UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2005
Transition Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from __________ to __________
COMMISSION FILE NO. 000-30191
KRONOS ADVANCED TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
NEVADA 87-0440410
-------------------------------- ---------------------------------------
(State of other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
464 Common Street, Suite 301, Belmont, MA 02478
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 993-9965
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(1) Registrant has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
/X/ Yes // No
As of May 12, 2005, there were 71,186,345 shares outstanding of the issuer's
common stock.
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following comprise our condensed (unaudited) consolidated financial
statements for the three and nine month periods ended March 31, 2005.
2
KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
March 31, June 30,
2005 2004
------------ ------------
Assets (Unaudited)
Current Assets
Cash $ 187,774 $ 69,063
Accounts receivable, net 48,929 97,544
Prepaids and other 222,865 71,050
------------ ------------
Total Current Assets 459,568 237,657
------------ ------------
Net Property and Equipment 4,181 6,292
------------ ------------
Other Assets
Intangibles 2,012,067 2,253,029
------------ ------------
Total Other Assets 2,012,067 2,253,029
------------ ------------
Total Assets $ 2,475,816 $ 2,496,978
============ ============
Liabilities and Shareholders' Deficit
Current Liabilities
Accrued expenses and payables
to directors and officers $ 16,837 $ 36,258
Accounts payable 98,102 272,544
Accrued expenses 438,945 312,346
Deferred revenue - 3,218
Notes payable to directors and
officers, current portion 278,221 76,637
Other notes payable, current portion 2,031,417 722,289
------------ ------------
Total Current Liabilities 2,863,522 1,423,292
------------ ------------
Long Term Liabilities
Notes payable:
Notes payable to directors and officers 145,693 1,063,266
Other notes payable 2,403,638 1,983,039
Discount on notes payable - (589,261)
------------ ------------
Total Long Term Liabilities 2,549,331 2,457,044
------------ ------------
Total Liabilities 5,412,853 3,880,336
------------ ------------
Shareholders' Deficit
Common stock, authorized 500,000,000
shares of $.001 par value -
71,186,345 and 61,323,845 shares
outstanding on March 31, 2005 and
June 30, 2004, respectively 71,186 61,323
Capital in excess of par value 22,959,327 18,578,019
Accumulated deficit (25,967,550) (20,022,700)
------------ ------------
Total Shareholders' Deficit (2,937,037) (1,383,358)
------------ ------------
Total Liabilities and Shareholders' Deficit $ 2,475,816 $ 2,496,978
============ ============
The accompanying notes are an integral part of these financial statements.
3
KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended March 31, Nine months ended March 31,
------------------------------- ------------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Sales $ 48,928 $ 100,108 $ 430,379 $ 341,653
Cost of sales 41,549 71,745 375,397 227,550
------------ ------------ ------------ ------------
Gross Profit 7,379 28,363 54,982 114,103
------------ ------------ ------------ ------------
Selling, General and
Administrative expenses
Compensation and benefits 371,413 213,805 889,415 626,352
Research and development 23,642 26,877 78,207 65,728
Professional services 108,176 85,755 95,119 203,039
Depreciation and amortization 98,931 72,046 297,206 213,090
Insurance 46,120 36,937 138,361 110,813
Facilities 23,859 23,897 67,792 68,607
Other 26,414 58,874 166,356 162,372
------------ ------------ ------------ ------------
Selling, General and
Administrative expenses 698,555 518,191 1,732,456 1,450,001
------------ ------------ ------------ ------------
Net Operating Loss (691,176) (489,828) (1,677,474) (1,335,898)
Loss on Debt Restructuring - - (3,857,467) -
Other Income 1,012 - 1,415 22,000
Interest Expense (117,168) (124,598) (411,324) (421,020)
------------ ------------ ------------ ------------
Net Loss $ (807,332) $ (614,426) $(5,944,850) $(1,734,918)
============ ============ ============ ============
Net Loss Per Share
- Basic and diluted $ (0.01) $ (0.01) $ (0.09) $ (0.03)
============ ============ ============ ============
Weighted average
shares outstanding
- Basic and diluted 71,578,502 58,988,534 67,612,904 56,627,368
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
4
KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended March 31,
-----------------------------------
2005 2004
------------ -------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss from operations $(5,944,850) $ (1,734,918)
Adjustments to reconcile net loss to
net cash used in operations
Depreciation and amortization 297,206 213,090
Common stock issued for
compensation/services - 148,430
Accretion of note discount 92,965 191,438
Loss on debt restructuring 3,857,467 -
Change In
Accounts receivable 48,615 16,935
Prepaid expenses and other assets 60,685 (19,577)
Deferred revenue (3,218) (130,533)
Accounts payable (193,863) (16,437)
Accrued expenses and other liabilities 126,599 12,710
------------ -------------
Net cash Used in Operations (1,658,394) (1,318,862)
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in patent protection (54,134) (104,760)
------------ -------------
Net cash Used in Investing Activities (54,134) (104,760)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock 1,030,000 1,376,861
Proceeds from short-term borrowings 100,000 -
Repayments of short-term borrowings (1,086,261) (319,746)
Proceeds from long-term borrowings 4,400,000 -
Repayments from long-term borrowings (2,400,000) -
Debt acquisition costs (212,500) -
------------ -------------
Net cash Provided by Financing
Activities 1,831,239 1,057,115
------------ -------------
NET (DECREASE) INCREASE IN CASH 118,711 (366,507)
CASH
Beginning of period 69,063 641,178
------------ -------------
End of period $ 187,774 $ 274,671
============ =============
Supplemental schedule of non-cash
investing and financing activities:
Interest paid in cash $ 111,359 $ 9,430
============ =============
Accounts payable/accrued expense
converted to notes payable $ - $ 1,139,903
============ =============
The accompanying notes are an integral part of these financial statements.
5
KRONOS ADVANCED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Kronos Advanced
Technologies, Inc. (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all the information and notes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments necessary to present fairly the
information set forth therein have been included. Operating results for the
three and nine month periods ended March 31, 2005 are not necessarily indicative
of the results that may be experienced for the fiscal year ending June 30, 2005.
These consolidated financial statements are those of the Company and its
wholly-owned subsidiary. All significant inter-company accounts and transactions
have been eliminated in the preparation of the consolidated financial
statements.
The accompanying consolidated financial statements should be read in conjunction
with the Kronos Advanced Technologies, Inc. Form 10-KSB for the fiscal year
ended June 30, 2004 filed on October 15, 2004.
NOTE 2 - REALIZATION OF ASSETS AND GOING CONCERN
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern. The
Company has sustained losses from operations in recent years, and such losses
have continued through the period ended March 31, 2005. In addition, the Company
has used, rather than provided, cash in its operations. The Company is currently
using its resources in its efforts to raise capital necessary to bring the
Kronos technology to market, 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:
HoMedics Licensing Agreement. In October 2002, Kronos Air Technologies, Inc.,
and HoMedics USA, Inc. executed a multiyear, multi-million-dollar Licensing
Agreement to bring Kronos' proprietary technology to the consumer. The agreement
provides for exclusive North American, Australian and New Zealand retail
distribution rights for next generation consumer air movement and purification
products based on the patented Kronos technology. In August 2004, the Company
and HoMedics, Inc. began preparing the Kronos-based consumer standalone product
line for mass production. In February 2005, Kronos and HoMedics began expanding
product production beyond the initial prototypes and initiated increased product
testing to complete the product claims platform. The initial term of the
agreement is three and one half years from the initial sale of consumer air
purification products by HoMedics, which shall be no later than December 31,
2006, with the option to extend the agreement for six additional years. Kronos
will be compensated through an initial royalty payment and ongoing quarterly
royalty payments based on a percentage of sales. HoMedics will pay minimum
royalty payments of at least $2.0 million during the initial term and on-going
royalty payments to extend the agreement. Kronos will retain full rights to all
of its intellectual property.
US Navy SBIR. In November 2002, Kronos was awarded by the U. S. Navy a Small
Business Innovation Research Phase II contract worth $580,000, plus an option of
$145,000. The Phase II contract (commercialization phase) is an extension of the
Phase I and the Phase I Option work that began in 2001. It is intended that the
Kronos devices being developed under this contract will be embedded in existing
HVAC systems in order to move air more efficiently than traditional, fan-based
technology. During Phase II, Kronos developed and produced a set of fully
controlled devices that represent a "cell" of an advanced distributive air
management system with medium capacity airflow in a U.S. Navy unique
environment. The "cell" has been designed to be easily adjustable to a variety
of parameters such as duct size, airflow requirements, and air quality. As of
March 31, 2005, the U. S. Navy had provided Kronos with $580,000 in funding for
this effort. Kronos is scheduled to ship the finished product to Northrop
Grumman for testing and evaluation in May 2005.
US Army SBIR Option. In October 2003, the U.S. Army awarded Kronos the Small
Business Innovation Research Phase II contract. The contract is worth $369,000.
The contract is to develop Kronos' proprietary Electrostatic Dehumidification
Technology ("EDT"). Kronos initiated work under the Phase II contract in
December 2003. In December 2004, the U.S. Army extended the first year of the
contract to February 2005. In February 2005, because the Army's focus was on
researching a specific aspect of using an electrostatic process for
dehumidification and did not share Kronos' vision for a broader application for
using the unique aspects of EDT for dehumidification, the Army decided not to
pursue their Phase II option. As of March 31, 2005, the U. S. Army had provided
Kronos with $275,000 in funding for this effort and another $49,000 was invoiced
by Kronos during the quarter ended March 31, 2005.
