company's Incentive Compensation Plan for
his services as a Director. This award vests immediately as to 10,000
shares; on September 1, 2006 as to 5,000 shares; and on September 1,
2007, as to 5,000 shares.
Mr. Hollinger received 200,000 shares of restricted stock on
September 1, 2005 under the Company's Incentive Compensation Plan for
services as an employee. This award vests 20% immediately and 20% per
year thereafter until fully vested.
Mr. Hollinger received 3,000 shares of stock which were
reserved by the Board of Directors to be granted to his wife, Dana
Hollinger, under the Company's Incentive Compensation Plan for services
as an employee. Mrs. Hollinger is now deceased and these shares have
been issued directly to Mr. Hollinger as her heir.
Mr. Hollinger received 21,601 shares of stock on September 1,
2005, upon conversion of a promissory note dated September 15, 2003 and
issued to Mr. Hollinger in exchange for a loan of $17,280 to the
company. Under the terms of the promissory note, these shares were
issued at a conversion price of $0.80 per share.
(2) Includes currently exercisable options to purchase 18,000
shares for $1.00 per share under the Company's Incentive Compensation
Plan.
(3) Includes 90,000 shares of restricted stock that are
subject to forfeiture under the Company's Incentive Compensation Plan.
(4) Includes 10,000 shares of restricted stock that are
subject to forfeiture under the Company's Incentive Compensation Plan.
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(5) Includes 10,000 shares of restricted stock that are
subject to forfeiture under the Company's Incentive Compensation Plan
and currently exercisable options to purchase 36,000 shares for $1.00
per share under the Company's Incentive Compensation Plan.
(6) These amounts represent shares beneficially owned by Mr.
Hollinger, Mr. Schiltz, Mr. Kremer, Mr. Trimble, and Mr. Bose,
including the options and restricted shares as described above.
Except as described above, the security ownership of each of the
above beneficial owners is also the owner of record for the like number of
shares.
There are currently no arrangements that would result in a change in
our control.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
We entered into an agreement dated July 11, 2003 with The Merrill
Company dba as Arnold Motor Supply, Inc. ("AMS") This agreement was executed by
Michael A. Schiltz on behalf of AMS. Mr. Schiltz became a Director of the
Company in January 2005 and became an employee of the Company as of September 1,
2005. The AMS agreement will expire in July 2006. Under this agreement, we have
purchased engine parts and related supplies from AMS, and AMS has rebuilt
engines for us, for an aggregate compensation to AMS of $73,791 from
commencement of our operations through December 31, 2005. We anticipate
purchases of approximately $500,000 from AMS in 2006.
In 2004, Mr. Schiltz was a senior partner with The Merrill Company when
Merrill loaned $100,000 to the company under the terms of a convertible
promissory note that was converted into 125,000 shares of stock as of September
1, 2005. Mr. Schiltz is an officer and director of the Company.
Thomas Trimble is Vice President and General Manager for the Engine
Center in Ferndale, MI. The Company and the Engine Center entered into a
Cooperation Agreement dated May 30, 2003 under which Engine Center supplies
various engine components to the Company. The agreement is a "preferred source"
and "preferred customer" arrangement. From the commencement of our operations
through December 31, 2005, we have paid an aggregate of $46,370 to the Engine
Center. We believe that all products and services are paid for under normal
business practices and under the customary prices charged by the Engine Center
to its other customers. Mr. Trimble is a Director of the Company.
ITEM 13. EXHIBITS.
Exhibit No. Description
----------- -----------
2.2 Revised and Amended Agreement and Plan of Merger with Hydrogen Engine Center, Inc. and Green
Mt. Acquisitions, Inc. (Incorporated by reference to the preliminary information statement
filed with the SEC on July 12, 2005).
