UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2003
[ ] 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)
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
There were 22,014,362 shares of common stock, $0.001 Par Value,
outstanding as of August 4, 2003.
Transitional Small Business Disclosure Format (check one); Yes [ ] No [X]
1
KLEENAIR SYSTEMS, INC.
FORM 10-QSB
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements
Report on Review by Independent Certified Public Accountants . . . 3
Consolidated Balance Sheet . . . . . . . . . . . . . . 4
Consolidated Statement of Operations . . . . . . . . . . . 5
Consolidated Statement of Stockholders' Equity . . . . . . . 6
Consolidated Statement of Cash Flows . . . . . . . . . . . 9
Selected Information Regarding the Financial Statements. . . . . 10
Item 2. Management's Discussion and Analysis and Plan of Operations. 13
Item 3: Controls and Procedures . . . . . . . . . . . . 15
Part II: Other information
Item 6: Exhibits and Reports on Form 8-K. . . . . . . . . . 16
Signatures . . . . . . . . . . . . . . . . . . . . . 16
Certification . . . . . . . . . . . . . . . . . . . . 17
2
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 consolidated balance sheet of KleenAir
Systems, Inc. (a development stage enterprise) (the "Company") as of June 30,
2003, and the related consolidated statements of operations for three and six
months, and stockholders' equity and cash flows for six months ended June 30,
2003 and 2002. We have also reviewed the cumulative statements of operations,
stockholders' equity and cash flows for the period from January 1, 1995
through June 30, 2003. 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 consolidated balance sheet as of December 31, 2002, and the
related statements of operations, stockholders' equity and cash flows for the
year then ended (not presented herein); and, in our report dated February 22,
2003, 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 consolidated balance
sheet as of December 31, 2002 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
August 10, 2003
3
KLEENAIR SYSTEMS, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2003 2002
---------- ----------
Unaudited
ASSETS
CURRENT ASSETS:
Cash $ 9,809 $ 76,758
Accounts receivable 14,070 12,542
Accounts receivable from related parties 98,449 50,000
Inventory-raw materials (at cost) 62,422 114,076
Notes receivable 120,000 220,000
Advances (net of allowance) 28,000 52,000
Prepaid expenses 97,486 121,542
---------- ----------
Total Current Assets 430,236 646,918
PROPERTY AND EQUIPMENT (net) 174,295 195,620
OTHER ASSETS:
Patent license (net) 1,589,135 1,617,380
---------- ----------
TOTAL ASSETS $2,193,666 $2,459,918
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable ($77,534 and $69,534 due
to related parties, respectively) $ 322,038 $ 150,176
Accrued expenses 10,702 -
Customer deposit 29,500 -
Capital lease liability 2,511 4,811
Notes payable to related parties 173,000 50,000
Advances from directors 96,584 95,850
---------- ----------
Total Current Liabilities 634,335 300,837
---------- ----------
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, 21,064,362 and 20,270,556
outstanding, respectively) 21,064 20,271
Additional paid-in capital 7,162,649 6,959,717
Deficit accumulated during the development stage (5,624,382) (4,820,907)
---------- ----------
Total Stockholder's Equity 1,559,331 2,159,081
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $2,193,665 $2,459,918
========== ==========
See accompanying selected information.
