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As filed with the Securities and Exchange Commission on August 14, 2000
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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 Six-month Period Ended June 30, 2000; Or
[ ] Act Of 1934 For The Transition Period From To
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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 August 13,
2000
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CLEAN ENERGY COMBUSTION SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10--Q/SB
TABLE OF CONTENTS
<TABLE>
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Page
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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............................................................ 4
Consolidated Statement Of Cash Flows...................................................................... 5
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..................................................................................... 12
Liquidity And Capital Resources........................................................................... 13
Other Matters............................................................................................. 14
Uncertainties And Other Factors That May Affect Our Future Results And Financial Condition................ 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................................ 26
Currency Fluctuations..................................................................................... 26
Interest Rate Fluctuations................................................................................ 27
ITEM II OTHER INFORMATION......................................................................................... 27
ITEM 1. LEGAL PROCEEDINGS......................................................................................... 27
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS................................................................. 27
ITEM 3. DEFAULTS UPON SENIOR SECURITIES........................................................................... 27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................................................... 27
ITEM 5. OTHER INFORMATION......................................................................................... 27
ITEM 6. EXHIBITS.................................................................................................. 27
Exhibits.................................................................................................. 27
Reports on Form 8--K...................................................................................... 27
</TABLE>
ii
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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)
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<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
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Assets
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ -- $ 26,414
Short term investments -- 10,000
Accounts receivable and prepaid expenses 20,186 21,261
Advances to an affiliated company (note 3) 51,191 52,514
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Total Current Assets 71,377 110,189
Patents 19,033 11,427
Property And Equipment (note 4) 66,102 43,429
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Total Assets.................................................................. $ 156,512 $ 165,045
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Liabilities
Current:
Bank overdraft $ 4,794 $ --
Accounts payable 19,633 23,297
Accrued liabilities 24,973 11,458
Current payroll taxes 13,498 11,620
Advances from related parties (note 5) 692,842 254,572
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Total Current liabilities 692,842 300,947
==============================================================================================================================
Going Concern (note 1(b))
Deficiency In Assets
Stockholders' Equity
Authorized (note 6):
Preferred stock; par value $0.0001 per share, 1,000,000 shares
Common stock; par value $0.0001 per share, 15,000,000 shares
Issued (note 6):
Series "A" convertible preferred stock; $1 per share liquidation
preference, 1,000 shares issued and outstanding 1 1
Series "B" convertible preferred stock; $2 per share liquidation
preference; 250,001 shares issued and outstanding 250 250
Common stock, 9,643,750 shares issued and outstanding 964 964
Additional paid-in capital 503,287 502,287
Accumulated Deficit (1,040,832) (639,404)
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Total Deficiency In Assets.................................................... (536,330) (135.902)
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Total Liabilities And Deficiency In Assets.................................... $ 156,512 $ 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>
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March 1,
1999
Three months ended June 31, Six months ended June 30, June 30,
--------------------------- -------------------------
2000
2000 1999 2000 1999 (cumulative)
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Administration Expenses
Accounting $ 4,261 $ 5,086 $ 4,261 $ 9,718 $ 26,337
Wages and benefits 53,959 39,680 100,094 81,589 257,605
Amortization 6,061 2,875 10,641 3,752 19,442
Communications 1,929 1,613 4,033 3,433 11,734
Foreign exchange loss (3,307) 5,687 4,975 5,956 13,560
Interest 11,966 3,062 19,237 3,062 25,098
Legal 10,610 17,233 23,583 49,189 93,033
Marketing 25,564 13,537 47,498 31,569 126,689
Occupancy 8,613 8,458 17,686 15,457 48,906
Office and miscellaneous 4,402 2,777 9,564 6,292 25,145
Transfer agent fees -- 1,542 3,027 1,542 15,417
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Total Administration Expenses (124,058) (101,550) (244,599) (211,558) (662,966)
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Research And Development Expenses
Wages and benefits 55,317 48,179 108,501 91,356 304,923
Development 35,194 7,590 48,328 12,305 72,943
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Total Research And Development Expenses 90,511 5,769 156,829 103.661 377,866
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Total Expenses And Net Loss For The Period $ (214,569) $ (157,319) $ (401,428) $ (315,220) $(1,040,832)
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Basic And Diluted Loss Per Share (note 2(j)) $ (0.02) $ (0.02) $ (0.04) $ (0.05)
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Weighted Average Shares Outstanding 9,643,750 9,643,750 9,643,750 9,429,167
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</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"
Convertible Convertible
Preferred Stock Preferred Stock Common Stock Additional Total
--------------- ----------------- ----------------- Paid-in Deficiency
Shares Amount Shares Amount Number 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 -- -- 500,002 -- 500,002
Issue of options to consultant -- -- -- -- -- -- 2,000 -- 2,000
