U.S. SECURITIES AND EXCHANGE COMMISSIONS
Washington, DC 20549
FORM 10-QSB
(Mark One)
[XXX] Quarterly report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended June 30, 1996
[ ] Transition report under Section 13 or 15(d) of the
Exchange Act
For the transition period from _____________ to
______________.
Commission File Number - 33-3362-D
Exact Name of Small Business Issuer as Specified in Its
Charter: KleenAir Systems, Inc.
State or Other Jurisdiction of Incorporation or Organization:
Nevada
IRS Employer Identification No.: 87-0431043
Address of Principal Executive Offices:
28095 Padrino, Laguna Niguel, Ca 92677
Issuer's Telephone Number, Including Area Code: 714-362-1862
Former Name, Former Address and Former Fiscal Year, if Changed
since Last Report: 18871 Portofino Drive, Irvine, Ca 92715
Check whether the issuer: (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12
months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirement for the past 90 days.
Yes XXX No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Exchange Act
after the distribution of securities under a plan confirmed by a
court.
Yes: N/A NO: N/A
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date:
5,207,364 as of June 30, 1996.
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
KLEENAIR SYSTEMS, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
(Prepared without audit review)
ASSETS June 30 December 31
1996 1995
CURRENT ASSETS:
Cash $ 3,291 $ 152,344
Advances to consultants 15,000 20,000
Prepaid marketing costs 27,083 27,083
Commissions receivable 8,9378,937
Notes receivable 136,035 136,035
Total Current Assets 190,346 344,399
FIXED ASSETS
(Net of accumulated depreciation 3,746 3,746
OTHER ASSETS:
Patent license 3,514,896 3,509,125
Notes receivable from non
related parties-long term 1,684,783 1,620,783
Prepaid marketing costs
(net of current portion) 31,598 45,139
Deposits 3,800 3,600
Total Other Assets $ 5,235,077 5,178,647
TOTAL ASSETS $ 5,429,169 $ 5,526,792
The accompanying notes are an integral part of these financial
statements.
KLEENAIR SYSTEMS, INC.
(A Development Stage Company)
LIABILITIES AND STOCKHOLDER'S EQUITY
(Prepared without audit review)
Period Ended Year Ended
June 30 December 31
1996 1995
CURRENT LIABILITIES:
Accounts payable $ 69,435 $ 42,439
Deferred consulting fees 83,750 73,342
Note payable -- ---
Other (3,525) 1,866
Total Current Liabilities 149,660 117,647
Deferred license fees $ 1,736,558 $ 1,736,558
STOCKHOLDER'S EQUITY:
Preferred stock, series A, $.001 par value
(10,000,000 shares authorized,
4,755,000 and 7,000,000 outstanding) 4,755 7,000
Common stock, $.001 par value
(50,000,000 shares authorized:
5,207,364 and 1,723,752 respectively) 5,207 1,724
Preferred stock to be issued
(250,000 shares) 125,000 125,000
Common stock to be issued
(0 and 571,112 shares) 0 250,400
Additional paid-in capital 4,345,269 3,924,358
Unearned compensation (29,722) (152,016)
Deficit accumulated during the
development stage (907,558) (483,879)
Total Stockholder's Equity 3,542,951 3,672,587
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 5,429,169 $ 5,526,792
The accompanying notes are an integral part of these financial
statements.
KLEENAIR SYSTEMS, INC.
