UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2006
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ __, ____ to _____________ __, ____
Commission File Number: 000-30191
KRONOS ADVANCED TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Nevada 87-0440410
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
494 Common Street, Suite 301, Belmont, MA 02478
(Address of principal executive offices) (Zip Code)
(617) 993-9965
(Registrant's telephone number, including area code)
-------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes __No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer ___ Accelerated filer ___ Non-accelerated filer X
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
__ Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of November 10, 2006, there
were 186,921,093 shares outstanding of the issuer's common stock.
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following comprise our (unaudited) consolidated financial statements for the
three months ended September 30, 2006.
KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
September 30,
2006 June 30,
Assets (Unaudited) 2006
---------------- ----------------
Current Assets
Cash $ 123,902 $ 598,323
Accounts Receivable - 10,000
Other Current Assets 48,028 58,028
---------------- ----------------
Total Current Assets 171,930 666,351
---------------- ----------------
Net Property and Equipment 7,409 5,597
Other Assets
Intangibles 1,906,755 1,983,908
---------------- ----------------
Total Other Assets 1,906,755 1,983,908
---------------- ----------------
Total Assets $ 2,086,094 $ 2,655,856
================ ================
Liabilities and Stockholders' Deficit
Current Liabilities
Accrued expenses and payables
to directors and officers $ 10,661 $ 8,843
Accounts payable 196,312 204,632
Accrued interest expenses 869,165 879,144
Accrued expenses 46,416 41,111
Deferred revenue 800 20,000
Notes payable, current portion 1,565,000 1,815,000
Notes payable to directors and
officers 202,307 256,544
---------------- ----------------
Total Current Liabilities 2,890,661 3,225,274
---------------- ----------------
Long Term Liabilities
Notes payable 2,575,000 2,575,000
---------------- -----------------
Total Long Term Liabilities 2,575,000 2,575,000
---------------- -----------------
Total Liabilities 5,465,661 5,800,274
---------------- -----------------
Stockholders' Deficit
Common stock, authorized
500,000,000 shares of $0.001 par value
Issued and outstanding - 161,543,898
and 144,499,657, respectively 161,544 144,500
Capital in excess of par value 28,418,621 27,828,241
Accumulated deficit (31,959,732) (31,117,159)
---------------- ----------------
Total Stockholders' Deficit (3,379,567) (3,144,418)
---------------- ----------------
Total Liabilities and
Stockholders' Deficit $ 2,086,094 $ 2,655,856
================ ================
The accompanying notes are an integral part of these financial statements.
KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended September 30,
-------------------------------------
2006 2005
(Unaudited) (Unaudited)
-------------- -----------------
Sales $ 19,200 $ 15,000
Cost of sales 9,584 -
-------------- -----------------
Gross Profit 9,616 15,000
-------------- -----------------
Selling, General and Administrative
expenses:
Compensation and benefits 337,721 315,044
Research and development 29,607 104,995
Professional services 102,711 102,861
Depreciation and amortization 108,850 171,820
Facilities 27,044 17,186
Insurance 54,144 37,144
Other selling general and
administrative expenses 92,878 83,018
-------------- -----------------
Selling, General and Administrative
expenses 752,955 832,068
-------------- -----------------
Net Operating Loss (743,339) (817,068)
Interest Expense (99,234) (156,142)
-------------- -----------------
Net Loss $ (842,573) $ (973,210)
============== =================
Basic Loss Per Share $ (0.01) $ (0.01)
============== =================
Diluted Loss Per Share $ (0.01) $ (0.01)
============== =================
Weighted average shares outstanding 149,157,131 76,038,741
The accompanying notes are an integral part of these financial statements.
KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended September 30,
------------------------------------------------
2006 2005
(Unaudited) (Unaudited)
---------------------- ----------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss from continuing operations $ (842,573) $ (973,210)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 118,850 171,819
Options issued for compensation/services 57,424 41,739
Change In:
Accounts receivable 10,000 (15,000)
Prepaid expenses and other assets - (7,138)
Deferred revenue (19,200) -
Accounts Payable (6,502) (191,035)
Accrued Expenses and other liabilities (4,674) 107,409
---------------------- ----------------------
Net cash used in Operating Activities (686,675) (865,416)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (2,194) (2,100)
Investment in patent protection (31,315) -
---------------------- ----------------------
Net cash used in Investing Activities (33,509) (2,100)
---------------------- ----------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock for cash 550,000 510,000
Repayments of short-term borrowings (304,237) (614,508)
---------------------- ----------------------
Net cash (used in) provided by
Financing Activities 245,763 (104,508)
---------------------- ----------------------
NET DECREASE IN CASH (474,421) (972,024)
CASH
Beginning of period 598,323 1,554,906
---------------------- ----------------------
End of period $ 123,902 $ 582,882
====================== ======================
Supplemental schedule of financing activities:
Interest paid in cash $ 106,649 $ 1,648
===================== =====================
The accompanying notes are an integral part of these financial statements.
KRONOS ADVANCED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Kronos Advanced
Technologies, Inc. (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all the information and notes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments necessary to present fairly the
information set forth therein have been included. Operating results for the
three months ended September 30, 2006 are not necessarily indicative of the
results that may be experienced for the fiscal year ending June 30, 2007.
These consolidated financial statements are those of the Company and its
wholly-owned subsidiary. All significant inter-company accounts and transactions
have been eliminated in the preparation of the consolidated financial
statements.
The accompanying consolidated financial statements should be read in conjunction
with the Kronos Advanced Technologies, Inc. Form 10-KSB for the fiscal year
ended June 30, 2006, which was filed on September 28, 2006.
NOTE 2 - REALIZATION OF ASSETS AND GOING CONCERN
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, 2006. 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.
