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, 2005
[ ] 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 #)
27121 Aliso Creek Road Ste 120, Aliso Viejo, CA 92656
------------------------------------------------------
(Address of principal executive offices)
(949) 831-1045
-------------------------------
(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 62,351,406 shares of common stock, $0.001 Par Value,
outstanding as of September 30, 2005.
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 . . . . . . . . . . . . . . . . . . . . 18
Part II: Other information
Item 6: Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 18
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Exhibits
2
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
REPORT ON REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors,
KleenAir Systems, Inc.
Aliso Viejo, CA
We have reviewed the accompanying consolidated balance sheet of KleenAir
Systems, Inc. (a development stage enterprise) (the "Company") as of
September 30, 2005, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the three and nine months ended
September 30, 2005 and 2004. We have also reviewed the cumulative
statements of operations, stockholders' equity and cash flows for the period
from January 1, 1995 through September 30, 2005. These financial statements
are the responsibility of the Company's management.
We conducted our review in accordance with the standards of the Public
Company Accounting Oversight Board (United States). A review of interim
financial information consists principally of applying analytical procedures
and making inquiries of Company personnel responsible for financial and
accounting matters. It is substantially less in scope than an audit in
accordance with the auditing standards of the Public Company Accounting
Oversight Board (United States), 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 accounting principles generally accepted in the United
States.
We have previously audited, in accordance with the auditing standards of the
Public Company Accounting Oversight Board (United States), the consolidated
balance sheet of the Company as of December 31, 2004, and the related
statements of operations, stockholders' equity and cash flows for the year
and cumulative period then ended (not presented herein); and, in our report
dated March 31, 2005, we expressed an opinion on those financial statements
which was qualified based on the Company's ability to continue as a going
concern. In our opinion, the information set forth in the accompanying
interim consolidated balance sheet as of December 31, 2004, is fairly stated
in all material respects in relation to the consolidated balance sheet from
which it has been derived.
/s/ ROBERT EARLY & COMPANY, P.C.
- ----------------------------------
Robert Early & Company, P.C.
Abilene, Texas
December 12, 2005
3
KLEENAIR SYSTEMS, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2005 2004
---------- ----------
Unaudited
ASSETS
CURRENT ASSETS:
Cash $ 18,986 $ 87,696
Accounts receivable (net) 10,202 2,970
Accounts receivable from related parties 211,309 105,074
Inventory-raw materials (at cost) 24,503 24,352
Prepaid expenses 20,207 38,094
Marketable securities (net) 119,215 195,202
---------- ----------
Total Current Assets 404,422 453,388
PROPERTY AND EQUIPMENT (net) 70,613 112,296
OTHER ASSETS:
Patent license (net) 1,215,413 1,469,076
---------- ----------
TOTAL ASSETS $1,690,448 $2,034,760
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 92,909 $ 111,155
Accounts payable to related parties 145,345 149,912
Accrued expenses 37,350 25,698
Deposits from customers 50,000 -
Notes payable to related entities 220,000 231,000
Advances from directors 68,922 76,000
---------- ----------
Total Current Liabilities 614,526 593,765
STOCKHOLDERS' EQUITY:
Preferred stock, series A, $.001 par value (
10,000,000 shares authorized, none outstanding) - -
Common stock, $.001 par value (100,000,000
shares authorized, 62,351,406 and 58,100,206
outstanding, respectively) 62,351 58,100
Additional paid-in capital 10,063,159 9,955,716
Deficit accumulated during the development stage (9,049,588) (8,572,821)
---------- ----------
Total Stockholders' Equity 1,075,922 1,440,995
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $1,690,448 $2,034,760
========== ==========
See accompanying selected information.
