SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 000-30191
KRONOS ADVANCED TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 87-0440410
------ ----------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
464 COMMON STREET, SUITE 301, BELMONT, MASSACHUSETTS 02478
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (617) 993-9965
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.001 PER SHARE
(Title of Class)
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, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. ___
The aggregate market value of the voting common stock held by non-affiliates of
the Registrant on September 26, 2005, was $5,852,000 based on the average bid
and asked prices on such date of $0.075.
The Registrant had 78,030,202 shares of Common Stock, par value $0.001 per
share, outstanding on September 26, 2005.
PART I
ITEM 1. BUSINESS
GENERAL DESCRIPTION OF BUSINESS
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS. THIS FILING CONTAINS
FORWARD-LOOKING STATEMENTS, INCLUDING STATEMENTS REGARDING, AMONG OTHER
THINGS:(A) OUR PROJECTED SALES AND PROFITABILITY, (B) OUR GROWTH STRATEGIES, (C)
ANTICIPATED TRENDS IN OUR INDUSTRY, (D) OUR FUTURE FINANCING PLANS, (E) OUR
ANTICIPATED NEEDS FOR WORKING CAPITAL, AND (F) THE BENEFITS RELATED TO OUR
OWNERSHIP OF KRONOS AIR TECHNOLOGIES, INC. IN ADDITION, WHEN USED IN THIS
FILING, THE WORDS "BELIEVES," "ANTICIPATES," "INTENDS," "IN ANTICIPATION OF,"
"EXPECTS," AND SIMILAR WORDS ARE INTENDED TO IDENTIFY CERTAIN FORWARD-LOOKING
STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE BASED LARGELY ON OUR
EXPECTATIONS AND ARE SUBJECT TO A NUMBER OF RISKS AND UNCERTAINTIES, MANY OF
WHICH ARE BEYOND OUR CONTROL. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS, INCLUDING, WITHOUT
LIMITATION, THE RISKS OUTLINED UNDER "FACTORS AFFECTING KRONOS' BUSINESS AND
PROSPECTS" AND MATTERS DESCRIBED IN THIS FILING GENERALLY. IN LIGHT OF THESE
RISKS AND UNCERTAINTIES, THERE CAN BE NO ASSURANCE THAT THE FORWARD-LOOKING
STATEMENTS CONTAINED IN THIS FILING WILL IN FACT OCCUR. WE DO NOT UNDERTAKE ANY
OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY REVISIONS TO THESE
FORWARD-LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT ANY FUTURE EVENTS OR
CIRCUMSTANCES.
OUR COMPANY
We are a Nevada corporation. Our principal executive offices are located at 464
Common Street, Suite 301, Belmont, Massachusetts 02478. Our telephone number is
(617) 993-9965. The address of our website is www.kronosati.com. Information on
our website is not part of this filing.
CORPORATE HISTORY
Kronos Advanced Technologies, Inc. was originally incorporated under the laws of
the State of Utah on September 17, 1980 as Penguin Petroleum, Inc. Penguin
Petroleum Inc.'s stockholders approved a name change on October 6, 1982 to
Petroleum Corporation of America, Inc. On December 29, 1996, stockholders
approved a reorganization whereby they exchanged their stock on a one-for-one
basis with Technology Selection, Inc., a Nevada corporation. Technology
Selection, Inc.'s shares began trading on the Over-the-Counter Bulletin Board on
August 28, 1996 under the symbol "TSET." On November 19, 1998, Technology
Selection, Inc. changed its name to TSET, Inc. Effective January 12, 2001, we
began doing business as Kronos Advanced Technologies; and, as of January 18,
2002, we changed our ticker symbol to "KNOS." Our recent activities have been
focused on capitalizing on our investment in Kronos Air Technologies, Inc., a
wholly owned subsidiary of Kronos, and we have not, to date, generated
significant operating revenues. We have never been party to any bankruptcy,
receivership, or similar proceedings and, other than noted above, have not been
party to any material reclassification, merger, or consolidation not in the
ordinary course of our business.
BUSINESS STRATEGY
Kronos Advanced Technologies, Inc. is an application development and licensing
company that has developed and patented technology that fundamentally changes
the way air is moved, filtered and sterilized. Kronos is pursuing
commercialization of its proprietary technology in a limited number of markets;
and if we are successful, we intend to enter additional markets in the future.
To date, our ability to execute our strategy has been restricted by our limited
amount of capital.
Technology Description and Benefits
The proprietary Kronos technology involves the application of high voltage
management across paired electrical grids to create an ion exchange that moves
and purifies air. Kronos technology has numerous valuable characteristics. It
moves air and gases at high velocities while removing odors, smoke and
particulates and killing pathogens, including bacteria, mold and spores. The
technology is cost-effective and is more energy efficient than current
alternative fan and filter (including HEPA filter and ultraviolet light based)
technologies. Although no commercial products using the Kronos technology have
been sold to date, in March 2005, the Company and its strategic consumer
products partner, HoMedics, expanded production beyond the initial prototypes
and increased product testing to complete the product claims platform. In August
2005, Kronos received initial shipment of products from its low cost, contract
manufacturer in Mexico and China and, in September 2005, initiated testing of
these products under a testing protocol co-developed by Kronos and HoMedics. In
May 2005, Kronos initiated a strategic relationship with IKEA of Sweden and, in
September 2005, Kronos shipped its initial prototype device to IKEA for testing
and evaluation.
A number of the scientific claims of the Kronos technology have been tested by
the U. S. government, multi-national companies and independent testing
facilities. To date, independent laboratory testing has verified the filtration
and sterilization capability of the Kronos technology.
Filtration Testing Results:
o LMS Industries - removal of over 99.97% of 0.1 micron (100
nanometers) and above size particles using HVAC industry's
ASHRAE 52.2 testing standard for filtration;
o MicroTest Laboratories - HEPA Clean Room Class 1000 quality
particulate reduction;
o Intertek - tobacco smoke elimination tests in accordance
with ANSI/AHAM AC-1-1988 standard entitled "American
National Standard Method for Measuring Performance of
Portable Household Electric Cord-Connected Room Air
Cleaners," which demonstrated a Clean Air Delivery Rate
(CADR) for the Kronos air purifier of over 300 for the
larger size Kronos air purifier and 80 for the smaller size
using consumer filtration testing standards for the
Association of Home Appliance Manufacturers (AHAM).
Sterilization Testing Results:
o New Hampshire Materials Laboratory - up to 95% reduction of
hazardous gases, including numerous contaminants found in
cigarette smoke;
o Battelle PNNL - 95% destruction of Bg (anthrax simulant);
o Dr. Sergey Stoylar, a bacteriologist from the American
Bacteriological Society - 100% destruction of Bacillus
subtilis 168 (bacteria simulant).
Market Segmentation
Kronos' business development strategy is to sell and license the Kronos
technology to six distinct market segments: (1) air movement and purification
(residential, health care, hospitality, and commercial facilities); (2) air
purification for unique spaces (clean rooms, airplanes, automotive, and cruise
ships); (3) specialized military (naval vessels, closed vehicles and mobile
facilities); (4) embedded cooling and cleaning (electronic devices and medical
equipment); (5) industrial scrubbing (produce storage and diesel and other
emissions); and (6) hazardous gas destruction (incineration and chemical
facilities).
Kronos' focus is on the first four of these market segments which are described
in more detail below. Kronos is currently developing products for the air
movement and purification, air purification for unique spaces, and specialized
military markets through specific customer contracts. Kronos is currently
undertaking research and development in the embedded micro cooling market using
Company funds and a third party grant. These contracts and grant are described
in more detail in the Technology Application and Product Development section of
this filing.
o Air Movement and Purification. Indoor air pollution, including "sick
building syndrome" and "building related illness," is primarily caused
by inadequate ventilation, chemical contaminants from indoor and
outdoor sources and biological contaminants. There is also a demand
for smaller devices that move, heat and deodorize the indoor air
stream. The addressable air movement and purification segment is made
up of four principal target markets: (1) residential, (2) health care,
(3) hospitality and (4) commercial.
o Air Purification for Unique Spaces. Electronics, semiconductor,
pharmaceutical, aerospace, medical and many other producers depend on
clean room technology. As products such as electronic devices become
smaller, the chance of contamination in manufacturing becomes higher.
For pharmaceutical companies, clean, safe and contaminant-free
products are imperative to manufacturing and distributing a viable
product. Other potential applications for the Kronos technology
include closed environments such as automobiles, aircraft, cruise
ships and other transportation modes that require people to breathe
contaminated, re-circulated air for extended periods.
o Specialized Military. Military personnel face the worst of all
possible worlds: indoor air pollution, often in very confined spaces
for extended periods, combined with the threat of biological warfare,
nuclear fallout, and other foreign elements. We believe that the
military market segment offers Kronos a unique opportunity to leverage
the technical and funding resources of the U. S. military to expand
Kronos' ability to develop and produce Kronos-based air movers and
purifiers for applications that require these products to be embedded
into ventilation systems to address the needs of military personnel.
o Embedded Cooling. Heat generation is becoming a major bottleneck in
high density electronics. We believe that the embedded cooling market
segment offers Kronos a near term opportunity to develop an
alternative to fans for air movement and cooling inside of personal
computers , servers and medical diagnostic equipment and a long term
opportunity to develop micro channel cooling solutions for a future
generation microchips.
3
Technology Application and Product Development
To best serve Kronos' targeted market segments, our Company is developing
specific product applications across two distinct product application platforms.
A Kronos device can be either used as a standalone product or can be embedded.
Standalone products are self-contained and only require the user to plug the
Kronos device into a wall outlet to obtain air movement and filtration for their
home, office or hotel room. Embedded applications of the Kronos technology
require the technology be added into another system such as a building
ventilation system for more efficient air movement and filtration or into an
electrical device such as computer or medical equipment to replace the cooling
fan.
Standalone Platform
Residential Products. In October 2002, Kronos and HoMedics executed a Licensing
Agreement granting HoMedics certain rights with respect to the distribution of
the Kronos proprietary technology to the consumer. The agreement provides for
exclusive North American, Australian and New Zealand retail distribution rights
for next generation consumer air movement and purification products based on the
patented Kronos technology. The initial term of the agreement is three and one
half years from the initial sale of consumer air purification products by
HoMedics, which shall be no later than December 31, 2006, with the option to
extend the Licensing Agreement for six additional years. Kronos was compensated
through an initial royalty payment and will receive ongoing quarterly royalty
payments based on a percentage of sales. HoMedics will pay minimum royalty
payments of at least $2 million during the initial three and a half year term
and on-going royalty payments to extend the agreement. Kronos will retain the
rights to all of its intellectual property. HoMedics commitment includes funding
a marketing and advertising campaign to promote the Kronos-based product line.
The products will be distributed by HoMedics. HoMedics currently distributes
their products through major domestic retailers, including Wal-Mart, Home Depot,
Sears, Bed Bath & Beyond, and Linens 'N Things.
We believe the Company has successfully completed the development of a
Kronos-based consumer standalone air purifier that is an efficient, high quality
product which is cost effective and easy to operate. In March 2005, Kronos and
HoMedics began expanding production development beyond the initial prototypes
and initiated increased product testing to complete the product claims platform.
In March and April 2005, Kronos modified the HoMedics design and ordered
prototype production devices from Kronos' preferred vendor along with select
components from HoMedics preferred vendors. In August 2005, Kronos received
initial shipment of products from its low cost, contract manufacturer in Mexico
and China and, in September 2005, initiated testing of these products under a
testing protocol co-developed by Kronos and HoMedics.
Other Standalone Products. Utilizing our recently expanded product development
resources, Kronos completed the initial design, development and production of a
series of small multifunctional devices that can be used as space heaters,
vaporizers, disinfectors, deodorizers and/or fans. Based on the proprietary
Kronos technology, these devices are currently undergoing testing and
evaluation. Kronos has been meeting with potential strategic partners for
manufacturing, marketing, selling and distributing these Kronos-based products.
Embedded Platform
Residential Products. In May 2005, Kronos initiated a strategic relationship
with IKEA of Sweden. A world leading retailer, IKEA distributes its products to
more than 400 million customers through its 200 stores. Kronos and IKEA plan to
co-develop new consumer products that embed Kronos' silent, air movement,
purification and sterilization technology into other products and devices for
residential use. In September 2005, Kronos shipped its initial prototype device
to IKEA for testing and evaluation.
Military Products. The U. S. Department of Defense and Department of Energy have
provided Kronos with various grants and contracts to develop, test and evaluate
the Kronos technology for embedded applications.
U.S. Navy SBIR Contracts. In November 2002, the U. S. Navy awarded Kronos a
Small Business Innovation Research Phase II contract worth $580,000. The Phase
II contract (commercialization phase) is an extension of the Phase I and the
Phase I Option work that began in 2001. It is intended that the Kronos devices
developed under this contract will be embedded in existing HVAC systems in order
to move air more efficiently than traditional, fan-based technology. During
Phase II, Kronos developed and produced a fully controlled device that
represents a "cell" of an advanced distributive air management system with
medium capacity airflow in a U. S. Navy unique environment. The "cell" has been
designed to be easily adjustable to a variety of parameters such as duct size,
airflow requirements, and air quality. The goal of this development work is to
significantly reduce or replace altogether the current HVAC air handling systems
on naval ships. In May 2005, Kronos shipped the device to Northrop Grumman for
testing and evaluation. Based on the success of these initial tests, Northrop
Grumman requested additional modifications and improvements to the device.
Northrop Grumman is scheduling further testing. As of June 30, 2005, the U. S.
Navy had provided Kronos with $580,000 in funding for this effort.
4
As part of its air management system, Kronos has developed and intends to test
the air filtration mechanism capable of performing to HEPA quality standards. We
believe that Kronos devices could replace current HEPA filters with a permanent,
easily cleaned, low-cost solution. Among the technical advantages of the Kronos
technology over HEPA filters is the ability of the Kronos-based devices to
eliminate the energy burden on air handling systems, which must generate high
levels of backpressure necessary to move air through HEPA-based systems.
Kronos-based devices enhance the air flow while providing better than HEPA level
filtration.
Kronos is pursuing Phase III (production phase) support for the Kronos-based
advanced distributive air management system being developed under Phase II.
Kronos is working with Northrop Grumman and others in this regard.
U.S. Army SBIR Contracts. In August 2003, Kronos was awarded the option on its
U. S. Army Small Business Innovation Research Phase I contract bringing the
value of the Phase I contract award to $120,000. In October 2003, the U.S. Army
awarded Kronos the Small Business Innovation Research Phase II contract to
develop Kronos' proprietary Electrostatic Dehumidification Technology ("EDT").
In February 2005, because the Army's focus was on researching a specific aspect
of using an electrostatic process for dehumidification and did not share Kronos'
vision for a broader application for using the unique aspects of EDT for
dehumidification, the Army decided not to pursue their Phase II option. Kronos
believes EDT is a viable solution for commercial dehumidification and will seek
one or more commercial partners to work with us to exploit the benefits of EDT.
As of June 30, 2005, the U. S. Army had provided Kronos with $324,000 in funding
for this effort under the Phase II contract.
Kronos is seeking to leverage its military application development work with the
U. S. Navy to develop and produce air handlers and purifiers for commercial and
industrial facilities. A future potential commercial line of Kronos-based air
handlers and purifiers would attempt to address the specific air quality issues,
including bacteria and other germs, found in large enclosed spaces such as
office buildings and multi-dwelling residential complexes, while providing more
efficient air movement.
Transportation Products. In January 2003, Kronos executed a Development and
Acquisition Agreement with a premier business jet manufacturer. The Agreement
was the direct result of initial prototype development work performed by the
Kronos Research Team with input from the customer in 2002. The Kronos devices
being designed and manufactured under this contract will need to meet all FAA
safety standards, including environmental, flammability and electromagnetic
interference (EMI). The Company has completed product design and development
based on the customer's specific product application requirements. We are
currently testing and evaluating the prototype product.
In August 2005, Kronos extended its work into the transportation industry by
signing a Prototype Development and Evaluation Agreement with a leading luxury
automotive manufacturer. The Kronos devices will be designed and manufactured to
meet exacting customer standards for placement inside of automobile passenger
cabins. According to various industry reports, the amount of time Americans have
spent in their cars has risen 236 percent since 1982 (with one report from Time
Magazine noting an average motorist will spend more than 5 years stuck in
traffic alone), providing optimum air circulation in automobiles is not only a
comfort factor, but can also be a critical means of improving air quality and
helping to prevent viruses and allergens that may otherwise accumulate in
filtration systems.
