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U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 33-3362-D
KLEENAIR SYSTEMS, INC.
(Exact name of small business issuer as specified in its charter)
State of Nevada 87-0431043
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification #)
828 Production Place, Newport Beach, CA 92663
(Address of principal executive offices) (Zip code)
Issuer's telephone number: (949) 574-1600
Check whether the issuer (1) filed all reports required to be filed by
Sections 13 or 15(d) of the Securities 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 requirements
for the past 90 days. Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
There were 3,593,906 shares of common stock, $0.001 Par Value,
outstanding as of June 30, 1999.
Transitional Small Business Disclosure Format (check one); Yes [ ] No [X]
1
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REPORT ON REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
KleenAir Systems, Inc.
Dana Point, CA
We have reviewed the accompanying balance sheet of KleenAir Systems,
Inc. (a development stage enterprise) (the "Company") as of June 30,
1999, and the related statements of operations, stockholders equity,
and cash flows for the three and six months ended June 30, 1999 and
1998. We have also reviewed the cumulative statements of
operations, stockholders equity and cash flows for the period from
January 1, 1995 through June 30, 1999. These financial statements
are the responsibility of the Company's management.
We conducted our review in accordance with standards established by
the American Institute of Certified Public Accountants. A review of
interim financial information consists principally of applying
analytical review procedures to financial data and making inquiries
of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the accompanying financial statements for them
to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the balance sheet as of December 31, 1998, and
the related statements of operations, stockholders' equity and cash
flows for the year then ended (not presented herein); and in our
report dated November 24, 1999, we expressed an opinion on those
financial statements which was qualified based on the Company's
ability to continue as a going concern. In our opinion, the
information set forth in the accompanying condensed consolidated
balance sheet as of December 31, 1998 is fairly stated in all
material respects in relation to the consolidated balance sheet from
which it has been derived.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in
Note 2 to the financial statements, the Company is in the development
stage and has no operating revenues. This situation raises
substantial doubt as to the Company's ability to continue as a going
concern. Management's plans in regard to this situation are also
described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Robert Early & Company
ROBERT EARLY & COMPANY, P.C.
Abilene, Texas
November 29, 1999
2
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KLEENAIR SYSTEMS, INC.
(A Development Stage Company)
BALANCE SHEETS
ASSETS
June 30 December 31
1999 1998
---------- -------------
Unaudited
CURRENT ASSETS:
Cash $ 35 $ 443
Prepaid expenses - 90,000
---------- -------------
Total Current Assets 35 90,443
---------- -------------
PROPERTY AND EQUIPMENT 1,305 1,595
OTHER ASSETS:
Patent license 3,607,137 3,607,137
---------- -------------
TOTAL ASSETS $ 3,608,477 $ 3,699,175
=========== =============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable (all due to
related parties) $ 43,811 $ 42,711
STOCKHOLDERS' EQUITY:
Preferred stock, series A, $.001
par value (10,000,000 shares
authorized, 112,333 outstanding) 112 112
Common stock, $.001 par value
(50,000,000 shares authorized,
3,593,906 and 3,293,906 outstanding) 3,594 3,294
Additional paid-in capital 5,286,075 5,211,375
Deficit accumulated during the
development stage (1,725,115) (1,558,317)
---------- -------------
Total Stockholder's Equity 3,564,666 3,656,464
---------- -------------
TOTAL LIABILITIES AND STOCKHOLDER'S
EQUITY $ 3,608,477 $ 3,699,175
=========== =============
See accounts review report and accompanying selected information.
