UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended June 30, 2006
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ___________ to ____________
Commission file number ______________________________
KRONOS ADVANCED TECHNOLOGIES, INC.
(Name of small business issuer in its charter)
NEVADA 87-0440410
------ ----------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
464 COMMON STREET, SUITE 301, BELMONT, MASSACHUSETTS 02478
(Address of Principal Executive Offices)
Issuer's telephone number (617) 993-9965
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
COMMON STOCK, PAR VALUE $0.001 _________________________________________
PER SHARE
Securities registered under Section 12(g) of the Exchange Act:
________________________________________________________________________________
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 in the past 90 days. Yes X No [ ]
Check if there is no disclosure of delinquent files in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. X
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No X
State issuer's revenues for its most recent fiscal year. $219,369
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked price of such common
equity, as of a specified date within the past 60 days. (See definition of
affiliate in Rule 12b-2 of the Exchange Act.)
Note: If determining whether a person if an affiliate will involve an
unreasonable effort and expense, the issuer may calculate the aggregate market
value of the common equity held by non-affiliates on the basis of reasonable
assumptions, if the assumptions are stated.
(ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Check whether the issuer has filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by court. Yes [ ] No X
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date. The Registrant had
161,543,898 shares of Common Stock, par value $0.001 per share, outstanding on
September 26, 2006.
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly
describe them and identify the part of the Form 10-KSB (e.g., Part I, Part II,
etc.) into which the document is incorporated: (1) any annual report to security
holders; (2) any proxy or information statement; and (3) any prospectus filed
pursuant to Rule 424(b) or (c) of the Securities Act of 1933 ("Securities Act").
The listed documents should be clearly described for identification purposes
(e.g., annual report to security holders for fiscal year ended December 24,
1990).
Transitional Small Business Disclosure Format (Check one): Yes _____; No X
2
PART I
ITEM 1. BUSINESS
GENERAL DESCRIPTION OF BUSINESS
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS. THIS FILING CONTAINS
FORWARD-LOOKING STATEMENTS, INCLUDING STATEMENTS REGARDING, AMONG OTHER
THINGS:(A) OUR PROJECTED SALES AND PROFITABILITY, (B) OUR GROWTH STRATEGIES, (C)
ANTICIPATED TRENDS IN OUR INDUSTRY, (D) OUR FUTURE FINANCING PLANS, (E) OUR
ANTICIPATED NEEDS FOR WORKING CAPITAL, AND (F) THE BENEFITS RELATED TO OUR
OWNERSHIP OF KRONOS AIR TECHNOLOGIES, INC. IN ADDITION, WHEN USED IN THIS
FILING, THE WORDS "BELIEVES," "ANTICIPATES," "INTENDS," "IN ANTICIPATION OF,"
"EXPECTS," AND SIMILAR WORDS ARE INTENDED TO IDENTIFY CERTAIN FORWARD-LOOKING
STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE BASED LARGELY ON OUR
EXPECTATIONS AND ARE SUBJECT TO A NUMBER OF RISKS AND UNCERTAINTIES, MANY OF
WHICH ARE BEYOND OUR CONTROL. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS, INCLUDING, WITHOUT
LIMITATION, THE RISKS OUTLINED UNDER "FACTORS AFFECTING KRONOS' BUSINESS AND
PROSPECTS" AND MATTERS DESCRIBED IN THIS FILING GENERALLY. IN LIGHT OF THESE
RISKS AND UNCERTAINTIES, THERE CAN BE NO ASSURANCE THAT THE FORWARD-LOOKING
STATEMENTS CONTAINED IN THIS FILING WILL IN FACT OCCUR. WE DO NOT UNDERTAKE ANY
OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY REVISIONS TO THESE
FORWARD-LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT ANY FUTURE EVENTS OR
CIRCUMSTANCES.
OUR COMPANY
We are a Nevada corporation. Our principal executive offices are located at 464
Common Street, Suite 301, Belmont, Massachusetts 02478. Our telephone number is
(617) 993-9965. The address of our website is www.kronosati.com. Information on
our website is not part of this filing.
CORPORATE HISTORY
Kronos Advanced Technologies, Inc. was originally incorporated under the laws of
the State of Utah on September 17, 1980 as Penguin Petroleum, Inc. Penguin
Petroleum Inc.'s stockholders approved a name change on October 6, 1982 to
Petroleum Corporation of America, Inc. On December 29, 1996, stockholders
approved a reorganization whereby they exchanged their stock on a one-for-one
basis with Technology Selection, Inc., a Nevada corporation. Technology
Selection, Inc.'s shares began trading on the Over-the-Counter Bulletin Board on
August 28, 1996 under the symbol "TSET." On November 19, 1998, Technology
Selection, Inc. changed its name to TSET, Inc. Effective January 12, 2001, we
began doing business as Kronos Advanced Technologies; and, as of January 18,
2002, we changed our ticker symbol to "KNOS." Our recent activities have been
focused on capitalizing on our investment in Kronos Air Technologies, Inc., a
wholly owned subsidiary of Kronos, and we have not, to date, generated
significant operating revenues. We have never been party to any bankruptcy,
receivership, or similar proceedings and, other than noted above, have not been
party to any material reclassification, merger, or consolidation not in the
ordinary course of our business.
BUSINESS STRATEGY
Kronos Advanced Technologies, Inc. is an application development and licensing
company that has developed and patented technology that fundamentally changes
the way air is moved, filtered and sterilized. Kronos is pursuing
commercialization of its proprietary technology in a limited number of markets;
and if we are successful, we intend to enter additional markets in the future.
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:
3
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 Health Care 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;
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;
o Residential Products - During the second half of the year, several
leading global home appliance manufacturers initiated discussions with
Kronos for developing select residential applications of our
technology, including silent kitchen range hoods. Kronos developed
initial prototype range hoods for customer demonstration. In August
2006, a global appliance manufacturer requested a second prototype be
designed and built to their specifications for which the customer has
agreed to provide a limited amount of development funding;
o Transportation Products - In December 2005, Kronos shipped a prototype
device designed and built under specific customer specifications to a
leading auto manufacturer for their testing and evaluation;
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;
o Military Products - During the year, the Company completed work on its
contract with the U.S. Army for designing and developing electrostatic
dehumidifiers and shipped product developed under contract with the
U.S. Navy to Northrop Grumman for further testing and evaluation.
4
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).
5
Sterilization Testing Results:
o Disinfection Research Institute Sterilization Laboratory in Moscow:
- completely disinfected a room 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.
6
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
Residential Products. In October 2002, Kronos and HoMedics executed a Licensing
Agreement granting HoMedics certain rights with respect to the distribution of
the Kronos proprietary technology to the consumer. The agreement provided for
exclusive North American, Australian and New Zealand retail distribution rights
for next generation consumer air movement and purification products based on the
patented Kronos technology. 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.
Health Care 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. EOL plans to assemble the finished products in
Russia from components supplied both locally and from contract manufacturers in
China. The products will be marketed and distributed in Russia, Ukraine,
Kazakhstan, Moldova and Byelorussia. 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.
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.
7
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 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. The customer has agreed to
provide a limited amount of development of funding for this project.
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.
U.S. Navy SBIR Contracts. In November 2002, the U. S. Navy awarded Kronos a
Small Business Innovation Research Phase II contract worth $580,000. The Phase
II contract (commercialization phase) was an extension of the Phase I and the
Phase I Option work that began in 2001. During Phase II, Kronos developed and
produced a fully controlled device that represents a "cell" of an advanced
distributive air management system with medium capacity airflow in a U. S. Navy
unique environment. The "cell" has been designed to be easily adjustable to a
variety of parameters such as duct size, airflow requirements, and air quality.
The goal of this development work is to significantly reduce or replace
altogether the current HVAC air handling systems on naval ships. In May 2005,
Kronos shipped the device to Northrop Grumman for testing and evaluation. Based
on the success of these initial tests, Northrop Grumman requested additional
modifications and improvements to the device. Northrop Grumman is scheduling
further testing. As of June 30, 2006, the U. S. Navy had provided Kronos with
$580,000 in funding for this effort.
U.S. Army SBIR Contracts. In August 2003, Kronos was awarded the option on its
U. S. Army Small Business Innovation Research Phase I contract bringing the
value of the Phase I contract award to $120,000. In October 2003, the U.S. Army
awarded Kronos the Small Business Innovation Research Phase II contract to
develop Kronos' proprietary Electrostatic Dehumidification Technology ("EDT").
In February 2005, because the Army's focus was on researching a specific aspect
of using an electrostatic process for dehumidification and did not share Kronos'
vision for a broader application for using the unique aspects of EDT for
dehumidification, the Army decided not to pursue their Phase II option. Kronos
believes EDT is a viable solution for commercial dehumidification and will seek
one or more commercial partners to work with us to exploit the benefits of EDT.
As of June 30, 2006, the U. S. Army had provided Kronos with $392,000 in funding
for this effort under the Phase II contract.
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.
8
In August 2005, Kronos extended its work into the transportation industry by
signing a Prototype Development and Evaluation Agreement with a leading luxury
automotive manufacturer. According to various industry reports, the amount of
time Americans have spent in their cars has risen 236 percent since 1982 (with
one report from Time Magazine noting an average motorist will spend more than 5
years stuck in traffic alone), providing optimum air circulation in automobiles
is not only a comfort factor, but can also be a critical means of improving air
quality and helping to prevent viruses and allergens that may otherwise
accumulate in filtration systems. The Kronos product has been designed and
manufactured to meet exacting customer standards for placement inside of
automobile passenger cabins. The customer is evaluating various potential
applications for the technology.
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.
9
U.S. Patents
Date U.S. Patent # Patent Title Description Protection
---- ------------- ------------ ----------- ----------
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 Method of and inertialess power supply for 2025
2006 Allowance Apparatus for safe operation and spark
Electrostatic Fluid prevention
Acceleration
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.
10
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.
MILESTONES
Our primary business objectives over the prior 12 months was to launch
Kronos-based standalone consumer products and to establish strategic partners
for developing and commercializing embedded product applications. During the
year, despite the success of the Company in developing and testing a viable
consumer product, the Company was not able to achieve its first objective of
having its residential, retail consumer products partner bring that product to
market; in September 2006, the Company sent a notice of termination of its
license agreement with that partner, HoMedics USA, Inc. The Company took this
action to protect the Company's assets and to position the Company to identify
new strategic partner(s) in the residential market place who have the
willingness and viability to bring Kronos-based consumer air purification
products to market.
The Company did achieve its second objective; in June 2006, the Company executed
its first license for embedded applications of Kronos technology with DESA, LLC.
In addition, during the year the Company (i) 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; (ii) shipped a prototype device
designed and built under specific customer specifications to a leading auto
manufacturer for their testing and evaluation; (iii) obtain an award from the
Washington Technology Center in conjunction with the University of Washington
and Intel Corporation for continued funding for a research and development
project based on a novel cooling system for microelectronics and computer chips;
(iv) completed the initial design and development of space heaters and
vaporizers, which are undergoing evaluation by potential strategic partners; (v)
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); and (v) pursued new opportunities
initiated by several leading global home appliance manufacturers for the
development of select residential applications of our technology, including
silent kitchen range hoods. This later opportunity was a direct result of our
initial development work with Ikea.
