CLEAN ENERGY COMBUSTION SYSTEMS INC - 10-Q Quarterly Report

As filed with the Securities and Exchange Commission on August 14, 2002

Securities And Exchange Commission
Washington, D.C. 20549

_________________

FORM 10-Q

_________________

(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, 2002; Or
	Transition Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934 For The Transition Period From ________ To _______

Commission File No. 333-88207

CLEAN ENERGY COMBUSTION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)

98-0211550
(I.R.S. Employer
Identification No.)

7087 MacPherson Avenue, British Columbia, Canada V5J 4N4
(Address of principal executive offices) (Zip Code)

(604) 435-9339
(Registrant's telephone number, including area code)

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 No

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

10,206,694 shares of common stock, par value $0.0001 per share, as of August 10, 2002

Introductory Notes

The information in this report is current as of the date of this report (August 11, 2002), unless another date is specified.

We conduct our transactions in the currency of both the United States and Canada, although we consider the United States dollar to be our functional and reporting currency. 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. The rate of exchange of Canadian dollars to United States dollars as of June 30, 2002, was CDN $1.5162 to U.S. $1. For information relative to the conversion of our accounts into U.S. dollars, see that section captioned "Foreign Currency Translation" contained in explanatory note 2 to the consolidated financial statements included in this report.

We prepare our consolidated financial statements in accordance with United States generally accepted accounting principles. Our consolidated financial condition and results of operations for the six-month interim period ended June 30, 2002 are not necessarily indicative of our prospective consolidated financial condition and results of operations for the full fiscal year ended December 31, 2002. The consolidated financial statements presented in this report as well as other information relating to our company contained in this report should be read in conjunction with the annual consolidated financial statements and more detailed background information relating to our company and our business contained in our annual report on form 10-K for our fiscal year ended December 31, 2001.

Special Note Regarding Forward Looking Statements

In this report we make a number of statements, referred to as "forward-looking statements", which are intended to convey our expectations or predictions regarding the occurrence of possible future events or the existence of trends and factors that may impact our future plans and operating results. These forward-looking statements are derived, in part, from various assumptions and analyses we have made in the context of our current business plan and information currently available to us and in light of our experience and perceptions of historical trends, current conditions and expected future developments and other factors we believe to be appropriate in the circumstances. You can generally identify forward-looking statements through words and phrases such as "seek", "anticipate", "believe", "estimate", "expect", "intend", "plan", "budget", "project", "will be", "will continue", "will likely result", and similar expressions. Forward-looking statements contained in this report would, for example, include statements relating to the timing and completion of pending or prospective projects and contracts and receipt of revenues.

When reading any forward looking statement you should remain mindful that actual results or developments may vary substantially from those expected as expressed in or implied by that statement for a number of reasons or factors including, by way of example and not limitation, (1) the various risks and uncertainties described in this special note or elsewhere in this report, and (2) our current and prospective financial requirements and current and prospective lack of capital; our inability to satisfactorily complete pending or new project proposals (including with prospective licensee or joint venture partners) and enter into binding revenue-producing contracts based upon those proposals; our overall inability or that of our licensees or joint venture partners, if any, to design, test, manufacture and sell pulse combustors on a profitable basis, including as a result of insufficient consumer acceptance of and demand for pulse combustors; regulatory constraints, and changes in our business plan and corporate strategies or those of our joint venture partners. Each forward-looking statement should be read in context with, and with an understanding of, the various other disclosures concerning our company and our business made elsewhere in this report as well as other pubic reports filed with the United States Securities and Exchange Commission (the "SEC").

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The various uncertainties and risk factors described in this special note or elsewhere in this report are not exhaustive, and new risks and uncertainties may emerge from time to time. It is not possible for us to predict all risks and uncertainties, nor can we assess the impact of all risks and uncertainties on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from, those contained in any forward-looking statement. Consequently, all forward-looking statements contained in this report are fully qualified by this special note, and we can give you no assurance that the results or developments anticipated or predicted by us will be realized, or even if realized, that they will have the expected consequences to, or effects on, us. Given these factors, you should not place undue reliance on any forward-looking statement as a prediction of actual results or developments.

