FILED PURSUANT TO RULE NO. 424(b)(3)
REGISTRATION NO. 333-97991
SECOND SUPPLEMENT TO PROSPECTUS
DATED JUNE 8, 2004
KRONOS ADVANCED TECHNOLOGIES, INC.
UP TO 16,400,000 SHARES OF COMMON STOCK
Attached hereto and hereby made part of the prospectus is: (1) the
company's Annual Report on Form 10-KSB for the year ended June 30, 2003, as
filed with the U.S. Securities and Exchange Commission on September 29, 2003,
and (2) the company's Quarterly Report on Form 10-QSB for the quarter ended
March 31, 2004, as filed with the U.S. Securities and Exchange Commission on May
14, 2004. Prospective investor in our common stock should carefully read each of
these documents and the related financial information prior to making any
investment decision.
__________________________
You should only rely on the information provided in the prospectus, this
prospectus supplement or any additional supplement. We have not authorized
anyone else to provide you with different information. The common stock is not
being offered in any state where the offer is not permitted. You should not
assume that the information in the prospectus or this prospectus supplement or
any additional supplement is accurate as of any date other than the date on the
front of those documents.
__________________________
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of the prospectus or this prospectus supplement. Any
representation to the contrary is a criminal offense.
__________________________
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS JUNE 8, 2004
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 000-30191
KRONOS ADVANCED TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 87-0440410
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
464 COMMON STREET, SUITE 301, BELMONT, MASSACHUSETTS 02478
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (617) 993-9965
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.001 PER SHARE
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes No X
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ___
The aggregate market value of the voting common stock held by
non-affiliates of the Registrant on September 23, 2003, was $22,277,975 based on
the average bid and asked prices on such date of $0.41.
The Registrant had 54,336,524 shares of Common Stock, par value $0.001 per
share, outstanding on September 23, 2003.
PART I
ITEM 1. BUSINESS
GENERAL DESCRIPTION OF BUSINESS
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS. THIS FILING CONTAINS
FORWARD-LOOKING STATEMENTS, INCLUDING STATEMENTS REGARDING, AMONG OTHER
THINGS:(A) OUR PROJECTED SALES AND PROFITABILITY, (B) OUR GROWTH STRATEGIES, (C)
ANTICIPATED TRENDS IN OUR INDUSTRY, (D) OUR FUTURE FINANCING PLANS, (E) OUR
ANTICIPATED NEEDS FOR WORKING CAPITAL, AND (F) THE BENEFITS RELATED TO OUR
OWNERSHIP OF KRONOS AIR TECHNOLOGIES, INC. IN ADDITION, WHEN USED IN THIS
FILING, THE WORDS "BELIEVES," "ANTICIPATES," "INTENDS," "IN ANTICIPATION OF,"
"EXPECTS," AND SIMILAR WORDS ARE INTENDED TO IDENTIFY CERTAIN FORWARD-LOOKING
STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE BASED LARGELY ON OUR
EXPECTATIONS AND ARE SUBJECT TO A NUMBER OF RISKS AND UNCERTAINTIES, MANY OF
WHICH ARE BEYOND OUR CONTROL. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS, INCLUDING, WITHOUT
LIMITATION, THE RISKS OUTLINED UNDER "FACTORS AFFECTING KRONOS' BUSINESS AND
PROSPECTS" AND MATTERS DESCRIBED IN THIS FILING GENERALLY. IN LIGHT OF THESE
RISKS AND UNCERTAINTIES, THERE CAN BE NO ASSURANCE THAT THE FORWARD-LOOKING
STATEMENTS CONTAINED IN THIS FILING WILL IN FACT OCCUR. WE DO NOT UNDERTAKE ANY
OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY REVISIONS TO THESE
FORWARD-LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT ANY FUTURE EVENTS OR
CIRCUMSTANCES.
OUR COMPANY
We are a Nevada corporation. Our principal executive offices are located at
464 Common Street, Suite 301, Belmont, Massachusetts 02478. Our telephone number
is (617) 993-9965. The address of our website is www.kronosati.com. Information
on our website is not part of this filing.