Microelectronics Cooling Products. In December 2004, Kronos and the University
of Washington were awarded funding for a research and technology development
project entitled "Heat Transfer Technology for Microelectronics and MEMS" by the
Washington Technology Center ("WTC"). The objective of the project is to develop
a novel energy-efficient heat transfer technology for cooling microelectronics.
Thermal management for microelectronics and MEMS systems is a challenge.
Existing cooling devices aren't meeting increasing needs for energy consumption
and heat dissipation. Kronos air handling technology is an emerging technology
that uses an electric field to exert force on ionized gas. Kronos is attempting
to develop an improved microchip air handling system that is smaller in size,
has high speed airflow, allows more targeted delivery of cooling to areas of
highest heat and is compatible with current processes. WTC will contribute
$40,000 to the project, with Kronos contributing $8,000, plus $32,000 in in-kind
services, including use of the Kronos Research and Product Development Facility.
During the quarter ended June 30, 2005, Kronos and the University of Washington
initiated research into development of an energy-efficient heat transfer
technology for cooling microelectronics.
5
Patents and Intellectual Property
Multiple U.S. Patents Allowed for Issuance. Kronos has received notification
that multiple patents have been allowed for issuance by the United States Patent
and Trademark Office. These patents are considered utility patents which
describe fundamental innovations in the generation, management and control of
Electrostatic Fluids, including air movement, filtration and purification. Each
of the patents contain multiple part claims for both general principles as well
as specific designs for incorporating the Kronos technology into air movement,
filtration and purification products. The patents provide protection for both
specific product implementations of the Kronos technology, as well as more
general processes for applying the unique attributes and performance
characteristics of the technology.
Date Patent Title Description Protection
------------ -------------------- ------------------------ -----------
April 2005 Electrostatic Fluid placement, utilization 2022
Accelerator Design and geometries of the
Geometries electrodes - impacts air
flow
December 2004 Spark Management Method analysis, detection and 2021
and Device prevention of sparks in
a high voltage field -
creates safe, effective
electrostatic technology
products
November 2004 Electrostatic Fluid electrode design 2021
Accelerator - Electrode geometries and
Design Geometries attributes - achieves
unique air movement and
purification performance
October 2004 Electrostatic Fluid management and control 2021
Accelerator - Power to produce air flow
Supply Management and rates, high efficiency
Control particulate removal and
biological destruction
April 2004 Electrostatic Fluid using an electrostatic 2021
Accelerator for and a fluid accelerator to
Method of Controlling produce commercially
Fluid useful air flow rates
December 2003 Method of and Apparatus enhancements to core 2020
for Electrostatic Fluid technology for producing
Acceleration Control of ion discharge to create
a Fluid Flow air movement and base
level filtration
January 2003 Electrostatic Fluid core technology for 2019
Accelerator producing ion discharge
to create air movement
and base level filtration
International Patent Allowed for Issuance. In November 2004, Kronos received
formal notification from the Commonwealth of Australian Patent Office indicating
that its application entitled "Electrostatic Fluid Accelerator" has been
examined and allowed for issuance as an Australian patent. There are a number of
other patent applications corresponding to Kronos' U.S. Patents that have been
filed and are pending outside of the United States.
Additional Patent Applications. A number of additional patent applications have
been filed for, among other things, the control and management of electrostatic
fluid acceleration. These additional patent applications are either being
examined or are awaiting examination by the Patent Office.
6
MILESTONES
Our primary business objectives over the next 12 months are the launch of
Kronos-based standalone consumer products and to establish strategic partners
for developing and commercializing embedded product applications. The primary
milestones necessary to achieve these objectives are as follows:
o mass production and marketing of the Kronos-based standalone and
embedded residential products;
o expansion of external partnerships and resources to facilitate the
production, marketing and sales of Kronos products;
o expansion of technical resources and product engineering to better
position Kronos' ability to address specific customer issues and
needs; and
o continuation of implementation of Kronos' intellectual property
strategies, including continuation of its U.S. and international
patent filing process to enable a full development and effective
management of its intellectual property rights and assets.
We estimate that achievement of our business plan will require substantial
additional funding. We anticipate that the source of funding will be obtained
pursuant to the senior debt funding from the HoMedics Secured Promissory Note;
equity funding from the Cornell Capital Standby Equity Distribution Agreement;
and/or the sale of additional equity in our Company, and cash flows generated
from government grants and contracts and from customer revenue. Pursuant to
discussions with the companies that we will be licensing our technology, we
anticipate generating cash flow in our 2006 fiscal year from advance funding
from these companies for product development work.
HOMEDICS SENIOR DEBT TRANSACTION
In May 2003, Kronos entered into an agreement with a strategic customer,
HoMedics, Inc., for $2.5 million in financing, including $2.4 million in secured
debt financing and $100,000 for the purchase of warrants. $2.5 million was paid
to Kronos upon execution of the agreement. In October 2004, HoMedics agreed to
extend repayment of Kronos debt and to provide an additional $1 million in
funding. HoMedics has agreed to provide Kronos with an additional $1 million in
financing - $925,000 in secured debt financing and $75,000 for the purchase of
additional warrants. The $925,000 will be paid to Kronos upon Kronos achieving
three milestones: (i) $175,000 shall be funded upon delivery and successful
testing of electronic boards and power supplies from Kronos' contract
manufacturing partner, (ii) $250,000 shall be funded upon obtaining tooling of
the current prototype configuration and device testing and performing to
HoMedics' specifications, and (iii) $500,000 shall be funded upon the initial
sale of Kronos-based air purifiers by HoMedics. Kronos and HoMedics have been in
discussions regarding the achievement of the first milestone. In addition,
quarterly debt payments and the maturity date for existing debt have been
extended. Quarterly payments due on the outstanding $2.4 million in secured debt
financing, which had been scheduled to begin in August 2004, will be due the
earlier of Kronos receipt of royalty payments from HoMedics sale of Kronos-based
air purification products or two years. The maturity date of the $2.4 million in
debt has been extended from May 2008 to October of 2009; the maturity date on
the $925,000 will also be October 2009. The interest rate will remain at 6% for
the $2.4 million in debt; the rate will also be 6% on the additional debt.
HoMedics increased their potential equity position in Kronos to 30% of Kronos
common stock on a fully diluted basis.
In addition, in connection with the First Amendment to Master Loan and
Investment Agreement, Kronos issued to HoMedics a warrant to purchase 26.5
million shares of Kronos' common stock. The warrant is exercisable for a period
of ten (10) years from the date of issuance. The exercise price is $0.10 per
share. In consideration for the warrant, HoMedics delivered to Kronos $75,000 by
funding the closing fees owed by Kronos and HoMedics agreed to amend two (2)
warrants to purchase 13.4 million shares of Kronos' common stock previously
issued by Kronos by removing the anti-dilution protection previously granted to
HoMedics. Kronos agreed to include new anti-dilution protection in the new
warrant. HoMedics is entitled, under certain circumstances, to anti-dilution
protection in order to maintain beneficial ownership of Kronos equal to 30%.
HoMedics may not be diluted below 30% for any funds raised at less than $0.20
per share, excluding options or shares issued to management, directors, and
consultants in the normal course of business or shares issued to Cornell Capital
in repayment of the two Promissory Notes. There are no anti-dilution measures
for funds raised at greater than $0.20 per share. In addition, Kronos agreed to
grant HoMedics piggy-back registration rights and one (1) demand registration
right with respect to any shares of common stock of Kronos that HoMedics may
acquire pursuant to the two (2) previously issued warrants and the warrant
issued in October 2004 in connection with the First Amendment to Master Loan and
Investment Agreement. HoMedics also agreed not to exercise any warrants until
one year after the effective date of the registration statement to be filed
pursuant to the Investor Registration Rights Agreement with Cornell Capital.
7
CORNELL CAPITAL TRANSACTION
In October 2004, Kronos entered into agreements for up to $20.5 million in
equity and equity backed debt financing from Cornell Capital Partners. Kronos
executed an Equity Investment Agreement and received $500,000 in gross proceeds
through the sale of 5 million unregistered shares of Kronos common stock.
Cornell Capital Partners provided $4 million pursuant to two Promissory Notes,
which were funded as follows: $2 million upon filing a Registration Statement
and $2 million upon the SEC declaring the Registration Statement effective.
Kronos executed a Standby Equity Distribution Agreement for $20 million of
funding which Kronos has the option to drawdown against in increments as large
as $1.5 million over the next twenty one months. Kronos intends to use the
proceeds under the Standby Equity Distribution Agreement to repay the Promissory
Notes. As of June 30, 2005, Kronos had received $4.5 million under these
agreements.
EMPLOYEES
On June 30, 2005, Kronos and its subsidiaries had eleven full-time employees. Of
the total number of full-time employees, one works in general management, nine
in research and product development, one in marketing and sales and operations,
and none are employed in administrative and other support positions. None of the
employees are represented by unions. There has been no disruption of operations
due to a labor dispute. We consider our relations with our employees to be good.
FACTORS AFFECTING KRONOS' BUSINESS AND PROSPECTS
We are subject to various risks which may have a material adverse effect on our
business, financial condition and results of operations, and may result in a
decline in our stock price. Certain risks are discussed below:
We have a limited operating history with significant losses and expect losses to
continue for the foreseeable future.
We have only recently begun implementing our plan to prioritize and concentrate
our management and financial resources to fully capitalize on our investment in
Kronos Air Technologies and have yet to establish any history of profitable
operations. We incurred a net loss of $7.1 million for the fiscal year ended
June 30, 2005. We incurred a net loss of $2.5 million for the fiscal year ended
June 30, 2004. As a result, at June 30, 2005 and June 30, 2004, we had an
accumulated deficit of $27.1 million and $20.0 million, respectively. Our
revenues and cash flows from operations have not been sufficient to sustain our
operations. We have sustained our operations through the issuance of our common
stock and the incurrence of debt. We expect that our revenues and cash flows
from operations may not be sufficient to sustain our operations for the
foreseeable future. Our profitability will require the successful
commercialization of our Kronos technologies. No assurances can be given that we
will be able to successfully commercialize our Kronos technologies or that we
will ever be profitable.
We will require significant additional financing to sustain our operations and
without it we will not be able to continue operations.
At June 30, 2005 and June 30, 2004, we had a working capital deficit of $3.6
million and $1.2 million, respectively. The Report of Independent Registered
Public Accounting Firm for the year ended June 30, 2005, includes an explanatory
paragraph to their audit opinion stating that our recurring losses from
operations and working capital deficiency raise substantial doubt about our
ability to continue as a going concern. For the fiscal year ended June 30, 2005
and June 30, 2004, we had an operating cash flow deficit of $1.8 million and
$2.8 million, respectively. We currently do not have sufficient financial
resources to fund our operations or pay certain existing obligations or those of
our subsidiary. Therefore, we need substantial additional funds to continue
these operations and pay certain existing obligations.
If obtaining sufficient financing from HoMedics and /or Cornell Capital Partners
were to be unavailable and if we are unable to commercialize and sell our
products or technologies, we will need to secure another source of funding in
order to satisfy our working capital needs. Even if we are able to access the
funds available under the HoMedics senior debt agreement and / or the Cornell
Capital Standby Equity Distribution Agreement, we may still need additional
capital to fully implement our business, operating and development plans. At
June 30, 2005 and June 30, 2004, we had a cash balance of $1,555,000 and
$69,000, respectively. Should the financing we require to sustain our working
capital needs be unavailable, or prohibitively expensive when we require it, we
would be forced to curtail our business operations.
Existing stockholders will experience significant dilution from our sale of
shares under the Cornell Capital Standby Equity Distribution Agreement and any
other equity financing.
8
The sale of shares pursuant to our agreement with Cornell Capital Partners, the
exercise of HoMedics stock warrants or any other future equity financing
transaction will have a dilutive impact on our stockholders. As a result, our
net income per share could decrease in future periods, and the market price of
our common stock could decline. In addition, the lower our stock price is, the
more shares of common stock we will have to issue under the Standby Equity
Distribution Agreement. If our stock price is lower, then our existing
stockholders would experience greater dilution. We cannot predict the actual
number of shares of common stock that will be issued pursuant to the Standby
Equity Distribution Agreement or any other future equity financing transaction,
in part, because the purchase price of the shares will fluctuate based on
prevailing market conditions and we do not know the exact amount of funds we
will need.
Competition in the market for air movement and purification devices may result
in the failure of the Kronos products to achieve market acceptance.
Kronos presently faces competition from other companies that are developing or
that currently sell air movement and purification devices. Many of these
competitors have substantially greater financial, research and development,
manufacturing, and sales and marketing resources than we do. Many of the
products sold by Kronos' competitors already have brand recognition and
established positions in the markets that we have targeted for penetration. In
the event that the Kronos products do not favorably compete with the products
sold by our competitors, we would be forced to curtail our business operations.
Our failure to enforce protection of our intellectual property would have a
material adverse effect on our business.
A significant part of our success depends in part on our ability to obtain and
defend our intellectual property, including patent protection for our products
and processes, preserve our trade secrets, defend and enforce our rights against
infringement and operate without infringing the proprietary rights of third
parties, both in the United States and in other countries. Our limited amount of
capital impedes our current ability to protect and defend our intellectual
property.
The validity and breadth of our intellectual property claims in ion wind
generation and electrostatic fluid acceleration and control technology involve
complex legal and factual questions and, therefore, may be highly uncertain.
Despite our efforts to protect our intellectual proprietary rights, existing
copyright, trademark and trade secret laws afford only limited protection.
Our industry is characterized by frequent intellectual property litigation based
on allegations of infringement of intellectual property rights. Although we are
not aware of any intellectual property claims against us, we may be a party to
litigation in the future.
Possible future impairment of intangible assets would have a material adverse
effect on our financial condition.
Our net intangible assets of approximately $2.1 million as of June 30, 2005
consist principally of purchased patent technology and marketing intangibles,
which relate to the acquisition of Kronos Air Technologies, Inc. in March 2000
and to the acquisition of license rights to fuel cell, computer and
microprocessor applications of the Kronos technology not included in the
original acquisition of Kronos Air Technologies, Inc. in May 2003. Intangible
assets comprise 54% of our total assets as of June 30, 2005. Intangible assets
are subject to periodic review and consideration for potential impairment of
value. Among the factors that could give rise to impairment include a
significant adverse change in legal factors or in the business climate, an
adverse action or assessment by a regulator, unanticipated competition, a loss
of key personnel, and projections or forecasts that demonstrate continuing
losses associated with these assets. In the case of our intangible assets,
specific factors that could give rise to impairment would be, but are not
limited to, an inability to obtain patents, the untimely death or other loss of
Dr. Igor Krichtafovitch, the lead inventor of the Kronos technology and Kronos
Air Technologies Chief Technology Officer, or the ability to create a customer
base for the sale or licensing of the Kronos technology. Should an impairment
occur, we would be required to recognize it in our financial statements. A
write-down of these intangible assets could have a material adverse impact on
our total assets, net worth and results of operations.
Our common stock is deemed to be "Penny Stock," subject to special requirements
and conditions and may not be a suitable investment.
9
Our common stock is deemed to be "penny stock" as that term is defined in Rule
3a51-1 promulgated under the Securities Exchange Act of 1934. Penny stocks are
stocks:
- With a price of less than $5.00 per share;
- That are not traded on a "recognized" national exchange;
- Whose prices are not quoted on the Nasdaq automated quotation system
(Nasdaq listed stock must still have a price of not less than $5.00
per share); or
- In issuers with net tangible assets less than $2.0 million (if the
issuer has been in continuous operation for at least three years) or
$5.0 million (if in continuous operation for less than three years),
or with average revenues of less than $6.0 million for the last three
years.
Broker/dealers dealing in penny stocks are required to provide potential
investors with a document disclosing the risks of penny stocks. Moreover,
broker/dealers are required to determine whether an investment in a penny stock
is a suitable investment for a prospective investor. These requirements may
reduce the potential market for our common stock by reducing the number of
potential investors. This may make it more difficult for investors in our common
stock to resell shares to third parties or to otherwise dispose of them. This
could cause our stock price to decline.
We rely on management and research personnel, the loss of whose services could
have a material adverse effect upon our business.
We rely principally upon the services of our senior executive management, and
certain key employees, including the Kronos research team, the loss of whose
services could have a material adverse effect upon our business and prospects.
Competition for appropriately qualified personnel is intense. Our ability to
attract and retain highly qualified senior management and technical research and
development personnel are believed to be an important element of our future
success. Our failure to attract and retain such personnel may, among other
things, limit the rate at which we can expand operations and achieve
profitability. There can be no assurance that we will be able to attract and
retain senior management and key employees having competency in those
substantive areas deemed important to the successful implementation of our plans
to fully capitalize on our investment in the Kronos technology, and the
inability to do so or any difficulties encountered by management in establishing
effective working relationships among them may adversely affect our business and
prospects. Currently, we do not carry key person life insurance for any of our
executive management, or key employees.
