<PAGE>
As filed with the Securities and Exchange Commission on November 14, 2000
================================================================================
Securities And Exchange Commission
Washington, D.C. 20549
_________________
FORM 10--Q/SB
_________________
(Mark One)
[X] Quarterly Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange
Act Of 1934 For The Nine-Month Period Ended September 30, 2000; Or
[_] Act Of 1934 For The Transition Period From ________ To _______
Commission File No. 333-88207
CLEAN ENERGY COMBUSTION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 98-0211550
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7087 MacPherson Avenue, British Columbia, Canada V5J 4N4
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (604) 435-9339
Indicate by check mark whether the registrant (1) has filed all Reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registration was
required to file such Reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
10,017,365 shares of common stock, par value $0.0001 per share, as of
November 8, 2000
================================================================================
<PAGE>
CLEAN ENERGY COMBUSTION SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10--Q/SB
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. Financial Information................................................................ 3
Item 1. Financial Statements................................................................. 3
Consolidated Balance Sheet........................................................... 3
Consolidated Statement Of Operations................................................. 4
Consolidated Statement Of Deficiency In Assets....................................... 5
Consolidated Statement Of Cash Flows................................................. 6
Notes To Consolidated Financial Statements........................................... 7
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations........................................................................ 11
General.............................................................................. 11
Overview............................................................................. 11
Results Of Operations................................................................ 11
Liquidity And Capital Resources...................................................... 12
Other Matters........................................................................ 13
Uncertainties And Other Factors That May Affect Our Future Results And Financial
Condition............................................................................ 14
Item 3. Quantitative And Qualitative Disclosures About Market Risk........................... 25
Currency Fluctuations................................................................ 25
Interest Rate Fluctuations........................................................... 25
ITEM II Other Information.................................................................... 25
Item 1. Legal Proceedings.................................................................... 25
Item 2. Changes In Securities And Use Of Proceeds............................................ 25
Item 3. Defaults Upon Senior Securities...................................................... 25
Item 4. Submission Of Matters To A Vote Of Security Holders.................................. 26
Item 5. Other Information.................................................................... 26
Item 6. Exhibits............................................................................. 26
Exhibits............................................................................. 26
Reports on Form 8-K.................................................................. 26
</TABLE>
-ii-
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CLEAN ENERGY COMBUSTION SYSTEMS, INC,
(A development stage enterprise)
Consolidated Balance Sheet
September 30, 2000
(Expressed in U,S, Dollars)
(Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents $ 24,489 $ 26,414
Short term investments 719 10,000
Accounts receivable and prepaid expenses 25,354 21,261
Advances to an affiliated company 49,794 52,514
Taxes receivable 127,899 0
-----------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 228,255 110,189
PATENTS 21,505 11,427
PROPERTY AND EQUIPMENT 61,479 43,429
-----------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 311,239 $ 165,045
=====================================================================================================
LIABILITIES
CURRENT
Accounts payable $ 23,290 $ 23,297
Accrued liabilities 4,232 11,458
Current payroll taxes 13,748 11,620
Advances from related parties 157,462 254,572
-----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 198,732 300,947
=====================================================================================================
Going concern (Note 2)
DEFICIENCY IN ASSETS
Stockholders' Equity
Authorized
Preferred stock; $.0001 par value; 1,000,000 shares
Common stock; $.0001 par value; 15,000,000 shares
Issued
Series A preferred stock; $.0001 par value
Liquidation preference $1,000
1,000 shares issued and outstanding 1 1
Series B preferred stock; $.0001 par value
Liquidation preference $500,000
250,001 shares issued and outstanding 250 250
Common stock; $.0001 par value; 10,017,365 shares
(December 31, 1999 - 9,643,750)
issued and outstanding 1,001 964
Additional paid-in capital 1,251,021 502,287
Accumulated deficit (1,139,766) (639,404)
-----------------------------------------------------------------------------------------------------
TOTAL DEFICIENCY IN ASSETS 112,507 (135,902)
-----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND DEFICIENCY IN ASSETS $ 311,239 $ 165,045
=====================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
CLEAN ENERGY COMBUSTION SYSTEMS, INC.
(A development stage enterprise)
Consolidated Statement of Operations
(Expressed in U.S. Dollars)
(Unaudited)
----------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 1,
1999 to
Three months ended September 30, Nine months ended September 30, September
-------------------------------- ------------------------------- 30, 2000
2000 1999 2000 1999 (cumulative)
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ADMINISTRATION EXPENSES
Accounting $ 4,400 $ 2,395 $ 8,661 $ 12,113 $ 30,737
Administrative wages and benefits 38,534 41,206 138,628 122,794 296,139
Amortization 5,175 2,928 15,816 6,680 24,617
Communications 1,636 1,855 5,668 5,288 13,369
Foreign exchange loss (gain) (2,045) 834 2,930 6,790 11,515
Interest 884 (337) 20,121 2,725 25,982
Legal 7,981 3,083 31,564 52,273 101,014
Marketing 25,747 17,130 73,245 48,698 152,436
Occupancy 8,045 7,145 25,731 22,602 56,951
Office and miscellaneous 12,326 2,748 21,891 9,040 37,472
Transfer agent fees (1,437) 2,671 1,590 4,213 13,980
---------------------------------------------------------------------------------------------------------------------------------
101,246 81,658 345,845 293,216 764,212
---------------------------------------------------------------------------------------------------------------------------------
RESEARCH AND DEVELOPMENT EXPENSES
Wages and benefits 55,317 48,179 188,287 141,961 384,709
Development 70,361 9,861 94,220 19,740 118,835
Tax recovery (127,990) - (127,990) - (127,990)
---------------------------------------------------------------------------------------------------------------------------------
(2,312) 58,040 154,517 161,701 375,554
---------------------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES AND NET LOSS
FOR THE PERIOD $ 98,934 $ 139,698 $ 500,362 $ 454,917 $1,139,766
=================================================================================================================================
BASIC AND DILUTED LOSS PER SHARE $ (0.01) $ (0.01) $ (0.05) $ (0.05)
==============================================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING 9,768,288 9,643,750 9,685,263 9,643,750
==============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CLEAN ENERGY COMBUSTION SYSTEMS, INC.
(A development stage enterprise)
Consolidated Statement of Deficiency in Assets
From commencement of operations on January 1, 1999 to September 30, 2000
(Expressed in U.S. Dollars)
(Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Series A Series B
Preferred Stock Preferred Stock Common Stock Additional Total
---------------- ----------------- ------------------ Paid-in Deficiency
Shares Amount Shares Amount Shares Amount Capital Deficit in Assets
------ ------ ------- ------ ---------- ------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issued on incorporation 1,000 $ 1 - $ - 9,643,750 $ 964 $ 535 $ - $ 1,500
Private placement - - 250,001 250 - - 499,793 - 500,043
Issue of options to consultant - - - - - - 2,000 - 2,000
Net loss - - - - - - - (639,404) (639,404)
-----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 1,000 1 250,001 250 9,643,750 964 502,328 (639,404) (135,861)
Issue of option to consultant - - - - - - 1,500 - 1,500
Issued on conversion (Note 5(b)) - - - - 373,615 37 747,193 - 747,230
Net loss - - - - - - - (500,362) (500,362)
-----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2000 1,000 1 250,001 250 10,017,365 1,001 1,251,021 (1,139,766) 112,507
===================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
CLEAN ENERGY COMBUSTION SYSTEMS, INC.
