U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 33-3362-D
KLEENAIR SYSTEMS, INC.
(Exact name of small business issuer as specified in its charter)
State of Nevada 87-0431043
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification #)
1711 Langley Avenue, Irvine CA 92614
(Address of principal executive offices)
(949) 955-3492
(Registrant's telephone number)
There were 16,425,162 shares of common stock, $0.001 Par Value,
outstanding as of April 15, 2002.
Transitional Small Business Disclosure Format (check one); Yes [ ] No [X]
1
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
REPORT ON REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors,
KleenAir Systems, Inc.
Irvine, CA
We have reviewed the accompanying balance sheet of KleenAir Systems, Inc. (a
development stage enterprise) (the "Company") as of March 31, 2002, and the
related statements of operations, stockholders' equity, and cash flows for
the three months ended March 31, 2002 and 2001. We have also reviewed the
cumulative statements of operations, stockholders' equity and cash flows for
the period from January 1, 1995 through March 31, 2002. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical review
procedures to financial data and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an
audit conducted in accordance with generally accepted auditing standards,
the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such
an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet as of December 31, 2001, and the related
statements of operations, stockholders' equity and cash flows for the year
then ended (not presented herein); and, in our report dated April 9, 2002,
we expressed an opinion on those financial statements that was qualified
based on the Company's ability to continue as a going concern. In our
opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 2000 is fairly stated in all
material respects in relation to the consolidated balance sheet from which
it has been derived.
/s/ Robert Early & Company
ROBERT EARLY & COMPANY, P.C.
Abilene, Texas
May 16, 2002
2
KLEENAIR SYSTEMS, INC.
(A Development Stage Company)
BALANCE SHEETS
March 31, December 31,
2002 2001
---------- ----------
Unaudited
ASSETS
CURRENT ASSETS:
Cash $ 624,092 $ 33,479
Accounts receivable 1,600 1,600
Note receivable 120,000 -
Prepaid expenses 139,714 119,862
---------- ----------
Total Current Assets 885,406 154,941
PROPERTY AND EQUIPMENT (net) 63,999 55,237
OTHER ASSETS:
Patent license 161,858 152,781
---------- ----------
TOTAL ASSETS $1,111,263 $ 362,959
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable ($71,615 and $74,899 due
to related parties, respectively) $ 107,997 $ 95,931
Advances from directors 95,850 95,850
---------- ----------
Total Current Liabilities 203,847 191,781
STOCKHOLDERS' EQUITY:
Preferred stock, series A, $.001 par value
(10,000,000 shares authorized, none
outstanding)
Common stock, $.001 par value (50,000,000
shares authorized, 16,425,162 and
15,391,069 outstanding, respectively) 16,425 15,391
Additional paid-in capital 4,789,662 3,857,649
Deficit accumulated during the development stage (3,898,671) (3,701,862)
---------- ----------
Total Stockholder's Equity 907,416 171,178
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $1,111,263 $ 362,959
========== ==========
See accompanying accountants' report and selected information.
3
KLEENAIR SYSTEMS, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
For Three Months Ended March 31, 2002 and 2001
Cumulative
During Devel-
2002 2001 opment Stage
--------- -------- -----------
REVENUES:
Sale of product license $ - $ 50,000 $ 119,188
Services - 3,000 4,600
--------- -------- -----------
Total Revenues - 53,000 123,788
--------- -------- -----------
PRODUCT DEVELOPMENT COSTS 61,948 29,968 766,646
--------- -------- -----------
OPERATING EXPENSES:
Personnel costs and director fees - - 582,602
Consultants 45,873 - 1,650,618
Professional fees 5,012 1,207 238,427
Office expenses 654 - 26,279
Depreciation 4,190 3,710 32,441
Advertising and promotion 45,142 89,063 199,354
Loss on cancellation of licensing agreements - - 19,860
Rent 7,500 7,500 58,750
Other expenses 26,491 14,940 150,674
Unknown sources prior to current ownership - - 151,518
--------- -------- -----------
Total operating expenses 134,862 116,420 3,110,523
--------- -------- -----------
(LOSS) FROM OPERATIONS (196,810) (93,388) (3,753,381)
OTHER INCOME AND (EXPENSES):
Interest income 1 49 2,501
Amortization of discount on receivables - - 20,259
--------- -------- -----------
(Loss) Before Extraordinary Item (196,809) (93,339) (3,730,621)
Extraordinary Item:
Costs of terminated acquisition - - (168,050)
--------- -------- -----------
Net (Loss) $(196,809) $(93,339) $(3,898,671)
========= ======== ===========
Basic earnings per share:
(Loss) Per Share Before Extraordinary Item $ (0.01) $ (0.01) $ (0.67)
(Loss) Per Share From Extraordinary Item - - (0.03)
--------- -------- -----------
Net (Loss) Per Share $ (0.01) $ (0.01) $ (0.70)
========= ======== ===========
Weighted Average Shares Outstanding 16,030,815 12,579,082 5,603,639
========== ========== ==========
See accompanying accountants' report and selected information.