4
KLEENAIR SYSTEMS, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
For Three and Six Months Ended June 30, 2003 and 2002
Cumulative
Three Months Six Months During Devel-
2003 2002 2003 2002 opment Stage
---------- ---------- ---------- ---------- ------------
REVENUES $ 157,705 $ 25,212 238,063 $ 25,212 $ 413,086
Cost of goods sold 126,719 15,935 195,315 15,935 245,776
---------- ---------- ---------- ---------- ------------
Gross Profit 30,986 9,277 42,748 9,277 167,310
---------- ---------- ---------- ---------- ------------
PRODUCT DEVELOPMENT COSTS 24,889 85,161 107,388 147,109 1,149,859
---------- ---------- ---------- ---------- ------------
OPERATING EXPENSES:
Personnel costs and director fees 3,140 40,100 12,110 40,100 679,409
Consultants 120,795 65,961 199,537 111,834 2,243,467
Professional fees 38,574 27,501 69,793 32,513 465,484
Office expenses 3,701 4,969 12,670 5,623 56,033
Depreciation 12,361 8,850 24,426 13,040 86,256
Amortization of intangible assets 24,567 - 49,133 - 114,644
Advertising and promotion 48,221 52,312 99,862 97,454 311,626
Loss on cancellation of licensing agreements - - - - 19,860
Rent 23,847 18,885 47,339 26,385 161,839
Travel 22,809 23,809 61,859 45,318 261,857
Other expenses 28,996 25,837 53,506 30,819 144,127
Bad debts - - 100,000 - 100,000
Unknown sources prior to current ownership - - - - 151,518
---------- ---------- ---------- ---------- ------------
Total operating expenses 327,011 268,224 730,235 403,086 4,796,120
---------- ---------- ---------- ---------- ------------
(LOSS) FROM OPERATIONS (320,914) (344,108) (794,875) (540,918) (5,778,669)
OTHER INCOME AND (EXPENSES):
Interest income 5 2 10 3 2,525
Interest expense (4,480) (937) (8,610) (937) (10,799)
Amortization of discount on receivables - - - - 20,259
---------- ---------- ---------- ---------- ------------
(Loss) before income taxes (325,389) (345,043) (803,475) (541,852) (5,766,684)
Benefit from deferred taxes - - - - 397,852
---------- ---------- ---------- ---------- ------------
(Loss) Before Extraordinary Item (325,389) (345,043) (803,475) (541,852) (5,368,832)
Extraordinary Item:
Costs of terminated acquisition - - - - (255,550)
---------- ---------- ---------- ---------- ------------
Net (Loss) $ (325,389) $ (345,043) $ (803,475) $ (541,852) $ (5,624,382)
========== ========== ========== ========== ============
Basic and Diluted Earnings Per Share:
(Loss) per share before extraordinary item $ (0.02) $ (0.02) $ (0.04) $ (0.03) $ (0.71)
(Loss) per share from extraordinary item - - - - (0.03)
---------- ---------- ---------- ---------- ------------
Net (Loss) Per Share $ (0.02) $ (0.02) $ (0.04) $ (0.03) $ (0.74)
========== ========== ========== ========== ============
Weighted Average Shares Outstanding 20,805,373 17,055,976 20,642,367 16,546,227 7,604,774
========== ========== ========== ========== ============
See accompanying selected information.
5
KLEENAIR SYSTEMS, INC.
(A Development Stage Company)
CONSOLIDATED 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 selected information.
6
</FN>
KLEENAIR SYSTEMS, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Continued from previous page)
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 - -
To officers and directors - - 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 - -
To officers and directors - - 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 - -
To officers and directors - - 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)
(Continued on next page)
<FN>
See accompanying selected information.
7
</FN>
KLEENAIR SYSTEMS, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Continued from previous page)
Accumulated
Additional Unearned Deficit During
Preferred Stock Common Stock Paid-In Compen- Development
Shares Amount Shares Amount Capital sation Stage
--------- -------- ---------- ---------- ---------- --------- -----------
Stock issued: For cash - $ - 2,804,545 $ 2,805 $1,717,195 $ - $ -
For services - - 1,201,692 1,202 404,232 - -
For Acquisition of Carbon Cloth - - 873,250 873 968,434 - -
Contributed inventory - - - - 12,207 - -
Net loss - - - - - - (1,119,045)
--------- -------- ---------- ---------- ---------- --------- -----------
BALANCES, 12/31/02 - - 20,270,556 20,271 6,959,717 - (4,820,907)
Stock issued:
For services - - 793,806 793 202,932 - -
Net loss - - - - - - (803,475)
--------- -------- ---------- ---------- ---------- --------- -----------
BALANCES, 06/30/03 - $ - 21,064,362 $ 21,064 $7,162,649 $ - $(5,624,382)
========= ======== ========== ========== ========== ========= ===========
<FN>
See accompanying selected information.