3
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KLEENAIR SYSTEMS, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
For Three and Six Months Ended June 30, 1999 and 1998
<TABLE>
<S> <C> <C> <C> <C> <C>
Cumulative
Three Months Six Months During Devel-
1999 1998 1999 1998 opment Stage
---------- ---------- ---------- ---------- ------------
PRODUCT DEVELOPMENT COSTS $ - $ 2,500 $ - $ 5,000 $ 251,660
OPERATING EXPENSES:
Personnel costs & director fees - - - - 135,625
Consultants 22,500 11,073 120,000 22,146 711,123
Professional fees 23,832 - 46,332 - 131,182
Office expenses - - - - 19,357
Depreciation 145 - 290 - 435
Advertising and promotion - - 35 - 133,483
Loss on cancellation of
licensing agreements - - - - 19,860
Other expenses 72 18 141 30 23,081
Unknown sources prior to
current ownership - - - - 151,518
---------- ---------- ---------- ---------- ------------
Total operating expenses 46,549 11,091 166,798 22,176 1,325,664
---------- ---------- ---------- ---------- ------------
(LOSS) FROM OPERATIONS (46,549) (13,591) (166,798) (27,176) (1,577,324)
OTHER INCOME AND (EXPENSES):
Amortization of discount
on receivables - - - - 20,259
---------- --------- ---------- ---------- ------------
(Loss) Before Extraordinary Item (46,549) (13,591) (166,798) (27,176) (1,557,065)
Extraordinary Item:
Costs of terminated acquisition - - - - 168,050
---------- --------- ---------- ---------- ------------
Net (Loss) $ (46,549) $ (13,591) $ (166,798) $ (27,176) $ (1,725,115)
========== ==========. ========== ========== ============
Basic earnings per share:
(Loss) Per Share Before
Extraordinary Item $ (0.01) $ (0.03) $ (0.05) $ (0.06) $ (5.60)
(Loss) Per Share From
Extraordinary Item - - - - (0.61)
---------- --------- ---------- ---------- ------------
Net (Loss) Per Share $ (0.01) $ (0.03) $ (0.05) $ (0.06) $ (6.21)
========== ==========. ========== ========== ============
Weighted Average Shares Outstanding 3,593,906 472,242 3,462,967 472,242 277,944
========== ==========. ========== ========== ============
</TABLE>
See accounts review report and accompanying selected information.
4
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KLEENAIR SYSTEMS, INC.
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Accumulated
Additional Unearned Deficit During
Preferred Stock Common Stock Paid-In Compen- Development
Shares Amount Shares Amount Capital sation Stage
--------- ------- --------- ------- ---------- --------- -------------
BALANCES, 12/31/94 - $ - 37,066 $ 37 $ 151,481 $ - $ (151,518)
Stock issued for cash - - 13,667 14 66,995 - -
For adjustment - - 267 1 - - -
For consulting services - - 43,074 43 279,482 - -
For professional services - - 2,333 2 12,748 - -
For purchase of patent rights 466,667 466 30,000 30 3,507,003 - -
For directors' compensation - - 2,000 2 22,498 - -
For officers' compensation 16,667 17 4,667 5 194,978 - -
Other contributed capital - - - - 2,367 - -
Options compensation - - - - 70,313 152,016) -
Net loss - - - - - - (329,289)
--------- ------- --------- ------- ---------- -------- -----------
BALANCES, 12/31/95 483,334 483 133,074 134 4,307,865 (152,016) (480,807)
Stock issued for services 6,666 6 12,333 12 201,857 (78,750) -
For officers' compensation 16,666 17 - - 15,608 (15,625) -
For aborted acquisition - - 20,000 20 140,530 - -
Exercise of options - - 37,500 37 112,462 - -
Conversion to common (159,333) (159) 159,334 159 - - -
Net Loss - - - - - 187,346 (716,511)
--------- ------- --------- ------- ---------- -------- -----------
BALANCES, 12/31/96 347,333 347 362,241 362 4,778,322 (59,045) (1,197,318)
Stock issued for cash - - 60,000 60 14,940 - -
For officers' compensation 16,667 17 - - 3,858 (3,875) -
Conversion to common (50,000) (50) 50,000 50 - - -
Net loss - - - - - 37,979 (55,438)
--------- ------- --------- ------- ---------- -------- -----------
BALANCES, 12/31/97 314,000 314 472,241 472 4,797,120 (24,941) (1,252,756)
Stock issued for cash - - 400,000 400 199,600 - -
For services - - 1,060,000 1,060 93,315 - -
To officers and developers - - 160,000 160 59,840 - -
For diesel license - - 1,000,000 1,000 61,500 - -
Conversion to common (201,667) (202) 201,665 202 - - -
Net loss - - - - - 24,941 (305,561)
--------- ------- --------- ------- ---------- -------- -----------
BALANCES, 12/31/98 112,333 112 3,293,906 3,294 5,211,375 - (1,558,317)
Stock issued for services - - 300,000 300 74,700 - -
Net loss - - - - - - (166,798)
--------- ------- --------- ------- ---------- -------- -----------
BALANCES, 06/30/99 112,333 $ 112 3,593,906 $ 3,594 $5,286,075 $ - $(1,725,115)
========= ======= ========= ======= ========== ======== ===========
</TABLE>
See accounts review report and accompanying selected information.