6
Cornell Equity and Equity Backed Financing. In October 2004, Kronos entered into
agreements for up to $20.5 million in equity and equity backed debt financing
from Cornell Capital Partners. In October 2004, Kronos sold five million
unregistered shares of Kronos common stock for gross proceeds of $500,000.
Cornell Capital Partners committed to provide $4 million pursuant to two Equity
Backed Promissory Notes: $2 million was funded upon the filing an SB-2
Registration Statement and $2 million will be funded upon the SEC declaring the
Registration Statement effective. Kronos executed a Standby Equity Distribution
Agreement for up to $20 million of funding which Kronos has the option to
drawdown against in increments as large as $1.5 million over the next
twenty-four months.
HoMedics provided debt financing. In October 2004, HoMedics agreed to extend
repayment of Kronos debt and to provide an additional $1.0 million in funding
(refer to Note 10 - Commitments and Contingencies below).
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Method. The Company's financial statements are prepared using the
accrual method of accounting. The Company has elected a June 30 fiscal year end.
Reclassifications. Certain reclassifications have been made to the 2004
financial statements in order to conform to the 2005 presentation. None of these
reclassifications affected previously reported financial position, results of
operations or cash flows of the Company.
Principles of Consolidation. The consolidated financial statements of the
Company include those of the Company and of each of its subsidiaries for the
periods in which the subsidiaries were owned/held by the Company. All
significant intercompany accounts and transactions have been eliminated in the
preparation of the consolidated financial statements. At March 31, 2005, we had
only one subsidiary, Kronos Air Technologies, Inc.
Use of Estimates. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the financial statements and the reported amounts of
revenues and expenses during the periods. Actual results could differ from those
estimates.
Concentrations of Credit Risk. Financial instruments which can potentially
subject the Company to concentrations of credit risk consist principally of
trade receivables. The Company manages its exposure to risk through ongoing
credit evaluations of its customers and generally does not require collateral.
The Company maintains an allowance for doubtful accounts for potential losses
and does not believe it is exposed to concentrations of credit risk that are
likely to have a material adverse impact on the Company's financial position or
results of operations.
Cash and Cash Equivalents. The Company considers all highly liquid short-term
investments, with a remaining maturity of twelve months or less when purchased,
to be cash equivalents.
Accounts Receivable. The Company provides an allowance for losses on trade
receivables based on a review of the current status of existing receivables and
management's evaluation of periodic aging of accounts. Accounts receivable are
shown net of allowances for doubtful accounts of $0 at March 31, 2005 and June
30, 2004. The Company charges off accounts receivable against the allowance for
losses when an account is deemed to be uncollectable.
Property and Equipment. Property and equipment are recorded at cost.
Depreciation is provided over the estimated useful lives of the assets, which
range from three to seven years. Expenditures for major renewals and betterments
that extend the original estimated economic useful lives of the applicable
assets are capitalized. Expenditures for normal repairs and maintenance are
charged to expense as incurred. The cost and related accumulated depreciation of
assets sold or otherwise disposed of are removed from the accounts, and any gain
or loss is included in operations.
Intangibles. The Company uses assumptions in establishing the carrying value,
fair value and estimated lives of our long-lived assets and goodwill. The
criteria used for these evaluations include management's estimate of the asset's
continuing ability to generate positive income from operations and positive cash
flow in future periods compared to the carrying value of the asset, the
strategic significance of any identifiable intangible asset in our business
objectives, as well as the market capitalization of the Company. Cash flow
projections used for recoverability and impairment analysis use the same key
assumptions and are consistent with projections used for internal budgeting, and
for lenders and other third parties. If assets are considered to be impaired,
the impairment recognized is the amount by which the carrying value of the
assets exceeds the fair value of the assets. Useful lives and related
amortization or depreciation expense are based on our estimate of the period
that the assets will generate revenues or otherwise be used by Kronos. Factors
that would influence the likelihood of a material change in our reported results
include significant changes in the asset's ability to generate positive cash
flow, loss of legal ownership or title to the asset, a significant decline in
the economic and competitive environment on which the asset depends, significant
changes in our strategic business objectives, and utilization of the asset.
Income Taxes. Income taxes are accounted for in accordance with the provisions
of 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.
7
Research and Development Expenses. Costs related to research and development are
charged to research and development expense as incurred.
Earnings (Loss) Per Share. Basic earnings (loss) per share is computed using the
weighted average number of shares outstanding. Diluted earnings (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. Statement of Financial Accounting Standards No. 148 "Accounting
for Stock-Based Compensation-Transition and Disclosure, an Amendment of FASB
Statement No. 123," amends the disclosure requirements of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), to require more prominent disclosures in both annual and interim
financial statements regarding the method of accounting for stock-based employee
compensation and the effect of the method used on reported results.
The Company accounts for stock-based compensation to employees and directors
using the intrinsic value method of accounting as prescribed under Accounting
Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees" and related Interpretations. Under the intrinsic value method,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of the grant, no compensation
expense is recognized in the Company's Consolidated Statements of Operations.
RECENT ACCOUNTING PRONOUNCEMENTS - In December 2004, the FASB issued Statement
123r (revised 2004) which is a revision of FASB Statement No. 123, Accounting
for Stock-Based Compensation. This Statement supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees, and its related implementation
guidance. This Statement establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. It also addresses transactions in which an entity incurs liabilities
in exchange for goods or services that are based on the fair value of the
entity's equity instruments or that may be settled by the issuance of those
equity instruments. This Statement focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. This Statement requires a public entity to measure the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award (with limited exceptions). That cost
will be recognized over the period during which an employee is required to
provide service in exchange for the award--the requisite service period (usually
the vesting period). The Company files as a small business issuer and must meet
the requirements of this Statement for accounting periods after December 15,
2005. Adoption of FASB 123r will have a significant impact on the financial
statements of the Company through the expensing of stock option grants.
NOTE 4 -- INCOME TAXES
The composition of deferred tax assets and the related tax effects at March 31,
2005 and June 30, 2004 are as follows:
March 31, 2005
(Unaudited) June 30, 2004
------------- -------------
Benefit from carryforward of capital and
net operating losses $ 5,674,537 $ 4,841,083
Other temporary differences 156,740 156,740
Less:
Valuation allowance (5,831,277) (4,997,823)
------------- -------------
Net deferred tax asset $ - $ -
============= =============
8
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:
March 31, 2005
(Unaudited) June 30,2004
--------------------------- ----------------------------
% of % of
Amount Pre-Tax Loss Amount Pre-Tax Loss
------------- ------------ -------------- ------------
Benefit for income tax at federal statutory rate $ 2,017,731 34.0 % $ 848,265 34.0%
Benefit for income tax at state statutory rate 118,690 2.0 % 49,728 1.9%
Non-deductible expenses (1,302,968) (22.0)% (123,348) (4.9)%
Increase in valuation allowance (833,453) (14.0)% (774,645) (31.0)%
------------- ------------ -------------- ------------
$ - 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 March 31, 2005, for federal income tax and alternative minimum tax reporting
purposes, the Company has approximately $13.4 million of unused Federal net
operating losses, $2.3 million of capital losses and $9.7 million of unused
State net operating losses available for carryforward to future years. The
benefit from carryforward of such losses will expire in various years between
2006 and 2025 and could be subject to limitations if significant ownership
changes occur in the Company.
NOTE 5 - SEGMENTS OF BUSINESS
The Company operates principally in one segment of business: The Company
licenses, manufactures and distributes air movement and purification devices
utilizing the Kronos technology. For the nine months ended March 31, 2005 and
the fiscal year ended June 30, 2004, the Company operated only in the U.S.
NOTE 6 - NET LOSS PER SHARE
Weighted average shares outstanding used in the net loss per share calculation
were 67,612,904 and 56,627,368 for the nine months ended March 31, 2005 and
2004, respectively.
As of March 31, 2005, there were outstanding options to purchase 12,813,812
shares of the Company's common stock and outstanding warrants to purchase
42,300,000 shares of the Company's common stock. These options and warrants have
been excluded from the earnings per share calculation as their effect is
anti-dilutive. As of March 31, 2004, there were outstanding options and warrants
to purchase 13,216,782 and 15,792,342 shares, respectively, of the Company's
common stock. These options have been excluded from the earnings per share
calculation as their effect is anti-dilutive.
NOTE 7 - NOTES PAYABLE
The Company had the following obligations as of March 31, 2005 and June 30,
2004,
March 31, 2005 June 30, 2004
(Unaudited)
--------------- ---------------
Obligation to HoMedics (1) $ 2,400,000 $ 2,400,000
Discount on obligation to HoMedics - (589,261)
Obligation to Cornell (2) 2,000,000 -
Obligation to current employees (3) 423,913 1,139,903
Obligation for finance leases (4) 35,056 50,328
Obligation to Fusion Capital (5) - 200,000
Obligations to others - 55,000
--------------- ---------------
4,858,969 3,255,970
Less:
Current portion 2,309,638 798,926
--------------- ---------------
Total long term obligations net of
current portion $ 2,549,331 $ 2,457,044
=============== ===============
9
(1) This note has a 5 year term and bears interest at 6%. In October 2004,
HoMedics agreed to extend repayment of this note. This note was issued
along with warrants for the purchase of 13.6 million shares of the
Company's common stock. As a result, the note was recorded with a discount
of $893,000 that was being amortized against earnings using the interest
rate method of amortization. In October 2004, the note was amended to
extend payment terms (refer to Note 10 - Commitments and Contingencies). As
a result, the discount on the obligation was expensed in full during the
quarter ended December 31, 2004.
