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, 2007
[ ] 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) 364-5089
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
_________________________________________
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, Par Value $0.001 Per Share
-----------------------------------------
(Title of class)
Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. Yes [ ] No [ ]
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: $160,478
The aggregate market value of the voting and non-voting common equity held by
non-affiliates on September 25, 2007 was $4,388,641 based on the average bid and
asked prices on such date of $0.18.
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 [ ]
(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 243,813,391 shares
of Common Stock, par value $0.001 per share, outstanding on September 26, 2007.
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
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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) 364-5089. 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. ("Kronos" or the "Company") 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, Inc.; 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 is a product development and production company that continues to develop
and patent technology that among other things 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
and funds are available, we intend to enter additional markets in the future.
The Company currently has thirteen U.S. patents and three international patents.
To date, our ability to execute our strategy has been restricted by our limited
amount of capital.
Kronos is focused on developing 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 (see "Independent Testing - Product Claims
Platform").
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The Company has begun establishing strategic partners with select companies both
domestically and internationally for standalone and embedded applications of our
proprietary technology. The Company and its partners are in various stages of
developing Kronos-based products.
Standalone Platform
o Residential Products - In December 2006, the Company's Exclusive
License Agreement with HoMedics expired. The Company is in active
discussions with other consumer products companies to market and sell
Kronos-based air purification products through retail, direct selling
and multi-level-marketing distribution channels. In conjunction with
these discussions, the Company has developed and built prototype
devices to customer specifications for their testing and evaluation.
o Medical Products - In December 2005, the Company executed a
non-exclusive license agreement with EOL LLC, a Russian Federation
company ("EOL"), for manufacturing and distributing Kronos-based
commercial standalone products in Russia and other select Commonwealth
of Independent States. The initial medical products are currently
being marketed in Russia and marketing plans are being implanted in
Ukraine, Kazakhstan, Moldova and Byelorussia. In November 2006, the
Ministry of Health Care and Social Development of the Russian
Federation issued a Registration Certificate for the product that
designates the product for medical use. During the fiscal year ended
June 30, 2007, Kronos earned $104,000 in revenue from the sale of
power supplies, other electrical components and engineering services,
and from the royalty from the sale of finished products by EOL. The
Company is in active discussions to enter the U.S. medical market with
one or more medical products distribution companies.
Embedded Platform
o Commercial Products - In June 2006, the Company executed its first
license for embedded applications of Kronos technology with DESA LLC
("DESA"). The agreement provides DESA the opportunity to embed the
Kronos electrostatic air movement technology within fireplaces, hearth
systems, zone heaters and mounted electric fans and heaters. In
October 2006, DESA approved Kronos' designs for the first Kronos-based
product and committed to the funding of the product development by
Kronos. In January 2007, DESA committed additional funds for Kronos
exploration of a second Kronos-based product application. By May 2007,
various prototype configurations for each of the two product
applications were under test and evaluation by Kronos and DESA.
o Residential Products - In October 2006, a leading global home
appliance manufacturer committed to fund 20% of the cost for Kronos to
manufacturer a silent kitchen range hood product. This next generation
range hood device represented the culmination of more than twelve
months of product design and development effort by Kronos to apply our
technology to this unique embedded residential application. The
product was shipped to the customer in October 2006. In January 2007,
the prototype design was modified based on customer input and a
revised unit was shipped to the customer. In addition to financial
support, the customer has also provided Kronos with product components
for Kronos testing and evaluation. In February 2007, a second global
appliance manufacturer committed to purchase prototypes from Kronos
for testing and evaluation. During the year ended June 30, 2007,
Kronos earned $37,000 in revenue from the development of prototype
devices for the residential range hood market place.
o Microelectronics Products - In June 2007, 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. This Phase III award follows the
Company's Phase 1 and Phase II awards in December 2004 and June 2006,
respectively.
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, bacteria and viral
removal, biohazard destruction, 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;
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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; and
o Intertek - tobacco smoke elimination tests in accordance with
ANSI/AHAM AC-1-1988 standard entitled "American National Standard
Method for Measuring Performance of Portable Household Electric
Cord-Connected Room Air Cleaners," which demonstrated a Clean Air
Delivery Rate ("CADR") for the Kronos air purifier of over 300 for the
larger size Kronos air purifier and 80 for the smaller size using
consumer filtration testing standards for the Association of Home
Appliance Manufacturers ("AHAM").
Sterilization Testing Results:
o Scientific Institution of Health Care, Central Clinical Hospital #2 in
Moscow (clinical trial):
- 100% decontamination of bacteria (Staphylococcus aureus) in under
one hour and 80% decontamination of general bacteria in under 24
hours from a 48m(3) hospital room while people were present.
o Pulmonary Department of Municipal Hospital #2 in Moscow (clinical
trial):
- 100% decontamination of bacteria (Staphylococcus aureus) in under
five hours from a 66m(3) hospital room while four patients were
present; and
- 100% decontamination of mildew fungi in under two hours from a
113.2m(3) hospital room.
o Disinfection Research Institute Sterilization Laboratory in Moscow:
- disinfected a room completely contaminated with Bacteriophage - a
microorganism which lives in the E. Coli bacteria. (Bacteriophage
is widely used in virus testing because the microorganism's
biological structure and size share many functional similarities
with a wide range of viruses); and
- 100% decontamination of room infected with bacteria
(Staphylococcus aureus strain 906 (S. aureus) and Bacillus cereus
strain 96 (B. cereus) - S. aureus is a known cause of
hospital-acquired infections, including skin lesions such as
boils and furunculosis and more serious infections such as
pneumonia and meningitis.
o Institute for Veterinary Medicine in the Ukraine - destroy and
sterilize air which had been inseminated with Anthrax and E.coli
spores;
o New Hampshire Materials Laboratory - up to 95% reduction of hazardous
gases, including numerous carcinogens found in cigarette smoke;
o Battelle PNNL - 95% destruction of Bg (anthrax simulant); and
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o Dr. Sergey Stoylar, a bacteriologist from the American Bacteriological
Society - 100% destruction of Bacillus subtilis 168 (bacteria
simulant).
Medical Product Approval
In September 2006, the Russian Research Institute of Medical Equipment approved
EOL's Kronos-based Tree(TM) air purification device for use in hospitals and
other healthcare facilities. The device received Category I approval, which
means the product has met the strictest regulations required for a device to be
used in operating rooms and other areas that require a sterile environment. In
November 2006, following the Russian Research Institute approval, the Ministry
of Health Care and Social Development of the Russian Federation issued a
Registration Certificate that designates the Kronos-based Tree(TM) air
purification device for medical use.
Market Segmentation
Kronos' initial business development strategy is to develop and produce products
based on 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) embedded cooling and cleaning
(electronic devices and medical equipment); (4) specialized military (naval
vessels, closed vehicles and mobile facilities); (5) industrial scrubbing
(produce storage and diesel and other emissions); and (6) hazardous gas
destruction (incineration and chemical facilities).
Kronos' current focus is on the first three 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
facilities.
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.
Kronos is currently developing products for the air movement and purification
and air purification for unique spaces markets through specific customer
contracts. Kronos is currently undertaking research and development in the
embedded micro cooling market using Company funds and third party grants. These
contracts and grants 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. Since the October 2002 Exclusive License Agreement with
HoMedics expired in December 31, 2006, the Company has been in active
discussions with other consumer products companies to market and sell
Kronos-based air purification products through retail, direct selling and
multi-level-marketing distribution channels. In conjunction with these
discussions, the Company has developed and built prototype devices to customer
specifications for their testing and evaluation.
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Medical Products. In December 2005, the Company executed a non-exclusive license
agreement with EOL LLC, a Russian Federation company ("EOL"), for manufacturing
and distributing Kronos-based commercial standalone products in Russia and other
select Commonwealth of Independent States. The initial medical products are
currently being marketed in Russia and marketing plans are being implanted in
Ukraine, Kazakhstan, Moldova and Byelorussia. In November 2006, the Ministry of
Health Care and Social Development of the Russian Federation issued a
Registration Certificate for the product that designates the product for medical
use. During the fiscal year ended June 30, 2007, Kronos earned $104,000 in
revenue from the sale of power supplies, other electrical components and
engineering services and from the royalty from the sale of finished products by
EOL.
In August 2006, the Russian Research Institute of Medical Equipment began the
process for product certification of the EOL's Kronos-based Tree(TM) air
purification device for use in medical facilities, including a successful
clinical trial of EOL products in the Pulmonary Department of Municipal Hospital
#2 in Moscow. In October 2006, Scientific Institution of Health Care, Central
Clinical Hospital #2 in Moscow completed a second clinical trial. As a result of
these clinical trials, the Russian Research Institute approved the Kronos-based
Tree(TM) air purification device for use in hospitals and other healthcare
facilities. The device received Category I approval, which means the product has
met the strictest regulations required for a device to be used in operating
rooms and other areas that require a sterile environment. In November 2006,
following the Russian Research Institute approval, the Ministry of Health Care
and Social Development of the Russian Federation issued a Registration
Certificate that designates the Kronos-based Tree(TM) air purification device
for medical use.
The Company is in active discussions to enter the U.S. medical market with one
or more medical products distribution companies.
Commercial and Other Standalone Products. Utilizing our expanded product
development resources, Kronos completed the initial design, development and
production of a series of small multifunctional devices that can be used as
space heaters, vaporizers, disinfectors, deodorizers and/or fans. Based on the
proprietary Kronos technology, these devices are currently undergoing testing
and evaluation. Kronos has been meeting with potential strategic partners for
manufacturing, marketing, selling and distributing these Kronos-based products.
Embedded Platform
Commercial Products. In June 2006, the Company executed its first license for
embedded applications of Kronos technology with DESA LLC ("DESA"). The agreement
provides DESA the opportunity to embed the Kronos electrostatic air movement
technology within fireplaces, hearth systems, zone heaters and mounted electric
fans and heaters. In October 2006, DESA approved Kronos' designs for the first
Kronos-based product and committed to the funding of the product development by
Kronos. In January 2007, DESA committed additional funds for Kronos exploration
of a second Kronos-based product application. By May 2007, various prototype
configurations for each of the two product applications were under test and
evaluation by Kronos and DESA.
In addition, Kronos has developed an air filtration and purification mechanism
capable of performing to HEPA quality standards, while eliminating bacteria and
viruses. The Company believes 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 commercialize, market and distribute Kronos based
commercial embedded air filtration and purification devices.
Residential Products. In October 2006, a leading global home appliance
manufacturer committed to fund 20% of the cost for Kronos to manufacturer a
silent kitchen range hood product. This next generation range hood device
represented the culmination of more than twelve months of product design and
development effort by Kronos to apply our technology to this unique embedded
residential application. The product was shipped to the customer in October
2006. In January 2007, the prototype design was modified based on customer input
and a revised unit was shipped to the customer. In addition to financial
support, the customer has also provided Kronos with product components for
Kronos testing and evaluation. In February 2007, a second global appliance
manufacturer committed to purchase additional prototypes from Kronos for testing
and evaluation. During the year ended June 30, 2007, Kronos earned $37,000 in
revenue from the development of prototype devices for the residential range hood
market place.
Transportation Products. In April 2006, Kronos was invited to serve as a member
and an industrial partner in the Federal Aviation Administration's (the "FAA")
Air Transportation Airliner Cabin Environment Research Center of Excellence. In
this capacity, Kronos is providing its real-time decontamination, air
filtration, purification and technology expertise to evaluate and develop
solutions that proactively address and improve cabin air quality. The program,
led by the FAA, includes senior executives from aerospace equipment
manufacturers and leading American universities.
Microelectronics Cooling Products. In December 2004, Kronos and the University
of Washington were awarded a Phase I grant for a research and technology
development project entitled "Heat Transfer Technology for Microelectronics and
MEMS" by the Washington Technology Center (the "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 WTC contributed $100,000 as a Phase II
grant for the project. Kronos provided $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 is leading a team of
scientists and engineers from Kronos and Intel Corporation who are also
collaborating on the project. In September 2006, Kronos hired a former Intel
employee to lead Kronos' development of micro cooling applications.