4
KLEENAIR SYSTEMS, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 2005 and 2004
Cumulative
Three Months Nine Months During Devel-
2005 2004 2005 2004 opment Stage
---------- ---------- ---------- ----------- ------------
REVENUES $ - $ 36,676 $ 49,384 $ 40,995 $ 1,020,754
Cost of goods sold 1,572 23,086 41,196 32,445 777,685
---------- ---------- ---------- ----------- ------------
Gross Profit (1,572) 13,590 8,188 8,550 243,069
---------- ---------- ---------- ----------- ------------
PRODUCT DEVELOPMENT COSTS 12,320 35,914 84,710 120,977 1,496,397
---------- ---------- ---------- ----------- ------------
OPERATING EXPENSES:
Personnel costs and director fees 22,120 17,911 87,690 140,199 1,517,899
Consultants (4,000) 93,713 8,250 485,192 3,238,096
Professional fees 35,772 16,376 61,264 49,349 618,523
Office expenses 1,329 1,860 6,005 5,485 67,035
Depreciation 8,809 12,341 28,975 36,836 192,086
Amortization of intangible assets 27,417 32,914 92,715 95,421 403,808
Advertising and promotion 1,508 2,966 3,198 8,056 267,920
Rent 10,085 27,942 47,707 74,690 405,571
Travel 8,906 12,788 33,702 60,919 380,587
Other expenses (7,604) 13,072 31,658 38,618 247,814
Bad debts - (4,993) - 1,000 221,000
Other - - - - 171,378
---------- ---------- ---------- ----------- ------------
Total operating expenses 104,342 226,890 401,164 995,765 7,731,717
---------- ---------- ---------- ----------- ------------
(LOSS) FROM OPERATIONS (118,234) (249,214) (477,686) (1,108,192) (8,985,045)
OTHER INCOME AND (EXPENSES):
Interest income - - - - 2,526
Interest expense (4,834) (4,706) (14,314) (14,974) (53,907)
Management fees 15,750 - 47,250 - 157,728
Foreign exchange loss - - - (4,715) (7,670)
Unrealized gain/(loss) on
marketable securities 22,220 - 54,289 - (137,588)
Loss on disposition of assets (7,674) - (7,674) - (7,674)
Loss on sale of stock - - (78,632) (92,747) (180,519)
Amortization of discount on receivables - - - - 20,259
---------- ---------- ---------- ----------- ------------
(Loss) before income taxes (92,772) (253,920) (476,767) (1,220,628) (9,191,890)
Benefit from deferred taxes - - - - 397,852
---------- ---------- ---------- ----------- ------------
(Loss) Before Extraordinary Item (92,772) (253,920) (476,767) (1,220,628) (8,794,038)
Extraordinary Item:
Costs of terminated acquisition - - - - (255,550)
---------- ---------- ---------- ----------- ------------
Net (Loss) $ (92,772) $ (253,920) $ (476,767) $(1,220,628) $ (9,049,588)
========== ========== ========== =========== ============
Basic and Diluted Earnings Per Share:
(Loss) per share before extraordinary item $ (0.00) $ (0.00) $ (0.01) $ (0.03) $ (0.56)
(Loss) per share from extraordinary item - - - - (0.02)
---------- ---------- ---------- ----------- ------------
Net (Loss) Per Share $ (0.00) $ (0.00) $ (0.01) $ (0.03) $ (0.58)
========== ========== ========== =========== ============
Weighted Average Shares Outstanding 61,593,382 52,141,770 59,592,912 43,929,493 15,701,270
========== ========== ========== =========== ============
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)
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 - - 750,000 750 74,250 - -
To officers and directors - - 7,600,000 7,600 511,490 - -
For services - - 2,801,605 2,801 460,839 - -
Net loss - - - - - - (2,147,297)
--------- -------- ---------- ---------- ----------- --------- -----------
BALANCES, 12/31/03 - - 31,422,161 31,422 8,006,296 - (6,968,204)
Stock issued:
For cash - - 750,000 750 74,250 - -
To officers and directors - - 1,200,000 1,200 78,519 - -
For investments - - 20,527,999 20,528 1,387,706 - -
For services - - 4,200,046 4,200 408,945 - -
Net loss - - - - - - (1,604,617)
--------- -------- ---------- ---------- ----------- --------- -----------
BALANCES, 12/31/04 - - 58,100,206 58,100 9,955,716 - (8,572,821)
Stock issued:
For cash - - 3,000,000 3,000 72,000 - -
For services - - 1,251,200 1,251 35,443 - -
Net loss - - - - - - (476,767)
--------- -------- ---------- ---------- ----------- --------- -----------
BALANCES, 09/30/05 - $ - 62,351,406 $ 62,351 $10,063,159 $ - $(9,049,588)
========= ======== ========== ========== =========== ========= ===========
<FN>
See accompanying selected information.