The Company was able to achieve these successes through the expansion of (i) our
product claims platform to include independent verification of Kronos'
technology's ability to decontaminate rooms infected with bacteria and viruses
and sterilize air flows contaminated with anthrax and E.coli spores and S.
aureus and B. cereus bacteria;(ii) our technical resources and product
engineering to better position Kronos' ability to address specific customer
issues and needs; and (iii) our intellectual property. Regarding the later
point, the Company received notification that an additional four of its patent
applications during the year and three subsequent to the fiscal year end have
been allowed for issuance by the United States Patent and Trademark Office.
Our primary business objectives over the next 12 months are to execute on our
agreements with DESA and EOL, to establish new strategic partner(s) for
marketing and selling Kronos-based, standalone air purification products, and to
establish additional strategic partners for developing and commercializing new
product applications. In order to achieve these objectives the Company will need
to:
o expand its product development and engineering resources to better
position Kronos to address specific customer issues and needs; and
o continue implementation of its intellectual property strategies,
including continuation of its U.S. and international patent filing
process to enable a full development and effective management of its
intellectual property rights and assets.
We estimate that achievement of our business plan will require substantial
additional funding. We anticipate that the source of funding will be obtained
pursuant to funding from the Cornell Capital Standby Equity Distribution
Agreement and/or the sale of additional equity in our Company, and cash flows
generated from customer funded product development work and licensing revenue
from the sale of Kronos-based products.
11
HOMEDICS SENIOR DEBT TRANSACTION
In May 2003, Kronos entered into an agreement with HoMedics, Inc. for $2.5
million in financing, including $2.4 million in secured debt financing and
$100,000 for the purchase of warrants. $2.5 million was paid to Kronos upon
execution of the agreement. In October 2004, HoMedics agreed to extend repayment
of Kronos debt and to provide an additional $1 million in funding. HoMedics has
agreed to provide Kronos with an additional $1 million in financing - $925,000
in secured debt financing and $75,000 for the purchase of additional warrants.
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%.
In connection with the First Amendment to Master Loan and Investment Agreement,
Kronos issued to HoMedics a warrant to purchase 26.5 million shares of Kronos'
common stock. The warrant is exercisable for a period of ten (10) years from the
date of issuance. The exercise price is $0.10 per share. In consideration for
the warrant, HoMedics delivered to Kronos $75,000 by funding the closing fees
owed by Kronos and HoMedics agreed to amend two (2) warrants to purchase 13.4
million shares of Kronos' common stock previously issued by Kronos by removing
the anti-dilution protection previously granted to HoMedics. Kronos agreed to
include new anti-dilution protection in the new warrant. HoMedics is entitled,
under certain circumstances, to anti-dilution protection in order to maintain
beneficial ownership of Kronos equal to 30%. HoMedics may not be diluted below
30% for any funds raised at less than $0.20 per share, excluding options or
shares issued to management, directors, and consultants in the normal course of
business or shares issued to Cornell Capital in repayment of the two Promissory
Notes. There are no anti-dilution measures for funds raised at greater than
$0.20 per share. In addition, Kronos agreed to grant HoMedics piggy-back
registration rights and one (1) demand registration right with respect to any
shares of common stock of Kronos that HoMedics may acquire pursuant to the two
(2) previously issued warrants and the warrant issued in October 2004 in
connection with the First Amendment to Master Loan and Investment Agreement.
CORNELL CAPITAL TRANSACTION
In October 2004, Kronos entered into agreements for up to $20.5 million in
equity and equity backed debt financing from Cornell Capital Partners. Kronos
executed an Equity Investment Agreement and received $500,000 in gross proceeds
through the sale of 5 million unregistered shares of Kronos common stock.
Cornell Capital Partners provided $4 million pursuant to two Promissory Notes,
which were funded as follows: $2 million upon filing a Registration Statement
and $2 million upon the SEC declaring the Registration Statement effective.
Kronos executed a Standby Equity Distribution Agreement for $20 million of
funding which Kronos has the option to drawdown against in increments as large
as $1.5 million over the next twelve months. Kronos intends to use the proceeds
under the Standby Equity Distribution Agreement to repay the Promissory Notes.
As of June 30, 2006, Kronos had received $6.2 million under these agreements. As
of June 30, 2006, Kronos had repaid the first promissory Note in full and owed
$1.8 million under the second Promissory Note.
EMPLOYEES
On June 30, 2006, Kronos and its subsidiaries had twelve full-time employees. Of
the total number of full-time employees, one works in general management, ten in
research and product development, one in marketing and sales and operations, and
none are employed in administrative and other support positions. None of the
employees are represented by unions. There has been no disruption of operations
due to a labor dispute. We consider our relations with our employees to be good.
FACTORS AFFECTING KRONOS' BUSINESS AND PROSPECTS
We are subject to various risks which may have a material adverse effect on our
business, financial condition and results of operations, and may result in a
decline in our stock price. Certain risks are discussed below:
We have a limited operating history with significant losses and expect losses to
continue for the foreseeable future.
We have only recently begun implementing our plan to prioritize and concentrate
our management and financial resources to fully capitalize on our investment in
Kronos Air Technologies and have yet to establish any history of profitable
operations. We incurred a net loss of $4.0 million for the fiscal year ended
June 30, 2006 and a net loss of $7.1 million for the fiscal year ended June 30,
2005. As a result, at June 30, 2006 and June 30, 2005, we had an accumulated
deficit of $31.1 million and $27.1 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.
12
We will require significant additional financing to sustain our operations and
without it we will not be able to continue operations.
At June 30, 2006 and June 30, 2005, we had a working capital deficit of $2.6
million and $3.6 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 fiscal year ended June 30, 2006
and June 30, 2005, we had an operating cash flow deficit of $2.6 million and
$1.8 million, respectively. We currently do not have sufficient financial
resources to fund our operations or pay certain existing obligations or those of
our subsidiary. Therefore, we need substantial additional funds to continue
these operations and pay certain existing obligations.
If obtaining sufficient financing from 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 June 30, 2006 and June 30, 2005, we had a cash balance of
$598,000 and $1,555,000, 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.
13
Possible future impairment of intangible assets would have a material adverse
effect on our financial condition.
Our net intangible assets of approximately $2.0 million as of June 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 75% of
our total assets as of June 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 2. PROPERTIES
Our principal executive office is located at 464 Common Street, Suite 301,
Belmont, Massachusetts. The offices of the Kronos Research and Product
Development facility are located at 15241 NE 90th Street, Redmond, Washington.
Kronos is committed through September 30, 2009 to annual lease payments on
operating leases for 6,000 square feet of office/research and product
development premises. We consider our Research and Product Development facility
to be adequate for our foreseeable needs.
14
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock trades on the Over-the-Counter Bulletin Board under the trading
symbol "KNOS." Our high and low bid prices by quarter during fiscal 2006 and
2005 are presented as follows:
FISCAL YEAR 2006
HIGH LOW
First Quarter (July 2005 to September 2005) $0.100 $0.045
Second Quarter (October 2005 to December 2005) $0.175 $0.042
Third Quarter (January 2006 to March 2006) $0.090 $0.052
Fourth Quarter (April 2006 to June 2006) $0.072 $0.037
FISCAL YEAR 2005
HIGH LOW
First Quarter (July 2004 to September 2004) $0.175 $0.125
Second Quarter (October 2004 to December 2004) $0.200 $0.125
Third Quarter (January 2005 to March 2005) $0.150 $0.080
Fourth Quarter (April 2005 to June 2005) $0.150 $0.063
On September 26, 2006, the closing price of our common stock as reported on the
Over-the-Counter Bulletin Board was $0.02 per share. On September 26, 2006, we
had approximately 2,000 beneficial stockholders of our common stock and
161,543,898 shares of our common stock were issued and outstanding.
DIVIDENDS
We have not declared or paid dividends on our common stock during fiscal 2005 or
2006 and do not plan to declare or pay dividends on our common stock during
fiscal 2007. Our dividend practices are determined by our Board of Directors and
may be changed from time to time. We will base any issuance of dividends upon
our earnings (if any), financial condition, capital requirements, acquisition
strategies, and other factors considered important by our Board of Directors.
Nevada law and our Articles of Incorporation do not require our Board of
Directors to declare dividends on our common stock. We expect to retain any
earnings generated by our operations for the development and expansion of our
business and do not anticipate paying any dividends to our stockholders for the
foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
Except as otherwise noted, all of the following shares were issued and options
and warrants granted pursuant to the exemption provided for under Section 4(2)
of the Securities Act of 1933, as amended, as a "transaction not involving a
public offering." No commissions were paid, and no underwriter participated, in
connection with any of these transactions. Each such issuance was made pursuant
to individual contracts which are discrete from one another and are made only
with persons who were sophisticated in such transactions and who had knowledge
of and access to sufficient information about Kronos to make an informed
investment decision. Among this information was the fact that the securities
were restricted securities.
All investors participating in private placements for cash were "accredited
investors" within the meaning of Regulation D. In addition, we note that there
are several categories of recipients of these shares. These include investors
for cash, officers, directors, consultants, litigants and former stockholders of
private companies acquired by Kronos. Kronos does not believe that these
categories of recipients should be integrated with each other under the concept
of integration. Under Securities Act Release Nos. 4552 and 4434, these
categories would not involve a single plan of financing and would not be
considered to be made for the same general purpose. As a result, each category
should be reviewed on its own. Given the small number of purchasers in these
categories, Kronos believes that these transactions complied in all respects
with Section 4(2). Kronos believes that this conclusion is true even if the
transactions occurring within each category are integrated with other
transactions occurring within six months or one year of a given transaction.
On July 1, 2004, we granted options to acquire 725,000 shares of our common
stock at an exercise price of $0.15 to Spencer Browne, James McDermott, William
Poster, Milton Segal and Charles Strang in exchange for services as directors or
advisory board members to the Company.
In October 2004, we issued five million shares of our common stock, valued at
$0.10 per share at an aggregate value of $500,000 to Cornell Capital Partners,
LLC.
15
In October 2004, we issued 62,500 shares of our common stock, valued at $0.10
per share at an aggregate value of $6,250 to Newbridge Securities Corporation as
a placement agent fee in connection with the Standby Equity Distribution
Agreement with Cornell Capital.
In October 2004, we issued to HoMedics a warrant to purchase 26,507,658 shares
of Kronos common stock. The warrant is exercisable for a period of ten (10)
years from the date of issuance. The exercise price is $0.10 per share.
In November 2004, we issued 2,000,000 shares of our common stock valued at $0.10
per share at an aggregate value of $200,000 to Fusion Capital Partners, LLC. The
proceeds were used to eliminate Kronos' non-interest bearing demand obligation
to Fusion Capital.
In November 2004, we issued 2,800,000 shares of our common stock valued at $0.10
per share at an aggregate value of $280,000 to a group of accredited investors.
On June 30, 2005, we issued 1,500,000 shares of our common stock valued at $0.09
per share at an aggregate value of $135,000 to Daniel R. Dwight, Igor
Krichtafovitch, and Richard F. Tusing for 2005 bonuses.
On June 30, 2005, we granted options to acquire 1,725,000 shares of our common
stock at an exercise price of $0.125. Of the 1,725,000 options, 1,200,000
options were granted to Daniel R. Dwight and Richard F. Tusing who are directors
and officers of Kronos.
On July 1, 2005, we granted options to acquire 632,000 shares of our common
stock at an exercise price of $0.125 to Spencer Browne, James McDermott, William
Poster, Milton Segal and Charles Strang in exchange for services as directors or
advisory board members to the Company.