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In June 2007, the Company and the University of Washington were awarded a Phase
III grant for continued funding. This additional funding is to support the
further development of prototype products. The WTC is contributing $100,000.
Kronos will provide $20,000 in funding and $20,000 in in-kind services,
including use of the Kronos Research and Product Development Facility.
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 currently has thirteen registered patents with the United States Patent
and Trademark Office and three international patents registered with the
Canadian Intellectual Property Office, the Commonwealth of Australia Patent
Office and the Mexican Institute of Industrial Property. These patents are
considered utility patents which describe fundamental innovations in the
generation, management and control of electrostatic fluids, including air
movement, filtration and purification. Each of the patents contain multiple part
claims for both general principles as well as specific designs for incorporating
the Kronos technology into air movement, filtration and purification products.
The patents provide protection for both specific product implementations of the
Kronos technology, as well as more general processes for applying the unique
attributes and performance characteristics of the technology.
U.S. Patents
Date U.S. Patent # Patent Title Description Protection
---- ------------- ------------ ----------- ----------
August 7,262,564 Alternative geometry, voltage ratios 2024
2007 Geometries and and power requirements
Voltage Supply for improved operational
Management performance
July 7,248,003 Electric Field effective electric field 2025
2007 Management management for reduced
sparking
October 7,122,070 Method of and inertialess power supply for 2025
2006 Apparatus for safe operation and spark
Electrostatic Fluid prevention
Acceleration
August 7,157,704 Corona Discharge method of generating air 2023
2006 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 7,150,780 Electrostatic Air method for improving the 2024
2006 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
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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 April 2007, Kronos received formal notification from the Canadian
Intellectual Property Office indicating that its application entitled
"Electrostatic Fluid Accelerator" has been examined and allowed for issuance as
a Canadian 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 approved as a
Mexican patent. 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 approved as an
Australian patent. There are a number of other patent applications corresponding
to Kronos' thirteen U.S. Patents that have been filed and are pending outside of
the United States.
Kronos intends to continue to aggressively file patent applications in the U.S.
and internationally. A number of additional patent applications have been filed
for, among other things, the control and management of electrostatic fluid
acceleration. These additional patent applications are either being examined or
are awaiting examination by the Patent Office.
MILESTONES
Our primary business objectives over the prior 12 months was to secure the
funding to support the Company's effort to commercialize its proprietary
technology while continuing to expand our research into new product
applications. In the fiscal year ended June 30, 2007, the Company received
$4,459,000 in funding from investors with an investor option to fund an
additional $13,900,000. In addition during the fiscal year ended June 30, 2007,
the Company received $1,380,000 in funding from Cornell Capital Partners and
$160,000 in customer funded product development work and licensing revenue from
the sale of Kronos-based products. The Company was also able to restructure its
debt during the fiscal year ended June 30, 2007 by settling in full $3,082,000
in outstanding debt inclusive of interest to HoMedics through a $1,000,000
payment under the terms of the Company and HoMedics' Settlement Agreement and
General Release and repayment in full $1,650,000 in debt with Cornell Capital
Partners.
Our second objective was to launch Kronos-based standalone consumer products.
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 objective of
having its residential, retail consumer products partner brought to market. As a
result, in December 2006, the Company allowed its license agreement to expire
with that partner, HoMedics USA, Inc. The expiration of this agreement
positioned the Company to identify and initiate discussion with new strategic
partners in the residential market place who have the willingness and viability
to bring Kronos-based consumer air purification products to market.
Our third objective was to execute on our agreements with EOL and DESA. The
Company provided technical services and electronics to EOL as EOL completed
development of a medical air purifier and began selling the product into the
hospital marketplace. The Company generated $104,000 in revenue during the
fiscal year ended June 30, 2007 through the sale of Kronos proprietary
electronics and from royalties from EOL sale of Kronos-based air purification
devices in Russia and other select Commonwealth of Independent States. The
Company provided technical support for embedded applications of Kronos
technology with DESA by designing and building prototype devices for DESA in the
embedded residential fireplace market.
9
In addition, during the year the Company (i) executed on a Phase II award and
obtained a Phase III award from the Washington Technology Center in conjunction
with the University of Washington and Intel Corporation for a research and
development project based on a novel cooling system for microelectronics and
computer chips; (ii) continued 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 (iii) 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. These opportunities generated $37,000 in
revenue during the fiscal year ended June 30, 2007 and a commitment for an
additional $34,000 in funding in fiscal 2008.
The Company was able to achieve these successes through the expansion of (i) our
product development resources to better position Kronos' ability to address
specific customer issues and needs; (ii) 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 Staphylococcus aureus and Bacillus cereus
bacteria; and (iii) our intellectual property.
Our primary business objectives over the next twelve months are to (i) secure
commitments from one or more distributors of residential standalone air
purifiers for the purchase of Kronos developed and manufactured air purifiers,
(ii) secure access to one or more viable contract manufactures to produce these
products, (iii) execute on our agreements with EOL and DESA, and (iv) secure new
strategic partner(s) for developing new product applications.
In order to achieve these objectives the Company will need to (i) expand our
product development and engineering resources to better position Kronos to
address specific customer issues and needs, (ii) secure commitments from one or
more distributors of residential range hoods for the purchase of Kronos
developed and manufactured air purifiers, and (iii) continue to implement our
intellectual property strategies, including continuation of our U.S. and
international patent filing process to enable a full development and effective
management of our intellectual property rights and assets. We believe that
execution on our business plan will be achieved through the funding from Kronos'
new investors, AirWorks and Hilltop, from customer funded product development
work and from revenue from the sale of Kronos-based products and services.
AIRWORKS AND HILLTOP SECURED CONVERTIBLE DEBT TRANSACTION
In June 2007, Kronos entered into a Funding Agreement with a group of lenders
providing for a loan, at the discretion of the lenders, in the aggregate amount
of up to $18,159,000. At the initial closing, the Company received an initial
advance of $4,259,000. After payment in full of the amounts due under an
outstanding convertible debenture issued to Cornell Capital Partners, the
settlement agreement obligation to HoMedics and the expenses of the transaction,
the remainder of $1,069,000 was used for working capital purposes.
The initial new lenders were: (i) AirWorks Funding LLLP, a newly-formed limited
partnership ("AirWorks"); (ii) Critical Capital Growth Fund, L.P. and various
Sands Brothers Venture Funds, all of which are affiliates of Laidlaw and Co.
(UK) Ltd. (collectively "Sands") and (iii) RS Properties I LLC, a New York-based
private investment company ("RS Properties"). Subsequently, RS Properties
assigned to Hilltop Holding Company, LP, a Delaware limited partnership,
(`Hilltop") its promissory note together with certain other rights and
agreements relating thereto, including, without limitation, its rights and
obligations under the Funding Agreement.
The loan is secured by all of the Company's assets and is convertible into
shares of the Company's common stock at a conversion price of $0.0028 per share,
subject to adjustment under certain circumstances. Future installments under the
Funding Agreement, up to $13,900,000, may be advanced at the discretion of the
lenders, even if not requested by the Company. Under the Funding Agreement and
related notes, the Company pays interest at the rate of 12% per annum. Of the
total amount of the initial advance, interest is paid monthly starting July 1,
2007 on $859,000, which principal amount is due and payable December 31, 2007.
Such amount may be converted into Kronos common stock at the option of the
holder at the $0.0028 conversion price only if not paid in full by December 31,
2007. With respect to all other loan amounts, interest is paid quarterly
starting January 1, 2008 and outstanding principal is due and payable June 19,
2010, unless earlier converted at the option of the lenders. Assuming payment
when due of the $859,000, that the maximum loan amount is advanced under the
Funding Agreement and related notes and that the lenders convert the entire
amount of the loan into Kronos common stock at the noted conversion price, the
lenders would own approximately 93.3% of the Company's total equity on a fully
diluted, as converted basis.
Also in connection with the Funding Agreement, several Kronos option and warrant
holders delivered standstill agreements pursuant to which such holders agreed
not to exercise their options or warrants before December 31, 2007. Several
stockholders also entered into Voting Agreements with the lenders pursuant to
which they agreed to vote, if and when proposed to shareholders, in favor of:
(i) a slate of directors of the Company's board of directors as proposed by
AirWorks; (ii) adjusting the size of the Company's board of directors such that
upon the election of the slate of directors proposed by AirWorks, such directors
hold a majority of the seats on the Company's board of directors; (iii)
approving an amendment to the Company's articles of incorporation to increase
the Company's authorized common stock to a number of shares necessary to allow
the lenders to convert the entire amount of the financing into shares of common
stock of the Company as provided in the Notes and the Funding Agreement; (iv)
reincorporating the Company in Delaware; (v) a reverse stock split proposed by
AirWorks or the Company's board of directors; and (vi) against any action or
transaction that may reasonably be expected to impede, interfere with, delay,
postpone or attempt to discourage the consummation of any of the foregoing. Such
standstill and voting agreements, combined with the conversion into Kronos
common stock of a sufficient amount of the initial advance under the Funding
Agreement, would give the lenders voting control of the Company.
10
The Funding Agreement also gives the lenders the right to designate a majority
of the members of the Company's Board of Directors. Such right has not yet been
exercised. The Funding Agreement also contains usual and customary
representations and warranties and covenants that prohibit the Company from
undertaking certain actions without the consent of AirWorks.
HOMEDICS SENIOR DEBT TRANSACTION
In May 2003, Kronos entered into an agreement with FKA Distributing Co. d/b/a
HoMedics, Inc., ("HoMedics") for $2,500,000 in financing, including $2,400,000
in secured debt financing and $100,000 for the purchase of warrants. $2,500,000
was paid to Kronos upon execution of the agreement. In October 2004, Kronos and
HoMedics agreed to extend repayment of Kronos debt and to provide an additional
$1,000,000 on in funding consisting of $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 was not funded. In addition,
quarterly debt payments and the maturity date for existing debt were extended.
Quarterly payments due on the outstanding $2,400,000 in secured debt financing,
which had been scheduled to begin in August 2004, were due in February 2007. The
maturity date of the $2,400,000 in debt had been extended from May 2008 to
October of 2009; the maturity date on the $175,000 was extended to October 2009.
The interest rate was at 6% for the $2,400,000 in debt; the rate was also 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. In February 2007, HoMedics and Kronos
executed a Settlement Agreement and General Release whereby among other things
HoMedics agreed to receive $1,000,000 in a cash payment to cancel the loan
agreements, including all principal and accrued interest, and to cancel the
warrants to purchase 26.5 million shares of the Company's common stock and the
anti-dilution provisions of the warrants. In June 2007, Kronos made the
$1,000,000 payment under the terms of a Settlement Agreement and General
Release.
CORNELL CAPITAL TRANSACTIONS
In October 2004, Kronos entered into agreements for up to $20,500,000 in equity
and equity backed debt financing from Cornell Capital Partners. Cornell Capital
Partners provided $4,000,000 pursuant to two Promissory Notes, which were funded
as follows: $2,000,000 upon filing a Registration Statement and $2,000,000 upon
the SEC declaring the Registration Statement effective. Kronos executed a
Standby Equity Distribution Agreement for $20,000,000 of funding which Kronos
had the option to drawdown against. As of June 30, 2006, Kronos had repaid the
first Promissory Note in full and as of June 30, 2007 had repaid the second
Promissory Note in full. On June 19, 2007, the Company cancelled the Standby
Equity Distribution Agreement.
EMPLOYEES
On September 26, 2007, Kronos and its subsidiaries had fifteen full-time
employees. Of the total number of full-time employees, one works in general
management, ten in product development, three in research, and one in marketing
and sales and operations. 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 do not have sufficient cash to continue operations and require significant
additional financing to sustain our operations.
