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| CPWE.OB > SEC Filings for CPWE.OB > Form 10-Q on 13-Jul-2009 | All Recent SEC Filings |
13-Jul-2009
Quarterly Report
This quarterly report contains forward-looking statements relating to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may", "should", "intends", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential", or "continue" or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors which may cause our or our industry's actual results, levels of activity or performance to be materially different from any future results, levels of activity or performance expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity or performance. You should not place undue reliance on these statements, which speak only as of the date that they were made. These cautionary statements should be considered with any written or oral forward-looking statements that we may issue in the future. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results, later events or circumstances or to reflect the occurrence of unanticipated events.
In this quarterly report unless otherwise specified, all dollar amounts are expressed in United States dollars and all references to "common shares" refer to the common shares of our capital stock.
The management's discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP").
As used in this quarterly report and unless otherwise indicated, the terms "we", "us", the "Company" and "Clean Power" refer to Clean Power Technologies Inc. and its subsidiaries.
The Company was incorporated in the State of Nevada, United States of America on October 30, 2003 as Sphere of Language. On June 13, 2006, the Company changed its name to Clean Power Technologies Inc.
The Company incorporated Clean Energy and Power Solutions Inc. ("CEPS") on May 12, 2006 in the State of Nevada as a wholly-owned subsidiary.
By agreement dated May 22, 2006, the Company agreed to issue 30,765,377 common shares for all the issued and outstanding common shares of Clean Power Technologies Inc. ("CPTI private"), a privately held company, incorporated on March 14, 2006 in the State of Nevada. CPTI private is developing a project for a gas/steam or diesel/steam hybrid technology. CPTI private incorporated a wholly-owned subsidiary, Clean Power Technologies Limited, ("CPTL") a company based in, and incorporated under the laws of the United Kingdom on May 10, 2006, to carry on all its research and development. On April 24, 2006, CPTI private entered a research and development agreement to fund all future costs for research, development, patenting, licensing and marketing for an alternative hybrid fuel technology that combines diesel and steam and gas (petrol) and steam technologies for a 100% ownership of the technology and any associated intellectual rights. CPTI private and CEPS merged on June 20, 2006 with CEPS being the surviving entity. On July 10, 2006 CEPS became a wholly-owned subsidiary of the Company when the stockholders of CPTI private tendered their remaining shares.
We presently have two subsidiaries, CEPS, which is a wholly-owned subsidiary of the Company, and CPTL, which is a wholly-owned subsidiary of CEPS. We undertake all of our business operations indirectly through our wholly-owned U.K. subsidiary, CPTL. These operations are presently focused on the research and development of our technology, a steam hybrid engine.
Plan of Operation
Our Company is committed to developing hybrid fuel technology and alternative fuel for a range of vehicles, including locomotives, heavy trucks and light cars. The Company's proprietary technology significantly reduces pollution through its Clean Energy Separation and Recovery ("CESAR") system, which takes otherwise wasted heat from the exhaust of a conventional combustion engine and modifies it through a heat recovery system to generate clean power for vehicles.
In 2006, testing of the CESAR system began on a Mazda RX8 passenger vehicle engine, with trials on a second identical engine commencing later that year. In June 2007, testing also began on a Caterpillar C18 diesel engine to explore applications, such as auxiliary power and trailer refrigeration, within the industrial vehicle and truck industries. Testing on the CESAR process began in late October 2007, with initial results recording a 40% improvement in fuel efficiency.
Our CESAR technology is designed to increase vehicle fuel economy and reduce emissions through lowered fuel consumption by capturing, storing, and reusing otherwise wasted heat from the exhaust of a conventional combustion engine. A heat exchanger captures waste energy, which is then stored in the form of steam in an accumulator, for 'on demand' use either in the same 'primary' engine, or in a secondary vapour engine. Power can be produced solely by the secondary vapour engine even after the primary combustion engine has shut down. Our CESAR system can be used to power auxiliary truck systems, such as trailer refrigeration and cab cooling or heating, in regulatory 'no idle' or 'quiet' zones. In additional to initial truck applications, CESAR can be further applied in our well developed passenger car programmed in addition to having longer-term potential in the locomotive and marine sectors.
Our plan of operation over the next twelve months is to further the research and development on our technology resulting in a advanced prototype and commercial application in mid 2010. If successful, we intend to license the technology or form partnerships for the use of the technology with any customers we may identify.