On July 15, 2005, we granted options to acquire 1,428,571 shares of our common
stock at an exercise price of $0.07 to the Wall Street Group 1,428,571
On March 9, 2006 we granted options to acquire 900,000 shares of our common
stock at an exercise price of $0.06 to various employees for bonuses.
On April 13, 2006, we granted options to acquire 5,625,000 shares of our common
stock at an exercise price of $0.06 for bonuses. Of the 5,625,000 options, an
aggregate of 3,475,000 options were granted to Daniel R. Dwight and Richard F.
Tusing who are directors and officers of Kronos.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with our consolidated
financial statements and the notes thereto appearing elsewhere in this filing.
Certain statements within this Item and throughout this Annual Report on Form
10-KSB and the documents incorporated herein are "forward-looking statements."
GENERAL
Kronos Advanced Technologies, Inc. is an application development and licensing
company that has developed and patented technology that fundamentally changes
the way air is moved, filtered and sterilized. Kronos is pursuing
commercialization of its proprietary technology in a limited number of markets;
and if we are successful, we intend to enter additional markets in the future.
Among the achievements of the Company over the past twelve months included the
following:
o Technology and Intellectual Property:
- secured additional U.S. and international patents for our
proprietary technology and made additional patent filings;
- expanded our product claims platform to include independent
verification of Kronos' technology's ability to decontaminate
rooms infected with bacteria and viruses and sterilize air flows
contaminated with anthrax and E.coli spores and S. aureus and B.
cereus bacteria.
16
o Business Development, Marketing and Sales:
- earned $0.2 million in revenue from military, consumer and
commercial customer contracts;
- executed license agreements with EOL and DESA for applying the
Kronos technology in the health care, residential and commercial
air purification markets;
- shipped a prototype device designed and built under specific
customer specifications to a leading auto manufacturer for their
testing and evaluation;
- awarded a Washington Technology Center Phase II grant for
developing a novel approach to cooling micro chips;
- completed the initial design and development of space heaters and
vaporizers, which are undergoing evaluation by potential
strategic partners;
- 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);
- pursued new opportunities initiated by several leading global
home appliance manufacturers for the development of select
residential applications of our technology, including silent
kitchen range hoods. This opportunity was a direct result of our
initial development work with Ikea.
o Operations:
- initiated work with EOL and DESA for developing a viable
standalone air purification product for the health care market
and the embedded heater market, respectively;
- completed testing of a viable consumer standalone air
purification product;
- completed Phase II of our U.S. Army Phase II dehumidification
contract;
- expanded into a larger facility to accommodate our growing
customer driven research and product development needs.
Recent Developments
EOL. 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.
DESA. In June 2006, the Company executed its first license for embedded
applications of Kronos technology with DESA, LLC.
Leading Automotive Manufacturer. In August 2005, Kronos extended its work into
the transportation industry by signing a Prototype Development and Evaluation
Agreement with a leading automotive manufacturer. In December 2005, Kronos
shipped a prototype device designed and built under specific customer
specifications to a leading auto manufacturer for their testing and evaluation.
U.S. Military and Northrop Grumman. In May 2005, Kronos shipped the Kronos US
Navy SBIR Phase II device to Northrop Grumman for testing and evaluation. Based
on the success of these initial tests, Northrop Grumman requested additional
modifications and improvements to the device. Northrop Grumman is scheduling
further testing. As of June 30, 2006, the U. S. Military had provided Kronos
with $972,000 in funding under SBIR Phase II contracts.
Washington Technology Center. 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 technology project
on a novel cooling system for microelectronics and computer chips.
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.
17
Disinfection Research Institute Sterilization Laboratory. In January 2006,
independent testing at the Disinfection Research Institute Sterilization
Laboratory in Moscow demonstrated the ability of Kronos devices to completely
disinfect a room 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 shares many functional
similarities with a wide range of viruses.) In June 2006, further testing at the
Disinfection Research Institute demonstrated the ability of Kronos devices to
100% decontaminate a room infected with bacteria (Staphylococcus aureus strain
906 (S. aureus)) and Bacillus cereus strain 96 (B. cereus);
Institute for Veterinary Medicine. In November 2005, independent testing at the
Institute for Veterinary Medicine in the Ukraine demonstrated the ability of
Kronos devices to destroy and sterilize air which had been inseminated with
Anthrax and E.coli spores;
Cornell Debt Repayment. In May 2006, the Company completed repayment of one of
two $2 million promissory notes to Cornell Capital Partners. As of June 30,
2006, Kronos owed $1.8 million under the second Promissory Note.
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.
18
Revenue Recognition. We recognize revenue in accordance with Securities and
Exchange Commission Staff Bulletin 104 ("SAB 104"). Further, Kronos Air
Technologies recognizes revenue on the sale of custom-designed contract sales
under the percentage-of-completion method of accounting in the ratio that costs
incurred to date bear to estimated total costs. For uncompleted contracts where
costs and estimated profits exceed billings, the net amount is included as an
asset in the consolidated balance sheet. For uncompleted contracts where
billings exceed costs and estimated profits, the net amount is included as a
liability in the consolidated balance sheet. Sales are reported net of
applicable cash discounts and allowances for returns.
RESULTS OF OPERATIONS
Consolidated Statement of Operations For the Year Ended June 30, 2006.
Our net losses for each of the current years ended June 30, 2006 and June 30,
2005 were $4,000,000 and $7,094,000, respectively. The decrease in the net loss
for the year ended June 30, 2006, as compared to the prior year, was principally
the result of a $3,857,000 decrease in other income associated with the
restructuring of the HoMedics debt, a $156,000 increase in gross profit to
$211,000 and a $32,000 decrease in interest expense to $489,000, partially
offset by a $959,000 or 35% increase in operating costs to $3,731,000.
Revenue. Revenues are generated through sales of services for design and
development of Kronos devices at Kronos Air Technologies, Inc. Revenues for the
year ended June 30, 2006 were $219,000 compared with $430,000 in the prior year.
Current year revenues were primarily from our DESA and EOL license agreements,
U.S. Navy Small Business Innovative Research Phase II contract, and U.S. Army
Small Business Innovative Research Phase II contracts.
Cost of Sales. Cost of sales for the year ended June 30, 2006 was $8,000
compared with $375,000 for the prior year. Cost of sales is primarily research
and development costs and material and labor associated with our U.S. Navy Small
Business Innovative Research Phase II contract and U.S. Army Small Business
Innovative Research Phase II contracts.
Selling, General and Administrative Expenses. Selling, General and
Administrative expenses for the year ended June 30, 2006 increased $959,000 from
the prior year to $3,731,000. The increase was principally the result of a
$277,000 increase in compensation and benefits as the result of an increase in
non cash compensation associated with the expensing of stock options; a $190,000
increase in research and development as the Company expanded it product
application capability and a $143,000 in increase in depreciation and
amortization as the result of an increase in the capitalization of intellectual
property and patenting costs.
Loss on Debt Restructuring. Loss on debt restructuring for the year ended June
30, 2005 was $3,857,000 and represented the non-cash charge to operations for
the cost to restructure the HoMedics debt, including the cost to issue 26
million warrants (refer to Note 13 - Commitments and Contingencies).
Interest expense. Interest expenses for the year ended June 30, 2006 was
$489,000 compared to $521,000 for the corresponding period of the prior year.
Consolidated Balance Sheet as of June 30, 2006
Our total assets at June 30, 2006 were $2,656,000 compared with $3,960,000 at
June 30, 2005. Total assets at June 30, 2006 and June 30, 2005 were comprised
primarily of $1,984,000 and $2,139,000, respectively, of patents/intellectual
property and $598,000 and $1,555,000, respectively, of cash. Total current
assets at June 30, 2006 and 2004 were $666,000 and $1,818,000, respectively,
while total current liabilities for those same periods were $3,225,000 and
$5,420,000, respectively, creating a working capital deficit of $2,559,000 and
$3,602,000 at each respective period end. This working capital deficit is
primarily due to short term borrowings from Cornell Capital Partners and accrued
interest expense.
Stockholders' deficit as of June 30, 2006 was ($3,144,000). The $4,000,000 net
loss for the twelve months ended June 30, 2006 was offset by the sale and
issuance of common stock for cash ($4,110,000) and the issuance of common
options for compensation and services ($606,000)
Consolidated Statement of Operations For the Year Ended June 30, 2005.
Our net losses for each of the current years ended June 30, 2005 and June 30,
2004 were $7,094,000 and $2,495,000, respectively. The increase in the net loss
for the year ended June 30, 2005, as compared to the prior year, was principally
the result of a $3,857,000 increase in other income associated with the
restructuring of the HoMedics debt, a $683,000 or 33% increase in operating
costs to $2,772,000 and a $99,000 or 64% decrease in gross profit, partially
offset by a $95,000 or 15% decrease in interest expense to $0.5 million.
19
Revenue. Revenues are generated through sales of services for design and
development of Kronos devices at Kronos Air Technologies, Inc. Revenues for the
year ended June 30, 2005 were $430,000 compared with $533,000 in the prior year.
Current year revenues were primarily from our HoMedics development agreement,
U.S. Navy Small Business Innovative Research Phase II contract, and U.S. Army
Small Business Innovative Research Phase II contracts.
Cost of Sales. Cost of sales for the year ended June 30, 2005 was $375,000
compared with $379,000 for the prior year. Cost of sales is primarily research
and development costs and material and labor associated with our HoMedics
development agreement, U.S. Navy Small Business Innovative Research Phase II
contract and U.S. Army Small Business Innovative Research Phase II contracts.
Selling, General and Administrative Expenses. Selling, General and
Administrative expenses for the year ended June 30, 2005 increased $683,000 from
the prior year to $2,772,000. The increase was principally the result of a
$274,000 in increase on non-cash compensation as the Company elected to
recognize Statement of Financial Accounting Standards No. 123R, Share-Based
Payment, during the fiscal year ended June 30, 2005; and $270,000 increase in
compensation and benefits and a $107,000 increase in research and development as
the Company expanded it product application capability; partially offset by a
$111,000 reduction in professional services.
Loss on Debt Restructuring. Loss on debt restructuring for the year ended June
30, 2005 was $3,857,000 and represented the non-cash charge to operations for
the cost to restructure the HoMedics debt, including the cost to issue 26
million warrants (refer to Note 14 - Commitments and Contingencies).
Interest expense. Interest expenses for the year ended June 30, 2005 was
$521,000 compared to $616,000 for the corresponding period of the prior year.
Consolidated Balance Sheet as of June 30, 2005
Our total assets at June 30, 2005 were $3,960,000 compared with $2,497,000 at
June 30, 2004. Total assets at June 30, 2005 and June 30, 2004 were comprised
primarily of $2,139,000 and $2,253,000, respectively, of patents/intellectual
property and $1,555,000 and $69,000, respectively, of cash. Total current assets
at June 30, 2005 and 2004 were $1,818,000 and $238,000, respectively, while
total current liabilities for those same periods were $5,420,000 and $1,423,000,
respectively, creating a working capital deficit of $3,602,000 and $1,186,000 at
each respective period end. This working capital deficit is primarily due to
short term borrowings from Cornell Capital Partners.
Stockholders' deficit as of June 30, 2005 was ($3,860,000). The $7,094,000 net
loss for the twelve months ended June 30, 2005 was offset by the value of the
warrants issued to HoMedics ($3,361,000), the sale and issuance of common stock
for cash ($968,000) and the issuance of common stock and options for services
($288,000).
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 June 30, 2006, Kronos has received
$6.2 million in funding under these agreements and owed $1.8 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%.