Net loss -- -- -- -- -- -- -- (639,404) (639,404)
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Balance -- December 31, 1999 1,000 1 250,001 250 9.643,750 964 502,287 (639,404) (135,902)
Issue of options to consultant -- -- -- -- -- -- 1,000 -- 1,000
Net loss -- -- -- -- -- -- -- (401,428) (401,428)
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Balance -- June 30, 2000 1,000 $ 1 250,001 $ 250 9.643,750 $ 964 $ 503,287 $(1,040,832) $(536,330)
====================================================================================================================================
</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>
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Jan. 1, 1999
(inception) to
Six months ended June 30, June 30, 2000
-----------------------------
2000 1999 (cumulative)
---------- ---------- -------------
<S> <C> <C> <C>
Operating Activities
Net operating expenses for the period $ (401,428) $ (315,220) $(1,040,832)
Adjustments to reconcile total operating expenses to net
cash utilized in operating activities:
Amortization 10,642 3,752 19,443
Non-cash consulting expense 1,000 -- 3,000
Change in operating assets and liabilities:
Accounts receivable and prepaid expenses 1,075 (8,037) (20,186)
Accounts payable (3,664) 13,833 19,633
Accrued liabilities 13,515 -- 24,973
Payroll taxes 1,878 12,002 13,498
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Net cash used in operating activities (376,982) (293,670) (980,471)
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Investing Activities
Purchase of short-term investment 10,000 (102,529) --
Purchase of patents (7,607) -- 19,034
Purchase of property and equipment (33,315) (40,902) 85,545
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Net cash used in investing activities (30,922) (143,331) (104,579)
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Financing Activities
Advances to an affiliated company 1,323 (51,807) (51,191)
Proceeds from long-term obligations 378,158 -- 619,441
Proceeds from advances from related parties (2,785) 11,359 10,504
Proceeds from the sale of common stock -- 1,000 1,000
Proceeds from the sale of series "A" convertible
preferred stock -- 500 500
Proceeds from the sale of series "B" convertible
preferred stock -- 500,002 500,002
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Net cash provided by financing activities 376,696 461,054 1,080,256
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Net Increase (Decrease) In Cash And Cash Equivalents (31,208) (23,953) (4,794)
Cash (Bank Overdraft) And Cash Equivalents At
Beginning Of Period 26,414 -- --
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Cash (Bank Overdraft)And Cash Equivalent At
End of Period $ (4,794) $ 23,953 $ (4,794)
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</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 $1,040,832 and has a working capital
deficiency of $621,465 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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(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%
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(h) Impairment Of Long-Lived Assets And Long-Lived Assets To Be Disposed Of
We evaluates 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
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.
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<PAGE>
3. Advances To An Affiliated Company
During fiscal 1999, Clean Energy advanced Cdn. $75,794 (U.S. $ 51,191) 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.
4. Property And Equipment
Summarized below are our capitalized costs for property and equipment as of
June 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
As of
----------------------------------------
June 30, December 31,
2000 1999
----------- ------------
<S> <C> <C>
Furniture and fixtures................................................ $ 7,622 $ 1,743
Communications equipment.............................................. 6,122 5,743
Computer equipment.................................................... 22,187 13,101
Computer software..................................................... 3,784 2,476
Lab equipment......................................................... 35,038 24,005
Leasehold improvements................................................ 11,727 5,462
-------- --------
Property and equipment............................................... 86,478 52,530
Less accumulated depreciation and amortization........................ (20,376) (9,101)
-------- --------
Net property and equipment........................................... $ 66,102 $43,429
======== ========
</TABLE>
5. Advances From Related Parties
(a) Advance From Related Company
During the six-month interim period ended June 30, 2000, Clean Energy
received advances of $10,503 (Cdn $15,552) (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.
(b) Advance From Shareholder
As at June 30, 2000, Clean Energy had borrowed $619,441 (Cdn. $917,144)
(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 at such time as Clean Energy
raises the sum of Cdn. $750,000 (U.S. $520,000) 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
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<PAGE>
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" 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.
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(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 June 30,2000.
(f) Common Stock Purchase Warrants
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 June 30,
2000, 15,000 shares have vested and none have been exercised. During
the first six months of fiscal 2000, Clean Energy recorded an expense
of $2,000 in relation to this agreement.
7. Subsequent Event
As at June 30,2000, Clean Energy had borrowed Cdn. $917,144 (U. S $619,441)
from a significant shareholder. On August 5, 2000, the holder advised Clean
Energy that he intended pursuant to the terms of the underlying promissory
note to convert the current balance of loan into common shares at the
conversion rate of $2.00 per share.
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 13, 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 June 30, 2000, was Cdn. $1.4806 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.
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<PAGE>
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 six-month interim fiscal periods ended June 30, 2000
and June 30, 1999.
Operating Loss
- First Six Months Of Fiscal 2000 As Compared To First Six Months Of Fiscal
1999
We incurred an operating loss of $401,428 for the first six months of fiscal
2000, as compared to $315,220 for the first six months of fiscal 1999,
representing a $86,208, or 27.3%, overall increase
The 27.3% increase in our operating loss for the first six months of fiscal
2000 over the first six months of fiscal 1999 was primarily attributable to
the following changes in costs and expenses:
. a $33,040, or 15.6%, increase in administration expense from $211,559 to
$244,599; and
. a $53,168, or 51.3%, increase in research and development expense from
$103,661 to $156,829.