(A development stage enterprise)
Consolidated Statement of Cash Flows
(Expressed in U.S. Dollars)
(Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine months ended September 30,
----------------------------------
2000 1999
----------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Total operating expenses for the period (500,362) (454,916)
Adjustments to reconcile total operating expenses
to net cash utilized in operating activities
Amortization 15,816 6,680
Non-cash consulting expense 1,500 -
Change in operating assets and liabilities:
Accounts receivable and prepaid expenses (4,093) (15,133)
Accounts payable (7) 15,319
Accrued liabilities (7,226) -
Payroll taxes 2,128 13,247
Tax receivable (127,899) -
--------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (620,143) (434,803)
--------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of short-term investment 9,281 (47,703)
Purchase of a patent (10,078) (11,137)
Purchase of property and equipment (33,678) (48,188)
--------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (34,475) (107,028)
--------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Advances to an affiliated company 2,720 (51,652)
Proceeds from long-term obligations (97,110) 128,175
Proceeds from advances from related parties 747,083 -
Proceeds from issue of common stock - 964
Proceeds from issue of Series A convertible preferred stock - 250
Proceeds from issue of Series B preferred stock - 1
Additional paid in capital - 501,420
--------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 652,693 579,158
--------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (1,925) 37,327
CASH (BANK OVERDRAFT) AND
CASH EQUIVALENTS, BEGINNING OF PERIOD 26,414 -
--------------------------------------------------------------------------------------------------------------------------
CASH (BANK OVERDRAFT) AND
CASH EQUIVALENTS, END OF PERIOD 24,489 37,327
==========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
CLEAN ENERGY COMBUSTION SYSTEMS, INC.
(A development stage enterprise)
Notes to the Consolidated Financial Statements
September 30, 2000
(Expressed in U.S. Dollars)
(Unaudited)
--------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLIIES
(a) Basis of presentation
These financial statements have been prepared in accordance with
accounting principles generally accepted in the United States for
interim financial reporting and pursuant to the instructions of the
United States Securities and Exchange Commission For 10-Q SB and
Article 10 of Regulation S-X. While these financial statements
reflect all normal recurring adjustments which are, in the opinion of
management, necessary for fair presentation of the results of the
interim period, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. For further information, refer to the
financial statements and footnotes thereto included in the Company's
Annual Report filed on Form 10-K SB for the year ended December 31,
1999.
(b) Use of estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management
to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
(c) Recent pronouncements
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133 (SFAS 133), Accounting for Derivative Instruments
and Hedging Activities, which standardizes the accounting for
derivative instruments. SFAS 133 is effective for all fiscal quarters
of all fiscal years beginning after June 15, 1999. The impact on the
Company's financial statements is not expected to be material.
2. NATURE OF BUSINESS AND GOING CONCERN
Clean Energy Combustion Systems Inc. ("Company") was incorporated in
Delaware, organized and commenced operations on March 1, 1999. These
financial statements also reflect certain preorganization transactions and
commitments incurred between January 1, 1999 and the date of incorporation
on March 1, 1999, which have been accepted by the Board of Directors as
obligations of the Company.
The Company is a development stage company with principal executive offices
located in Vancouver, British Columbia, Canada.
<PAGE>
CLEAN ENERGY COMBUSTION SYSTEMS, INC.
(A development stage enterprise)
Notes to the Consolidated Financial Statements
September 30, 2000
(Expressed in U.S. Dollars)
(Unaudited)
--------------------------------------------------------------------------------
2. NATURE OF BUSINESS AND GOING CONCERN (Continued)
The Company was formed for the specific purpose of acquiring exclusive
world-wide license rights entitling it to design, engineer, manufacture,
market, distribute, license and otherwise commercially exploit two
innovative, patented "burner" technologies, the Pulse Blade Combustion or
"PBC" Technology and the Diesel Technology. The Company acquired two
licenses in the amount of $10 each from founding shareholders of the
Company.
The Company has incurred losses from inception totalling $1,139,766 and has
working capital of $29,523 and does not currently have the financial
resources to complete its business plan. The Company's ability to continue
as a going concern is dependent upon its ability to attain future
profitable operations and to obtain the necessary financing to meet its
obligations and repay its liabilities arising from normal business
operations when they come due. External financing, predominately by the
issuance of common stock to the public will be sought to finance
development of the Company's products; however, there can be no assurance
that sufficient funds will be raised.
The Company's objective is to enter into licensing, royalty, joint venture,
or manufacturing agreements with established national and international
heat transfer industry manufacturers.
3. ADVANCES TO AN AFFILIATED COMPANY
As at September 30, 2000, the Company had advanced $49,794 (Cdn $76,202)
(December 31, 1999 - $52,514 (Cdn $75,794)) to a company controlled by
shareholders in common. These advances are non-interest bearing, are
repayable in Canadian dollars and have no specific terms of repayment.
<PAGE>
CLEAN ENERGY COMBUSTION SYSTEMS, INC.
(A development stage enterprise)
Notes to the Consolidated Financial Statements
September 30, 2000
(Expressed in U.S. Dollars)
(Unaudited)
--------------------------------------------------------------------------------
4. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------------------------------------------------------------- --------------------
Accumulated Net Book Net Book
Cost Depreciation Value Value
----------------- -------------------- ----------------- --------------------
<S> <C> <C> <C> <C>
Communications equipment $ 5,923 $ (2,673) $ 3,250 $ 4,391
Computer hardware 21,507 (8,708) 12,799 9,705
Computer software 4,182 (1,997) 2,185 1,722
Display/promotional equipment 4,690 (1,042) 3,648 -
Furnishings 2,277 (671) 1,606 1,425
Lab equipment 35,771 (8,077) 27,694 20,971
Leasehold improvements 11,345 (1,424) 9,921 5,215
Office equipment 511 (135) 376 -
--------------------------------------------------------------------------------------------------------------------------
$86,206 $(24,727) $61,479 $43,429
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
5. ADVANCES FROM RELATED PARTIES
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ -----------
<S> <C> <C>
Advance from related company 7,170 13,289
Advance from shareholders $ 150,292 $ 241,283
--------------------------------------------------------------------------------------------------------------------------
$ 157,462 $ 254,572
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Advance from related company
As at September 30, 2000, the Company had received advances of $7,169
(Cdn $10,972) (December 31, 1999 - $13,289 (Cdn $19,552)) from a
company controlled by shareholders in common. The advances bear
interest at the rate of 8.75% per annum, are repayable in Canadian
dollars, and have no specific terms of repayment.
<PAGE>
CLEAN ENERGY COMBUSTION SYSTEMS, INC.