20
Net cash flow used in operating activities was $2.6 million for the year ended
June 30, 2006. We were able to satisfy most of our cash requirements for this
period from the proceeds of the $4 million Promissory Notes with Cornell Capital
Partners, the sale of equity to Cornell Capital Partners, our DESA and EOL
license agreements, and our U.S. Army Phase II contract.
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.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements appear beginning at page F-1.
21
KRONOS ADVANCED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AT JUNE 30, 2006
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets as of June 30, 2006 and June 30, 2005 F-3
Consolidated Statements of Operations for the years ended June 30,
2006 and 2005 F-4
Consolidated Statement of Changes of Stockholders' Deficit for years
ended June 30, 2006 and 2005 F-5
Consolidated Statements of Cash Flows for the years ended June 30,
2006 and 2005 F-6
Notes to Consolidated Financial Statements F-7 to F-16
F - 1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors Kronos Advanced Technologies, Inc.
We have audited the accompanying consolidated balance sheet of Kronos Advanced
Technologies, Inc. and Subsidiary as of June 30, 2006 and 2005 and the related
consolidated statements of operations, stockholders' deficit and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Kronos Advanced
Technologies, Inc. and Subsidiary as of June 30, 2006 and 2005 and the results
of their operations and their cash flows for the years then ended, in conformity
with U. S. generally accepted accounting principles generally accepted in the
United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has incurred
significant losses and has a working capital deficiency as more fully described
in Note 3. These issues among others raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 3. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Sherb & Co., LLP
---------------------------------
Sherb & Co., LLP
New York, New York
September 27, 2006
F - 2
KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
June 30, June 30,
2006 2005
-------------------- --------------------
Assets
Current Assets
Cash $ 598,323 $ 1,554,906
Accounts receivable 10,000 -
Other Current Assets 58,028 263,490
-------------------- --------------------
Total Current Assets 666,351 1,818,396
-------------------- --------------------
Property and Equipment 51,755 46,011
Less: Accumulated Depreciation (46,158) (43,384)
-------------------- --------------------
Net Property and Equipment 5,597 2,627
-------------------- --------------------
Other Assets
Intangibles, net 1,983,908 2,138,814
-------------------- --------------------
Total Other Assets 1,983,908 2,138,814
-------------------- --------------------
Total Assets $ 2,655,856 $ 3,959,837
==================== ====================
Liabilities and Stockholders' Deficit
Current Liabilities
Accrued expenses and payables to officers $ 8,843 $ 28,837
Accounts payable 204,632 479,175
Accrued interest expense 879,144 428,612
Accrued expenses 41,111 58,458
Deferred revenue 20,000 -
Notes payable, current portion 1,815,000 4,028,131
Notes payable to officers 256,544 397,004
-------------------- --------------------
Total Current Liabilities 3,225,274 5,420,217
-------------------- --------------------
Long Term Liabilities
Notes payable 2,575,000 2,400,000
-------------------- --------------------
Total Long Term Liabilities 2,575,000 2,400,000
-------------------- --------------------
Total Liabilities 5,800,274 7,820,217
-------------------- --------------------
Stockholders' Deficit
Common stock, authorized 500,000,000
shares of $.001 par value
Issued and outstanding - 144,499,657
and 72,786,345, respectively 144,500 72,686
Capital in excess of par value 27,828,241 23,183,747
Accumulated deficit (31,117,159) (27,116,813)
-------------------- --------------------
Total Stockholders' Deficit (3,144,418) (3,860,380)
-------------------- --------------------
Total Liabilities and Stockholders' Deficit $ 2,655,856 $ 3,959,837
==================== ====================
The accompanying notes are an integral part of these financial statements.
F - 3
KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the year ended June 30,
----------------------------------
2006 2005
---------------- ----------------
Sales $ 219,369 $ 430,379
Cost of sales 8,449 375,397
---------------- ----------------
Gross Profit 210,920 54,982
---------------- ----------------
Selling, General and Administrative expenses
Compensation and benefits 1,661,555 1,384,481
Research and development 357,822 167,500
Professional services 343,338 244,570
Depreciation and amortization 618,247 475,250
Facilities 100,982 96,882
Insurance 131,148 173,597
Other selling general and administrative expenses 517,697 229,658
---------------- ----------------
Total Selling, General and Administrative expenses 3,730,789 2,771,938
---------------- ----------------
Net Operating Loss (3,519,869) (2,716,956)
Other Income (Expense)
Loss on Debt Restructure - (3,857,467)
Other Income 8,776 1,414
Interest Expense (489,253) (521,104)
---------------- ----------------
Net Loss $ (4,000,346) $ (7,094,113)
================ ================
Basic and Diluted Loss Per Share:
Net Loss $ (0.04) $ (0.10)
================ ================
Weighted Average Shares Outstanding - Basic and Diluted 98,512,184 67,612,904
================ ================
The accompanying notes are an integral part of these financial statements.
F - 4
KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
Common Stock Capital in Total
----------------------- Excess of Par Accumulated Stockholders'
Shares Amount Value Deficit Deficit
----------- ---------- ------------- -------------- ------------
BALANCE at June 30, 2004 61,323,845 $ 61,323 $ 18,578,019 $ (20,022,700) $(1,383,358)
Shares issued for cash 9,800,000 9,800 957,700 - 967,500
Shares issued for services to officers 1,500,000 1,500 133,500 - 135,000
Shares issued for consulting services 62,500 63 6,187 - 6,250
Value of warrants issued in conjunction
with debt restructure - - 3,361,171 - 3,361,171
Stock options issued for Board Service - - 147,170 - 147,170
Net loss for the year ended June 30, 2005 - - - (7,094,113) (7,094,113)
----------- ---------- ------------- -------------- ------------
BALANCE at June 30, 2005 72,686,345 72,686 23,183,747 (27,116,813) (3,860,380)
Shares issued for cash 71,813,312 71,814 4,038,186 - 4,110,000
Stock options issued for employee services - - 500,477 - 500,477
Stock options issued for Board Service - - 26,548 - 26,548
Stock options issued for consulting services - - 79,283 - 79,283
Net loss for the year ended June 30, 2006 - - - (4,000,346) (4,000,346)
----------- ---------- ------------- -------------- ------------
BALANCE at June 30, 2006 144,499,657 $ 144,500 $ 27,828,241 $ (31,117,159) $(3,144,418)
============ ========== ============= ============== ============
The accompanying notes are an integral part of this financial statement
F - 5
KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended June 30,
----------------------------------------
2006 2005
-------------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (4,000,346) $ (7,094,113)
Adjustments to reconcile net loss to net cash
used in operations
Depreciation and amortization 618,245 475,250
Accretion of note discount - 92,965
Loss on debt restructuring - 3,857,467
Common stock issued for compensation/services 606,308 282,170
Change In:
Accounts receivable (10,000) 97,544
Prepaid expenses and other assets 12,337 102,447
Deferred revenue 20,000 (3,218)
Accounts payable (294,537) 199,224
Accrued expenses and other liabilities 433,185 174,710
-------------------- ------------------
Net cash used in Operating Activities (2,614,808) (1,815,554)
-------------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (5,745) -
Investment in patent protection (247,440) (279,245)
-------------------- ------------------
Net cash used in Investing Activities (253,185) (279,245)
-------------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock for cash 4,110,000 973,750
Proceeds from short-term borrowings - 100,000
Repayments of short-term borrowings (2,353,590) (1,120,095)
Proceeds from long-term borrowings 175,000 4,000,000
Debt Acquisition Costs (20,000) (373,013)
-------------------- ------------------
Net cash provided by Financing Activities 1,911,410 3,580,642
-------------------- ------------------
NET (DECREASE) INCREASE IN CASH (956,583) 1,485,843
CASH
Beginning of year 1,554,906 69,063
-------------------- ------------------
End of year $ 598,323 $ 1,554,906
==================== ==================
Supplemental schedule:
Interest paid in cash $ 250,124 $ 129,886
==================== ==================
The accompanying notes are an integral part of this financial statement.
F - 6
KRONOS ADVANCED TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS
Kronos Advanced Technologies, Inc. ("Kronos") is a Nevada corporation (the
"Company"). The Company's shares began trading on the over-the-counter bulletin
board exchange on August 28, 1996 under the symbol "TSET." Effective January 12,
2002, the Company began doing business as Kronos Advanced Technologies, Inc.
and, as of January 18, 2002, we changed the Company ticker symbol to "KNOS." We
have confined most of our recent activities to develop the Kronos technology.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Method. The Company's consolidated financial statements are prepared
using the accrual method of accounting. The Company has elected a June 30 fiscal
year end.
Principles of Consolidation. The consolidated financial statements of the
Company include those of the Company and its subsidiary for the periods in which
the subsidiary was owned/held by the Company. All significant intercompany
accounts and transactions have been eliminated in the preparation of the
consolidated financial statements. At June 30, 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 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
June 30, 2006 and June 30, 2005. The Company charges off accounts receivable
against the allowance for losses when an account is deemed to be uncollectable.
Property and Equipment. Property and equipment are recorded at cost.
Depreciation is provided over the estimated useful lives of the assets, which
range from three to seven years. Expenditures for major renewals and betterments
that extend the original estimated economic useful lives of the applicable
assets are capitalized. Expenditures for normal repairs and maintenance are
charged to expense as incurred. The cost and related accumulated depreciation of
assets sold or otherwise disposed of are removed from the accounts, and any gain
or loss is included in operations.
Intangibles. The Company uses assumptions in establishing the carrying value,
fair value and estimated lives of our long-lived assets and goodwill. The
criteria used for these evaluations include management's estimate of the asset's
continuing ability to generate positive income from operations and positive cash
flow in future periods compared to the carrying value of the asset, the
strategic significance of any identifiable intangible asset in our business
objectives, as well as the market capitalization of the Company. Cash flow
projections used for recoverability and impairment analysis use the same key
assumptions and are consistent with projections used for internal budgeting, and
for lenders and other third parties. If assets are considered to be impaired,
the impairment recognized is the amount by which the carrying value of the
assets exceeds the fair value of the assets. Useful lives and related
amortization or depreciation expense are based on our estimate of the period
that the assets will generate revenues or otherwise be used by Kronos. Factors
that would influence the likelihood of a material change in our reported results
include significant changes in the asset's ability to generate positive cash
flow, loss of legal ownership or title to the asset, a significant decline in
the economic and competitive environment on which the asset depends, significant
changes in our strategic business objectives, and utilization of the asset.
F - 7
Income Taxes. Income taxes are accounted for in accordance with the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 109. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amounts expected to be realized, but no less than
quarterly.
Research and Development Expenses. Costs related to research and development are
charged to research and development expense as incurred.
Net Loss Per Share. Basic loss per share is computed using the weighted average
number of shares outstanding. Diluted loss per share is computed using the
weighted average number of shares outstanding adjusted for the incremental
shares attributed to outstanding options and warrants to purchase common stock,
when their effect is dilutive.