We have to date been funded by existing working capital, by an offering of our convertible debentures and common stock, and by stockholder loans from a director and executive officer of the Company. On July 11, 2008, the Company closed on two million ($2,000,000) of a maximum of $5,000,000 of convertible debentures. Under the terms of the agreement the Company could raise an additional three million ($3,000,000) from one or more investors. On February 10, 2009, the Company closed an additional one million ($1,000,000) by way of an equity financing at a price of $0.45 per share. The Company issued a total of 2,222,222 shares of common stock and warrants to purchase an aggregate of 2,777,778 shares of common stock pursuant to this financing, excluding placement agent warrants. During the next twelve (12) months, the Company will require approximately three and a half million ($3,500,000) dollars for development and operating costs, of which approximately nine hundred thousand ($900,000) dollars will be applied to research and development of the project. The Company anticipates expending approximately $1,400,000 on salaries for management, employees and consultants, $144,000 in lease and rental payments for our development facility, $300,000 on patent related fees and legal fees, $400,000 on taxes, insurance and administration of the project, $120,000 on audit and accounting related fees and approximately $250,000 on travel, investor/public relations and miscellaneous corporate expenses. As of May 31, 2009, the Company had available cash of $144,806 as compared to available cash of $1,203,030 at August 31, 2008. During the nine month period covered by this quarterly report, along with regular monthly operational expenditures, the Company undertook certain leasehold improvements and acquired certain equipment further reducing the Company's cash position by approximately $510,924. The Company will not have sufficient capital to continue operations for the next three months and will be required to raise additional required capital by way of equity or stockholder loans. The Company is currently expending approximately $500,000 per quarter in operations and therefore an additional $360,000 at a minimum will need to be raised during the three months ended August 31, 2009, after taking into account the existing cash available of approximately $140,000 as at the quarter ended May 31, 2009. There can be no assurance that the Company will be able to raise these required funds. If the Company cannot raise the required funds then operations may cease.
We believe that we have validated the theoretical predictions that were the foundation of the CESAR system. A substantial development component of the programme has now commenced and will require appropriate augmentation of the engineering team, which the Company intends to continue to undertake this calendar year. This is essential for design studies of potential applications of the total system and will commence using the empirical data revealed by the research programme undertaken. These applications include using the CESAR system to provide refrigeration power for trucks when the main combustion engine is shut down, with a target of road testing an especially directed system in late summer of 2009. Further applications include provision of auxiliary power derived at low recurrent cost from the exhaust heat of combustion engines for other transportation areas, including lighter vehicles than trucks and heavier in the form of railway locomotives. There is also a promising application in marine applications, not excluding commercial vessels but particularly attractive for pleasure craft with their heavy requirement for auxiliary electrical power when not under way.
In order to meet many challenges relating to the development of the steam technology, the Company has appointed a Swiss steam technology specialist company called Dampflokomotiv-und Maschinenfabrik DLM AG ("DLM") to act as its outside consultant for the further development of the Company's CESAR technology. DLM will advise and use its in-house expertise to assist and facilitate the development of the next stage in our CESAR programme. DLM has professionally qualified engineers with specialist experience. DLM will provide knowledge and experience in such areas as the design of the process to predict and analyse the heat transfer performance and issues associated with pressure losses for a range of thermal operations involving liquids and gases with and without change of phase. DLM has experience with stress analysis including pressure vessel design to European and British standards. DLM will work with the engineers of the Company on a routine basis. We intend to continue this development through the fiscal year.
The Company employed a CAD engineer in mid-January 2008 and work has commenced on the development of the truck production and vehicle detail design and initial system configuration feasibility. The CAD engineer is experienced in all aspects of design and development. The Company has licensed UGS NX5 and S-IDEAS CAD software to achieve its design objectives. The Company, as it continues to evolve from the research phase to that of testing and pre-production, continues to bring additional engineering expertise in-house. Also acquired in January 2009, was a CNC milling machine, enabling more rapid and cost effective metal fabrication work on-site, rather than through a sub-contractor
In early May 2008, the Company agreed to acquire additional space in Newhaven,
UK, to accommodate its corporate office and expanding test cell
facility. Effective November 13, 2008 the Company entered into a five (5) year
lease for office and warehouse space in a property located in New Haven, East
Sussex, U.K., adjacent to its current leased facilities at an annual rate of
$25,207 (£15,000) payable quarterly commencing March 2009. Concurrently, the
Company entered into an option to purchase the aforementioned property,
exercisable March through August 2010, for a purchase price of the greater of
(i) the price stated in an Independent Valuation or (ii) £425,000 less any
reductions previously specified and agreed in a former option agreement.