At June 30 2007 and June 30, 2006, we had a working capital deficit of
$1,208,000 and $2,559,000, respectively. The Report of Independent Registered
Public Accounting Firm for the year ended June 30, 2007, includes an explanatory
paragraph to their audit opinion stating that our recurring losses from
operations and working capital deficiency raise doubt about our ability to
continue as a going concern. For the fiscal years ended June 30, 2007 and 2006,
we had an operating cash flow deficit of $3,029,000 and $2,615,000 and a cash
balance of $364,000 and $598,000, respectively. Funding may be available to
Kronos through AirWorks and Hilltop. However, Kronos has not determined if this
funding will be sufficient, because the lenders, at their sole discretion,
control the timing of and whether such funding will occur.
11
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 $2,351,000 for the fiscal year ended June
30, 2007 and a net loss of $4,000,000 for the fiscal year ended June 30, 2006.
As a result, at June 30, 2007 and June 30, 2006, we had an accumulated deficit
of $33,469,000 and $31,117,000, 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. If we
do not achieve profitability we could be forced to curtail or cease our business
operations.
Existing stockholders will experience significant dilution from our sale of
shares under any equity financing.
The sale of shares pursuant to the conversion of the AirWorks and Hilltop
Secured Convertible Promissory Note, the exercise of stock options and 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.
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 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 or cease 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. If we are unable to enforce protection
of our intellectual property, we could be forced to curtail or cease our
business operations.
Possible future impairment of intangible assets would have a material adverse
effect on our financial condition.
Our net intangible assets of approximately $1,723,000 as of June 30, 2007
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 82% of
our total assets as of June 30, 2007. 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 Kronos-based products. 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.
12
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 $2,000,000 (if the
issuer has been in continuous operation for at least three years) or
$5,000,000 (if in continuous operation for less than three years), or
with average revenues of less than $6,000,000 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 and product development
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 product 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 Company's Research and Product Development facility
is 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 do not
consider our Research and Product Development facility to be adequate and the
Company expects to expand on its leased space during the fiscal year ended June
30, 2008.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company may be subject to law suits in the normal course
of business.
Thompson E. Fehr has filed a complaint in the Second Judical District Court of
Weber County in the state of Utah against Kronos with respect to prior services
rendered to High Voltage Integrated, Inc. totaling $47,130. The Company believes
this complaint is without merit and is rigorously defending itself.
Allstate Insurance Company, as subrogee of David Buell, filed a complaint in the
Cicruit Court for the County of Oakland in the state of Michigan against
HoMedics, Inc. and Kronos with respect to damages related to a fire in the home
of Mr. Buell which resulted in $244,155 in damages. Under the terms of the
Company's General Liability insurance policy, this matter is currently being
addressed by the Company's insurance carrier, Argonaut Group.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
13
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 2007 and
2006 are presented as follows:
FISCAL YEAR 2007
HIGH LOW
First Quarter (July 2006 to September 2006) $0.048 $0.019
Second Quarter (October 2006 to December 2006) $0.024 $0.012
Third Quarter (January 2007 to March 2007) $0.021 $0.006
Fourth Quarter (April 2007 to June 2007) $0.028 $0.008
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
On September 26, 2007, the closing price of our common stock as reported on the
Over-the-Counter Bulletin Board was $0.02 per share. On September 26, 2007, we
had approximately 2,500 beneficial stockholders of our common stock and
243,813,391 shares of our common stock were issued and outstanding.
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 were 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. As of the All the option under the TSET, Inc.
Stock Option Plan have been issued.
On June 15, 2007, the Board of Directors approved the Kronos Advanced
Technologies 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 100,000,000 shares
of common stock under the Stock Option Plan.
DIVIDENDS
We have not declared or paid dividends on our common stock during fiscal 2006 or
2007 and do not plan to declare or pay dividends on our common stock during
fiscal 2008. 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." 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 officers and
directors. 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.
14
On April 27, 2007, we issued three year Convertible Promissory Notes to two
accredited investors for $200,000 convertible into shares of Kronos common stock
at $0.0028 per share.
On June 18, 2007, we issued 80 million stock options to employees and directors.
The ten year options vest two thirds upon issuance and one third over the
following twelve months and convert into shares of Kronos common stock at $0.016
per share.
On June 19, 2007, we issued three year Secured Convertible Promissory Notes to a
group of institutional investors for up to $17,300,000 convertible into shares
of Kronos common stock at $0.0028 per share. As of June 30, 2007, $3,400,000 of
the $17,300,000 had been funded. In August, an additional $659,000 had been
funded.
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 a product development and production
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.
The achievements of the Company over the past twelve months included the
following:
o Business Development, Marketing and Sales:
- earned $160,000 in revenue from the sale of electronics, royalties
from the sale of finished products and development contracts for
embedded product applications;
- initiated discussions with residential distributors of standalone air
purifiers to consumers and health care product distributors to
medical practitioners as the Company's seeks to secure orders for the
sale of Kronos developed and produced air purification products;
- awarded a Washington Technology Center Phase III grant for developing
a novel approach to cooling micro chips.
o Operations:
- expanded our product development resources, including the recruitment
of a senior product development and engineering leader;
- completed testing of consumer standalone air purification products;
- developed an acceptable standalone air purifier for the medical
market with the Company's strategic partner, EOL;
- developed prototype range hoods for two leading global appliance
manufacturers;
- developed prototype products with Company's strategic partner, DESA,
for the embedded heater market.
o Technology and Intellectual Property:
- secured additional U.S. and international patents for our proprietary
technology and made additional patent filings;
15
- 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 Staphylococcus aureus
and Bacillus cereus bacteria.
Recent Developments
HoMedics. In December 2006, the Company's Exclusive License Agreement with
HoMedics USA, Inc. expired. This freed the Company to pursue alternative
strategic distribution partners in the retail, consumer market place.
EOL. During the fiscal year ended June 30, 2007, the Company developed a viable
standalone air purifier for the medical market with EOL and generated $104,000
in revenue from the sale of the Company's proprietary electronics to EOL and
from royalties from EOL's sale of Kronos-based air purifiers to hospitals in
Russia.
Global Appliance Manufacturers: During the fiscal year ended June 30, 2007, the
Company developed silent range hood prototypes based on embedding the Kronos
technology into existing range hood product configurations. Initial prototypes
were shipped to one customer and additional prototypes under construction are
expected to shipped to a second customer in fiscal 2008.
DESA. During the year ended June 2007, the Company developed prototype products
with DESA for the embedded heater market.
Washington Technology Center. In June 2007, the Washington Technology Center
awarded the Company in conjunction with the University of Washington and Intel
Corporation continued funding under a Phase III contract for a research and
development technology project on a novel cooling system for microelectronics
and computer chips. This award was a follow on to the Company's Phase I and II
contract awards and the successful bench scale demonstration of micron cooling
of a MEMS chip.
Cornell Debt Repayment. In June 2007, the Company completed repayment of the
second $2,000,000 promissory note to Cornell Capital Partners.
HoMedics Debt Repayment. In June 2007, the Company made the $1,000,000 payment
under the terms of the settlement agreement obligation with HoMedics thereby
canceling the loan agreements, including all principal and accrued interest, and
canceling the warrants to purchase 26.5 million shares of the Company's common
stock and the anti-dilution provisions of the warrants.
AirWorks and Hilltop. In June 2007, Kronos entered into a Funding Agreement with
AirWorks, Hilltop and Sands providing for a loan, at the discretion of the
lenders, in the aggregate amount of up to $18,159,000. At the initial closing,
the Company received an initial advance of $4,259,000. After payment in full of
the amounts due under an outstanding convertible debenture issued to Cornell
Capital Partners and settlement agreement obligation to HoMedics and the
expenses of the transaction, the remainder of $1,069,000 was used for working
capital purposes.
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
16
we do for internal budgeting, lenders and other third parties; therefore, they
are internally and externally consistent with financial statement and other
public and private disclosures. We are not aware of any negative implications
resulting from the projections used for purposes of evaluating the
appropriateness of the carrying value of these assets. If assets are considered
to be impaired, the impairment recognized is the amount by which the carrying
value of the assets exceeds the fair value of the assets. Useful lives and
related amortization or depreciation expense are based on our estimate of the
period that the assets will generate revenues or otherwise be used by Kronos.
Factors that would influence the likelihood of a material change in our reported
results include significant changes in the asset's ability to generate positive
cash flow, loss of legal ownership or title to the asset, a significant decline
in the economic and competitive environment on which the asset depends,
significant changes in our strategic business objectives, and utilization of the
asset.
Valuation of Deferred Income Taxes. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
The likelihood of a material change in our expected realization of these assets
is dependent on our ability to generate future taxable income, our ability to
deduct tax loss carryforwards against future taxable income, the effectiveness
of our tax planning and strategies among the various tax jurisdictions that we
operate in, and any significant changes in the tax treatment received on our
business combinations.
Revenue Recognition. We recognize revenue in accordance with Securities and
Exchange Commission Staff Bulletin 104 ("SAB 104"). Further, Kronos Air
Technologies recognizes revenue on the sale of custom-designed contract sales
under the percentage-of-completion method of accounting in the ratio that costs
incurred to date bear to estimated total costs. For uncompleted contracts where
costs and estimated profits exceed billings, the net amount is included as an
asset in the consolidated balance sheet. For uncompleted contracts where
billings exceed costs and estimated profits, the net amount is included as a
liability in the consolidated balance sheet. Sales are reported net of
applicable cash discounts and allowances for returns.
RESULTS OF OPERATIONS
Consolidated Statement of Operations For the Year Ended June 30, 2007 Compared
to the Year Ended June 30, 2006.
Our net losses for each of the fiscal years ended June 30, 2007 and June 30,
2006 were $2,351,000 and $4,000,000, respectively. The decrease in the net loss
for the year ended June 30, 2007, as compared to the prior year, was principally
the result of a $2,856,000 increase in other income associated with the
settlement of the HoMedics debt and cancellation of 26.5 million warrants issued
to HoMedics, and a $121,000 decrease in interest expense to $368,000, partially
offset by a $144,000 decrease in gross profit and a $1,176,000 increase in
operating costs to $4,907,000.
Revenue. Revenues are generated through sales of electronics, royalties from the
sale of finished Kronos-based products and sale of services for design and
development of Kronos devices at Kronos Air Technologies, Inc. Revenues for the
year ended June 30, 2007 were $160,000 compared with $219,000 in the prior year.
Current year revenues were primarily from our EOL, Bosch Siemens, DESA and GE
agreements.
Cost of Sales. Cost of sales for the year ended June 30, 2007 was $93,000
compared with $8,000 for the prior year. Cost of sales is primarily cost of
goods sold from the sale of electronics to EOL.
Selling, General and Administrative Expenses. Selling, General and
Administrative expenses for the year ended June 30, 2007 increased $1,176,000
from the prior year to $4,907,000. The increase was principally the result of a
$924,000 increase on equity compensation as the result of an increase in non
cash compensation associated with the expensing of stock options and a $605,000
increase in professional services as the result of the cost of securing new
funding and settlement of the HoMedics debt, partially offset by a $170,000
decrease in research and development and a $74,000 decrease in compensation and
benefits as the Company prioritized its limited resources on product
development.
Gain on Extinguishment of Debt and Warrant Cancellation. The non-cash gain on
debt and warrant cancellation for the year ended June 30, 2007 was $2,856,000
and represented the settlement of the HoMedics debt and cancellation of 26.5
million warrants issued to HoMedics under the terms of the Settlement Agreement
and General Release. (refer to Note 13 - Commitments and Contingencies).
Interest expense. Interest expenses for the year ended June 30, 2007 decreased
$121,000 to $368,000 compared to $489,000 for the the prior year as a result of
the reduction in principal outstanding to Cornell Capital Partners.
Consolidated Balance Sheet as of June 30, 2007 Compared to June 30, 2006.