CORPORATE HISTORY
Kronos Advanced Technologies, Inc. ("Kronos") was originally incorporated
under the laws of the State of Utah on September 17, 1980 as Penguin Petroleum,
Inc. Penguin Petroleum Inc.'s stockholders approved a name change on October 6,
1982 to Petroleum Corporation of America, Inc. On December 29, 1996,
stockholders approved a reorganization whereby they exchanged their stock on a
one-for-one basis with Technology Selection, Inc., a Nevada corporation.
Technology Selection, Inc.'s shares began trading on the Over-the-Counter
Bulletin Board on August 28, 1996 under the symbol "TSET." On November 19, 1998,
Technology Selection, Inc. changed its name to TSET, Inc. Effective January 12,
2001, we began doing business as Kronos Advanced Technologies; and, as of
January 18, 2002, we changed our ticker symbol to "KNOS." Our recent activities
have been focused on capitalizing on our investment in Kronos Air Technologies,
Inc., a wholly owned subsidiary of Kronos, and we have not, to date, generated
significant operating revenues. We have never been party to any bankruptcy,
receivership, or similar proceedings and, other than noted above, have not been
party to any material reclassification, merger, or consolidation not in the
ordinary course of our business.
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BUSINESS STRATEGY
We are a high technology company focused on developing, marketing and
selling products using the Company's proprietary air movement and purification
technology. Kronos is pursuing commercialization of its patented 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(TM) technology combines high voltage electronics and electrodes.
By combining these technologies, a Kronos(TM)-based device can both move and
clean air without any moving parts. Kronos(TM) devices are versatile, energy-
and cost-efficient and capable of multiple design forms. As a result, Kronos(TM)
devices have the immediate potential to be used as a standalone product or to
replace a range of heating, ventilation and air conditioning ("HVAC") products
for residential usage to high efficiency particulate air ("HEPA") filtration
systems for operating and manufacturing clean rooms.
The proprietary Kronos(TM) technology involves the application of high
voltage management across paired electrical grids to create an ion exchange that
moves and purifies air. Kronos(TM) technology has numerous valuable
characteristics. It moves air and gases at high velocities while removing odors,
smoke and particulates and killing pathogens, including bacteria and mold. The
technology is cost-effective and is more energy efficient than current
alternative fan and filter (including HEPA filter and ultraviolet light based)
technologies. To date, no commercial products using the Kronos(TM) technology
have been sold.
A number of the scientific claims of the Kronos(TM) 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(TM) technology. Tests conducted at
MicroTest Laboratories and at the New Hampshire Materials Laboratory
demonstrated HEPA Clean Room Class 1000 quality particulate reduction and up to
95% reduction of hazardous gases (in one air pass through the Kronos(TM)
system), including numerous contaminants found in cigarette smoke.
Market Segmentation
Kronos' business development strategy is to sell and license the Kronos(TM)
technology to six distinct market segments: (1) air movement and purification
(health care, hospitality, residential and commercial facilities); (2) air
purification for unique spaces (cleanrooms, automotive, cruise ships and
airplanes); (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' initial focus is on the first three 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 through customer contracts which were executed over the
past twelve months. These contracts are described in more detail in the
Technology Application and Product Development section of this filing.
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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. The addressable air movement and
purification segment is made up of four principal applications: (1) health
care, (2) hospitality, (3) commercial and (4) residential. Kronos is
seeking to leverage the product development and funding resources of
HoMedics, Inc., Kronos' strategic partner for consumer-based residential
applications, to develop standalone products for other air movement and
purification applications.
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(TM) 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 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. 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(TM)-based air movers and purifiers for applications that require
these products to be embedded into ventilation systems to address the needs
of military personnel.
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(TM) 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(TM) device into a wall outlet to obtain air filtration for their
home, office or hotel room. Embedded applications of the Kronos(TM) 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 HoMedics Contract. 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(TM)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(TM)technology. In November 2002, Kronos and HoMedics
executed a Development Agreement to provide Kronos with the financial
resources believed necessary to complete commercialization of the initial
Kronos(TM)-based consumer product line. Kronos is working with HoMedics'
engineers, designers, manufacturers, and marketing and sales personnel to
complete the initial product line for sales and distribution. HoMedics is
focused on product design and features, completion of manufacturing tooling
and assembly line processes, and product packaging, including prominent
display of the "Kronos" brand. Kronos is focused on completion of the
technical hardware and related power supplies for each of the products in
the air purification product line, as well as on developing product
features and benefits unique to this initial consumer product line.