The Company is presently undertaking a twin track process to design a new refrigeration engine for reefers, while holding collaborative discussions with major North American trailer fleet operators. During fiscal 2008, the Company signed a memorandum of understanding ("MOU") with one of the USA's largest grocery chains, under which the Company used a refrigerated vehicle for data collection on a range of duty cycles in June, 2008. This was an off site data collection process in order to validate test results which will be collected in our test cell this summer 2009.
The Company has acquired a further 7,500 sq ft of additional space in Newhaven, UK. This additional space has been used for newly acquired test equipment and offices.
The first system has been installed on the Company's truck, which was acquired and delivered during in the prior quarterly reporting period. The Company's truck is similar to the trucks in the U.S. trucking company fleet. This truck is a Columbia CL120 Conventional Chassis with a Day Cab. This vehicle has the same specifications as the current U.S. fleet of vehicles on which we did our testing in mid 2008. The Company had conducted a series of tests in mid 2008 to collect data and validate test results to be used in this test vehicle.
Customer expectations are that any vehicle application will be fully reliable, continuously delivering the performance benefits promised in all conditions over a period of at least ten years. To this end the Company has recently made a major investment of approximately $170,000 in a rolling road dynamometer manufactured by Dynomite of New Hampshire USA. This substantial piece of equipment can accommodate a maximum weight double-drive axle truck which turns the dynamometer rollers against a variable load created by applying electrical inertia. This allows the simulation of all road conditions that a truck may encounter in its day to day operation such as hilly terrain, urban stop-start and interstate highway running.
The Rolling Road will provide the "hub" of the development and validation programme for the CESAR system ensuring optimum functionality for each vehicle application. The issue of durability will also be addressed by other recent investments such as multi-axis shaker test rigs which will be programmed to home-in on harmful resonant frequencies for the system, as identified by data collected over specific proving ground surfaces. By running these shaker rigs on a 24 hour basis in environmental enclosures, capable of operating between -40 and +50 degrees Celsius, ten year life testing can be compressed into a period of only a few months. This rigorous testing of our technology and associated refinements that ensure from the testing we believe will accelerate our technology from an advanced prototype to a commercially viable product.
The Rolling Road, became fully operational in this quarter ended May 2009, with testing having commenced on our truck. This bespoke truck, fitted with a Detroit Diesel engine and Eaton transmission, is designed to be used on highways, hectic city streets, narrow roads and can also be driven off-road. The Rolling Road, which will be able to simulate all these conditions, will be a perfect test ground for the vehicle, and allow Clean Power to demonstrate how its CESAR technology improves the truck's fuel efficiency in these conditions. This vehicle has been installed with a Prototype 2 CESAR system.. The testing underway will reproduce the delivery routes used in the areas covered by the U.S. hauler. This will confirm the actual fuel savings to the major grocery hauler when compared against their current fuel usage. Typical routes we would use are Calgary to Banff and Calgary local area city routes.
Prior to this a Prototype 1 CESAR system has been tested and validated within the test cell with the same vehicle package constraints being driven from our Caterpillar C15 engine.
Once the system is working on the truck with the Rolling Road, the vehicle will be used for data collection at Millbrook Proving ground (this is GM built, proving ground just outside Bedford). This data will be used for drive file creation for accelerated durability testing on our hydraulic fatigue testing machines in Newhaven. These tests will represent the equivalent to 10 years of road durability in the space of 4 weeks.
It is anticipated that the first vehicle may require some electronic tuning in order for the system to work including steam valve optimization. This should take no longer than 4 weeks, and is planned to commence in September, 2009. We can then successfully run the test to prove the fuel savings for our potential customers.
The Company anticipates that a newly designed reefer engine will be ready for road testing by late summer of 2009. Following a ten month road trial and analysis, and further design refinements, the Company expects to submit the CESAR technology for regulatory approval under various jurisdictions worldwide, including the US Environmental Protection Agency ("EPA"), with the hopes of achieving commercialization during late spring of 2010.
Starting June 1, 2009, our CAD engineering team will be preparing drawings for production, with drawing release expected in early 2010.
Michael Roberts our Product Acceptability Engineer started work on April 27, 2009. His role is to ensure that our product is suitable and acceptable to the end user / customer. He will be responsible for the work content required to validate the system for the North American markets and the introduction to the EPA of our system and the market sectors that our product can enter. He is also responsible for negotiations of available tax benefits for our customers installing our fuel saving environmentally friendly systems. unique electronic control system, using Clean Power's own Intellectual Property to ensure the maximum possible fuel efficiency and emissions reductions in all operating conditions
Also recently joining the Company is Mr. Marco Cucinotta, a Control System Specialist. Under Mr. Cucinotta, the Company is undertaking the development of a unique electronic control system, using Clean Power's own Intellectual Property to ensure the maximum possible fuel efficiency and emissions reductions in all operating conditions.