(2) This note has less than a one year term and bears interest at 12%. Payments
on the note begin upon a Registration Statement being declared effective by
the SEC.
(3) These notes bear interest at the rate of 12% and are due December 31, 2006.
(4) See Note 8 below.
(5) This is a non-interest bearing demand obligation and was only outstanding
until Fusion Capital purchased enough stock from the Company to eliminate
the advance position. In November 2004, Fusion Capital purchased two
million shares of the Company's Common Stock to eliminate the advance
position.
NOTE 8 - CAPITAL LEASES
The Company entered into a capital lease for the purpose of purchasing equipment
used in the research and product development center. Certain officers of the
Company personally guaranteed the capital lease if the Company does not fulfill
its terms of the lease obligations. The leases are for 36 months and contain
bargain purchase provisions so that the Company can purchase the equipment at
the end of each lease. The following sets forth the minimum future lease
payments and present values of the net minimum lease payments under these
capital leases:
Minimum Future Lease Payments and Present Values of the Net Minimum Lease
Payments
Period ended March 31,
-----------------------------------
2005 $ 36,337
2006 3,887
---------
Total minimum lease payments 40,224
Less: Executory costs -
---------
Net minimum lease payments 40,224
Less: Imputed interest (5,168)
---------
Present value of net minimum lease payments $ 35,056
=========
Of the equipment that was purchased using capital leases, $10,650 was
capitalized and the remaining $65,782 was expensed through research and
development and cost of sales. In the three and nine months ended March 31,
2005, the Company paid $6,047 and $22,016 in principal and $1,745 and $6,744 in
interest on capital leases, respectively. In the three and nine months ended
March 31, 2004, the Company paid $5,316 and $15,018 in principal and $3,769 and
$12,234 in interest on capital leases, respectively.
NOTE 9 - CONSULTING AGREEMENTS
On October 31, 2003, the Company entered into a 10-month consulting agreement
with Joshua B. Scheinfeld and Steven G. Martin, principals of Fusion Capital,
for consulting services with respect to operations, executive employment issues,
employee staffing, strategy, capital structure and other matters as specified
from time to time. As consideration for their services, the Company issued
360,000 shares of its common stock. In accordance with EITF 96-18, the
measurement date was established as the contract date of October 31, 2003 as the
share grant was non-forfeitable and fully vested on that date. The stock was
valued on that date at $0.22 a share (the closing price for the Company's common
stock on the measurement date). The stock issuance has been recorded as a
prepaid consulting fee and was amortized to Professional Fee Expense ratably
over the ten month term of the contract. Under this contract, expenses of $0 and
$12,586 were recorded for the three and nine months ended March 31, 2005,
respectively.
10
NOTE 10 - COMMITMENTS AND CONTINGENCIES
In October 2004, HoMedics agreed to extend repayment of Kronos debt and to
provide an additional $1 million in funding. HoMedics has agreed to provide
Kronos with an additional $1 million in financing - $925,000 in secured debt
financing and $75,000 for the purchase of additional 26,507,628 ten year
warrants exercisable at $0.10 per share. HoMedics increased their potential
equity position in Kronos to 30% of Kronos common stock on a fully diluted
basis. The $925,000 will be paid to Kronos upon Kronos achieving three
milestones: (i) $175,000 shall be funded upon delivery and successful testing of
electronic boards and power supplies from Kronos' contract manufacturing
partner, (ii) $250,000 shall be funded upon obtaining tooling of the current
prototype configuration and device testing and performing to HoMedics'
specifications, and (iii) $500,000 shall be funded upon the initial sale of
Kronos-based air purifiers by HoMedics. In addition, quarterly debt payments and
the maturity date for existing debt have been extended. Quarterly payments due
on the outstanding $2.4 million in secured debt financing, which had been
scheduled to begin in August 2004, will be due the earlier of Kronos receipt of
royalty payments from HoMedics sale of Kronos-based air purification products or
two years. The maturity date of the $2.4 million in debt has been extended from
May 2008 to October of 2009; the maturity date on the $925,000 will also be
October 2009. The interest rate will remain at 6% for the $2.4 million in debt;
the rate will also be 6% on the additional debt. In conjunction with the October
2004 agreements, Kronos issued HoMedics a warrant to buy 26. 5 million shares of
Kronos common stock. As a result of this debt restructuring, the Company
recognized a loss of $3,857,467 which represents the reacquisition price less
the net carrying value of the debt restructuring. The reacquisition price is
made up of $2,400,000 which is the amount of the new debt and $3,361,161 which
represents the value of the warrants using the Black-Scholes method. The net
carrying value is the $2,400,000 which is the old debt less the unamortized debt
discount of $496,296.
In October 2004, Kronos entered into agreements for up to $20.5 million in
equity and equity backed debt financing from Cornell Capital Partners. In
October 2004, Kronos sold 5 million unregistered shares of Kronos common stock
for gross proceeds of $500,000 to Cornell Capital Partners. Cornell Capital
Partners committed to provide $4 million pursuant to two Equity Backed
Promissory Notes, which is to be funded as follows: $2 million was funded upon
the filing of an SB-2 Registration Statement and $2 million will be funded
upon the SEC declaring the Registration Statement effective. Kronos executed a
Standby Equity Distribution Agreement for $20 million of funding which Kronos
has the option to drawdown against in increments as large as $1.5 million over
the next twenty four months. Kronos received $0.5 million in funding upon the
amendment of the HoMedics debt financing and $2 million upon filing of an SB-2
Registration Statement. Kronos expects to receive an additional $2 million over
the next 30 - 60 days under these agreements.
Employment Agreements
The Company entered into an Employment Agreement with its President and Chief
Executive Officer, Daniel Dwight, effective as of February 11, 2001. The initial
term of the Employment Agreement was for two years and the agreement will
automatically renew for successive one year terms unless written notice within
three months of the end of the renewal term is received by either party. The
Board of Directors renewed the Employment Agreement on August 13, 2003 and again
on August 15, 2004. The Employment Agreement provides for base cash compensation
of $180,000 per year and eligibility for annual incentive bonus compensation in
an amount equal to annual salary based on the achievement of certain bonus
objectives.
The Company entered into an Employment Agreement with its Chief Operating
Officer, Richard Tusing, effective as of January 1, 2003. The initial term of
the Employment Agreement is for two years and will automatically renew for
successive one year terms unless written notice within three months of the end
of the initial term or any subsequent renewal term is received by either party.
The Board of Directors renewed the Employment Agreement on October 1, 2004. The
Employment Agreement provides for base cash compensation of $160,000 per year.
NOTE 11 - SUBSEQUENT EVENTS
In April 2005, Kronos received formal notification from the United States Patent
and Trademark Office indicating that its application entitled Electrostatic
Fluid Accelerator Design Geometries has been examined and allowed for issuance
as a U. S. patent. The patent addressed the placement, utilization and
geometries of the electrodes in Kronos based devices, which impacts the air
flow. The patent provides protection for key aspects of Kronos' technology until
2022.
In April 2005, Spencer Browne, a Member of the Kronos Board of Directors passed
away. Mr. Browne had served as a Board Member since August 2003.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTORY STATEMENTS
FORWARD LOOKING STATEMENTS AND ASSOCIATED RISKS
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS. THIS FILING CONTAINS
FORWARD-LOOKING STATEMENTS, INCLUDING STATEMENTS REGARDING, AMONG OTHER
THINGS:(A) OUR PROJECTED SALES AND PROFITABILITY, (B) OUR GROWTH STRATEGIES, (C)
ANTICIPATED TRENDS IN OUR INDUSTRY, (D) OUR FUTURE FINANCING PLANS, (E) OUR
ANTICIPATED NEEDS FOR WORKING CAPITAL, AND (F) THE BENEFITS RELATED TO OUR
OWNERSHIP OF KRONOS AIR TECHNOLOGIES, INC. IN ADDITION, WHEN USED IN THIS
FILING, THE WORDS "BELIEVES," "ANTICIPATES," "INTENDS," "IN ANTICIPATION OF,"
"EXPECTS," AND SIMILAR WORDS ARE INTENDED TO IDENTIFY CERTAIN FORWARD-LOOKING
STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE BASED LARGELY ON OUR
EXPECTATIONS AND ARE SUBJECT TO A NUMBER OF RISKS AND UNCERTAINTIES, MANY OF
WHICH ARE BEYOND OUR CONTROL. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS, INCLUDING, WITHOUT
LIMITATION, THE RISKS OUTLINED UNDER "FACTORS AFFECTING KRONOS' BUSINESS AND
PROSPECTS" AND MATTERS DESCRIBED IN THIS FILING GENERALLY. IN LIGHT OF THESE
RISKS AND UNCERTAINTIES, THERE CAN BE NO ASSURANCE THAT THE FORWARD-LOOKING
STATEMENTS CONTAINED IN THIS FILING WILL IN FACT OCCUR. WE DO NOT UNDERTAKE ANY
OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY REVISIONS TO THESE
FORWARD-LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT ANY FUTURE EVENTS OR
CIRCUMSTANCES.
GENERAL
Kronos Advanced Technologies, Inc. is an application development and licensing
company that has developed and patented technology that fundamentally changes
the way air is moved, filtered and sterilized. Kronos is pursuing
commercialization of its proprietary technology in a limited number of markets;
and if we are successful, we intend to enter additional markets in the future.
To date, our ability to execute our strategy has been restricted by our limited
amount of capital.