(A development stage enterprise)
Notes to the Consolidated Financial Statements
September 30, 2000
(Expressed in U.S. Dollars)
(Unaudited)
--------------------------------------------------------------------------------
5. ADVANCES FROM RELATED PARTIES (Continued)
(b) Advance from shareholder (Continued)
As at September 30, 2000, the Company had borrowed $150,292 (Cdn
$230,000) (December 31, 1999 - $241,283 (Cdn $355,000)) from a
significant shareholder. The loan bears interest at Canadian prime
rate plus 2% per annum and is repayable in Canadian dollars.
The holder of the loan has the right to covert any portion of the
principal amount and all interest into common shares at the conversion
rate of $2.00 per share.
During the three months ended September 30, 2000, the holder converted
$747,230 of loan principle and accrued interest into common shares.
<PAGE>
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
General
The following discussion of our consolidated financial condition and the results
of operations should be read in conjunction with our consolidated financial
statements and the notes to our consolidated financial statements included in
Part I, Item 1, of this report. The information set forth below in this report
is current as of the date of this report, November, 2000, unless an earlier or
later date is indicated. All references to "dollars" in this report refer to
United States, or U.S., dollars unless specific reference is made to Canadian,
or Cdn., dollars. For information relative to currency conversion, see note
Foreign Exchange Fluctuations, under Other Matters, below. The rate of exchange
of Canadian dollars to United States dollars as of September 30, 2000, was Cdn.
$1.53035 to U.S. $1.
Overview
Clean Energy Combustion Systems, Inc. ("we," "our company" or "Clean Energy") is
a development stage enterprise formed on March 1, 1999, for the specific purpose
of acquiring exclusive world-wide license rights entitling us to design,
engineer, manufacture, market, distribute, license and otherwise commercially
exploit two innovative patented "burner" technologies, our pulse blade
combustion technology and our diesel fuel combustion technology. Both of these
technologies have completed the primary development stage and are in a position
to be commercially exploited. Our objective is to enter into licensing,
royalty, joint venture or manufacturing agreements with established national and
international heat transfer industry manufacturers which will result in the
introduction of a variety of different burner units based upon our technology
into various selected market segments. We have no revenues to date, nor have we
entered into any revenue producing contracts to date, although we are currently
working on a number of proto-types under several proposal requests which could
lead to revenue producing contracts over the next four to six months.
For additional and more detailed information relating to our company and our
business, see our registration statement on form SB-2 (amendment no. 3).
Results Of Operations
Operating Revenues
We had no revenues for our nine-month interim fiscal periods ended September 30,
2000 and September 30, 1999.
Operating Loss
. First Nine Months Of Fiscal 2000 As Compared To First Nine Months Of Fiscal
1999
We incurred an operating loss of $500,362 for the first nine months of fiscal
2000, as compared to $454,917 for the first nine months of fiscal 1999,
representing a $45,445, or 10.0%, overall increase. . The operating loss for
the first nine months of fiscal 1999 included $108,888 in pre-incorporation
operating expenses incurred from January 1, 1999 through February 28, 1999,
which we assumed upon our incorporation.
The 10.0% increase in our operating loss for the first nine months of fiscal
2000 over the first nine months of fiscal 1999 was primarily attributable to
the following changes in costs and expenses:
. a $52,629, or 17.96%, increase in administration expense from $293,216 to
$345,845;
. a 127,990 tax recovery in fiscal 2000, and.
. a $79,194, or 74.7%, increase in research and development expense from
$161,701 to $282,507.
<PAGE>
The $52,668 increase in administration expense for the first nine months of
fiscal 2000 over the first nine months of fiscal 1999 was primarily
attributable to across-the-board net increases in costs to support our
increased level of business activities for the first nine months of fiscal
2000, the most significant of which were increases of $15,834 in wages and
benefits, $17,396 in interest payments and $24,547 in marketing costs,
partially offset by a $24,161 decline in legal and accounting fees.
Research and development expense generally relates to the cost--including
allocable salaries--to develop, improve and test our burner systems and
related components. The $79,194 increase in research and development expense
for the first nine months of fiscal 2000 over the first nine months of fiscal
1999 was principally attributable to the cost of materials and equipment
associated with additional research and development efforts.
. Third Quarter Of Fiscal 2000 As Compared To Third Quarter Of Fiscal 1999
We incurred an operating loss of $98,934 for the third quarter of fiscal
2000, as compared to $139,698 for the third quarter of fiscal 1999,
representing a $40,764, or 29.18%, overall decrease. .
The 29.18% decrease in our operating loss for the third quarter of fiscal
2000 over the third quarter of fiscal 1999 was primarily attributable to the
following changes in costs and expenses:
. a $19,588, or 24.0%, increase in administration expense from $81,658 to
$101,246; and
. a $67,638 or 116.54%, increase in research and development expense from
$58,040, to $125.678.
. a 127,990 tax recovery in the third quarter of fiscal 2000
The $19,588 increase in administration expense for the third quarter of
fiscal 2000 over the third quarter of fiscal 1999 was primarily attributable
to across-the-board net increases in costs to support our increased level of
business activities for the third quarter of fiscal 2000, the most
significant of which were increases of $14,279 in wages and benefits, $4,898
in interest payments and $8,617 in marketing costs.
The $67,638 increase in research and development expense for the third
quarter of fiscal 2000 over the third quarter of fiscal 1999 was principally
attributable to the cost of materials and equipment associated with
additional research and development efforts.
Liquidity And Capital Resources
. Sources of Cash
Our cash flow requirements from our inception through September 30, 2000 were
funded primarily from the following sources:
. $747,083 in short-term advances by one of our directors, Mr. R. Dirk
Stinson, which were, in the current quarter, converted under our financing
agreement with Mr. Stinson, to common shares at a conversion price of
US$2.00 per share.
. $500,002 in gross proceeds from a private placement of series "B"
preferred stock which closed on April 6, 1999, and
. $150,292 in short-term advances by one of our directors, Mr. R. Dirk
Stinson.
$619,441 was advanced by Mr. Stinson under a promissory note in the original
amount of $50,000 dated August 8, 1999. This note required our company to
repay the $50,000, plus any additional amounts Mr. Stinson agrees to advance
to our company ($150,292 as of Sept.30, 2,000), plus interest accrued on
these amounts at the rate of prime plus 2% per annum, by August 10, 2000, or
any earlier time we raise Cdn. $750,000 in equity, debt or joint-venture
financing or product revenues. Mr. Stinson is also
<PAGE>
afforded the right under the note to convert any portion of the outstanding
indebtedness under the note into our common stock at any time at the
conversion rate of one share of common stock per $2.00 of indebtedness. On
August 15, 2000, Mr. Stinson converted the current balance of loan into
common shares pursuant to the terms of the promissory note and has continued,
since that date to fund the company through convertible short-term advances.
. Cash Position and Sources And Uses Of Cash
Our cash and cash equivalents position as of Sept.30, 2000 was 24,489, as
compared to $26,414 as of December 31, 1999. Our cash position as of
Sept.30, 1999 was $37,328, as compared to $0 as of March 1, 1999.
The $1,925 decrease in our cash position as of Sept.30, 2000 as compared to
December 31, 1999 was attributable to $620,143 in cash used in operating
activities and $34,475 in cash used in financing activities, partially offset
by $652,693 in cash raised in investing activities. The $37,328 increase in
our cash position as of Sept.30, 1999 as compared to March 1, 1999 was
attributable to $579,161 in cash raised through financing activities,
partially offset by $434,804 in cash used in operating activities and
$107,029 in cash used in investing activities.