During the quarter ended May 31, 2009, Clean Power engaged Cascade Sierra Solutions ("Cascade") as potential advisors for the EPA and other Regulatory application processes (www.cascadesierrasolutions.org). Located in the State of Oregon, Cascade is a non-profit organization working with heavy duty truck operators to save fuel and reduce emissions. Cascade is well connected with Federal and State agencies, working especially closely with agenda-setting regulators in California. The Company believes this will assist in optimizing the approval process, as well as benefitting from Cascade's broad expertise in implementation of innovative technologies in the trucking industry.
Although the Company remains focused on completing this US reefer project on schedule, there is significant interest in its steam hybrid technology for broader applications (including automotive, marine and military) in a wide range of countries. The Company continues to respond to these expressions of interest and will pursue opportunities which may arise and which management believes to be in the best interests of the Company. As part of our new development, we are developing a system for use in land fill site electrical power generation; our system will deliver an estimated 20% or greater extra power back to the national grid. The spark ignition engines are run using the methane gas from the land fill, our system will add to this via heat recovery from the otherwise wasted exhaust gases. The Company has already entered into preliminary discussions with a regional landfill site operator in the U.K. and will be meeting another larger UK player in the near future. Clean Power intends to install a prototype test engine at a landfill site by early spring 2010.
With respect to the intellectual property of the Company, as of May 31, 2009, patent applications have been filed in five jurisdictions, with the intention to include additional jurisdictions. Furthermore, the Company has received the international search report and written opinion of the Searching Authority and understands that all of the claims were deemed to have industrial applicability and that 10 of the 19 claims were both novel and inventive. The Company intends to make certain revisions to the other claims and seek to get additional claims allowed. To further assist and accelerate this process, the Company has engaged US legal counsel specifically for patent management.
Liquidity and Capital Resources
As of May 31, 2009, we have a total of $144,806 in cash on hand. The Company is expending approximately $500,000 per quarter and we will therefore be required to raise additional funds to continue operations. The Company expects to raise these funds by way of shareholder loans and equity placements.
Results of Operations
The Company had no revenues for the period from inception to May 31, 2009. The
Company reported a loss from its operations totaling $2,986,536 as compared to a
loss from operations totaling $5,184,729 (2008) over the 9 month period as a
result of the quarterly revaluation of its derivative financial instruments
which resulted in a net gain of $1,730,269 with no comparative entry over the
comparative period for the nine months ending May 31, 2008. General and
administrative expenses, net the aforementioned gain during the current nine
month period ended May 31, 2009, totaled $4,716,805 as compared to $5,184,729 in
the prior nine month period ended May 31, 2008, which amount included $2,600,000
as compensation in the form of shares for the services provided by Mr. Mitha to
the Company from April 27, 2004 through May 1, 2008. General and administrative
expenses related primarily to salaries and consulting fees totaling $1,066,610
(2008 - $512,740), office and administrative expenses totaling $500,991 (2008 -
$755,880), interest expense associated with the amortization of certain
convertible notes totaling $366,598 (2008 - $26,648) and stock-based
compensation expenses totaling $376,958 (2008 - Nil). The Company also expended
a total of $301,768 (2008 - $213,082) on professional fees, $33,630 (2008 -
$3,125,000, primarily comprised of a single amount as described above in this
paragraph) in salaries and consulting fees settled by the issuance of common
stock, and $235,516 ($82,899 - 2008) in research and development
efforts. Depreciation costs, amortization of stock option costs and deferred
financing costs cumulatively totaled $646,821 during the nine month period as
compared to $218,480 for the nine month period ended May 31, 2008. Additionally
during the nine month period ended May 31, 2008 the Company expensed $250,000
with respect to certain director's fees settled by the issuance of common stock,
with no similar expenditure in the nine month period ended May 31, 2009.
Reported under other comprehensive loss the Company recorded an unrealized loss from foreign exchange of $27,524 during the nine month period ended May 31, 2009, as opposed to a unrealized loss from foreign exchange during the comparative nine month period ended May 31, 2008 totaling $30,953. The comprehensive loss for the nine month period ended May 31, 2009 totaled $3,014,060 as compared to a comprehensive loss totaling $5,215,682 for the nine month period ended May 31, 2008. The Company reported a basic and diluted loss of $0.04 per share for the nine months ended May 31, 2009 as compared to a basic and diluted loss of $0.09 per share for the nine months ended May 31, 2008. The comprehensive loss from inception to date totals $16,763,601 as at May 31, 2009.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders.
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