(a Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Prepared without audit review)
Three Months Six Months
Ended June 30 Ended June 30
1996 1995 1996 1995
SALES $ $ $ $ 14,866
COST OF GOODS SOLD 13,493
GROSS PROFIT 1,373
OTHER OPERATING INCOME:
Residual income 8,861 28,043 19,729 62,656
Other income 1,826 525 5,372 5,301
Total Other 10,687 28,568 25,101 67,957
RESEARCH AND DEVELOPMENT
COSTS 51,968 111,334
OPERATING EXPENSES:
Director's fees 1,250 7,500 40,500 7,500
Consultants 108,854 220,208
Professional fees 18,973 15,250 21,672 15,250
Office expenses 1,096 8,750 2,760 8,750
Advertising and
promotion 28,175 3,750 80,191 3,750
Automobile lease 359 4,672
Selling expenses 4,111
Other expenses 3,451 25,000 31,843 48,068
Ttl operating exp 162,158 60,250 401,846 87,429
INCOME/(LOSS) FROM
OPERATIONS (203,439) (31,682) (488,079) (18,099)
OTHER INCOME AND (EXPENSES):
Amortization of discount
on receivables 32,000 64,400
NET INCOME/(LOSS) FROM
CONTINUING OPS (171,439) (31,682) (423,679) (18,099)
Provision for income taxes 800
NET (LOSS) $(171,439)$(31,682) $(423,679) $(18,899)
WEIGHTED AVERAGE SHARES
OUTSTANDING 3,421,155 1,308,419 2,884,273 1,080,332
NET (LOSS) PER SHARE$ (.05) $ (.02) $ (.15) $ (.02)
KLEENAIR SYSTEMS, INC.
(a Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Prepared without audit review)
Six Months Ended June 30
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $ (423,680) $ 18,899
Adjustments to reconcile net income/(loss)
to net cash provided by operations:
Amortization of receivables discount (64,000) -
Amortization of prepaid marketing 13,541 -
Depreciation 1,000
Stock recorded for services 122,500 -
Stock issued for director fees 49,250 35,250
Compensation recognized
relating stock to be issued 122,294 -
Decrease in accounts receivable - 9,144
Decrease in other receivables 5,000 5,000
Increase in prepaid expenses ( 200) -
Decrease in inventory - 1,277
Increase in accounts payable 26,996 (22,700)
Increase in deferred consulting fees 10,408 -
Decrease in deferred income - (3,840)
Decrease in deposits - 2,000
Decrease in other payables ( 5,391) -
NET CASH PROVIDED BY/(USED BY) OPERATING
ACTIVITIES (143,282) 9,214
CASH FLOWS FROM INVESTING ACTIVITIES:
Patent licensing costs (5,771)
Purchase of fixed assets (109)
NET CASH PROVIDED BY/(USED BY)
INVESTING ACTIVITIES (5,771) (109)
KLEENAIR SYSTEMS, INC.
(a Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CON'T)
(Prepared without audit review)
Six Months Ended June 30
1996 1995
CASH FLOWS FROM FINANCING ACTIVITIES:
Additional capital contributions - 9,165
Distribution to shareholders - (7,108)
Repayment of note payable - (9,964)
NET CASH PROVIDED BY/(USED BY)
FINANCING ACTIVITIES 0 (7,907)
NET INCREASE/(DECREASE) IN CASH (149,053) 1,198
CASH AT BEGINNING OF YEAR 152,344 348
CASH AT END OF PERIOD $ 3,291 $ 1,546
SUPPLEMENTAL DISCLOSURES:
Non-cash investing and financing transactions:
Stock issued for Directors fees $49,250 $ 35,250
Services and prepaid services 122,500
- - -
Reduction of deferred consulting fees
for exercising stock options 112,500
- - -
Reduction of deferred consulting fees
for repayment of note receivable 10,000
- - -
Reduction of deferred consulting fees
for repayment of interest receivable 400
- - -
The accompanying notes are an integral part of these financial
statements.
KLEENAIR SYSTEMS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Prepared without audit review)
DESCRIPTION OF BUSINESS
KleenAir Systems, Inc. (the Company) (formerly Investment &
Consulting International, Inc.) was originally incorporated in 1986
in Nevada as Covington Capital Corporation. The Company has had
various names during its existence as various endeavors were
attempted. None of these actually became fruitful. The Company
was most recently known as Investment & Consulting International,
Inc. until April 1995. In April 1995, the Company purchased a
patent for a proprietary device shown to be capable of neutralizing
the environmental impact of automobile exhaust emissions without
significant modification to the vehicle. Soon after the
acquisition of this patent and the right to use of the seller's
name, the Company changed to its current name. With the patent
acquisition in April 1995, the Company moved into the development
stage and has since worked toward the completion of tests, fine
tuning, and clearance of California Air Resources Board standards.