Technology Description and Benefits
The Kronos technology combines high voltage electronics and electrodes. By
combining these technologies, a Kronos-based device can both move and clean air
without any moving parts. Kronos devices are versatile, energy and
cost-efficient and capable of multiple design forms. As a result, Kronos devices
have the immediate potential to be used as a standalone product or to replace a
range of heating, ventilation and air conditioning products for residential
usage to high efficiency particulate air filtration systems for operating and
manufacturing clean rooms.
The proprietary Kronos technology involves the application of high voltage
management across paired electrical grids to create an ion exchange that moves
and purifies air. Kronos technology has numerous valuable characteristics. It
moves air and gases at high velocities while removing odors, smoke and
particulates and killing pathogens, including bacteria, mold and spores. The
technology is cost-effective and is more energy efficient than current
alternative fan and filter (including HEPA filter and ultraviolet light based)
technologies. Although no commercial products using the Kronos technology have
been sold to date, in August 2004, the Company and its strategic consumer
products partner, HoMedics, initiated the transition to mass production of the
Kronos-based consumer standalone product line.
A number of the scientific claims of the Kronos technology have been tested by
the U. S. government and a few multi-national companies, including the U. S.
Department of Energy, the U. S. Department of Defense, General Dynamics,
Underwriters Laboratory, and Intel.
Independent laboratory testing has verified the purification capability of the
Kronos technology. Tests conducted at MicroTest Laboratories, LMS Industries and
New Hampshire Materials Laboratory demonstrated HEPA Clean Room Class 1000
quality particulate reduction, removal of over 99.97% of 0.1 micron and above
size particles, and up to 95% reduction of hazardous gases, including numerous
contaminants found in cigarette smoke. Intertek, one of the global leaders for
testing electrical and electronic products, performed 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." The test demonstrated a Clean Air
Delivery Rate (CADR) for the Kronos air purifier of over 300. These results
place the Kronos device in one of the highest categories of particulate cleaning
for standalone devices.
Market Segmentation
Kronos' business development strategy is to sell and license the Kronos
technology to six distinct market segments: (1) air movement and purification
(residential, health care, hospitality, and commercial facilities); (2) air
purification for unique spaces (cleanrooms, airplanes, automotive, and cruise
ships); (3) specialized military (naval vessels, closed vehicles and mobile
facilities); (4) embedded cooling and cleaning (electronic devices and medical
equipment); (5) industrial scrubbing (produce storage and diesel and other
emissions); and (6) hazardous gas destruction (incineration and chemical
facilities).
Kronos' focus is on the first four of these market segments which are described
in more detail below. Kronos is currently developing products for the air
movement and purification, air purification for unique spaces, and specialized
military markets through specific customer contracts. Kronos is currently
undertaking research and development in the embedded micro cooling market using
Company funds and a third party grant. These contracts and grant are described
in more detail in the Technology Application and Product Development section of
this filing.
12
o Air Movement and Purification. Indoor air pollution, including "sick
building syndrome" and "building related illness," is primarily caused
by inadequate ventilation, chemical contaminants from indoor and
outdoor sources and biological contaminants. There is also a demand
for smaller devices that move, heat and deodorize the indoor air
stream. The addressable air movement and purification segment is made
up of four principal target markets: (1) residential, (2) health care,
(3) hospitality and (4) commercial.
o Air Purification for Unique Spaces. Electronics, semiconductor,
pharmaceutical, aerospace, medical and many other producers depend on
cleanroom 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 aircraft, cruise ships and other
transportation modes that require people to breathe contaminated,
re-circulated air for extended periods. Kronos is building on its
product development effort with its strategic partner in the business
jet market and the U.S. military to serve other closed environment
applications.
o Specialized Military. Military personnel face the worst of all
possible worlds: indoor air pollution, often in very confined spaces
for extended periods, combined with the threat of biological warfare,
nuclear fallout, and other foreign elements. We believe that the
military market segment offers Kronos a unique opportunity to leverage
the technical and funding resources of the U. S. military to expand
Kronos' ability to develop and produce Kronos-based air movers and
purifiers for applications that require these products to be embedded
into ventilation systems to address the needs of military personnel.
o Embedded Cooling. Heat generation is becoming a major bottleneck in
high density electronics. We believe that the embedded cooling market
segment offers Kronos a near term opportunity to develop an
alternative to fans for air movement and cooling inside of personal
computers , servers and medical diagnostic equipment and a long term
opportunity to develop micro channel cooling solutions for a future
generation microchips.
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 filtration for their home, office
or hotel room. Embedded applications of the Kronos technology require the
technology be added into another system such as a building ventilation system
for more efficient air movement and filtration or into an electrical device such
as computer or medical equipment to replace the cooling fan.
Standalone Platform
o Consumer Products. In October 2002, Kronos Air Technologies, Inc., and
HoMedics USA, Inc. executed a Licensing Agreement granting HoMedics
certain rights with respect to the distribution of the Kronos
proprietary technology to the consumer. The agreement provides for
exclusive North American, Australian and New Zealand retail
distribution rights for next generation consumer air movement and
purification products based on the patented Kronos technology. In
August 2004, the Company and HoMedics initiated the transition to mass
production of the Kronos-based consumer standalone product line.
Preparing to meet these goals entails the use of Kronos' technical
resources and HoMedics' product development and international
production expertise. Select third party vendors, including experts in
electronics, software and gas sensors, are integral resources in this
process. While HoMedics is managing production of the finished
product, Kronos is managing the production of our proprietary power
supply and related circuitry.
We believe the Company has successfully completed the development of a
Kronos-based consumer standalone air purifier that is an efficient,
high quality product which is cost effective and easy to operate. In
August 2004, the Company and HoMedics initiated the transition to mass
production of the Kronos-based consumer standalone product line. In
October 2004, Kronos received its first shipment of electronics from
Flextronics International USA, Inc. In November, Kronos successfully
tested the technical hardware and related power supplies manufactured
by Flextronics, including the successful incorporation of gas sensors.
The gas sensors were developed in conjunction with a leading gas
sensing technology supplier for Kronos' unique operating requirements.
In February 2005, Kronos and HoMedics began expanding production
development beyond the initial prototypes and initiated increased
product testing to complete the product claims platform. In March and
April 2005, Kronos modified the HoMedics design and ordered prototype
production devices from Kronos' preferred vendor along with select
components from HoMedics preferred vendors. Kronos is continuing to
prepare for mass production of the electronics for each of the
products in the air purification product line. Kronos expects begin to
receive larger quantities of electronics and gas sensors in May 2005
for installation and testing in the prototype production devices.
The initial term of the agreement is three and one half years from the
initial sale of consumer air purification products by HoMedics, which
shall be no later than December 31, 2006, with the option to extend
the Licensing Agreement for six additional years. Kronos was
compensated through an initial royalty payment and will receive
ongoing quarterly royalty payments based on a percentage of sales.
HoMedics will pay minimum royalty payments of at least $2 million
during the initial three and a half year term and on-going royalty
payments to extend the agreement. Kronos will retain the rights to all
of its intellectual property.
13
HoMedics commitment includes funding a marketing and advertising
campaign to promote the Kronos-based product line. The products will
be distributed by HoMedics. HoMedics currently distributes their
products through major domestic retailers, including Wal-Mart, Home
Depot, Sears, Bed Bath & Beyond, and Linens 'N Things.
o Commercial Products. In addition, Kronos is seeking to leverage its
consumer product development work to market and sell a commercial line
of standalone air purifiers. This commercial line of Kronos-based air
purifiers will target to address the specific air quality issues,
including odors, bacteria and viruses, found in most nursing home and
assisted living, healthcare and other commercial facilities. Kronos is
using the new research and product development personnel, equipment
and software acquired with the Cornell investment proceeds to build
demonstration products, which the Company intends to install in select
nursing home, assisted living and hospitality facilities in North
America for demonstrating the benefits of the Kronos technology to the
commercial marketplace.
o Other Standalone Products. Utilizing our recently expanded product
development resources, Kronos completed the initial design,
development and production of a series of small multifunctional
devices that can be used as space heaters, disinfectors, deodorizers
and/or fans. Based on the proprietary Kronos technology, these devices
are currently undergoing testing and evaluation. Kronos is assessing
potential strategic partners for manufacturing, marketing, selling and
distributing these Kronos-based products.
Embedded Platform
o Military Products. The U. S. Department of Defense and Department of
Energy have provided Kronos with various grants and contracts to
develop, test and evaluate the Kronos technology for embedded
applications. Kronos has developed several commercial and industrial
applications, including the retrofit of berthing fan systems and
embedded air movement systems for U. S. Navy Aegis Class destroyers.
U.S. Navy SBIR Contracts. In November 2002, the U. S. Navy awarded
Kronos a Small Business Innovation Research Phase II contract worth
$580,000, plus an option of $145,000. The Phase II contract
(commercialization phase) is an extension of the Phase I and the Phase
I Option work that began in 2001. It is intended that the Kronos
devices developed under this contract will be embedded in existing
HVAC systems in order to move air more efficiently than traditional,
fan-based technology. Kronos has completed production of an advanced
air management system and is awaiting product testing and evaluation
by Northrop Grumman.
During Phase II, Kronos developed and produced a fully controlled
device that represents a "cell" of an advanced distributive air
management system with medium capacity airflow in a U. S. Navy unique
environment. The "cell" has been designed to be easily adjustable to a
variety of parameters such as duct size, airflow requirements, and air
quality. The goal of this development work is to significantly reduce
or replace altogether the current HVAC air handling systems on naval
ships. During the term of the contract, Kronos designed a new
generation power supply, improved the efficiency of the core
technology to allow for increased air movement and filtration, and
initiated selection with the U. S. Navy of the specifications for the
commercial products. Kronos is scheduled to ship the finished product
to Northrop Grumman for testing and evaluation in May 2005. As of
March 31, 2005, the U. S. Navy had provided Kronos with $580,000 in
funding for this effort.