8
</FN>
KLEENAIR SYSTEMS, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Six Months Ended June 30, 2003 and 2002
Cumulative
During Devel-
2003 2002 opment Stage
----------- --------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (803,475) $(541,852) $(5,624,382)
Adjustments to reconcile net income/(loss)
to net cash provided by operations:
Losses prior to current ownership - - 151,518
Depreciation 24,427 13,040 86,257
Amortization of:
Intangibles 49,133 - 114,644
Prepaid expenses 93,624 79,376 1,182,319
Stock issued for services 97,672 92,101 1,938,314
Stock issued for extraordinary loss - - 140,550
Deferred income taxes - - (397,852)
Bad debts 100,000 - 100,000
Changes in operating assets and liabilities:
Accounts and note receivable (25,977) (180,862) (118,122)
Advances to consultants - - 20,000
Inventory 51,654 (11,166) (39,884)
Prepaid expenses (8,068) (59,540) (255,068)
Accounts payable and accrued expenses 227,117 (64,877) 281,149
Customer deposit 29,500 - 29,500
----------- --------- -----------
NET CASH USED BY OPERATING ACTIVITIES (164,393) (673,780) (2,391,057)
----------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment (3,102) (103,102) (250,859)
Patent licensing costs (20,888) (72,017) (152,376)
Business acquisition - - (44,820)
Notes receivable - - (220,000)
----------- --------- -----------
NET CASH USED IN INVESTING ACTIVITIES (23,990) (175,119) (668,055)
----------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuing stock - 900,000 2,794,459
Additional capital contributions - - 2,367
Capital lease obligation - (1,431) 7,765
Payments on capital lease (2,300) - (5,254)
Proceeds from loans from related parties 123,000 - 173,000
Advances from directors 734 - 96,584
----------- --------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 121,434 898,569 3,068,921
----------- --------- -----------
NET INCREASE/(DECREASE) IN CASH (66,949) 49,670 9,809
CASH AT BEGINNING OF YEAR 76,758 33,479 -
----------- --------- -----------
CASH AT END OF PERIOD $ 9,809 $ 83,149 $ 9,809
=========== ========= ===========
SUPPLEMENTAL DISCLOSURES
See Note 4.
See accompanying selected information.
9
KLEENAIR SYSTEMS, INC.
(A Development Stage Enterprise)
SELECTED INFORMATION FOR CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(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, 2002.
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 financial statements included in Item 1 of Part 1. Operating
results for the six-month period ended June 30, 2003, are not necessarily
indicative of the results that may be expected for the year ending December
31, 2003.
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 2003 and 2002 was $12,065 and $4,190,
respectively.
Office furniture and equipment $ 61,496
Test vehicles 28,028
Analysis equipment 161,461
Leasehold improvements 11,682
----------
262,667
Accumulated depreciation (88,372)
----------
Net property & equipment $ 174,295
==========
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. These amortized costs
were included in "Advertising and promotion," although this is not necessarily
true for the cumulative amounts presented. Amortization totaled $93,624 and
$79,376 in the six months ended June 30, 2003 and 2002, respectively.
10
NOTE 4: SUPPLEMENTAL CASH FLOW DISCLOSURES
The following table sets forth supplemental cash flow disclosures.
Cumulative
During Devel-
2003 2002 opment Stage
----------- --------- -----------
Cash payments for:
Interest $ 4,074 $ 937 $ 6,263
Income taxes - - -
Non-cash investing and financing transactions:
Stock issued for:
Compensation and directors fees $ - $ 40,100 $ 819,560
Services and prepaid services 106,053 142,751 1,796,810
Equipment - - 8,300
Patent licensing - 1,255,410 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
Acquisition of Carbon Cloth
Technologies, Inc. - - 981,514
Uncompleted business acquisition - - 87,500
NOTE 5: STOCK TRANSACTIONS
During the first quarter of 2003, the Company issued 100,000 restricted shares
valued at $30,750 for financial consulting services. Another 115,000
unrestricted S-8 shares valued at $35,475 were issued to consultants for
business promotion and financial consulting services. The Company also issued
96,223 unrestricted S-8 shares valued at $27,899 for research and development
services and sales promotion.
During the second quarter of 2003, the Company issued 82,500 restricted shares
and 50,000 S-8 shares valued at $24,413 for an agreement regarding release of
certain patent licensing. A total of 171,151 S-8 shares valued at $40,635
were issued for business promotion and consulting services. Another 178,932
S-8 shares were issued as compensation for legal services billed at $44,553.
NOTE 6: NOTES RECEIVABLE
During the first quarter of 2002, the Company lent $120,000 to a licensee.