We are not obligated to update or revise any forward-looking statement contained in this report to reflect new events or circumstances unless and to the extent required by applicable law. All forward-looking statements contained in this report constitute "forward-looking statements" within the meaning section 21E of the United States Securities Exchange Act of 1934 and, to the extent it may be applicable by way of the incorporation of statements contained in this report by reference or otherwise, section 27A of the United States Securities Act of 1933, each of which establishes a safe-harbor from private actions for forward-looking statements as defined in those statutes.

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Table of Contents

		Page
CONSOLIDATED BALANCE SHEETS		1
CONSOLIDATED STATEMENTS OF OPERATIONS		2
CONSOLIDATED STATEMENTS OF CAPITAL DEFICIENCY		3
CONSOLIDATED STATEMENTS OF CASH FLOW		4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS		5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		16
	Overview	16
	Results Of Operations	16
	Liquidity And Capital Resources	17
	Other Matters	20
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK		20
	Currency Fluctuations	20
	Interest Rate Fluctuations	21
UNCERTAINTIES AND OTHER RISK FACTORS THAT MAY AFFECT OUR FUTURE RESULTS AND FINANCIAL CONDITION		21
	Uncertainties And Risks Generally Relating To Our Company And Our Business	21
	Risks Relating To Our Securities	29
LEGAL PROCEEDINGS		32
CHANGES IN SECURITIES AND USE OF PROCEEDS		32
DEFAULTS UPON SENIOR SECURITIES		32
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		32
OTHER INFORMATION		33
EXHIBITS AND REPORTS ON FORM 8-K		33
SIGNATURES		33

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CLEAN ENERGY COMBUSTION SYSTEMS, INC.
(a development stage enterprise)
(expressed in U.S. dollars)
CONSOLIDATED BALANCE SHEETS

			June 30, 2002	December 31, 2001

			(unaudited)
ASSETS
CURRENT
	Advances to an affiliated company (note 4)		$ 468,738	$ 370,716
	Prepaid expenses		2,825	-

		Total current assets	471,563	370,716
PATENTS			36,613	35,335

TOTAL ASSETS			$ 508,176	$ 406,051

LIABILITIES
CURRENT
	Accounts payable		$ 254,187	$ 84,498
	Accrued expenses (Including accrued interest of $35,782 at June 30, 2002 and $8,084 at December 31, 2002 - note 6)		57,382	8,084
	Advances from related parties (note 6)		473,618	190,729

		Total current liabilities	785,187	283,311
Provisions and liabilities related to transfer of ownership of subsidiary (notes 3 & 8)			557,611	659,403

TOTAL LIABILITIES			1,342,798	942,714

Going concern (note 1)
Commitments and contingencies (note 10)
CAPITAL DEFICIENCY
Authorized (note 7)
	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 7):
	Series 'A' convertible preferred stock; Liquidation preference $1 per share, or $1,000 total; 1,000 shares issued and outstanding as of June 30, 2002 and December 31, 2001		1	1
	Series 'B' convertible preferred stock; Liquidation preference $2 per share, or $500,002 total; 175,001 shares issued and outstanding as of June 30, 2002 and December 31, 2001		175	175
	Common stock; 10,206,694 shares outstanding as of June 30, 2002 and December 31, 2001		1,020	1,020
Additional paid-in capital			1,821,816	1,821,816

Deficiency accumulated during the development stage			(2,657,634)	(2,359,675)

TOTAL CAPITAL DEFICIENCY			(834,622)	(536,663)

TOTAL LIABILITIES AND CAPITAL DEFICIENCY			$ 508,176	$ 406,051

The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets

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CLEAN ENERGY COMBUSTION SYSTEMS, INC.
(a development stage enterprise)
(expressed in U.S. dollars)
CONSOLIDATED STATEMENTS OF OPERATIONS

				Three months Ended June 30,		Six months Ended June 30,		Jan. 1, 1999 to June 30, 2002 (Cumulative)
				2002	2001	2002	2001	Jan. 1, 1999 to June 30, 2002 (Cumulative)