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The initial term of the agreement is three and one half years with the
option to extend the Licensing Agreement for six additional years. Kronos
was compensated through an initial royalty payment and will receive ongoing
quarterly royalty payments based on a percentage of sales. HoMedics will
pay minimum royalty payments of at least $2 million during the initial
three and a half year term and on-going royalty payments to extend the
agreement. Kronos will retain the rights to all of its intellectual
property.
HoMedics commitment includes funding a marketing and advertising campaign
to promote the Kronos(TM)-based product line. The products will be
manufactured and 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. Kronos will
manufacture and provide HoMedics with Kronos' proprietary electronics.
In May 2003, Kronos entered into an agreement with HoMedics, Inc. for $3.5
million in financing, including $3.4 million in secured debt financing and
$100,000 for the purchase of warrants. $2.5 million was paid to Kronos upon
execution of the agreement and $1.0 million will be paid upon the start of
production as defined in the Licensing Agreement for the Kronos(TM)-based
air purification product line to be marketed and distributed by HoMedics.
In conjunction with securing this financing, Kronos and HoMedics agreed to
negotiate the expansion of our relationship into additional
Kronos(TM)-based stand-alone consumer products, including fans, heaters,
humidifiers and dehumidifiers, as well as geographic expansion into Europe
and Asia.
Kronos is seeking to leverage its consumer product development work with
HoMedics to develop and produce our own commercial line of standalone air
purifiers. This commercial line of Kronos(TM)-based air purifiers would
attempt 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.
Embedded Platform
o U.S. Navy SBIR Contracts. 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(TM) 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.
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(TM) 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.
5
During Phase II, Kronos will attempt to develop, produce and install 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" will be 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 initial six months of the contract,
Kronos has 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 and Northrop Grumman of the
specifications for the commercial products to be built under the Phase II
contract. As of June 30, 2003, the U. S. Navy had provided Kronos with
$150,000 in funding for this effort under the Phase II contract.
As part of its air management system, Kronos intends to develop and test an
air filtration mechanism capable of performing to HEPA quality standards.
We believe that Kronos(TM) devices could replace current HEPA filters with
a permanent, easily cleaned, low-cost solution. The U.S. Navy unique
environment includes shock exposure, vibration, Electromagnetic
Interference/Compatibility (EMI/EMC), and salt spray. Kronos(TM) devices
will be built and tested to meet specific Navy standards. Testing shall
include assessments for system performance, including control techniques,
noise levels, acquisition and lifecycle costs.
We believe that during the option portion of the contract, Kronos(TM)
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(TM) technology can kill all or
most airborne pathogens regardless of their nature, genetic structure,
robustness, or method of delivery.
Kronos has begun the process for obtaining Phase III (production phase)
support for the Kronos(TM)-based advanced distributive air management
system being developed under Phase II. Phase III contracts may be awarded
prior to completion of Phase II contract work. Kronos is working directly
with Dawn Breaker, a U. S. Government entity established for the purpose of
supporting companies seeking Phase III contracts.
o 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 July 2003,
Kronos obtained a Pre-Award notice from the U. S. Army for a Small Business
Innovation Research Phase II contract worth $730,000. During the Pre-Award
stage, the U. S. Army will need to complete the necessary documentation for
Kronos to begin work on Phase II. The U. S. Army expects that completion of
the documentation will take approximately 90 days. The Phase II contract is
an extension of the Phase I work that began in 2002. We anticipate the
Kronos(TM)devices manufactured under this contract will further demonstrate
the versatility of the Kronos(TM)technology to meet airflow, system
pressure and reduced humidity requirements for HVAC systems. In December
2001, Kronos was awarded the Phase I contract. Phase I of the contract was
worth $70,000 in funding to investigate and analyze the feasibility of the
Kronos(TM)technology to reduce humidity in HVAC systems. Dehumidification
is essential to making HVAC systems more energy efficient.
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Kronos is seeking to leverage its military application development work
with the U.S Navy and U. S. Army to develop and produce air handlers and
purifiers for commercial and industrial facilities. A future potential
commercial line of Kronos(TM)-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 Business Jet Manufacturer. 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(TM) 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 initiated the next
phase of design and development based on the customer's specific product
application requirements.