Revenue Recognition. The Company recognizes revenue in accordance with Staff
Accounting Bulletin (SAB) 104, which requires evidence of an agreement, delivery
of the product or services at a fixed or determinable price, and assurance of
collection within a reasonable period of time. Further, Kronos Air Technologies
recognizes revenue on the sale of the custom-designed contract sales under the
percentage-of-completion method of accounting in the ratio that costs incurred
to date bear to estimated total costs. For uncompleted contracts where costs and
estimated profits exceed billings, the net amount is included as an asset in the
balance sheet. For uncompleted contracts where billings exceed costs and
estimated profits, the net amount is included as a liability in the balance
sheet. Sales are reported net of applicable cash discounts and allowances for
returns. Revenue from government grants for research and development purposes is
recognized as revenue as long as the Company determines that the government will
not be the sole or principal expected ultimate customer for the research and
development activity or the products resulting from the research and development
activity. Otherwise, such revenue is recorded as an offset to research and
development expenses in accordance with the Audit and Accounting Guide, Audits
of Federal Government Contractors. In either case, the revenue or expense offset
is not recognized until the grant funding is invoiced and any customer
acceptance provisions are met or lapse.
Stock, Options and Warrants Issued for Services. Issuances of shares of the
Company's stock to employees or third-parties for compensation or services is
valued using the closing market price on the date of grant for employees and the
date services are completed for non-employees. Issuances of options and warrants
of the Companies stock are valued using the Black-Scholes option model.
Stock Options. In December 2004, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 123R,
Share-Based Payment ("SFAS No. 123R"). This Statement is a revision of SFAS No.
123, Accounting for Stock-Based Compensation, and supersedes Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
its related implementation guidance. SFAS No. 123R focuses primarily on
accounting for transactions in which an entity obtains employee services in
share-based payment transactions. The Statement requires entities to recognize
stock compensation expense for awards of equity instruments to employees based
on the grant-date fair value of those awards (with limited exceptions). Kronos
elected to implement the provisions of SFAS No. 123R in the fiscal year ended
June 30, 2005.
Accounting Changes and Error Corrections - In May 2005, the FASB issued FASB
Statement No. 154, which replaces APB Opinion No.20 and FASB No. 3. This
Statement provides guidance on the reporting of accounting changes and error
corrections. It established, unless impracticable retrospective application as
the required method for reporting a change in accounting principle in the
absence of explicit transition requirements to a newly adopted accounting
principle. The Statement also provides guidance when the retrospective
application for reporting of a change in accounting principle is impracticable.
The reporting of a correction of an error by restating previously issued
financial statements is also addressed by this Statement. This Statement is
effective for financial statements for fiscal years beginning after December 15,
2005. Earlier application is permitted for accounting changes and corrections of
errors made in fiscal years beginning after the date of this Statement is
issued. Management believes this Statement will have no impact on the financial
statements of the Company once adopted.
F - 8
Accounting for Certai Hybrid Financial Instruments - In February 2006, the FASB
issued FASB Statement No. 155, which is an amendment of FASB 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.
Accounting for Servicing of Financial Assets - In March 2006, the FASB issued
FASB Statement No. 156, which amends FASB 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.
In June 2006, the FASB 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.
In June 2006, the FASB 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.
NOTE 3 - REALIZATION OF ASSETS
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern. The
Company has sustained losses from operations in recent years, and such losses
have continued through the current year ended June 30, 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.
F - 9
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. EOL plans to assemble the finished products in Russia from
components supplied both locally and from contract manufacturers in China. The
products will be marketed and distributed in Russia, Ukraine, Kazakhstan,
Moldova and Byelorussia. 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.
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.
U.S. Navy. In November 2002, the U. S. Navy awarded Kronos a Small Business
Innovation Research Phase II contract worth $580,000, plus an option of
$145,000. The Phase II contract (commercialization phase) is an extension of the
Phase I and the Phase I Option work that began in 2001. In May 2005, Kronos
shipped the Kronos device to Northrop Grumman for testing and evaluation. Based
on the success of these initial tests, Northrop Grumman requested additional
modifications and improvements to the device. Northrop Grumman is scheduling
further testing. As of June 30, 2006, the U. S. Navy had provided Kronos with
$580,000 in funding for this effort since inception.
Leading Automotive Manufacturer. In August 2005, Kronos extended its work into
the transportation industry by signing a Prototype Development and Evaluation
Agreement with a leading luxury automotive manufacturer. The Kronos product has
been designed and manufactured to meet customer standards for placement inside
of automobile passenger cabins. The customer is evaluating various potential
applications for the technology.
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.
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.
F - 10
NOTE 4 - OTHER CURRENT ASSETS
Other current assets at June 30, consist of the following:
2006 2005
--------------- ---------------
Debt acquisition costs $ 10,000 $ 203,125
Payroll deposit - 50,000
Lease deposits 7,138 10,365
Prepaid insurance 40,890 -
--------------- ---------------
Prepaid and other current assets $ 58,028 $ 263,490
=============== ===============
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment at June 30, consists of the following:
2006 2005
--------------- ---------------
Office furniture and fixtures $ 43,500 $ 37,756
Machinery and equipment 8,255 8,255
--------------- ---------------
51,755 46,011
Less accumulated depreciation (46,158) (43,384)
--------------- ---------------
Net property and equipment $ 5,597 $ 2,627
=============== ===============
Depreciation expense for the years ended June 30, 2006 and 2005 were $2,774, and
$3,655, respectively.
NOTE 6 - INTANGIBLES
Intangible assets at June 30, consists of the following:
2006 2005
--------------- ----------------
Marketing intangibles $ 587,711 $ 587,711
Purchased patent technology 2,669,355 2,669,355
Developed patent technology 766,401 518,960
--------------- ----------------
4,023,467 3,776,026
Less accumulated amortization (2,039,559) (1,637,212)
--------------- ----------------
Net intangible assets $ 1,983,908 $ 2,138,814
=============== ================
Purchased patent technology includes property that was acquired in the Kronos
acquisition.
Intangible assets are being amortized on a straight line basis over 10 years.
Amortization expense for the years ended June 30, 2006 and 2005 was $402,347 and
$393,460, respectively.
Amortization of the Company's Intangible Assets shown above for the fiscal years
ended June 30,
2007 2008 2009 2010 2011
----------- ----------- ----------- ----------- -----------
Marketing intangibles $ 587,711 $ 587,711 $ 587,711 $ 587,711 $ 587,711
Purchased patent technology 2,669,355 2,669,355 2,669,355 2,669,355 2,669,355
Developed patent technology 766,400 766,400 766,400 766,400 766,400
----------- ----------- ----------- ----------- -----------
4,023,466 4,023,466 4,023,466 4,023,466 4,023,466
Less accumulated amortization (2,441,905) (2,844,252) (3,246,599) (3,559,997) (3,695,408)
----------- ----------- ----------- ----------- -----------
Net intangible assets $1,581,561 $1,179,214 $ 776,867 $ 463,469 $ 328,058
=========== =========== =========== =========== ===========
NOTE 7 - ACCRUED EXPENSES
Accrued expenses at June 30, consisted of the following:
2006 2005
--------------- ---------------
Accrued professional services $ 38,500 $ 37,014
Accrued compensation and other 2,611 21,444
--------------- ---------------
$ 41,111 $ 58,458
Accrued interest 879,144 428,612
--------------- ---------------
$ 920,255 $ 487,070
=============== ===============
F - 11
NOTE 8 - NOTES PAYABLE
The Company had the following obligations as of June 30,
2006 2005
--------------- ---------------
Obligations to Cornell Capital(1) $ 1,815,000 $ 4,000,000
Obligation to HoMedics (2) 2,575,000 2,400,000
Obligation to current employees (3) 256,544 397,004
Obligation for finance leases (4) - 28,131
-------------- ---------------
4,646,544 6,825,135
Less:
Current portion 2,071,544 4,425,135
--------------- ---------------
Total long term obligations net of
current portion $ 2,575,000 $ 2,400,000
=============== ===============
(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 the earlier of Kronos receipt of royalty payments from HoMedics
sale of Kronos-based air purification products or two years. This note was
issued along with warrants for the purchase of 13.4 million shares of the
Company's common stock.
(3) These notes bear interest at the rate of 12%. They represent obligation to
current employees of the Company, which are due by December 31, 2006.
(4) See Note 9 below.
Payout of the Company's Notes Payable obligations listed above for the fiscal
years ended June 30,
2007 2008 2009 2010 2011
----------- ---------- ---------- ---------- ----------
Obligations to Cornell Capital $1,815,000 $ - $ - $ - $ -
Obligation to current employees 256,544 - - - -
Obligation to HoMedics 594,231 792,308 792,308 396,153 -
----------- ---------- ---------- ---------- ----------
$2,665,775 $ 792,308 $ 792,308 $ 396,153 $ -
=========== ========== ========== ========== ==========
NOTE 9 - LEASES
The Company has entered into a non-cancelable operating lease for facilities.
Rental expense was approximately $66,600 and $66,500 for years ended June 30,
2006 and 2005 respectively. Effective October 1, 2005, Kronos is committed
through September 30, 2009 to annual lease payments on operating leases for
6,000 square feet of office/research and product development premises of for
rent during fiscal,
2007 2008 2009 2010
---------- --------- --------- ---------
Lease payments $ 60,564 $62,388 $ 64,260 $ -
========== ======== ========= =========
In the year ended June 30, 2006 the Company paid $28,131 in principal and $8,482
in interest on capital leases. Of the equipment that was purchased using capital
leases, $10,650 was capitalized and the remaining $65,781 was expensed through
research and development and cost of sales.
NOTE 10 - NET LOSS PER SHARE
As of June 30, 2006, there were outstanding options to purchase 22,783,112
shares of the Company's common stock and outstanding warrants to purchase
42,300,000 shares of the Company's common stock. These options and warrants have
been excluded from the loss per share calculation as their effect is
anti-dilutive. As of June 30, 2005 there were outstanding options to purchase
14,989,782 shares of Kronos common stock and outstanding warrants to purchase
42,300,000 shares of Kronos common stock. These options and warrants have been
excluded from the loss per share calculation as their effect is anti-dilutive.
F - 12
NOTE 11 - INCOME TAXES
The composition of deferred tax assets and the related tax effects are as
follows at June 30,
2006 2005
--------------- ---------------
Benefit from carryforward of capital
and net operating losses $ (7,209,000) $ (6,092,000)
Other temporary differences (157,000) (157,000)
Options issued for services (218,000) -
Less:
Valuation allowance 7,584,000 6,249,000
--------------- ---------------
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:
June 30,
--------------------------------------------------------------------------------
2006 2005
--------------------------------------------------------------------------------
Amount % of pre-tax Loss Amount % of pre-tax Loss
--------------------------------------------------------------------------------
Benefit for income tax at:
Federal statutory rate $ (1,360,000) (34.0%) $ (2,412,000) (34.0%)
State statutory rate (80,000) (2.0%) (142,000) (2.0%)
Non-deductible expenses 105,000 2.6% 1,303,030 18.4%
Increase in valuation allowance 1,335,000 33.4% 1,251,000 17.6%
--------------------------------------------------------------------------------
$ - 0.0% $ - 0.0%
================================================================================
The non-deductible expenses shown above related primarily to the amortization of
intangible assets and to the accrual of stock options for compensation using
different valuation methods for financial and tax reporting purposes.
At June 30, 2006, the Company has approximately $17.6 million of unused Federal
net operating losses, $2.3 million capital losses and $13.4 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 12 - STOCK OPTIONS AND WARRANTS
On February 12, 2002, the Board of Directors approved the TSET, Inc. Stock
Option Plan under which Kronos' key employees, consultants, independent
contractors, officers and directors are eligible to receive grants of stock
options. Kronos has reserved and issued a total of 6,250,000 shares of common
stock under the Stock Option Plan. Prior to that, the Company had no formal
stock option plan but offered as special compensation to certain officers,
directors and third party consultants the granting of non-qualified options to
purchase Company shares at the market price of such shares as of the option
grant date. The options generally have terms of three to ten years. The Company
granted non-qualified stock options totaling 8,585,571 and 2,510,000 shares in
the years ended June 30, 2006 and 2005, respectively.
