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 SEPTEMBER 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 033-03362-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 23,049,661 shares of common stock, $0.001 Par Value,
outstanding as of October 17, 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 . . . . . . . . . . . . . 16
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
September 30, 2003, and the related consolidated statements of operations
for three and nine months, and stockholders' equity and cash flows for
nine months ended September 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 September 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
November 11, 2003
3
KLEENAIR SYSTEMS, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2003 2002
---------- ----------
Unaudited
ASSETS
CURRENT ASSETS:
Cash $ 61,241 $ 76,758
Accounts receivable 147,610 12,542
Accounts receivable from related parties 207,036 50,000
Inventory-raw materials (at cost) 80,283 114,076
Notes receivable 120,000 220,000
Advances (net of allowance) - 52,000
Prepaid expenses 76,834 121,542
---------- ----------
Total Current Assets 693,004 646,918
PROPERTY AND EQUIPMENT (net) 167,782 195,620
OTHER ASSETS:
Patent license (net) 1,560,961 1,617,380
---------- ----------
TOTAL ASSETS $2,421,747 $2,459,918
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable ($48,059 and $69,534 due
to related parties, respectively) $ 549,444 $ 150,176
Accrued expenses 22,688 -
Capital lease liability 1,462 4,811
Notes payable to related parties 173,000 50,000
Advances from directors 96,584 95,850
---------- ----------
Total Current Liabilities 843,178 300,837
---------- ----------
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, 22,884,661 and 20,270,556
outstanding, respectively) 22,885 20,271
Additional paid-in capital 7,313,156 6,959,717
Deficit accumulated during the development stage (5,757,472) (4,820,907)
---------- ----------
Total Stockholder's Equity 1,578,569 2,159,081
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $2,421,747 $2,459,918
========== ==========
See accompanying selected information.
4
KLEENAIR SYSTEMS, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
For Three and Nine Months Ended September 30, 2003 and 2002
Cumulative
Three Months Nine Months During Devel-
2003 2002 2003 2002 opment Stage
---------- ---------- ---------- ----------- ------------
REVENUES $ 655,192 $ 7,332 $ 893,255 $ 32,544 $ 1,068,278
Cost of goods sold 414,709 7,511 610,024 23,446 660,485
---------- ---------- ---------- ----------- ------------
Gross Profit 240,483 (179) 283,231 9,098 407,793
---------- ---------- ---------- ----------- ------------
PRODUCT DEVELOPMENT COSTS 20,853 93,491 128,240 240,600 1,170,711
---------- ---------- ---------- ----------- ------------
OPERATING EXPENSES:
Personnel costs and director fees 75,528 51,042 87,638 91,142 754,937
Consultants 117,437 56,918 316,974 168,752 2,360,904
Professional fees 17,773 133,638 87,566 166,151 483,257
Office expenses 2,399 5,578 15,069 11,201 58,432
Depreciation 12,445 10,611 36,871 23,651 98,701
Amortization of intangible assets 36,466 - 85,599 - 151,110
Advertising and promotion 25,884 71,631 125,746 169,085 337,510
Loss on cancellation of license agreements - - - - 19,860
Rent 24,041 14,365 71,380 40,750 185,880
Travel 20,721 20,447 82,580 65,766 282,578
Other expenses 15,594 42,592 69,100 73,410 159,721
Bad debts - - 100,000 - 100,000
Unknown - prior to current ownership - - - - 151,518
---------- ---------- ---------- ----------- ------------
Total operating expenses 348,288 406,822 1,078,523 809,908 5,144,408
---------- ---------- ---------- ----------- ------------
(LOSS) FROM OPERATIONS (128,658) (500,492) (923,532) (1,041,410) (5,907,326)
OTHER INCOME AND (EXPENSES):
Interest income 1 7 11 10 2,526
Interest expense (4,434) (203) (13,044) (1,140) (15,233)
Amortization of discount on receivables - - - - 20,259
---------- ---------- ---------- ----------- ------------
(Loss) before income taxes (133,091) (500,688) (936,565) (1,042,540) (5,899,774)
Benefit from deferred taxes - - - - 397,852
---------- ---------- ---------- ----------- ------------
(Loss) Before Extraordinary Item (133,091) (500,688) (936,565) (1,042,540) (5,501,922)
Extraordinary Item:
Costs of terminated acquisition - - - - (255,550)
---------- ---------- ---------- ----------- ------------
Net (Loss) $ (133,091) $ (500,688) $ (936,565) $(1,042,540) $ (5,757,472)
========== ========== ========== =========== ============
Basic and Diluted Earnings Per Share:
(Loss) per share before extraordinary item $ (0.01) $ (0.03) $ (0.04) $ (0.06) $ (0.69)
(Loss) per share from extraordinary item - - - - (0.03)
---------- ---------- ---------- ----------- ------------
Net (Loss) Per Share $ (0.01) $ (0.03) $ (0.04) $ (0.06) $ (0.72)
========== ========== ========== =========== ============
Weighted Average Shares Outstanding 22,202,549 18,401,894 21,168,143 17,171,514 8,025,116
========== ========== ========== =========== ============
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 cash - - 500,000 500 49,500 - -
For services - - 1,320,299 2,114 303,939 - -
Net loss - - - - - - (936,565)
--------- -------- ---------- ---------- ---------- --------- -----------
BALANCES, 09/30/03 - $ - 21,064,362 $ 22,885 $7,313,156 $ - $(5,757,472)
========= ======== ========== ========== ========== ========= ===========
<FN>
See accompanying selected information.