6
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KLEENAIR SYSTEMS, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
Increases/(Decreases) in Cash and Cash Equivalents
For Six Months Ended June 30, 1999 and 1998
Cumulative
During Devel-
1999 1998 opment Stage
--------- -------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (166,798) $ (27,176) $ (1,725,115)
Adjustments to reconcile net
income/(loss) to net cash
provided by operations:
Losses prior to current ownership - - 151,518
Depreciation 290 - 435
Amortization of:
Prepaid expenses 90,000 13,542 252,220
Deferred services - 13,604 250,267
Stock issued for services 75,000 - 507,950
Stock issued for extraordinary loss - - 140,550
Advances to consultants - - 20,000
Prepaid expenses - - (180,000)
Trade accounts payable 1,100 - 43,811
--------- -------- ------------
NET CASH USED BY OPERATING ACTIVITIES (408) (30) (538,364)
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment - - (1,740)
Patent licensing costs - - (37,137)
NET CASH USED IN INVESTING ACTIVITIES - - (38,877)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuing stock - - 574,909
Additional capital contributions - - 2,367
NET CASH PROVIDED BY FINANCING
ACTIVITIES - - 577,276
--------- -------- ------------
NET INCREASE/(DECREASE) IN CASH (408) (30) 35
CASH AT BEGINNING OF YEAR 443 557 -
--------- -------- ------------
CASH AT END OF YEAR $ 35 $ 527 $ 35
=========== ========== =============
SUPPLEMENTAL DISCLOSURES:
Cash payments for:
Interest $ - $ - $ -
Income taxes - - -
Non-cash investing and financing
transactions:
Stock issued for:
Compensation and directors fees - - 186,875
Services and prepaid services 75,000 - 437,500
Patent licensing - - 3,507,500
Repurchase of U.S. diesel license - - 62,500
Acquisition of National
Diversified Telecom, Inc. - - 140,550
Sale of marketing licenses for
notes receivable - - 1,736,558
See accounts review report and accompanying selected information.
7
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KLEENAIR SYSTEMS, INC.
(A Development Stage Enterprise)
SELECTED INFORMATION FOR FINANCIAL STATEMENTS
June 30, 1999
(Unaudited)
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions of Regulation S-B.
They do not include all information and footnotes required by generally
accepted accounting principles for complete financial statements.
However, except as disclosed herein, there has been no material change
in the information included in the Company's Annual Report on Form 10-
KSB for the year ended December 31, 1998. In the opinion of
Management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. The
report of Robert Early & Company, P.C. commenting on their review
accompanies the condensed financial statements included in Item 1 of
Part 1. Operating results for the six month period ended June 30,
1999, are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999.
The December 31, 1998, balance sheet presented is from the audited
financial statements for the year ended December 31, 1998 as presented
in Form 10-KSB.
NOTE 2: GOING CONCERN ISSUES
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, 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
its activities 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 development activities being carried on by
the Company will be continued and that there should be no substantial
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: STOCK TRANSACTIONS
During the first quarter, the Company issued 300,000 shares of S-8
free-trading stock in exchange for financial consulting services.
These shares, valued at the market price on the date of approval, were
recorded at $75,000.
NOTE 4: AMORTIZATION
The Company has amortized services prepaid during 1998. The services
were to be provided over a year starting in July 1998. The total
amortization of $90,000, which ended June 1999, is split equally
between Professional fees and Consultants.
NOTE 5: SUBSEQUENT EVENTS
In July 1999, the Company issued 210,000 shares to key personnel as
compensation for services and efforts to get the Company moving.
In October 1999, the Company has also entered into a contract with a
third party for the modification of catalytic coatings to work
specifically with the Company's diesel emission control system.
8
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Item 2. MANAGEMENT'S DISCUSSION AND PLAN OF OPERATION
The Company was incorporated under the laws of the State of
Nevada on February 4, 1986, under the name of Covington Capital
Corporation. In 1986, the Company filed an S-18 and registered
certain stock. From 1989 through 1993, the Company underwent a
series of name changes in order to explore various business
opportunities. However, none of the business opportunities was
successfully completed.
In April, 1995, under the name Investment and Consulting
International, Inc., the Company acquired a patent for a
proprietary device designed to neutralize nitrogen oxide
automobile emissions from a separate company which was then known
as KleenAir Systems, Inc. Simultaneously with the acquisition of
the patent, the Company acquired the right to use the corporate
name "KleenAir Systems, Inc.," and changed to its current name.