4
KLEENAIR SYSTEMS, INC.
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY
Accumulated
Additional Unearned Deficit During
Preferred Stock Common Stock Paid-In Compen- Development
Shares Amount Shares Amount Capital sation Stage
--------- -------- --------- ---------- --------- --------- ----------
BALANCES, 1/1/95 - $ - 74,132 $ 74 $ 151,444 $ - $ (151,518)
Stock issued for cash - - 27,334 27 66,982 - -
For adjustment - - 534 1 - - -
For consulting services - - 86,148 86 279,439 - -
For professional services - - 4,666 5 12,745 - -
For purchase of patent rights 933,334 934 60,000 60 13,905 - -
For directors' compensation - - 4,000 4 22,496 - -
For officers' compensation 33,334 33 9,334 9 194,958 - -
Other contributed capital - - - - 2,367 - -
Options compensation - - - - 70,313 (152,016) -
Net loss - - - - - - (329,289)
--------- -------- --------- ---------- --------- --------- ----------
BALANCES, 12/31/95 966,668 967 266,148 266 814,649 (152,016) (480,807)
Stock issued for services 13,332 13 24,666 25 201,837 (78,750) -
For officers' compensation 33,332 33 - - 15,592 (15,625) -
For aborted acquisition - - 40,000 40 140,510 - -
Exercise of options - - 75,000 75 112,424 - -
Conversion to common (318,666) (319) 318,666 319 - - -
Net Loss - - - - - 187,346 (716,511)
--------- -------- --------- ---------- --------- --------- ----------
BALANCES, 12/31/96 694,666 694 724,480 725 1,285,012 (59,045) (1,197,318)
Stock issued for cash - - 120,000 120 14,880 - -
For officers' compensation 33,334 33 - - 3,842 (3,875) -
Conversion to common (100,000) 100) 100,000 100 - - -
Net loss - - - - - 37,979 (55,438)
--------- -------- --------- ---------- --------- --------- ----------
BALANCES, 12/31/97 628,000 627 944,480 945 1,303,734 (24,941) (1,252,756)
(Continued on next page)
<FN>
See accompanying accountants' report and selected information.
5
</FN>
KLEENAIR SYSTEMS, INC.