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:
EOL. In December 2005, Kronos executed a non-exclusive License Agreement with
EOL LLC, a Russian Federation corporation. Based in Korolev, Moscow Region,
Russia, EOL will leverage the Kronos technology to produce, market, and
distribute Kronos commercial air purification products, bacteriological and
virus destruction devices and space heaters in select Commonwealth of
Independent States. The agreement comes after successful completion of multiple
tests in Eastern Europe, which found the Kronos technology capable of
decontaminating rooms infected with airborne viruses and bacteria. Under the
terms of the five-year agreement, EOL will provide Kronos a fixed percentage
royalty on every product sold, as well as upfront licensing and quarterly
maintenance fees. Based on contractual milestones, EOL is required to: (i)
complete initial product design by March 2006; (ii) complete initial product
prototypes by June 2006; and (iii) make product available for customer purchase
by September 2006. In March 2006, EOL achieved the first milestone: initial
design of a wall mounted air sterilizer for the health care market. In June
2006, EOL achieved the second milestone: completion of the initial product
prototypes. In August 2006, the Russian Research Institute of Medical Equipment
began the process for product certification of the EOL device for use in medical
facilities, including a successful clinical trial of EOL products in the
Pulmonary Department of Municipal Hospital #2 in Moscow. In September 2006, EOL
achieved the third milestone: EOL has begun to assemble the finished products in
Russia from components supplied both locally and from contract manufacturers in
China, as well as electronic components and power supplies from Kronos. In
October 2006, Scientific Institution of Health Care, Central Clinical Hospital
#2 in Moscow completed the final trial of the Kronos-based TreeTM air
purification device in conjunction with the Russian Research Institute of
Medical Equipment process for approving the product for medical use and the
Russian Research Institute approved the Kronos-based TreeTM air purification
device for use in hospitals and other healthcare facilities. The device received
Category I approval, which means the product has met the strictest regulations
required for a device to be used in operating rooms and other areas that require
a sterile environment. In November 2006, following the Russian Research
Institute approval, the Ministry of Health Care and Social Development of the
Russian Federation issued a Registration Certificate that designates the
Kronos-based TreeTM air purification device for medical use. The initial medical
products are currently being marketed in Russia and planned to be marketed
beginning in 2007 in Ukraine, Kazakhstan, Moldova and Byelorussia.
DESA. In June 2006, the Company executed a License Agreement with DESA IP, LLC,
a wholly owned subsidiary of DESA LLC. DESA is a global provider of hearth,
heating and zone comfort products. DESA is the first U.S. company to license the
technology for embedded applications, which represents another step forward in
the commercialization and globalization of Kronos' proprietary air movement,
filtration and decontamination technology. This License Agreement provides DESA
the opportunity to embed the Kronos electrostatic air movement technology within
fireplaces, hearth systems, zone heaters and mounted electric fans and heaters.
DESA will be seeking to take advantage of the silence, energy efficiency and, in
select applications, air filtration benefits of the Kronos technology. DESA has
the rights to distribute these products across thirty-four countries in North
America, Europe and the former Eastern Block region. In October 2006, DESA
approved Kronos' designs for the first Kronos-based product and committed to the
funding of the product development by Kronos.
Global Appliance Manufacturer. In October 2006, a leading global home appliance
manufacturer committed to fund 20% of the cost for Kronos to manufacturer a
silent kitchen range hood product. In addition, the customer has committed to a
120 day testing and evaluation period on a non-exclusive basis. This next
generation range hood device will represent the culmination of more than 12
months of product design and development effort by Kronos to apply our
technology to this unique embedded residential application. The product was
shipped to the customer in October 2006.
Washington Technology Center. In December 2004, Kronos and the University of
Washington were awarded a Phase I grant 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. In January 2006, Kronos and the University of Washington
conducted a successful bench scale demonstration of micron cooling of a MEMS
chip. In June 2006, the Company and the University of Washington were awarded a
Phase II grant for continued funding in its novel cooling system for
microelectronics and computer chips. The Washington Technology Center is
contributing $100,000 as a Phase II grant for the project. Kronos will provide
$35,000 in funding, $38,000 in in-kind services, including use of the Kronos
Research and Product Development Facility. The Phase II grant is a follow-on
award to the December 2004 Phase I grant to Kronos and the University of
Washington to initiate development of a novel energy-efficient heat transfer
technology for cooling microelectronics.
HoMedics. In September 2006, the Company sent a notice of termination of its
license agreement with HoMedics USA, Inc. HoMedics has indicated that it does
not recognize Kronos' termination of the License Agreement as valid. HoMedics
has requested an amicable and expedient resolution of the parties' differences.
The outcome of this matter cannot be determined at this time.
NOTE 3 - 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 September 30, 2006, 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 September 30, 2006 and June 30,
2006 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
September 30, 2006 and June 30, 2006. 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.
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.
Recent Accounting Pronouncements
Accounting for Certain Hybrid Financial Instruments. In February 2006, the FASB
issued SFAS Statement No. 155, which is an amendment of SFAS Statements No. 133
and 140. This Statement; a) permits fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that otherwise would
require bifurcation, b) clarifies which interest-only strip and principal-only
strip are not subject to the requirements of Statement 133, c) establishes a
requirement to evaluate interests in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation, d)
clarifies that concentrations of credit risk in the form of subordination are
not embedded derivatives, e) amends Statement 140 to eliminate the prohibition
on a qualifying special-purpose entity from holding a derivative financial
instrument that pertains to a beneficial interest other than another derivative
financial instrument. This Statement is effective for financial statements for
fiscal years beginning after September 15, 2006. Earlier adoption of this
Statement is permitted as of the beginning of an entity's fiscal year, provided
the entity has not yet issued any financial statements for that fiscal year.
Management believes this Statement will have no impact on the financial
statements of the Company once adopted. This statement has not had any impact on
the financial statements since adoption.