Our operating activities required cash in the amount of $620,143 for the
first nine months of fiscal 2000, as compared to cash requirements of
$434,804 for the first nine months of fiscal 1999. The $620,143 in cash used
in operating activities for the first nine months of fiscal 2000 reflected
our net loss of $500,362 for that period, as decreased for non-cash
deductions and a net increase in non-cash working capital balances. The
$434,804 in cash used in operating activities for the first nine months of
fiscal 1999 reflected our net loss of $454,916 for that period, as decreased
for non-cash deductions and a net increase in non-cash working capital
balances.
We used cash in the amount of $33,475 for investing activities for the first
nine months of fiscal 2000, as compared to $107,029 in cash used for
investing activities for the first nine months of fiscal 1999. The principal
use of cash for the first nine months of fiscal 2000 was to acquire property
and equipment of $33,678, compared to acquisitions of property and equipment
of $48,188 for the first nine months of fiscal 1999.
We raised $652,693 in cash from financing activities for the first nine
months of fiscal 2000, as compared to $579,161 in cash raised from financing
activities for the first nine months of fiscal 1999. The $652,693 in cash
raised through financing activities for the first nine months of fiscal 2000
was principally comprised of $649,973 funds advanced by a shareholder and
subsequently converted to common shares. The $579,158 in cash raised through
financing activities for the first nine months of fiscal 1999 was principally
comprised of $500,002 in net proceeds from the private placement of series"B"
preferred stock, partially offset by $51,652 in advances to a related
company.
Other Matters
Foreign Exchange Fluctuations
We recorded a $2,930 foreign currency translation loss for the first nine months
of fiscal 2000 as an administration expense item on our statements of operations
and deficiency in assets in consolidating our books for financial reporting
purposes as a result of the fluctuation in United States--Canadian currency
exchange rates during that period. We anticipate that our exposure to
significant foreign currency gains or losses on our books will increase as we
invest a greater portion of our United States-dollar denominated cash reserves
into our Canadian operations and properties through intercompany advancements.
We cannot give you any assurance that our future operating results will not be
similarly adversely affected by currency exchange rate fluctuations. See Part
I, Item 3, of this report captioned "Quantitative and Qualitative Disclosure
About Market Risk," for a description of other aspects of our company that may
be potentially affected by foreign exchange fluctuations.
<PAGE>
Effect Of Inflation
We do not believe that our operating results were adversely affected during the
first ninesix months of fiscal 2000 or fiscal 1999 by inflation or changing
prices.
Year 2000 Compliance
During fiscal 1999 we reviewed our internal computer systems and software
products for Year 2000 problems, and found them to be generally Year 2000
compliant, and have had no Year 2000 complications as of the date of this
report.
Uncertainties And Other Factors That May Affect Our Future Results And Financial
Condition
Readers are urged to carefully review and consider the various uncertainties and
risks which, in addition to uncertainties and risks presented elsewhere in this
report, may affect our future results of operations or financial condition and
an investment in our securities. These uncertainties and risks should also be
considered in context with the various disclosures concerning our company and
our business and uncertainties and risks that may affect our future results of
operations or financial condition made in other reports we periodically file
with the Securities and Exchange Commission, including the following fillings
which we incorporate by reference into this report:
. our registration statement on form SB-2 (amendment no. 3);
. any quarterly reports on form 10-Q/SB we may filed during the remainder of
fiscal 2000, and
. any current reports on Form 8-K/SB we may file subsequent to this report.
Uncertainties and Risk Factors Generally Relating To Our Company And Our
Business
. As a recently formed company with a limited operating history, we are subject
to all the risks and issues inherent in the establishment and expansion of a
new business enterprise, and our failure to address these risks and issues
will adversely affect our ability to complete pending project proposals,
introduce our products to the market, generate revenues and profits, and
raise additional working capital
We were only recently organized, on March 1, 1999, and have a limited
operating history. We are, as a consequence, subject to all the risks and
issues inherent in the establishment and expansion of a new business
enterprise. Our failure to successfully address these risks would adversely
affect our ability to:
. complete our pending project proposals and introduce burner products using
our technologies onto the market and to compete, with consequential delays
in our ability to generate revenues and profits; and
. raise additional working capital.
Our activities through the date of this report have been limited to:
. developing our business plan;
. obtaining license rights to our burner technologies;
. establishing administrative offices and laboratory facilities; engaging
administrative and research and development personnel; and
. commencing work on various burner proto-types under pending proposals
intended to lead to commercial contracts.
<PAGE>
Risks and issues inherent in the establishment and expansion of a new
business enterprise which we face include, among others, problems of entering
new markets, marketing new technologies, hiring and training personnel,
acquiring reliable facilities and equipment, and implementing operational
controls. In general, startup businesses are subject to risks and or levels
of risk that are often greater than those encountered by companies with
established operations and relationships. Startups often require significant
capital from sources other than operations. The management and employees of
startup business shoulder the burdens of the business operations and a
workload associated with company growth and capitalization that is
disproportionately greater than that for an established business. Our
limited operating history makes it difficult, if not impossible, to predict
future operating results. We cannot give you any assurance that we will
successfully address these risks.
. We have accumulated losses since our inception. and our continued inability
to generate revenues and profits would adversely affect our ability to
complete pending project proposals, introduce our products to the market and
raise additional working capital, and could ultimately force us to suspend
our operations and even liquidate our assets and wind-up and dissolve our
company
We are a developmental stage company since we have not commenced commercial
sales of our burner technologies and have no revenues to date. Our failure
to generate revenues and ultimately profits would:
. in the shorter-term, adversely affect our ability to:
. complete our pending project proposals and introduce burner products
using our technologies onto the market and to compete, with
consequential delays in our ability to generate revenues and profits;
and
. raise additional working capital; and
. in the longer-term, force us to suspend our operations, and possibly even
liquidate our assets and wind-up and dissolve our company.
We do not anticipate that we will generate revenues for at least four to six
months at the earliest, assuming that one or more of our pending projects
lead to a commercial contract. We have, as a result of our lack of revenues,
incurred operating losses in the amount of $1,139,766 from our inception in
March 1999 through September 30, 2000, and we anticipate that we will
continue to incur substantial operating losses for the foreseeable future,
despite any revenues we may receive in the short-term from any of our pending
projects, due to the significant costs associated with the development and
marketing of our burner technologies. We cannot give you any assurance that
we will generate revenues or profits in the near future or at all.
. If we do not raise additional working capital funds to pay our operating and
project expenses, we will not be able to sustain our operations, and may even
be forced to liquidate our assets and wind-up and dissolve our company
We currently have insufficient working capital to fund our projected
operating and project costs for more than one month. Our inability to raise
sufficient additional working capital in the near future would likely force
us to suspend our operations, and possibly even liquidate our assets and
wind-up and dissolve our company.
Our operating expenses are currently being funded through advances made by
one of our directors and principal stockholders, Mr. R. Dirk Stinson.