As of July 1, 2004, the Company elected to follow Statement of Financial
Accounting Standards No. 123R, Share-Based Payment ("SFAS No. 123R") to
recognize stock compensation expense for awards of equity instruments to
employees based on the grant-date fair value of those awards (with limited
exceptions).
On April 13, 2006, the non-executive directors of the Board of Directors upon
the recommendation of the Compensation Committee modified the exercise price on
the 7,812,482 stock options issued to employees between November 15, 2001 and
January 3, 2005. The exercise prices were changed from a range of $0.150 to
$0.680 to a new range of exercise prices of $0.060 to $0.094. The base exercise
price of $0.060 was set at the trailing three month average closing price of the
stock prior to April 13, 2006, which represented an 8% premium to the closing
price on April 12, 2006. This modification resulted in an expense of $453,905
for the year ended June 30, 2006.
F - 13
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
the Company's opinion the existing available models do not necessarily provide a
reliable single measure of the fair value of the Company's employee stock
options. Using the Black-Scholes option valuation model, the weighted average
grant date fair value of options granted during the years ended June 30, 2006
and 2005 was $0.058 and $0.068 per option share, respectively.
A summary of the Company's stock option activity and related information for the
years ended June 30, 2006 and 2005 is as follows (in thousands, except per share
amounts):
Weighted
Average
Shares Exercise Price
--------------- ------------
Outstanding at June 30, 2004 12,813 0.42
Granted 2,510 0.15
Exercised - -
Cancelled (273) 0.84
--------------- ------------
Outstanding as June 30, 2005 15,050 $ 0.37
Granted 8,585 0.07
Exercised - -
Cancelled (852) 0.84
--------------- ------------
Outstanding as June 30, 2006 22,783 $ 0.24
=============== ============
A summary of options outstanding and exercisable at June 30, 2006 and 2005 is
follows (in thousands, except per share amounts and years):
Options Outstanding Options Exercisable
-------------------------------------------- ------------------------------
Weighted
Average
Remaining Weighted
Range of Life (in Average Range of
Exercise Prices Options years) Exercise Price Exercise Prices Options
------------------ -------- ---------- -------------- --------------- --------
June 30, 2006
$0.71 - $1.12 648 2.4 $0.82 $0.71 - $1.12 648
$0.21 - $0.70 1,290 4.5 $0.42 $0.21 - $0.70 1,290
$0.00 - $0.20 20,845 7.6 $0.08 $0.00 - $0.20 20,845
June 30, 2005
$0.71 - $1.12 1,472 2.9 $0.87 $0.71 - $1.12 1,472
$0.21 - $0.70 5,925 6.3 $0.49 $0.21 - $0.70 5,925
$0.00 - $0.20 7,653 8.0 $0.17 $0.00 - $0.20 7,653
A summary of the Company's stock warrant activity and related information for
the years ended June 30, 2006 and 2005 is as follows (in thousands, except per
share amounts):
Weighted Average
Warrants Exercise Price
---------------- -------------
Outstanding at June 30, 2004 15,792 $0.16
Granted 26,508 $0.10
Exercised - -
Cancelled - -
--------------- ------------
Outstanding as June 30, 2005 42,300 $ 0.12
Granted - -
Exercised - -
Cancelled - -
--------------- ------------
Outstanding as June 30, 2006 42,300 $ 0.12
=============== ============
F - 14
NOTE 13 - 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 June 30, 2006, Kronos has
received $6.2 million in funding under these agreements. As of June 30, 2006,
the Company owed $1.8 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. 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. In addition, Kronos granted Mr. Dwight 1,000,000 immediately
vested and exercisable, ten-year stock options at various exercise prices. Mr.
Dwight will be entitled to fully participate in any and all 401(k), stock
option, stock bonus, savings, profit-sharing, insurance, and other similar plans
and benefits of employment.
Richard F. Tusing, Chief Operating Officer, and the Company entered into an
Employment agreement effective as of January 1, 2003. The initial term of Mr.
Tusing's Employment Agreement is for 2 years and will automatically renew for
successive 1 year terms unless Kronos or Mr. Tusing provide the other party with
written notice within 3 months of the end of the initial term or any subsequent
renewal term. The Board of Directors renewed Mr. Tusing's Employment Agreement
on October 1, 2004 and October 1, 2005. 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 14 - MAJOR CUSTOMERS
As of June 30, 2006 the Company had six major customers: DESA, EOL, HoMedics,
leading automotive manufacturer, the U.S. Navy and the U.S. Army. Of the
$219,369 in revenue recorded in the year ended June 30, 2006, $219,369 or 100%
was derived from these six customers.
As of June 30, 2005 the Company had three major customers: HoMedics, the U.S.
Navy and the U.S. Army. Of the $430,379 in revenue recorded in the year ended
June 30, 2005, $430,379 or 100% was derived from these three customers.
F - 15
NOTE 15 - SEGMENTS OF BUSINESS
The Company operates principally in one segment of business: The Kronos segment
licenses, manufactures and distributes air movement and purification devices
utilizing the Kronos technology. In the year ended June 30, 2006, the Company
operated only in the United States of America.
NOTE 16 - RELATED PARTIES
As of June 30, 2006, the Company has outstanding obligations for past
compensation to management of $256,544. As of June 30, 2005, the Company has
outstanding obligations for past compensation management of $397,904. These
unpaid amounts currently accrue interest at the rate of 12% per annum.
NOTE 17 - STOCKHOLDERS' DEFICIT
During the year ended June 30, 2006, the Company issued 71,813,312 shares of its
common stock for $4,110,000 in cash.
During the year ended June 30, 2005, the Company issued 9,800,000 shares of its
common stock for $967,500 in cash. The Company issued 1,500,000 shares valued at
$135,000 for services to officers and employees and 62,500 shares valued at
$6,250 for consulting services.
NOTE 18 - SUBSEQUENT EVENTS (Unaudited)
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.
In July and August 2006, the Company received notification that three more of
its patent applications have been allowed for issuance by the United States
Patent and Trademark Office.
In August and September 2006, Kronos issued 17,044,241 shares of common stock
for $550,000 to Cornell under the terms of our Standby Equity Distribution
Agreement. The proceeds were used for working capital and making payments on the
second Promissory Note.
F - 16
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A. CONTROLS AND PROCEDURES
There were no policy reviews, improvements of documentation or general
improvement in the state of internal controls that led to any change fiscal
year, or subsequent to the end of the fiscal year through the date this Form
10-KSB, that materially affected or were reasonably likely materially affect,
internal controls over financial reporting.
Evaluation of Disclosure Controls and Procedures. As of the end of the covered
by this report, the Company carried out an evaluation, under the supervision and
with the participation of the Company's Principal Officer/Principal Financial
Officer, of the effectiveness of the design 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 Company's Principal Executive Officer/Principal
Financial Officer concluded that the Company's disclosure controls and
procedures are, in effective at this reasonable assurance level as of the end of
period covered. 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 their
last evaluation or from the end of the reporting period to the date of this Form
10-KSB.
Changes in Internal Controls. In connection with the evaluation of the Company's
internal controls during the Company's year ended June 30, 2006, the Company's
Principal Executive Officer/Principal Financial Officer has determined that
there were no changes to the Company's internal controls over financial
reporting that have materially affected, June 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-KSB.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our directors and executive officers and their ages as of October 8, 2004, are
as follows:
NAME AGE POSITION
-------------------- ----- ----------------------------------------
Daniel R. Dwight 46 Director; President and Chief
Executive Officer
Richard F. Tusing 48 Director; Chief Operating Officer
James P. McDermott 44 Director
M. J. Segal 60 Director
Daniel R Dwight, 46, has served as a Director of Kronos since November 2000, and
as a Director and Chief Executive Officer of Kronos Air Technologies since
January 2001. Effective October 16, 2001, Mr. Dwight was appointed President and
Chief Executive Officer of Kronos. Effective January 1, 2004, Mr. Dwight was
appointed Acting Chief Financial Officer of Kronos. He has extensive experience
in private equity and operations in a wide variety of high growth and core
industrial businesses. Mr. Dwight spent 17 years with General Electric including
10 years of operations, manufacturing, and business development experience with
GE's industrial businesses, and seven years of international investment and
private equity experience with GE Capital. He has had responsibility for over a
$1 billion in merger and acquisition and private equity transactions at GE. Mr.
Dwight initiated GE Capital's entry in the Asia private equity market. Between
1995 and 1999, the Asian equity portfolio grew to include consolidations,
leveraged buyouts, growth capital and minority investments in diverse
industries, including information technology, telecommunications services,
consumer products, services and distribution, and contract manufacturing. Since
1982, Mr. Dwight has held other leadership positions domestically and
internationally with GE Capital, as well as senior positions with GE Corporate
Business Development (1989-1992) and GE Corporate Audit Staff (1984-1987). Mr.
Dwight holds an MBA in Finance and Marketing with Honors from The University of
Chicago Graduate School of Business and a B.S. in Accounting with Honors from
the University of Vermont and is a member of the Association of Heating,
Ventilation, Air conditioning and Refrigeration Engineers, Inc. (ASHRAE) and a
member of the SatCon Technology Corporation Board of Directors.
22
Richard F. Tusing, 48, has served as a Director of Kronos since October 2000 and
as a Director of Kronos Air Technologies since January 2001 and was appointed
Chief Operating Officer on January 1, 2002. Mr. Tusing has had extensive
experience in developing new enterprises, negotiating the licensing of
intellectual property rights, and managing technical and financial
organizations, and has more than 20 years of business development, operations,
and consulting experience in the technology and telecommunications industries.
Prior to his services to Kronos, Mr. Tusing spent four years in executive
management with several emerging technology companies, 14 years in various
managerial and executive positions with MCI Communications Corporation, and
three additional years in managerial consulting. From 1982-1996, Mr. Tusing held
multiple managerial and executive positions with MCI Communications Corporation.
From 1994-1996, he served as MCI's Director of Strategy and Technology, managing
MCI's emerging technologies division (having primary responsibility for
evaluating, licensing, investing in, and acquiring third-party technologies
deemed of strategic importance to MCI), and also oversaw the development of
several early-stage and venture-backed software and hardware companies; in this
capacity, Mr. Tusing managed more than 100 scientists and engineers developing
state-of-the-art technologies. From 1992-1994, Mr. Tusing founded MCI Metro,
MCI's entree into the local telephone services business and, as MCI Metro's
Managing Director, managed telecommunications operations, developed financial
and ordering systems, and led efforts in designing its marketing campaigns. From
1990-1992, he served as Director of Finance and Business Development for MCI's
western region. From 1982-1990, Mr. Tusing held other management and leadership
positions within MCI, including service as MCI's Pacific Division's Regional
Financial Controller, Manager of MCI's Western Region's Information Technology
Division, and led MCI's National Corporate Financial Systems Development
Organization. Mr. Tusing received B.S. degrees in business management and
psychology from the University of Maryland in 1979.
James P. McDermott, 44, became a Director of Kronos in July 2001. Mr. McDermott
has over 22 years of financial and operational problem-solving experience. Mr.
McDermott is a co-founder and is currently a Managing Director of Eagle Rock
Advisors, LLC, the Manager for The Eagle Rock Group, LLC. Mr. McDermott is also
currently President and CEO of AF&L, Inc. and its subsidiaries. AF&L is a Senior
Markets Insurer. From 1992 through 2000, Mr. McDermott held various managerial
and executive positions with PennCorp Financial Group, Inc. and its affiliates.