Accounting for Servicing of Financial Assets. In March 2006, the FASB issued
SFAS Statement No. 156, which amends SFAS Statement No. 140. This Statement
establishes, among other things, the accounting for all separately recognized
servicing assets and servicing liabilities. This Statement amends Statement 140
to require that all separately recognized servicing assets and servicing
liabilities be initially measured at fair value, if practicable. This Statement
permits, but does not require, the subsequent measurement of separately
recognized servicing assets and servicing liabilities at fair value. An entity
that uses derivative instruments to mitigate the risks inherent in servicing
assets and servicing liabilities is required to account for those derivative
instruments at fair value. Under this Statement, an entity can elect subsequent
fair value measurement to account for its separately recognized servicing assets
and servicing liabilities. By electing that option, an entity may simplify its
accounting because this Statement permits income statement recognition of the
potential offsetting changes in fair value of those servicing assets and
servicing liabilities and derivative instruments in the same accounting period.
This Statement is effective for financial statements for fiscal years beginning
after September 15, 2006. Earlier adoption of this Statement is permitted as of
the beginning of an entity's fiscal year, provided the entity has not yet issued
any financial statements for that fiscal year. Management believes this
Statement will have no impact on the financial statements of the Company once
adopted.
Accounting for Uncertainty in Income Taxes. In June 2006, the FSAB issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" (FIN 48).
FIN 48 clarifies the accounting for uncertainty in income taxes recognized in
financial statements in accordance with Statement of Financial Accounting
Standard (SFAS) No. 109, "Accounting for Income Taxes." This Interpretation
prescribes a recognition threshold and measurement attribute of tax positions
taken or expected to be taken on a tax return. This Interpretation is effective
for the first fiscal year beginning after December 15, 2006. Management believes
this Statement will have no impact on the financial statements of the Company
once adopted.
Accounting for the Conversion of an Instrument That Became Convertible upon the
Issuer's Exercise of a Call Option. In June 2006, the FSAB ratified Emerging
Issues Task Force 05-1, Accounting for the Conversion of an Instrument That
Became Convertible upon the Issuer's Exercise of a Call Option ("EITF 05-1").
EITF 05-1 addresses instruments that are currently not convertible to equity but
the instrument becomes convertible upon the exercise of the issuer's call
option. EITF 05-1 calls for debt extinguishment treatment if the instrument did
not contain a substantive conversion feature apart from the right to convert
upon the issuer's exercise of its call right at the date of issuance.
Conversely, if such substantive conversion feature did exist at issuance date,
EITF 05-1 requires conversion treatment for those equity securities issued to
satisfy the debt conversion. EITF 05-1 must be applied prospectively as of June
28, 2006. The Company does not expect EITF 05-1 to have a significant impact on
its future financial position or results of operations.
Fair Value Measurements. In September 2005, the FSAB issued SFAS Statement No.
157. This Statement defines fair value, establishes a framework for measuring
fair value according to GAAP, and expands disclosures about fair value
measurements. This Statement applies under other accounting pronouncements that
require or permit fair value measurements, the Board having previously concluded
in those accounting pronouncements that fair value is a relevant measurement
attribute. Accordingly, this Statement does not require any new fair value
measurements. However, for some entities, the application of this Statement will
change current practices. This Statement is effective for financial statements
for fiscal years beginning after November 15, 2007. Earlier application is
permitted provided that the reporting entity has not yet issued financial
statements for that fiscal year. Management is currently evaluating the impact
this Statement will have on the financial statements of the Company once
adopted.
NOTE 4 -- INCOME TAXES
The composition of deferred tax assets and the related tax effects at September
30, 2006 and June 30, 2006 are as follows:
September 30, 2006
(unaudited) June 30, 2006
--------------- ---------------
Benefit from carryforward of capital
and net operating losses $ (7,685,000) $ (7,209,000)
Other temporary differences (157,000) (157,000)
Options issued for services ( 21,000) (218,000)
Less:
Valuation allowance 7,863,000 7,584,000
--------------- ---------------
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:
September 30, 2006
(Unaudited) June 30,2006
------------------------------------ -------------------------------------
% of % of
Amount Pre-Tax Loss Amount Pre-Tax Loss
------------- ------------ -------------- ------------
Benefit for income tax at:
Federal statutory rate $ (286,000) (34.0)% $ (1,360,000) (34.0)%
State statutory rate (17,000) (2.0)% (80,000) (2.0)%
Non-deductible expenses 24,000 2.8 % 105,000 2.6 %
Increase in valuation allowance 279,000 33.2 % 1,335,000 33.4 %
------------------------------------ -------------------------------------
$ - 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 September 30, 2006, the Company has approximately $18.3 million of unused
Federal net operating losses, $2.3 million capital losses and $14.1 million
State net operating losses available for carryforward to future years. The
benefit from carryforward of such losses will expire in various years through
2026 and could be subject to limitations if significant ownership changes occur
in the Company.
NOTE 5 - SEGMENTS OF BUSINESS
The Company operates principally in one segment of business: The Company
licenses, manufactures and distributes air movement and purification devices
utilizing the Kronos technology. For the three months ended September 30, 2006
and the fiscal year ended June 30, 2006 the Company operated only in the U.S.
NOTE 6 - EARNINGS PER SHARE
Weighted average shares outstanding used in the earnings per share calculation
were 149,157,131 and 76,038,741 for the three months ended September 30, 2006
and 2005, respectively.
As of September 30, 2006, there were outstanding options to purchase 23,636,027
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 earnings per share calculation as their effect is
anti-dilutive. As of September 30, 2005, there were outstanding options and
warrants to purchase 15,782,425 shares of the Company's common stock and
outstanding warrants to purchase 42,300,000 shares of the Company's common
stock. These options have been excluded from the earnings per share calculation
as their effect is anti-dilutive.