As part of its air management system, Kronos has developed and intends
to test the air filtration mechanism capable of performing to HEPA
quality standards. We believe that Kronos devices could replace
current HEPA filters with a permanent, easily cleaned, low-cost
solution. Among the technical advantages of the Kronos technology over
HEPA filters is the ability of the Kronos-based devices to eliminate
the energy burden on air handling systems, which must generate high
levels of backpressure necessary to move air through HEPA-based
systems. Kronos-based devices enhance the air flow while providing
HEPA level filtration.
We believe that during the option portion of the contract, Kronos
technology's ability to kill bacteria and other pathogens will be
confirmed and expanded to a wide range of pathogens for space
disinfection and bio-terrorist attacks. We believe the Kronos
technology can kill all or most airborne pathogens regardless of their
nature, genetic structure, robustness, or method of delivery.
Kronos is pursuing Phase III (production phase) support for the
Kronos-based advanced distributive air management system being
developed under Phase II. Kronos is working with Northrop Grumman and
others in this regard.
U.S. Army SBIR Contracts. In August 2003, Kronos was awarded the
option on its U. S. Army Small Business Innovation Research Phase I
contract bringing the value of the Phase I contract award to $120,000.
In October 2003, the U.S. Army awarded Kronos the Small Business
Innovation Research Phase II contract. The contract is worth up to
$369,000. The contract is to develop Kronos' proprietary Electrostatic
Dehumidification Technology ("EDT"). Kronos initiated work under the
Phase II contract in December 2003. In December 2004, the U. S. Army
extended the first year of the contract until February 2005. In
February 2005, because the Army's focus was on researching a specific
aspect of using an electrostatic process for dehumidification and did
not share Kronos' vision for a broader application for using the
unique aspects of EDT for dehumidification, the Army decided not to
pursue their Phase II option. Kronos believes EDT is a viable solution
for commercial dehumidification and will seek one or more commercial
partners to work with us to exploit the benefits of EDT. As of March
31, 2005, the U. S. Army had provided Kronos with $275,000 in funding
for this effort under the Phase II contract and another $49,000 was
invoiced by Kronos during the quarter ended March 31, 2005.
14
Kronos is seeking to leverage its military application development
work with the U. S. Navy to develop and produce air handlers and
purifiers for commercial and industrial facilities. A future potential
commercial line of Kronos-based air handlers and purifiers would
attempt to address the specific air quality issues, including bacteria
and other germs, found in large enclosed spaces such as office
buildings and multi-dwelling residential complexes, while providing
more efficient air movement.
o Transportation Products. In January 2003, Kronos extended its work
into the transportation industry by signing a Development and
Acquisition Agreement with a premier business jet manufacturer. The
Agreement was the direct result of initial prototype development work
performed by the Kronos Research Team with input from the customer in
2002. The Kronos devices being designed and manufactured under this
contract will need to meet all FAA safety standards, including
environmental, flammability and electromagnetic interference (EMI).
The Company has completed product design and development based on the
customer's specific product application requirements. We are currently
testing and evaluating the prototype product.
Kronos is seeking to leverage its business jet application development
work to develop and produce air handlers and purifiers for the
commercial aviation and automotive markets. A future potential
commercial line of Kronos-based air handlers and purifiers would
attempt to address the specific air quality issues, including exhaust
and viruses, found in enclosed spaces occupied by multiple people for
extended periods of time, while providing more efficient air movement
within unique space constraints.
o Microelectronics Cooling Products. In December 2004, Kronos and the
University of Washington were awarded funding for a research and
technology development project entitled "Heat Transfer Technology for
Microelectronics and MEMS" by the Washington Technology Center
("WTC"). The objective of the project is to develop a novel
energy-efficient heat transfer technology for cooling
microelectronics. Thermal management for microelectronics and MEMS
systems is a challenge. Existing cooling devices aren't meeting
increasing needs for energy consumption and heat dissipation. Kronos
air handling technology is an emerging technology that uses an
electric field to exert force on ionized gas. Kronos is attempting to
develop an improved microchip air handling system that is smaller in
size, has high speed airflow, allows more targeted delivery of cooling
to areas of highest heat and is compatible with current processes. WTC
will contribute $40,000 to the project, with Kronos contributing
$8,000, plus $32,000 in in-kind services, including use of the Kronos
Research and Product Development Facility. During the quarter ended
March 31, 2005, Kronos and the University of Washington initiated
research into development of an energy-efficient heat transfer
technology for cooling microelectronics.
Patents and Intellectual Property
o Seven U.S. Patents Allowed for Issuance. Kronos has received
notification that seven of its patents have been allowed for issuance
by the United States Patent and Trademark Office. These patents are
considered utility patents which describe fundamental innovations in
the generation, management and control of Electrostatic Fluids,
including air movement, filtration and purification. Each of the
patents contain multiple part claims for both general principles as
well as specific designs for incorporating the Kronos technology into
air movement, filtration and purification products. The patents
provide protection for both specific product implementations of the
Kronos technology, as well as more general processes for applying the
unique attributes and performance characteristics of the technology.
Date Patent Title Description Protection
------------ -------------------- ------------------------ -----------
April 2005 Electrostatic Fluid placement, utilization 2022
Accelerator Design and geometries of the
Geometries electrodes - impacts air
flow
December 2004 Spark Management Method analysis, detection and 2021
and Device prevention of sparks in
a high voltage field -
creates safe, effective
electrostatic technology
products
November 2004 Electrostatic Fluid electrode design 2021
Accelerator - Electrode geometries and
Design Geometries attributes - achieves
unique air movement and
purification performance
October 2004 Electrostatic Fluid management and control 2021
Accelerator - Power to produce air flow
Supply Management and rates, high efficiency
Control particulate removal and
biological destruction
15
April 2004 Electrostatic Fluid using an electrostatic 2021
Accelerator for and a fluid accelerator to
Method of Controlling produce commercially
Fluid useful air flow rates
December 2003 Method of and Apparatus enhancements to core 2020
for Electrostatic Fluid technology for producing
Acceleration Control of ion discharge to create
a Fluid Flow air movement and base
level filtration
January 2003 Electrostatic Fluid core technology for 2019
Accelerator producing ion discharge
to create air movement
and base level filtration
o First International Patent Allowed for Issuance. In November 2004,
Kronos received formal notification from the Commonwealth of
Australian Patent Office indicating that its application entitled
"Electrostatic Fluid Accelerator" has been examined and allowed for
issuance as an Australian patent (#773626). There are a number of
other patent applications corresponding to Kronos' seven U.S. Patents
that have been filed and are pending outside of the United States.
o Additional Patent Applications. A number of additional patent
applications have been filed for, among other things, the control and
management of electrostatic fluid acceleration. These additional
patent applications are either being examined or are awaiting
examination by the Patent Office.
CRITICAL ACCOUNTING POLICIES
Use of Estimates. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Allowance for Doubtful Accounts. We provide a reserve against our receivables
for estimated losses that may result from our customers' inability to pay. These
reserves are based on potential uncollectible accounts, aged receivables,
historical losses and our customers' credit-worthiness. Should a customer's
account become past due, we generally will place a hold on the account and
discontinue further shipments and/or services provided to that customer,
minimizing further risk of loss.
Valuation of Goodwill, Intangible and Other Long Lived Assets. We use
assumptions in establishing the carrying value, fair value and estimated lives
of our long-lived assets and goodwill. The criteria used for these evaluations
include management's estimate of the asset's ability to generate positive income
from operations and positive cash flow in future periods compared to the
carrying value of the asset, the strategic significance of any identifiable
intangible asset in our business objectives, as well as the market
capitalization of Kronos. We have used certain key assumptions in building the
cash flow projections required for evaluating the recoverability of our
intangible assets. We have assumed revenues from the following applications of
the Kronos technology: consumer stand-alone devices, assisted care/skilled
nursing stand-alone devices, embedded devices in the hospitality industry and in
specialized military applications. Expenses/cash out flows in our projections
include sales and marketing, production, distribution, general and
administrative expenses, research and development expenses and capital
expenditures. These expenses are based on management estimates and have been
compared with industry norms (relative to sales) to determine their
reasonableness. We use the same key assumptions for our cash flow evaluation as
we do for internal budgeting, lenders and other third parties; therefore, they
are internally and externally consistent with financial statement and other
public and private disclosures. We are not aware of any negative implications
resulting from the projections used for purposes of evaluating the
appropriateness of the carrying value of these assets. If assets are considered
to be impaired, the impairment recognized is the amount by which the carrying
value of the assets exceeds the fair value of the assets. Useful lives and
related amortization or depreciation expense are based on our estimate of the
period that the assets will generate revenues or otherwise be used by Kronos.
Factors that would influence the likelihood of a material change in our reported
results include significant changes in the asset's ability to generate positive
cash flow, loss of legal ownership or title to the asset, a significant decline
in the economic and competitive environment on which the asset depends,
significant changes in our strategic business objectives, and utilization of the
asset.
Valuation of Deferred Income Taxes. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
The likelihood of a material change in our expected realization of these assets
is dependent on our ability to generate future taxable income, our ability to
deduct tax loss carryforwards against future taxable income, the effectiveness
of our tax planning and strategies among the various tax jurisdictions that we
operate in, and any significant changes in the tax treatment received on our
business combinations.