During the third quarter of 2002, the Company lent another $100,000 to this
licensee. These loans were collateralized by stock of the Company held by the
licensee. During the fourth quarter of 2002, the licensee assigned the
$120,000 loan along with the underlying collateral to a consultant for the
Company. In March 2003, a final settlement of a dispute and lawsuit between
the entities resulted in the forgiveness of the $100,000 loan. This debt
forgiveness has been recorded as "Bad debts."
11
NOTE 7: ACCOUNTS RECEIVABLE FROM RELATED PARTIES
This balance consists of three elements as presented below. KleenAir Systems
International LTD. (KASI) is partially owned by the Company and controlled by
the Company's President. Nox Masters LTD. is wholly owned by KASI. The
$53,449 represents sales of particulate traps and NoxMasterTM sytems for
resale and installation on British vehicles. The $45,000 is billings for
equipment and support services during the testing phases leading to approval
of the systems in the U.K.
KleenAir Systems International LTD. $ 53,449
KleenAir Systems LTD. 45,000
--------
Total $ 98,449
========
NOTE 8: NOTE PAYABLE TO RELATED PARTIES
During the first and second quarters of 2003, officers and entities related to
them loaned the Company $90,000 and $33,000, respectively. These loans bear
interest at 7% compounded monthly and are due on demand.
NOTE 9: SUBSEQUENT EVENTS
During July 2003, the Company has authorized 100,000 S-8 shares for a
consultant for financial representation and advisory services with another
potential 100,000 shares, based on performance. Another 40,000 S-8 shares
have been approved as compensation for a consultant for management services.
Additionally, 850,000 restricted shares have been authorized as director fees
for 2003 and 500,000 restricted shares have been sold.
The Company has additional orders for significant sales of particulate traps
and NOxMaster(TM) systems from its U.K. affiliate, who is reselling them to a
distributor. The Company also is in the midst of an series of orders to
provide its CarbonGuard(TM) system, which has been designated a "single-source
product" for retrofitting city buses in New York.
12
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 1986, the
Company filed an S-18 and registered certain stock. From 1989 through 1993,
the Company underwent a series of name changes in order to explore various
business opportunities. However, none of the business opportunities was
successfully completed.
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 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., and changed to its current name.
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(TM) technology. The Company owns U.S. Patent # 5,224,346
Engine NOx Reduction System issued in 1993, U.S. Patent # 5,609,026 Engine NOx
Reduction issued in 1997. In 1999 the Company was issued a third patent on
Ammonia Injection in NOx Control, U.S. Patent # 5,992,141. 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.
The Company has applied for additional patents related to its NOxMaster(TM)
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. A license for
this technology has been sold to Ecologic, LLC for China, India and
California.
The Company occupies 10,000 square foot R & D facilities at 1711 Langley,
Irvine, CA 92614. The Company has 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 has completed the final phase of its London Taxi Program funded by
a U.K. government grant and been advised that KleenAir is now approved for the
Clean-Up Register of the Energy Savings Trust for all light duty applications.
Test systems have been installed on a Dennis refuse collection truck and a
Mercedes-Benz Sprinter 16 passenger bus operated by the Borough of Hounslow in
London. An Energy savings Trust grant has been awarded for a test and
evaluation program on both these vehicles. Final emissions tests were
conducted on the Sprinter and application has been made to have it included
for medium duty vehicles on the Clean-Up Register. Patent awards have now been
confirmed for several European countries including the U.K., Germany, France,
Italy, Spain and Sweden, and anticipated soon for Japan, Brazil, and China.
Distribution arrangements have been concluded through the Company's U.K.
affiliate with Dinex A/S of Denmark and Dinex Exhaust Systems Ltd of the U.K.
for the KleenAir product line. Dinex specializes in after-market sales of
particulate filters, silencers and exhaust system components for medium and
heavy-duty diesel-powered vehicles. Initial orders for $150,000 have been
delivered to Dinex and a further $500,000 worth of orders are in the process
of being shipped during the third quarter. Additional significant orders are
anticipated in the coming months.
13
U.S. testing continues of the NOxMaster(TM) Diesel Catalytic Converter together
with its NOxMaster(TM) Ammonia Injection System to present an integrated system
for the elimination of emissions from diesel powered mobile sources. 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..
