<PAGE>
As filed with the Securities and Exchange Commission on September 1, 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 Three-month Period Ended March 31, 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:
9,643,750 shares of common stock, par value $0.0001 per share, as of
March 31, 2000
================================================================================
<PAGE>
CLEAN ENERGY COMBUSTION SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10--Q/SB
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION................................................................ 1
Item 1. Financial Statements................................................................. 1
Consolidated Balance Sheet........................................................... 1
Consolidated Statement Of Operations................................................. 2
Consolidated Statement Of Deficiency In Assets....................................... 3
Consolidated Statement Of Cash Flows................................................. 4
Notes To Consolidated Financial Statements........................................... 6
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.................................................................. 13
Item 3. Quantitative And Qualitative Disclosures About Market Risk........................... 24
Currency Fluctuations................................................................ 24
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.................................. 25
Item 5. Other Information.................................................................... 25
Item 6. Exhibits............................................................................. 25
Exhibits............................................................................. 25
Reports on Form 8--K................................................................. 25
</TABLE>
-ii-
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CLEAN ENERGY COMBUSTION SYSTEMS, INC.
(a development stage enterprise)
Consolidated Balance Sheet
(expressed in U.S. dollars)
(unaudited)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
March 31, December 31,
2000 1999
--------- ------------
<S> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents $ 4,506 $ 26,414
Short term investments - 10,000
Accounts receivable and prepaid expenses 13,898 21,261
Advances to an affiliated company 51,458 52,514
---------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 69,862 110,189
PATENTS 19,123 11,427
PROPERTY AND EQUIPMENT 58,451 43,429
---------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 147,436 $ 165,045
===================================================================================================
LIABILITIES
CURRENT
Accounts payable $ 33,297 $ 23,297
Accrued liabilities 14,727 11,458
Current payroll taxes 15,565 11,620
Advances from related parties 405,608 254,572
---------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 469,197 300,947
---------------------------------------------------------------------------------------------------
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; 9,643,750 shares issued and
outstanding 964 964
Additional paid-in capital 502,787 502,287
Accumulated deficit (825,763) (639,404)
---------------------------------------------------------------------------------------------------
TOTAL DEFICIENCY IN ASSETS (321,761) (135,902)
---------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND DEFICIENCY IN ASSETS $ 147,436 $ 165,045
---------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
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<PAGE>
CLEAN ENERGY COMBUSTION SYSTEMS, INC.
(a development stage enterprise)
Consolidated Statement Of Operations
(expressed in U.S. dollars)
(unaudited)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
January 1, 2000
(inception)
Three months ended March 31, March 31, 2000
------------------------------
2000 1999 (cumulative)
---------------------------------------------------
<S> <C> <C> <C>
ADMINISTRATION EXPENSES
Accounting $ - $ 4,632 $ 22,076
Administrative wages and benefits 46,135 41,909 203,646
Amortization 4,580 877 13,381
Communications 2,103 1,819 9,804
Foreign exchange loss 8,282 269 16,867
Interest 7,272 - 13,133
Legal 12,973 31,957 82,423
Marketing 21,434 18,031 100,625
Occupancy 9,073 6,999 40,293
Office and miscellaneous 5,162 3,515 20,743
Transfer agent fees 3,027 - 15,417
----------------------------------------------------------------------------------------------
TOTAL ADMINISTRATION EXPENSES 120,041 110,008 538,408
----------------------------------------------------------------------------------------------
RESEARCH AND DEVELOPMENT EXPENSES
Wages and benefits 53,184 43,177 249,606
Development 13,134 4,716 37,749
----------------------------------------------------------------------------------------------
TOTAL RESEARCH AND DEVELOPMENT EXPENSES 66,318 47,893 287,355
----------------------------------------------------------------------------------------------
TOTAL EXPENSES AND NET LOSS FOR THE PERIOD $ (186,359) $ (157,901) $(825,763)
==============================================================================================
BASIC AND DILUTED LOSS PER SHARE $ (0,02) $ (0,05)
==============================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING 9,643,750 3,214,583
=============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
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<PAGE>
CLEAN ENERGY COMBUSTION SYSTEMS, INC.