16
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
The Company's net loss for the nine months ended March 31, 2005 was $5,945,000
compared with a net loss of $1,735,000 for the corresponding period of the prior
year. The increase in the net loss was primarily the result of the restructuring
of the HoMedics debt (refer to Note 10 - Commitments and Contingencies) which
resulted in a non-cash charge to operations of $3,857,000.
The Company's net operating loss for the nine months ended March 31, 2005
increased by 26% to $1,677,000 compared with a net operating loss of $1,336,000
for the corresponding period of the prior year. The $341,000 increase in the net
operating loss was primarily the result of an increase in selling, general and
administrative expenses ($282,000) and a decrease in gross profit ($59,000).
Revenue. Revenues are generated through sales of Kronos devices, and fees earned
from licensing the Kronos technology and providing technical services to our
customers at Kronos Air Technologies, Inc. Revenue for the nine months ended
March 31, 2005 was $430,000. These revenues were primarily from our U.S. Navy
SBIR Phase II and U. S. Army SBIR Phase II contracts. Revenue of $342,000
recorded during the corresponding period of the prior year was primarily from
our HoMedics, U. S. Navy SBIR Phase II and U. S. Army SBIR Phase I and Phase I
Option contracts.
Cost of sales. Cost of sales for the nine months ended March 31, 2005 was
$375,000 compared to $228,000 for the corresponding period of the prior year,
respectively. Cost of sales in the current year was primarily development costs
associated with our U. S. Navy SBIR and U. S. Army SBIR contracts. Prior year
cost of sales related to revenue from our HoMedics, U. S. Navy SBIR and U. S.
Army SBIR contracts.
Gross profit. Gross profit for the nine months ended March 31, 2005 was $55,000
compared to $114,000 for the corresponding period of the prior year because of
the increased cost to build products under contract for the U.S. Navy and U.S.
Army, partially offset by the increase in revenue from these contracts.
Selling and other general administrative expenses. Selling, general and
administrative expenses for the nine months ended March 31, 2005 increased 19%
to $1,732,000 compared to $1,450,000 for the corresponding period of the prior
year. This $282,000 increase was primarily the result of an increase in
compensation and benefits ($263,000) due to the expansion of the Company's
research and product development team and an increase in the cost of health
benefits, an increase in depreciation and amortization ($84,000) because of the
increase in amortization of expenditures for intellectual property development
and for research and product development, an increase in insurance ($28,000)
because of the increase in directors and officers and product liability
insurance, an increase in research and development ($12,000) because the company
expanded its development of new products, partially offset by a decrease in
professional services ($108,000) because of a decrease in legal and accounting
expenses and the capitalization of patent counsel expenditures for the
development of the Company's intellectual property.
Loss on Debt Restructuring. Loss on debt restructuring for the nine months ended
March 31, 2005 was $3,857,000 and represented the non-cash charge to operations
for the cost to restructure the HoMedics debt, including the cost to issue 26
million warrants (refer to Note 10 - Commitments and Contingencies).
Other income. Other income for the nine months ended March 31, 2004 was $22,000
and was consideration earned from the assignment of the Company's stock
repurchase rights to Fusion Capital who made a partial repurchase of the
Company's stock used in May 2003 to acquire the remaining license rights to the
Kronos technology not included in the original acquisition of Kronos Air
Technologies, Inc.
Interest expense. Interest expenses for the nine months ended March 31, 2005 was
$411,000 compared to $421,000 for the corresponding period of the prior year.
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2005
Our total assets at March 31, 2005 and June 30, 2004 were $2,476,000 for each
period. Total assets at March 31 2005 were comprised primarily of $2,012,000 of
patents/intellectual property, $223,000 of prepaid assets and $188,000 of cash.
Total assets at June 30, 2004 were comprised primarily of $2,253,000 of
patents/intellectual property. Total current assets at March 31, 2005 and June
30, 2004 were $460,000 and $238,000, respectively, while total current
liabilities for those same periods were $2,864,000 and $1,423,000, respectively,
creating a working capital deficit of $2,404,000 and $1,186,000 at each
respective period end. This 103% increase in the working capital deficit was
primarily the result of increases in the current portion of notes payable
($1,511,000) offset by an increase in prepaid assets ($152,000) and an increase
in cash ($119,000). The increase in the current portion of notes payable was the
result of the Company incurring $2,000,000 in short term debt financing from
Cornell Capital Partners, partially offset by conversion of HoMedics debt from
short term to long term ($722,000).
Shareholders' deficit as of March 31, 2005 and June 30, 2004 was $2,937,000 and
$1,383,000, respectively. The increase in accumulated deficit ($5,945,000) was
partially offset by an increase in paid in capital ($4,391,000) due to the
issuance of shares of common stock during the nine months ended March 31, 2005.
17
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have relied principally on the sale of common stock and secured
debt and customer contracts for research and product development to finance our
operations.
In October 2004, Kronos entered into agreements for up to $20.5 million in
equity and equity backed debt financing from Cornell Capital Partners. In
October 2004, Kronos sold 5 million unregistered shares of Kronos common stock
for gross proceeds of $500,000 to Cornell Capital Partners. Cornell Capital
Partners committed to provide $4 million pursuant to two Equity Backed
Promissory Notes, which have or will be funded as follows: $2 million was funded
upon the filing an SB-2 Registration Statement and $2 million will be upon the
SEC declaring the Registration Statement effective. Kronos executed a Standby
Equity Distribution Agreement for $20 million of funding which Kronos has the
option to drawdown against in increments as large as $1.5 million over the next
twenty four months. Kronos received $0.5 million in funding upon the amendment
of the HoMedics debt financing and $2 million upon filing of the Registration
Statement. Kronos expects to receive an additional $2 million over the next 30 -
60 days under these agreements.
In October 2004, HoMedics agreed to extend repayment of Kronos debt and to
provide an additional $1 million in funding. HoMedics has agreed to provide
Kronos with an additional $1 million in financing - $925,000 in secured debt
financing and $75,000 for the purchase of additional warrants. The $925,000 will
be paid to Kronos upon Kronos achieving three milestones: (i) $175,000 shall be
funded upon delivery and successful testing of electronic boards and power
supplies from Kronos' contract manufacturing partner, (ii) $250,000 shall be
funded upon obtaining tooling of the current prototype configuration and device
testing and performing to HoMedics' specifications, and (iii) $500,000 shall be
funded upon the initial sale of Kronos-based air purifiers by HoMedics. In
addition, quarterly debt payments and the maturity date for existing debt have
been extended. Quarterly payments due on the outstanding $2.4 million in secured
debt financing, which had been scheduled to begin in August 2004, will be due
the earlier of Kronos receipt of royalty payments from HoMedics sale of
Kronos-based air purification products or two years. The maturity date of the
$2.4 million in debt has been extended from May 2008 to October of 2009; the
maturity date on the $925,000 will also be October 2009. The interest rate will
remain at 6% for the $2.4 million in debt; the rate will also be 6% on the
additional debt. HoMedics increased their potential equity position in Kronos to
30% of Kronos common stock on a fully diluted basis. In connection with the
October 2004 agreements, Kronos issued HoMedics a warrant to buy 26.5 million
shares of Kronos common stock.
Net cash flow used in operating activities was $1.7 million for the nine months
ended March 31, 2005. We were able to satisfy most of our cash requirements for
this period from the proceeds of the sale of equity to Cornell Capital Partners
and a group of accredited investors, the first $2 million Equity Backed
Promissory Note with Cornell Capital Partners and our U.S. Navy and U.S. Army
Phase II contracts.
We estimate that achievement of our business plan will require substantial
additional funding. We anticipate that the source of funding will be obtained
pursuant to senior debt funding from the HoMedics Secured Promissory Notes;
equity funding from the Cornell Capital Equity Investment Agreement, Equity
Backed Promissory Notes and the Standby Equity Distribution Agreement; and/or
the sale of additional equity in our Company; cash flow generated from
government grants and contracts; and cash flow generated from customer revenue.
There are no assurances that these sources of funding will be adequate to meet
our cash flow needs.
GOING CONCERN OPINION
Our Report of Independent Registered Public Accounting Firm includes an
explanatory paragraph to their audit opinions issued in connection with our 2004
and 2003 consolidated 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 financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
We can make no assurance that we will be able to successfully develop,
manufacturer and sell commercial products on a broad basis. While attempting to
make this transition, we will be subject to all the risks inherent in a growing
venture, including, but not limited to, the need to develop and manufacture
reliable and effective products, develop marketing expertise and expand our
sales force.
FACTORS AFFECTING KRONOS' BUSINESS AND PROSPECTS
We are subject to various risks which may have a material adverse effect on our
business, financial condition and results of operations, and may result in a
decline in our stock price. Certain risks are discussed below:
We have a limited operating history with significant losses and expect losses to
continue for the foreseeable future.
We have only recently begun implementing our plan to prioritize and concentrate
our management and financial resources to fully capitalize on our investment in
Kronos Air Technologies and have yet to establish any history of profitable
operations. We incurred a net loss of $5.9 million for the nine months ended
March 31, 2005. We incurred a net loss of $2.5 million for the fiscal year ended
June 30, 2004. As a result, at March 31, 2005 and June 30, 2004, we had an
accumulated deficit of $26.0 million and $20.0 million, respectively. Our
revenues and cash flows from operations have not been sufficient to sustain our
operations. We have sustained our operations through the issuance of our common
stock and the incurrence of debt. We expect that our revenues and cash flows
from operations may not be sufficient to sustain our operations for the
foreseeable future. Our profitability will require the successful
commercialization of our Kronos technologies. No assurances can be given that we
will be able to successfully commercialize our Kronos technologies or that we
will ever be profitable.