ITEM 2. PROPERTIES
Our principal executive office is located at 464 Common Street, Suite 301,
Belmont, Massachusetts. At June 30, 2005, the offices of the Kronos Research and
Product Development facility were located at 8549/8551 154th Avenue NE, Redmond,
Washington. Effective October 1, 2005, Kronos Research and Product Development
facility will be located at 15241 90th Street, NE, Redmond, Washington. Kronos
is committed through September 30, 2009 to annual lease payments on operating
leases for 6,000 square feet of office/research and product development
premises. We consider our new Research and Product Development facility to be
adequate for our foreseeable needs.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock trades on the Over-the-Counter Bulletin Board under the trading
symbol "KNOS." Our high and low bid prices by quarter during fiscal 2005 and
2004 are presented as follows:
FISCAL YEAR 2005
HIGH LOW
First Quarter (July 2004 to September 2004) $0.175 $0.125
Second Quarter (October 2004 to December 2004) $0.200 $0.125
Third Quarter (January 2005 to March 2005) $0.150 $0.080
Fourth Quarter (April 2005 to June 2005) $0.150 $0.063
FISCAL YEAR 2004
HIGH LOW
First Quarter (July 2003 to September 2003) $0.450 $0.220
Second Quarter (October 2003 to December 2003) $0.370 $0.230
Third Quarter (January 2004 to March 2004) $0.330 $0.180
Fourth Quarter (April 2004 to June 2004) $0.255 $0.155
10
On September 26, 2005, the closing price of our common stock as reported on the
Over-the-Counter Bulletin Board was $0.075 per share. On September 26, 2005, we
had approximately 2,000 beneficial stockholders of our common stock and
78,030,202 shares of our common stock were issued and outstanding.
DIVIDENDS
We have not declared or paid dividends on our common stock during fiscal 2004 or
2005 and do not plan to declare or pay dividends on our common stock during
fiscal 2006. Our dividend practices are determined by our Board of Directors and
may be changed from time to time. We will base any issuance of dividends upon
our earnings (if any), financial condition, capital requirements, acquisition
strategies, and other factors considered important by our Board of Directors.
Nevada law and our Articles of Incorporation do not require our Board of
Directors to declare dividends on our common stock. We expect to retain any
earnings generated by our operations for the development and expansion of our
business and do not anticipate paying any dividends to our stockholders for the
foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
Except as otherwise noted, all of the following shares were issued and options
and warrants granted pursuant to the exemption provided for under Section 4(2)
of the Securities Act of 1933, as amended, as a "transaction not involving a
public offering." No commissions were paid, and no underwriter participated, in
connection with any of these transactions. Each such issuance was made pursuant
to individual contracts which are discrete from one another and are made only
with persons who were sophisticated in such transactions and who had knowledge
of and access to sufficient information about Kronos to make an informed
investment decision. Among this information was the fact that the securities
were restricted securities.
All investors participating in private placements for cash were "accredited
investors" within the meaning of Regulation D. In addition, we note that there
are several categories of recipients of these shares. These include investors
for cash, officers, directors, consultants, litigants and former stockholders of
private companies acquired by Kronos. Kronos does not believe that these
categories of recipients should be integrated with each other under the concept
of integration. Under Securities Act Release Nos. 4552 and 4434, these
categories would not involve a single plan of financing and would not be
considered to be made for the same general purpose. As a result, each category
should be reviewed on its own. Given the small number of purchasers in these
categories, Kronos believes that these transactions complied in all respects
with Section 4(2). Kronos believes that this conclusion is true even if the
transactions occurring within each category are integrated with other
transactions occurring within six months or one year of a given transaction.
On October 31, 2003, we authorized the issuance of 360,000 shares of our common
stock pursuant to a consulting agreement, valued at $0.22 per share (the
fair-market value of our shares as of such date), at an aggregate value of
$79,200, to Fusion Capital, LLC, in exchange for consulting services.
In February 2004, we authorized the issuance of 438,493 shares of our common
stock, valued at $0.16 per share, at an aggregate value of $69,230, to Daniel
Dwight, Richard Papworth and Richard Tusing in exchange for Board of Director
services.
In March 2004, we granted options to acquire 2,126,522 options of our common
stock at an exercise price of $0.18 to Alexander Chriss, Daniel Dwight, Igor
Krichtafovitch, and Richard Tusing in exchange for the conversion of $1,063,261
in past due accounts payable into Promissory Notes due on December 31, 2006.
On July 1, 2004, we granted options to acquire 725,000 shares of our common
stock at an exercise price of $0.15 to Spencer Browne, James McDermott, William
Poster, Milton Segal and Charles Strang in exchange for services as directors or
advisory board members to the Company.
In October 2004, we issued five million shares of our common stock, valued at
$0.10 per share at an aggregate value of $500,000 to Cornell Capital Partners,
LLC.
In October 2004, we issued 62,500 shares of our common stock, valued at $0.10
per share at an aggregate value of $6,250 to Newbridge Securities Corporation as
a placement agent fee in connection with the Standby Equity Distribution
Agreement with Cornell Capital.
In October 2004, we issued to HoMedics a warrant to purchase 26,507,658 shares
of Kronos common stock. The warrant is exercisable for a period of ten (10)
years from the date of issuance. The exercise price is $0.10 per share.
In November 2004, we issued 2,000,000 shares of our common stock valued at $0.10
per share at an aggregate value of $200,000 to Fusion Capital Partners, LLC. The
proceeds were used to eliminate Kronos' non-interest bearing demand obligation
to Fusion Capital.
In November 2004, we issued 2,800,000 shares of our common stock valued at $0.10
per share at an aggregate value of $280,000 to a group of accredited investors.
11
On June 30, 2005, we issued 1,500,000 shares of our common stock valued at $0.09
per share at an aggregate value of $135,000 to Daniel R. Dwight, Igor
Krichtafovitch, and Richard F. Tusing for 2005 bonuses.
On June 30, 2005, we granted options to acquire 1,725,000 shares of our common
stock at an exercise price of $0.125. Of the 1,725,000 options, 1,200,000
options were granted to Daniel R. Dwight and Richard F. Tusing who are directors
and officers of Kronos.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with our consolidated
financial statements and the notes thereto appearing elsewhere in this filing.
Certain statements within this Item and throughout this Annual Report on Form
10-KSB and the documents incorporated herein are "forward-looking statements."
GENERAL
Kronos Advanced Technologies, Inc. is an application development and licensing
company that has developed and patented technology that fundamentally changes
the way air is moved, filtered and sterilized. Kronos is pursuing
commercialization of its proprietary technology in a limited number of markets;
and if we are successful, we intend to enter additional markets in the future.
Among the achievements of the Company over the past twelve months included the
following:
| | Technology and Intellectual Property:
- secured additional U.S. and international patents for our
proprietary technology and made additional patent filings;
- expanded our product claims platform to include independent
verification of Kronos' technology's ability to filter
submicron size particles (30 - 100 nanometers), which
includes bacteria and virus size particles.
| | Business Development, Marketing and Sales:
- earned $0.4 million in revenue from military, consumer and
commercial customer contracts;
- developed new strategic relationships with IKEA of Sweden,
leading automotive manufacturer and Northrop Grumman in the
residential, transportation and military markets,
respectively.
| | Operations:
- reduced the cost and size of the Kronos electronics through
our strategic relationship with TechEn;
- completed development and initiated testing of a viable
consumer standalone air purification product;
- shipped U.S. Navy product developed under an SBIR Phase II
contract to Northrop Grumman for testing and evaluation;
- shipped initial prototype device to IKEA for testing and
evaluation;
- expanded our technical, research and product development
team;
- initiated expansion into a larger facility to accommodate
our growing customer driven research and product development
needs.
| | Financial and Other:
- secured funding from Cornell Capital partners, including $4
million in debt financing, $0.5 million in equity financing
and $20 million in commitment through a Standby Equity
Distribution Agreement;
- obtained agreement from HoMedics to extend repayment of
Kronos debt and to provide an additional $1 million in
funding.
Recent Developments
HoMedics. In March and April 2005, Kronos modified the HoMedics design and
ordered prototype production devices from Kronos' preferred vendors along with
select components from HoMedics preferred vendor. In August 2005, Kronos
received initial shipment of products from its low cost, contract manufacturer
in Mexico and China. In September 2005, Kronos initiated testing of these
products under a testing protocol co-developed by Kronos and HoMedics.
IKEA of Sweden. In May 2005, Kronos initiated a strategic relationship with IKEA
of Sweden. In September 2005, Kronos shipped its initial prototype device to
IKEA for testing and evaluation.
12
Leading Automotive Manufacturer. In August 2005, Kronos extended its work into
the transportation industry by signing a Prototype Development and Evaluation
Agreement with leading automotive manufacturer.
U.S. Military and Northrop Grumman. In May 2005, Kronos shipped the Kronos US
Navy SBIR Phase II device to Northrop Grumman for testing and evaluation. Based
on the success of these initial tests, Northrop Grumman requested additional
modifications and improvements to the device. Northrop Grumman is scheduling
further testing.
In February 2005, because the Army's focus was on researching a specific aspect
of using an electrostatic process for dehumidification and did not share Kronos'
vision for a broader application for using the unique aspects of Kronos'
Electrostatic Dehumidification Technology ("EDT"), the Army decided not to
pursue their Phase II option.
As of June 30, 2005, the U. S. Military had provided Kronos with $904,000 in
funding for these efforts under SBIR Phase II contracts.
Leading Business Jet Manufacturer. The Company has completed product design and
development based on the customer's specific product application requirements.
We are currently testing and evaluating the prototype product.
Washington Technology Center. In December 2004, Kronos and the University of
Washington were awarded funding for a research and technology development
project entitled "Heat Transfer Technology for Microelectronics and MEMS" by the
Washington Technology Center. During the quarter ended June 30, 2005, Kronos and
the University of Washington initiated research into development of an
energy-efficient heat transfer technology for cooling microelectronics.
Senior Debt Financing. In October 2004, HoMedics agreed to extend repayment of
Kronos debt and to provide an additional $1 million in funding. HoMedics has
agreed to provide Kronos with an additional $1 million in financing - $925,000
in secured debt financing and $75,000 for the purchase of additional warrants.
In October 2004, Kronos entered into agreements for up to $20.5 million in
equity and equity backed debt financing from Cornell Capital Partners. Kronos
executed an Equity Investment Agreement and received $500,000 in gross proceeds
through the sale of 5 million unregistered shares of Kronos common stock.
Cornell Capital Partners provided $4 million pursuant to two Promissory Notes,
which were funded as follows: $2 million upon filing a Registration Statement
and $2 million upon the SEC declaring the Registration Statement effective.
Kronos executed a Standby Equity Distribution Agreement for $20 million of
funding which Kronos has the option to drawdown against in increments as large
as $1.5 million over the next twenty one months. Kronos intends to use the
proceeds under the Standby Equity Distribution Agreement to repay the Promissory
Notes. As of June 30, 2005, Kronos has received $4.5 million under these
agreements.
In July 2005, Cornell Capital Partners suspended until further notice weekly
repayments of the Kronos Promissory Note dated June 21, 2005 and suspended for
one month weekly repayments of the Kronos Promissory Note dated March 7, 2005.
In September 2005, Cornell Capital Partners suspended until further notice
weekly repayments of the Kronos Promissory Note dated March 7, 2005.
CRITICAL ACCOUNTING POLICIES
Use of Estimates. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures 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.
Allowance for Doubtful Accounts. We provide a reserve against our receivables
for estimated losses that may result from our customers' inability to pay. These
reserves are based on potential uncollectible accounts, aged receivables,
historical losses and our customers' credit-worthiness. Should a customer's
account become past due, we generally will place a hold on the account and
discontinue further shipments and/or services provided to that customer,
minimizing further risk of loss.
Valuation of Goodwill, Intangible and Other Long Lived Assets. We use
assumptions in establishing the carrying value, fair value and estimated lives
of our long-lived assets and goodwill. The criteria used for these evaluations
include management's estimate of the asset's ability to generate positive income
from operations and positive cash flow in future periods compared to the
carrying value of the asset, the strategic significance of any identifiable
intangible asset in our business objectives, as well as the market
capitalization of Kronos. We have used certain key assumptions in building the
cash flow projections required for evaluating the recoverability of our
intangible assets. We have assumed revenues from the following applications of
13
the Kronos technology: consumer stand-alone devices, assisted care/skilled
nursing stand-alone devices, embedded devices in the hospitality industry and in
specialized military applications. Expenses/cash out flows in our projections
include sales and marketing, production, distribution, general and
administrative expenses, research and development expenses and capital
expenditures. These expenses are based on management estimates and have been
compared with industry norms (relative to sales) to determine their
reasonableness. We use the same key assumptions for our cash flow evaluation as
we do for internal budgeting, lenders and other third parties; therefore, they
are internally and externally consistent with financial statement and other
public and private disclosures. We are not aware of any negative implications
resulting from the projections used for purposes of evaluating the
appropriateness of the carrying value of these assets. If assets are considered
to be impaired, the impairment recognized is the amount by which the carrying
value of the assets exceeds the fair value of the assets. Useful lives and
related amortization or depreciation expense are based on our estimate of the
period that the assets will generate revenues or otherwise be used by Kronos.
Factors that would influence the likelihood of a material change in our reported
results include significant changes in the asset's ability to generate positive
cash flow, loss of legal ownership or title to the asset, a significant decline
in the economic and competitive environment on which the asset depends,
significant changes in our strategic business objectives, and utilization of the
asset.
Valuation of Deferred Income Taxes. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
The likelihood of a material change in our expected realization of these assets
is dependent on our ability to generate future taxable income, our ability to
deduct tax loss carryforwards against future taxable income, the effectiveness
of our tax planning and strategies among the various tax jurisdictions that we
operate in, and any significant changes in the tax treatment received on our
business combinations.
Revenue Recognition. We recognize revenue in accordance with Securities and
Exchange Commission Staff Bulletin 104 ("SAB 104"). Further, Kronos Air
Technologies recognizes revenue on the sale of custom-designed contract sales
under the percentage-of-completion method of accounting in the ratio that costs
incurred to date bear to estimated total costs. For uncompleted contracts where
costs and estimated profits exceed billings, the net amount is included as an
asset in the consolidated balance sheet. For uncompleted contracts where
billings exceed costs and estimated profits, the net amount is included as a
liability in the consolidated balance sheet. Sales are reported net of
applicable cash discounts and allowances for returns.
RESULTS OF OPERATIONS
Consolidated Statement of Operations For the Year Ended June 30, 2005.
Our net losses for each of the current years ended June 30, 2005 and June 30,
2004 were $7,094,000 and $2,495,000, respectively. The increase in the net loss
for the year ended June 30, 2005, as compared to the prior year, was principally
the result of a $3,857,000 increase in other income associated with the
restructuring of the HoMedics debt, a $683,000 or 33% increase in operating
costs to $2,772,000 and a $99,000 or 64% decrease in gross profit, partially
offset by a $95,000 or 15% decrease in interest expense to $0.5 million.
Revenue. Revenues are generated through sales of services for design and
development of Kronos devices at Kronos Air Technologies, Inc. Revenues for the
year ended June 30, 2005 were $430,000 compared with $533,000 in the prior year.
Current year revenues were primarily from our HoMedics development agreement,
U.S. Navy Small Business Innovative Research Phase II contract, and U.S. Army
Small Business Innovative Research Phase II contracts.
Cost of Sales. Cost of sales for the year ended June 30, 2005 was $375,000
compared with $379,000 for the prior year. Cost of sales is primarily research
and development costs and material and labor associated with our HoMedics
development agreement, U.S. Navy Small Business Innovative Research Phase II
contract and U.S. Army Small Business Innovative Research Phase II contracts.
Selling, General and Administrative Expenses. Selling, General and
Administrative expenses for the year ended June 30, 2005 increased $683,000 from
the prior year to $2,772,000. The increase was principally the result of a
$274,000 in increase on non-cash compensation as the Company elected to
recognize Statement of Financial Accounting Standards No. 123R, Share-Based
Payment, during the fiscal year ended June 30, 2005; and $270,000 increase in
compensation and benefits and a $107,000 increase in research and development as
the Company expanded it product application capability; partially offset by a
$111,000 reduction in professional services.
Loss on Debt Restructuring. Loss on debt restructuring for the year ended June
30, 2005 was $3,857,000 and represented the non-cash charge to operations for
the cost to restructure the HoMedics debt, including the cost to issue 26
million warrants (refer to Note 14 - Commitments and Contingencies).