Since acquiring the patent in 1995, the Company has been a
developmental stage company and has worked towards the completion
of the development and testing of the NOxMasterTM technology. The
Company owns US Patent # 5,224,346 "Engine NOx Reduction System"
issued in 1993, US Patent # 5,609,026 "Engine NOx Reduction" and
has been notified of the approval of 10 claims under US Patent
Application SN 08/816,796 filed in 1997. on "Ammonia Injection in
NOx Control". However, the Company decided to appeal for approval
of the balance of the claims under this Patent pending
application. The Company has applied for and maintained patent
protection under the Patent Cooperation Treaty (PCT) to protect
its intellectual property in a variety of countries that are
significant producers of automotive products.
The Company conducted certain tests of its NOxMasterTM NOx
reduction system with a significant United Kingdom technology
Company with a view to creating a combined NOx/Particulate
reduction system and developing a strategic partnership for the
commercial exploitation of such an integrated system for use with
mobile sources powered by diesel engines.
Once production and sales begin, the Company anticipates
employing initially 15 to 20 employees, primarily in management,
technical and administrative capacities. The Company is actively
seeking sources of funding for its operating capital requirements
both to complete its test and evaluation programs and to support
initial sales and production.
The Company is negotiating potential licensing and other
commercial arrangements with some major international companies
in the automotive industry, subject to completion of satisfactory
test and evaluation programs.
9
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PART II
Item 1. Market For Common Equity and Other shareholder Matters
Market Information: The trading market for the common
equity securities of the Company is the National Association of
Securities Dealers OTC Bulletin Board quotation system. The
following are the highs and lows for each quarter for the two
fiscal quarters ended December 31, 1997, fiscal year 1998 and the
first 2 quarters of fiscal year 1999 respectively. These
quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commissions, and may not represent actual
transactions.
High Low
1997
3rd Quarter $1.125 $0.125
4th Quarter $0.125 $0.125
1998
1st Quarter $0.125 $0.125
2nd Quarter $0.125 $0.125
3rd Quarter $1.25 $0.125
4th Quarter $1.31 $0.75
1999
1st Quarter $0.25 $0.625
2nd Quarter $0.25 $1.125
Shareholders: At October 31, 1999 there were 122
shareholders of record with an additional 62 shareholders
registered with firms reporting to the Depository Trust Company.
Item 2. Legal Proceedings
There were no legal proceedings to which the registrant was
subject as of June 30th, 1999.
Item 3. Changes in and Disagreements with Accountants
None
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None
Item 6. Exhibits and Reports on From 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: November 30, 1999 /s/ LIONEL SIMONS.
By: Lionel Simons., President,
Secretary,
Principal Accounting Officer, &
Principal Financial Officer
10
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The following schedule contains summary financial information which has
been extracted from the consolidated financial statements of KLEENAIR
SYSTEMS, INC. for the interim financial statements filed on Form 10-QSB
for the periods indicated. These summary schedules are qualified in their
entirety by reference to such financial statements and the notes thereto.
</LEGEND>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998 DEC-31-1999 DEC-31-1998
<PERIOD-END> JUN-30-1999 JUN-30-1998 JUN-30-1999 JUN-30-1998
<CASH> 35 0 35 0
<SECURITIES> 0 0 0 0
<RECEIVABLES> 0 0 0 0
<ALLOWANCES> 0 0 0 0
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 35 0 35 0
<PP&E> 1,740 0 1,740 0
<DEPRECIATION> (435) 0 (435) 0
<TOTAL-ASSETS> 3,608,477 0 3,608,477 0
<CURRENT-LIABILITIES> 43,811 0 43,811 0
<BONDS> 0 0 0 0
0 0 0 0
112 0 112 0
<COMMON> 3,594 0 3,594 0
<OTHER-SE> 3,560,960 0 3,560,960 0
<TOTAL-LIABILITY-AND-EQUITY> 3,608,477 0 3,608,477 0
<SALES> 0 0 0 0
<TOTAL-REVENUES> 0 0 0 0
<CGS> 0 0 0 0
<TOTAL-COSTS> 0 0 0 0
<OTHER-EXPENSES> 46,549 13,591 166,798 27,176
<LOSS-PROVISION> (46,549) (13,591) (166,798) (27,176)
<INTEREST-EXPENSE> 0 0 0 0
<INCOME-PRETAX> (46,549) (13,591) (166,798) (27,176)
<INCOME-TAX> 0 0 0 0
<INCOME-CONTINUING> (46,549) (13,591) (166,798) (27,176)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (46,549) (13,591) (166,798) (27,176)
<EPS-BASIC> (0.01) (0.03) (0.05) (0.06)
<EPS-DILUTED> (0.01) (0.03) (0.05) (0.06)
</TABLE>