Our total assets at June 30, 2007 were $2,111,000 compared with $2,656,000 at
June 30, 2006. Total assets at June 30, 2007 and June 30, 2006 were comprised
primarily of $1,723,000 and $1,984,000, respectively, of patents/intellectual
property and $364,000 and $598,000, respectively, of cash. Total current assets
at June 30, 2007 and 2006 were $381,000 and $666,000, respectively, while total
current liabilities for those same periods were $1,589,000 and $3,225,000,
respectively, creating a working capital deficit of $1,208,000 and $2,559,000 at
each respective period end. The working capital deficit at June 30, 2007 was
primarily due to short term borrowings from Sands Brothers, accounts payable and
notes payable to employees and at June 30, 2006 due to short term borrowings
from Cornell Capital Partners and accrued interest.
17
Stockholders' equity as of June 30, 2007 was $287,000. The beneficial conversion
feature associated with the issuance of convertible debt ($3,400,000), the sale
and issuance of common stock for cash ($1,380,000) and the issuance of common
options for compensation and services ($1,531,000) was partially offset by the
$2,351,000 net loss for the twelve months ended June 30, 2007 and $528,000 from
the cancellation of HoMedics's warrants.
Consolidated Statement of Operations For the Year Ended June 30, 2006 Compared
to the Year Ended June 30, 2005.
Our net losses for each of the fiscal 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 increase 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
$324,000 increase in equity compensation 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 26.5
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 the prior year.
Consolidated Balance Sheet as of June 30, 2006 Compared to June 30, 2005.
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)
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.
Net cash flow used in operating activities was $3,029,000 for the year ended
June 30, 2007. We were able to satisfy most of our cash requirements for this
period from the proceeds of the convertible secured promissory notes with
AirWorks, Hilltop and Sands Brothers and the sale of equity to Cornell Capital
Partners.
18
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 AirWorks and Hilltop Funding Agreement.
There are no assurances that these sources of funding will be available to the
Company or adequate to meet our cash flow needs.
In June 2007, Kronos entered into a Funding Agreement with a group of lenders
providing for a loan, at the discretion of the lenders, in the aggregate amount
of up to $18,159,000. At the initial closing, the Company received an initial
advance of $4,259,000. After payment in full of the amounts due under an
outstanding convertible debenture issued to Cornell Capital Partners and
settlement agreement obligation to HoMedics and the expenses of the transaction,
the remainder of $1,069,000 was used for working capital purposes.
The initial new lenders were: (i) AirWorks Funding LLLP, a newly-formed limited
partnership; (ii) Critical Capital Growth Fund, L.P. and various Sands Brothers
Venture Funds, all of which are affiliates of Laidlaw and Co. (UK) Ltd. and
(iii) RS Properties I LLC, a New York-based private investment company.
Subsequently, RS Properties assigned to Hilltop its promissory note in the
amount of $6,480,000, together with certain other rights and agreements relating
thereto, including, without limitation, its rights and obligations under the
Funding Agreement.
The loan is secured by all of the Company's assets and is convertible into
shares of the Company's common stock at a conversion price of $0.0028 per share,
subject to adjustment under certain circumstances. Future installments under the
Funding Agreement, up to $13,900,000, may be advanced at the discretion of the
lenders, even if not requested by the Company. Under the Funding Agreement and
related notes, the Company pays interest at the rate of 12% per annum. Of the
total amount of the initial advance, interest is paid monthly starting July 1,
2007 on $859,000, which principal amount is due and payable December 31, 2007.
Such amount may be converted into Kronos common stock at the option of the
holder at the $0.0028 conversion price only if not paid in full by December 31,
2007. With respect to all other loan amounts, interest is paid quarterly
starting January 1, 2008 and outstanding principal is due and payable June 19,
2010, unless earlier converted at the option of the lenders. Assuming payment
when due of the $859,000, that the maximum loan amount is advanced under the
Funding Agreement and related notes and that the lenders convert the entire
amount of the loan into Kronos common stock at the noted conversion price, the
lenders would own approximately 93.3% of the Company's total equity on a fully
diluted, as converted basis.
In May 2003, Kronos entered into an agreement with FKA Distributing Co. d/b/a
HoMedics, Inc., ("HoMedics") for $2,500,000 in financing, including $2,400,000
in secured debt financing and $100,000 for the purchase of warrants. $2,500,000
was paid to Kronos upon execution of the agreement. In October 2004, Kronos and
HoMedics agreed to extend repayment of Kronos debt and to provide an additional
$1,000,000 in funding consisting of $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 was not funded. In addition,
quarterly debt payments and the maturity date for existing debt were extended.
Quarterly payments due on the outstanding $2,400,000 in secured debt financing,
which had been scheduled to begin in August 2004, were due in February 2007. The
maturity date of the $2,400,000 in debt had been extended from May 2008 to
October of 2009; the maturity date on the $175,000 was extended to October 2009.
The interest rate was at 6% for the $2,400,000 in debt; the rate was also 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. In February 2007, HoMedics and Kronos
executed a Settlement Agreement and General Release whereby among other things
HoMedics agreed to receive $1,000,000 in a cash payment to cancel the loan
agreements, including all principal and accrued interest, and to cancel the
warrants to purchase 26.5 million shares of the Company's common stock and the
anti-dilution provisions of the warrants. In June 2007, Kronos made the
$1,000,000 payment under the terms of the Settlement Agreement and General
Release.
In October 2004, Kronos entered into agreements for up to $20,500,000 in equity
and equity backed debt financing from Cornell Capital Partners. Cornell Capital
Partners provided $4,000,000 pursuant to two Promissory Notes, which were funded
as follows: $2,000,000 upon filing a Registration Statement and $2,000,000 upon
the SEC declaring the Registration Statement effective. Kronos executed a
Standby Equity Distribution Agreement for $20,000,000 of funding which Kronos
had the option to drawdown against. As of June 30, 2006, Kronos had repaid the
first Promissory Note in full and as of June 30, 2007 had repaid the second
Promissory Note in full. On June 19, 2007, the Company cancelled the Standby
Equity Distribution Agreement.
GOING CONCERN OPINION
The Report of Independent Registered Public Accounting Firm includes an
explanatory paragraph to their audit opinions issued in connection with our 2007
and 2006 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.
19
OFF-BALANCE SHEET ARRANGEMENTS
As of June 30, 2007, the Company has not engaged in any off-balance sheet
arrangements, and management does not anticipate that the Company will be
engaged in off-balance sheet arrangements in the foreseeable future.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements appear beginning at page F-1.
20
KRONOS ADVANCED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AT JUNE 30, 2007
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets as of June 30, 2007 and June 30, 2006 F-3
Consolidated Statements of Operations for the years ended June 30,
2007 and 2006 F-4
Consolidated Statement of Changes of Stockholders' Deficit for years
ended June 30, 2007 and 2006 F-5
Consolidated Statements of Cash Flows for the years ended June 30,
2007 and 2006 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, 2007 and 2006 and the related
consolidated statements of operations, stockholders' equity/(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, 2007 and 2006 and the results
of their operations and their cash flows for the years then ended, in conformity
with U. S. generally accepted accounting principles.
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, 2007
KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
June 30, June 30,
2007 2006
Assets ----------------- -----------------
Current Assets
Cash $ 363,955 $ 598,323
Accounts receivable 5,027 10,000
Other Current Assets 12,138 58,028
----------------- -----------------
Total Current Assets 381,120 666,351
----------------- -----------------
Property and Equipment 53,949 51,755
Less: Accumulated Depreciation (47,401) (46,158)
----------------- -----------------
Net Property and Equipment 6,548 5,597
----------------- -----------------
Other Assets
Intangibles, net 1,723,150 1,983,908
----------------- -----------------
Total Other Assets 1,723,150 1,983,908
----------------- -----------------
Total Assets $ 2,110,818 $ 2,655,856
================= =================
Liabilities and Stockholders' Equity/(Deficit)
Current Liabilities
Accounts payable $ 359,019 $ 204,632
Accrued expenses 125,000 41,111
Accrued expenses and payables to officers 22,699 8,843
Accrued interest expense 21,303 879,144
Notes payable, current portion 859,000 1,815,000
Notes payable to officers 202,307 256,544
Deferred revenue -
20,000
----------------- -----------------
Total Current Liabilities 1,589,328 3,225,274
----------------- -----------------
Long Term Liabilities
Notes payable 3,600,000 2,575,000
Discount for Beneficial Conversion Feature (3,365,845) -
----------------- -----------------
Total Long Term Liabilities 234,155 2,575,000
----------------- -----------------
Total Liabilities 1,823,483 5,800,274
----------------- -----------------
Stockholders' Equity/(Deficit)
Common stock, authorized 500,000,000
shares of $.001 par value
Issued and outstanding - 242,342,803
and 144,499,658, respectively 242,343 144,500
Capital in excess of par value 33,513,598 27,828,241
Accumulated deficit (33,468,606) (31,117,159)
----------------- -----------------
Total Stockholders' Equity/(Deficit) 287,335 (3,144,418)
----------------- -----------------
Total Liabilities and Stockholders' Equity/(Deficit) $ 2,110,818 $ 2,655,856
================= =================
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,
----------------------------------
2007 2006
---------------- ----------------
Sales $ 160,478 $ 219,369
Cost of sales 93,373 8,449
---------------- ----------------
Gross Profit 67,105 210,920
---------------- ----------------
Selling, General and Administrative expenses
Compensation and benefits (includes $1,530,764
and $606,308 of equity compensation) 2,512,365 1,661,555
Professional services 948,212 343,338
Depreciation and amortization 479,282 618,247
Research and development 188,101 357,822
Insurance 112,819 131,148
Facilities 100,538 100,982
Other selling general and administrative expenses 565,485 517,697
---------------- ----------------
Total Selling, General and Administrative expenses 4,906,802 3,730,789
---------------- ----------------
Net Operating Loss (4,839,697) (3,519,869)
Other Income (Expense)
Gain on Extinguishment of Debt and
Warrant Cancellation 2,856,194 -
Other Income - 8,776
Interest Expense (367,944) (489,253)
---------------- ----------------
Net Loss $ (2,351,447) $ (4,000,346)
================ ================
Basic and Diluted Loss Per Share:
Net Loss $ (0.01) $ (0.04)
================ ================
Weighted Average Shares Outstanding - Basic and Diluted 200,022,410 98,512,184
================ ================
The accompanying notes are an integral part of these financial statements.
F-4
KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY/(DEFICIT)
Common Stock Capital in Total
----------------------- Excess of Par Accumulated Stockholders'
Shares Amount Value Deficit Equity/(Deficit)
----------- ---------- ------------- -------------- ------------
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, 2007 - - - (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)
Shares issued for cash 97,843,146 97,843 1,282,094 1,379,937
Stock options issued for employee services - - 1,268,600 - 1,268,600
Stock options issued for Board Service - - 22,137 - 22,137
Stock options issued for consulting services - - 240,027 - 240,027
Value of warrants cancelled during debt
restructuring - - (527,501) - (527,501)
Value of discount on beneficial conversion feature - - 3,400,000 - 3,400,000
Net loss for the year ended June 30, 2007 - - - (2,351,447) (2,351,447)
------------ ---------- ------------- -------------- ------------
BALANCE at June 30, 2007 242,342,803 $ 242,343 $ 33,513,598 $ (33,468,606) $ 287,335
============ ========== ============= ============== ============
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,
----------------------------------------
2007 2006
-------------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (2,351,446) $ (4,000,346)
Adjustments to reconcile net loss to net cash
used in operations
Depreciation and amortization 479,282 618,245
Gain on debt restructuring (2,856,222) -
Stock options issued for compensation/services 1,530,765 606,308
Change In:
Accounts receivable 4,973 (10,000)
Prepaid expenses and other assets 35,890 12,337
Deferred revenue (20,000) 20,000
Accounts payable 252,132 (294,537)
Accrued expenses and other liabilities (104,121) 433,185
-------------------- ------------------
Net cash used in Operating Activities (3,028,747) (2,614,808)
-------------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (2,194) (5,745)
Investment in patent protection (173,127) (247,440)
-------------------- ------------------
Net cash used in Investing Activities (175,321) (253,185)
-------------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock for cash 1,379,937 4,110,000
Proceeds from short-term borrowings 989,476 -
Repayments of short-term borrowings (1,999,713) (2,353,590)
Proceeds from long-term borrowings 3,600,000 175,000
Retirement and repayment of long-term debt (1,000,000) -
Debt Acquisition Costs - (20,000)
-------------------- ------------------
Net cash provided by Financing Activities 2,969,700 1,911,410
-------------------- ------------------
NET (DECREASE) INCREASE IN CASH (234,368) (956,583)
CASH
Beginning of year 598,323 1,554,906
-------------------- ------------------
End of year $ 363,955 $ 598,323
==================== ==================
Supplemental schedule:
Interest paid in cash $ 289,140 $ 250,124
==================== ==================
Taxes paid in cash $ - $ -
==================== ==================
Supplemental schedule of non-cash investing and financing
activities:
Notes convertible into common stock $ 384,000 $ 2,185,000
==================== ==================
Discount related to notes payable -
Beneficial Conversion Feature $ 3,400,000 $ -
==================== ==================
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" or the "Company") is a Nevada
corporation. 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, it changed the Company ticker symbol to "KNOS."