Interest expense. Interest expenses for the year ended June 30, 2005 was
$521,000 compared to $616,000 for the corresponding period of the prior year.
14
Consolidated Balance Sheet as of June 30, 2005
Our total assets at June 30, 2005 were $3,960,000 compared with $2,497,000 at
June 30, 2004. Total assets at June 30, 2005 and June 30, 2004 were comprised
primarily of $2,139,000 and $2,253,000, respectively, of patents/intellectual
property and $1,555,000 and $69,000, respectively, of cash. Total current assets
at June 30, 2005 and 2004 were $1,818,000 and $238,000, respectively, while
total current liabilities for those same periods were $5,420,000 and $1,423,000,
respectively, creating a working capital deficit of $3,602,000 and $1,186,000 at
each respective period end. This working capital deficit is primarily due to
short term borrowings from Cornell Capital Partners.
Stockholders' deficit as of June 30, 2005 was ($3,860,000). The $7,094,000 net
loss for the twelve months ended June 30, 2005 was offset by the value of the
warrants issued to HoMedics ($3,361,000), the sale and issuance of common stock
for cash ($968,000) and the issuance of common stock and options for services
($288,000).
Consolidated Statement of Operations For the Year Ended June 30, 2004.
Our net losses for each of the current years ended June 30, 2004 and June 30,
2003 were $2.5 million and $2.8 million, respectively. The decrease in the net
loss for the year ended June 30, 2004, as compared to the prior year, was
principally the result of a $0.8 million or 28% reduction in operating costs to
$2.1 million, partially offset by a $0.4 million or 233% increase in interest
expense to $0.6 million.
Revenue. Revenues are generated through sales of services for design and
development of Kronos devices at Kronos Air Technologies, Inc. Revenues for the
year ended June 30, 2004 were $533,000 compared with $559,000 in the prior year.
Current year revenues were primarily from our HoMedics development agreement,
U.S. Navy Small Business Innovative Research Phase II contract, U.S. Army Small
Business Innovative Research Phase I and Phase II contracts and our contract
with a business jet manufacturer.
Cost of Sales. Cost of sales for the year ended June 30, 2004 was $379,000
compared with $314,000 for the prior year. Cost of sales is primarily research
and development costs and material and labor associated with our HoMedics
development agreement, U.S. Navy Small Business Innovative Research Phase II
contract, U.S. Army Small Business Innovative Research Phase I and Phase II
contracts and contract with a business jet manufacturer.
Selling, General and Administrative Expenses. Selling, General and
Administrative expenses for the year ended June 30, 2004 decreased $0.8 million
from the prior year to $2.1 million. The decrease was principally the result of
a $801,000 reduction in professional services, and a $191,000 reduction in
compensation and benefits expenses off set by a $156,000 increase in other
selling, general and administrative expense. The reduction in professional
services was primarily the result of (i) a reduction in legal costs as a result
of the completion of the restructuring of the Company in 2003; (ii) a reduction
in accounting and auditing expenses as a result of the change in public
accountants in August 2003; and a reduction in consulting expenses as a result
of Richard F. Tusing, our Chief Operating Officer, as a result of terminating
his consulting agreements and entering into a new employment agreement with
Kronos in January 2003 and (iii) the completion of a twelve month consulting
agreement with the Eagle Rock Group, LLC in March 2003. The increase in other
selling, general and administrative expense was primarily the result of an
increase in Directors and Officers, general liability and product liability
insurance.
Consolidated Balance Sheet as of June 30, 2004
Our total assets at June 30, 2004 were $2.5 million compared with $3.2 million
at June 30, 2003. Total assets at June 30, 2004 and June 30, 2003 were comprised
primarily of $2.3 million and $2.5 million, respectively, of
patents/intellectual property. Total current assets at June 30, 2004 and 2002
were $238,000 and $724,000, respectively, while total current liabilities for
those same periods were $1.4 million and $1.9 million, respectively, creating a
working capital deficit of $1.2 million at each respective period end. This
working capital deficit is primarily due to the current portion of notes payable
due to HoMedics.
Stockholders' deficit as of June 30, 2004 and 2003 was ($1.4 million). The $2.5
million loss from continuing operations for the twelve months ended June 30,
2004 was offset by the sale and issuance, net of offering costs, of $1.5 million
of common stock and by the transfer $0.8 million of warrants from liabilities to
stockholders' deficit.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have relied principally on the sale of common stock and secured
debt and customer contracts for research and product development to finance our
operations.
15
In October 2004, Kronos entered into agreements for up to $20.5 million in
equity and equity backed debt financing from Cornell Capital Partners. In
October 2004, Kronos sold 5 million unregistered shares of Kronos common stock
for gross proceeds of $500,000 to Cornell Capital Partners. Cornell Capital
Partners committed to provide $4 million pursuant to two Promissory Notes, which
have been funded as follows: $2 million upon the filing an SB-2 Registration
Statement and $2 million upon the SEC declaring the Registration Statement
effective. Kronos executed a Standby Equity Distribution Agreement for $20
million of funding which Kronos has the option to drawdown against in increments
as large as $1.5 million over the next twenty one months. As of June 30, 2005,
Kronos has received $4.5 million in funding under these agreements. In July
2005, Cornell Capital Partners suspended until further notice weekly repayments
of the Kronos Promissory Note dated June 21, 2005 and suspended for one month
weekly repayments of the Kronos Promissory Note dated March 7, 2005. In
September 2005, Cornell Capital Partners suspended until further notice weekly
repayments of the Kronos Promissory Note dated March 7, 2005.
In October 2004, HoMedics agreed to extend repayment of Kronos debt and to
provide an additional $1 million in funding. HoMedics has agreed to provide
Kronos with an additional $1 million in financing - $925,000 in secured debt
financing and $75,000 for the purchase of additional warrants. The $925,000 will
be paid to Kronos upon Kronos achieving three milestones: (i) $175,000 shall be
funded upon delivery and successful testing of electronic boards and power
supplies from Kronos' contract manufacturing partner, (ii) $250,000 shall be
funded upon obtaining tooling of the current prototype configuration and device
testing and performing to HoMedics' specifications, and (iii) $500,000 shall be
funded upon the initial sale of Kronos-based air purifiers by HoMedics. Kronos
and HoMedics have been in discussions regarding the achievement of the first
milestone. In addition, quarterly debt payments and the maturity date for
existing debt have been extended. Quarterly payments due on the outstanding $2.4
million in secured debt financing, which had been scheduled to begin in August
2004, will be due the earlier of Kronos receipt of royalty payments from
HoMedics sale of Kronos-based air purification products or two years. The
maturity date of the $2.4 million in debt has been extended from May 2008 to
October of 2009; the maturity date on the $925,000 will also be October 2009.
The interest rate will remain at 6% for the $2.4 million in debt; the rate will
also be 6% on the additional debt. HoMedics increased their potential equity
position in Kronos to 30% of Kronos common stock on a fully diluted basis. In
connection with the October 2004 agreements, Kronos issued HoMedics a warrant to
buy 26.5 million shares of Kronos common stock.
Net cash flow used in operating activities was $1.8 million for the year ended
June 30, 2005. We were able to satisfy most of our cash requirements for this
period from the proceeds of the sale of equity to Cornell Capital Partners and a
group of accredited investors, the $4 million Promissory Notes with Cornell
Capital Partners and our U.S. Navy and U.S. Army Phase II contracts.
We estimate that achievement of our business plan will require substantial
additional funding. We anticipate that the source of funding will be obtained
pursuant to senior debt funding from the HoMedics Secured Promissory Note;
equity funding from the Cornell Capital Standby Equity Distribution Agreement;
and/or the sale of additional equity in our Company; cash flow generated from
government grants and contracts; and cash flow generated from customer revenue.
There are no assurances that these sources of funding will be adequate to meet
our cash flow needs.
GOING CONCERN OPINION
The Report of Independent Registered Public Accounting Firm includes an
explanatory paragraph to their audit opinions issued in connection with our 2005
and 2004 financial statements that states that we do not have significant cash
or other material assets to cover our operating costs. Our ability to obtain
additional funding will largely determine our ability to continue in business.
Accordingly, there is substantial doubt about our ability to continue as a going
concern. Our consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
We can make no assurance that we will be able to successfully develop,
manufacturer and sell commercial products on a broad basis. While attempting to
make this transition, we will be subject to all the risks inherent in a growing
venture, including, but not limited to, the need to develop and manufacture
reliable and effective products, develop marketing expertise and expand our
sales force.
16
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements appear beginning at page F-1.
17
KRONOS ADVANCED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AT JUNE 30, 2005
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets as of June 30, 2005 and June 30, 2004 F-3
Consolidated Statements of Operations for the years ended June 30,
2005 and 2004 F-4
Consolidated Statement of Changes of Stockholders' Deficit for years
ended June 30, 2005 and 2004 F-5
Consolidated Statements of Cash Flows for the years ended June 30,
2005 and 2004 F-6
Notes to Consolidated Financial Statements F-7 to F-17
F - 1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors Kronos Advanced Technologies, Inc.
We have audited the accompanying consolidated balance sheet of Kronos Advanced
Technologies, Inc. and Subsidiary as of June 30, 2005 and 2004 and the related
consolidated statements of operations, stockholders' deficit and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Kronos Advanced
Technologies, Inc. and Subsidiary as of June 30, 2005 and 2004 and the results
of their operations and their cash flows for the years then ended, in conformity
with U. S. generally accepted accounting principles generally accepted in the
United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has incurred
significant losses and has a working capital deficiency as more fully described
in Note 3. These issues among others raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 3. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Sherb & Co., LLP
---------------------------------
Sherb & Co., LLP
New York, New York
September 27, 2005
F - 2
KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
June 30, June 30,
2005 2004
-------------------- --------------------
Assets
Current Assets
Cash $ 1,554,906 $ 69,063
Accounts receivable - 97,544
Other Current Assets 263,490 71,050
-------------------- --------------------
Total Current Assets 1,818,396 237,657
-------------------- --------------------
Property and Equipment 46,011 46,011
Less: Accumulated Depreciation (43,384) (39,719)
-------------------- --------------------
Net Property and Equipment 2,627 6,292
-------------------- --------------------
Other Assets
Intangibles, net 2,138,814 2,253,029
-------------------- --------------------
Total Other Assets 2,138,814 2,253,029
-------------------- --------------------
Total Assets $ 3,959,837 $ 2,496,978
==================== ====================
Liabilities and Stockholders' Deficit
Current Liabilities
Accrued expenses and payables to officers $ 28,837 $ 36,258
Accounts payable 479,175 272,544
Accrued expenses 487,070 312,346
Deferred revenue - 3,218
Notes payable, current portion 4,028,131 798,926
Notes payable to directors & officers 397,004 -
-------------------- --------------------
Total Current Liabilities 5,420,217 1,423,292
-------------------- --------------------
Long Term Liabilities
Notes payable
Notes payable to directors &
officers - 1,063,266
Other notes payable 2,400,000 1,983,038
Discount on notes payable - (589,260)
-------------------- --------------------
Total Long Term Liabilities 2,400,000 2,457,044
-------------------- --------------------
Total Liabilities 7,820,217 3,880,336
-------------------- --------------------
Stockholders' Deficit
Common stock, authorized 500,000,000
shares of $.001 par value
Issued and outstanding - 72,786,345
and 61,323,845, respectively 72,686 61,323
Capital in excess of par value 23,183,747 18,578,019
Accumulated deficit (27,116,813) (20,022,700)
-------------------- --------------------
Total Stockholders' Deficit (3,860,380) (1,383,358)
-------------------- --------------------
Total Liabilities and Stockholders' Deficit $ 3,959,837 $ 2,496,978
==================== ====================
The accompanying notes are an integral part of these financial statements.
F - 3
KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the year ended June 30,
----------------------------------
2005 2004
---------------- ----------------
Sales $ 430,379 $ 533,220
Cost of sales 375,397 379,331
---------------- ----------------
Gross Profit 54,982 153,889
---------------- ----------------
Selling, General and Administrative expenses
Compensation and benefits 1,384,481 840,205
Research and development 167,500 60,517
Professional services 244,570 355,454
Depreciation and amortization 475,250 360,955
Facilities 96,882 88,914
Insurance 173,597 125,622
Other selling general and administrative expenses 229,658 257,287
---------------- ----------------
Total Selling, General and Administrative expenses 2,771,938 2,088,954
---------------- ----------------
Net Operating Loss (2,716,956) (1,935,065)
Other Income (Expense)
Loss on Debt Restructure (3,857,467) -
Other Income 1,414 56,000
Interest Expense (521,104) (615,831)
---------------- ----------------
Net Loss $ (7,094,113) $ (2,494,896)
================ ================
Basic and Diluted Loss Per Share:
Net Loss $ (0.10) $ (0.04)
================ ================
Weighted Average Shares Outstanding - Basic and Diluted 67,612,904 57,760,785
================ ================
The accompanying notes are an integral part of these financial statements.
F - 4
KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
Common Stock Capital in Total
----------------------- Excess of Par Accumulated Stockholders'
Shares Amount Value Deficit Deficit
----------- ---------- ------------- -------------- ------------
BALANCE at June 30, 2003 53,836,524 $ 53,837 $ 16,240,378 $ (17,527,804) $(1,233,589)
Stock options issued for Board Service - - 19,179 - 19,179
Shares issued for Board services 438,493 438 68,792 - 69,230
Shares issued for cash 6,705,576 6,705 1,365,513 - 1,372,218
Reclassification of redeemable warrants - - 805,300 - 805,300
Shares issued for consulting services 360,000 360 78,840 - 79,200
Adjustment to stock (16,748) (17) 17 - -
Net loss for the year ended June 30, 2004 - - - (2,494,896) (2,494,896)
----------- ---------- ------------- -------------- ------------
BALANCE at June 30, 2004 61,323,845 61,323 18,578,019 (20,022,700) (1,383,358)
Shares issued for cash 9,800,000 9,800 957,700 - 967,500
Shares issued for services to officers 1,500,000 1,500 133,500 - 135,000
Shares issued for consulting services 62,500 63 6,187 - 6,250
Value of warrants issued in conjunction
with debt restructure - - 3,361,171 - 3,361,171
Stock options issued for Board Service - - 147,170 - 147,170
Net loss for the year ended June 30, 2005 - - - (7,094,113) (7,094,113)
----------- ---------- ------------- -------------- ------------
BALANCE at June 30, 2005 72,686,345 $ 72,686 $ 23,183,747 $ (27,116,813) $(3,860,380)
=========== ========== ============= ============== ============
The accompanying notes are an integral part of this financial statement
F - 5
KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended June 30,
----------------------------------------
2005 2004
-------------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (7,094,113) $ (2,494,896)
Adjustments to reconcile net loss to net cash
used in operations
Depreciation and amortization 475,250 360,955
Accretion of note discount 92,965 303,786
Loss on debt restructuring 3,857,467 -
Common stock issued for compensation/services 282,170 167,609
Change In:
Accounts receivable 97,544 (48,778)
Prepaid expenses and other assets 102,447 (36,916)
Deferred revenue (3,218) (130,533)
Accounts payable 199,224 (596,666)
Accrued expenses and other liabilities 174,710 (347,215)
-------------------- ------------------
Net cash used in Operating Activities (1,815,554) (2,822,654)
-------------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in patent protection (279,245) (104,760)
-------------------- ------------------
Net cash used in Investing Activities (279,245) (104,760)
-------------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock 973,750 1,372,218
Proceeds from short-term borrowings 100,000 200,000
Repayments of short-term borrowings (1,120,095) (355,396)
Proceeds from long-term borrowings 4,000,000 1,138,478
Debt Acquisition Costs (373,013) -
-------------------- ------------------
Net cash provided by Financing Activities 3,580,642 2,355,300
-------------------- ------------------
NET (DECREASE) INCREASE IN CASH 1,485,843 (572,114)
CASH
Beginning of year 69,063 641,177
-------------------- ------------------
End of year $ 1,554,906 $ 69,063
==================== ==================
Supplemental schedule of non-cash investing and financing
activities:
Interest paid in cash $ 129,886 $ 15,667
==================== ==================
Non-cash investing and financing activities:
Accounts payable/accrued expenses converted to notes payable $ - $ 1,139,903
==================== ==================
The accompanying notes are an integral part of this financial statement.
F - 6
KRONOS ADVANCED TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS
Kronos Advanced Technologies, Inc. ("Kronos") is a Nevada corporation (the
"Company"). The Company's shares began trading on the over-the-counter bulletin
board exchange on August 28, 1996 under the symbol "TSET." Effective January 12,
2002, the Company began doing business as Kronos Advanced Technologies, Inc.
and, as of January 18, 2002, we changed the Company ticker symbol to "KNOS." We
have confined most of our recent activities to develop the Kronos technology.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Method. The Company's consolidated financial statements are prepared
using the accrual method of accounting. The Company has elected a June 30 fiscal
year end.