NOTE 7 - NOTES PAYABLE
The Company had the following obligations as of September 30, 2006 and June 30,
2006,
September 30, 2006
(Unaudited) June 30, 2006
--------------- ---------------
Obligations to Cornell Capital(1) $ 1,565,000 $ 1,815,000
Obligation to HoMedics (2) 2,575,000 2,575,000
Obligation to current employees (3) 202,307 256,544
-------------- ---------------
4,342,307 4,646,544
Less:
Current portion 1,767,307 2,071,544
--------------- ---------------
Total long term obligations net of
current portion $ 2,575,000 $ 2,575,000
=============== ===============
(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 February 1, 2007. This note along with an obligation by HoMedics
to provide Kronos with an additional $750,000 in debt financing was issued along
with warrants for the purchase of 40 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 and payable in full.
NOTE 8 - 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
was 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 twelve months. As of September 30, 2006, Kronos
has received $6.9 million in funding under these agreements. As of September 30,
2006, the Company owed $1.5 million under the second Promissory Note.
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 December 2005,
$175,000 of the $925,000 was funded. The balance of $750,000 has not been
funded. 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 begin in February 2007. 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
$175,000 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. In addition, Kronos granted Mr. Dwight 1,000,000
immediately vested and exercisable, ten-year stock options at various exercise
prices. The Board of Directors renewed Mr. Dwight's Employment Agreement on
August 13, 2003 and again on August 15, 2004 and August 15, 2005. In April 2006,
the Board of Directors renewed Mr. Dwight's Employment Agreement and increased
his base cash compensation to $225,000 per year effective April 15, 2006. 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.
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, October 1, 2005 and October 1, 2006. 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 9 - SUBSEQUENT EVENTS
In October 2006, DESA approved Kronos' designs for the first Kronos-based
product to be licensed by DESA and committed to the funding of the product
development by Kronos.
In October 2006, a leading global home appliance manufacturer committed to fund
20% of the cost for Kronos to manufacturer a silent kitchen range hood product.
The product has been shipped to the customer for testing and evaluation.
In October 2006, Kronos began shipment of components and, in November 2006,
began shipment of complete power supplies manufactured by Kronos to EOL for
installation in finished products being assembled, marketed and distributed in
Russia by EOL.
In October 2006, the U.S. Patent Office issued its latest Kronos patent
(#7,122,070). In total, Kronos has been awarded eleven U.S. patents and two
international patents.
In October 2006, Kronos issued 25,377,195 shares of common stock for $400,000 to
Cornell under the terms of our Standby Equity Distribution Agreement. The
proceeds were used to increase the Company's cash reserves and repay debt.
In October 2006, Scientific Institution of Health Care, Central Clinical
Hospital #2 in Moscow completed the final trial of the Kronos-based TreeTM air
purification device in conjunction with the Russian Research Institute of
Medical Equipment process for approving the product for medical use.
In October 2006, the Russian Research Institute of Medical Equipment approved
the Kronos-based TreeTM air purification device for use in hospitals and other
healthcare facilities. The device received Category I approval, which means the
product has met the strictest regulations required for a device to be used in
operating rooms and other areas that require a sterile environment.
In November 2006, following the Russian Research Institute approval, the
Ministry of Health Care and Social Development of the Russian Federation issued
a Registration Certificate that designates the Kronos-based TreeTM air
purification device for medical use.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTORY STATEMENTS
FORWARD LOOKING STATEMENTS AND ASSOCIATED RISKS
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.
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.
Eleven of the Company's U.S. patent applications and two of its international
patent applications have been allowed for issuance. To date, our ability to
execute our strategy has been restricted by our limited amount of capital.
Kronos is focused on prioritizing the Company's limited resources on developing
and licensing Kronos' proprietary technology for air movement and purification
applications to address the indoor air quality market. The Kronos technology has
numerous valuable characteristics for applications in the indoor air quality
market, including moving air and gases at high velocities while filtering odors,
smoke and particulates and sterilizing air from bacteria and virus
contamination. A number of the scientific claims of the Kronos technology have
been tested by the U. S. and foreign governments, multi-national companies and
independent testing facilities.
Although no commercial products using the Kronos technology have been sold to
date, the Company has begun establishing strategic relationships with select
companies both domestically and internationally for standalone and embedded
applications of our proprietary technology:
Standalone Platform:
o Residential Products - Between March 2005 and October 2005, the
Company (i) expanded production beyond its initial standalone
residential air purification prototypes, (ii) increased product
testing to complete the product claims platform, (iii) received
initial shipment of sample products from its low cost, contract
manufacturers in Mexico and China, and (iv) completed internal testing
of these products under a testing protocol co-developed by Kronos and
a former strategic partner;
In September 2006, the Company sent a notice of termination of its
license agreement with HoMedics USA, Inc. HoMedics has indicated that
it does not recognize Kronos' termination of the License Agreement as
valid. HoMedics has requested an amicable and expedient resolution of
the parties' differences. The outcome of this matter cannot be
determined at this time.
o Medical Products - In December 2005, the Company executed a
non-exclusive license agreement with EOL LLC, a Russian Federation
company, for manufacturing and distributing Kronos-based commercial
standalone products in Russia and other select Commonwealth of
Independent States. In September 2006, began to assemble the finished
products in Russia from components supplied both locally and from
contract manufacturers in China, as well as electronic components and
power supplies from Kronos. The initial Medical Products are currently
being marketed in Russia and planned to be marketed beginning in 2007
in Ukraine, Kazakhstan, Moldova and Byelorussia. In November 2006, the
Ministry of Health Care and Social Development of the Russian
Federation issued a Registration Certificate for the product that
designates the product for medical use;
o Commercial and Other Standalone Products - During the year, Kronos
completed the initial design and development of space heaters and
vaporizers, which are undergoing evaluation by potential strategic
partners.