				(unaudited)
ADMINISTRATION AND MARKETING EXPENSES
	Accounting			$ 2 ,134	$ 18,011	$ 8,487	$ 27,240	$ 77,052
	Wages and benefits			34,142	14,118	67,109	66,704	557,002
	Amortization			-	2,476	-	7,472	45,027
	Communications			1,299	1,411	2,849	3,281	33,160
	Foreign exchange (gain) loss			(116)	18,130	(116)	7,360	(27,536)
	Interest			22,775	3,576	27,698	7,519	71,554
	Legal & patent maintenance			6,534	21,922	6,818	44,083	160,930
	Marketing			15,193	24,391	26,279	54,838	318,325
	Occupancy			-	8,697	-	18,133	99,829
	Office and miscellaneous			2,462	8,449	4,450	13,169	99,632
	Professional fees			-	9,775	-	9,775	15,972
	Transfer agent fees			520	-	520	2,460	34,402

			Total administration and marketing	84,423	130,956	144,094	262,034	1,485,349

RESEARCH AND DEVELOPMENT EXPENSES
		Wages and benefits		-	30,263	-	108,501	768,339
		Development		120,066	34,664	255,656	48,328	505,737

			Total research and development	120,066	64,927	255,656	169,337	1,274,076

TOTAL EXPENSES AND NET LOSS BEFORE THE FOLLOWING:				(204,489)	(195,883)	(399,750)	(431,371)	(2,759,425)
REDUCTION OF PROVISION RELATED TO TRANSFER OF SUBSIDIARY (note 3)				23,481	―	101,791	―	101,791

TOTAL EXPENSES AND NET LOSS FOR THE PERIOD				$ (181,008)	$ (195,883)	$ (297,959)	$ (431,371)	$ (2,657,634)

BASIC AND DILUTED NET LOSS PER SHARE OF COMMON STOCK (note 2)				$ (0.02)	$ (0.02)	$ (0.03)	$ (0.04)

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING				10,382,695	10,382,695	10,382,695	10,382,695

The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements of operations

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CLEAN ENERGY COMBUSTION SYSTEMS, INC.
(a development stage enterprise)
(expressed in U.S. dollars)
CONSOLIDATED OF CAPITAL DEFICIENCY

	Series 'A' Preferred Stock		Series 'B' Preferred Stock		Common Stock		Additional Paid-in Capital	Accumulated During The Development Stage
	Shares	Amount	Shares	Amount	Shares	Amount	Additional Paid-in Capital	Period	Cumulative

	(unaudited)
Issued on incorporation	1,000	$ 1	-	$ -	9,643,750	$ 964	$ 535	$ -	$ 1,500
Private placement	-	-	250,001	250	-	-	499,752	-	500,002
Vesting of previously issued but unexercised warrants granted to consultant (note 7)	-	-	-	-	-	-	2,000	-	2,000
Net loss for the period ended December 31, 1999	-	-	-	-	-	-	-	(639,404)	(639,404)

Balance, December 31, 1999	1,000	1	250,001	250	9,643,750	964	502,287	(639,404)	(135,902)

Vesting of previously issued but unexercised warrants granted to consultant (note 7)	-	-	-	-	-	-	18,500	-	18,500
Issued on conversion of promissory note	-	-	-	-	487,944	49	975,838	-	975,887
Net loss for the period ended December 31, 2000	-	-	-	-	-	-	-	(907,826)	(907,826)

Balance, December 31, 2000	1,000	1	250,001	250	10,131,694	1,013	1,496,625	(1,547,230)	(49,341)

Vesting of previously issued but unexercised warrants granted to consultant (note 7)	-	-	-	-	-	-	30,601	-	30,601
Conversion of series 'B' convertible preferred stock to common stock	-	-	(75,000)	(75)	75,000	7	68	-	-
Disposition of subsidiary (note 3)							294,522		294,522
Net loss for the period ended December 31, 2001	-	-	-	-	-	-	-	(812,445)	(812,445)