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, 2007, 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 account 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, 2007 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 accounts 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, 2007 and June 30, 2006. The Company charges off accounts
receivable against the allowance for losses when an account is deemed to be
uncollectable.
Property and Equipment. Property and equipment are recorded at cost.
Depreciation is provided over the estimated useful lives of the assets, which
range from three to seven years. Expenditures for major renewals and betterments
that extend the original estimated economic useful lives of the applicable
assets are capitalized. Expenditures for normal repairs and maintenance are
charged to expense as incurred. The cost and related accumulated depreciation of
assets sold or otherwise disposed of are removed from the accounts, and any gain
or loss is included in operations.
Intangibles. The Company uses assumptions in establishing the carrying value,
fair value and estimated lives of the Company's 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 its
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 the Company's 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 the
Company's 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 the Company's 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.
RECENT ACCOUNTING PRONOUNCEMENTS
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. Management believes this Statement will have no impact on the
financial statements of the Company once adopted.
In September 2006, the FASB issued FASB Statement No. 157 "Fair Value
Measurements". This Statement defines fair value, establishes a framework for
measuring fair value in accordance with generally accepted accounting principles
("GAAP"), and expands disclosures about fair value measurements. This statement
applies under other accounting pronouncements that require or permit fair value
measurements, the FASB having previously concluded in those accounting
pronouncements that fair value is a relevant measurement attribute. Accordingly,
this statement does not require any new fair value measurements. However, for
some entities, the application of this statement will change current practices.
This statement is effective for financial statements for fiscal years beginning
after November 15, 2007. Earlier application is permitted provided that the
reporting entity has not yet issued financial statements for that fiscal year.
Management believes this statement will have no impact on the financial
statements of the Company once adopted.
F-8
In February 2007, the FASB issued FASB Statement No. 159 "The Fair Value Option
for Financial Assets and Financial Liabilities--Including an amendment of FASB
Statement No. 115". This statement permits entities to choose to measure many
financial instruments and certain other items at fair value. The objective is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. This statement is expected to expand the use of fair value
measurement, which is consistent with the FASB's long-term measurement
objectives for accounting for financial instruments. This statement applies to
all entities, including not-for-profit organizations. Most of the provisions of
this statement apply only to entities that elect the fair value option. However,
the amendment to FASB Statement No. 115, Accounting for Certain Investments in
Debt and Equity Securities, applies to all entities with available-for-sale and
trading securities. Some requirements apply differently to entities that do not
report net income. Management is currently evaluating the impact, if any, this
statement will have impact on the financial statements of the Company once
adopted.
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, 2007. In addition, the
Company has used, rather than provided cash in its operations. The Company is
currently using its resources to commercialize its technology and develop viable
commercial products, and to provide for its working capital needs.
In view of the matters described in the preceding paragraph, recoverability of a
major portion of the asset amounts shown in the accompanying balance sheet is
dependent upon continued operations of the Company, which in turn is dependent
upon the Company's ability to meet its financing requirements on a continuing
basis, to maintain present financing and to succeed in its future operations.
The consolidated financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the Company be
unable to continue in existence.
Management has taken the following steps with respect to its operating and
financial requirements, which it believes are sufficient to provide the Company
with the ability to continue in existence:
EOL. In December 2005, Kronos executed a non-exclusive License Agreement with
EOL LLC, a Russian Federation corporation ("EOL"), based in Korolev, Moscow
Region. EOL is leveraging the Kronos technology to produce, market, and
distribute Kronos commercial air purification products, bacteriological and
virus destruction devices 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
is providing Kronos a fixed percentage royalty on every product sold, as well as
upfront licensing and quarterly maintenance fees. The initial medical products
are currently being marketed in Russia and marketing plans are being implanted
in Ukraine, Kazakhstan, Moldova and Byelorussia. During the fiscal year ended
June 30, 2007, Kronos earned $104,000 in revenue from the sale of power
supplies, other electrical components and engineering services and from the
royalty from the sale of finished products by EOL.
Global Appliance Manufacturers. In October 2006, a leading global home appliance
manufacturer committed to fund 20% of the cost for Kronos to manufacturer a
silent kitchen range hood product. This next generation range hood device
represented the culmination of more than twelve months of product design and
development effort by Kronos to apply our technology to this unique embedded
residential application. The product was shipped to the customer in October
2006. In January 2007, the prototype design was modified based on customer input
and a revised unit was shipped to the customer. In addition to financial
support, the customer has also provided Kronos with product components for
Kronos testing and evaluation. In February 2007, a second global appliance
manufacturer committed to purchase additional prototypes from Kronos for testing
and evaluation. During the year ended June 30, 2007, Kronos earned $37,000 in
revenue from the development of prototype devices for the residential range hood
market place.
DESA. In June 2006, the Company executed its first license for embedded
applications of Kronos technology with DESA LLC ("DESA"). The agreement provides
DESA the opportunity to embed the Kronos electrostatic air movement technology
within fireplaces, hearth systems, zone heaters and mounted electric fans and
heaters. In October 2006, DESA approved Kronos' designs for the first
Kronos-based product and committed to the funding of the product development by
Kronos. In January 2007, DESA committed additional funds for Kronos exploration
of a second Kronos-based product application. By May 2007, various prototype
configurations for each of the two product applications were under test and
evaluation by Kronos and DESA.
Washington Technology Center. In June 2007, 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. This Phase III
award follows the Company's Phase 1 and Phase II awards in December 2005 and
June 2006, respectively.
F-9
NOTE 4 - OTHER CURRENT ASSETS
Other current assets consisted of the following at June 30,
2007 2006
--------------- --------------
Lease deposits $ 7,138 $ 7,138
Prepaid insurance 5,000 40,890
Debt acquisition costs - 10,000
--------------- --------------
Prepaid and other current assets $ 12,138 $ 58,028
=============== ==============
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at June 30,
2007 2006
--------------- ---------------
Office furniture and fixtures $ 45,694 $ 43,500
Machinery and equipment 8,255 8,255
--------------- ---------------
53,949 51,755
Less accumulated depreciation (47,401) (46,158)
--------------- ---------------
Net property and equipment $ 6,548 $ 5,597
=============== ===============
Depreciation expense for the years ended June 30, 2007 and 2006 was $1,273, and
$2,774, respectively.
NOTE 6 - INTANGIBLES
Intangible assets consisted of the following at June 30,
2007 2006
--------------- ----------------
Marketing intangibles $ 587,711 $ 587,711
Purchased patent technology 2,669,355 2,669,355
Developed patent technology 939,528 766,401
--------------- ----------------
4,196,594 4,023,467
Less accumulated amortization (2,473,444) (2,039,559)
--------------- ----------------
Net intangible assets $ 1,723,150 $ 1,983,908
=============== ================
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, 2007 and 2006 was $433,885 and
$402,347, respectively.
F-10
Amortization of the Company's Intangible Assets shown above for the fiscal years
ended June 30,
2008 2009 2010 2011 2012
----------- ----------- ----------- ----------- -----------
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 939,527 939,527 939,527 939,527 939,527
----------- ----------- ----------- ----------- -----------
4,196,593 4,196,593 4, 196,593 4,196,593 4,196,593
Less accumulated amortization (2,893,102) (3,312,761) (3,643,472) (3,796,196) (3,948,920)
----------- ----------- ----------- ----------- -----------
Net intangible assets $1,303,491 $ 883,832 $ 553,121 $ 400,397 $ 247,673
=========== =========== =========== =========== ===========
NOTE 7 - ACCRUED EXPENSES
Accrued expenses consisted of the following at June 30,
2007 2006
--------------- ---------------
Accrued professional services $ 75,390 $ 38,500
Accrued compensation and other 49,610 2,611
--------------- ---------------
$ 125,000 $ 41,111
Accrued interest 21,303 879,144
--------------- ---------------
$ 146,303 $ 920,255
=============== ===============
NOTE 8 - CONVERTIBLE NOTES PAYABLE AND NOTES PAYABLE
The Company had the following obligations as of June 30,
2007 2006
--------------- ---------------
Obligations to AirWorks Funding LLLP (1) $ 2,480,000 $ -
Obligations to RS Properties LP (1) 920,000 -
Discount for Beneficial Conversion Feature (2) (3,365,845) -
Obligations to Sands Brothers (3) 859,000 -
Obligations to Gumbinner and Sun (1) 200,000 -
Obligation to current employees (4) 202,307 256,544
Obligations to Cornell Capital(5) - 1,815,000
Obligation to HoMedics (6) - 2,575,000
-------------- ---------------
1,295,462 4,646,544
Less:
Current portion 1,061,307 2,071,544
--------------- ---------------
Total long term obligations net of
current portion $ 234,155 $ 2,575,000
=============== ===============
(1) These notes bear interest at the rate of 12% are secured by the assets of
the Company and convert into shares of Kronos Common Stock at $0.0028 or are
payable in full on June 19, 2010.
(2) Under Generally Accepted Account Principles, the Company recorded a discount
for the Beneficial Conversion Feature ("BCF") on the convertible debt issued to
AirWorks and RS Properties. The amount of the BCF discount was calculated using
the Black-Scholes model. Because the maximum value of the BCF discount can not
exceed the full value of the issued debt, the Company recorded the discount at
the full value of the debt of $3,400,000. The Company is amortizing the BCF
discount over the three year life of the debt. For the fiscal year ended June
30, 2007, the Company recorded eleven days of discount amortization ($34,155).
(3) These notes bear interest at the rate of 12% are secured by the assets of
the Company and are payable in full on December 31, 2007.
(4) These notes bear interest at the rate of 12%. They represent obligation to
current employees of the Company, which are due in full.
F-11
(5) These notes had a one year term and interest at 12% with weekly payments.
This obligation was paid in full on June 19, 2007. (6) This note had a 5 year
term and interest at 6%. The obligation was settled in full on June 19, 2007
under the terms of the Settlement Agreement and General Release.
Payout of the Company's Notes Payable obligations listed above consist of the
following for the fiscal years ending June 30,
2008 2009 2010 2011
---------- --------- ---------- ----------
Obligations to AirWorks Funding LLLP $ - $ - $1,825,000 $ -
Obligations to RS Properties LLP - - 920,000 -
Obligation to Sands Brothers 859,000 - - -
Obligation to current employees - - - -
Obligations to Gumbinner and Sun - - 200,000 -
---------- --------- ---------- ----------
$ 859,000 $ - $2,945,000 $ -
========== ========= ========== ==========
NOTE 9 - LEASES
The Company has entered into a non-cancelable operating lease for facilities.
Rental expense was approximately $73,128 and $66,600 for years ended June 30,
2007 and 2006 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 the
following for fiscal years ending June 30,
2008 2009 2010
---------- --------- ---------
Lease payments $ 62,388 $64,260 $ -
========== ======== =========
NOTE 10 - NET LOSS PER SHARE
As of June 30, 2007, there were outstanding options to purchase 89,075,771
shares of the Company's common stock and outstanding warrants to purchase
15,792,342 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, 2006 there were outstanding options to purchase
22,783,112 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.