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
The Company's accounting and reporting policies conform with
generally accepted accounting principles. Policies which
materially affect the determination of financial position, cash
flows, and results of operations are summarized as follows:
Development stage reporting -- Generally accepted accounting
principles call for certain presentations of cumulative financial
statement information from inception to the date of the financial
statements. Since the Company restarted its operations (from a
position of inactivity) in April 1995, these statements present
information from inception of its development stage although
separate columns have not presented to so indicate.
Patent License -- The Company has purchased the rights to a patent
as discussed below. The cost of the patent, along with legal costs
incurred to register and protect it, has been capitalized and will
be amortized once the Company commences sales of the product.
Amortization will be charged on a straight-line basis over seven
years. No amortization expense related to these rights has been
charged to operations because development of the underlying
patented device has not been completed. Amortization is expected
to begin in 1996 along with anticipated initial sales of the
device.
Federal Income Taxes -- For Federal income tax purposes, the
Company reports its operations on the accrual basis of accounting.
Depreciation and amortization are recorded on the basis most
advantageous to the Company for minimizing its income tax
liabilities.
Generally accepted accounting principles require an asset and
liability approach for financial accounting and reporting of
deferred income taxes. Generally, this approach allows for
recognition of deferred tax assets in the current period for the
future benefit of operating loss carryforwards and other items for
which expenses have been recognized for financial accounting
purposes but will be deductible in tax returns of future periods.
A valuation allowance is recognized, if available evidence
indicates that it is more likely than not that some portion or all
of the deferred tax asset will not be realized. Deferred tax
liabilities are recognized for revenue items which have been
recognized for financial accounting purposes which will be
includable in future tax returns.
Cash Flows -- The Company considers cash to be its only cash
equivalent for purposes of presenting its Statements of Cash Flows.
Common Stock Data -- Per share data has been computed on the
weighted average number of common stock shares outstanding each
period. The 1994 amounts and 1993 balances have been adjusted to
reflect the effect of a 1 for 10 reverse stock split in March
1995.
Stock to be issued has been included in weighted average shares
outstanding. Options and convertible preferred shares have not
been included in the calculation of earnings per share because they
would be anti-dilutive. See Note 5 for further information on
equity transactions.
Accounting Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
New Accounting Pronouncements -- Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long- Lived Assets to Be Disposed Of" (SFAS 121)
issued by the Financial Accounting Standards Board (FASB) is
effective for financial statements for fiscal years beginning after
December 15, 1995. The new standard establishes new guidelines
regarding when impairment losses on long-lived assets, which
includes plant and equipment and certain identifiable intangible
assets, should be recognized and how impairment losses should be
measured. The Company does not expect adoption to have a material
effect on its financial position or results of operations.
Statements of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (SFAS 123) issued by the FASB is
effective for specific transactions entered into after December 15,
1995, while the disclosure requirements of SFAS 123 are effective
for financial statements for fiscal years beginning after December
15, 1995. The new standard establishes a fair value method of
accounting for stock-based compensation plans and for transactions
in which an entity acquires goods or services from non-employees in
exchange for equity instruments. The Company does not expect
adoption to have a material effect on its financial position or
results of operations. At the present time, the Company has not
determined if it will change its accounting policy for stock-based
compensation or only provide the required financial statement
disclosures. As such, the impact on the Company's financial
position and results of operations is currently unknown.
NOTE 2: GOING CONCERN
These financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has neither
sufficient operating revenues or disposable assets to fund
completion of its development program, current level of expenses,
or initial production stages . In this situation, the Company is
reliant solely upon its ability to raise capital through sales of
its stock, the obtainment of debt financing, or acquisition of
services through issuances of the Company's stock. There is no
assurance that a market exists for the sale of the Company's stock
or that lenders could be found to loan money to the Company.
Should financing not be available, the Company would, in all
likelihood, be forced to stop development efforts and/or to shut
down operations completely.
Management has had indications that investors are interested in the
technology being developed by the Company and that these investors
have capacity and will be willing to be available to provide
financing for the remaining cost of the development of the device.