Embedded Platform:
o Commercial Products - In June 2006, the Company executed its first
license for embedded applications of Kronos technology with DESA LLC.
The agreement provides DESA the opportunity to embed the Kronos
electrostatic air movement technology within fireplaces, hearth
systems, zone heaters and mounted electric fans and heaters. In
October 2006, DESA approved Kronos' designs for the first Kronos-based
product and committed to the funding of the product development by
Kronos.
o Residential Products - In October 2006, a leading global home
appliance manufacturer committed to fund 20% of the cost for Kronos to
manufacturer a silent kitchen range hood product. In addition, the
customer has committed to a 120 day testing and evaluation period on a
non-exclusive basis. This next generation range hood device will
represent the culmination of more than 12 months of product design and
development effort by Kronos to apply our technology to this unique
embedded residential application. The product was shipped to the
customer in October 2006;
o Microelectronics Products - In June 2006, the Washington Technology
Center awarded the Company in conjunction with the University of
Washington and Intel Corporation continued funding for a research and
development project based on a novel cooling system for
microelectronics and computer chips.
Technology Description and Benefits
The proprietary Kronos technology involves the management of corona discharge by
applying high voltage management across paired electrical grids to create an ion
exchange. Applications for efficient high voltage management, efficient corona
discharge and ion exchange include but are not limited to:
o air movement, including dielectric fluid movement and propulsion;
o air purification, including particulate removal, biohazard
destruction, chemical and industrial gas treatment, and odor removal;
o temperature and environmental management, including space heating and
cooling;
o microchip, MEMS and other electronics devices and components cooling;
o air management, including sorting and separation of air streams by
particle content;
o sound generation, including high fidelity sound recreation and active
noise cancellation;
o high voltage management, including development of high voltage power
supplies and control of energy surges and electrical discharges;
o control of water and moisture content in air streams, including
dehumidification and humidification; and
o water treatment, including water purification, ionization and water
desalination.
Independent Testing - Product Claims Platform
A number of the scientific claims of the Kronos technology have been tested by
the U. S. and foreign governments, 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 Aerosol and Air Quality Research Laboratory - up to 99.8% filtration
of 0.02 to 0.20 micron (20 to 200 nanometers) size particles;
o LMS Industries - removal of over 99.97% of 0.10 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 Scientific Institution of Health Care, Central Clinical Hospital #2 in
Moscow (clinical trial):
- 100% decontamination of bacteria (Staphylococcus aureus) in under
one hour and 80% decontamination of general bacteria in under 24
hours from a 48m(3) hospital room while people were present;
o Pulmonary Department of Municipal Hospital #2 in Moscow (clinical
trial):
- 100% decontamination of bacteria (Staphylococcus aureus) in under
five hours from a 66m(3) hospital room while four patients were
present; and
- 100% decontamination of mildew fungi in under two hours from a
113.2m(3) hospital room;
o Disinfection Research Institute Sterilization Laboratory in Moscow:
- disinfected a room completely contaminated with Bacteriophage - a
microorganism which lives in the E. Coli bacteria. Bacteriophage
is widely used in virus testing because the microorganism's
biological structure and size share many functional similarities
with a wide range of viruses; and
- 100% decontamination of room infected with bacteria
(Staphylococcus aureus strain 906 (S. aureus) and Bacillus cereus
strain 96 (B. cereus) - S. aureus is a known cause of
hospital-acquired infections, including skin lesions such as
boils and furunculosis and more serious infections such as
pneumonia and meningitis;
o Institute for Veterinary Medicine in the Ukraine - destroy and
sterilize air which had been inseminated with Anthrax and E.coli
spores;
o New Hampshire Materials Laboratory - up to 95% reduction of hazardous
gases, including numerous carcinogens 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' initial business development strategy is to sell and license the Kronos
technology to six distinct air quality 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:
o Air Movement and Purification - Indoor air pollution, including sick
building syndrome, second hand cigarette smoke and various bacterial
and viral contaminants , 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 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 future
generation microchips.
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.
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.
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 or heat sink.
Standalone Platform
Medical Products. In December 2005, Kronos executed a non-exclusive License
Agreement with EOL LLC, a Russian Federation corporation. Based in Korolyov,
Moscow Region, Russia, EOL will leverage the Kronos technology to produce,
market, and distribute Kronos commercial air purification and bacteriological
and virus destruction devices in select Commonwealth of Independent States for
the health care market. The agreement comes after successful completion of
multiple tests in Eastern Europe, which found the Kronos technology capable of
decontaminating rooms infected with airborne viruses and bacteria. Under the
terms of the five-year agreement, EOL will provide Kronos a fixed percentage
royalty on every product sold, as well as upfront licensing and quarterly
maintenance fees. Based on contractual milestones, EOL is required to: (i)
complete initial product design by March 2006; (ii) complete initial product
prototypes by June 2006; and (iii) make initial product available for customer
purchase by September 2006.
In March 2006, EOL achieved the first milestone: initial design of a wall
mounted air sterilizer for the health care market. In June 2006, EOL achieved
the second milestone: completion of the initial product prototypes. In August
2006, the Russian Research Institute of Medical Equipment began the process for
product certification of the EOL device for use in medical facilities, including
a successful clinical trial of EOL products in the Pulmonary Department of
Municipal Hospital #2 in Moscow. In September 2006, EOL achieve the third
milestone: EOL has begun to assemble the finished products in Russia from
components supplied both locally and from contract manufacturers in China, as
well as electronic components and power supplies from Kronos. In October 2006,
Scientific Institution of Health Care, Central Clinical Hospital #2 in Moscow
completed the final trial of the Kronos-based TreeTM air purification device in
conjunction with the Russian Research Institute of Medical Equipment process for
approving the product for medical use and the Russian Research Institute
approved the Kronos-based TreeTM air purification device for use in hospitals
and other healthcare facilities. The device received Category I approval, which
means the product has met the strictest regulations required for a device to be
used in operating rooms and other areas that require a sterile environment. In
November 2006, following the Russian Research Institute approval, the Ministry
of Health Care and Social Development of the Russian Federation issued a
Registration Certificate that designates the Kronos-based TreeTM air
purification device for medical use. The initial medical products are currently
being marketed in Russia and planned to be marketed beginning in 2007 in
Ukraine, Kazakhstan, Moldova and Byelorussia
Commercial and 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.