(a development stage enterprise)
Consolidated Statement Of Deficiency In Assets
(expressed in U.S. dollars)
(unaudited)
<TABLE>
<CAPTION>
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Series "A" Series "B"
Preferred Stock Preferred Stock Common Stock Additional
---------------- ---------------- ---------------- Paid-in
Shares Amount Shares Amount Shares Amount Capital Deficit
------ ------ ------ ------ ------ ------ ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issued on incorporation 1,000 $ 1 - $ - 9,643,750 $964 $ 535 $ -
Private placement - - 250,001 250 - - 499,752 -
Issue of options to consultant - - - - - - 2,000 -
Net loss - - - - - - - (639,404)
-----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 1,000 1 250,001 250 9,643,750 964 502,287 (639,404)
Issue of option to consultant - - - - - - 500 -
Net loss - - - - - - - (186,359)
-----------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2000 1,000 $ 1 250,001 $250 9,643,750 $964 $502,787 $(825,763)
-----------------------------------------------------------------------------------------------------------------------
<CAPTION>
--------------------------------------------
Total
Deficiency
in Asset
----------
<S> <C>
Issued on incorporation $ 1,500
Private placement 500,000
Issue of options to consultant 2,000
Net loss (639,404)
--------------------------------------------
Balance, December 31, 1999 (135,902)
Issue of option to consultant 500
Net loss (186,359)
--------------------------------------------
Balance, March 31, 2000 $(321,761)
--------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
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<PAGE>
CLEAN ENERGY COMBUSTION SYSTEMS, INC.
(a development stage enterprise)
Consolidated Statement Of Cash Flows
(expressed in U.S. dollars)
(unaudited)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
January 1, 1999
Three months ended March 31, (inception) to
---------------------------- March 31, 2000
2000 1999 (cumulative)
------------ ------------- ---------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Total operating expenses for the period $(186,359) $(157,901) $(825,763)
Adjustments to reconcile total operating expenses to net cash
utilized in operating activities:
Amortization 4,580 877 13,381
Non-cash consulting expense 500 - 2,500
Change in operating assets and liabilities:
Accounts receivable and prepaid expenses 7,363 (4,969) (13,898)
Accounts payable 10,000 54,784 33,297
Accrued liabilities 3,269 - 14,727
Payroll taxes 3,945 40,669 15,565
------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (156,702) (66,540) (760,191)
------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of short-term investment 10,000 - -
Purchase of a patent (7,696) - (19,123)
Purchase of property and equipment (19,602) (17,654) (71,832)
------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (17,298) (17,654) (90,955)
------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
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<PAGE>
CLEAN ENERGY COMBUSTION SYSTEMS, INC.
(a development stage enterprise)
Consolidated Statement Of Cash Flows
(expressed in U.S. dollars)
(unaudited) Continued
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
January 1, 1999
Three months ended March 31, (inception) to
---------------------------- March 31, 2000
2000 1999 (cumulative)
------------ -------------- ---------------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Advances to an affiliated company 1,056 42,518 (51,458)
Proceeds from long-term obligations 150,874 - 392,157
Proceeds from advances from related parties 162 40,842 13,451
Proceeds from issue of common stock - 1,000 1,000
Proceeds from issue of Series A convertible preferred stock - 500 500
Proceeds from issue of Series B preferred stock - - 500,000
-----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 152,092 84,860 855,650
-----------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (21,908) 666 4,560
CASH (BANK OVERDRAFT) AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 26,414 - -
-----------------------------------------------------------------------------------------------------------------
CASH (BANK OVERDRAFT) AND CASH EQUIVALENTS AT END
OF PERIOD $ 4,506 $ 666 $ 4,506
-----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
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<PAGE>
CLEAN ENERGY COMBUSTION SYSTEMS, INC.
(a development stage enterprise)
Notes To Consolidated Financial Statements
(expressed in U.S. dollars)
(unaudited)
--------------------------------------------------------------------------------
1. Organization And Operations
(a) Our Company
Clean Energy Combustion Systems, Inc. ("we," "our company" or "Clean
Energy") was incorporated under the laws of the State of Delaware and
organized and commenced its operations on March 1, 1999. These
financial statements also reflect select pre-organization transactions
and commitments incurred between January 1, 1999 and the date of
incorporation on March 1, 1999, that were accepted by the board of
directors of Clean Energy in connection with its organization as
obligations of our company.
