KAIR Kleenair Sys Inc (OTC BB) 4/27/2004 12:00:00 AM ET

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10KSB: KLEENAIR SYSTEMS INC
4/14/2004 10:06:57 AM
(EDGAR Online via COMTEX) -- ITEM 6. MANAGEMENT'S DISCUSSION AND PLAN OF OPERATION.

During 2003, the Company started delivering its patented NOxMaster(TM) NOx Reduction System. Sales for the year topped $750,000 as compared to approximately $50,000 in 2002.

This consisted mainly of shipments of components to Dinex A/S in Denmark who then manufactured completed systems which have been installed on buses, taxis, shuttles and refuse collection vehicles in test quantities. It is expected that field demonstrations of the system will lead to significant orders during the course of the current year and into the future.

The Company is positioning itself to be a leading provider of Selective Catalytic Reduction (SCR) systems in the European market where it has achieved certification status with the Energy Savings Trust (EST) in the U.K. and meets all the retrofit standards for the other EU countries.

The Company owns a number of significant patents which it believes gives it special advantage in the SCR market worldwide and has applied for patents on systems that combine particulate and NOx reduction systems which will further extend its market value.

The Company's original U.S. Patent # 5,224,346 was acquired in April of 1995. U.S. Patent # 5,609,026 "Engine NOx Reduction" was issued in 1997 after successfully overturning a challenge in Patent Court. International patent rights have been granted for these patents and have been issued for Europe (patent # 5 638 139 covering Germany, France and the U.K.) and international coverage extends to certain Asian countries and Canada as well as Brazil and certain other countries.

On November 30, 1999 the Company was issued a third patent on "Ammonia Injection in NOx Control", U.S. Patent # 5,992,141. This patent deals with the NOxMaster(TM) ammonia injection control system and chemical reaction enhancement techniques to ensure optimum effectiveness of the system to achieve maximum NOx reduction. In the opinion of management, this patent significantly strengthens the position of the Company in the exploitation of its technology and increases the value of its future commercial exploitation and licensing potential. Management believes that its patent coverage in all the major automobile and truck producing countries provides it with the patent protection necessary to successfully exploit the technology world-wide. No value has been capitalized on the books for the second and third patents.

Two additional patents were applied for during 2001 that improve the NOxMaster(TM) device in specific relation to its reduction of particulate emissions. The Company believes that a system that reduces particulate emissions as well as oxides of nitrogen meets the two major mobile source pollutants of greatest concern to the mandating authorities, such as the EPA and CARB.

The Company continued testing on its Sonic Flow Carburetor with a patent granted in September 2002(U.S. 6,446,940). This device significantly improves fuel-burning efficiency and reduces emissions on gasoline engines by effectively atomizing the fuel into very fine particles for an even and homogenous distribution throughout the engine cylinders.

The Company is positioning the Sonic Flow Carburetor as a low cost alternative to a fuel injection system for the two wheel market in China and India, It offers more power, greater fuel economy and lower emissions at significantly lower cost. In China some 12 million two wheel vehicles are manufactured annually. The Company has a test and evaluation agreement with a major manufacturer of some 2 million vehicles with the a view to replacing their carburetor systems with the Sonic Flow Carburetor

A similar Sonic Flow concept is employed in the Company's new duel fuel injector on which a patent was issued in December 2002. This device is designed to improve operating efficiency and reduce emissions on diesel engines by using regular diesel fuel to commence fuel combustion and then switch to atomized fuel. These new products are the result of following through on the Company's mission to develop technologies that significantly reduce polluting emissions and improve operating efficiencies.

The original product, the NOxMaster(TM) device is currently being prepared for commercialization in the U.K. and Denmark. Also, Retrofit Verification by the EPA and the California Air Resource Board (CARB) has been applied for in the U.S..

Nitrogen Oxides (NOx) are the most difficult auto exhaust pollutants to control. They are not from the engines fuel but are produced by the oxidation of nitrogen in the combustion of air. 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 minimum standards requires sacrifice of performance and economy.

The NOxMaster(TM) 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 the desired reaction does occur in the presence of excess air (oxygen) and might even be enhanced by the oxygen. Thus the NOxMasterTM device gives the manufacturer a method of control that is essentially independent of engine operating parameters and provides new options for economy and performance.

The product can also be distributed in states other than California where an Executive Order (EO) is required before distribution can commence. The Company has received an EO from the CARB in enabling it to sell its product in the State of California. 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.