As such, Management anticipates that there will not be any
interruption in the development activities and that the Company
will have no difficulties in obtaining sufficient financing to
carry its project through to completion and subsequent
distribution. The financial statements do not include any
adjustments relating to the recoverability and classification of
recorded asset amounts or the amount of liabilities that might be
necessary should the Company be unable to continue in existence.
NOTE 3: FEDERAL INCOME TAXES
Because of timing, relative insignificance, and changes in control
and management, the Company has elected to ignore prior operating
losses in calculating its income taxes. Operating losses reported
for tax purposes vary from accumulated deficits in retained
earnings due to differences in tax treatment or timing of various
items. The tax loss carry-forward generated in 1995 is estimated
to be $148,187 and expires in the year 2010.
The Company has deferred tax assets (no liabilities) at December
31, 1995. This asset has occurred due to timing differences in the
deductibility of deferred payments to contractors ($69,750),
options compensation recorded ($70,313), and accrued stock
compensation ($41,039). These differences would yield a deferred
tax asset of $45,276. However, because management is unable to
determine that it is more likely than not that the Company will be
able to utilize these deductions against future revenues, a
valuation allowance has been recorded to offset the asset.
There is no income tax benefit or expense to be reported for the
period ended December 31, 1995.
NOTE 4: PATENT LICENSE, RESEARCH AND DEVELOPMENT
During April 1995, the Company acquired a patent for a proprietary
device shown to reduce the pollutant content of automobile
emissions. The cost of acquiring this patent has been capitalized
and shown as Patent on the balance sheet. Subsequent to the
acquisition of this patent, the Company has continued to refine the
device and expand its applicability to a wider range of vehicles.
Also, the Company has been in the process of performing tests aimed
at obtaining minimum state approvals to be able to advertise and
sell the device initially as not causing an increase in pollution.
Subsequent testing and completion of the specified procedures are
expected to allow the Company to obtain a ruling by the Air
Resource Board that the device reduces pollutants. This ruling
would greatly expand the markets for the device.
The Company's rights to the patent are subject to royalties
totalling seven per cent of wholesale sales. The royalties do not
require the Company to make minimum payments.
Only the direct costs of acquisition of the license and costs of
extending or perfecting the patents are available for
capitalization. All payments for the development and production
thereof are charged to operations as development costs when
incurred and are included in results of operations.
Management has estimated that additional costs required to obtain
executive orders and additional approvals should be in the $15,000
to $25,000 range. Management also has estimated that it should be
able to obtain the executive orders in the second quarter of 1996.
NOTE 5: NOTES RECEIVABLE AND DEFERRED LICENSE FEES
During September and October 1995, the Company entered into
licensing agreements with two entities for non-U.S. marketing
rights for the device. These agreements call for the licensees to
develop these markets for sales of the device as produced by the
Company. One of the licensees is a stockholder in the Company.
Under each of these licensing agreements, the licensee agreed to
pay the license fee in four installments without interest. The
total face value of these agreements is $2,000,000. The balances
shown represent the net amount after application of a seven percent
discount factor in order to show the present value of the
obligations. The agreements call for the Company to secure certain
approvals by the State of California prior to the due dates of the
first installment. The Company has been assured by its consultants
that this approval will occur significantly ahead of the dates
contemplated in the license agreements. However, due to the
uncertainty of the date of this approval, the license revenues have
been deferred until such approval has been obtained and the
contingency removed. The Company expects to recognize these
revenues over the anticipated life of the license (currently
estimated to be seven years) on a straight-line basis.
Item 2. Management's Discussion and Plan of Operation
During the past 12 months the Company acquired 100% of the patent
rights under United States Patent #5,224,346 entitled "Engine NOx
Reduction System" subject to royalties in the amount of 7% of the
wholesale value of the product and/or products covered by this or
related patents for the issuance of 7,000,000 preferred shares and
400,000 common shares. There was no cash consideration for the
acquisition of this(these) patents.
Through the private placement of the companies common equity
shares, the Company has raised capital in the approximate amount of
$252,000 which has been sufficient to continue operations through
the fiscal year end. Continued efforts in capital raising have
been successful resulting in formal commitments in the amounts of
$500,000 and $250,000 respectively. These commitments are
combinations of stock purchases and the purchase of certain
marketing, distribution and manufacturing rights to the Company's
product(s). Management believes this funding will be sufficient to
continue operations through December 31, 1996.