(b) Our Business
Clean Energy was formed 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 or "PBC" technology and our diesel fuel combustion
technology. Clean Energy acquired these technologies through the
purchase of two licenses in the amount of $10 each from founding
shareholders of our company.
Since we have not generated operating revenues to date, we should be
considered a development stage enterprise. Clean Energy has incurred
losses from inception totalling $825,763 and has a working capital
deficiency of $399,335 and does not currently have the financial
resources to complete its business plan. Our ability to continue as a
going concern will be dependent upon our ability to attain future
profitable operations and to obtain the necessary financing to meet
our obligations and repay our liabilities arising from normal business
operations when they come due. External financing, predominately in
the short-term by loans from affiliated parties and in the longer-term
through the issuance of common stock to the public will be sought to
finance development of our products; however, there can be no
assurance that sufficient funds will be raised.
Our objective is to enter into licensing, royalty, joint venture, or
manufacturing agreements with established national and international
heat transfer industry manufacturers.
2. Significant Accounting Policies
(a) Basis Of Presentation
We have prepared these consolidated financial statements in accordance
with accounting principles generally accepted in the United States for
interim financial reporting. 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 notes
required by accounting principles generally accepted in the United
States for complete financial statements. For further information,
refer to our consolidated financial statements for our fiscal year
ended December 31, 1999 included in Clean Energy's registration
statement on form SB-2 (amendment no. 3).
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<PAGE>
(b) Consolidation
We have consolidated the accounts of our wholly owned subsidiary with
those of Clean Energy in the course of preparing these consolidated
financial statements. All significant intercompany balances and
transactions amongst Clean Energy and its subsidiary have been
eliminated as a consequence of the consolidation process, and are
therefore not reflected in these consolidated financial statements.
(c) Estimates And Assumptions
The preparation of these consolidated financial statements in
conformity with generally accepted accounting principles in the United
States requires our management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of these consolidated
financial statements and the reported amount of revenues and expenses
during the reporting periods. Actual results may differ from those
estimates.
(d) Cash And Cash Equivalents
Cash and cash equivalents consist of cash on hand, funds on deposit
and short-term investments with an original maturity of 90 days or
less.
(e) Short-Term Investments
Short-term investments consist of term deposits with a one-year
maturity. These investments are cashable and can be drawn on at any
time.
(f) Patents
Costs related to the acquisition of patents are capitalized in the
accounts and are amortized on a straight-line basis over the shorter
of the estimated life of the technology and the life of the patent
commencing the first quarter following acquisition, which is 20 years.
The costs of servicing our patents are expensed as incurred. Clean
Energy assesses potential impairment of patents by measuring the
expected net recovery based on cash flows from products based on these
rights on an annual basis. These capitalized costs are valued at the
lower of amortized cost and net recoverable amount.
(g) Property And Equipment
We state property and equipment at cost, and then record amortization
on these assets on a straight-line basis over their respective
estimated service lives as follows:
Furniture and fixtures 20%
Communications equipment 30%
Computer equipment 30%
Computer software 50%
Lab equipment 20%
Leasehold improvements 20%
(h) Impairment Of Long-Lived Assets And Long-Lived Assets To Be Disposed
Of
We evaluate our long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of such
assets or intangibles may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount
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<PAGE>
of an asset to future undiscounted net cash flows expected to be
generated by the assets. If any assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
(i) Foreign Currency Translation
We use the United States dollar as our reporting currency, although
Clean Energy and our subsidiary maintain Canadian denominated accounts
for some matters and also periodically engage in transactions using
Canadian currency. For purposes of preparing these financial
statements, foreign currency monetary assets and liabilities are
translated into U.S. dollars at the exchange rates in effect at the
balance sheet date. Other balance sheet items and revenues and
expenses are translated at the rates prevailing on the respective
transaction dates. Translation gains and losses are included in
income.