8
</FN>
KLEENAIR SYSTEMS, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Nine Months Ended September 30, 2003 and 2002
Cumulative
During Devel-
2003 2002 opment Stage
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (936,565) $(1,042,540) $(5,757,472)
Adjustments to reconcile net income/(loss)
to net cash provided by operations:
Losses prior to current ownership - - 151,518
Depreciation 36,872 23,651 98,702
Amortization of:
Intangibles 85,599 - 151,110
Prepaid expenses 117,750 141,750 1,206,445
Stock issued for services 200,000 192,147 2,040,642
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 (240,104) (226,753) (332,249)
Advances to consultants - - 20,000
Inventory 33,793 (116,161) (57,745)
Prepaid expenses (11,542) (53,850) (258,542)
Accounts payable and accrued expenses 466,509 (94,498) 520,541
----------- ----------- -----------
NET CASH USED BY OPERATING ACTIVITIES (147,688) (1,176,254) (2,374,352)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment (9,034) (159,448) (256,791)
Patent licensing costs (29,180) (72,017) (160,668)
Business acquisition - - (44,820)
Notes receivable - - (220,000)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (38,214) (231,465) (682,279)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuing stock 50,000 1,650,000 2,844,459
Additional capital contributions - - 2,367
Capital lease obligation - - 7,765
Payments on capital lease (3,349) (2,334) (6,303)
Proceeds from loans from related parties 123,000 - 173,000
Advances from directors 734 - 96,584
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 170,385 1,647,666 3,117,872
----------- ----------- -----------
NET INCREASE/(DECREASE) IN CASH (15,517) 239,947 61,241
CASH AT BEGINNING OF YEAR 76,758 33,479 -
----------- ----------- -----------
CASH AT END OF PERIOD $ 61,241 $ 273,426 $ 61,241
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES
See Note 4.
See accompanying selected information.
9
KLEENAIR SYSTEMS, INC.
(A Development Stage Enterprise)
SELECTED INFORMATION FOR CONSOLIDATED FINANCIAL STATEMENTS
September 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 nine-
month period ended September 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 three quarters of 2003 and 2002 was $36,872 and
$23,651, respectively.
Office furniture and equipment $ 61,496
Test vehicles 28,928
Analysis equipment 166,493
Leasehold improvements 11,682
----------
268,599
Accumulated depreciation (100,817)
----------
Net property & equipment $ 167,782
==========
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 $117,750 and $141,750 in the nine months ended September 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 $ 5,356 $ 1,140 $ 7,545
Income taxes - - -
Non-cash investing and financing transactions:
Stock issued for:
Compensation and directors fees $ 65,340 $ 59,188 $ 884,900
Services and prepaid services 240,713 223,709 1,931,470
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
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 71,522 unrestricted S-8 shares valued at $21,641 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
which had been billed at $44,553.
During the third quarter of 2003, the Company issued 200,000 unrestricted
S-8 shares valued at $36,750 for financial consulting services. Another
45,000 unrestricted S-8 shares valued at $6,495 were issued for research
and development and as compensation. A total of 1,100,000 restricted
shares valued at $65,340 were issued to directors as compensation for
their continued services to the Company. An officer purchased 500,000
restricted shares for $50,000.
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
11
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, the 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."
NOTE 7: ACCOUNTS RECEIVABLE FROM RELATED PARTIES
This balance consists of the elements 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 $133,299 and the $6,250 represent sales of particulate traps
and NoxMaster(TM) systems 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. The $22,000
is for patent royalties.
KleenAir Systems International LTD. $133,299
KleenAir Systems LTD. 6,250
KleenAir Systems LTD. 22,000
KleenAir Systems LTD. 45,000
Advances to employees 487
--------
Total $207,036
========
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 October 2003, the Company has issued 115,000 S-8 shares to a
consultant for financial representation and advisory services with
potential additional shares, based on performance.
The Company has additional orders for 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, two of which have been granted. The U.S. Patent
# 6,446,940 has been issued for a new emission control device, the Sonic
Flow Carburetor, which atomizes fuel on gasoline powered engines,
enhancing operating efficiency and reducing emissions. An additional U.S.
Patent # 6,499,463 has been issued for a device which atomizes diesel fuel
to enhance the performance of and reduce emissions in diesel engines.
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.
13
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
were delivered to Dinex during the second quarter, and $400,000 worth of
orders were shipped during the third quarter. Additional significant
orders are anticipated in the coming months.
The Energy Savings Trust has awarded an additional grant to Dinex and
KleenAir to test a combination system that includes a particulate filter
and the NOxMaster(TM) NOx reduction system together with the
CarbonGuard(TM) thermal management system on a London taxi. It is
believed that this combination will meet the new emission target for
London taxis being required under the Mayor of London's new emission
reduction strategy.
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 using its NOxMaster(TM) NOx
reduction system. Approval has also been received from the 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 is
preparing for a 50,000 mile durability test under the EPA and CARB
programs that will, hopefully, be completed by year-end or early in 2004.
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 back pressure. 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 shipped orders of approximately $200,000 to Johnson
Matthey, Inc. and is anticipating an additional $50,000 in shipments
during the fourth quarter. These systems are intended as retrofits on 600
New York City Transit Buses to help improve performance of particulate
14
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 over the next few months and will 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 in July 2002. 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.
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.
15
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 Chief
Financial Officer concluded that the Corporation's disclosure
controls and procedures are effective in timely alerting him 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.
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: November 13, 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 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: November 13, 2003
/s/ LIONEL SIMONS
Lionel Simons
President and
Chief Financial Officer
17