The Company has now received approval from CARB for its applications for
Retrofit Verification for heavy-duty vehicles on its NOxMaster(TM) NOx
reduction system. It has also received approval from EPA to proceed with an
application for certification of the combination package of its Oxidizing
Particulate Trap (OPT) with the NOxMaster(TM) for both high particulate
reduction as well as high NOx reduction.
The Company's wholly owned subsidiary, Carbon Cloth Technologies, Inc. (Carbon
Cloth), of Malibu, California, is a manufacturer of automotive thermal
management systems. Carbon Cloth has several years of experience developing
thermal solutions for such motorsports industry leaders as Ferrari, Mercedes-
Benz and Penske, that has enabled development of the CarbonGuard(TM), a
significant addition to the battle on pollution. It has applied for patents
in automotive thermal management systems. At present the CarbonGuard(TM) is
used to enhance the effectiveness of particulate filters. These filters need
to maintain 300 degrees centigrade for 30% of a vehicle's operating time
otherwise the filters clog and create backpressure. Wherever particulate
filters are currently installed, estimated to be at least 30,000 units at
present, the CarbonGuard(TM) can improve performance and save maintenance
expense. Filter technology has come to prominence recently as both the
Environmental Protection Agency (EPA) and the California Air Resource Board
(CARB) have determined that particulates from vehicle emissions are a serious
public health problem.
Carbon Cloth has recently received an order of nearly $200,000 from Johnson
Matthey, Inc. These systems are intended as retrofits on 600 New York City
Transit Buses to help improve performance of particulate filters being
installed. The CarbonGuard(TM) is already 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 has been selected as a sole
source product for this application. A further several hundred buses are
anticipated to be upgraded with the CarbonGuard(TM). It is expected that this
product will generate meaningful revenues during the balance of this year and
make a significant contribution toward covering the Company's overhead
expenses. Negotiations are being held with a number of automotive OEM
manufacturers to incorporate our CarbonGuard(TM) for a variety of thermal
management applications.
The acquisition agreement with ServoTech Engineering Inc. did not close as
anticipated in February. Discussions are ongoing as to the nature of the
future relationship. In the meantime, the Company is continuing its sales
activities on behalf of the SOBRIS(TM) system under an agency agreement signed
last July. ServoTech is a licensee of Ford Motor Company on SCR injection
technology. It's SOBRIS(TM) product is under test and evaluation by a number
of automotive manufacturers in the U.S. and Europe. Dr. Hamid Servati,
President of Servotech and a director of the Company, has purchased an
additional 500,000 shares of restricted common stock from the Company. This
increases his holdings to 1,250,000 shares. The Company and Servotech
continue to negotiate a more permanent relationship between the two entities.
14
Once production and sales begin, the Company anticipates employing initially
15 to 20 employees, primarily in management, technical and administrative
capacities. 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.
Item 3: Controls and Procedures
(a) Within the 90-day period prior to the date of this report, the
Corporation carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Corporation's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). Based on that evaluation, the Chief Executive Officer
and the Chief Financial Officer concluded that the Corporation's disclosure
controls and procedures are effective in timely alerting them to material
information relating to the Corporation (including its consolidated
subsidiaries) required to be included in the Corporation's Exchange Act
filings.
(b) There have been no significant changes in the Corporation's internal
controls or in other factors which could significantly affect its internal
controls subsequent to the date the Corporation carried out its evaluation.
15
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
Exhibit 23 -- Accountants' consent to incorporation by reference
Exhibit 99.1 -- Certification Pursuant to 18 U.S.C. Section 1350, as
adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Reports on Form 8-K None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
KLEENAIR SYSTEMS, INC.
Date: August 14, 2003 /s/ LIONEL SIMONS
By: Lionel Simons, President,
Secretary, Principal Accounting
Officer, & Principal Financial Officer
16
CERTIFICATION
I, Lionel Simons President and Chief Financial Officer certify that:
1. I have reviewed this quarterly report on Form 10-QSB of KleenAir Systems,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and I have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. I have disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of the registrant's board of directors (or
persons performing equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: August 14, 2003
/s/ LIONEL SIMONS
Lionel Simons
President and
Chief Financial Officer
17