Kronos is seeking to leverage its business jet application development work
with the business jet manufacturer to develop and produce air handlers and
purifiers for the commercial aviation and automotive markets. A future
potential commercial line of Kronos(TM)-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.
COMPETITION
In each of these market segments, there are a large number of incumbent
specialty, national and global competitors. These competitors have firmly
established products, customers, distribution and sales channels and broad brand
recognition. These competitors have significantly greater financial resources
than our Company. The consumer, commercial and industrial fan, air movement and
air purification markets are highly competitive based on price, availability,
customization, service and warranty. Kronos intends to position itself based
upon its advantages in features and performance to create a beneficial value to
its customers. Kronos intends to compete in licensing of air movement and
purification technologies to existing manufacturers and product sales
organizations.
PATENTS AND INTELLECTUAL PROPERTY
In August 2003, Kronos received a Notice of Allowance from the United
States Patent and Trademark Office indicating that its patent application
entitled Method of and Apparatus for Electrostatic Fluid Acceleration Control of
a Fluid Flow has been examined and allowed for issuance as a U.S. patent. It is
expected that the U. S. Patent will be issued in due course. This latest patent
when formally issued will provide intellectual property protection for key
aspects of Kronos' technology until late in 2020.
In January 2003, Kronos received formal notification from the United States
Patent and Trademark Office indicating that its application entitled
Electrostatic Fluid Accelerator has been examined and allowed for issuance as a
U.S. patent (#6,504,308). The patent provides protection for key aspects of
Kronos' technology until late in 2019.
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In addition to the Electrostatic Fluid Accelerator and Method of and
Apparatus for Electrostatic Fluid Acceleration Control of a Fluid Flow patents,
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. There are a number of corresponding patent
applications, which have been filed and are pending outside of the United
States.
MILESTONES
Our primary business objectives over the next 12 months are the launch of
Kronos(TM)-based standalone consumer and commercial products and to establish
strategic partners for developing and commercializing embedded product
applications. The primary milestones necessary to achieve these objectives are
as follows:
o adaptation of the initial standalone consumer product line for
commercial applications including assisted living, nursing home and
healthcare facilities;
o hiring additional marketing and sales personnel to expand Kronos'
commercial customer base to allow Kronos to increase both near term and
long term revenue;
o expansion of external partnerships and resources to facilitate the
production and post-sale servicing of Kronos(TM)products;
o expansion of technical resources and product engineering to better
position Kronos' ability to address specific customer issues and needs;
and
o continuation of implementation of Kronos' intellectual property
strategies, including continuation of its U.S. and international patent
filing process to enable a full development and effective management of
its intellectual property rights and assets.
We estimate that achievement of our business plan will require substantial
additional funding. We anticipate that the source of funding will be obtained
pursuant to the senior debt funding from HoMedics, Fusion Capital transaction
and/or the sale of additional equity in our Company, cash flow generated from
government grants and contracts, which includes funding from the Small Business
Innovation Research contracts sponsored by the U.S. Navy and Army awarded to
Kronos Air Technologies, and cash flow generated from customer revenue. Pursuant
to discussions with the companies that we will be licensing our technology, we
anticipate generating cash flow in our 2004 fiscal year from advance funding
from these companies for production development work. As set forth below, our
agreement with HoMedics limits our ability to borrow money and as a result,
required capital will be from the sale of equity, cash flow from operations and
/ or the sale or licensing of the Kronos(TM) technology to other parties.
HOMEDICS SENIOR DEBT TRANSACTION
In May 2003, Kronos entered into an agreement with a strategic customer,
HoMedics, Inc., for $3.5 million in financing, including $3.4 million in secured
debt financing and $100,000 for the purchase of warrants. $2.5 million was paid
to Kronos upon execution of the agreement and $1.0 million will be paid upon the
start of production as defined in the Licensing Agreement for the Kronos(TM) -
based air purification product line to be marketed and distributed by HoMedics.