NOTE 11 - INCOME TAXES
The composition of deferred tax assets and the related tax effects are as
follows at June 30,
2007 2006
--------------- ---------------
Benefit from carryforward of capital
and net operating losses $ (7,698,000) $ (7,209,000)
Other temporary differences (157,000) (157,000)
Options issued for services (551,000) (218,000)
Less:
Valuation allowance 8,406,000 7,584,000
--------------- ---------------
Net deferred tax asset $ - $ -
=============== ===============
F-12
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,
--------------------------------------------------------------------------------
2007 2006
--------------------------------------------------------------------------------
Amount % of pre-tax Loss Amount % of pre-tax Loss
--------------------------------------------------------------------------------
Benefit for income tax at:
Federal statutory rate $ (799,000) (34.0)% $ (1,360,000) (34.0)%
State statutory rate (47,000) (2.0)% (80,000) (2.0)%
Non-deductible expenses 24,000 1.4 % 105,000 2.6 %
Increase in valuation allowance 822,000 34.6 % 1,335,000 33.4 %
--------------------------------------------------------------------------------
$ - 0.0 % $ - 0.0 %
================================================================================
The non-deductible expenses shown above related primarily to the amortization of
intangible assets and to the accrual of stock options for compensation using
different valuation methods for financial and tax reporting purposes.
At June 30, 2007, the Company has approximately $18.2 million of unused Federal
net operating losses, $2.3 million capital losses and $14.0 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.
On June 15, 2007, the Board of Directors approved the Kronos Advanced
Technologies 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 100,000,000 shares
of common stock under the Stock Option Plan. The options generally have terms of
up to ten years.
The Company granted non-qualified stock options totaling 85,426,320 and
8,585,571 shares in the years ended June 30, 2007 and 2006, respectively.
As of July 1, 2004, the Company elected to follow Statement of Financial
Accounting Standards No. 123R, Share-Based Payment ("SFAS No. 123R") to
recognize stock compensation expense for awards of equity instruments to
employees based on the grant-date fair value of those awards (with limited
exceptions).
The fair value of the options is based on the Black - Scholes Model using the
following assumptions:
Exercise price: $0.02-$0.06
Market price at date of grant: $0.02-$0.06
Volatility: 168.28% -233.57%
Expected dividend rate: 0%
Risk-free interest rate: 4.44%-4.55%
F-13
A summary of the Company's stock option activity and related information for the
years ended June 30, 2007 and 2006 is as follows (in thousands, except per share
amounts):
Weighted
Average
Shares Exercise Price
--------------- ------------
Outstanding at June 30, 2005 15,050 0.370
Granted 8,585 0.070
Exercised - -
Cancelled (852) 0.840
--------------- ------------
Outstanding as June 30, 2006 22,783 $ 0.240
Granted 85,426 0.018
Exercised - -
Cancelled (19,144) 0.073
--------------- ------------
Outstanding as June 30, 2007 89,065 $ 0.063
=============== ============
A summary of options outstanding and exercisable at June 30, 2007 and 2006 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, 2007
$0.71 - $1.12 648 3.8 $0.82 $0.71 - $1.12 648
$0.21 - $0.70 1,157 4.0 $0.43 $0.21 - $0.70 1,290
$0.00 - $0.20 87,260 9.4 $0.02 $0.00 - $0.20 20,845
June 30, 2006
$0.71 - $1.12 648 4.8 $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
A summary of the Company's stock warrant activity and related information for
the years ended June 30, 2007 and 2006 is as follows (in thousands, except per
share amounts):
Weighted Average
Warrants Exercise Price
---------------- -------------
Outstanding at June 30, 2005 43,300 $0.12
Granted - -
Exercised - -
Cancelled - -
--------------- ------------
Outstanding as June 30, 2006 42,300 $ 0.12
Granted - -
Exercised - -
Cancelled (26,508) 0.10
--------------- ------------
Outstanding as June 30, 2007 15,792 $ 0.15
=============== ============
F-14
NOTE 13 - COMMITMENTS AND CONTINGENCIES
In June 2007, Kronos entered into a Funding Agreement with a group of lenders
providing for a loan, at the discretion of the lenders, in the aggregate amount
of up to $18,159,000. At the initial closing, the Company received an initial
advance of $4,259,000. After payment in full of the amounts due under an
outstanding convertible debenture issued to Cornell Capital Partners and
settlement agreement obligation to HoMedics and the expenses of the transaction,
the remainder of $1,069,000 was used for working capital purposes. The initial
new lenders were: (i) AirWorks Funding LLLP, a newly-formed limited partnership;
(ii) Critical Capital Growth Fund, L.P. and various Sands Brothers Venture
Funds, all of which are affiliates of Laidlaw and Co. (UK) Ltd. and (iii) RS
Properties I LLC, a New York-based private investment company. RS Properties
assigned to Hilltop Holding Company, LP, a Delaware limited partnership,
(`Hilltop") its promissory note together with certain other rights and
agreements relating thereto, including, without limitation, its rights and
obligations under the Funding Agreement.
The loan is secured by all of the Company's assets and is convertible into
shares of the Company's common stock at a conversion price of $0.0028 per share,
subject to adjustment under certain circumstances. Future installments under the
Funding Agreement, up to $13,900,000, may be advanced at the discretion of the
lenders, even if not requested by the Company. Under the Funding Agreement and
related notes, the Company pays interest at the rate of 12% per annum. Of the
total amount of the initial advance, interest is paid monthly starting July 1,
2007 on $859,000, which principal amount is due and payable December 31, 2007.
Such amount may be converted into Kronos common stock at the option of the
holder at the $0.0028 conversion price only if not paid in full by December 31,
2007. With respect to all other loan amounts, interest is paid quarterly
starting January 1, 2008 and outstanding principal is due and payable June 19,
2010, unless earlier converted at the option of the lenders. Assuming the
payment when due of the $859,000, the maximum loan amount is advanced under the
Funding Agreement and related notes and the lenders convert the entire amount of
the loan into Kronos common stock at the noted conversion price, the lenders
would own approximately 93.3% of the Company's total equity on a fully diluted,
as converted basis.
In May 2003, Kronos entered into an agreement with FKA Distributing Co. d/b/a
HoMedics, Inc., ("HoMedics") for $2,500,000 in financing, including $2,400,000
in secured debt financing and $100,000 for the purchase of warrants. $2,500,000
was paid to Kronos upon execution of the agreement. In October 2004, Kronos and
HoMedics agreed to extend repayment of Kronos debt and to provide an additional
$1,000,000 in funding consisting of $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 was not funded. In addition,
quarterly debt payments and the maturity date for existing debt were extended.
Quarterly payments due on the outstanding $2,400,000 in secured debt financing,
which had been scheduled to begin in August 2004, were due in February 2007. The
maturity date of the $2,400,000 in debt had been extended from May 2008 to
October of 2009; the maturity date on the $175,000 was extended to October 2009.
The interest rate was at 6% for the $2,400,000 in debt; the rate was also 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. In February 2007, HoMedics and Kronos
executed a Settlement Agreement and General Release whereby among other things
HoMedics agreed to receive $1,000,000 in a cash payment to cancel the loan
agreements, including all principal and accrued interest, and to cancel the
warrants to purchase 26.5 million shares of the Company's common stock and the
anti-dilution provisions of the warrants. In June 2007, Kronos made the
$1,000,000 payment under the terms of the Settlement Agreement and General
Release.
In October 2004, Kronos entered into agreements for up to $20,500,000 in equity
and equity backed debt financing from Cornell Capital Partners. Cornell Capital
Partners provided $4,000,000 pursuant to two Promissory Notes, which were funded
as follows: $2,000,000 upon filing a Registration Statement and $2,000,000 upon
the SEC declaring the Registration Statement effective. Kronos executed a
Standby Equity Distribution Agreement for $20,000,000 of funding which Kronos
had the option to drawdown against. As of June 30, 2006, Kronos had repaid the
first Promissory Note in full and as of June 30, 2007 had repaid the second
Promissory Note in full. On June 19, 2007, the Company cancelled the Standby
Equity Distribution Agreement.
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. Mr. Dwight's Employment Agreement was renewed on August
13, 2003 and again on August 15, 2004, August 15, 2005, August 15, 2006 and
August 15, 2007. In April 2006, the Board of Directors increased Mr. Dwight's
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 is
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 was 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. Mr. Tusing's Employment Agreement was renewed on October 1, 2004,
October 1, 2005 and October 1, 2006. Mr. Tusing's Employment Agreement provides
for base cash compensation of $160,000 per year. Mr. Tusing will be entitled to
fully participate in any and all 401(k), stock option, stock bonus, savings,
profit-sharing, insurance, and other similar plans and benefits of employment.
F-15
NOTE 14 - LEGAL PROCEEDINGS
Thompson E. Fehr has filed a complaint in the state of Utah against Kronos with
respect to prior services rendered to High Voltage Integrated, Inc. totaling
$47,130. The Company believes this complaint is without merit and is rigorously
defending itself.
Allstate Insurance Company, as subrogee of David Buell, filed a complaint in the
state of Michigan against HoMedics, Inc. and Kronos with respect to damages
related to a fire in the home of Mr. Buell which resulted in $244,155 in
damages. Under the terms of the Company's General Liability insurance policy,
this matter is currently being addressed by the Company's insurance carrier,
Argonaut Group.
NOTE 15 - MAJOR CUSTOMERS
As of June 30, 2007 the Company had four major customers: EOL, Bosch, DESA and
GE. Of the $160,478 in revenue recorded in the year ended June 30, 2007,
$160,478 or 100% was derived from these four 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, 2007, $219,369 or 100%
was derived from these six customers.
NOTE 16 - SEGMENTS OF BUSINESS
The Company operates principally in one segment of business: The Kronos segment
licenses, manufactures and distributes air movement and purification devices
utilizing the Kronos technology. In the year ended June 30, 2007, the Company
operated only in the United States of America.
NOTE 17 - RELATED PARTIES
As of June 30, 2007, the Company has outstanding obligations for past
compensation to management of $202,307. As of June 30, 2006, the Company has
outstanding obligations for past compensation management of $256,544. These
unpaid amounts currently accrue interest at the rate of 12% per annum.
NOTE 18 - STOCKHOLDERS' EQUITY/(DEFICIT)
During the fiscal ended June 30, 2007, we issued 97,843,146 shares of Kronos
common stock to Cornell Capital Partners under our Standby Equity Distribution
Agreement. The proceeds from the issuance of these shares were used for working
capital purposes ($801,438) and to repay debt ($578,500).
On June 18, 2007, we issued 80 million stock options to employees and directors.
The ten year options vest two thirds upon issuance and one third over the
following twelve months and convert into shares of Kronos common stock at $0.016
per share.
On June 19, 2007, we cancelled 26,508,658 warrants issued to HoMedics.
On June 19, 2007, we issued $3,400,000 in convertible debt. The beneficial
conversion feature was valued at the full face value of the debt and recorded to
the Company's paid in capital.
NOTE 19 - SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
During the fourth quarter, the Company entered into a Funding Agreement with a
group of lenders providing for a loan, at the discretion of the lenders, in the
aggregate amount of up to $18,159,000. At the initial closing, the Company
received an initial advance of $4,259,000. Use of proceeds included payment in
full of the amounts due under an outstanding convertible debenture issued to
Cornell Capital Partners and settlement agreement obligation to HoMedics.
F-16
The loan is secured by all of the Company's assets and is convertible into
shares of the Company's common stock at a conversion price of $0.0028 per share,
subject to adjustment under certain circumstances. Future installments under the
Funding Agreement, up to $13,900,000, may be advanced at the discretion of the
lenders, even if not requested by the Company. Under the Funding Agreement and
related notes, the Company pays interest at the rate of 12% per annum. Of the
total amount of the initial advance, interest is paid monthly starting July 1,
2007 on $859,000, which principal amount is due and payable December 31, 2007.