(j) Basic And Diluted Loss Per Common Share
Our basic loss per share is computed in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share," ("SFAS
No. 128"), by dividing the net loss for the period attributable to
holders of our common stock by the weighted average number of shares
of our common stock outstanding for the period. Our diluted loss per
share is computed, also in accordance with SFAS No. 128, by including
the potential dilution that could occur if holders of our dilutive
securities were to exercise or convert these securities into our
common stock. Common stock equivalent shares are excluded from the
computation if their effect is anti-dilutive. Common stock equivalent
shares consist of the common shares issuable upon the conversion of
the convertible loan notes and special warrants (using the if-
converted method) and incremental shares issuable upon the exercise of
stock options and share purchase warrants (using the treasury stock
method).
(k) Stock-based compensation
We account for stock-based compensation using the intrinsic value
based method whereby compensation cost is recorded for the excess, if
any, of the quoted market price of the common share over the exercise
price at the date granted for all common stock options. No
compensation cost has been recorded for any period under this method.
(l) Recent pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as subsequently amended by SFAS
No. 137,which established accounting and reporting standards requiring
that every derivative instrument, including certain derivative
instruments embedded in other contracts, be recorded in the balance
sheet as either an asset or liability measured at its fair value for
fiscal quarters of fiscal years beginning after June 15, 2000. Our
management has not had the opportunity to evaluate the impact of SFAS
Nos. 133 and 137 on our consolidated financial position, results of
operations or cash flows.
3. Advances To An Affiliated Company
During fiscal 1999, Clean Energy advanced Cdn. $75,794 (U.S. $ 52,514) 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.
-8-
<PAGE>
4. Property And Equipment
Summarized below are our capitalized costs for property and equipment as of
March 31, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
As of
---------------------------
May 31, December 31,
2000 1999
------- ------------
<S> <C> <C>
Furniture and fixtures................................... $ 7,336 $ 1,743
Communications & Office equipment........................ 6,283 5,743
Computer equipment....................................... 14,665 13,101
Computer software........................................ 2,910 2,476
Lab equipment............................................ 31,104 24,005
Leasehold improvements................................... 10,772 5,462
-------- -------
Property and equipment.................................. 73,070 52,530
Less accumulated depreciation and amortization........... (14,619) (9,101)
-------- -------
Net property and equipment.............................. $ 58,451 $43,429
======== =======
</TABLE>
5. Advances From Related Parties
(a) Advance From Related Company
As at March 31,2000, Clean Energy had received advances of $13,451
(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.
(b) Advance From Shareholder
As at March 31,2000, Clean Energy had borrowed $ 392,157 (Cdn $
570,000) from a significant shareholder. The loan bears interest at
Canadian prime rate plus 2% per annum and is repayable in Canadian
dollars at such time as Clean Energy raises the sum of Cdn. $750,000
(U.S. $ 506,551) through equity, debt, joint-venture financing or
product revenues, or any combination thereof, but no later than August
10, 2000.
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.
6. Share Capital And Stock Options
(a) Series "A" Preferred Stock
Our series "A" preferred stock is non-voting and is convertible into
one share of common stock at the option of the holder at any time.
Clean Energy requires the affirmative consent of a majority of all
outstanding series "A" preferred shares in order to take any of the
following actions: our liquidation or dissolution, the sale of our
principle assets, our merger or consolidation with another company,
our declaration of a dividend, making any changes in our authorized
capital stock or issuing additional preferred shares. Should our
common stock be accepted for listing on The New York Stock Exchange or
The American Exchange or accepted for quotation on Nasdaq, all
outstanding series "A" preferred shares will automatically convert
into common stock on a one for one basis once our common stock has
been actively traded on that exchange or market for a two year
continuous period. In the event of the voluntary or involuntary
liquidation, dissolution or winding up of our company, our series "A"
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<PAGE>
preferred stockholders will be entitled to an amount equal to $1 per
share, but after payment has been made to all series "B" preferred
stockholders.
Clean Energy designated and issued 1,000 shares of series "A"
preferred stock on incorporation.