3.1 Certificate of Incorporation (Previously filed as an Exhibit to the Form 10-SB filed January 8,
2004)
3.2 Bylaws (Previously filed as an Exhibit to the Form 10-SB filed January 8, 2004)
3.3 Certificate of Amendment to Articles of Incorporation (Previously filed as an Exhibit to the
Form 10-QSB filed 11-21-2005)
3.4 Amendment to Bylaws (Previously filed as an Exhibit to the Form 10-QSB filed 11-21-2005)
4.1 Instrument defining rights of stockholders (See Exhibits No. 3.1-3.4)
10.1 Iowa Department of Economic Development Enterprise Zone Program Agreement (Previously filed as
an Exhibit to the Form 10-QSB filed 11-21-2005)
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Exhibit No. Description
----------- -----------
10.2 Iowa Department of Economic Development PIAP Loan Agreement (Previously filed as an Exhibit to
the Form 10-QSB filed 11-21-2005)
10.3 Iowa Department of Economic Development CEBA Loan Agreement (Previously filed as an Exhibit to
the Form 10-QSB filed 11-21-2005)
10.4 Construction Agreement (Previously filed as an Exhibit to the Form 10-QSB filed 11-21-2005)
10.5 Lease (Previously filed as an Exhibit to the Form 10-QSB filed 11-21-2005)
10.6 Loan Agreement - City of Algona (Previously filed as an Exhibit to the Form 10-QSB filed
11-21-2005)
10.7 Loan Agreement Algona Area Economic Development Corporation (Previously filed as an Exhibit to
the Form 10-QSB filed 11-21-2005)
10.8 Jobs Training Agreement (Previously filed as an Exhibit to the Form 10-QSB filed 11-21-2005)
10.9 Consortium Agreement (Previously filed as an Exhibit to the Form 10-QSB filed 11-21-2005)
10.10 Agreement with Universite Du Quebec a Trois-Rivieres (Previously filed as an Exhibit to the
Form 10-QSB filed 11-21-2005) 10.11 Mortgage to Iowa State Bank dated 12-16-2005.
10.12 Purchase Contract with Department of Natural Resources Canada dated March 17, 2006
10.13 Mortgage to Algona Area Economic Development Corporation
31.1 Certification pursuant to Item 601 of Regulation S-B, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, by Theodore G. Hollinger, the Company's Chief Executive Officer.
31.2 Certification pursuant to Item 601 of Regulation S-B, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, by Sandra Batt, the Company's Chief Financial Officer.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, by Theodore G. Hollinger, the Company's Chief Executive Officer.
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, by Sandra Batt, the Company's Chief Financial Officer.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit Fees
----------
On October 12, 2005, the Company appointed LWBJ, LLP of West Des
Moines, Iowa, as the Company's auditors following the dismissal of HJ &
Associates, LLC. Fees billed by LWBJ, LLP and fees incurred, for professional
services are estimated to be $120,000 for the year ended December 31, 2005 and
$32,100 for the year ended December 31, 2004, including fees associated with the
annual audit and review of the Company's September 30, 2005 quarterly report on
Form 10-QSB. Fees for these services are billed as incurred and recorded by the
Company as invoices are received.
Audit-Related Fees
------------------
Fees for audit-related services totaled $0 for the year ended December
31, 2005. Audit-related fees incurred for the year ended December 31, 2004 were
$0.
Tax Fees
--------
No fees were billed by LWBJ, LLP for tax services.
All other Fees
--------------
No fees were billed by HJ & Associates or LWBJ, LLP, for professional
services rendered during the fiscal years ended December 31, 2005 and December
31, 2004 other than those specified above.
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The entire Board of Directors, acting as the Audit Committee,
pre-approves audit engagement terms prior to the commencement of any audit work.
All services described above were approved by the Board of Directors
acting as the Audit Committee pursuant to SEC Regulation S-X, Rule
2-01(c)(7)(i).
Notes about Forward-looking Statements
Statements contained in this current report which are not historical
facts, including some statements regarding the effects of the merger, acceptance
of the company's products, levels of competition for the company, new products
and technological changes, the company's dependence on third-party suppliers,
and other risks detailed elsewhere in this report, may be considered
"forward-looking statements" under the Private Securities Litigation Reform Act
of 1995. Forward-looking statements are based on current expectations and the
current economic environment. We caution readers that such forward-looking
statements are not guarantees of future performance. Unknown risks and
uncertainties as well as other uncontrollable or unknown factors could cause
actual results to materially differ from the results, performance or
expectations expressed or implied by such forward-looking statements.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
HYDROGEN ENGINE CENTER., INC.
Date: March 31, 2006 By /s/ THEODORE G. HOLLINGER
----------------------------------------
Theodore G. Hollinger
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Date: March 31, 2006 By /s/ THEODORE G. HOLLINGER
----------------------------------------
Director
Date: March 31, 2006 /s/ MIKE SCHILTZ
----------------------------------------
Mike Schiltz
Director
Date: March 31, 2006 /s/ TOM TRIMBLE
----------------------------------------
Tom Trimble
Director
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