Although Mr. Stinson has indicated his willingness to continue funding
operations for the near future, has also advised us that he will have no
obligation to make any further advances beyond any amounts he has previously
extended should he at any time deem it inadvisable to do so.
<PAGE>
We anticipate that we will need to raise at least $700,000 to fund our
projected operating and project costs over the next twelve months, and at
least $2.5 million, including the $700,000 noted above, in additional working
capital to fully implement our longer-term business plan and marketing
strategies. We have no current arrangements for obtaining this additional
capital other than our current relationship with Mr. Stinson, and will seek
to raise this amount in one or more increments through contract advances,
public or private sales of debt or equity securities, debt financing or
short-term loans, or a combination of the foregoing. We cannot give you any
assurance that we will be able to secure the additional capital we require to
continue our operation at all, or on terms which will not be objectionable to
our company or our stockholders, including substantial dilution or the sale
or licensing of our technologies.
Note number one to our financial statements states that if we do not raise
sufficient capital there is a substantial doubt as to our ability to continue
as a going concern. Our independent auditors, Deloitte & Touche LLP, stated
in their report accompanying our financial statements for our fiscal year
ended December 31, 1999 that they would be required to express a going
concern opinion were our financial statements prepared in accordance with
United States reporting standards for auditors.
. We have not entered into any revenue-generating contracts to date, and our
failure to enter into revenue-generating contracts would force us to suspend
our operations, and possibly even liquidate our assets and wind-up and
dissolve our company
Although we are working on proto-types under several pending proposals, we
have not entered into any revenue-generating contracts to date, and our
ability to do so will be dependent in primary part upon our ability to
satisfactorily complete the proto-types, to raise sufficient capital to fund
these efforts, and to otherwise successfully implement our various market
strategies under our business plan. Our failure to enter into any revenue-
generating contracts would:
. in the shorter-term, adversely affect our ability to:
. complete other pending project proposals and introduce burner products
using our technologies onto the market and to compete, with
consequential delays in our ability to generate revenues and profits;
and
. raise additional working capital; and
. in the longer-term, force us to suspend our operations, and possibly even
liquidate our assets and wind-up and dissolve our company unless we are
otherwise able to raise sufficient working capital to fund our continuing
operations until we enter into revenue-generating contracts in the farther
future.
Even if we enter into revenue-generating contracts, we cannot give you any
assurance that we will attain or sustain operating profitability as a result
of these contracts.
. Our burner products are based upon burner technologies that are new and
unique, and the failure of these products to achieve or sustain market
acceptance would likely force us to suspend our operations, liquidate our
assets, and wind-up and dissolve our company
The failure of our burner products to achieve or sustain market acceptance
would likely force us to suspend our operations, liquidate our assets, and
wind-up and dissolve our company. Products using our burner technologies
must compete with established conventional steady-state burner technologies
and conventional "tubular" pulse combustion technologies which have already
achieved market acceptance. The design for our burner technologies is new
and unique, and no products based upon our technologies and configurations
have been commercially produced or sold to date, either by our company or by
any of our competitors. Additionally, although there is a market for pulse
combustion burner products using differently configured pulse burner
technology designs, these products are not widely accepted by the market, and
therefore not particularly useful as a precedent for the introduction of our
pulse combustion burner technology. As is typical in the case of any new
technology, demand and market acceptance for products based upon new
technologies are subject to a high level of uncertainty
<PAGE>
and risk, including the risk that the marketplace may not accept, or be
receptive to, the potential benefits of these new products. The extent and
pace of market acceptance of new burner products based upon our burner
technologies will ultimately be a function of many variables, including the
following:
. the efficacy, performance and attributes of these new products;
. the ability to obtain necessary regulatory approvals to commercially
market these new products;
. the effectiveness of marketing and sales efforts, including educating
potential customers as to the distinctive characteristics and benefits of
these new products; and
. the ability to meet manufacturing and delivery schedules; and product
pricing.
The extent and pace of market acceptance of products based upon our burner
technologies will also depend upon general economic conditions affecting
customers' purchasing patterns. Because the market for our burner
technologies is new and evolving, it is difficult, if not impossible, to
predict the future growth rate, and the size of the potential market. We
cannot give you any assurance that a market for our burner technologies will
develop or, if developed, will be sustainable.
. Our inability to develop our sales, marketing and distribution capabilities
either internally or through strategic partners or third party marketing and
distribution companies would adversely affect our ability to introduce our
products to the market, generate revenues and profits, and raise additional
working capital, and may even force us to suspend our operations and possibly
even liquidate our assets and wind-up and dissolve our company
We currently have no internal sales, marketing and distribution capabilities,
and will likely be forced to rely extensively on strategic partners or third
party marketing and distribution companies. Our failure to generate
substantial sales through any strategic partners or distribution arrangements
we procure or to otherwise develop our own internal sales, marketing and
distribution capabilities would:
. in the shorter-term, adversely affect our ability to:
. introduce burner products using our technologies onto the market and to
compete, with consequential delays in our ability to generate revenues
and profits; and
. raise additional working capital; and
. in the longer-term, force us to suspend our operations, and possibly even
liquidate our assets and wind-up and dissolve our company.
As a consequence of our prospective reliance upon strategic partners or third
party marketing and distribution partners, our ability to effectively market
and distribute our burner products will be dependent in large part on the
strength and financial condition of others, the expertise and relationships
of our strategic partners or distributors and marketers with customers, and
the interest of these parties in selling and marketing our products. Our
prospective strategic partners and marketing and distribution parties may
also market and distribute the products of other companies. If our
relationships with any strategic partners or third party marketing and
distribution partners were to terminate, we would need to either develop
alternative relationships or develop our own internal sales and marketing
forces to continue to sell our products. Even if we are able to develop our
internal sales, marketing and distribution capabilities, these efforts would
require significant cash and other resources that would be diverted from
other uses, if available at all, and could cause delays or interruptions in
our product supply to customers, which could result in the loss of
significant sales or customers. We can give you no assurance that we will be
successful in our efforts to engage strategic partners or third party
marketing and distribution companies to meet our sales, marketing and
distribution requirements.
. Our strategic partners' or third party suppliers' failure to satisfy our
manufacturing requirements would adversely affect our ability to introduce
our products to the market, generate revenues and
<PAGE>
profits, and raise additional working capital, and may even force us to
suspend our operations and possibly even liquidate our assets and wind-up and
dissolve our company
We currently have no internal manufacturing capability, and will likely be
forced to rely extensively on strategic partners or third party contract
manufacturers or suppliers. A delay or interruption in the supply of
components or finished products would:
. in the shorter-term, adversely affect our ability to:
. introduce burner products using our technologies onto the market and
to compete, with consequential delays in our ability to generate
revenues and profits; and
. raise additional working capital; and
. in the longer-term, force us to suspend our operations, and possibly
even liquidate our assets and wind-up and dissolve our company.
Should we be forced to manufacture our burner products, we cannot give you
any assurance that we will be able to develop or internal manufacturing
capability or procure third party suppliers. Moreover, we cannot give you
any assurance that any contract manufacturers or suppliers we procure will be
able to supply our product in a timely or cost effective manner or in
accordance with applicable regulatory requirements or our specifications.