(b) Series "B" Preferred Stock
Our series "B" preferred stock is voting and is entitled to
participate in dividends with our common stock. Clean Energy requires
the affirmative consent of a majority of all outstanding series "B"
preferred shares in order to take any of the following actions: making
any changes in our authorized capital stock or issuing additional
preferred shares. Our series "B" preferred stock is convertible at the
option of the holder, at any time, into one share of common stock.
Should our common stock be accepted for listing on The New York Stock
Exchange or The American Exchange or accepted for quotation on Nasdaq,
all outstanding series "B" preferred shares will automatically convert
into common stock on a one for one basis. In the event of the
voluntary or involuntary liquidation, dissolution or winding up of our
company, our series "B" preferred stockholders will be entitled to an
amount equal to $2 per share before any payment will be made or any
assets distributed to the holders of series "A" preferred stock,
common stock, or any other junior equity security.
During the period ended June 30, 1999, Clean Energy designated 500,000
preferred shares as series "C" preferred stock and issued, pursuant to
a private placement, 250,001 shares of series "B" preferred stock for
gross proceeds of $500,002.
(c) Series "C" Preferred Stock
Our series "C" preferred stock is voting and is entitled to
participate in dividends with shares of common stock. Clean Energy
requires the affirmative consent of a majority of all outstanding
series "C" preferred shares in order to take any of the following
actions: making any changes in our authorized capital stock; issuing
additional preferred shares, declaring any dividends and redeeming or
purchasing any series "C" preferred shares. Our series "C" preferred
stock is convertible at the option of the holder, at any time, into
one share of common stock. Should our common stock be accepted for
listing on The New York Stock Exchange or The American Exchange or
accepted for quotation on Nasdaq, all outstanding series "C" preferred
shares will automatically convert into common stock on a one for one
basis. In the event of the voluntary or involuntary liquidation,
dissolution or winding up of our company, our series "C" preferred
stockholders will be entitled to an amount equal to the stated value
or issuance cost before any payment will be made or any assets
distributed to the holders of our series "A" preferred stock, series
"B" preferred stock, common stock, or any other junior equity
security.
During the period ended December 31, 1999, Clean Energy designated
500,000 preferred shares as series "C" preferred stock. As at June 30,
2000, there were no series "C" preferred stock outstanding.
(d) Common Stock
Clean Energy has issued 9,643,750 shares of common stock on
incorporation.
(e) Common Stock Purchase Options
Clean Energy has granted to executive officers and key employees non-
qualified stock options to purchase an aggregate of 320,000 common
shares at an exercise price of $2.00. These options vest equally
annually over a five-year period and each annual vesting portion
expires five years subsequent to the vesting date. No stock options
have been exercised as at March 31,2000.
(f) Common Stock Purchase Warrants
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<PAGE>
Clean Energy has issued 36,000 share purchase warrants as additional
consideration pursuant to a public relations services agreement
pursuant to which the holder is given the right to purchase 36,000
common shares at $2.00 per share. The right to exercise these warrants
vests in equal monthly instalments over a 24-month period, and each
instalment lapses five years after date of vesting. As at March 31,
2000, 10,50015,000 shares have vested and none have been exercised.
During the first three months of fiscal 2000, Clean Energy recorded an
expense of $2,000 in relation to this agreement.
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, August 30, 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
2(i) to our consolidated financial statements. The rate of exchange of Canadian
dollars to United States dollars as of March 31, 2000, was Cdn. $1.4535 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 three 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 three-month interim fiscal periods ended March 31,
2000 and March 31, 1999.
Operating Loss
. First Three Months Of Fiscal 2000 As Compared To First Three Months Of
Fiscal 1999
We incurred an operating loss of $186,359 for the first three months
of fiscal 2000, as compared to $157,901 for the first three months of
fiscal 1999, representing a $28,458, or 18.0%, overall increase. The
operating loss for the first three 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 18.0% increase in our operating loss for the first three months of
fiscal 2000 over the first three months of fiscal 1999 was primarily
attributable to the following changes in costs and expenses:
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<PAGE>
. a $10,033, or 9.12%, increase in administration expense from $110,008
to $120,041; and
. a $18,425, or 38.47%, increase in research and development expense
from $47,893 to $66,318.