Principles of Consolidation. The consolidated financial statements of the
Company include those of the Company and its subsidiary for the periods in which
the subsidiary was owned/held by the Company. All significant intercompany
accounts and transactions have been eliminated in the preparation of the
consolidated financial statements. At June 30, 2005, we had only one subsidiary,
Kronos Air Technologies, Inc.
Use of Estimates. The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the dates of the financial statements and the reported
amounts of revenues and expenses during the periods. Actual results could differ
from those estimates.
Concentrations of Credit Risk. Financial instruments which can potentially
subject the Company to concentrations of credit risk consist principally of
trade receivables. The Company manages its exposure to risk through ongoing
credit evaluations of its customers and generally does not require collateral.
The Company maintains an allowance for doubtful accounts for potential losses
and does not believe it is exposed to concentrations of credit risk that are
likely to have a material adverse impact on the Company's financial position or
results of operations.
Cash and Cash Equivalents. The Company considers all highly liquid short-term
investments, with a remaining maturity of three months or less when purchased,
to be cash equivalents. The Company maintains cash and cash equivalents with
high-credit, quality financial institutions. At June 30, 2005 the cash balances
held at financial institutions were in excess of federally insured limits.
Accounts Receivable. The Company provides an allowance for potential losses, if
necessary, on trade receivables based on a review of the current status of
existing receivables and management's evaluation of periodic aging of accounts.
Accounts receivable are shown net of allowances for doubtful accounts of $0 at
June 30, 2005 and June 30, 2004. The Company charges off accounts receivable
against the allowance for losses when an account is deemed to be uncollectable.
Property and Equipment. Property and equipment are recorded at cost.
Depreciation is provided over the estimated useful lives of the assets, which
range from three to seven years. Expenditures for major renewals and betterments
that extend the original estimated economic useful lives of the applicable
assets are capitalized. Expenditures for normal repairs and maintenance are
charged to expense as incurred. The cost and related accumulated depreciation of
assets sold or otherwise disposed of are removed from the accounts, and any gain
or loss is included in operations.
Intangibles. The Company uses assumptions in establishing the carrying value,
fair value and estimated lives of our long-lived assets and goodwill. The
criteria used for these evaluations include management's estimate of the asset's
continuing ability to generate positive income from operations and positive cash
flow in future periods compared to the carrying value of the asset, the
strategic significance of any identifiable intangible asset in our business
objectives, as well as the market capitalization of the Company. Cash flow
projections used for recoverability and impairment analysis use the same key
assumptions and are consistent with projections used for internal budgeting, and
for lenders and other third parties. If assets are considered to be impaired,
the impairment recognized is the amount by which the carrying value of the
assets exceeds the fair value of the assets. Useful lives and related
amortization or depreciation expense are based on our estimate of the period
that the assets will generate revenues or otherwise be used by Kronos. Factors
that would influence the likelihood of a material change in our reported results
include significant changes in the asset's ability to generate positive cash
flow, loss of legal ownership or title to the asset, a significant decline in
the economic and competitive environment on which the asset depends, significant
changes in our strategic business objectives, and utilization of the asset.
F - 7
Income Taxes. Income taxes are accounted for in accordance with the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 109. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amounts expected to be realized, but no less than
quarterly.
Research and Development Expenses. Costs related to research and development are
charged to research and development expense as incurred.
Net Loss Per Share. Basic loss per share is computed using the weighted average
number of shares outstanding. Diluted loss per share is computed using the
weighted average number of shares outstanding adjusted for the incremental
shares attributed to outstanding options and warrants to purchase common stock,
when their effect is dilutive.
Revenue Recognition. The Company recognizes revenue in accordance with Staff
Accounting Bulletin (SAB) 104, which requires evidence of an agreement, delivery
of the product or services at a fixed or determinable price, and assurance of
collection within a reasonable period of time. Further, Kronos Air Technologies
recognizes revenue on the sale of the custom-designed contract sales under the
percentage-of-completion method of accounting in the ratio that costs incurred
to date bear to estimated total costs. For uncompleted contracts where costs and
estimated profits exceed billings, the net amount is included as an asset in the
balance sheet. For uncompleted contracts where billings exceed costs and
estimated profits, the net amount is included as a liability in the balance
sheet. Sales are reported net of applicable cash discounts and allowances for
returns. Revenue from government grants for research and development purposes is
recognized as revenue as long as the Company determines that the government will
not be the sole or principal expected ultimate customer for the research and
development activity or the products resulting from the research and development
activity. Otherwise, such revenue is recorded as an offset to research and
development expenses in accordance with the Audit and Accounting Guide, Audits
of Federal Government Contractors. In either case, the revenue or expense offset
is not recognized until the grant funding is invoiced and any customer
acceptance provisions are met or lapse.
Stock, Options and Warrants Issued for Services. Issuances of shares of the
Company's stock to employees or third-parties for compensation or services is
valued using the closing market price on the date of grant for employees and the
date services are completed for non-employees. Issuances of options and warrants
of the Companies stock are valued using the Black-Scholes option model.
Stock Options. In December 2004, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 123R,
Share-Based Payment ("SFAS No. 123R"). This Statement is a revision of SFAS No.
123, Accounting for Stock-Based Compensation, and supersedes Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
its related implementation guidance. SFAS No. 123R focuses primarily on
accounting for transactions in which an entity obtains employee services in
share-based payment transactions. The Statement requires entities to recognize
stock compensation expense for awards of equity instruments to employees based
on the grant-date fair value of those awards (with limited exceptions). Kronos
elected to implement the provisions of SFAS No. 123R in the fiscal year ended
June 30, 2005.
NOTE 3 - REALIZATION OF ASSETS
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern. The
Company has sustained losses from operations in recent years, and such losses
have continued through the current year ended June 30, 2005. In addition, the
Company has used, rather than provided cash in its operations. The Company is
currently using its resources to attempt to raise capital necessary to
commercialize its technology and develop viable commercial products, and to
provide for its working capital needs.
In view of the matters described in the preceding paragraph, recoverability of a
major portion of the asset amounts shown in the accompanying balance sheet is
dependent upon continued operations of the Company, which in turn is dependent
upon the Company's ability to meet its financing requirements on a continuing
basis, to maintain present financing and to succeed in its future operations.
The consolidated financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the Company be
unable to continue in existence.
F - 8
Management has taken the following steps with respect to its operating and
financial requirements, which it believes are sufficient to provide the Company
with the ability to continue in existence:
HoMedics. October 2002, Kronos and HoMedics executed a Licensing Agreement
granting HoMedics certain rights with respect to the distribution of the Kronos
proprietary technology to the consumer. The agreement provides for exclusive
North American, Australian and New Zealand retail distribution rights for next
generation consumer air movement and purification products based on the patented
Kronos technology. The initial term of the agreement is three and one half years
from the initial sale of consumer air purification products by HoMedics, which
shall be no later than December 31, 2006, with the option to extend the
Licensing Agreement for six additional years. Kronos was compensated through an
initial royalty payment and will receive ongoing quarterly royalty payments
based on a percentage of sales. HoMedics will pay minimum royalty payments of at
least $2 million during the initial three and a half year term and on-going
royalty payments to extend the agreement. Kronos will retain the rights to all
of its intellectual property. HoMedics commitment includes funding a marketing
and advertising campaign to promote the Kronos-based product line. The products
will be distributed by HoMedics. HoMedics currently distributes their products
through major domestic retailers, including Wal-Mart, Home Depot, Sears, Bed
Bath & Beyond, and Linens 'N Things.
We believe the Company has successfully completed the development of a
Kronos-based consumer standalone air purifier that is an efficient, high quality
product which is cost effective and easy to operate. In March 2005, Kronos and
HoMedics began expanding production development beyond the initial prototypes
and initiated increased product testing to complete the product claims platform.
In March and April 2005, Kronos modified the HoMedics design and ordered
prototype production devices from Kronos' preferred vendors along with select
components from a HoMedics preferred vendor. In August 2005, Kronos received
initial shipment of products from its low cost, contract manufacturer in Mexico
and China and, in September 2005, initiated testing of these products under a
testing protocol co-developed by Kronos and HoMedics.
U.S. Navy. In November 2002, the U. S. Navy awarded Kronos a Small Business
Innovation Research Phase II contract worth $580,000, plus an option of
$145,000. The Phase II contract (commercialization phase) is an extension of the
Phase I and the Phase I Option work that began in 2001. It is intended that the
Kronos devices developed under this contract will be embedded in existing HVAC
systems in order to move air more efficiently than traditional, fan-based
technology. In May 2005, Kronos shipped the Kronos device to Northrop Grumman
for testing and evaluation. Based on the success of these initial tests,
Northrop Grumman requested additional modifications and improvements to the
device. Northrop Grumman is scheduling further testing. As of June 30, 2005, the
U. S. Navy had provided Kronos with $580,000 in funding for this effort.
Leading Business Jet Manufacturer. In January 2003, Kronos executed a
Development and Acquisition Agreement with a premier business jet manufacturer.
The Agreement was the direct result of initial prototype development work
performed by the Kronos Research Team with input from the customer in 2002. The
Kronos devices being designed and manufactured under this contract will need to
meet all FAA safety standards, including environmental, flammability and
electromagnetic interference (EMI). The Company has completed product design and
development based on the customer's specific product application requirements.
We are currently testing and evaluating the prototype product.
Leading Automotive Manufacturer. In August 2005, Kronos extended its work into
the transportation industry by signing a Prototype Development and Evaluation
Agreement with a leading luxury automotive manufacturer. The Kronos devices will
be designed and manufactured to meet exacting customer standards for placement
inside of automobile passenger cabins. According to various industry reports,
the amount of time Americans have spent in their cars has risen 236 percent
since 1982 (with one report from Time Magazine noting an average motorist will
spend more than 5 years stuck in traffic alone), providing optimum air
circulation in automobiles is not only a comfort factor, but can also be a
critical means of improving air quality and helping to prevent viruses and
allergens that may otherwise accumulate in filtration systems.
Washington Technology Center. In December 2004, Kronos and the University of
Washington were awarded funding for a research and technology development
project entitled "Heat Transfer Technology for Microelectronics and MEMS" by the
Washington Technology Center ("WTC"). The objective of the project is to develop
a novel energy-efficient heat transfer technology for cooling microelectronics.
Thermal management for microelectronics and MEMS systems is a challenge.
Existing cooling devices aren't meeting increasing needs for energy consumption
and heat dissipation. Kronos air handling technology is an emerging technology
that uses an electric field to exert force on ionized gas. Kronos is attempting
to develop an improved microchip air handling system that is smaller in size,
has high speed airflow, allows more targeted delivery of cooling to areas of
highest heat and is compatible with current processes. WTC will contribute
$40,000 to the project, with Kronos contributing $8,000, plus $32,000 in in-kind
services, including use of the Kronos Research and Product Development Facility.
During the quarter ended June 30, 2005, Kronos and the University of Washington
initiated research into development of an energy-efficient heat transfer
technology for cooling microelectronics.
F - 9
NOTE 4 - OTHER CURRENT ASSETS
Other current assets at June 30, consist of the following:
2005 2004
--------------- ---------------
Debt acquisition costs $ 203,125 $ -
Payroll deposit 50,000 -
Lease deposits 10,365 10,365
Prepaid professional fees - 12,587
Prepaid insurance - 4,104
Work in Progress - 43,994
--------------- ---------------
Prepaid and other current assets $ 263,490 $ 71,050
=============== ===============
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment at June 30, consists of the following:
2005 2004
--------------- ---------------
Office furniture and fixtures $ 37,756 $ 37,756
Machinery and equipment 8,255 8,255
--------------- ---------------
46,011 46,011
Less accumulated depreciation (43,384) (39,719)
--------------- ---------------
Net property and equipment $ 2,627 $ 6,292
=============== ===============
Depreciation expense for the years ended June 30, 2005 and 2004 were $3,655 and
$13,283, respectively.
NOTE 6 - INTANGIBLES
Intangible assets at June 30, consists of the following:
2005 2004
--------------- ---------------
Marketing intangibles $ 587,711 $ 587,711
Purchased patent technology 2,669,355 2,669,355
Developed patent technology 518,960 239,715
--------------- ---------------
3,776,026 3,496,781
Less accumulated amortization (1,637,212) (1,243,752)
--------------- ---------------
Net intangible assets $ 2,138,814 $ 2,253,029
=============== ===============
Purchased patent technology includes property that was acquired in the Kronos
acquisition.
Intangible assets are being amortized on a straight line basis over 10 years.
Amortization expense for the years ended June 30, 2005 and 2004 was $393,460 and
$271,364, respectively.
Amortization of the Company's Intangible Assets shown above for the fiscal years
ended June 30,
2006 2007 2008 2009 2010
----------- ----------- ----------- ----------- -----------
Marketing intangibles $ 587,711 $ 587,711 $ 587,711 $ 587,711 $ 587,711
Purchased patent technology 2,669,355 2,669,355 2,669,355 2,669,355 2,669,355
Developed patent technology 518,960 518,960 518,960 518,960 518,960
----------- ----------- ----------- ----------- -----------
3,776,026 3,776,026 3,776,026 3,776,026 3,776,026
Less accumulated amortization (2,014,815) (2,392,418) (2,770,021) (3,147,624) (3,434,800)
----------- ----------- ----------- ----------- -----------
Net intangible assets $1,761,211 $1,383,608 $1,006,005 $ 628,402 $ 341,226
=========== =========== =========== =========== ===========
F - 10
NOTE 7 - ACCRUED EXPENSES
Accrued expenses at June 30, consisted of the following:
2005 2004
--------------- ---------------
Accrued compensation $ 21,344 $ 55,913
Accrued interest 428,712 166,276
Accrued professional services 37,014 90,157
--------------- ---------------
$ 487,070 $ 312,346
=============== ===============
NOTE 8 - NOTES PAYABLE
The Company had the following obligations as of June 30, 2005 and 2004,
2005 2004
--------------- ---------------
Obligations to Cornell Capital(1) $ 4,000,000 $ -
Obligation to HoMedics (2) 2,400,000 2,400,000
Discount on obligation to HoMedics - (589,260)
Obligation to current employees (3) 397,004 1,139,903
Obligation for finance leases (4) 28,131 50,327
Obligation to Fusion Capital (5) - 200,000
Obligations to others (6) - 55,000
--------------- ---------------
6,825,135 3,255,970
Less:
Current portion 4,425,135 798,926
--------------- ---------------
Total long term obligations net of
current portion $ 2,400,000 $ 2,457,044
=============== ===============
(1) These notes have a one year term and bear interest at 12% with weekly
payments.
(2) This note has a 5 year term and bears interest at 6% with no payments
required until the earlier of Kronos receipt of royalty payments from HoMedics
sale of Kronos-based air purification products or two years. This note was
issued along with warrants for the purchase of 13.4 million shares of the
Company's common stock.
(3) These notes bear interest at the rate of 12%. They represent obligation to
current employees of the Company, which are due by December 31, 2006.
(4) See Note 9 below.
(5) This was a non-interest bearing demand obligation and was outstanding until
November 2004 when Fusion Capital purchased enough stock from the Company to
eliminate the advance position.
(6) This obligation was originally incurred for the acquisition of license
rights of the Kronos technology (see note 7) with a value of $270,000. This note
was non-interest bearing with quarterly payments of $30,000 until paid it was
paid in full on October 5, 2004.
Payout of the Company's Notes Payable obligations listed above for the fiscal
years ended June 30,
2006 2007 2008 2009 2010
----------- ---------- ---------- ---------- ----------
Obligations to Cornell Capital $4,000,000 $ - $ - $ - $ -
Obligation to current employees 397,004 - - - -
Obligation for finance leases 28,131
Obligation to HoMedics - 553,846 738,846 738,462 369,231
----------- ---------- ---------- ---------- ----------
$4,425,135 $ 553,846 $ 738,462 $ 738,462 $ 369,231
=========== ========== ========== ========== ==========
F - 11
NOTE 9 - LEASES
The Company has entered into a non-cancelable operating lease for facilities.