. Our inability to increase the amount of financial resources for our research
and development requirements would adversely affect our ability to introduce
our products to the market and to generate revenues and profits
Due to the early developmental stage of our business, we have expended only
limited amounts on research and development of our burner products to date,
including development of project proto-types, and currently have very limited
resources to devote to future research and development. Unless we are able
to obtain and devote resources to our research and development efforts,
including project proto-types, we may only be able to develop limited product
offerings in the future and our ability to procure contracts or otherwise
achieve market acceptance for our burner products will be limited. As a
result, we may fail to achieve significant growth in revenues or
profitability in the future.
. Our inability to achieve or sustain market acceptance for our burner products
as a consequence of the intense competition that is prevalent in the
conventional burner industry would likely force us to suspend our operations,
liquidate our assets, and wind-up and dissolve our company
Products based upon our burner technologies will face intense domestic and
foreign competition in all markets in which they are introduced from
conventional products and technologies already being sold in these markets.
The failure of our burner products to achieve or sustain market acceptance
would likely force us to suspend our operations, liquidate our assets, and
wind-up and dissolve our company. Additionally, many of our prospective
competitors have significantly greater financial, technical and marketing
resources and trade name recognition than ours, which may enable them to
successfully develop and market products based on technologies or approaches
similar to ours, or develop products based on other technologies or
approaches which are, or may be, competitive with our burner technologies.
The development by our competitors new or improved products, processes or
technologies may make our burner technologies less competitive or obsolete.
We will be required to devote significant financial and other resources to
continue to develop our burner technologies in view of potential competition.
We cannot give you any assurance that we will be able to initially penetrate
or compete successfully within the heat transfer industry.
. The loss of our technology licenses as a consequence of our failure to list
our common stock on a national market would likely force us to suspend our
operations, liquidate our assets, and wind-up and dissolve our company
<PAGE>
The licensors of our pulse combustion and diesel fuel combustion technologies
reserved several termination rights as a condition for their licensing these
technologies to our company. The loss of either of our technology licenses
would likely force us to suspend our operations, liquidate our assets, and
wind-up and dissolve our company. Specifically:
. 818879 Alberta, Ltd., the licensor of our pulse combustion technology,
reserves the right to terminate the pulse combustion technology license if
our common stock does not actively trade on a "national market," which we
define under the license agreement as The New York Stock Exchange, The
American Stock Exchange or The Nasdaq Stock Market, on or after March 4,
2002. Should 818879 Alberta, Ltd., exercise this termination right, we
reserve the right to over-ride 818879 Alberta, Ltd.'s exercise by
purchasing the pulse combustion technology outright for a formula-based
cash payment.
. Mr. John D. Chato, the licensor of our diesel fuel combustion technology,
reserves the right to terminate the diesel fuel combustion technology
license if the 818879 Alberta, Ltd. terminates the pulse combustion
technology license for the reasons stated above.
. If we acquire title to our pulse combustion technology from 818879
Alberta, Ltd. by reason of our success in developing an active trading
market on a national market, then 818879 Alberta, Ltd. will retain the
right to repurchase the pulse combustion technology from us should we
declare bankruptcy or become insolvent.
We can give you no assurance in the event of the potential termination of
either of our technology licenses that we will be able to preserve the
license through the exercise of any cures or other protective rights
available to us under the applicable technology license.
. Our inability to retain our key managerial and research and development
personnel would adversely affect our ability to introduce our products to the
market, generate revenues and profits, and raise additional working capital,
and may even force us to suspend our operations and possibly even liquidate
our assets and wind-up and dissolve our company
Our success depends to a significant extent on the continued efforts of our
research and development and senior management team, which currently is
composed of a small number of individuals, including Mr. John D. Chato, our
head of research and development and the inventor of our licensed
technologies, Mr. John P. Thuot, our President, Mr. Barry A. Sheahan, our
Chief Financial Officer, and Mr. James V. DeFina, our Projects Director. The
loss of any of these management personnel would:
. in the shorter-term, adversely affect our ability to:
. complete our pending project proposals and introduce burner products
using our technologies onto the market and to compete, with
consequential delays in our ability to generate revenues and profits;
and
. raise additional working capital; and
. in the longer-term, if not satisfactorily replaced, force us to suspend
our operations, and possibly even liquidate our assets and wind-up and
dissolve our company.
Although Messrs. Chato, Thuot, Sheahan and DeFina have signed employment
agreements, we cannot give you any assurance that one or more of these
employees will not leave our company. We also do not carry key person life
insurance on any of our key management personnel.
. Our inability to attract the qualified personnel engineering, managerial,
sales and marketing and administrative personnel required to implement our
growth strategies would impede our growth
Our ability to implement our growth strategies will be dependent upon our
continuing ability to attract and retain highly qualified engineering,
managerial, sales and marketing and administrative personnel. Our
<PAGE>
inability to attract and retain the necessary personnel would impede our
growth. Competition for the type of personnel we require is intense and we
cannot give you any assurance that we will be able to retain our key
managerial and technical employees, or that we will be able to attract and
retain additional highly qualified managerial and technical personnel in the
future
. Our inability to effectively manage our growth would adversely affect our
ability to introduce our products to the market, generate revenues and
profits, and raise additional working capital
Our success will depend upon the rapid expansion of our business. Our
inability to effectively manage our growth, or the failure of our new
personnel to achieve anticipated performance levels, would adversely affect
our ability to:
. complete our pending project proposals and introduce burner products using
our technologies onto the market and to compete, with consequential delays
in our ability to generate revenues and profits; and
. raise additional working capital.
Expansion will place a significant strain on our financial, management and
other resources, and will require us, among other things, to:
. change, expand and improve our operating, managerial and financial systems
and controls;
. improve he coordination between our various corporate functions; and
. hire additional engineering, sales and marketing, customer service and
managerial personnel.
We cannot give you any assurance that our efforts to hiring or retain these
personnel will be successful, or that we will be able to manage the expansion
of our business effectively.
. Our inability to protect our patents and proprietary rights would force us to
suspend our operations and possibly even liquidate our assets and wind-up and
dissolve our company
Our ability to compete effectively will be materially dependent upon the
proprietary nature of our designs, processes, technologies and materials.
The invalidation or circumvention of key patents or proprietary rights which
we own or license would likely force us to suspend our operations, liquidate
our assets, and wind-up and dissolve our company.
Although we protect our proprietary property, technologies and processes
through a combination of patent law, trade secrets and non-disclosure
agreements, we cannot give you any assurance that these measures will prove
to be effective. For example, in the case of patents, we cannot give you any
assurance that our or our licensors' existing patents will not be
invalidated, that any patents that we or our licensors' currently or
prospectively apply for will be granted, or that any of these patents will
ultimately provide significant commercial benefits. Moreover, it is possible
that competing companies may circumvent any patents that we or our licensors
may hold by developing products which closely emulate but do not infringe our
or our these patents, and accordingly market products that compete with our
products without obtaining a license from us. In addition to patented or
potentially patentable designs, technologies, processes and materials, we
also rely on proprietary designs, technologies, processes and know-how not
eligible for patent protection. We cannot give you any assurance that our
competitors will not independently develop the same or superior designs,
technologies, processes and know-how as we possess.