The $10,033 increase in administration expense for the first three months
of fiscal 2000 over the first three 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 three months of fiscal
2000, the most significant of which were increases of $4,226 in wages and
benefits, $7,272 in interest payments and $3,403 in marketing costs,
partially offset by a $19,984 decline in legal 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 $18,425 increase in research and development
expense for the first three months of fiscal 2000 over the first three
months 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 June 30, 2000
were funded from the following sources:
. $13,451 in short-term advances from one of our stockholders, BO
Tech Burner Systems Ltd.;
. $500,000 in gross proceeds from a private placement of series "B"
preferred stock which closed on April 6, 1999, and
. $392,157 in short-term advances by one of our directors, Mr. R.
Dirk Stinson.
Mr. Stinson advanced the $392,157 under a promissory note in the original
amount of $50,000 dated August 8, 1999. This note requires our company to
repay the $50,000, plus any additional amounts Mr. Stinson agrees to
advance to our company ($392,157 as of March 31, 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 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.
Cash Position and Sources And Uses Of Cash
Our cash and cash equivalents position as of March 31, 2000 was $4,506, as
compared to $26,414 as of December 31, 1999. Our cash position as of March
31, 1999 was $666, as compared to $0 as of March 1, 1999.
The $21,908 decrease in our cash position as of March 31, 2000 as compared
to December 31, 1999 was attributable to $156,702 in cash used in operating
activities and $17,298 in cash used in Investing activities. The $666
increase in our cash position as of March 31, 1999 as compared to March 1,
1999 was attributable to $84,860 in cash raised through financing
activities, partially offset by $66,540 in cash used in operating
activities and $17,654 in cash used in investing activities.
Our operating activities required cash in the amount of $156,702 for the
first three months of fiscal 2000, as compared to cash requirements of
$66,540 for the first three months of fiscal 1999. The $156,702 in cash
used in operating activities for the first three months of fiscal 2000
reflected our net loss of $186,359 for that period, as decreased for non-
cash deductions and a net increase in non-cash working capital balances.
The $66,540 in cash used in operating activities for the first three months
of fiscal 1999 reflected our net loss of $157,901 for that period, as
decreased for non-cash deductions and a net increase in non-cash working
capital balances.
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We used cash in the amount of $17,298 for investing activities for the
first three months of fiscal 2000, as compared to $17,654 in cash used for
investing activities for the first three months of fiscal 1999. The
principal use of cash for the first three months of fiscal 2000 was to
acquire property and equipment ($19,602), and the principal use of cash for
the first three months of fiscal 1999 was to acquire property and equipment
($17,654).
We raised $152,092 in cash from financing activities for the first three
months of fiscal 2000, as compared to $84,860 in cash raised from financing
activities for the first three months of fiscal 1999. The $152,092 in cash
raised through financing activities for the first three months of fiscal
2000 was principally comprised of $150,874 funds advanced by a shareholder.
The $84,860 in cash raised through financing activities for the first three
months of fiscal 1999 was principally comprised of $42,518 in advances from
a related company.
Other Matters
Foreign Exchange Fluctuations
We recorded a $8,282 foreign currency translation loss for the first three
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.
Effect Of Inflation
We do not believe that our operating results were adversely affected during the
first three 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.
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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.
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
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. 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
$825,763 from our inception in March 1999 through March 31, 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.
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 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:
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. 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 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
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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 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
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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
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.
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<PAGE>
. 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, C.A., 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 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 the coordination between our various corporate functions;
and
. hire additional engineering, sales and marketing, customer
service and managerial personnel.
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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.
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
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<PAGE>
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;
. 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.
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. 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 ($469,197 as of March
31, 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;
. 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"
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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 ``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;"
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. 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.
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.
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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
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 30th day of August, 2000.
Clean Energy Combustion Systems, Inc.
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By: /s/ John P. Thuot
--------------------------------
John P. Thuot
President
(principal executive officer)
By: /s/ Barry A. Sheahan
--------------------------------
Barry A. Sheahan, C.A.
Chief Financial Officer
(principal accounting officer)
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