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. In September 2006, the
Company sent a notice of termination of its license agreement with HoMedics USA,
Inc. HoMedics has indicated that it does not recognize Kronos' termination of
the License Agreement as valid. HoMedics has requested an amicable and expedient
resolution of the parties' differences. The outcome of this matter cannot be
determined at this time. 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. The
Company intends to seek one or more strategic partners to manufacturer, market
and distribute Kronos based residential air purifiers.
Embedded Platform
Commercial Products. In June 2006, the Company executed a License Agreement with
DESA IP, LLC, a wholly owned subsidiary of DESA LLC. DESA is a global provider
of hearth, heating and zone comfort products. DESA is the first U.S. company to
license the Kronos technology for embedded applications, which represents
another step forward in the commercialization and globalization of Kronos'
proprietary air movement, filtration and decontamination technology. This
License Agreement provides DESA the opportunity to embed the Kronos
electrostatic air movement technology within fireplaces, hearth systems, zone
heaters and mounted electric fans and heaters. DESA will be seeking to take
advantage of the silence, energy efficiency and, in select applications, air
filtration benefits of the Kronos technology. DESA has the rights to distribute
these products across thirty-four countries in North America, Europe and the
former Eastern Block region. In October 2006, DESA approved Kronos' designs for
the first Kronos-based product and committed to the funding of the product
development by Kronos.
In addition, Kronos has developed an air filtration and purification mechanism
capable of performing to HEPA quality standards, while eliminating bacteria and
viruses. 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 and purification. Kronos is seeking one or more strategic
partners to commercial, market and distribute Kronos based commercial embedded
air filtration and purification devices.
Residential Products. During the second half of fiscal 2006, several leading
global home appliance manufacturers initiated discussions with Kronos with an
interest in using the Kronos technology for developing select residential
applications, including silent kitchen range hoods. With specific customer
input, Kronos has designed and developed initial prototype range hoods for
additional customer demonstration and evaluation. In August 2006, a leading
global appliance manufacturer requested a second prototype be designed and built
to their specifications for further evaluation. In October 2006, the customer
committed to fund 20% of the cost for Kronos to manufacturer a silent kitchen
range hood product. In addition, the customer has committed to a 120 day testing
and evaluation period on a non-exclusive basis. This next generation range hood
device represents the culmination of more than 12 months of product design and
development effort by Kronos to apply our technology to this unique embedded
residential application. The product was shipped to the customer in October
2006.
Military Products. The U. S. Department of Defense has provided Kronos with
various grants and contracts to develop, test and evaluate the Kronos technology
for embedded applications. Under a Office of Naval Research grant and SBIR Phase
I and Phase II contracts, the U. S. military had provided Kronos with over $1
million in funding. The Company currently has devices build for the U.S. Navy
under evaluation by Northrop Grumman for potential deployment of U.S. Naval
ships.
Transportation Products. In April 2006, Kronos was invited to serve as a member
and an industrial partner in the Federal Aviation Administration's (FAA) Air
Transportation Airliner Cabin Environment Research Center of Excellence (ACER
CoE). In this capacity, Kronos will provide its real-time decontamination, air
filtration, purification and technology expertise to evaluate and develop
solutions that proactively address and improve cabin air quality. The program,
led by the FAA, includes senior executives from aerospace equipment
manufacturers and leading American universities.
Microelectronics Cooling Products. In December 2004, Kronos and the University
of Washington were awarded a Phase I grant 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. In January 2006, Kronos and the University of Washington
conducted a successful bench scale demonstration of micron cooling of a MEMS
chip.
In June 2006, the Company and the University of Washington were awarded a Phase
II grant for continued funding in its novel cooling system for microelectronics
and computer chips. The Washington Technology Center is contributing $100,000 as
a Phase II grant for the project. Kronos will provide $35,000 in funding and
$38,000 in in-kind services, including use of the Kronos Research and Product
Development Facility. Dr. Alexander Mamishev of the University of Washington
Electrical Engineering Department is the principal investigator on the project
and will lead a team of scientists and engineers from Kronos and Intel
Corporation who will also collaborate on the project. The Phase II grant is a
follow-on award to the December 2004 Phase I grant to Kronos and the University
of Washington to initiate development of 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.
Patents and Intellectual Property
Kronos has received notification that eleven of its patent applications have
been allowed for issuance by the United States Patent and Trademark Office and
two of its international patent applications have been allowed for issuance by
the Commonwealth of Australia Patent Office and the Mexican Institute of
Industrial Property, respectively. 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.