18
We will require significant additional financing to sustain our operations and
without it we will not be able to continue operations.
At March 31, 2005 and June 30, 2004, we had a working capital deficit of $2.4
million and $1.2 million, respectively. The Report of Independent Registered
Public Accounting Firm for the year ended June 30, 2004, includes an explanatory
paragraph to their audit opinion stating that our recurring losses from
operations and working capital deficiency raise substantial doubt about our
ability to continue as a going concern. For the nine months ended March 31, 2005
and March 31, 2004, we had an operating cash flow deficit of $1.7 million and
$1.3 million, respectively. We currently do not have sufficient financial
resources to fund our operations or pay certain existing obligations or those of
our subsidiary. Therefore, we need substantial additional funds to continue
these operations and pay certain existing obligations.
If obtaining sufficient financing from the U. S. Navy, U. S. Army, HoMedics and
/or Cornell Capital Partners were to be unavailable and if we are unable to
commercialize and sell our products or technologies, we will need to secure
another source of funding in order to satisfy our working capital needs. Even if
we are able to access the funds available under the U. S. Navy and U.S. Army
SBIR contracts, HoMedics senior debt agreement and / or the Cornell Capital
Equity Investment Agreement, Equity Backed Promissory Notes and Standby Equity
Distribution Agreement, we may still need additional capital to fully implement
our business, operating and development plans. At March 31, 2005 and June 30,
2004, we had a cash balance of $188,000 and $69,000, respectively. Should the
financing we require to sustain our working capital needs be unavailable, or
prohibitively expensive when we require it, we would be forced to curtail our
business operations.
Existing shareholders will experience significant dilution from our sale of
shares under the Cornell Capital Equity Investment Agreement and Standby Equity
Distribution Agreement and any other equity financing.
The sale of shares pursuant to our agreement with Cornell Capital Partners, the
exercise of HoMedics stock warrants or any other future equity financing
transaction will have a dilutive impact on our stockholders. As a result, our
net income per share could decrease in future periods, and the market price of
our common stock could decline. In addition, the lower our stock price is, the
more shares of common stock we will have to issue under the Equity Investment
Agreement and Standby Equity Distribution Agreement with Cornell Capital. If our
stock price is lower, then our existing stockholders would experience greater
dilution. We cannot predict the actual number of shares of common stock that
will be issued pursuant to the Standby Equity Distribution Agreement with
Cornell Capital or any other future equity financing transaction, in part,
because the purchase price of the shares will fluctuate based on prevailing
market conditions and we do not know the exact amount of funds we will need.
Competition in the market for air movement and purification devices may result
in the failure of the Kronos products to achieve market acceptance.
Kronos presently faces competition from other companies that are developing or
that currently sell air movement and purification devices. Many of these
competitors have substantially greater financial, research and development,
manufacturing, and sales and marketing resources than we do. Many of the
products sold by Kronos' competitors already have brand recognition and
established positions in the markets that we have targeted for penetration. In
the event that the Kronos products do not favorably compete with the products
sold by our competitors, we would be forced to curtail our business operations.
Our failure to enforce protection of our intellectual property would have a
material adverse effect on our business.
A significant part of our success depends in part on our ability to obtain and
defend our intellectual property, including patent protection for our products
and processes, preserve our trade secrets, defend and enforce our rights against
infringement and operate without infringing the proprietary rights of third
parties, both in the United States and in other countries. Our limited amount of
capital impedes our current ability to protect and defend our intellectual
property.
The validity and breadth of our intellectual property claims in ion wind
generation and electrostatic fluid acceleration and control technology involve
complex legal and factual questions and, therefore, may be highly uncertain.
Despite our efforts to protect our intellectual proprietary rights, existing
copyright, trademark and trade secret laws afford only limited protection.
Our industry is characterized by frequent intellectual property litigation based
on allegations of infringement of intellectual property rights. Although we are
not aware of any intellectual property claims against us, we may be a party to
litigation in the future.
Possible future impairment of intangible assets would have a material adverse
effect on our financial condition.
Our net intangible assets of approximately $2.0 million as of March 31, 2005
consist principally of purchased patent technology and marketing intangibles,
which relate to the acquisition of Kronos Air Technologies, Inc. in March 2000
and to the acquisition of license rights to fuel cell, computer and
microprocessor applications of the Kronos technology not included in the
original acquisition of Kronos Air Technologies, Inc. in May 2003. Intangible
assets comprise 81% of our total assets as of March 31, 2005. Intangible assets
are subject to periodic review and consideration for potential impairment of
value. Among the factors that could give rise to impairment include a
significant adverse change in legal factors or in the business climate, an
adverse action or assessment by a regulator, unanticipated competition, a loss
of key personnel, and projections or forecasts that demonstrate continuing
losses associated with these assets. In the case of our intangible assets,
specific factors that could give rise to impairment would be, but are not
limited to, an inability to obtain patents, the untimely death or other loss of
Dr. Igor Krichtafovitch, the lead inventor of the Kronos technology and Kronos
Air Technologies Chief Technology Officer, or the ability to create a customer
base for the sale or licensing of the Kronos technology. Should an impairment
occur, we would be required to recognize it in our financial statements. A
write-down of these intangible assets could have a material adverse impact on
our total assets, net worth and results of operations.
19
Our common stock is deemed to be "Penny Stock," subject to special requirement
and conditions and may not be a suitable investment.
Our common stock is deemed to be "penny stock" as that term is defined in Rule
3a51-1 promulgated under the Securities Exchange Act of 1934. Penny stocks are
stocks:
- With a price of less than $5.00 per share;
- That are not traded on a "recognized" national exchange;
- Whose prices are not quoted on the Nasdaq automated quotation system
(Nasdaq listed stock must still have a price of not less than $5.00 per
share); or
- In issuers with net tangible assets less than $2.0 million (if the
issuer has been in continuous operation for at least three years) or
$5.0 million (if in continuous operation for less than three years), or
with average revenues of less than $6.0 million for the last three
years.
Broker/dealers dealing in penny stocks are required to provide potential
investors with a document disclosing the risks of penny stocks. Moreover,
broker/dealers are required to determine whether an investment in a penny stock
is a suitable investment for a prospective investor. These requirements may
reduce the potential market for our common stock by reducing the number of
potential investors. This may make it more difficult for investors in our common
stock to resell shares to third parties or to otherwise dispose of them. This
could cause our stock price to decline.
We rely on management and research personnel, the loss of whose services could
have a material adverse effect upon our business.
We rely principally upon the services of our senior executive management, and
certain key employees, including the Kronos research team, the loss of whose
services could have a material adverse effect upon our business and prospects.
Competition for appropriately qualified personnel is intense. Our ability to
attract and retain highly qualified senior management and technical research and
development personnel are believed to be an important element of our future
success. Our failure to attract and retain such personnel may, among other
things, limit the rate at which we can expand operations and achieve
profitability. There can be no assurance that we will be able to attract and
retain senior management and key employees having competency in those
substantive areas deemed important to the successful implementation of our plans
to fully capitalize on our investment in the Kronos technology, and the
inability to do so or any difficulties encountered by management in establishing
effective working relationships among them may adversely affect our business and
prospects. Currently, we do not carry key person life insurance for any of our
executive management, or key employees.
ITEM 3. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. Within 90 days prior to the
filing date of this report, our Company carried out an evaluation of the
effectiveness of the design and operation of its disclosure controls and
procedures pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e). This
evaluation was done under the supervision and with the participation of our
Company's President and Chief Financial Officer. Based upon that evaluation,
they concluded that our Company's disclosure controls and procedures are
effective in gathering, analyzing and disclosing information needed to satisfy
our Company's disclosure obligations under the Exchange Act.
Changes in Internal Controls. There were no significant changes in our Company's
internal controls or in other factors that could significantly affect those
controls since the most recent evaluation of such controls.