Rental expense was approximately $66,600 and $66,500 for years ended June 30,
2005 and 2004 respectively. Effective October 1, 2005, Kronos is committed
through September 30, 2009 to annual lease payments on operating leases for
6,000 square feet of office/research and product development premises of for
rent during fiscal,
2006 2007 2008 2009
---------- --------- --------- ---------
Lease payments $ 58,800 $60,564 $ 62,388 $ 64,260
========== ======== ========= =========
The Company has entered into capital leases for equipment. The leases are for 36
months and contain bargain purchase provisions so that the Company can purchase
the equipment at the end of each lease. The following sets forth the minimum
future lease payments and present values of the net minimum lease payments under
these capital leases:
Year ended June 30,
2006 $ 31,550
------------
Total minimum lease payments 31,550
Less: Imputed interest (3,419)
------------
Present value of net minimum
lease payments $ 28,131
============
In the year ended June 30, 2005 the Company paid $22,197 in principal and $8,493
in interest on capital leases. Of the equipment that was purchased using capital
leases, $10,650 was capitalized and the remaining $65,781 was expensed through
research and development and cost of sales.
NOTE 10 - NET LOSS PER SHARE
As of June 30, 2005, there were outstanding options to purchase 14,989,782
shares of the Company's common stock and outstanding warrants to purchase
42,300,000 shares of the Company's common stock. These options and warrants have
been excluded from the loss per share calculation as their effect is
anti-dilutive. As of June 30, 2004 there were outstanding options to purchase
12,813,812 shares of Kronos common stock and outstanding warrants to purchase
15,792,342 shares of Kronos common stock. These options and warrants have been
excluded from the loss per share calculation as their effect is anti-dilutive.
NOTE 11 - INCOME TAXES
The composition of deferred tax assets and the related tax effects at June 30,
2005 and 2004 are as follows:
2005 2004
--------------- ---------------
Benefit from carryforward of capital
and net operating losses $ 6,091,927 $ 4,841,083
Other temporary differences 156,740 156,740
Less:
Valuation allowance (6,248,667) (4,997,823)
--------------- ---------------
Net deferred tax asset $ - $ -
=============== ===============
The other temporary differences shown above relate primarily to impairment
reserves for intangible assets, and accrued and deferred compensation. The
difference between the income tax benefit in the accompanying statements of
operations and the amount that would result if the U.S. Federal statutory rate
of 34% were applied to pre-tax loss is as follows:
F - 12
June 30,
--------------------------------------------------------------------------------
2005 2004
--------------------------------------------------------------------------------
Amount % of pre-tax Loss Amount % of pre-tax Loss
--------------------------------------------------------------------------------
Benefit for income tax at:
Federal statutory rate $ 2,411,998 34.0% $ 848,265 34.0%
State statutory rate 141,882 2.0% 49,728 2.0%
Non-deductible expenses (1,303,036) (18.4)% (123,348) 11.6%
Increase in valuation allowance (1,250,844) (17.6)% (774,645) (47.6)%
--------------------------------------------------------------------------------
$ - 0.0% $ - 0.0%
================================================================================
The non-deductible expenses shown above related primarily to the amortization of
intangible assets and to the accrual of stock options for compensation using
different valuation methods for financial and tax reporting purposes.
At June 30, 2005, for federal income tax and alternative minimum tax reporting
purposes, the Company has approximately $14.5 million of unused Federal net
operating losses, $2.3 million capital losses and $10.3 million State net
operating losses available for carryforward to future years. The benefit from
carryforward of such losses will expire in various years between 2006 and 2023
and could be subject to limitations if significant ownership changes occur in
the Company.
NOTE 12 - CONSULTING AGREEMENTS
On October 31, 2003, the Company entered into a 10 month consulting agreement
with Joshua B. Scheinfeld and Steven G. Martin for consulting services with
respect to operations, strategy, capital structure and other matters as
specified from time to time. As consideration for their services, the Company
issued 360,000 shares of its common stock. In accordance with Emerging Issues
Task Force ("EITF") 96-18, the measurement date was established as the contract
date of October 31, 2003 as the share grant is non-forfeitable and fully vested
on that date. The stock was valued on that date at $0.22 a share (the closing
price for the Company's common stock on the measurement date). The stock
issuance, valued at $79,200 was recorded as a prepaid consulting fee and was
amortized to Professional Fee Expense ratably over the 10 month term of the
contract. Under this contract, expenses of $15,840 and $63,360 were recorded for
the years ended June 30, 2005 and 2004, respectively.
NOTE 13 - STOCK OPTIONS AND WARRANTS
On February 12, 2002, the Board of Directors approved the TSET, Inc. Stock
Option Plan under which Kronos' key employees, consultants, independent
contractors, officers and directors are eligible to receive grants of stock
options. Kronos has reserved and issued a total of 6,250,000 shares of common
stock under the Stock Option Plan. Prior to that, the Company had no formal
stock option plan but offered as special compensation to certain officers,
directors and third party consultants the granting of non-qualified options to
purchase Company shares at the market price of such shares as of the option
grant date. The options generally have terms of three to ten years. The Company
granted non-qualified stock options totaling 2,450,000 and 3,239,782 shares in
the years ended June 30, 2005 and 2004, respectively.
As of July 1, 2004, the Company elected to follow Statement of Financial
Accounting Standards No. 123R, Share-Based Payment ("SFAS No. 123R") to
recognize stock compensation expense for awards of equity instruments to
employees based on the grant-date fair value of those awards (with limited
exceptions).
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
the Company's opinion the existing available models do not necessarily provide a
reliable single measure of the fair value of the Company's employee stock
options. Using the Black-Scholes option valuation model, the weighted average
grant date fair value of options granted during the years ended June 30, 2005
and 2004 was $0.68 and $0.18 per option share, respectively.
F - 13
A summary of the Company's stock option activity and related information for the
years ended June 30, 2005 and 2004 is as follows (in thousands, except per share
amounts):
Weighted
Average
Shares Exercise Price
--------------- ------------
Outstanding at June 30, 2003 10,102 $ 0.52
Granted 3,240 0.19
Exercised - -
Cancelled (529) 0.89
--------------- ------------
Outstanding at June 30, 2004 12,813 0.42
Granted 2,450 0.15
Exercised - -
Cancelled (273) 0.84
--------------- ------------
Outstanding as June 30, 2005 14,990 $ 0.37
=============== ============
A summary of options outstanding and exercisable at June 30, 2005 and 2004 is
follows (in thousands, except per share amounts and years):
Options Outstanding Options Exercisable
-------------------------------------------- ------------------------------
Weighted
Average
Remaining Weighted
Range of Life (in Average Range of
Exercise Prices Options years) Exercise Price Exercise Prices Options
------------------ -------- ---------- -------------- --------------- --------
June 30, 2005
$0.71 - $1.12 1,472 2.9 $0.87 $0.71 - $1.12 1,472
$0.21 - $0.70 5,925 6.3 $0.49 $0.21 - $0.70 5,925
$0.00 - $0.20 7,593 8.0 $0.17 $0.00 - $0.20 7,593
June 30, 2004
$0.71 - $1.12 1,670 3.5 $0.89 $0.71 - $1.12 1,670
$0.21 - $0.70 5,975 7.3 $0.49 $0.21 - $0.70 5,975
$0.00 - $0.20 5,168 8.8 $0.18 $0.00 - $0.20 5,168
A summary of the Company's stock warrant activity and related information for
the years ended June 30, 2005 and 2004 is as follows (in thousands, except per
share amounts):
Weighted Average
Warrants Exercise Price
---------------- -------------
Outstanding at June 30, 2003 15,792 $0.16
Granted - -
Exercised - -
Cancelled - -
--------------- ------------
Outstanding as June 30, 2004 15,792 $ 0.16
Granted 26,508 0.10
Exercised - -
Cancelled - -
--------------- ------------
Outstanding as June 30, 2005 42,300 $ 0.12
=============== ============
NOTE 14 - COMMITMENTS AND CONTINGENCIES
In October 2004, Kronos entered into agreements for up to $20.5 million in
equity and equity backed debt financing from Cornell Capital Partners. In
October 2004, Kronos sold 5 million unregistered shares of Kronos common stock
for gross proceeds of $500,000 to Cornell Capital Partners. Cornell Capital
Partners committed to provide $4 million pursuant to two Promissory Notes, which
had been funded as follows: $2 million upon the filing an SB-2 Registration
Statement and $2 million upon the SEC declaring the Registration Statement
effective. Kronos executed a Standby Equity Distribution Agreement for $20
million of funding which Kronos has the option to drawdown against in increments
as large as $1.5 million over the next twenty one months. As of June 30, 2005,
Kronos has received $4.5 million in funding under these agreements.
F - 14
In October 2004, HoMedics agreed to extend repayment of Kronos debt and to
provide an additional $1 million in funding. HoMedics has agreed to provide
Kronos with an additional $1 million in financing - $925,000 in secured debt
financing and $75,000 for the purchase of additional warrants. The $925,000 will
be paid to Kronos upon Kronos achieving three milestones: (i) $175,000 shall be
funded upon delivery and successful testing of electronic boards and power
supplies from Kronos' contract manufacturing partner, (ii) $250,000 shall be
funded upon obtaining tooling of the current prototype configuration and device
testing and performing to HoMedics' specifications, and (iii) $500,000 shall be
funded upon the initial sale of Kronos-based air purifiers by HoMedics. Kronos
and HoMedics have been in discussions regarding the achievement of the first
milestone. In addition, quarterly debt payments and the maturity date for
existing debt have been extended. Quarterly payments due on the outstanding $2.4
million in secured debt financing, which had been scheduled to begin in August
2004, will be due the earlier of Kronos receipt of royalty payments from
HoMedics sale of Kronos-based air purification products or two years. The
maturity date of the $2.4 million in debt has been extended from May 2008 to
October of 2009; the maturity date on the $925,000 will also be October 2009.
The interest rate will remain at 6% for the $2.4 million in debt; the rate will
also be 6% on the additional debt. HoMedics increased their potential equity
position in Kronos to 30% of Kronos common stock on a fully diluted basis. In
connection with the October 2004 agreements, Kronos issued HoMedics a warrant to
buy 26.5 million shares of Kronos common stock. As a result of this debt
restructuring, the Company recognized a loss of $3,857,467 which represents the
reacquisition price less the net carrying value of the debt restructuring. The
reacquisition price is made up of $2,400,000 which is the amount of the new debt
and $3,361,161 which represents the value of the warrants using the
Black-Scholes method. The net carrying value is the $2,400,000 which is the old
debt less the unamortized debt discount of $496,296.
Daniel R. Dwight, President and Chief Executive Officer, and the Company entered
into an Employment agreement effective as of November 15, 2001. The initial term
of Mr. Dwight's Employment Agreement was for 2 years and will automatically
renew for successive 1 year terms unless Kronos or Mr. Dwight provide the other
party with written notice within 3 months of the end of the initial term or any
subsequent renewal term. The Board of Directors renewed Mr. Dwight's Employment
Agreement on August 13, 2003 and again on August 15, 2004 and August 15, 2005.
Mr. Dwight's Employment Agreement provides for base cash compensation of
$180,000 per year. Mr. Dwight is eligible for annual incentive bonus
compensation in an amount equal to Mr. Dwight's annual salary based on the
achievement of certain bonus objectives. In addition, Kronos granted Mr. Dwight
1,000,000 immediately vested and exercisable, ten-year stock options at various
exercise prices. Mr. Dwight will be entitled to fully participate in any and all
401(k), stock option, stock bonus, savings, profit-sharing, insurance, and other
similar plans and benefits of employment.
Richard F. Tusing, Chief Operating Officer, and the Company entered into an
Employment agreement effective as of January 1, 2003. The initial term of Mr.
Tusing's Employment Agreement is for 2 years and will automatically renew for
successive 1 year terms unless Kronos or Mr. Tusing provide the other party with
written notice within 3 months of the end of the initial term or any subsequent
renewal term. The Board of Directors renewed Mr. Tusing's Employment Agreement
on October 1, 2004. Mr. Tusing's Employment Agreement provides for base cash
compensation of $160,000 per year. Mr. Tusing will be entitled to fully
participate in any and all 401(k), stock option, stock bonus, savings,
profit-sharing, insurance, and other similar plans and benefits of employment.
NOTE 15 - MAJOR CUSTOMERS
As of June 30, 2005 the Company had three major customers: HoMedics, the U.S.
Navy and the U.S. Army. Of the $430,379 in revenue recorded in the year ended
June 30, 2005, $430,379 or 100% was derived from these three customers.
As of June 30, 2004, the Company had two major customers: HoMedics and the U.S.
Navy. Of the $533,220 in revenue recorded in the year ended June 30, 2004,
$477,032 or 89% was derived from these two customers.
F - 15
NOTE 16 - SEGMENTS OF BUSINESS
The Company operates principally in one segment of business: The Kronos segment
licenses, manufactures and distributes air movement and purification devices
utilizing the Kronos technology. In the year ended June 30, 2005, the Company
operated only in the United States of America.
NOTE 17 - RELATED PARTIES
As of June 30, 2005, the Company has outstanding obligations for past
compensation to management of $397,004. As of June 30, 2004, the Company has
outstanding obligations for past compensation management of $1,139,903. These
unpaid amounts currently accrue interest at the rate of 12% per annum.
NOTE 18 - STOCKHOLDERS' DEFICIT
During the year ended June 30, 2005, the Company issued 9,800,000 shares of its
common stock for $967,500 in cash. The Company issued 1,500,000 shares valued at
$135,000 for services to officers and employees and 62,500 shares valued at
$6,250 for consulting services.
During the year ended June 30, 2004, the Company issued 6,705,576 shares of its
common stock for $1,403,718 in cash. The Company issued 360,000 shares valued at
$79,200 for consulting services and 438,493 shares of its common stock valued at
$69,230 for board service to current members of the Board of Directors.
NOTE 19 - SUBSEQUENT EVENTS
In July 2005, Cornell Capital Partners suspended until further notice weekly
repayments of the Kronos Promissory Note dated June 21, 2005 and suspended for
one month weekly repayments of the Kronos Promissory Note dated March 7, 2005.
In September 2005, Cornell Capital Partners suspended until further notice
weekly repayments of the Kronos Promissory Note dated March 7, 2005. In July,
August and September 2005, Kronos issued 6,843,857 shares of common stock for
$460,000 to Cornell under the terms of our Standby Equity Distribution
Agreement. The proceeds were used to make payments on the two Promissory Notes.
In August 2005, Kronos extended its work into the transportation industry by
signing a Prototype Development and Evaluation Agreement with a leading luxury
automotive manufacturer. The Kronos devices will be designed and manufactured to
meet exacting customer standards for placement inside of automobile passenger
cabins.
F - 16
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. Within 90 days prior to the
filing date of this report, our Company carried out an evaluation of the
effectiveness of the design and operation of its disclosure controls and
procedures pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e). This
evaluation was done under the supervision and with the participation of our
Company's President and Chief Financial Officer. Based upon that evaluation,
they concluded that our Company's disclosure controls and procedures are
effective in gathering, analyzing and disclosing information needed to satisfy
our Company's disclosure obligations under the Exchange Act.
Changes in Internal Controls. There were no significant changes in our Company's
internal controls or in other factors that could significantly affect those
controls since the most recent evaluation of such controls.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our directors and executive officers and their ages as of October 8, 2004, are
as follows:
NAME AGE POSITION
-------------------- ----- ----------------------------------------
Daniel R. Dwight 45 Director; President and Chief
Executive Officer
Richard F. Tusing 48 Director; Chief Operating Officer
James P. McDermott 43 Director
M. J. Segal 60 Director
Daniel R Dwight, 45, has served as a Director of Kronos since November 2000, and
as a Director and Chief Executive Officer of Kronos Air Technologies since
January 2001. Effective October 16, 2001, Mr. Dwight was appointed President and
Chief Executive Officer of Kronos. Effective January 1, 2004, Mr. Dwight was
appointed Acting Chief Financial Officer of Kronos. He has extensive experience
in private equity and operations in a wide variety of high growth and core
industrial businesses. Mr. Dwight spent 17 years with General Electric including
10 years of operations, manufacturing, and business development experience with
GE's industrial businesses, and seven years of international investment and
private equity experience with GE Capital. He has had responsibility for over a
$1 billion in merger and acquisition and private equity transactions at GE. Mr.
Dwight initiated GE Capital's entry in the Asia private equity market. Between
1995 and 1999, the Asian equity portfolio grew to include consolidations,
leveraged buyouts, growth capital and minority investments in diverse
industries, including information technology, telecommunications services,
consumer products, services and distribution, and contract manufacturing. Since
1982, Mr. Dwight has held other leadership positions domestically and
internationally with GE Capital, as well as senior positions with GE Corporate
Business Development (1989-1992) and GE Corporate Audit Staff (1984-1987). Mr.
Dwight holds an MBA in Finance and Marketing with Honors from The University of
Chicago Graduate School of Business and a B.S. in Accounting with Honors from
the University of Vermont and is a member of the Association of Heating,
Ventilation, Air conditioning and Refrigeration Engineers, Inc. (ASHRAE).