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY
(Continued)
Accumulated
Additional Unearned Deficit During
Preferred Stock Common Stock Paid-In Compen- Development
Shares Amount Shares Amount Capital sation Stage
--------- -------- ---------- ---------- ---------- --------- -----------
Stock issued for cash - $ - 800,000 $ 800 $ 199,200 $ - $ -
For services - - 2,120,000 2,120 92,255 - -
For officer/director services - - 320,000 320 59,680
For diesel license - - 2,000,000 2,000 60,500 - -
Conversion to common (403,334) (403 403,334 403 - - -
Net loss - - - - - 24,941 (305,561)
--------- -------- ---------- ---------- ---------- --------- -----------
BALANCES, 12/31/98 224,666 224 6,587,814 6,588 1,715,369 - (1,558,317)
Stock issued for cash - - 146,800 147 35,653 - -
For services - - 1,103,334 1,103 247,179 - -
For equipment - - 33,200 33 8,267 - -
For officer/director services - - 1,425,000 1,425 408,808 - -
Conversion to common (61,334) (61) 61,334 61 - - -
Net loss - - - - - - (802,722)
--------- -------- ---------- ---------- ---------- --------- -----------
BALANCES, 12/31/99 163,332 163 9,357,482 9,357 2,415,276 - (2,361,039)
Stock issued for cash - - 1,414,000 1,414 357,336 - -
For services - - 1,642,666 1,643 600,024 - -
As promotion - - 1,600 2 3,199 - -
Conversion to common (163,332) (163) 163,334 163 - - -
Net loss - - - - - - (717,012)
--------- -------- ---------- ---------- ---------- --------- -----------
BALANCES, 12/31/00 - - 12,579,082 12,579 3,375,835 - (3,078,051)
Stock issued for cash - - 195,000 195 104,805 - -
For services - - 1,749,487 1,749 293,087 - -
For officer/director services - - 850,000 850 77,690 - -
For rent - - 17,500 18 6,232 - -
Net loss - - - - - - (623,811)
--------- -------- ---------- ---------- ---------- --------- -----------
BALANCES, 12/31/01 - $ - 15,391,069 $ 15,391 $3,857,649 $ - $(3,701,862)
Stock issued for cash - - 1,000,000 1,000 899,000 - -
For services - - 34,093 34 33,013 - -
Net loss - - - - - - (196,809)
BALANCES, 03/31/02 - $ - 16,425,162 $ 16,425 $4,789,662 $ - $(3,898,671)
========= ======== ========== ========== ========== ========= ===========
<FN>
See accompanying accountants' report and selected information.
6
</FN>
KLEENAIR SYSTEMS, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
For Three Months Ended March 31, 2002 and 2001
Cumulative
During Devel-
2002 2001 opment Stage
--------- -------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $(196,809) $(93,339) $(3,898,671)
Adjustments to reconcile net income/(loss)
to net cash provided by operations:
Losses prior to current ownership - - 151,518
Depreciation 4,190 3,710 32,441
Amortization of:
Prepaid expenses 39,688 89,063 707,846
Deferred services - - 250,267
Stock issued for services 33,047 - 1,594,005
Stock issued for extraordinary loss - - 140,550
Changes in operating assets and liabilities:
Accounts and note receivable (120,000) 10,380 (121,600)
Advances to consultants - - 20,000
Prepaid expenses (59,540) - (260,340)
Trade accounts payable 12,066 (21,225) 107,997
--------- -------- -----------
NET CASH USED BY OPERATING ACTIVITIES (287,358) (11,411) (1,275,987)
--------- -------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment (12,952) (1,428) (88,139)
Patent licensing costs (9,077) (2,298) (84,458)
--------- -------- -----------
NET CASH USED IN INVESTING ACTIVITIES (22,029) (3,726) (172,597)
--------- -------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuing stock 900,000 - 1,974,459
Additional capital contributions - - 2,367
Advances from directors - - 95,850
--------- -------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 900,000 - 2,072,676
--------- -------- -----------
NET INCREASE/(DECREASE) IN CASH 590,613 (15,137) 624,092
CASH AT BEGINNING OF YEAR 33,479 24,365 -
--------- -------- -----------
CASH AT END OF PERIOD $ 624,092 $ 9,228 $ 624,092
========= ======== ===========
SUPPLEMENTAL DISCLOSURES:
Cash payments for:
Interest $ - $ - $ -
Income taxes - - -
Non-cash investing and financing transactions:
Stock issued for:
Compensation and directors fees - - 648,108
Services and prepaid services 33,047 - 1,498,782
Equipment - - 8,300
Patent licensing - - 14,900
Repurchase of U.S. diesel license - - 62,500
Acquisition of National Diversified
Telecom, Inc. - - 140,550
Sale of marketing licenses for notes
receivable - - 1,736,558
See accompanying accountants' report and selected information.
7
KLEENAIR SYSTEMS, INC.
(A Development Stage Enterprise)
SELECTED INFORMATION FOR FINANCIAL STATEMENTS
March 31, 2002
(Unaudited)
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions of Regulation S-B. They do
not include all information and footnotes required by generally accepted
accounting principles for complete financial statements. However, except as
disclosed herein, there has been no material change in the information
included in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 2001. In the opinion of Management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. The report of Robert Early & Company, P.C.
commenting on their review accompanies the condensed financial statements
included in Item 1 of Part 1. Operating results for the three-month period
ended March 31, 2002, are not necessarily indicative of the results that may
be expected for the year ending December 31, 2002.