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The loan has the following features: (i) six percent (6%) interest per
annum with no interest payments during the first twelve months; (ii) five (5)
year term with no payments required until August 2004 (interest accrues) and
principal amortized over the remaining four years with payments due quarterly
unless HoMedics provides notice to waive the payment obligation for any given
quarter, which in such event shall add to the final payment due; (iii)
affirmative and negative covenants, including restrictions on Kronos' ability
(a) to declare or pay distributions, dividends or management fees to any of its
shareholders, (b) to incur, create, assume or permit to exist any indebtedness
or liability for borrowed money, or any other indebtedness or liability
evidenced by notes, bonds, debentures, or similar obligations, or any other
indebtedness whatsoever, with certain limited exceptions, (c) create, incur,
assume or suffer to exist any mortgage, pledge, encumbrance security interest,
lien or charge of any kind upon any of its property or assets, (d) to make
loans, advances or extensions of credit to any person, with limited exceptions,
(e) to guarantee or otherwise, directly or indirectly, in any way be or become
responsible for obligations of any person, and (f) to purchase, redeem, retire
or otherwise acquire any of the shares of its capital stock; (iv) a setoff
arrangement with HoMedics' license whereby the outstanding principal and accrued
interest on the note shall be offset by any royalty payments due to Kronos from
HoMedics; and (v) a security interest in Kronos' assets, including its
intellectual property. In exchange for providing $3.4 million in debt financing
and $100,000, Kronos provided HoMedics with two warrants: (i) 6.7 million
warrants (which equated to 10% of the then fully diluted shares) fully vested at
the time of funding and (ii) 6.7 million warrants (which equated to 10% of the
then fully diluted shares) which will vest only (1) if Kronos does not prepay
the entire amount of principal and interest due under the Notes by November 8,
2005; (2) upon a default by Kronos, or (3) Kronos does not earn, at any time
after the date of this agreement but prior to November 8, 2005, revenues in an
aggregate amount equal to or greater than $3.5 million. The exercise price was
set at the market price at the time of closing ($0.10). HoMedics has
antidilution rights for any funds raised at less than $0.20 per share, excluding
options or shares issued to management, directors, and consultants in the normal
course of business. HoMedics antidilution rights do not apply for funds raised
at greater than $0.20 per share.
FUSION CAPITAL TRANSACTION
On August 12, 2002, we entered into a common stock purchase agreement with
Fusion Capital. Pursuant to the common stock purchase agreement and subject to
the condition that Fusion Capital is not obligated nor permitted to purchase
shares of our common stock if the per-share price of our common stock does not
equal or exceed the floor price of $0.10, Fusion Capital has agreed to purchase
on each trading day during the term of the agreement, $10,000 of our common
stock or an aggregate of $6.0 million. The $6.0 million of our common stock can
be purchased over a 30-month period, subject to a six-month extension or earlier
termination at our sole discretion and subject to certain events. The purchase
price per share is equal to the lesser of (i) the lowest price of our common
stock on the purchase date; or (ii) the average of the three (3) lowest closing
sale prices of our common stock during the twelve (12) consecutive trading days
prior to the date of a purchase by Fusion Capital. However, there can be no
assurance of how much cash we will receive, if any, under the common stock
purchase agreement with Fusion Capital. As of June 30, 2003, Kronos has obtained
$579,000 under the stock purchase agreement.
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RETENTION OF THE EAGLE ROCK GROUP, LLC
On July 9, 2001, we signed an agreement to utilize the strategic planning
and business plan execution services of The Eagle Rock Group, LLC. ("Eagle
Rock"). Pursuant to the agreement that we entered into with Eagle Rock, we
issued to Eagle Rock a ten-year warrant granting them the right to purchase
1,400,000 shares of our common stock at an exercise price of $0.68 per share.
The warrant contains redemption rights in the event that we enter into a
transaction that results in a change of control of our company. Effective March
11, 2002, we entered into a new agreement with Eagle Rock for a nearly one year
period ending March 1, 2003. Pursuant to the agreement, we issued Eagle Rock a
ten-year warrant granting them the right to purchase 900,000 shares of our
common stock. Two hundred and fifty thousand (250,000) warrant shares are
exercisable at an exercise price of $0.42 and two hundred and fifty thousand
(250,000) warrant shares are exercisable at an exercise price of $0.205. These
warrants were earned over a 12-month period and four hundred thousand (400,000)
warrant shares are exercisable at an exercise price of $0.145 and were earned
upon the securing of our Licensing Agreement with HoMedics. The Company is no
longer compensating Eagle Rock for any work it may perform on our behalf.