It is anticipated that the Company will proceed with a Secondary
Offering of its common stock during the fourth quarter of 1996 in
order to fully fund operations until revenues from sales will
sustain operations. Sales are anticipated to begin in the fourth
quarter but will not be sufficient to sustain operations until the
second quarter of 1997.
The first product, the NOxMaster device, is currently in the final
stages of refinement. Nitrogen oxides (NOx) are the most difficult
auto exhaust pollutants to control. They are not fuel based but
are produced by the oxidation of nitrogen in the combustion air and
their formation requires high temperature (2500 degrees F and
above). The higher the temperature, the more NOx is produced, thus
NOx is produced in proportion to engine power output and
efficiency. Meeting even the current emission standard (0.4
grams/mile) requires sacrifice of performance and economy.
The NOxMaster utilizes both the non-catalytic reaction, that
occurs at high temperature, and the catalytic reaction, at lower
temperature. Tests have confirmed this approach. Further test
data has shown that the desired reaction does occur in the presence
of excess air (oxygen) and might even be enhanced by the oxygen.
Thus the NOxMaster gives the manufacturer a method of control
which is essentially independent of engine operating parameters and
provides new options for economy and performance.
The first beta test prototypes to be used in beta testing are
anticipated to be installed on a small fleet of vehicles by the end
of April, 1996 with the production prototype is being completed by
June 30, 1996. The testing laboratory of California Environmental
Engineering (CEE) in Irvine, California, has been certified by the
California Air Resources Board (CARB) and is the Company's
laboratory of choice for the continued testing of the product. CEE
is also used by the California Air Resources Board for testing.
As of this filing an application for the issuance of an Executive
Order (EO) from the California Air Resources Board has been
submitted. The EO states that the product does not increase NOx
emissions and will allow the Company to sell the product(s) in the
state of California. Once the production prototype is finalized
the Company will request formal testing by the CARB to validate the
finding of CEE and thereby certifying that the device does in fact
reduce the NOx in significate amounts to qualify for emission
credits.
Emission Credits - The emphasis will be on NOx reduction products
which are not required by law or regulation thereby satisfying the
mobile source emission reduction criteria for "emission credits".
The Guidelines for the Generation and Use of Mobile Source Emission
Reduction Credits published by the California Environmental
Protection Agency, Air Resources Board (ARB), and Mobile Source
Emission Reduction Credits were approved by the ARB on February 19,
1993.
The document states that NOx is the only pollutant considered in
the guidelines as a reasonable candidate for credit generation.
These emission credits do not as of yet have a specific monetary
value placed on them, however, the control costs are in the range
of a few thousand dollars to more than $20,000 per ton removed.
The Company believes the value of these emission credits will be a
very substantial tool in the marketing of the NOxMaster to fleet
vehicle owners, especially the Diesel transportation industry.
Once production and sales begin the Company anticipates employing
an additional 5 to 10 full time employees, primarily in the
management and administrative capacity.
The pooling of interest with National Diversified Telecom, Inc.
should require the addition of 7 to 10 sales personnel who will be
paid a commission on sales in lieu of a salary. The revenues from
sales are anticipated to reach $50,000 monthly by the end of fiscal
year 1996. (See Notes to Financial Statements for more details on
the combination.)
PART II
Item 1. Legal Proceedings.
There are no legal proceedings to which the registrant is
subject as of June 30, 1996.
Item 2. Changes is Securities.
There has been no changes in the registered securities of the
registrant.
Item 3. Defaults Upon Senior Securities.
There have been no defaults upon any senior securities of the
registrant as of June 30, 1996.
Item 4. Submission of Matters to a Vote of Security-Holders.
There were no matters submitted for vote by security-holders
of the registrant during the period covered by this report.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KleenAir Systems, Inc.
____________________________ Date
Lester Berriman
Chairman of the Board
_____________________________ Date
Lionel Simons
President/CEO/Director
_____________________________ Date
William Ward
Secretary/Director