From 1998 through 2000, Mr. McDermott was Executive Vice-President and Chief
Financial Officer of PennCorp Financial Group. While serving in this position,
Mr. McDermott was one-third of the executive management team that was
responsible for developing and implementing operational stabilization, debt
reduction and recapitalization plans for the company. From 1995 through 1998,
Mr. McDermott served as Senior Vice-President of PennCorp Financial Group. Mr.
McDermott worked closely with the Audit Committee of the Board of Directors on
evaluating the PennCorp's accounting and actuarial practices. In addition, Mr.
McDermott was responsible for developing a corporate-wide technology management
program resulting in technology convergence and cost savings to the company's
technology budget. From 1994 through 1998, Mr. McDermott was a principal in
Knightsbridge Capital Fund I, LP, a $92 million investment fund specializing in
leverage-equity acquisitions of insurance and insurance-related businesses. Mr.
McDermott was also the founding Chairman of the e-business Internet service
provider, Kivex.com, and a senior manager of one of the world's leading public
accounting firms, KPMG. Mr. McDermott received a B.S. Degree in Business
Administration from the University of Wisconsin, Madison.
M. J. Segal, 60, became a Director of Kronos in September 2003. Mr. Mr. Segal
has over 35 years of corporate governance, entrepreneurial and investment
banking expertise. Mr. Segal founded the investment banking firm of M.J. Segal
Associates in 1987. Since 1992, the firm has specialized in researching private
equity opportunities in both private and emerging growth public companies. The
Segal group caters primarily to institutional clients, private investment
partnerships and professional money managers. After starting his career as a
stockbroker and financial planner in 1966 with Philadelphia based New York Stock
Exchange firm, Robinson & Company, Mr. Segal joined Josephthal & Co. Inc., a
leading full-service investment banking and brokerage firm in New York. Mr.
Segal has served as senior vice president of the congressionally charted
National Corporation for Housing Partnerships in Washington, D. C. and president
of its investment banking subsidiary and has qualified as a NASD broker/dealer
financial principal. Originally from Philadelphia, Mr. Segal attended the
Wharton School of the University of Pennsylvania and is a graduate of The New
York Institute of Finance.
DIRECTORS
Our Board of Directors consists of eight seats. Directors serve for a term of
one year and stand for election at our annual meeting of stockholders. All our
current directors were elected at our annual meeting of stockholders held on
December 20, 2005. Four vacancies currently exist on the Board of Directors as
of the date of this filing. Pursuant to our Bylaws, a majority of directors may
appoint a successor to fill any vacancy on the Board of Directors.
23
ADVISORY BOARD
We established an Advisory Board in July 2001 to assist management in the
development of long-range business plans for our Company. Currently, William
Poster and Charles Strang are the only Advisory Board Members.
Mr. Poster is a seasoned entrepreneur with a successful track record as a
founder of several businesses spanning five continents. Mr. Poster has
experience in developing business opportunities in the United States, Europe,
Asia and the Middle East. Mr. Poster recently stepped down as President of
Computer Systems & Communications Corporation, a wholly-owned subsidiary of
General Dynamics. Computer Systems & Communications Corporation is a
cutting-edge communications and technology company that Mr. Poster founded and
later sold to General Dynamics. Mr. Poster is currently a principal with Eagle
Rock Advisors, LLC.
Mr. Strang is a former Kronos Director from January 2001 through December 2002.
Mr. Strang was named National Commissioner of NASCAR (National Association for
Stock Car Auto Racing, Inc.) in 1998 and continues to serve in that capacity. In
1989 Mr. Strang received President Bush's American Vocation Success Award; in
1992 was elected to the Hall of Fame of the National Marine Manufacturers
Association; in 1990 was awarded the Medal of Honor of the Union for
International Motorboating; and is a life member of the Society of Automotive
Engineers. He also currently serves as a Director of the American Power Boat
Association (the U.S. governing body for powerboat racing) and Senior
Vice-President of the Union for International Motorboating (the world governing
body for powerboat racing, with approximately 60 member nations).
We will continue to evaluate additional potential candidates for our Advisory
Board.
COMMITTEES
On September 11, 2001, the Board of Directors established a Compensation
Committee consisting of at least two independent members of the Board of
Directors. The Compensation Committee is charged with reviewing and making
recommendations concerning Kronos' general compensation strategy, reviewing
salaries for officers, reviewing employee benefit plans, and administering
Kronos' stock incentive plan, once adopted and implemented. Messrs. McDermott
and Segal are the current members of the Compensation Committee. During the year
the Compensation Committee held two meetings. Each member attended at least 75%
of the meetings.
On September 4, 2003, the Board of Directors established an Executive Committee.
The purpose of the Executive Committee is to exercise all the powers and
authority of the Board of Directors in the management of the property, affairs
and business of the Company. The Committee shall consist of no fewer than three
members, including the Chief Executive Officer of the Company. Messrs. Dwight,
McDermott, Segal and Tusing are the current members of the Executive Committee.
On September 10, 2003, the Board of Directors established an Audit Committee
consisting of at least two independent members of the Board of Directors. The
Audit Committee is charged with providing independent and objective oversight of
the accounting functions and internal controls of the Company and its
subsidiaries to ensure the objectivity of the Company's financial statements.
Messrs. McDermott and Segal are the current members of the Audit Committee.
During the year the Audit Committee held three meetings. Each member attended at
least 75% of the meetings.
COMPENSATION OF DIRECTORS
Cash Compensation. Our Bylaws provide that, by resolution of the Board of
Directors, each director may be reimbursed his expenses of attendance at
meetings of the Board of Directors; likewise, each director may be paid a fixed
sum or receive a stated salary as a director. During the fiscal year ended June
30, 2006, no director receives any salary or other form of cash compensation for
such service. Effective July 1, 2006, non-executive directors are entitled to
receive $4,500 per quarter as compensation for their services as members of our
Board of Directors.
Share Based Compensation. During the fiscal year ended June 30, 2006, each
non-executive director is entitled to receive annually 70,000 fully-vested stock
option grants, 7,000 stock option grants per meeting attended via conference
call, 14,000 option grants per meeting attended in person, 3,500 option grants
per meeting for participation on a committee or 5,000 stock option grants per
meeting for chairing a committee, as compensation for their services as members
of our Board of Directors. Effective July 1, 2006, non-executive directors
entitled to receive quarterly $4,500 and annually 200,000 fully-vested stock
option grants, 2,500 stock option grants per meeting attended via conference
call, 5,000 option grants per meeting attended in person, or 1,250 option grants
per meeting for participation on a committee, as compensation for their services
as members of our Board of Directors.
For the twelve month period ending June 30, 2006, Messrs. McDermott and Segal
earned 182,000 stock options each as compensation for their services as members
of our Board of Directors.
24
For the twelve month period ending June 30, 2005, Messrs. McDermott, Brown and
Segal earned 189,000, 154,000, and 189,000 stock options, respectively as
compensation for their services as members of our Board of Directors.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires our directors and
executive officers, and persons who own more than 10% of a registered class of
our equity securities to file with the Securities and Exchange commission
initial reports of ownership and reports of changes in ownership of Common Stock
and other of our equity securities. Officers, directors and greater than 10%
stockholders are required by SEC regulations to furnish us copies of all Section
16(a) forms they file.
To our knowledge, based solely on a review of the copies of such reports
furnished to us and written representations that no other reports were required
during the fiscal year ended June 30, 2006, all Section 16(a) filing
requirements applicable to our officers and directors were complied with.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth compensation for the fiscal year ended June 30,
2006 for our executive officers:
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
--------------------------------------- --------------------------------------------------------
Restricted Securities
Name and Other Stock Underlying LTIP All Other
Principal Salary Bonus Compensation Awards Options/SARS Payouts Compensation
Fiscal Position Year $ $ $ $ # $ $
---------------- ----- --------- ---------- -------------- ----------- --------------- -------- --------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
---------------- ----- --------- ---------- -------------- ----------- --------------- -------- --------------
Daniel R. 2006 189,375 -- 15,083 -- 2,455,000 -- --
Dwight, 2005 180,000 67,500(4) 14,689 -- 750,000 -- --
President and 2004 180,000 -- 14,292 -- 726,206 -- --
Chief
Executive
Officer(1)
Richard F. 2006 160,000 -- -- -- 1,020,000 -- --
Tusing, Chief 2005 160,000 37,530(4) -- -- 450,000 -- --
Operating 2004 160,000 -- -- -- 971,756 -- --
Officer(2)
Richard A. 2006 -- -- -- -- -- -- --
Papworth Chief 2005 -- -- -- -- -- -- --
Financial 2004 120,000 -- -- -- -- -- --
Officer(3)
(1) Mr. Dwight became President and Chief Executive Officer of Kronos effective
October 16, 2001. He executed a two year employment contract on November 15,
2001. His contract was renewed on August 13, 2003 and again on August 15, 2004,
August 15, 2005 and April 13, 2006 by the Board of Directors. Effective April
15, 2006, his annual salary is $225,000.
(2) Mr. Tusing became Chief Operating Officer of Kronos effective January 1,
2002. Mr. Tusing executed an employment contract effective January 1, 2003. The
Board of Directors renewed Mr. Tusing's Employment Agreement on October 1, 2004
and again on October 1, 2005. His annual salary is $160,000.
(3) Mr. Papworth was the Company's Chief Financial Officer from May 19, 2000
until January 1, 2004. His annual salary was $120,000. On July 1, 2004 Mr.
Papworth ended his employment with Kronos.
(4) Cash Bonuses earned in 2005 were paid through the issuance of common stock
at the market closing price on June 30, 2005.
25
AGGREGATED OPTIONS/SAR EXERCISES
IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTIONS/SAR VALUES(1)
VALUE OF
NUMBER OF SECURITIES UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES ACQUIRED OPTIONS/SARS AT FISCAL OPTIONS/SARS AT
NAME ON EXERCISE VALUE REALIZED YEAR END(1) FISCAL YEAR END(2)
------------------- ----------------- ----------------- -------------------------- ---------------------
Daniel R. Dwight, -0- -0- Exercisable: 7,191,206 -0-
President and Unexercisable: -0- -0-
Chief Executive
Officer(3)
Richard F. -0- -0- Exercisable: 3,391,756 -0-
Tusing, Chief Unexercisable: -0- -0-
Operating
Officer(4)
Richard A. -0- -0- Exercisable: 998,475 -0-
Papworth Chief Unexercisable: -0- -0-
Financial
Officer(5)
(1) These grants represent options to purchase common stock. No SAR's have been
granted.
(2) The value of the unexercised in-the-money options were calculated by
determining the difference between the fair market value of the common stock
underlying the options and the exercise price of the options as of June 30,
2006.
(3) Mr. Dwight became President and Chief Executive Officer of Kronos effective
October 16, 2001.
(4) Mr. Tusing became Chief Operating Officer of Kronos effective January 1,
2002.