U.S. Patents
Date U.S. Patent # Patent Title Description Protection
---- ------------- ------------ ----------- ----------
October 7,122,070 Method of and inertialess power supply for 2025
2006 Apparatus for safe operation and spark
Electrostatic Fluid prevention
Acceleration
August Notice of Corona Discharge method of generating air 2023
2006 Allowance Electrode and Method flow and air cleaning with
of Operating reduced amount of ozone by-
product and with extended
life-span of the electrodes
July Notice of Electrostatic Air method for improving the 2024
2006 Allowance Cleaning Device efficiency of electrodes for
filtering micron and sub-
micron size particles
May 7,053,565 Electrostatic Fluid effective powering of the 2024
2006 Accelerator - Power electrodes for high level of
Management air velocity
November 6,963,479 Electrostatic Fluid advanced voltage management 2023
2005 Accelerator - impacts air filtration and
Advanced Geometries sterilization, air flow and
ozone as well as safe operation
and spark prevention
August 6,937,455 Spark Management analysis, detection and 2022
2005 Method and Device prevention of sparks in a
high voltage field -
creating safe, effective
electrostatic technology
products
July 6,919,698 Voltage Management materials and geometry 2023
2005 for Electrostatic allowing for spark free
Fluid Accelerator operation and use of light
weight, inexpensive
materials as the electrodes
May 6,888,314 Electrostatic Fluid electrode design geometries 2022
2005 Accelerator - and attributes including
Electrode Design micro channeling to achieve
Geometries unique air movement and
purification performance
April 6,727,657 Electrostatic Fluid synchronization of multiple 2022
2004 Accelerator for and stages of arrays -
a Method of increasing air flow and air
Controlling Fluid flow efficiency
December 6,664,741 Method of and ratio of voltage for 2022
2003 Apparatus for producing ion discharge to
Electrostatic Fluid create air movement and
Acceleration Control base level filtration
of a Fluid Flow
January 6,504,308 Electrostatic Fluid electrode density core for 2019
2003 Accelerator producing ion discharge to
create air movement and
base level filtration
International Patents
In November 2004, Kronos received formal notification from the Commonwealth of
Australia Patent Office indicating that its application entitled "Electrostatic
Fluid Accelerator" has been examined and allowed for issuance as an Australian
patent. In December 2005, Kronos received formal notification from the Mexican
Institute of Industrial Property indicating that its application entitled
"Electrostatic Fluid Accelerator" has been examined and allowed for issuance as
a Mexican patent. There are a number of other patent applications corresponding
to Kronos' eleven U.S. Patents that have been filed and are pending outside of
the United States.
Kronos intends to continue to aggressively file patent applications in the U.S.
and internationally. 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.
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
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 Quarter Ended September 30, 2006.
Our net losses for each of the quarters ended September 30, 2006 and September
30, 2005 were $843,000 and $973,000, respectively. The decrease in the net loss
for the quarter ended September 30, 2006, as compared to the prior year, was
principally the result of a $79,000 or 10% decrease in operating costs to
$753,000 and a $57,000 or 36% decrease in interest expense.
Revenue. Revenues are generated through sales of services for design and
development of Kronos devices at Kronos Air Technologies, Inc. Revenues for the
quarter ended September 30, 2006 were $19,000 compared with $15,000 in the prior
year. Revenues for the three months ended were from our license agreement with
DESA. Revenues for the three months ended September 30, 2005 were from fees
associated with our prototype development and acquisition agreement with a
luxury automotive manufacturer.
Cost of Sales. Cost of sales for the quarter ended September 30, 2006 was
$10,000 compared with $0 for the prior year. Cost of sales for the quarter ended
September 30, 2006 was primarily product development costs associated with our
DESA license agreement.
Selling, General and Administrative Expenses. Selling, General and
Administrative expenses for the quarter ended September 30, 2006 decreased
$79,000 from the corresponding period of the prior year to $753,000. The
decrease was principally the result of a $75,000 decrease in research and
development as a result of a shift in focus from technology research to
technology commercialization and product development, a $63,000 decrease in
depreciation and amortization as a result of an increase in the amortization of
capitalized patent costs and Cornell Capital funding costs, partially offset by
a $23,000 increase in compensation and benefits as a result of an the expansion
of the Company's product development resources.
Interest expense. Interest expenses for the quarter ended September 30, 2006 was
$99,000 compared to $156,000 for the corresponding period of the prior year. The
$57,000 decrease in interest expense for the quarter ended September 30, 2006,
as compared to the prior year, was principally the result of decrease in notes
payable to Cornell Capital.
Consolidated Balance Sheet as of September 30, 2006
Our total assets at September 30, 2006 were $2,086,000 compared with $2,656,000
at June 30, 2006. Total assets at September 30, 2006 and June 30, 2006 were
comprised primarily of $1,907,000 and $1,984,000, respectively, of
patents/intellectual property and $124,000 and $598,000, respectively, of cash.
Total current assets at September 30, 2006 and June 30, 2006 were $172,000 and
$666,000, respectively, while total current liabilities for those same periods
were $2,891,000 and $3,225,000, respectively, creating a working capital deficit
of $2,719,000 and $2,559,000 at each respective period end. This working capital
deficit is primarily due to short term borrowings from Cornell Capital Partners.
Stockholders' deficit as of September 30, 2006 was ($3,380,000). The $843,000
net loss for the three months ended September 30, 2006 was partially offset by
the sale and issuance of common stock for cash ($550,000) and the issuance of
options for services ($57,000).
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.
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 provided $4 million pursuant to two Promissory Notes, which were 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 twelve months. In May 2006, Kronos completed repayment of
the first $2 million promissory note. As of September 30, 2006, Kronos has
received $6.9 million in funding under these agreements and owed $1.5 million
under the second Promissory Note.
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 December 2005,
$175,000 of the $925,000 was funded. The balance of $750,000 has not been
funded. 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 begin in February 2007. 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
$175,000 will also be October 2009. The interest rate will remain at 6%.
Net cash flow used in operating activities was $0.7 million for the quarter
ended September 30, 2006. We were able to satisfy most of our cash requirements
for this period from the proceeds of the $2 million Promissory Note with Cornell
Capital Partners, the sale of equity to Cornell Capital Partners and our DESA
license agreement.
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 equity funding from the Standby Equity Distribution Agreement and/or
the sale of additional equity in our Company 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 2006
and 2005 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.