Such amount may be converted into Kronos common stock at the option of the
holder at the $0.0028 conversion price only if not paid in full by December 31,
2007. With respect to all other loan amounts, interest is paid quarterly
starting January 1, 2008 and outstanding principal is due and payable June 19,
2010, unless earlier converted at the option of the lenders. Assuming payment
when due of the $859,000, that the maximum loan amount is advanced under the
Funding Agreement and related notes and that the lenders convert the entire
amount of the loan into Kronos common stock at the noted conversion price, the
lenders would own approximately 93.3% of the Company's total equity on a fully
diluted, as converted basis.
The initial advance due and payable on June 19, 2010 of $3,400,000 contains a
beneficial conversion feature ("BCF") that allows the note holders to convert
into shares of the Company's common stock at a conversion price of $0.0028 per
share. The accounting treatment related to the BCF was a discount in long term
notes payable and an increase in stockholders equity for the full face amount of
the notes. The discount in long term debt is being amortized over the three year
life of the notes. For the fiscal year ended June 30, 2007, the Company recorded
eleven days of discount amortization of $34,155.
During the fourth quarter of 2007, the Company recorded a gain on the retirement
of debt and the cancellation of 26.6 million warrants of $2,856,194. In May
2003, Kronos entered into an agreement with FKA Distributing Co. d/b/a HoMedics,
Inc., ("HoMedics") for $2,400,000 in secured debt financing. In October 2004,
Kronos and HoMedics agreed to extend repayment of Kronos debt and to provide an
additional $1,000,000 in funding consisting of $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 was not funded. In
connection with the October 2004 agreements, Kronos issued HoMedics a warrant to
buy 26.5 million shares of Kronos common stock. In February 2007, HoMedics and
Kronos executed a Settlement Agreement and General Release whereby among other
things HoMedics agreed to receive $1,000,000 in a cash payment to cancel the
loan agreements, including all principal and accrued interest, and to cancel the
warrants to purchase 26.5 million shares of the Company's common stock and the
anti-dilution provisions of the warrants. In June 2007, Kronos made the
$1,000,000 payment under the terms of the Settlement Agreement and General
Release. As a result of the $1,000,000 payment, the Company (i) extinguished
$2,575,000 in debt and $753,692 in accrued interest, which resulted in a
$2,328,692 gain; and (ii) cancelled 26.5 million warrants, which resulted in a
$527,502 gain.
NOTE 20 - SUBSEQUENT EVENTS (Unaudited)
In August 2007, RS Properties assigned to Hilltop Holding Company, LP, a
Delaware limited partnership, (`Hilltop") its promissory note together with
certain other rights and agreements relating thereto, including, without
limitation, its rights and obligations under the Funding Agreement.
In August 2007, we received additional aggregate advances of $650,466 from
AirWorks and Hilltop under the terms of the Funding Agreement and related notes.
In September 2007, we issued 1,470,588 shares of Kronos common stock to Cornell
Capital Partners under our Standby Equity Distribution Agreement in payment of a
past due commitment fee.
F-17
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 during the
fiscal year ended June 30, 2007, 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 June 30, 2007, 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 Company's disclosure controls and procedures (as
defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the "Exchange
Act")) pursuant to Rule 13a-15 of the Exchange Act. It should be noted that any
system of controls, however well designed and operated, can provide only
reasonable, and not absolute, assurance that the objectives of the system are
met. Based on that evaluation, the Company's management, including the Company's
Principal Executive Officer/Principal Financial Officer, concluded that the
Company's disclosure controls and procedures were ineffective at this reasonable
assurance level as of June 30, 2007.
Changes in Internal Controls over Financial Reporting. In connection with the
evaluation of the Company's internal controls over financial reporting during
the Company's fiscal year ended June 30, 2007, 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 during the fourth
quarter that have materially affected or is reasonably likely to affect the
Company's internal control over financial reporting..
21
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our directors and executive officers and their ages as of September 26, 2007 are
as follows:
NAME AGE POSITION
-------------------- ----- ----------------------------------
Daniel R. Dwight 47 Director; President and Chief
Executive Officer
Richard F. Tusing 49 Director; Chief Operating Officer
James P. McDermott 45 Director
M. J. Segal 62 Director
Daniel R Dwight, 47, 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 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.
Richard F. Tusing, 49, 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, 45, became a Director of Kronos in July 2001. Mr. McDermott
has over 25 years of financial and operational problem-solving experience. Mr.
McDermott is a Managing Director at Alvarez & Marsal North American, LLC. From
2000 until joining Alvarez & Marsal, Mr. McDermott was Managing Director of
Eagle Rock Group, LLC, a business advisory firm he co-founded. Mr. McDermott was
also 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.
22
M. J. Segal, 62, became a Director of Kronos in September 2003. 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.
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 plans, 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.
23
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 four meetings. Each member attended at
least 75% of the meetings. Board of the Directors has detain has that Mr.
McDermott is an audit commit financial expert as defined by Item 407(d)(5)(ii)
of Regulation S-B.
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. 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, 2007, 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 are
entitled to receive quarterly $4,500 and annually 200,000 fully-vested stock
option grants, 2,500 stock option grants per meeting attended via conference
call, 5,000 option grants per meeting attended in person, or 1,250 option grants
per meeting for participation on a committee, as compensation for their services
as members of our Board of Directors. For the twelve month period ending June
30, 2007, Messrs. McDermott and Segal earned 2,000,000 and 1,500,000 stock
options each as compensation for their services as members of our Board of
Directors, including their time and effort in securing funding from AirWorks,
Hilltop and Sands, and in exchange for cancellation of 688,459 and 573,500 stock
options, respectively, previously granted for Board services.
DIRECTOR COMPENSATION
Fees Non-Equity Non-Qualified
Earned or Incentive Deferred
Paid in Stock Option Plan Compensation All
Cash Awards Awards Compensation Earnings Other Total
Name ($) ($) ($) ($) ($) Compensation ($) ($)
(a) (b) (c) (d) (e) (f) (g) (j)
--------- ------- ------ ------ ------------ ------------ ------------ -----
James P.
McDermott (1) $18,000 -- $40,000 -- -- -- $58,000
Milton J.
Segal (2) $18,000 -- $30,000 -- -- -- $48,000
(1) For the twelve months ended June 30, 2007, Mr. McDermott earned $18,000 as
cash compensation and 2,000,000 million stock options for his services as a
member of our Board of Directors.
(2) For the twelve months ended June 30, 2007, Mr. Segal earned $18,000 as cash
compensation and 1,500,000 million stock options for his services as a
member of our Board of Directors.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires our directors and
executive officers, and persons who own more than 10% of a registered class of
our equity securities to file with the Securities and Exchange commission
initial reports of ownership and reports of changes in ownership of Common Stock
and other of our equity securities. Officers, directors and greater than 10%
stockholders are required by SEC regulations to furnish us copies of all Section
16(a) forms they file.
To our knowledge, based solely on a review of the copies of such reports
furnished to us and written representations that no other reports were required
during the fiscal year ended June 30, 2007, all Section 16(a) filing
requirements applicable to our officers and directors were complied with.
CODE OF ETHICS
The Company has not adopted a Code of Ethics at this time.
24
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth compensation for the fiscal year ended June 30,
2007 for our executive officers:
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
------------------------------------------ --------------------------------------------------------
Non-Equity
Name and Stock Option Deferred All Other Total
Principal Salary Bonus Awards Awards Compensation Compensation Compensation
Position Year ($) ($) ($) ($) ($) ($) ($)
(a) (b) (c) (d) (e) (f) (g) (h) (i)
----------------- ------ --------- ---------- -------------- ----------- --------------- ----------- ------------
Daniel R. 2007 $225,000 -- -- $520,000 -- $16,344 $761,344
Dwight,
President and
Chief
Executive
Officer(1)
Richard F. 2007 $160,000 -- -- $300,000 -- -- $460,000
Tusing, Chief
Operating
Officer(2)
Igor 2007 $150,000 -- -- $356,000 -- -- $506,000
Krichtafovitch
Chief Technology
Officer - Kronos
Air Technologies
Karl Winkler 2007 $135,000 -- -- $166,000 -- -- $301,000
VP & General
Manager - Kronos
Air Technologies
(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 renewed on August 13, 2003 and again on August 15, 2004,
August 15, 2005, August 15, 2006 and August 15, 2007. 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. Mr.
Tusing's Employment Agreement renewed on October 1, 2004 and again on October 1,
2005 and October 1, 2006. His annual salary is $160,000.
25
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
OPTION AWARDS STOCK AWARDS
----------------------------------------------------------------------- --------------------------------------------------
Equity
Equity Incentive
Incentive Plan Awards:
Number Plan Awards: Market or
Equity of Market Number of Payout Value
Number of Number of Incentive Plan Shares Value of Unearned of Unearned
Securities Securities Awards: Number or Units Shares or Shares, Units Shares, Units
Underlying Underlying of Securities of Stock Units of or Other or Other
Unexercised Unexercised Underlying Option That Stock Rights That Rights That
Options Options Unexercised Exercise Have Not That Have Have Not Have Not
(#) (#) Unearned Options Price Option Vested Not Vested Vested Vested
Name Exercisable Unexercisable (#) ($) Expiration Date (#) ($) (#) (#)
(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)
------- ----------- ------------- ------------ -------- ----------- ------- ------- ----------- -----------
Daniel R.
Dwight 17,333,333 8,666,667 -- $0.016 06/18/2017 -- -- -- --
Richard F.
Tusing 10,000,000 5,000,000 -- $0.016 06/18/2017 -- -- -- --
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.
On June 15, 2007, he Board of Directors approved the Kronos Advanced
Technologies 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 100,000,000 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.
Equity Compensation Plan Information
------------------------------------------------------------------------------------------------------------------------------------
Number of securities remaining available for
Number of securities to be issued Weighted-average exercise future issuance under equity compensation
upon exercise of outstanding price of outstanding plans (excluding securities reflected in
Plan category options, warrants and rights options, warrants and rights column (a))
------------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c)
------------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans -- -- --
approved by security
holders
------------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans 79,700,000 $0.016 20,300,000
not approved by security
holders
------------------------------------------------------------------------------------------------------------------------------------
Total 79,700,000 20,300,000
------------------------------------------------------------------------------------------------------------------------------------
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. Mr. Dwight's Employment Agreement
renewed on August 13, 2003 and again on August 15, 2004, August 15, 2005, August
15, 2006 and August 15, 2007. In April 2006, the Board of Directors increased
Mr. Dwight's 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 was 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. Mr. Tusing's Employment Agreement renewed on October 1, 2004 and
again on October 1, 2005 and October 1, 2006. Mr. Tusing's Employment Agreement
provides for base cash compensation of $160,000 per year. Mr. Tusing will be
entitled to fully participate in any and all 401(k), stock option, stock bonus,
savings, profit-sharing, insurance, and other similar plans and benefits of
employment.
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 current 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 current
employment term.
As of the date of this filing, we have not adopted any other executive severance
agreements.
27
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 243,813,391 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, 2007 as
issued and outstanding. Unless otherwise indicated, each person has sole voting
and investment power over such shares.
COMMON STOCK
BENEFICIALLY OWNED
-------------------------
NAME AND ADDRESS NUMBER PERCENT
---------------- ------------- -----------
AirWorks Funding LLLP 253,807,563(1) 51.0%
655 Madison Avenue
New York, NY 10021
Hilltop Holding LP 253,807,563(2) 51.0%
111 Broadway
New York, NY 10021
Daniel R. Dwight 27,201,926(3) 10.0%
464 Common Street
Suite 301
Belmont, MA 02478
Richard F. Tusing 15,852,758(4) 6.1%
464 Common Street
Suite 301
Belmont, MA 02478
James P. McDermott 2,294,118(5) 0.9%
464 Common Street
Suite 301
Belmont, MA 02478
Milton M. Segal 1,500,000(6) 0.6%
464 Common Street
Suite 301
Belmont, MA 02478
All officers, and directors
of Kronos as a group 46,848,802(7) 16.1%
(1) Includes a convertible note to purchase 256,186,609 shares of common stock
that can be acquired within sixty days of September 26, 2007 pursuant to a Side
Letter Agreement agreed to between the Company and AirWorks, Airworks has agreed
not to convert such note prior to December 31, 2007 into more shares than the
Company has authorized and available.