8
</FN>
KLEENAIR SYSTEMS, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2005 and 2004
Cumulative
During Devel-
2005 2004 opment Stage
---------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (476,767) $(1,220,628)$(9,049,588)
Adjustments to reconcile net loss to net
cash provided by operations:
Losses prior to current ownership - - 151,518
Depreciation 28,975 36,836 192,086
Amortization of intangibles 92,714 95,421 403,807
Amortization of prepaid expenses 12,450 15,908 1,266,093
Stock issued for services 36,695 472,483 3,291,431
Stock issued for extraordinary loss - - 140,550
Deferred income taxes - - (397,852)
Bad debts - 1,000 221,000
Loss on disposition of assets 7,674 - 7,674
Loss on sale of marketable securities 78,631 92,747 180,518
Unrealized loss/(gain) on marketable
securities (54,289) - 137,588
Changes in operating assets and liabilities:
Accounts and note receivable 66,743 (51,393) 71,882
Inventory (151) 19,633 (1,965)
Prepaid expenses 5,437 (15,500) (261,563)
Accounts payable and accrued expenses (11,161) (224,117) 107,674
Customer deposit 50,000 - 50,000
---------- ----------- ----------
Net Cash Used by Operating Activities (163,049) (777,610) (3,489,147)
---------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment (4,473) (8,276) (270,187)
Patent licensing costs (19,505) (47,347) (248,271)
Proceeds from disposition of assets 9,750 - 9,750
Business acquisition - - (44,820)
Proceeds from sale of stock 51,645 814,408 970,913
Notes receivable and advances - (105,206) (220,000)
---------- ----------- ----------
Net Cash Provided/(Used) by Investing
Activities 37,417 653,579 197,385
---------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuing stock 75,000 75,000 3,021,826
Capital lease obligation - - 7,765
Payments on capital lease - (372) (7,765)
Foreign currency translation adjustment - 745 -
Proceeds from loans from related parties 2,922 91,000 434,521
Advances from directors - 37,590 -
Repayments to related parties (21,000) (95,503) (145,599)
---------- ----------- ----------
Net Cash Provided/(Used) by Financing
Activities 56,922 108,460 3,310,748
---------- ----------- ----------
Net Increase/(Decrease) in Cash (68,710) (15,571) 18,986
Cash at Beginning of Year 87,696 28,739 -
---------- ----------- ----------
CASH AT END OF PERIOD $ 18,986 $ 13,168 $ 18,986
========== =========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
See Note 2.
See accompanying selected information.
9
KLEENAIR SYSTEMS, INC.
(A Development Stage Enterprise)
SELECTED INFORMATION FOR CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(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, 2004. 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, 2005, are not necessarily indicative of the results that may
be expected for the year ending December 31, 2005.
NOTE 2: SUPPLEMENTAL CASH FLOW DISCLOSURES
The following table sets forth supplemental cash flow disclosures.
Cumulative
During Devel-
2005 2004 opment Stage
---------- ----------- -----------
Cash payments for:
Interest $ 2,662 $ 4,612 $ 16,557
Income taxes - - -
Non-cash investing and financing transactions:
Stock issued for:
Compensation and directors' fees $ - $ 79,985 $ 1,417,850
Services and prepaid services 36,695 392,498 3,193,095
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
Investment in marketable security - 1,408,324 1,408,234
10
NOTE 3: STOCK TRANSACTIONS
During the first quarter of 2005, the Company issued 1,500 unrestricted S-8
common shares valued at $150 for clerical services.
During the second quarter of 2005, the Company issued 1,000,000 restricted
common shares valued at $24,000 to Servotech for product development costs.
Another 3,000 unrestricted S-8 common shares valued at $240 were issued for
clerical services. An investor purchased 1,000,000 restricted common shares
for $25,000.
During the third quarter of 2005, an investor purchased 2,000,000 restricted
common shares for $50,000. The Company also issued 243,700 restricted
common shares in payment of $12,185 in legal fees and 3,000 unrestricted S-8
common shares valued at $120 for clerical services.