We believe that the international market for our products and technologies is
as important as the domestic market, and we will therefore seek patent
protection for our products and technologies or those of our licensors in
selected foreign countries. Because of the differences in foreign patent and
other laws concerning proprietary rights, our products and technologies may
not receive the same degree of protection in a number of foreign countries as
they would in the United States.
<PAGE>
We cannot give you any assurance that we will be able to successfully defend
our patents and proprietary rights. We also cannot give you any assurance
that we will not be required to defend against litigation involving the
patents or proprietary rights of others, or that we will be able to obtain
licenses for these rights. Legal and accounting costs relating to
prosecuting or defending patent infringement litigation may be substantial.
Matters Relating To Our Capital Stock
. There is no public trading market for our common stock, and no public trading
market may ever develop
There is no public market for our common stock or other securities, and we
cannot give you any assurance that any active or liquid public market for our
common stock will develop or be sustained at any time in the future. Our
common stock does not now, and may never qualify for, quotation or listing on
any over-the-counter market or on any exchange.
. In the absence of a public market for our common stock, your ability to sell
our common stock will limited to privately negotiated transactions, and you
will face difficulties in finding purchasers for your shares
In the absence of a public market for our common stock on an over-the-counter
market or an exchange, you will not be able to sell any common shares or
other securities you may hold in Clean Energy through normal brokerage
channels, and your ability to sell these securities will be limited to
privately negotiated transactions. You will likely face difficulties in
finding a purchaser for your shares, particularly in view of our limited
operating history, our absence of revenues, profits and dividends, our need
for additional capital, your position as a minority stockholder, and the
other risk factors discussed in this report relating to an investment in our
common stock. Lenders will also not readily accept your shares as collateral
for these same reasons. Also, our company and our officers, directors,
stockholders and agents are under no obligation to purchase these shares from
you. As a result of these factors, you may not be able to sell or liquidate
these shares should you need to do so due to a financial emergency or other
exigent circumstances, including your death or disability. Moreover, if you
do find a purchaser for your shares, the price you receive may be less than
the price you believe to be warranted. Consequently, you should consider any
common shares or other securities you hold in Clean Energy only as an
illiquid long-term investment.
. Our common stock may never be quoted on the OTC Bulletin Board
Although we have promised some of our stockholders that we would use our best
efforts to procure a market makers to file a Form 15c2-11 application with
the NASD in order to quote our common stock on the OTC Bulletin Board, we
have not procured any sponsoring market maker to date, and we cannot give you
any assurance that we will be able to procure a sponsoring market maker or
that an active or liquid public market for our common stock will develop or
be sustained if the NASD eventually accepts our common stock for quotation.
. Even if a public market for our common stock were to develop, your ability to
sell shares on that market will be circumscribed by a number of regulatory
and contractual restrictions
Even if a public market for our common stock is eventually developed through
its quotation on the OTC Bulletin Board or later quotation or listing on a
national market, your ability to sell our common stock on that public market
will be circumscribed by the following regulatory and contractual
considerations:
. the disclosure and investor suitability rules promulgated under the Penny
Stock Reform Act of 1990 and limitations mandated by Rule 15c-2-6
promulgated by the Securities and Exchange Commission;
. the necessity of complying with any state "Blue Sky" or Canadian
provincial securities laws which may be applicable;
<PAGE>
. contractual volume restrictions on sale imposed on some of the holders of
blocks of more than 3,000 shares of our common stock upon whom we have
imposed lock-up restrictions as a condition to our cooperation in
establishing a public market for our common stock on the OTC Electronic
Bulletin Board; and
. the amount of shares which you may freely trade under Rule 144 if
applicable.
Should a public market for our common stock develop, no prediction can be
made as to the effect, if any, that the sale of shares or the availability of
shares for sale will have on the market price prevailing from time to time.
Moreover, sales of substantial amounts of our common stock on the public
market, or the perception that substantial sales could occur, could adversely
affect the prevailing market prices for our common stock and also, to the
extent the prevailing market price for our common stock is reduced, adversely
impact our ability to raise additional capital in the equity markets.
. Even if a public market for our common stock were to develop, our stock price
would likely be volatile due to market considerations beyond our control
The securities markets have from time to time experienced significant price
and volume fluctuations that can be unrelated to the operating performance or
financial condition of any particular company. This is especially true with
respect to emerging companies such as ours. Announcements of technology
innovations or new products by other companies, release of reports by
securities analysts, regulatory developments, economic or other external
factors, as well as quarterly fluctuation in our or in our competitors'
operating results, could have a significant impact on our stock price were a
public market develop for our common stock.
. You should not expect to receive a liquidation distribution
If we were to wind-up and dissolve our company and liquidate and distribute
our assets, you would share ratably with our other common stockholders in our
assets only after we satisfy the following obligations:
. any amounts we would owe to our creditors ($198,732 as of September,
2000);
. any amounts we would owe to our series "A" preferred stockholders as a
liquidation preference ($1,000 as of the date of this report);
. any amounts we would owe to our series "B" preferred stockholders as a
liquidation preference ($500,002 as of the date of this report); and
. any amounts we would owe to our series "C" preferred stockholders as a
liquidation preference (currently $0).
If our liquidation were attributable to our inability to profitably operate
our business, then it is likely that we would have material liabilities at
the time of liquidation or dissolution. Accordingly, we cannot give you any
assurance that sufficient assets will remain available after the payment of
our creditors and preferred stockholders to enable you to receive any
liquidation distribution with respect to any common shares or other
securities of Clean Energy you may hold.
. Our current principal stockholders will continue to control our company, and
will accordingly retain the power to substantially influence corporate
actions that conflict with the interests of public stockholders
Our present executive officers and directors, as a group, will hold
approximately 57.6% of our common stock following the completion of the sales
and distributions contemplated under our registration statement on form SB-2
(amendment no. 3), and will, and as consequence, retain the power to
substantially influence corporate actions that conflict with the interests of
public stockholders, including:
. our business expansion or acquisition policies;
<PAGE>
. whether we should raise additional capital through financing or equity
sources, and in what amounts;
. whether we should retain cash reserves for future product development, or
distribute them as a dividend, and in what amounts;
. whether we should sell all or a substantial portion of our assets, or
should merge or consolidate with another corporation; and
. transactions which may cause or prevent a change in control or the
winding-up and dissolution of our company.
An investment in our common stock will entail you entrusting these and
similar decisions to our present management subject, of course, to their
fiduciary duties and the business judgment rule.
. Our right to issue additional capital stock at any time could have an adverse
effect on your proportionate ownership and voting rights
Our Certificate of Incorporation authorizes us to issue 15,000,000 shares of
common stock, and 1,000,000 shares of preferred stock, including 248,999
shares of serial or "blank check" preferred stock that will contain rights,
preferences and privileges to be prospectively fixed by our Board of
Directors at the time of issuance--without stockholder consent or approval--
based upon any factors our Board may deem relevant at that time. Your
proportionate ownership and voting rights as a common stockholder could be
adversely effected by the issuance of additional shares of our common stock
or our series "C" convertible or "blank check" preferred stock, depending on
their rights, preferences and privileges, including a substantial dilution in
your net tangible book value per share. We cannot give you any assurance
that we will not issue shares of either our common stock or our series "C"
convertible or "blank check" preferred stock under circumstances we may deem
appropriate at the time. See that section of this report captioned
"Description Of Our Securities" for information concerning our
capitalization, including the rights, preferences and privileges of our
preferred stock.