The $86,208 increase in administration expense for the first six months of
fiscal 2000 over the first six 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 six months of fiscal
2000, the most significant of which were increases of $18,505 in wages and
benefits, $16,175 in interest payments and $15,929 in marketing costs,
partially offset by a $25,606 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 $53,168 increase in research and development expense
for the first six months of fiscal 2000 over the first six months of fiscal
1999 was principally attributable to the cost of materials and equipment
associated with additional research and development efforts.
- Second Quarter Of Fiscal 2000 As Compared To Second Quarter Of Fiscal 1999
We incurred an operating loss of $214,569 for the second quarter of fiscal
2000, as compared to $157,319 for the second quarter of fiscal 1999,
representing a $57,250, or 36.4%, overall increase.
The 36.4% increase in our operating loss for the first six months of fiscal
2000 over the first six months of fiscal 1999 was primarily attributable to
the following changes in costs and expenses:
. a $22,508, or 22.2%, increase in administration expense from $101,550 to
$124,058; and
. a $34,742, or 62.3%, increase in research and development expense from
$55,769 to $90,511.
The $22,508 increase in administration expense for the second quarter of
fiscal 2000 over the second 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 second quarter of fiscal 2000, the most
significant of which were increases of $14,279 in wages and benefits, $8,904
in interest payments and $12,027 in marketing costs, partially offset by a
$6,623 decline in legal fees.
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The $34,742 increase in research and development expense for the second
quarter of fiscal 2000 over the second 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 June 30, 2000 were
funded from the following sources:
. $108,888 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
. $619,441 in short-term advances by one of our directors, Mr. R. Dirk
Stinson.
We repaid the $108,888 short term advance to BO Tech Burner Systems Ltd. in
June, 1999, together with interest of $3,437 accrued a the rate of 8.75%.
The $619,441 was advanced by Mr. Stinson 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 ($569,441 as of June 30, 2000), 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. On
August 5, 2000, Mr. Stinson advised Clean Energy that he intended to convert
the current balance of loan into common shares pursuant to the terms of the
promissory note.
- Cash Position and Sources And Uses Of Cash
Our cash and cash equivalents position as of June 30, 2000 was $0, as
compared to $26,414 as of December 31, 1999. Our cash position as of June
30, 1999 was $23,953, as compared to $0 as of March 1, 1999.
The $31,208 decrease in our cash position as of June 30, 2000 as compared to
December 31, 1999 was attributable to $376,982 in cash used in operating
activities and $376,696 in cash generated by financing activities, partially
offset by $30,922 in cash used in investing activities. The $23,953 increase
in our cash position as of June 30, 1999 as compared to March 1, 1999 was
attributable to $461,054 in cash raised through financing activities,
partially offset by $293,670 in cash used in operating activities and
$143,431 in cash used in investing activities.
Our operating activities required cash in the amount of $376,982 for the
first six months of fiscal 2000, as compared to cash requirements of $293,670
for the first six months of fiscal 1999. The $376,982 in cash used in
operating activities for the first six months of fiscal 2000 reflected our
net loss of $401,428 for that period, as decreased for non-cash deductions
and a net increase in non-cash working capital balances. The $293,670 in
cash used in operating activities for the first six months of fiscal 1999
reflected our net loss of $315,220 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 $30,922 for investing activities for the first
six months of fiscal 2000, as compared to $143,431 in cash used for investing
activities for the first six months of fiscal 1999.
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The principal use of cash for the first six months of fiscal 2000 was to
acquire property and equipment ($33,315), while the principal use of cash for
the first six months of fiscal 1999 was to repay advances ($102,529) and to
acquire property and equipment ($40,902).
We raised $376,696 in cash from financing activities for the first six months
of fiscal 2000, as compared to $461,054 in cash raised from financing
activities for the first six months of fiscal 1999. The $376,696 in cash
raised through financing activities for the first six months of fiscal 2000
was principally comprised of $378,158 funds advanced by a shareholder. The
$461,054 in cash raised through financing activities for the first six 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 $51,807
in advances to a related company.
Other Matters
Foreign Exchange Fluctuations
We recorded a $4,975 foreign currency translation loss for the first six 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 six 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
1. 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.
2. 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:
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. 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 $1,040,832 from our inception in
March 1999 through June 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.
3. 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.
4. 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
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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.
5. 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
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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.
6. 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.
7. 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
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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.
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.
8. 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.
9. 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.
10. 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
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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.
11. 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.
12. 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
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13. 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.
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.
14. 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.
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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:
o 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;
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. 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.
. 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 ($692,842 as of June 30,
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.
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. 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" 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;
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. 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;"
. 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."
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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.
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.
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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 13th day of August, 2000.
<TABLE>
<CAPTION>
Clean Energy Combustion Systems, Inc.
<S> <C>
By: /s/ John P. Thuot
------------------------------
</TABLE>
26
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John P. Thuot
President
(principal executive officer)
By: /s/ Barry A. Sheahan
----------------------
Barry A. Sheahan
Chief Financial Officer
(principal accounting officer)
27