16
Richard F. Tusing, 48, has served as a Director of Kronos since October 2000 and
as a Director of Kronos Air Technologies since January 2001 and was appointed
Chief Operating Officer on January 1, 2002. Mr. Tusing has had extensive
experience in developing new enterprises, negotiating the licensing of
intellectual property rights, and managing technical and financial
organizations, and has more than 20 years of business development, operations,
and consulting experience in the technology and telecommunications industries.
Prior to his services to Kronos, Mr. Tusing spent four years in executive
management with several emerging technology companies, 14 years in various
managerial and executive positions with MCI Communications Corporation, and
three additional years in managerial consulting. From 1982-1996, Mr. Tusing held
multiple managerial and executive positions with MCI Communications Corporation.
From 1994-1996, he served as MCI's Director of Strategy and Technology, managing
MCI's emerging technologies division (having primary responsibility for
evaluating, licensing, investing in, and acquiring third-party technologies
deemed of strategic importance to MCI), and also oversaw the development of
several early-stage and venture-backed software and hardware companies; in this
capacity, Mr. Tusing managed more than 100 scientists and engineers developing
state-of-the-art technologies. From 1992-1994, Mr. Tusing founded MCI Metro,
MCI's entree into the local telephone services business and, as MCI Metro's
Managing Director, managed telecommunications operations, developed financial
and ordering systems, and led efforts in designing its marketing campaigns. From
1990-1992, he served as Director of Finance and Business Development for MCI's
western region. From 1982-1990, Mr. Tusing held other management and leadership
positions within MCI, including service as MCI's Pacific Division's Regional
Financial Controller, Manager of MCI's Western Region's Information Technology
Division, and led MCI's National Corporate Financial Systems Development
Organization. Mr. Tusing received B.S. degrees in business management and
psychology from the University of Maryland in 1979.
James P. McDermott, 43, became a Director of Kronos in July 2001. Mr. McDermott
has over 20 years of financial and operational problem-solving experience. Mr.
McDermott is a co-founder and is currently a Managing Director of Eagle Rock
Advisors, LLC, the Manager for The Eagle Rock Group, LLC. From 1992 through
2000, Mr. McDermott held various managerial and executive positions with
PennCorp Financial Group, Inc. and its affiliates. From 1998 through 2000, Mr.
McDermott was Executive Vice-President and Chief Financial Officer of PennCorp
Financial Group. While serving in this position, Mr. McDermott was one-third of
the executive management team that was responsible for developing and
implementing operational stabilization, debt reduction and recapitalization
plans for the company. From 1995 through 1998, Mr. McDermott served as Senior
Vice-President of PennCorp Financial Group. Mr. McDermott worked closely with
the Audit Committee of the Board of Directors on evaluating the PennCorp's
accounting and actuarial practices. In addition, Mr. McDermott was responsible
for developing a corporate-wide technology management program resulting in
technology convergence and cost savings to the company's technology budget. From
1994 through 1998, Mr. McDermott was a principal in Knightsbridge Capital Fund
I, LP, a $92 million investment fund specializing in leverage-equity
acquisitions of insurance and insurance-related businesses. Mr. McDermott was
also the founding Chairman of the e-business Internet service provider,
Kivex.com, and a senior manager of one of the world's leading public accounting
firms, KPMG. Mr. McDermott received a B.S. Degree in Business Administration
from the University of Wisconsin, Madison.
M. J. Segal, 60, became a Director of Kronos in September 2003. Mr. Mr. Segal
has over 35 years of corporate governance, entrepreneurial and investment
banking expertise. Mr. Segal founded the investment banking firm of M.J. Segal
Associates in 1987. Since 1992, the firm has specialized in researching private
equity opportunities in both private and emerging growth public companies. The
Segal group caters primarily to institutional clients, private investment
partnerships and professional money managers. After starting his career as a
stockbroker and financial planner in 1966 with Philadelphia based New York Stock
Exchange firm, Robinson & Company, Mr. Segal joined Josephthal & Co. Inc., a
leading full-service investment banking and brokerage firm in New York. Mr.
Segal has served as senior vice president of the congressionally charted
National Corporation for Housing Partnerships in Washington, D. C. and president
of its investment banking subsidiary and has qualified as a NASD broker/dealer
financial principal. Originally from Philadelphia, Mr. Segal attended the
Wharton School of the University of Pennsylvania and is a graduate of The New
York Institute of Finance.
17
DIRECTORS
Our Board of Directors consists of eight seats. Directors serve for a term of
one year and stand for election at our annual meeting of stockholders. Three of
our current directors were elected at our annual meeting of stockholders held on
December 30, 2002, and two additional directors were appointed in August and
September 2003, respectively. In April 2005, Spencer Browne, a Member of the
Kronos Board of Directors passed away. Mr. Browne had served as a Board Member
since August 2003. Four vacancies currently exist on the Board of Directors as
of the date of this filing. Pursuant to our Bylaws, a majority of directors may
appoint a successor to fill any vacancy on the Board of Directors.
ADVISORY BOARD
We established an Advisory Board in July 2001 to assist management in the
development of long-range business plans for our Company. Currently, William
Poster and Charles Strang are the only Advisory Board Members.
Mr. Poster is a seasoned entrepreneur with a successful track record as a
founder of several businesses spanning five continents. Mr. Poster has
experience in developing business opportunities in the United States, Europe,
Asia and the Middle East. Mr. Poster recently stepped down as President of
Computer Systems & Communications Corporation, a wholly-owned subsidiary of
General Dynamics. Computer Systems & Communications Corporation is a
cutting-edge communications and technology company that Mr. Poster founded and
later sold to General Dynamics. Mr. Poster is currently a principal with Eagle
Rock Advisors, LLC.
Mr. Strang is a former Kronos Director from January 2001 through December 2002.
Mr. Strang was named National Commissioner of NASCAR (National Association for
Stock Car Auto Racing, Inc.) in 1998 and continues to serve in that capacity. In
1989 Mr. Strang received President Bush's American Vocation Success Award; in
1992 was elected to the Hall of Fame of the National Marine Manufacturers
Association; in 1990 was awarded the Medal of Honor of the Union for
International Motorboating; and is a life member of the Society of Automotive
Engineers. He also currently serves as a Director of the American Power Boat
Association (the U.S. governing body for powerboat racing) and Senior
Vice-President of the Union for International Motorboating (the world governing
body for powerboat racing, with approximately 60 member nations).
We will continue to evaluate additional potential candidates for our Advisory
Board.
COMMITTEES
On September 11, 2001, the Board of Directors established a Compensation
Committee consisting of at least two independent members of the Board of
Directors. The Compensation Committee is charged with reviewing and making
recommendations concerning Kronos' general compensation strategy, reviewing
salaries for officers, reviewing employee benefit plans, and administering
Kronos' stock incentive plan, once adopted and implemented. Messrs. McDermott
and Segal are the current members of the Compensation Committee. During the year
the Compensation Committee held two meetings. Each member attended at least 75%
of the meetings.
On September 4, 2003, the Board of Directors established an Executive Committee.
The purpose of the Executive Committee is to exercise all the powers and
authority of the Board of Directors in the management of the property, affairs
and business of the Company. The Committee shall consist of no fewer than three
members, including the Chief Executive Officer of the Company. Messrs. Dwight,
McDermott, Segal and Tusing are the current members of the Executive Committee.
On September 10, 2003, the Board of Directors established an Audit Committee
consisting of at least two independent members of the Board of Directors. The
Audit Committee is charged with providing independent and objective oversight of
the accounting functions and internal controls of the Company and its
subsidiaries to ensure the objectivity of the Company's financial statements.
Messrs. McDermott and Segal are the current members of the Audit Committee.
During the year the Audit Committee held three meetings. Each member attended at
least 75% of the meetings.
COMPENSATION OF DIRECTORS
Cash Compensation. Our Bylaws provide that, by resolution of the Board of
Directors, each director may be reimbursed his expenses of attendance at
meetings of the Board of Directors; likewise, each director may be paid a fixed
sum or receive a stated salary as a director. As of the date of this filing, no
director receives any salary or other form of cash compensation for such
service.
18
Share Based Compensation. Each non-executive director is entitled to receive
annually 70,000 fully-vested stock option grants, 7,000 stock option grants per
meeting attended via conference call, 14,000 option grants per meeting attended
in person, 3,500 option grants per meeting for participation on a committee or
5,000 stock option grants per meeting for chairing a committee, as compensation
for their services as members of our Board of Directors. Effective August 6,
2003, executive directors, including Messrs. Dwight and Tusing are not be
compensated separately for their services as members of our Board of Directors.
For the twelve month period ending June 30, 2005, Messrs. McDermott, Brown and
Segal have earned 189,000, 154,000, and 189,000 stock options, respectively as
compensation for their services as members of our Board of Directors.
For the twelve month period ending June 30, 2004, Messrs. McDermott, Brown and
Segal have earned 243,000, 213,000, and 199,000 stock options, respectively as
compensation for their services as members of our Board of Directors. Messrs.
Tusing and Dwight have each been granted 5,068 shares of our common stock as
compensation for their services as members of our Board of Directors during
fiscal 2004.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires our directors and
executive officers, and persons who own more than 10% of a registered class of
our equity securities to file with the Securities and Exchange commission
initial reports of ownership and reports of changes in ownership of Common Stock
and other of our equity securities. Officers, directors and greater than 10%
stockholders are required by SEC regulations to furnish us copies of all Section
16(a) forms they file.
To our knowledge, based solely on a review of the copies of such reports
furnished to us and written representations that no other reports were required
during the fiscal year ended June 30, 2005, all Section 16(a) filing
requirements applicable to our officers and directors were complied with.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth compensation for the fiscal year ended June 30,
2005 for our executive officers:
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
--------------------------------------- --------------------------------------------------------
Restricted Securities
Name and Other Stock Underlying LTIP All Other
Principal Salary Bonus Compensation Awards Options/SARS Payouts Compensation
Fiscal Position Year $ $ $ $ # $ $
---------------- ----- --------- ---------- -------------- ----------- --------------- -------- --------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
---------------- ----- --------- ---------- -------------- ----------- --------------- -------- --------------
Daniel R. 2005 180,000 67,500(4) 14,689 -- 750,000 -- --
Dwight, 2004 180,000 -- 14,292 -- 726,206 -- --
President and 2003 180,000 118,800(5) 12,288 -- 660,000 -- --
Chief
Executive
Officer(1)
Richard F. 2005 160,000 37,530(4) -- -- 450,000 -- --
Tusing, Chief 2004 160,000 -- -- -- 971,756 -- --
Operating 2003 80,000 -- -- -- -- -- --
Officer(2)
Richard A. 2005 -- -- -- -- -- -- --
Papworth Chief 2004 120,000 -- -- -- -- -- --
Financial 2003 120,000 21,000(5) -- -- 300,000 -- --
Officer(3)
(1) Mr. Dwight became President and Chief Executive Officer of Kronos effective
October 16, 2001. He executed a two year employment contract on November 15,
2001. His contract was renewed on August 13, 2003 and again on August 15, 2004
and August 15, 2005 by the Board of Directors. His annual salary is $180,000.
(2) Mr. Tusing became Chief Operating Officer of Kronos effective January 1,
2002. Mr. Tusing executed an employment contract effective January 1, 2003. The
Board of Directors renewed Mr. Tusing's Employment Agreement on October 1, 2004.
Prior to this date, Mr. Tusing was compensated as a consultant to the Company.
His annual salary is $160,000.
19
(3) Mr. Papworth was the Company's Chief Financial Officer from May 19, 2000
until January 1, 2004. His annual salary was $120,000. On July 1, 2004 Mr.
Papworth ended his employment with Kronos.
(4) Cash Bonuses earned in 2005 were paid through the issuance of common stock
at the market closing price on June 30, 2005.
(5) Cash Bonuses earned in 2003 were paid and have been included in Notes
Payable.
AGGREGATED OPTIONS/SAR EXERCISES
IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTIONS/SAR VALUES(1)
VALUE OF
NUMBER OF SECURITIES UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES ACQUIRED OPTIONS/SARS AT FISCAL OPTIONS/SARS AT
NAME ON EXERCISE VALUE REALIZED YEAR END(1) FISCAL YEAR END(2)
------------------- ----------------- ----------------- -------------------------- ---------------------
Daniel R. Dwight, -0- -0- Exercisable: 4,786,206 -0-
President and Unexercisable: -0- -0-
Chief Executive
Officer(3)
Richard F. -0- -0- Exercisable: 2,794,956 -0-
Tusing, Chief Unexercisable: -0- -0-
Operating
Officer(4)
Richard A. -0- -0- Exercisable: 1,048,475 -0-
Papworth Chief Unexercisable: -0- -0-
Financial
Officer(5)
(1) These grants represent options to purchase common stock. No SAR's have been
granted.
(2) The value of the unexercised in-the-money options were calculated by
determining the difference between the fair market value of the common stock
underlying the options and the exercise price of the options as of June 30,
2005.
(3) Mr. Dwight became President and Chief Executive Officer of Kronos effective
October 16, 2001.
(4) Mr. Tusing became Chief Operating Officer of Kronos effective January 1,
2002.
(5) Mr. Papworth was the Company's Chief Financial Officer from May 19, 2000
until January 1, 2004. On July 1, 2004 Mr. Papworth ended his employment with
Kronos.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
% TOTAL
NO. OF OPTIONS/SAR'S
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES EXERCISE OR
OPTIONS/SAR'S IN FISCAL BASE PRICE
NAME GRANTED (#) YEAR (%) ($ PER SHARE) EXPIRATION DATE
------------------- ------------- ------------- ------------ -----------------
Daniel R. Dwight 750,000 43.5% $ 0.125 June 30, 2015
President and
Chief Executive
Richard F. Tusing 450,000 26.1% $ 0.125 June 30, 2015
Chief Operating
Officer
20
STOCK OPTION PLAN
On February 12, 2002, the Board of Directors approved the TSET, Inc. Stock
Option Plan under which Kronos' key employees, consultants, independent
contractors, officers and directors are eligible to receive grants of stock
options. Kronos has reserved and issued a total of 6,250,000 shares of common
stock under the Stock Option Plan. It is presently administered by Kronos' Board
of Directors. Subject to the provisions of the Stock Option Plan, the Board of
Directors has full and final authority to select the individuals to whom options
will be granted, to grant the options and to determine the terms and conditions
and the number of shares issued pursuant thereto.
EMPLOYMENT AGREEMENTS
Daniel R. Dwight, our President and Chief Executive Officer, and our Company
entered into an Employment agreement effective as of November 15, 2001. The
initial term of Mr. Dwight's Employment Agreement was for 2 years and will
automatically renew for successive 1 year terms unless Kronos or Mr. Dwight
provide the other party with written notice within 3 months of the end of the
initial term or any subsequent renewal term. The Board of Directors renewed Mr.
Dwight's Employment Agreement on August 13, 2003 and again on August 15, 2004
and August 15, 2005. Mr. Dwight's Employment Agreement provides for base cash
compensation of $180,000 per year. Mr. Dwight is eligible for annual incentive
bonus compensation in an amount equal to Mr. Dwight's annual salary based on the
achievement of certain bonus objectives. In addition, Kronos granted Mr. Dwight
1,000,000 immediately vested and exercisable, ten-year stock options at various
exercise prices. Mr. Dwight will be entitled to fully participate in any and all
401(k), stock option, stock bonus, savings, profit-sharing, insurance, and other
similar plans and benefits of employment.
Richard F. Tusing, our Chief Operating Officer, and our Company entered into an
Employment agreement effective as of January 1, 2003. The initial term of Mr.
Tusing's Employment Agreement is for 2 years and will automatically renew for
successive 1 year terms unless Kronos or Mr. Tusing provide the other party with
written notice within 3 months of the end of the initial term or any subsequent
renewal term. The Board of Directors renewed Mr. Tusing's Employment Agreement
on October 1, 2004. Mr. Tusing's Employment Agreement provides for base cash
compensation of $160,000 per year. Mr. Tusing will be entitled to fully
participate in any and all 401(k), stock option, stock bonus, savings,
profit-sharing, insurance, and other similar plans and benefits of employment.
EXECUTIVE SEVERANCE AGREEMENTS
The Employment Agreement of Daniel R. Dwight, our Chief Executive Officer,
provides that, upon the occurrence of any transaction as defined as a "change of
control" of Kronos, Mr. Dwight shall receive his salary and benefits for a
period of time that is the greater of (i) one year or (ii) the remainder of Mr.
Dwight's employment term.