NOTE 2: PROPERTY AND EQUIPMENT
The Company has purchased testing equipment, test vehicles, and office
equipment and furniture as presented in the following table. Depreciation
expense for the first quarter of 2002 and 2001 was $4,190 and $3,710,
respectively.
Office furniture and equipment $ 10,369
Test vehicle 5,750
Analysis equipment 80,322
---------
96,441
Accumulated depreciation (32,442)
---------
Net property & equipment $ 63,999
=========
NOTE 3: PREPAID EXPENSES AND AMORTIZATION
The Company frequently prepays for services to be rendered either in cash or
by stock issuance. These transactions are recorded as prepaid expenses and
amortized over the period covered by the agreement. During the current
periods presented, these amortization costs have been included in
advertising and promotion, although this is not necessarily true for the
cumulative amounts presented. Amortization totaled $39,688 and $89,063 in
the three months ended March 31, 2002 and 2001, respectively.
NOTE 4: SALE OF LICENSE
During the first quarter of 2001, the Company sold certain marketing
licenses regarding patents to its new carburetor to Ecologic, LLC for
$50,000.
8
NOTE 5: STOCK TRANSACTIONS
During the first quarter of 2002, the Company issued a total of 14,093
restricted shares valued at $10,697 for research and development services
and sales promotion. Another 20,000 unrestricted S-8 shares valued at
$22,350 were issued to a consultant for business promotion. The Company
also sold 1,000,000 shares for $900,000 pursuant to a private placement.
NOTE 6: NOTE RECEIVABLE
During the first quarter of 2002, the Company lent $120,000 to a licensee.
This loan is expected to be repaid during the second quarter.
NOTE 7: SUBSEQUENT EVENTS
During April 2002, the Company completed negotiations to acquire Carbon
Cloth Technologies, Inc., a California corporation ("CCT"). CCT is a
manufacturer of automotive thermal management systems. Its Carbon Guard(TM)
product is currently installed on a number of New York City Transit
Authority buses as enhancements for the operating efficiency of particulate
traps. It is expected that this product will generate meaningful revenues
during the balance of this year and make a significant contribution to the
Company's overhead expense. It is also expected that there will be a
synergy of sales from the combination of presentations for the Company's
emission control device and CCT's products.
CCT began sales of its products during the fourth quarter of 2001. Prior to
that time, it had spent several years developing and testing its products
for racing applications before porting its products to commercial uses.
The Company is issuing a total of 1,000,000 shares for this acquisition.
Out of this total, 166250 shares are to be issued pursuant to employment and
consulting agreements.
This acquisition was reported on a Form 8-K dated April 30, 2002 and filed
on May 14, 2002. As stated in that filing, financial statements and pro
forma combined financial information will be presented in an amendment filed
on or before July 15, 2002.
9
Item 2. Management's Discussion and Plan of Operation
The Company was incorporated under the laws of the State of Nevada on
February 4, 1986, under the name of Covington Capital Corporation.
In April, 1995, under the name Investment and Consulting International,
Inc., the Company acquired a patent for a proprietary device, designed to
neutralize nitrogen oxide in automobile emissions, from a separate company
which was then known as KleenAir Systems, Inc. Simultaneously with the
acquisition of the patent, the Company acquired the right to use the
corporate name KleenAir Systems, Inc..
Since acquiring the patent in 1995, the Company has been a developmental
stage company and has worked towards the completion of the development and
testing of the NOxMaster(R) technology. This technology is protected by the
following patents which are owned by the Company: US Patent # 5,224,346
issued in 1993, US Patent # 5,609,026 issued in 1997 and, US Patent #
5,992,141 issued in 1999.
The Company has applied for and maintained patent protection under the
Patent Cooperation Treaty (PCT) to protect its intellectual property in a
variety of countries that are significant producers of automotive products.
Patent awards have now been confirmed for the following countries in Europe:
the UK, Germany, France, Italy, Spain, and Sweden. Further patent awards
for Japan, Brazil and China are expected soon.
The Company has applied for additional patents related to its NOxMaster
technology and in addition has applied for a patent on a new emission
control device, the Sonic Flow Carburetor, which atomizes fuel on gasoline
powered engines, enhancing operating efficiency and reducing emissions.