(5) Mr. Papworth was the Company's Chief Financial Officer from May 19, 2000
until January 1, 2004. On July 1, 2004 Mr. Papworth ended his employment with
Kronos.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
% TOTAL
NO. OF OPTIONS/SAR'S
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES EXERCISE OR
OPTIONS/SAR'S IN FISCAL BASE PRICE EXPIRATION
NAME GRANTED (#) YEAR (%) ($ PER SHARE) DATE(1)
------------------- ------------- ------------- ------------ -----------------
Daniel R. Dwight 2,455,000 37.6% $ 0.060 April 13, 2016
President and
Chief Executive
Richard F. Tusing 1,020,000 15.6% $ 0.060 April 13, 2016
Chief Operating
Officer
(1) Expatriation date is the earlier of April 13, 2016 or 90 days
after the date the officer is no longer employed by the Company.
STOCK OPTION PLAN
On February 12, 2002, the Board of Directors approved the TSET, Inc. Stock
Option Plan under which Kronos' key employees, consultants, independent
contractors, officers and directors are eligible to receive grants of stock
options. Kronos has reserved and issued a total of 6,250,000 shares of common
stock under the Stock Option Plan. It is presently administered by Kronos' Board
of Directors. Subject to the provisions of the Stock Option Plan, the Board of
Directors has full and final authority to select the individuals to whom options
will be granted, to grant the options and to determine the terms and conditions
and the number of shares issued pursuant thereto.
26
EMPLOYMENT AGREEMENTS
Daniel R. Dwight, our President and Chief Executive Officer, and our Company
entered into an Employment agreement effective as of November 15, 2001. The
initial term of Mr. Dwight's Employment Agreement was for 2 years and will
automatically renew for successive 1 year terms unless Kronos or Mr. Dwight
provide the other party with written notice within 3 months of the end of the
initial term or any subsequent renewal term. The Board of Directors renewed Mr.
Dwight's Employment Agreement on August 13, 2003 and again on August 15, 2004
and August 15, 2005. 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. In addition, Kronos granted Mr. Dwight
1,000,000 immediately vested and exercisable, ten-year stock options at various
exercise prices. Mr. Dwight will be entitled to fully participate in any and all
401(k), stock option, stock bonus, savings, profit-sharing, insurance, and other
similar plans and benefits of employment.
Richard F. Tusing, our Chief Operating Officer, and our Company entered into an
Employment agreement effective as of January 1, 2003. The initial term of Mr.
Tusing's Employment Agreement is for 2 years and will automatically renew for
successive 1 year terms unless Kronos or Mr. Tusing provide the other party with
written notice within 3 months of the end of the initial term or any subsequent
renewal term. The Board of Directors renewed Mr. Tusing's Employment Agreement
on October 1, 2004 and again on October 1, 2005. Mr. Tusing's Employment
Agreement provides for base cash compensation of $160,000 per year. Mr. Tusing
will be entitled to fully participate in any and all 401(k), stock option, stock
bonus, savings, profit-sharing, insurance, and other similar plans and benefits
of employment.
EXECUTIVE SEVERANCE AGREEMENTS
The Employment Agreement of Daniel R. Dwight, our Chief Executive Officer,
provides that, upon the occurrence of any transaction as defined as a "change of
control" of Kronos, Mr. Dwight shall receive his salary and benefits for a
period of time that is the greater of (i) one year or (ii) the remainder of Mr.
Dwight's employment term.
The Employment Agreement of Richard F. Tusing, our Chief Operating Officer,
provides that, upon the occurrence of any transaction as defined as a "change of
control" of Kronos that is not approved by the Board of Directors, Mr. Tusing
shall receive his salary, pro-rata bonus and benefits for a period of time that
is the greater of (i) one year or (ii) the remainder of Mr. Tusing's employment
term.
As of the date of this filing, we have not adopted any separate executive
severance agreements.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
The following table presents certain information regarding the beneficial
ownership of all shares of common stock at September 26, 2006 for each executive
officer and director of our Company and for each person known to us who owns
beneficially more than 5% of the outstanding shares of our common stock. The
percentage ownership shown in such table is based upon the 161,543,898 common
shares issued and outstanding at September 26, 2006 and ownership by these
persons of options or warrants exercisable within 60 days of such date. Also
included is beneficial ownership on a fully diluted basis showing all
authorized, but unissued, shares of our common stock at September 26, 2006 as
issued and outstanding. Unless otherwise indicated, each person has sole voting
and investment power over such shares.
27
COMMON STOCK
BENEFICIALLY OWNED
-------------------------
NAME AND ADDRESS NUMBER PERCENT
---------------- ------------- -----------
Daniel R. Dwight 8,393,132(1) 5.2%
464 Common Street
Suite 301
Belmont, MA 02478
Richard F. Tusing 4,244,508(2) 2.6%
464 Common Street
Suite 301
Belmont, MA 02478
James P. McDermott 979,077(3) 0.1%
464 Common Street
Suite 301
Belmont, MA 02478
Milton M. Segal 570,000(4) 0.0%
464 Common Street
Suite 301
Belmont, MA 02478
All Officers and Directors of Kronos 14,186,717(5) 8.8%
(1) Includes options to purchase 7,191,206 shares of common stock that can be
acquired within sixty days of September 26, 2006. (2) Includes options to
purchase 3,391,756 shares of common stock that can be acquired within sixty days
of September 26, 2006. (3) Includes options to purchase 684,959 hares of common
stock that can be acquired within sixty days of September 26, 2006. (4) Includes
options to purchase 570,000 hares of common stock that can be acquired within
sixty days of September 26, 2006. (5) Includes options to purchase 8,472,121
shares of common stock that can be acquired within sixty days of September 26,
2006.
We are unaware of any arrangement or understanding that may, at a subsequent
date, result in a change of control of our Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We believe that all prior related party transactions have been entered into upon
terms no less favorable to us than those that could be obtained from
unaffiliated third parties. Our reasonable belief of fair value is based upon
proximate similar transactions with third parties or attempts to obtain the
consideration from third parties. All ongoing and future transactions with such
persons, including any loans or compensation to such persons, will be approved
by a majority of disinterested members of the Board of Directors.
On March 31, 2004, we entered into Promissory Notes with Daniel R. Dwight and
Richard F. Tusing in exchange for past due compensation, expenses and interest
do and payable for $363,139 and $485,883. The Notes bear a simple interest rate
1% per month and call for aggregate monthly principal and interest payments
$6,718 and $8,989, respectively, for each month in which the Company's beginning
cash balance equals or exceeds $200,000. Subject to certain conditions,
including default, these notes become payable in full. In the event of a debt or
equity financing, 20% of the proceeds derived from the financing will be used to
pay down the outstanding interest and principal obligations. As a result of the
Cornell Capital financing, the Notes are due and payable in full. As of June 30,
2006, Kronos had repaid the first promissory Note in full and owed $1.8 million
under the second Promissory Note.
28
ITEM 13. EXHIBITS
(a)(3) EXHIBITS.
EXHIBIT NO. DESCRIPTION LOCATION
-------------------------------------------------------------------------------------------------
2.1 Articles of Merger for Technology Incorporated by reference to
Selection, Inc. with the Nevada Exhibit 2.1 to the Registrant's
Secretary of State Registration Statement on Form
S-1 filed on August 7, 2001 (the
"Registration Statement")
3.1 Articles of Incorporation Incorporated by reference to
Exhibit 3.1 to the Registration
Statement on Form S-1 filed on
August 7, 2001
3.2 Bylaws Incorporated by reference to
Exhibit 3.2 to the Registration
Statement on Form S-1 filed on
August 7, 2001
4.1 2001 Stock Option Plan Incorporated by reference to
Exhibit 4.1 to
Registrant's Form
10-Q for the
quarterly period
ended March 31,
2002 filed on May
15, 2002
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
29
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 Exhibit
2005, by and between Kronos Advanced 10.63 to the Registrant's Form SB-2
Technologies, Inc. and Cornell Capital filed on April 19, 2005
Partners, LP
10.44 Standby Equity Distribution Agreement, Incorporated by reference to Exhibit
dated April 13, 2005, by and between 10.64 to the Registrant's Form SB-2
Kronos Advanced Technologies, Inc. and filed on April 19, 2005
Cornell Capital Partners, LP
10.45 Registration Rights Agreement, dated Incorporated by reference to Exhibit
April 13, 2005, by and between Kronos 10.65 to the Registrant's Form SB-2
Advanced Technologies, Inc. and Cornell filed on April 19, 2005
Capital Partners, LP
30
10.46 Escrow Agreement, dated April 13, 2005, Incorporated by reference to Exhibit
by and between Kronos Advanced 10.66 to the Registrant's Form SB-2
Technologies, Inc. and Cornell Capital filed on April 19, 2005
Partners, LP
10.47 Placement Agent Agreement, dated April Incorporated by reference to Exhibit
13, 2005, by and between Kronos Advanced 10.67 to the Registrant's Form SB-2
Technologies, Inc. and Cornell Capital filed on April 19, 2005
Partners, LP
10.48 Form of Equity-Back Promissory Note in Incorporated by reference to Exhibit
the principal amount of $2,000,000 dated 10.68 to the Registrant's Form SB-2
March 7, 2005 between Kronos Advanced filed on April 19, 2005
Technologies, Inc. and Cornell Capital
Partners, LP
10.49 Form of Equity-Back Promissory Note in Incorporated by reference to Exhibit
the principal amount of $2,000,000 dated 10.59 to the Registrant's Form 10-KSB
June 22, 2005 between Kronos Advanced filed on September 28, 2005
Technologies, Inc. and Cornell Capital
Partners, LP
EXHIBIT NO. DESCRIPTION LOCATION
--------------------------------------------------------------------------------
31.1 Certification of Chief Executive Provided herewith
Officer pursuant to 15 U.S.C.
Section 7241, as adopted pursuant
to Section 302 of the Sarbanes-Oxley
Act of 2002
31.2 Certification of Principal Financial Provided herewith
Officer pursuant to U.S.C. Section
7241, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32 Certification by Chief Executive Officer Provided herewith
and Acting Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
ITEM 14. PRINCIPAL ACCOUNTANT AND SERVICES
The firm Sherb & Co. LLP, independent registered public accounting firm, has
audited our financial statements for the year ended June 30, 2006. The Board of
Directors has appointed Sherb & Co. LLP to serve as our independent registered
public accounting firm for the 2006 year-end audit and to review our quarterly
financial reports for filing with the Securities and Exchange Commission during
fiscal year 2007.
The following table shows the fees paid or accrued by us for the audit and other
services provided by Sherb & Co. LLP for fiscal year 2006 and 2005.
June 30, 2006 June 30, 2005
--------------- ---------------
Audit Fees(1) $ 67,000 $ 62,500
Audit-Related Fees 2,310 14,165
--------------- ---------------
Total $ 69,310 $ 76,665
=============== ===============
(1) Audit fees represent fees for professional services provided in connection
with the audit of our annual financial statements and review of our quarterly
financial statements and audit services provided in connection with other
statutory or regulatory filings
31
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereto duly authorized.
Date: September 28, 2006.
KRONOS ADVANCED TECHNOLOGIES, INC.
By: /s/ Daniel R. Dwight
------------------------------------
Daniel R. Dwight
President, Chief Executive
Officer and Director
By: /s/ Daniel R. Dwight
------------------------------------
Daniel R. Dwight
Acting Chief Financial Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Daniel R. Dwight Director, President, September 28, 2006
----------------------------- Chief Executive
Daniel R. Dwight Officer and Acting
Chief Financial
Officer
/s/ James P. McDermott Director September 28, 2006
-----------------------------
James P. McDermott
/s/ M. J. Segal Director September 28, 2006
-----------------------------
M. J. Segal
/s/ Richard F. Tusing Director and Chief September 28, 2006
----------------------------- Operating Officer
Richard F. Tusing