NOTE 4: 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 two quarters of 2005 and 2004 was $28,975 and $36,836,
respectively.
Office furniture and equipment $ 62,358
Test vehicles 28,928
Analysis equipment 164,432
----------
255,718
Accumulated depreciation (185,105)
----------
Net property and equipment $ 70,613
==========
During the second quarter of 2005, the Company reached the end of its lease
and moved its offices. As part of the move, certain fixed assets were sold
or otherwise disposed of. Proceeds from the sales totaled $9,750. The cost
of the assets sold and disposed of totaled $26,277 and accumulated
depreciation on these assets totaled $9,096.
NOTE 5: ACCOUNTS RECEIVABLE FROM RELATED PARTIES
Accounts receivable from related parties consists of amounts due from the
Company's affiliate in England. KleenAir Systems International, Plc
(trading symbol KSIP.L) is partially owned by the Company. The Company's
President also serves as Chairman of the board and President of KSIP.
During the third quarter, the Company sold the primary rights to its diesel
NOxMaster (TM) to KSIP in exchange for $180,210 to be paid out of a public
offering being arranged by KSIP. See Note 7 for additional discussion.
NOTE 6: MARKETABLE SECURITIES
During 2004, the Company acquired an investment in Langley Park Investments
Trust in England in exchange for the issuance of a large block of its stock.
11
(See the financial statements for the year ended 12/31/04, Note 13.) The
Langley Park investment was partially sold during 2004 and partially held at
the end of the year.
During the second quarter of 2005, the Company sold an additional block of
these shares and received proceeds of $51,645. A net loss of $9,964 was
recognized after adjusting for previous unrealized losses.
The following table presents information regarding the Company's investments
in marketable securities at June 30, 2005. This security is being held as a
trading security.
Aggregate cost basis $ 256,803
Unrealized gain/(loss) (137,588)
Aggregate fair value (carrying value) $ 119,215
NOTE 7: SALE OF PATENT RIGHTS
During the third quarter, as mention above, the Company entered into an
agreement to sell the primary rights to the patents related to the diesel
version of its NOxMaster (TM) technology to its British affiliate. The
Company retained its 8% royalty for sales of products related to this
technology and received a license to market products within the North
American continent.
This transaction has resulted in recognizing the sale through recording the
receivable and removing patent cost of $226,101 and accumulated patent
amortization of $45,607, for a net gain of $156.
NOTE 8: PLANNED TRANSACTIONS
During the third quarter, the Company entered into agreements to purchase
two privately held, commonly-controlled entities. Although these agreements
were announced, they were never consummated and are no longer valid
agreements.
12
Item 2. Management's Discussion and Plan of Operation
RESULTS OF OPERATIONS
Revenues for the three months of the third quarter of 2005 were $0 compared
to $36,676 with cost of goods sold at $1,572 and $23,086, respectively, for
the same period last year. Revenue for the first nine months amounted to
$49,384 compared to $40,995 during the first nine months of 2004, with cost
of goods at $41,196 and $32,445. This revenue was primarily related to sales
of Carbon Cloth Technology's CarbonGuard(TM) with more units being installed
on New York City Transit buses and also sales to Ferrari Motor Company of
Italy.
Gross profit for the quarter was ($1,572) compared to a gross profit of
$13,590 last year and for the year-to-date was $8,188 compared to a gross
profit of $8,550 for the same period in the previous year.
Operating expenses for the third quarter of 2005 were reduced from $226,890
in 2004 to $104,342 in 2005. For the nine month period expenses have been
reduced from $995,765 to $401,164. The main areas of saving have been in
consultant fees and rent. As of April, the Company moved into smaller
facilities and moved its dynamometer and testing equipment into a Dinex
facility where the two companies can share our testing capability.
Loss for the quarter was down from $253,920 in 2004 to $92,772 for 2005. For
the year-to-date the cumulative loss has been $476,767, down from a loss of
$1,220,628 in the same period last year.