The recently introduced requirement to secure a Retrofit Verification approval from the CARB or EPA for SCR technology is needed in order to qualify for SIP and Emission Trading Credits. These enable the user to sell credits to cover the cost of equipment and operations.

The Company applied for EPA and CARB Retrofit Verification in the fourth quarter of 2003 in line with new protocols for Selective Catalytic Reduction (SCR) now finalized by those agencies. These verifications are necessary to permit sale of the Company's NOxMaster(TM) system nationwide and to qualify its customers for emission credits. The emphasis for emission trading credits is on NOx reduction products, 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 Boards 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 are currently traded on a commodity-like exchange and are valued in the range over $20,000 per ton. The Company believes the value of these emission credits will be a very substantial tool in the marketing of the NOxMaster(TM) products to fleet vehicle owners, especially the diesel transportation industry.

The Company has established an limited liability partnership in partnership with Emission Credit Brokers of Houston, TX for the purpose of facilitating the use of credits to self-finance the application of the Company's emission reduction products to commercial vehicle fleets in those areas of the country where such trading credits are available.

The Company has signed a distribution agreement with DINEX A/S of Denmark and its U.K. subsidiary, Dinex U.K. Ltd. Under this agreement DINEX has a non-exclusive right to sell the Company's products in its market area (Scandinavia, U.K., Germany, France, Italy and Spain).

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 production and sales.

On December 29, 1999 the Company signed a Letter of Intent with Extengine Transport Systems, LLC regarding the awarding of licenses for commercial exploitation of the Company's technology in China, India, California and the U.S. Urban and School Bus markets. This was subsequently followed by completion of Licensing Agreements, the exclusive terms of which, if fulfilled, would represent significant income to the Company over the succeeding 10 years. As part of the Agreement, Extengine Transport Systems LLC has invested funds in the Company to cover the costs of research and development to fulfill contracts requiring the demonstration of NOx reduction capability with regard to a number of engines supplied by major Chinese automotive companies. Discussions have also been held with various California Transportation Authorities with regard to the testing of the Company's products on its buses as part of the Extengine drive to exploit the Company's technologies in the Urban Bus market.

This license has now, by mutual agreement, been set aside. Extengine no longer has exclusive rights for India and China, but instead has been given exclusive rights for Hong Kong, Korea, and Japan. It also retains an exclusive right in the U.S. Urban Bus market and non-exclusive rights to sales of products utilizing KleenAir Systems technology in the U.S. and certain other limited territories overseas.

The Company has moved into a 10,000 square foot Research and Development facility in Irvine, California where it has expanded its R & D dynomometer testing capabilities and broadened the range of engine types and sizes for which it can customize its products.

Several NOxMaster(TM) units have been installed and are in service on a number of London Taxicabs where they are continuing field tests. Systems have also been installed on a London Borough 16 passenger Mercedes Sprinter bus and on a number of waste collection trucks in the several other London Boroughs.

A subsequent event in March 2004, was the acquisition by the Jubilee Investment Trust of London, U.K. of $2.1 million worth of the Company's common stock. This was accomplished by the issuance of 10,026,666 restricted shares of the Company in exchange for 910,569 shares of Jubilee. Jubilee is a British entity listed on the London Stock Exchange.



KleenAir Announces $2 Million Sale of Zero-Coupon Convertible Preferred Stock
4/21/2004 8:30:00 AM
IRVINE, Calif., Apr 21, 2004 (BUSINESS WIRE) -- KleenAir Systems Inc. ( KAIR ) announced an institutional financing for $2 million has been agreed with a London-based investment company.

The investment is in the form of zero-coupon, restricted non-voting convertible preferred stock with a minimum 2-year period before conversion rights can be exercised. Payment is in the form of $2 million of free trading stock.

The transaction adds $2 million to the company's balance sheet as a current asset and helps improve the liquidity of the company. It will provide cash-flow opportunity as required to meet operating expenses of the company and will be particularly helpful in meeting the upcoming costs of EPA and CARB Retrofit Verification testing.

"This new demonstration of confidence in the growing prospects of KleenAir Systems as it prepares to commercialize its NOx reduction technology is very gratifying," said Lionel Simons, president, "and provides the resources to move the company through its takeoff period."

KleenAir is at the cutting edge of automotive emission reduction technology including Selective Catalytic Reduction (SCR), Diesel Particulate Filters, Diesel Oxidizing Catalysts and advanced catalytic technology that significantly reduces nitrogen oxides, carbon monoxide, hydrocarbon and particulates. These pollutants have been shown to be a major contributor to heart and lung disease.