EMPLOYEES
On September 23, 2003, Kronos and its subsidiaries had nine full-time
employees. Of the total number of full-time employees, one works in general
management, five in research and product development, two in marketing and sales
and operations, one in finance, and none are employed in administrative and
other support positions. None of the employees are represented by unions. There
has been no disruption of operations due to a labor dispute. We consider our
relations with our employees to be good.
FACTORS AFFECTING KRONOS' BUSINESS AND PROSPECTS
We are subject to various risks which may have a material adverse effect on
our business, financial condition and results of operations, and may result in a
decline in our stock price. Certain risks are discussed below:
WE HAVE A LIMITED OPERATING HISTORY WITH SIGNIFICANT LOSSES AND EXPECT LOSSES TO
CONTINUE FOR THE FORESEEABLE FUTURE
We have only recently begun implementing our plan to prioritize and
concentrate our management and financial resources to fully capitalize on our
investment in Kronos Air Technologies and have yet to establish any history of
profitable operations. For the year ended June 30, 2003, we had negative cash
flows from our operations. We have incurred annual net losses of $2.8 million
during each of the past two fiscal years of operation. As a result, at June 30,
2003, we had an accumulated deficit of $17.5 million. For the fiscal years ended
June 30, 2003 and 2002, we had revenue of $559,000 and $93,000, respectively. We
have incurred net losses from continuing operations of $2.8 million and $3.5
million for the fiscal years ended June 30, 2003 and 2002. For the fiscal years
ended June 30, 2003 and 2002, we generated negative cash flows from our
operations. 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 secured 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(TM) technologies. No assurances can
be given that we will be able to successfully commercialize our Kronos(TM)
technologies or that we will ever be profitable.
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WE WILL REQUIRE SIGNIFICANT ADDITIONAL FINANCING TO SUSTAIN OUR OPERATIONS AND
WITHOUT IT WE WILL NOT BE ABLE TO CONTINUE OPERATIONS
At June 30, 2003, we had a working capital deficit of $1.2 million. The
independent auditor's report for the years ended June 30, 2003 and June 30,
2002, 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
years ended 2003 and 2002, we had an operating cash flow deficit of $2.0 million
and $1.5 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 Fusion Capital were to be unavailable and if we are unable to
commercialize and sell the 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 Fusion common stock
purchase agreement, we may still need additional capital to fully implement our
business, operating and development plans. At June 30, 2003, we had a cash
balance of $641,000. 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 COMMON STOCK PURCHASE AGREEMENT WITH FUSION CAPITAL AND ANY
OTHER EQUITY FINANCING
The sale of shares pursuant to our agreement with Fusion Capital, 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 common stock
purchase agreement with Fusion Capital in order to draw down the full amount. 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 agreement with Fusion 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.
FAILURE TO DEVELOP MANUFACTURING CAPABILITIES WOULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR BUSINESS
The manufacture of consumer products by HoMedics based on our technology is
in the initial stage. We have no experience manufacturing and distributing
commercial quantities of our Kronos' products. Kronos currently does not have
any commercial-scale manufacturing facilities. Kronos does not have any
contractual relationships with third parties to contract manufacture. If Kronos
is unable to acquire adequate manufacturing capabilities or if it cannot enter
into satisfactory arrangements with third parties to manufacture the Kronos(TM)
products on commercially reasonable terms, we would be forced to curtail our
business operations. There can be no assurance that we will be able to acquire
adequate manufacturing capabilities or be able to enter into satisfactory
arrangements with third parties to manufacture the Kronos(TM) products.
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COMPETITION IN THE MARKET FOR AIR MOVEMENT AND PURIFICATION DEVICES MAY RESULT
IN THE FAILURE OF THE KRONOS(TM)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(TM) 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.