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 $0.8 million for the quarter ended
September 30, 2006 and a net loss of $4.0 million for the fiscal year ended June
30, 2006. As a result, at September 30, 2006 and June 30, 2006, we had an
accumulated deficit of $32.0 million and $31.1 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 will 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 September 30, 2006 and June 30, 2006, we had a working capital deficit of
$2.7 million and $2.6 million, respectively. The Report of Independent
Registered Public Accounting Firm for the year ended June 30, 2006, 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 quarter ended September 30, 2006
and fiscal year ended June 30, 2006, we had an operating cash flow deficit of
$0.7 million and $2.6 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 Cornell Capital Partners and/or our
strategic customers 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 Standby Equity Distribution Agreement, we
may still need additional capital to fully implement our business, operating and
development plans. At September 30, 2006 and June 30, 2006, we had a cash
balance of $124,000 and $598,000, 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 Standby Equity Distribution Agreement and any other equity
financing.
The sale of shares pursuant to the Standby Equity Distribution Agreement, 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 $1.9 million as of September 30, 2006
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 and
capitalized legal costs for securing patents. Intangible assets comprise 91% of
our total assets as of September 30, 2006. 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.
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 3. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. As of the end of the period
covered by this report, the Company carried out an evaluation, under the
supervision and with the participation of the Company's Principal Executive
Officer and Principal Financial Officer of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. The Company's
disclosure controls and procedures are designed to provide a reasonable level of
assurance of achieving the Company's disclosure control objectives. The
Company's Principal Executive Officer and Principal Financial Officer have
concluded that the Company's disclosure controls and procedures are, in fact,
effective at this reasonable assurance level as of the period covered. In
addition, the Company reviewed its internal controls, and there have been no
significant changes in its internal controls or in other factors that could
significantly affect those controls subsequent to the date of evaluation or from
the end of the reporting period to the date of this Form 10-QSB.
Changes in Internal Controls. In connection with the evaluation of the Company's
internal controls during the Company's first fiscal quarter ended September 30,
2006, the Company's Principal Executive Officer and Principal Financial Officer
have determined that there are no changes to the Company's internal controls
over financial reporting that has materially affected, or is reasonably likely
to materially effect, the Company's internal controls over financial reporting
during the fiscal quarter ended September 30, 2006, or subsequent to the date of
their last evaluation, or from the end of the reporting period to the date of
this Form 10-QSB.
PART II
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company may be subject to law suits in the normal course
of business. Thompson E. Fehr has filed a complaint against Kronos with respect
to prior services rendered to High Voltage Integrated, Inc. totaling $47,130.
The Company believes this complaint is without merit and will rigorously defend
itself.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three months ended September 30, 2006, we issued 22,758,527 shares of
Kronos common stock to Cornell Capital Partners under our Standby Equity
Distribution Agreement. The proceeds from the issuance of these shares were used
to repay $350,000 of debt and to increase the Company's cash reserves by
$300,000.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. 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
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 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")
10.25 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
10.26 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
10.27 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
10.28 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
10.29 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
10.30 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
10.31 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
10.32 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
10.33 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
10.34 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
10.35 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
10.36 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 November 12, 2004
Capital Partners, LP
10.37 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 November 12, 2004
Cornell Capital Partners, LP
10.38 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 November 12, 2004
Partners, LP
10.39 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 November 12, 2004
10.40 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 November 12, 2004
10.41 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.
10.42 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 November 12, 2004
Technologies Inc., a Nevada corporation
and FKA Distributing Co. d/b/a HoMedics,
a Michigan corporation
10.43 Termination Agreement dated March 28, Incorporated by reference to
2005, by and between Kronos Advanced Exhibit 10.63 to the Registrant's
Technologies, Inc. and Cornell Capital Form SB-2 filed on April 19, 2005
Partners, LP
10.44 Standby Equity Distribution Agreement, Incorporated by reference to
dated April 13, 2005, by and between Exhibit 10.64 to the Registrant's
Kronos Advanced Technologies, Inc. and Form SB-2 filed on April 19, 2005
Cornell Capital Partners, LP
10.45 Registration Rights Agreement, dated Incorporated by reference to
April 13, 2005, by and between Kronos Exhibit 10.65 to the Registrant's
Advanced Technologies, Inc. and Cornell Form SB-2 filed on April 19, 2005
Capital Partners, LP
10.46 Escrow Agreement, dated April 13, 2005, Incorporated by reference to
by and between Kronos Advanced Exhibit 10.66 to the Registrant's
Technologies, Inc. and Cornell Capital Form SB-2 filed on April 19, 2005
Partners, LP
10.47 Placement Agent Agreement, dated April Incorporated by reference to
13, 2005, by and between Kronos Advanced Exhibit 10.67 to the Registrant's
Technologies, Inc. and Cornell Capital Form SB-2 filed on April 19, 2005
Partners, LP
10.48 Form of Equity-Back Promissory Note in Incorporated by reference to
the principal amount of $2,000,000 dated Exhibit 10.68 to the Registrant's
March 7, 2005 between Kronos Advanced Form SB-2 filed on April 19, 2005
Technologies, Inc. and Cornell Capital
Partners, LP
10.49 Form of Equity-Back Promissory Note in Incorporated by reference to
the principal amount of $2,000,000 dated Exhibit 10.59 to the Registrant's
June 22, 2005 between Kronos Advanced Form 10-KSB filed on September
Technologies, Inc. and Cornell Capital 28, 2005
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 Certification by Chief Executive Officer Provided herewith
and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATED: November 14, 2006 KRONOS ADVANCED TECHNOLOGIES, INC.
By: /s/ DANIEL R. DWIGHT
----------------------
Daniel R. Dwight
President and Chief Executive
Officer
By: /s/ DANIEL R. DWIGHT
------------------------
Daniel R. Dwight
Chief Financial Officer