LIQUIDITY AND SOURCE OF CAPITAL
The Company has continued to make private placements of stock to meet its
working capital needs and has arrangements in place to sell more stock as
and when needed. It has also sold part of its stock in Langley Park
Investment Trust in London, the proceeds from which have been utilized to
meet current working capital requirements. In addition, various officers and
directors have made short-term loans to the Company as needed. In 2004,
private placements plus the sale of the Company's investment in Jubilee
Investment Trust met the working capital requirement for the year in the
absence of cash generated from sales revenue.
GENERAL DISCUSSION AND PLAN OF OPERATIONS
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.
13
Since acquiring the patent in 1995, the Company has been a developmental
stage company and has worked toward 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 and 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. 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.
The Company occupies 2,000 square foot facility at 27121 Aliso Creek Road,
Suite 120, Aliso Viejo, CA 92656. The Company has loaned its R & D testing
equipment to its strategic partner, Dinex Exhausts, Inc., which is occupying
a several-thousand square foot facility in the City of Industry. The
arrangement calls for Dinex to conduct tests and evaluations on this
equipment of systems to be presented to the California Air Resource Board
(CARB) and the Environment Protection Agency (EPA). The Company and Dinex
will jointly apply for Retrofit Verification to these agencies for certain
applications of it technology. KleenAir will, from time to time, continue to
use the equipment, of which it has retained ownership, for its own exclusive
testing and development programs.
As a result of an extensive test and evaluation program funded by the Energy
Savings Trust (EST) and implemented on a variety of vehicles over the last
four years, the Company has now been included as an approved vendor on the
EST Cleanup Register in a number of categories. It is currently undergoing
an additional test program for EST on several London taxicabs incorporating
an updated light duty combination particulate filter and NOxMaster(TM) NOx
reduction system manufactured and installed by the Company's licensee in
Europe, Dinex A/S. These tests are expected to conclude in March prior to
anticipated commencement of installations of selected technologies in the
May/June period.
Some forty Light Commercial Vehicles have been installed with these
combination particulate and Nox reduction systems in the fleet of a major
U.K. local authority. In addition, systems have been installed on twenty-
four London sightseeing buses.
The Company is the only entry in the SCR category for retrofit. In addition,
the Company's Selected Catalytic Reduction and Filter (SCRF) systems, which
combine high levels of emission reduction for both NOx and PM (particulates)
together with CO and HC, has become the sole entry for light and medium duty
vehicles in a new especially-created category called SCRF, which has the
highest level of funding grants. The Eminox is the only other SCRF product
for heavy duty and has recently been added to the Clean Up. The Company's
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systems have now been qualified for a variety of vehicles ranging from
light-duty taxi applications, to light commercial vans, shuttle buses and
heavy duty bus transport applications.
This opens the door to product launches in a variety of market segments in
the U.K., and subsequently, in other European countries such as Germany and
Denmark. Eight SCRF systems have been installed on buses in Copenhagen.
Distribution and supply agreements 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. The supply agreement will
enable the Company to source product at most favored nation pricing and
distribute to its own list of customers in Europe and elsewhere. The Company
is in negotiation with a number of fleet operators with a view to
retrofitting and upgrading vehicles to Euro 3 requirements.
Distribution and supply agreements for the KleenAir product line have been
concluded with Dinex Exhaust Systems, Inc., a wholly owned US subsidiary of
Dinex A/S of Denmark, with which the Company has European distributorship
and supply agreements. It is expected that Dinex will be applying for CARB
and EPA Retrofit Verification Programs for various types and sizes of
vehicles for both NOx and particulate reduction.
During 2003, over $750,000 of system components were shipped to Dinex.
However, in October 2003 the EST suspended funding payments due to budget
problems and these were not reinstated until April 2004. Orders for systems
for over 100 buses, worth $500,000 in Company sales, were put on hold. The
Company is awaiting clarification as to whether these orders will now be
funded or whether new applications have to be filed to fund these systems.
As of the current date, only limited funding has been released for special
programs and it is not clear whether this will include taxis. It is hoped
that some of the bus applications applied for will be processed.