In January 2003, Kronos received formal notification from the United States
Patent and Trademark Office indicating that its application entitled
Electrostatic Fluid Accelerator had been examined and allowed for issuance as a
U.S. patent (#6,504,308). The patent will provide protection for key aspects of
Kronos'(TM) technology until late in 2019. In August 2003, Kronos received a
Notice of Allowance from the United States Patent and Trademark Office
indicating that its patent application entitled Method of and Apparatus for
Electrostatic Fluid Acceleration Control of a Fluid Flow has been examined and
allowed for issuance as a U.S. patent. It is expected that the U. S. Patent will
issue in due course. We have additional U.S. and foreign patent applications
pending. 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 $2.5 million as of June 30, 2003
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(TM) technology not included in the
original acquisition of Kronos Air Technologies, Inc. in May 2003. Intangible
assets comprise 78% of our total assets as of June 30, 2003. 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(TM) technology and
Kronos Air Technologies Chief Technology Officer, or the ability to create a
customer base for the sale or licensing of the Kronos(TM) technology.
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Should an impairment occur, we would be required to recognize it in our
financial statements. A write-down of these intangible assets could have a
material adverse impact on our total assets, net worth and results of
operations.
OUR COMMON STOCK IS DEEMED TO BE "PENNY STOCK," SUBJECT TO SPECIAL REQUIREMENTS
AND CONDITIONS, AND MAY NOT BE A SUITABLE INVESTMENT
Our common stock is deemed to be "penny stock" as that term is defined in
Rule 3a51-1 promulgated under the Securities Exchange Act of 1934. Penny stocks
are stocks:
o With a price of less than $5.00 per share;
o That are not traded on a "recognized" national exchange;
o 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
o 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(TM) 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.
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OUR FAILURE TO TIMELY FILE FEDERAL AND STATE INCOME TAX RETURNS FOR CALENDAR
YEARS 1997 THROUGH 2001 MAY RESULT IN THE IMPOSITION OF INTEREST AND PENALTIES
We failed to timely file federal and state income tax returns for calendar
years 1997 through 2001, respectively; however, we are now current in all of our
income tax filings. We had operating losses for each year during the period 1997
through 2001, and there were no income taxes due and owing for those years.
These returns could be subject to review and potential examination by the
respective taxing authorities. Should any of these returns come under
examination by federal or state authorities, our positions on certain income tax
issues could be challenged. The impact, if any, of the potential future
examination cannot be determined at this time. If our positions are successfully
challenged, we may be forced to pay income taxes, interest and penalties for
those years.
ITEM 2. PROPERTIES
Our principal executive office is located at 464 Common Street, Suite 301,
Belmont, Massachusetts. The offices of the Kronos Research Center are located at
8549/8551 154th Avenue NE, Redmond, Washington. Kronos is committed through June
30, 2004 to annual lease payments on operating leases for 4,000 square feet of
office/research lab premises of $61,836 per year. We consider our existing
facilities to be adequate for our foreseeable needs.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock trades on the Over-the-Counter Bulletin Board under the
trading symbol "KNOS." Our high and low bid prices by quarter during fiscal 2003
and 2002 are presented as follows:
FISCAL YEAR 2003
HIGH LOW
First Quarter (July 2002 to September 2002) $0.200 $0.140
Second Quarter (October 2002 to December 2002) $0.170 $0.110
Third Quarter (January 2003 to March 2003) $0.129 $0.087
Fourth Quarter (April 2003 to June 2003) $0.290 $0.085
FISCAL YEAR 2002
HIGH LOW
First Quarter (July 2001 to September 2001) $0.700 $0.300
Second Quarter (October 2001 to December 2001) $0.530 $0.210
Third Quarter (January 2002 to March 2002) $0.280 $0.185
Fourth Quarter (April 2002 to June 2002) $0.330 $0.140
On September 23, 2003, the closing price of our common stock as reported on
the Over-the-Counter Bulletin Board was $0.41 per share. On September 23, 2003,
we had approximately 1,500 beneficial stockholders of our common stock and
54,336,524 shares of our common stock were issued and outstanding.
DIVIDENDS
We have not declared or paid dividends on our common stock during fiscal
2002 or 2003 and do not plan to declare or pay dividends on our common stock
during fiscal 2004. Our dividend practices are determined by our Board of
Directors and may be changed from time to time. We will base any issuance of
dividends upon our earnings (if any), financial condition, capital requirements,
acquisition strategies, and other factors considered important by our Board of
Directors. Nevada law and our Articles of Incorporation do not require our Board
of Directors to declare dividends on our common stock. We expect to retain any
earnings generated by our operations for the development and expansion of our
business and do not anticipate paying any dividends to our stockholders for the
foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
Except as otherwise noted, all of the following shares were issued and
options and warrants granted pursuant to the exemption provided for under
Section 4(2) of the Securities Act of 1933, as amended, as a "transaction not
involving a public offering." No commissions were paid, and no underwriter
participated, in connection with any of these transactions. Each such issuance
was made pursuant to individual contracts which are discrete from one another
and are made only with persons who were sophisticated in such transactions and
who had knowledge of and access to sufficient information about Kronos to make
an informed investment decision. Among this information was the fact that the
securities were restricted securities.