Balance, December 31, 2001	1,000	1	175,001	175	10,206,694	1,020	1,821,816	(2,359,675)	(536,663)

Net loss for the period ended June 30, 2002	-	-	-	-	-	-	-	(297,959)	(297,959)

Balance, June 30, 2002	1,000	$ 1	175,001	$ 175	10,206,694	$ 1,020	$ 1,821,816	$ (2,657,634)	$ (834,622)

The accompanying notes to consolidated financial statements are
an integral part of these consolidated statements of capital deficiency

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CLEAN ENERGY COMBUSTION SYSTEMS, INC.
(a development stage enterprise)
(expressed in U.S. dollars)
CONSOLIDATED OF CASH FLOW

			Six-Months Ended June 30,		Jan. 1, 1999 to June 30, 2002 (Cumulative)
			2002	2001	Jan. 1, 1999 to June 30, 2002 (Cumulative)

			(unaudited)
OPERATING ACTIVITIES
	Total expenses and net loss		$ (297,959)	$ (431,371)	$ (2,657,634)
	Adjustments to reconcile total expenses and net loss to net cash utilized in operating activities:
		Amortization	-	7,472	45,027
		Non-cash consulting expense	-	27,576	51,101
		Reduction of provision related to transfer of subsidiary	(101,792)	-	(101,792)
	Change in operating assets and liabilities:
		Accounts receivable and prepaid expenses	(2,825)	(193,945)	(21,144)
		Accounts payable	169,689	434,408	738,596
		Accrued liabilities	49,298	40,431	189,107
		Payroll taxes	-	(27,293)	-

Net cash used in operating activities			(183,589)	(142,722)	(1,756,739)

INVESTING ACTIVITIES
	Proceeds from sale of short-term investment		-	13,338	-
	Additions to patents		(1,278)	(4,252)	(36,613)
	Purchase of property and equipment		-	(179)	(92,791)

Net cash provided by (used in) investing activities			(1,278)	8,307	(129,404)

FINANCING ACTIVITIES
	Advances to an affiliated company		(98,022)	487	(145,863)
	Advances from shareholders (note 6)		-	-	273,779
	Advances from related parties		282,889	132,398	282,889
	Net proceeds from disposal of subsidiary		-		(2,051)
	Proceeds from issue of common stock		-	-	976,887
	Proceeds from issue of series 'A' convertible preferred stock		-	-	500
	Proceeds from issue of series 'B' convertible preferred stock		-	-	500,002

Net cash provided by financing activities			184,867	132,885	1,886,143

NET DECREASE IN CASH AND CASH EQUIVALENTS			-	(930)	-
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			-	2,122	-

CASH AND CASH EQUIVALENTS, END OF PERIOD			$ -	$ 1,192	$ -

NON-CASH INVESTING AND FINANCING ACTIVITIES:

In December 2001, 75,000 series 'B' shares of preferred stock were converted into 75,000 shares of common stock.
In August and October 2000, a significant shareholder converted the principal amount and all interest of a loan into 487,944 shares of common stock.

The accompanying notes to consolidated financial statements are
an integral part of these consolidated statements of cash flows

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CLEAN ENERGY COMBUSTION SYSTEMS, INC.
(a development stage enterprise)
(expressed in U.S. dollars)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Nature Of Business; Organization And Operations; Going Concern

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 our board of directors in connection with its organization as obligations of our company.

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 "burner" technologies, our patented pulse blade combustion or "PBC" technology which we hold a license from one of our founding shareholders, Ravenscraig Properties Limited ("Ravenscraig Properties"), and our diesel fuel combustion technology which we hold a license from another of our founding shareholders, Mr. John D. Chato.

Since we have not generated operating revenues to date, we should be considered a development stage enterprise. As of June 30, 2002, we have incurred losses from inception totaling $2,657,634, have a working capital deficiency of $313,624, and do not currently have the financial resources to complete our 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 equity or debt will be sought to finance development of our products; however, there can be no assurance that sufficient funds will be raised.

In the event that cash flo