(2) Includes a convertible note to purchase 256,186,609 shares of common stock
that can be acquired within sixty days of September 26, 2007 pursuant to a Side
Letter Agreement agreed to between the Company and Hilltop, Hilltop has agreed
not to convert such note prior to December 31, 2007 into more shares than the
Company has authorized and available.
(3) Includes options to purchase 26,000,000 shares of common stock that can be
acquired within sixty days of September 26, 2007.
28
(4) Includes options to purchase 15,000,000 shares of common stock that can be
acquired within sixty days of September 26, 2007
(5) Includes options to purchase 2,000,000 hares of common stock that can be
acquired within sixty days of September 26, 2007.
(6) Includes options to purchase 1,500,000 hares of common stock that can be
acquired within sixty days of September 26, 2007.
(7) Includes the rights to purchase 552,115,126 shares of common stock that can
be acquired within sixty days of September 26, 2007.
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
of 1% per month and call for aggregate monthly principal and interest payments
of $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. The
Notes are due and payable in full.
29
ITEM 13. 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 TSET 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
30
10.31 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
10.32 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
10.33 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
10.34 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
10.35 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
10.36 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
10.37 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
10.38 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
10.39 Warrant No. 3, dated October 25, 2004, Incorporated by reference to
issued to FKA Distributing Co. d/b/a Exhibit 99.13 to the Registrant's
HoMedics, Inc. Form 8-K filed on November 12, 2004
10.40 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
10.41 Termination Agreement dated March 28, Incorporated by reference to
2005, by and between Kronos Advanced Exhibit 10.63 to the Registrant's
Technologies, Inc. and Cornell Capital Form SB-2 filed on April 19, 2005
Partners, LP
10.42 Standby Equity Distribution Agreement, Incorporated by reference to
dated April 13, 2005, by and between Exhibit 10.64 to the Registrant's
Kronos Advanced Technologies, Inc. and Form SB-2 filed on April 19, 2005
Cornell Capital Partners, LP
10.43 Registration Rights Agreement, dated Incorporated by reference to
April 13, 2005, by and between Kronos Exhibit 10.65 to the Registrant's
Advanced Technologies, Inc. and Cornell Form SB-2 filed on April 19, 2005
Capital Partners, LP
10.44 Escrow Agreement, dated April 13, 2005, Incorporated by reference to
by and between Kronos Advanced Exhibit 10.66 to the Registrant's
Technologies, Inc. and Cornell Capital Form SB-2 filed on April 19, 2005
Partners, LP
10.45 Placement Agent Agreement, dated April Incorporated by reference to
13, 2005, by and between Kronos Advanced Exhibit 10.67 to the Registrant's
Technologies, Inc. and Cornell Capital Form SB-2 filed on April 19, 2005
Partners, LP
10.46 Form of Equity-Back Promissory Note in Incorporated by reference to
the principal amount of $2,000,000 dated Exhibit 10.68 to the Registrant's
March 7, 2005 between Kronos Advanced Form SB-2 filed on April 19, 2005
Technologies, Inc. and Cornell Capital
Partners, LP
31
10.47 Form of Equity-Back Promissory Note in Incorporated by reference to
the principal amount of $2,000,000 dated Exhibit 10.59 to the Registrant's
June 22, 2005 between Kronos Advanced Form 10-KSB filed on September
Technologies, Inc. and Cornell Capital 28, 2005
Partners, LP
10.48 Form of Convertible Debenture in the Incorporated by reference to
principal amount of $1,645,476 dated Exhibit 10.1 to the Registrant's
December 13, 2006 between Kronos Advanced Form 8-K filed on December 15, 200
Technologies, Inc. and Cornell Capital
Partners, LP
10.49 Kronos Advanced Technologies, Inc. Stock Incorporated by reference to
Incentive Plan Exhibit 3.1 to the Registrant's
Form 8-K filed on June 22, 2007
10.50 Voting Agreement dated June 19, 2007 by Incorporated by reference to
and between the Company and Daniel Dwight, Exhibit 3.1 to the Registrant's
James McDermott, Milton Segal, Rich Tusing Form 8-K filed on June 22, 2007
And Igor Krichtafovitch
10.51 Voting Agreement dated June 19, 2007 by Incorporated by reference to
and between the Company and Richard Sun Exhibit 9.1 to the Registrant's
and Frederic Gumbinner Form 8-K filed on June 22, 2007
10.53 Funding Agreement dated June 19, 2007 by Incorporated by reference to
and between the Company and Sand Brothers Exhibit 10.1 to the Registrant's
Venture Capital LLC, Sands Brothers Form 8-K filed on June 22, 2007
Venture Capital II LLC, , Sands
Brothers Venture Capital III LLC, and Sands
Brothers Venture Capital IV LLC,
(collectively, "Sands"); Critical Capital
Growth Fund, L.P., ("CCGF"); Airworks
Funding LLLP, ("AirWorks") and RS Properties
I LLC, ("RSP", and together with Sands, CCGF
and AirWorks, the "Lenders")
10.54 Registration Rights Agreement dated Incorporated by reference to
June 19, 2007 by and among the Company Exhibit 10.2 to the Registrant's
and the Lenders Form 8-K filed on June 22, 2007
10.55 Security Agreement dated June 19, 2007 Incorporated by reference to
by and among the Company and the Lenders Exhibit 10.3 to the Registrant's
Form 8-K filed on June 22, 2007
10.56 Patent Security Agreement dated Incorporated by reference to
June 19, 2007 by and among the Company Exhibit 10.4 to the Registrant's
and the Lenders Form 8-K filed on June 22, 2007
10.57 Standstill Letter Agreement dated Incorporated by reference to
June 19, 2007 by and among the Company Exhibit 10.5 to the Registrant's
and Daniel Dwight Form 8-K filed on June 22, 2007
10.58 Standstill Letter Agreement dated Incorporated by reference to
June 19, 2007 by and among the Company Exhibit 10.6 to the Registrant's
and Richard Tusing Form 8-K filed on June 22, 2007
10.59 Standstill Letter Agreement dated Incorporated by reference to
June 19, 2007 by and among the Company Exhibit 10.7 to the Registrant's
and James McDermott Form 8-K filed on June 22, 2007
10.60 Standstill Letter Agreement dated Incorporated by reference to
June 19, 2007 by and among the Company Exhibit 10.8 to the Registrant's
and Eagle Rock Group LLC Form 8-K filed on June 22, 2007
10.61 Standstill Letter Agreement dated Incorporated by reference to
June 19, 2007 by and among the Company Exhibit 10.9 to the Registrant's
and Milton Segal Form 8-K filed on June 22, 2007
10.62 Standstill Letter Agreement dated Incorporated by reference to
June 19, 2007 by and among the Company Exhibit 10.10 to the Registrant's
and J. Alexander Chriss Form 8-K filed on June 22, 2007
10.63 Standstill Letter Agreement dated Incorporated by reference to
June 19, 2007 by and among the Company Exhibit 10.11 to the Registrant's
and Igor Krichtafovitch Form 8-K filed on June 22, 2007
10.64 Standstill Letter Agreement dated Incorporated by reference to
June 19, 2007 by and among the Company Exhibit 10.12 to the Registrant's
and Karl Winkler Form 8-K filed on June 22, 2007
32
10.65 Standstill Letter Agreement dated Incorporated by reference to
June 19, 2007 by and among the Company Exhibit 10.13 to the Registrant's 6
and Maciej Ziomkowski Form 8-K filed on June 22, 2007
10.66 Standstill Letter Agreement dated Incorporated by reference to
June 19, 2007 by and among the Company Exhibit 10.14 to the Registrant's
and Vladimir Gorobets Form 8-K filed on June 22, 2007
10.67 Standstill Letter Agreement dated Incorporated by reference to
June 19, 2007 by and among the Company Exhibit 10.15 to the Registrant's
and Vladimir Bibikov Form 8-K filed on June 22, 2007
10.68 Standstill Letter Agreement dated Incorporated by reference to
June 19, 2007 by and among the Company Exhibit 10.16 to the Registrant's
and Sergey Karpov Form 8-K filed on June 22, 2007
10.69 Standstill Letter Agreement dated Incorporated by reference to
June 19, 2007 by and among the Company Exhibit 10.17 to the Registrant's
and Vladislov Korolyov Form 8-K filed on June 22, 2007
10.60 Standstill Letter Agreement dated Incorporated by reference to
June 19, 2007 by and among the Company Exhibit 10.18 to the Registrant's
and Terence Tam Form 8-K filed on June 22, 2007
10.61 Standstill Letter Agreement dated Incorporated by reference to
June 19, 2007 by and among the Company Exhibit 10.19 to the Registrant's
and Jacob Oharah Form 8-K filed on June 22, 2007
10.62 Standstill Letter Agreement dated Incorporated by reference to
June 19, 2007 by and among the Company Exhibit 10.20 to the Registrant's
and Nels Jewell-Larsen Form 8-K filed on June 22, 2007
10.63 Standstill Letter Agreement dated Incorporated by reference to
June 19, 2007 by and among the Company Exhibit 10.21 to the Registrant's
and Richard Sun Form 8-K filed on June 22, 2007
10.64 Standstill Letter Agreement dated Incorporated by reference to
June 19, 2007 by and among the Company Exhibit 10.22 to the Registrant's
and Frederic R. Gumbinner Form 8-K filed on June 22, 2007
10.65 US$859,000 SCCGF Note dated June 19, 2007 Incorporated by reference to
issued by the Company to Sands and CCGF Exhibit 10.23 to the Registrant's
Form 8-K filed on June 22, 2007
10.66 US$10,820,000 Note dated June 19, 2007 Incorporated by reference to
issued by the Company to AirWorks Exhibit 10.24 to the Registrant's
Form 8-K filed on June 22, 2007
10.67 US$6,480,000 Note dated June 19, 2007 Incorporated by reference to
issued by the Company to RSP Exhibit 10.25 to the Registrant's
Form 8-K filed on June 22, 2007
10.68 Proxy date June 19, 2007 by and among Incorporated by reference to
the Company, Daniel R. Dwight, James Exhibit 10.25 to the Registrant's
McDermott, Milton Segal, Richard Tusing Form 8-K filed on June 22, 2007
Igor Krichtafovitch, Richard A. Sun and
Richard A. Sun, as attorney-in-fact
for Fredric R. Gumbinner
10.69 Settlement Agreement and General Release Incorporated by reference to
Dated February 20, 2007 by and between Exhibit 99.1 to the Registrants
Kronos Advanced Technologies, Inc. and Form 8-K Filed on February 22,
FKA Distributing Co. d/b/a HoMedics, Inc. 2007
And HoMedics U.S.A., Inc.
21 Subsidiaries of the Registrant Provided herewith
31 Certification of Chief Executive Provided herewith
Officer pursuant to U.S.C. Section
7241, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32 Certification by Chief Executive Officer Provided herewith
and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
33
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, 2007. The Board of
Directors has appointed Sherb & Co. LLP to serve as our independent registered
public accounting firm for the 2007 year-end audit and to review our quarterly
financial reports for filing with the Securities and Exchange Commission during
fiscal year 2008.
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 2007 and 2006.
June 30, 2007 June 30, 2006
--------------- ---------------
Audit Fees(1) $ 70,000 $ 67,000
Audit-Related Fees 14,670 2,310
Tax Fees - -
All Other Fees - -
--------------- ---------------
Total $ 84,670 $ 69,310
=============== ===============
(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
34
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, 2007.
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
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, 2007
----------------------------- Chief Executive
Daniel R. Dwight Officer and Chief
Financial Officer
/s/ James P. McDermott Director September 28, 2007
-----------------------------
James P. McDermott
/s/ M. J. Segal Director September 28, 2007
-----------------------------
M. J. Segal
/s/ Richard F. Tusing Director and Chief September 28, 2007
----------------------------- Operating Officer
Richard F. Tusing