The Employment Agreement of Richard F. Tusing, our Chief Operating Officer,
provides that, upon the occurrence of any transaction as defined as a "change of
control" of Kronos that is not approved by the Board of Directors, Mr. Tusing
shall receive his salary, pro-rata bonus and benefits for a period of time that
is the greater of (i) one year or (ii) the remainder of Mr. Tusing's employment
term.
As of the date of this filing, we have not adopted any separate executive
severance agreements.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
The following table presents certain information regarding the beneficial
ownership of all shares of common stock at September 26, 2005 for each executive
officer and director of our Company and for each person known to us who owns
beneficially more than 5% of the outstanding shares of our common stock. The
percentage ownership shown in such table is based upon the 78,030,202 common
shares issued and outstanding at September 26, 2005 and ownership by these
persons of options or warrants exercisable within 60 days of such date. Also
included is beneficial ownership on a fully diluted basis showing all
authorized, but unissued, shares of our common stock at September 26, 2005 as
issued and outstanding. Unless otherwise indicated, each person has sole voting
and investment power over such shares.
COMMON STOCK
BENEFICIALLY OWNED
-------------------------
NAME AND ADDRESS NUMBER PERCENT
---------------- ------------- -----------
Cornell Capital Partners, LP 7,600,000 9.7%
101 Hudson Street - Suite 3700
Jersey City, NJ 07302
Daniel R. Dwight 5,988,132(1) 7.7%
464 Common Street
Suite 301
Belmont, MA 02478
21
Richard F. Tusing 3,647,708(2) 4.7%
464 Common Street
Suite 301
Belmont, MA 02478
James P. McDermott 797,077(3) 1.0%
464 Common Street
Suite 301
Belmont, MA 02478
Milton M. Segal 388,000(4) 0.5%
464 Common Street
Suite 301
Belmont, MA 02478
All Officers and Directors of Kronos 18,420,917(5) 23.6%
(1) Includes options to purchase 4,786,206 shares of common stock that can be
acquired within sixty days of September 26, 2005. (2) Includes options to
purchase 2,794,956 hares of common stock that can be acquired within sixty days
of September 26, 2005. (3) Includes options to purchase 502,959 hares of common
stock that can be acquired within sixty days of September 26, 2005. (4) Includes
options to purchase 388,000 hares of common stock that can be acquired within
sixty days of September 26, 2005. (5) Includes options to purchase 8,472,121
shares of common stock that can be acquired within sixty days of September 26,
2005.
We are unaware of any arrangement or understanding that may, at a subsequent
date, result in a change of control of our Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We believe that all prior related party transactions have been entered into upon
terms no less favorable to us than those that could be obtained from
unaffiliated third parties. Our reasonable belief of fair value is based upon
proximate similar transactions with third parties or attempts to obtain the
consideration from third parties. All ongoing and future transactions with such
persons, including any loans or compensation to such persons, will be approved
by a majority of disinterested members of the Board of Directors.
On March 31, 2004, we entered into Promissory Notes with Daniel R. Dwight and
Richard F. Tusing in exchange for past due compensation, expenses and interest
do and payable for $363,139 and $485,883. The Notes bear a simple interest rate
1% per month and call for aggregate monthly principal and interest payments
$6,718 and $8,989, respectively, for each month in which the Company's beginning
cash balance equals or exceeds $200,000. Subject to certain conditions,
including default, these notes become payable in full. In the event of a debt or
equity financing, 20% of the proceeds derived from the financing will be used to
pay down the outstanding interest and principal obligations. As a result of the
Cornell Capital financing, the Notes are due and payable in full. As of June 30,
2005, $679,000 had been paid under the terms of the Notes.
ITEM 13. EXHIBITS
(a)(3) EXHIBITS.
EXHIBIT NO. DESCRIPTION LOCATION
-------------------------------------------------------------------------------------------------
2.1 Articles of Merger for Technology Incorporated by reference to
Selection, Inc. with the Nevada Exhibit 2.1 to the Registrant's
Secretary of State Registration Statement on Form
S-1 filed on August 7, 2001 (the
"Registration Statement")
3.1 Articles of Incorporation Incorporated by reference to
Exhibit 3.1 to the Registration
Statement on Form S-1 filed on
August 7, 2001
3.2 Bylaws Incorporated by reference to
Exhibit 3.2 to the Registration
Statement on Form S-1 filed on
August 7, 2001
4.1 2001 Stock Option Plan Incorporated by reference to
Exhibit 4.1 to Registrant's Form
10-Q for the quarterly period
ended March 31, 2002 filed on May
15, 2002
22
10.21 Indemnification Agreement, dated May 1, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.38 to the
Daniel R. Dwight Registration Statement on Form
S-1 filed on August 7, 2001
10.22 Indemnification Agreement, dated May 1, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.39 to the
Richard F. Tusing Registration Statement on Form
S-1 filed on August 7, 2001
10.23 Employment Agreement, effective Incorporated by reference to
February 11, 2001 by and between Exhibit 10.55 to the Registrant's
TSET, Inc. and Daniel R. Dwight Form 10-Q for the quarterly period
ended March 31, 2002 filed on
May 15, 2002
10.24 Common Stock Purchase Agreement, Incorporate by reference to Exhibit
dated August 12, 2002 by and between 10.57 to the Registrant's Form S-1
between TSET, Inc. and Fusion filed on August 13, 2002
Capital Fund II, LLC
10.25 Registration Rights Agreement, dated Incorporated by reference to Exhibit
August 12, 2002 by and between TSET, 10.58 to the Registrant's Form S-1
Inc. and Fusion Capital Fund II, LLC filed on August 13, 2002
10.26 Termination Agreement, dated Incorporated by reference to Exhibit
August 12, 2002 by and between TSET, 10.59 to the Registrant's Amendment
Inc. and Fusion Capital Fund II, LLC No. 1 to Form S-1 filed on
September 16, 2002
10.27 Master Loan and Investment Incorporated by reference to
Agreement, dated May 9, 2003, the Registrant's 8-K filed on
by and among Kronos Advanced May 15, 2003
Technologies, Inc., Kronos Air
Technologies, Inc. and FKA
Distributing Co. d/b/a HoMedics,
Inc., a Michigan corporation
("HoMedics")
10.28 Secured Promissory Note, dated Incorporated by reference to
May 9, 2003, in the principal Exhibit 99.2 to the Registrant's
amount of $2,400,000 payable to 8-K filed on May 15, 2003
HoMedics
10.29 Secured Promissory Note, dated Incorporated by reference to
May 9, 2003, in the principal Exhibit 99.4 to the Registrant's
amount of $1,000,000 payable to 8-K filed on May 15, 2003
HoMedics
10.30 Security Agreement dated May 9, Incorporated by reference to
2003, by and among Kronos Air Exhibit 99.4 to the Registrant's
Technologies, Inc. and HoMedics 8-K filed on May 15, 2003
10.31 Registration Rights Agreement, Incorporated by reference to
dated May 9, 2003, by and between Exhibit 99.5 to the Registrant's
Kronos and HoMedics 8-K filed on May 15, 2003
10.32 Warrant No. 1 dated May 9, 2003, Incorporated by reference to
issued to HoMedics Exhibit 99.7 to the Registrant's
8-K filed on May 15, 2003
10.33 Warrant No. 2 dated May 9, 2003, Incorporated by reference to
issued to HoMedics Exhibit 99.7 to the Registrant's
8-K filed on May 15, 2003
2002
23
10.33 Consulting Agreement effective Incorporated by reference to
October 31, 2003, by and among Kronos Exhibit 10.67 to the Registrant's
Advanced Technologies, Inc., Form 10-Q for the quarterly period
Steven G. Martin and Joshua B. on ended December 31, 2003 filed on
Scheinfeld February 17, 2004
10.34 Promissory Note by and among Kronos Incorporated by reference to
Advanced Technologies, Inc., and Exhibit 10.67 to the Registrant's
Richard A. Papworth Form 10-Q for the quarterly period
ended March 31, 2004 filed on
May 17, 2004
10.35 Promissory Note by and among Kronos Incorporated by reference to
Advanced Technologies, Inc., and Exhibit 10.67 to the Registrant's
Daniel R. Dwight Form 10-Q for the quarterly period
ended March 31, 2004 filed on
May 17, 2004
10.36 Promissory Note by and among Kronos Incorporated by reference to
Advanced Technologies, Inc., and Exhibit 10.67 to the Registrant's
Richard F. Tusing Form 10-Q for the quarterly period
ended March 31, 2004 filed on
May 17, 2004
10.37 Promissory Note by and among Kronos Incorporated by reference to
Advanced Technologies, Inc., and Exhibit 10.67 to the Registrant's
Igor Krichtafovitch Form 10-Q for the quarterly period
ended March 31, 2004 filed on
May 17, 2004
10.38 Promissory Note by and among Kronos Incorporated by reference to
Advanced Technologies, Inc., and Exhibit 10.67 to the Registrant's
J. Alexander Chriss Form 10-Q for the quarterly period
ended March 31, 2004 filed on
May 17, 2004
10.39 Standby Equity Distribution Agreement, Incorporated by reference to
dated October 15, 2004, by and between Exhibit 99.1 to the Registrant's
Kronos Advanced Technologies, Inc. and Form 8-K filed on February 12, 2004
Cornell Capital Partners, LP
10.40 Registration Rights Agreement, dated Incorporated by reference to
October 15, 2004, by and between Kronos Exhibit 99.2 to the Registrant's
Advanced Technologies, Inc. and Cornell Form 8-K filed on February 12, 2004
Capital Partners, LP
10.41 Escrow Agreement, dated October 15, 2004, Incorporated by reference to
by and between Kronos Advanced Exhibit 99.3 to the Registrant's
Technologies, Inc. and Cornell Capital Form 8-K filed on February 12, 2004
Partners, LP
10.42 Placement Agent Agreement, dated October Incorporated by reference to
15, 2004, by and between Kronos Advanced Exhibit 99.4 to the Registrant's
Technologies, Inc. and Cornell Capital Form 8-K filed on February 12, 2004
Partners, LP
10.43 Securities Purchase Agreement, dated Incorporated by reference to
October 15, 2004, by and between Kronos Exhibit 99.5 to the Registrant's
Advanced Technologies, Inc. and Cornell Form 8-K filed on February 12, 2004
Capital Partners, LP
10.44 Investor Registration Rights Agreement, Incorporated by reference to
dated October 15, 2004, by and between Exhibit 99.6 to the Registrant's
Kronos Advanced Technologies, Inc. and Form 8-K filed on February 12, 2004
Cornell Capital Partners, LP
10.45 Escrow Agreement, dated October 15, 2004, Incorporated by reference to
by and between Kronos Advanced Exhibit 99.7 to the Registrant's
Technologies, Inc. and Cornell Capital Form 8-K filed on February 12, 2004
Partners, LP
24
10.46 Form of Equity-Back Promissory Note in Incorporated by reference to
the principal amount of $2,000,000 Exhibit 99.8 to the Registrant's
Form 8-K filed on February 12, 2004
10.47 First Amendment to Master Loan and Incorporated by reference to
Investment Agreement, dated October 25, Exhibit 99.9 to the Registrant's
2004, by and among Kronos Advanced Form 8-K filed on February 12, 2004
Technologies, Inc., f/k/a TSET, Inc.,
a Nevada corporation, Kronos Air
Technologies, Inc., a Nevada corporation
and FKA Distributing Co. d/b/a HoMedics,
Inc., a Michigan corporation
10.48 Secured Promissory Note, dated October Incorporated by reference to
25, 2004, payable to FKA Distributing Exhibit 99.10 to the Registrant's
Co., d/b/a HoMedics, Inc., a Michigan Form 8-K filed on February 12, 2004
corporation, in the principal amount of
$925,000
10.49 Amended and Restated Warrant No. 1, Incorporated by reference to
dated October 25, 2004, issued to FKA Exhibit 99.11 to the Registrant's
Distributing Co. d/b/a HoMedics, Inc. Form 8-K filed on February 12, 2004
10.50 Amended and Restated Warrant No. 2, Incorporated by reference to
dated October 25, 2004, issued to FKA Exhibit 99.12 to the Registrant's
Distributing Co. d/b/a HoMedics, Inc. Form 8-K filed on February 12, 2004
10.51 Warrant No. 3, dated October 25, 2004, Incorporated by reference to
issued to FKA Distributing Co. d/b/a Exhibit 99.13 to the Registrant's
HoMedics, Inc. Form 8-K filed on February 12, 2004
10.52 Amended and Restated Registration Rights Incorporated by reference to
Agreement, dated October 25, 2004, by Exhibit 99.14 to the Registrant's
And between Kronos Advanced Form 8-K filed on February 12, 2004
Technologies Inc., a Nevada corporation
and FKA Distributing Co. d/b/a HoMedics,
a Michigan corporation
10.53 Termination Agreement dated March 28, Incorporated by reference to Exhibit
2005, by and between Kronos Advanced 10.63 to the Registrant's Form SB-2
Technologies, Inc. and Cornell Capital filed on April 19, 2005
Partners, LP
10.54 Standby Equity Distribution Agreement, Incorporated by reference to Exhibit
dated April 13, 2005, by and between 10.64 to the Registrant's Form SB-2
Kronos Advanced Technologies, Inc. and filed on April 19, 2005
Cornell Capital Partners, LP
10.55 Registration Rights Agreement, dated Incorporated by reference to Exhibit
April 13, 2005, by and between Kronos 10.65 to the Registrant's Form SB-2
Advanced Technologies, Inc. and Cornell filed on April 19, 2005
Capital Partners, LP
10.56 Escrow Agreement, dated April 13, 2005, Incorporated by reference to Exhibit
by and between Kronos Advanced 10.66 to the Registrant's Form SB-2
Technologies, Inc. and Cornell Capital filed on April 19, 2005
Partners, LP
10.57 Placement Agent Agreement, dated April Incorporated by reference to Exhibit
13, 2005, by and between Kronos Advanced 10.67 to the Registrant's Form SB-2
Technologies, Inc. and Cornell Capital filed on April 19, 2005
Partners, LP
25
10.58 Form of Equity-Back Promissory Note in Incorporated by reference to Exhibit
the principal amount of $2,000,000 dated 10.68 to the Registrant's Form SB-2
March 7, 2005 between Kronos Advanced filed on April 19, 2005
Technologies, Inc. and Cornell Capital
Partners, LP
10.59 Form of Equity-Back Promissory Note in Provided herewith
the principal amount of $2,000,000 dated
June 22, 2005 between Kronos Advanced
Technologies, Inc. and Cornell Capital
Partners, LP
EXHIBIT NO. DESCRIPTION LOCATION
--------------------------------------------------------------------------------
31.1 Certification of Chief Executive Provided herewith
Officer pursuant to 15 U.S.C.
Section 7241, as adopted pursuant
to Section 302 of the Sarbanes-Oxley
Act of 2002
31.2 Certification of Principal Financial Provided herewith
Officer pursuant to U.S.C. Section
7241, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification by Chief Executive Officer Provided herewith
and Principal Accounting Officer pursuant
to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
ITEM 14. PRINCIPAL ACCOUNTANT AND SERVICES
The firm Sherb & Co. LLP, independent registered public accounting firm, has
audited our financial statements for the year ended June 30, 2005. The Board of
Directors has appointed Sherb & Co. LLP to serve as our independent registered
public accounting firm for the 2004 year-end audit and to review our quarterly
financial reports for filing with the Securities and Exchange Commission during
fiscal year 2005.
The following table shows the fees paid or accrued by us for the audit and other
services provided by Sherb & Co. LLP for fiscal year 2005 and 2004.
June 30, 2005 June 30, 2004
--------------- ---------------
Audit Fees(1) $ 62,500 $ 61,000
Audit-Related Fees 14,165 1,710
--------------- ---------------
Total $ 76,665 $ 62,710
=============== ===============
(1) Audit fees represent fees for professional services provided in connection
with the audit of our annual financial statements and review of our quarterly
financial statements and audit services provided in connection with other
statutory or regulatory filings
26
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereto duly authorized.
Date: September 28, 2005.
KRONOS ADVANCED TECHNOLOGIES, INC.
By: /s/ Daniel R. Dwight
------------------------------------
Daniel R. Dwight
President, Chief Executive
Officer and Director
By: /s/ Daniel R. Dwight
------------------------------------
Daniel R. Dwight
Acting Chief Financial Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Daniel R. Dwight
-----------------------------
Daniel R. Dwight Director, President, September 28, 2005
Chief Executive
Officer and Acting
Chief Financial
Officer
/s/ James P. McDermott
-----------------------------
James P. McDermott Director September 28, 2005
/s/ M. J. Segal
-----------------------------
M. J. Segal Director September 28, 2005
/s/ Richard F. Tusing
-----------------------------
Richard F. Tusing Director and Chief September 28, 2005
Operating Officer