20
PART II
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In January 2005, Cornell Capital Partners returned 2,941,177 shares to the
Company. These shares were acquired by Cornell in private placement transactions
entered into in October 2004. Pursuant to a new Standby Equity Distribution
Agreement dated January 28, 2005 Cornell has agreed to accept 1,470,587 shares
in 6 months and 1,470,588 in 12 months.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. EXHIBITS
EXHIBIT NO. DESCRIPTION LOCATION
-------------------------------------------------------------------------------------------------
2.1 Articles of Merger for Technology Incorporated by reference to
Selection, Inc. with the Nevada Exhibit 2.1 to the Registrant's
Secretary of State Registration Statement on Form
S-1 filed on August 7, 2001 (the
"Registration Statement")
3.1 Articles of Incorporation Incorporated by reference to
Exhibit 3.1 to the Registration
Statement on Form S-1 filed on
August 7, 2001
3.2 Bylaws Incorporated by reference to
Exhibit 3.2 to the Registration
Statement on Form S-1 filed on
August 7, 2001
4.1 2001 Stock Option Plan Incorporated by reference to
Exhibit 4.1 to
Registrant's Form
10-Q for the
quarterly period
ended March 31,
2002 filed on May
15, 2002
10.21 Consulting Agreement, dated January 1, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.21 to the
Dwight, Tusing & Associates Registration Statement on Form
S-1 filed on August 7, 2001
10.22 Letter Agreement, dated April 12, 2001, Incorporated by reference to
by and between TSET, Inc. and Daniel R. Exhibit 10.35 to the
Dwight and Richard F. Tusing Registration Statement on Form
S-1 filed on August 7, 2001
10.23 Indemnification Agreement, dated May 1, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.37 to the
Jeffrey D. Wilson Registration Statement on Form
S-1 filed on August 7, 2001
21
10.24 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
10.25 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
10.26 Indemnification Agreement, dated May 1, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.40 to the
Charles D. Strang Registration Statement on Form
S-1 filed on August 7, 2001
10.27 Indemnification Agreement, dated May 1, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.41 to the
Richard A. Papworth Registration Statement on Form
S-1 filed on August 7, 2001
10.28 Indemnification Agreement, dated Incorporated by reference to
May 1 2001, by and between TSET, Exhibit 10.42 to the
Inc. and Erik W. Black Registration Statement on Form
S-1 filed on August 7, 2001
10.29 Warrant Agreement, dated July 16, 2001, Incorporated by reference to
by and between TSET, Inc. and The Eagle Exhibit 10.49 to the
Rock Group, LLC Registration Statement on Form
S-1 filed on August 7, 2001
10.30 Agreement and Release, dated October Incorporated by reference to
10, 2001, by and between TSET, Inc. and Exhibit 10.50 to the
Jeffrey D. Wilson Registrant's Form 10-K for the
year ended June 30, 2001 filed
on October 15, 2001
10.31 Promissory Note dated October 10, 2001 Incorporated by reference to
payable to Mr. Jeffrey D. Wilson Exhibit 10.51 to the Registrant's
Form 10-K for the year ended
June 30, 2001 filed on October 15,
2001
10.32 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
10.33 Common Stock Purchase Agreement, Incorporate by reference to Exhibit
dated August 12, 2002 by and between 10.57 to the Registrant's Form S-1
between TSET, Inc. and Fusion filed on August 13, 2002
Capital Fund II, LLC
10.34 Registration Rights Agreement, dated Incorporated by reference to Exhibit
August 12, 2002 by and between TSET, 10.58 to the Registrant's Form S-1
Inc. and Fusion Capital Fund II, LLC filed on August 13, 2002
10.35 Termination Agreement, dated Incorporated by reference to Exhibit
August 12, 2002 by and between TSET, 10.59 to the Registrant's Amendment
Inc. and Fusion Capital Fund II, LLC No. 1 to Form S-1 filed on
September 16, 2002
10.36 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")
22
10.37 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
10.38 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
10.39 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
10.40 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
10.41 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
10.42 Warrant No. 2 dated May 9, 2003, Incorporated by reference to
issued to HoMedics Exhibit 99.7 to the Registrant's
8-K filed on May 15, 2003
2002
10.43 Consulting Agreement effective Incorporated by reference to
October 31, 2003, by and among Kronos Exhibit 10.67 to the Registrant's
Advanced Technologies, Inc., Form 10-Q for the quarterly period
Steven G. Martin and Joshua B. on ended December 31, 2003 filed on
Scheinfeld February 17, 2004
10.44 Promissory Note by and among Kronos Incorporated by reference to
Advanced Technologies, Inc., and Exhibit 10.67 to the Registrant's
Richard A. Papworth Form 10-Q for the quarterly period
ended March 31, 2004 filed on
May 17, 2004
10.45 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
10.46 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
10.47 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
10.48 Promissory Note by and among Kronos Incorporated by reference to
Advanced Technologies, Inc., and Exhibit 10.67 to the Registrant's
J. Alexander Chriss Form 10-Q for the quarterly period
ended March 31, 2004 filed on
May 17, 2004
23
10.49 Standby Equity Distribution Agreement, Incorporated by reference to
dated October 15, 2004, by and between Exhibit 99.1 to the Registrant's
Kronos Advanced Technologies, Inc. and Form 8-K filed on February 12, 2004
Cornell Capital Partners, LP
10.50 Registration Rights Agreement, dated Incorporated by reference to
October 15, 2004, by and between Kronos Exhibit 99.2 to the Registrant's
Advanced Technologies, Inc. and Cornell Form 8-K filed on February 12, 2004
Capital Partners, LP
10.51 Escrow Agreement, dated October 15, 2004, Incorporated by reference to
by and between Kronos Advanced Exhibit 99.3 to the Registrant's
Technologies, Inc. and Cornell Capital Form 8-K filed on February 12, 2004
Partners, LP
10.52 Placement Agent Agreement, dated October Incorporated by reference to
15, 2004, by and between Kronos Advanced Exhibit 99.4 to the Registrant's
Technologies, Inc. and Cornell Capital Form 8-K filed on February 12, 2004
Partners, LP
10.53 Securities Purchase Agreement, dated Incorporated by reference to
October 15, 2004, by and between Kronos Exhibit 99.5 to the Registrant's
Advanced Technologies, Inc. and Cornell Form 8-K filed on February 12, 2004
Capital Partners, LP
10.54 Investor Registration Rights Agreement, Incorporated by reference to
dated October 15, 2004, by and between Exhibit 99.6 to the Registrant's
Kronos Advanced Technologies, Inc. and Form 8-K filed on February 12, 2004
Cornell Capital Partners, LP
10.55 Escrow Agreement, dated October 15, 2004, Incorporated by reference to
by and between Kronos Advanced Exhibit 99.7 to the Registrant's
Technologies, Inc. and Cornell Capital Form 8-K filed on February 12, 2004
Partners, LP
10.56 Form of Equity-Back Promissory Note in Incorporated by reference to
the principal amount of $2,000,000 Exhibit 99.8 to the Registrant's
Form 8-K filed on February 12, 2004
10.57 First Amendment to Master Loan and Incorporated by reference to
Investment Agreement, dated October 25, Exhibit 99.9 to the Registrant's
2004, by and among Kronos Advanced Form 8-K filed on February 12, 2004
Technologies, Inc., f/k/a TSET, Inc.,
a Nevada corporation, Kronos Air
Technologies, Inc., a Nevada corporation
and FKA Distributing Co. d/b/a HoMedics,
Inc., a Michigan corporation
10.58 Secured Promissory Note, dated October Incorporated by reference to
25, 2004, payable to FKA Distributing Exhibit 99.10 to the Registrant's
Co., d/b/a HoMedics, Inc., a Michigan Form 8-K filed on February 12, 2004
corporation, in the principal amount of
$925,000
10.59 Amended and Restated Warrant No. 1, Incorporated by reference to
dated October 25, 2004, issued to FKA Exhibit 99.11 to the Registrant's
Distributing Co. d/b/a HoMedics, Inc. Form 8-K filed on February 12, 2004
10.60 Amended and Restated Warrant No. 2, Incorporated by reference to
dated October 25, 2004, issued to FKA Exhibit 99.12 to the Registrant's
Distributing Co. d/b/a HoMedics, Inc. Form 8-K filed on February 12, 2004
10.61 Warrant No. 3, dated October 25, 2004, Incorporated by reference to
issued to FKA Distributing Co. d/b/a Exhibit 99.13 to the Registrant's
HoMedics, Inc. Form 8-K filed on February 12, 2004
24
10.62 Amended and Restated Registration Rights Incorporated by reference to
Agreement, dated October 25, 2004, by Exhibit 99.14 to the Registrant's
And between Kronos Advanced Form 8-K filed on February 12, 2004
Technologies Inc., a Nevada corporation
and FKA Distributing Co. d/b/a HoMedics,
a Michigan corporation
10.63 Termination Agreement dated March 28, Incorporated by reference to Exhibit
2005, by and between Kronos Advanced 10.63 to the Registrant's Form SB-2
Technologies, Inc. and Cornell Capital filed on April 19, 2005
Partners, LP
10.64 Standby Equity Distribution Agreement, Incorporated by reference to Exhibit
dated April 13, 2005, by and between 10.64 to the Registrant's Form SB-2
Kronos Advanced Technologies, Inc. and filed on April 19, 2005
Cornell Capital Partners, LP
10.65 Registration Rights Agreement, dated Incorporated by reference to Exhibit
April 13, 2005, by and between Kronos 10.65 to the Registrant's Form SB-2
Advanced Technologies, Inc. and Cornell filed on April 19, 2005
Capital Partners, LP
10.66 Escrow Agreement, dated April 13, 2005, Incorporated by reference to Exhibit
by and between Kronos Advanced 10.66 to the Registrant's Form SB-2
Technologies, Inc. and Cornell Capital filed on April 19, 2005
Partners, LP
10.67 Placement Agent Agreement, dated April Incorporated by reference to Exhibit
13, 2005, by and between Kronos Advanced 10.67 to the Registrant's Form SB-2
Technologies, Inc. and Cornell Capital filed on April 19, 2005
Partners, LP
10.68 Form of Equity-Back Promissory Note in Incorporated by reference to Exhibit
the principal amount of $2,000,000 dated 10.68 to the Registrant's Form SB-2
March 7, 2005 between Kronos Advanced filed on April 19, 2005
Technologies, Inc. and Cornell Capital
Partners, LP
EXHIBIT NO. DESCRIPTION LOCATION
--------------------------------------------------------------------------------
31.1 Certification of Chief Executive Provided herewith
Officer pursuant to 15 U.S.C.
Section 7241, as adopted pursuant
to Section 302 of the Sarbanes-Oxley
Act of 2002
31.2 Certification of Principal Financial Provided herewith
Officer pursuant to U.S.C. Section
7241, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification by Chief Executive Officer Provided herewith
and Principal Accounting Officer pursuant
to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
25
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
DATED: May 12, 2005 KRONOS ADVANCED TECHNOLOGIES, INC.
By: /s/ DANIEL R. DWIGHT
-------------------------------------
Daniel R. Dwight
President and Chief Executive Officer
By: /s/ DANIEL R. DWIGHT
-------------------------------------
Daniel R. Dwight
Acting Chief Financial Officer