The Public Carriage Office (PCO) has announced a mandate for the upgrade of
some 17,500 London Taxis to Euro 3 emission standards. The PCO has recently
announced that the start date for this program will be delayed from January
2005 until July 2006. It is expected that there will be 3,500 upgrades for
2006, for which Company deliveries from the US to Europe would need to
commence during the first quarter of 2005. The estimated number for 2007 is
9,000 with a further 5,000 in 2008. The Company expects that its strategic
partner Dinex will be the principal supplier of systems for this application
with a net revenue potential to the Company of over $500 per vehicle.
In his post-election policy statement in July 2004, the Mayor of London, Ken
Livingstone, outlined plans for a Low Emission Zone for all areas of London
within the M25 Ring Road. It is estimated that this will impact up to 50,000
vehicles by the end of 2007 and a further 100,000 to 200,000 by the end of
2010. The Company's products already qualify to meet the required emission
standards for such mandated upgrades and have been approved by the Energy
savings Trust for such applications.
The London Taxicab Upgrade Program, as a portion of the Low Emission
Strategy, has been clearly mandated for commencement as of July 1, 2006, for
taxis renewing their permits as of that date and from then forward. During
the following two years it is anticipated that some 14,000 taxis will
upgrade to Euro 3 standards
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The Company has formed a consortium together with Dinex, ATS Euromaster (a
subsidiary of Michelin), Air Products Plc and Terra Nitrogen(UK) Ltd for the
purpose of creating and supporting the infrastructure for ammonia supply,
installation and maintenance. It is anticipated that a similar consortium
with the same members will be formed to handle the U.S. infrastructure once
EPA and CARB Retrofit Verification has been received.
As the U.K. market is on the threshold of major commercial advances in the
use of SCR for retrofit programs, such as London taxis and buses, the
Company, in consultation with the Department For Transport (DFT) and Energy
Savings Trust (EST), has moved to pull together all the resources necessary
for a reliable, efficient and cost-effective infrastructure to support the
implementation of its Selected Catalytic Reduction and Filter (SCRF) systems
on a variety of vehicles for a number of different applications across the
U.K.
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 medium 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. However, the Company
has negotiated an arrangement with the EPA and CARB for a single testing
protocol that would satisfy both their requirements rather than having to
bear the considerable cost of running two separate test programs for the
same product. Applications have been on file with both institutions for a
long time. The actual Retrofit Verification Program is currently expected to
commence during the first quarter of 2006.
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.
The CarbonGuard(TM) is already installed on over 1,000 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.
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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. The Company is working with
ServoTech on component development that incorporates injection controller
and reduction delivery technology suitable for effective implementation of
its systems and such controllers have been incorporated in the pilot
installations currently in use in the U.K.
Once production and sales begin, the Company anticipates initially employing
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.
The U.K. affiliate, KleenAir Systems International Plc, has successfully
raised approximately $1,500,000 in private equity funding. This funding
diluted the Company's ownership interest to approximately 23%. The funding
strategy is designed to provide the working capital necessary to fully
exploit the commercialization opportunity in Europe for the Company's
products.
In June 2005, the Company signed an exclusive distribution agreement for
China with AirTek, Inc. of Hobart, IN of certain products of AirTek's CATCO
catalyst manufacturing wholly-owned subsidiary. The Company also signed a
contract with Chongqing Qinchuan Industrial Group (CQIG) requiring them to
purchase 150,000 catalysts and substrates over a three-year period, with a
value amounting to approximately $10,000,000.
OFF-BALANCE SHEET ARRANGEMENTS
As of September 30, 2005, the Company had no off-balance sheet arrangements.
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.
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Item 3: Controls and Procedures
(a) The management of KleenAir Systems, Inc. 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 as of
September 30, 2005, pursuant to Rule 13a-15 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Based on that
evaluation, the Company's Chief Executive Officer and Chief Financial
Officer concluded that the Corporation's disclosure controls and
procedures were effective as of September 30, 2005, in timely
alerting them to material information relating to the Corporation
required to be included in the Corporation's periodic 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 31 -- Certification of President and Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32 -- Certification of Chief Executive Officer and Chief
Financial Officer 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: December 14, 2005 /s/ LIONEL SIMONS
--------------------------------
By: Lionel Simons, President,
Secretary, Principal Accounting Officer,
and Principal Financial Officer
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