The Company has recently leased new 10,000 square foot R & D facilities at
1711 Langley, Irvine, CA 92614. The Company has also acquired a new chassis
dynamometer in addition to its engine dynamometer to cope with increasing
levels of R & D engine and device testing programs as it prepares for
commercializing its technology.
The Company is in the final phase of its London Taxi Testing Program funded
by a U.K. government grant. This in-service test involving four London
taxicabs started in January 2002 and is expected to be completed in
September 2002.
Test systems have also been installed on a Dennis refuse collection truck
and a Mercedes-Benz Sprinter 16 passenger bus, both operated by the Borough
of Hounslow in London. A U.K. government grant has also been awarded for a
test and evaluation program on both these vehicles.
NOxMaster(R) systems have also been ordered by four other London Boroughs
for test and evaluation and are expected to be installed by the end of June
2002 on both refuse collection trucks and buses.
U.S. testing continues of the NOxMaster(R) Diesel Catalytic Converter together
with its NOxMaster(R) Ammonia Injection System to present an integrated
system for the elimination of emissions from diesel powered mobile sources.
10
The Company's technology was successfully tested by the City of Houston
along with a number of competing technologies with the results being
published in February 2002. A level of 82% NOx reduction and 92%
particulate reduction was achieved. The tests were conducted by the Company
for its licensee Extengine Transport Systems under the brand name ADEC.
The Company has received an EO certification from the California Air
Resources Board (CARB) for off-road and stationary engine applications,
which will enable it to commence sales of its products in California. EO
certification for on-road applications is expected shortly.
The Company is preparing to meet CARB and EPA Retrofit Verification
requirements for heavy-duty vehicles on its NOxMaster(R) NOx reduction
system. It will also seek certification of the combination package of its
Oxidizing Particulate Trap (OPT) with the NOxMaster(R) for high particulate
reduction as well as high NOx reduction.
The Company has acquired Carbon Cloth Technologies, Inc. ("CCT"), of
Malibu, California. CCT is a manufacturer of automotive thermal management
systems which technology is complementary to the Company's existing
technology. Its Carbon Guard is currently installed on a number of New
York City Transit Authority buses as enhancements for the operating
efficiency of its installed base of particulate traps. It is expected that
this product will generate meaningful revenues during the balance of this
year and make a significant contribution to the Company's overhead expense.
The Company is actively seeking sources of funding for its operating capital
requirements both to complete its test and evaluation programs and to
support initial sales and production.
The Company is negotiating potential licensing and other commercial
arrangements with certain international companies in the automotive
industry, subject to completion of satisfactory test and evaluation
programs.
Disclosure Regarding Forward-Looking Statements
Where this Form 10-QSB includes "forward-looking" statements within the
meaning of Section 27A and Section 21E of the Securities Act, the Company
desires to take advantage of the "safe harbor" provisions thereof.
Therefore, the Company is including this statement for the express purpose
of availing itself of the protections of such safe harbor provisions with
respect to all of such forward-looking statements. The forward-looking
statements in this Form 10-QSB reflect the Company's current views with
respect to future events and financial performance. These forward-looking
statements are subject to certain risks and uncertainties that could cause
actual results to differ from those anticipated. These risks include, but
are not limited to, economic conditions, changes in environmental
regulations, the market for venture capital, etc. In this Form 10-QSB, the
words "anticipates," "believes," "expects," "intends," "future" and similar
expressions identify forward-looking statements. The Company undertakes no
obligation to publicly revise these forward-looking statements to reflect
events or circumstances that may arise after the date hereof. All
subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by this section.
11
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
Exhibit 23 --- Consent to incorporation by reference
Report on Form 8-K --- A Form 8-K dated April 30, 2002 reported
that the Registrant had completed negotiations and signed an
agreement to acquire Carbon Cloth Technologies, Inc. (a
California Corporation) effective April 30, 2002. Financial
statements for Carbon Cloth and pro forma combined financial
information are to be filed with an amendment to the Form 8-K.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
KLEENAIR SYSTEMS, INC.
Date: May 17, 2002 /s/ LIONEL SIMONS
By: Lionel Simons, President,
Secretary, Principal Accounting Officer,
& Principal Financial Officer
12