. A third party acquisition of our company would be difficult due to "anti-
takeover" provisions contained in our charter documents and provided for
under Delaware corporate law
Some of the provisions contained in our charter documents and Delaware
corporate law may discourage transactions involving an actual or potential
change in control of our company, and may limit the ability of our
stockholders to approve these transactions should they deem them to be in
their best interests. For example, our Certificate of Incorporation and
Bylaws:
. reserve the right to fill any vacancies in any Non-Series A Director
positions exclusively to our Board of Directors;
. stipulate that our Non-Series A Directors can only be removed for cause;
. require any action to be taken by our common and series "B" preferred
stockholders to be effected at a duly called annual or special meeting of
these stockholders, and prohibit these stockholders from effecting any
action by written consent unless approved by a two-thirds affirmative vote
of these stockholders;
. reserve the right to call special meetings of our common and series "B"
preferred stockholders exclusively to our Board of Directors and
designated executive officers; and
. require any amendments to the preceding provisions to be approved by a
two-thirds affirmative vote of our stockholders.
We are also subject to Section 203 of the Delaware General Corporation Law
which generally prohibits a Delaware corporation from engaging in any of a
broad range of business combinations with any
<PAGE>
"interested stockholder" for a period of three years following the date that
stockholder became an interested stockholder.
Our Board of Directors also has the authority to fix the rights and
preferences of and issue shares of our "blank check" preferred stock without
the approval of our common stockholder and, in some cases, our series "B" and
series "C" preferred stockholders. Any "blank check" preferred stock we
issue could also be utilized as a method for raising additional capital or
discouraging, delaying or preventing a change in control of our company. We
cannot give you any assurance that we will not issue "blank check" preferred
stock under circumstances we may deem appropriate at the time.
Our Statements About Anticipated Events Or Future Trends May Prove To Be
Inaccurate
In this report we have made a number of statements, which we refer to as
"forward-looking statements," generally relating to our expectations or
speculations as to future events and our observations as to trends and factors
that may impact our future operating results. You can generally identify any
forward-looking statements contained in this report through words such as
"anticipate," "believe," "estimate," "expect," "budget" and "project" and
similar expressions. Forward-looking statements that contained in this report,
for example, include statements relating to:
. the amount and character of future revenues we may receive, the timing of
receipt of revenues, and the timing of break-even, including, by way of
example and not limitation, those statements contained in those sections in
Part I, Item 2 of this report captioned "Management's Discussion And Analysis
Of Financial Condition And Results Of Operations--Overview;" and
"Management's Discussion And Analysis Of Financial Condition And Results Of
Operations--Capital Requirements;"
. the amount and character of expenses we may incur, and the timing of these
expenditures including, by way of example and not limitation, those
statements contained in those sections in Part I, Item 2, of this report
captioned "Management's Discussion And Analysis Of Financial Condition And
Results Of Operations--Capital Requirements" and "Management's Discussion And
Analysis Of Financial Condition And Results Of Operations--Results Of
Consolidated Operations;" and
. the amount and composition of our capital expense budget, and the timing of
these capital outlays including, by way of example and not limitation, those
statements contained in those sections in Part I, Item 2, of this report
captioned "Management's Discussion And Analysis Of Financial Condition And
Results Of Operations--Capital Requirements" and "Management's Discussion And
Analysis Of Financial Condition And Results Of Operations--Results Of
Consolidated Operations."
Whenever you read any forward looking statement contained in this report, you
should be aware of and take into consideration that:
. the forward-looking statement merely reflects the current expectations and
speculation of our management as to anticipated events or observations
relating to future trends based, in part, upon currently available
information and our current business plan, and
. actual results from these future events may differ materially from the
results expected or speculated or trends observed as expressed in, or implied
by, the forward-looking statement, as a result of changes in circumstances
and events and other uncertainties and risks, including:
. changes in our business plan; and
. the occurrence of the various types of uncertainties and risk factors
described above in this section as well as those described in Part I, Item
3, of this report captioned "Quantitative and Qualitative Disclosure About
Market Risk;" and
. the forward-looking statement must, in any event, be considered in context
with the various disclosures concerning our company and our business made in
this report as well as other reports we periodically file with the Securities
and Exchange Commission.
<PAGE>
As a consequence of the forgoing factors, you are cautioned not to put undue
reliance on any forward-looking statement contained in this report.
We are not obligated to update or revise any forward looking statement contained
in this report to reflect new events or circumstances except to the extent
required by law. You are also cautioned that we intend for all forward-looking
statements contained in this report to be construed as "forward-looking
statements" within the meaning Section 21E of the United States Securities
Exchange Act of 1934, which establishes a safe-harbor from private actions for
forward-looking statements as defined by Section 21E.
Item 3. Quantitative And Qualitative Disclosures About Market Risk
Currency Fluctuations
We intend to sell our products and technologies internationally as well as to
the United States and within Canada. This will subject us to various risks
associated with international transactions that may adversely effect our results
of operations, including risks associated with:
. fluctuating exchange rates,
. the regulation by the governments of the United States and Canada as well as
foreign governments of fund transfers and export and import duties and
tariffs; and
. political instability.
We do not currently engage in activities to mitigate the effects of foreign
currency fluctuations, and we anticipate we will be paid in U.S. dollars with
respect to any international transactions we may enter into. If earnings from
international operations increase, our exposure to fluctuations in foreign
currencies may increase, and we may utilize forward exchange rate contracts or
engage in other efforts to mitigate foreign currency risks. We can give no you
assurance as to the effectiveness of these efforts in limiting any adverse
effects of foreign currency fluctuations on our international operations and our
overall results of operations.
Interest Rate Fluctuations
Our interest income from short-term investments could be adversely affected by
any material changes in interest rates within the United States.
ITEM II OTHER INFORMATION
Item 1. Legal Proceedings
As of the date of this report: (1) there are no material legal proceedings
pending or, to the knowledge of our management, contemplated or threatened, to
which to our company or properties are or may become a party; and (2) to the
knowledge of our management, no material proceedings to which any director,
officer of affiliate of our company is a party adverse to our company or has a
material interest adverse to our company.
Item 2. Changes In Securities And Use Of Proceeds
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
<PAGE>
Item 4. Submission Of Matters To A Vote Of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits
Exhibits
27 Financial Data Table
Reports on Form 8--K
None
Signatures
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this quarterly report on form 10--Q/SB to be signed
on its behalf by the undersigned, thereunto duly authorized.
Dated at Burnaby, British Columbia, Canada, this 13th day of November, 2000.
CLEAN ENERGY COMBUSTION SYSTEMS, INC.
By: /s/ John P. Thuot
------------------------------
John P. Thuot
President
(principal executive officer)
By: /s/ Barry A. Sheahan
------------------------------
Barry A. Sheahan
Chief Financial Officer
(principal accounting officer)