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All investors participating in private placements for cash were "accredited
investors" within the meaning of Regulation D. In addition, we note that there
are several categories of recipients of these shares. These include investors
for cash, officers, directors, consultants, litigants and former shareholders of
private companies acquired by Kronos. Kronos does not believe that these
categories of recipients should be integrated with each other under the concept
of integration. Under Securities Act Release Nos. 4552 and 4434, these
categories would not involve a single plan of financing and would not be
considered to be made for the same general purpose. As a result, each category
should be reviewed on its own. Given the small number of purchasers in these
categories, Kronos believes that these transactions complied in all respects
with Section 4(2). Kronos believes that this conclusion is true even if the
transactions occurring within each category are integrated with other
transactions occurring within six months or one year of a given transaction.
In April 1999, we issued 1,000,000 shares of our common stock, valued at
$0.30 per share, at an aggregate value of $300,000, to The Pangea Group, LLC,
the nominee of Jeffrey A. Wilson, a former director and executive officer of
Kronos, based on an employment agreement dated April 16, 1999. The fair market
value of a share of our common stock on April 16, 1999, the date of grant, was
$1.00 per share. In September 2001, Kronos determined that such employment
agreement was null and void from its inception. As a consequence, the issuance
of the 1,000,000 common shares is void as of April 16, 1999, the effective date
of the employment agreement, and these shares of common stock will be treated as
if they never were issued. The issuance of such shares is not reflected in the
financial statements.
In August 1999, we issued 100,000 shares of our common stock, valued at
$0.50 per share (the fair market value for our shares as of such date), at an
aggregate value of $50,000, to twelve persons in exchange for ownership of U.S.
patent no. 4,803,632 (issued February 7, 1989) and related intellectual property
rights relating to a technology and device referred to as the "Intelligent
Utility Meter System".
In January 2000, we issued 74,094 shares of our common stock, valued at
$0.69 per share (the negotiated purchase price for such shares), to one person,
a stockholder of Kronos, in exchange for $51,125 in cash.
In February 2000, we issued 80,435 shares of our common stock, valued at
$0.92 per share (the negotiated purchase price for such shares), to one person,
a stockholder of Kronos, in exchange for $74,000 in cash.
In March 2000, we issued 619,645 shares of our common stock, valued at
$1.81 per share (the negotiated purchase price for such shares), at an aggregate
value of $1,119,234, to nine persons in exchange for all of the issued and
outstanding shares of common stock of Atomic Soccer owned by such persons.
In March 2000, we issued 380,355 shares of our common stock, valued at
$1.81 per share (the negotiated purchase price for such shares), at an aggregate
value of $687,016, to one person in exchange for all of the issued and
outstanding shares of common stock of Atomic Soccer owned by such person.
In March 2000, we issued 37,555 shares of our common stock as part of the
Atomic Soccer acquisition.
16
In March 2000, we issued 2,250,000 shares of our common stock, valued at
$1.49 per share (the negotiated purchase price for such shares), at an aggregate
value of $3,346,875, to six persons in exchange for 100% of the issued and
outstanding common stock of Kronos Air Technologies.
In March 2000, we issued 45,045 shares of our common stock, valued at $2.22
per share (the negotiated purchase price for such shares), to one person, a
stockholder of Kronos, in exchange for $100,000 in cash.
In March 2000, we issued 78,325 shares of our common stock, valued at $2.03
per share (the negotiated purchase price for such shares), to one person, a
stockholder of Kronos, in exchange for $159,000 in cash.
In April 2000, we issued 77,670 shares of our common stock, valued at $1.03
per share (the negotiated purchase price for such shares), to one person, a
stockholder of Kronos, in exchange for $80,000 in cash.
In April 2000, we issued 179,641 shares of our common stock, valued at
$1.67 per share (the negotiated purchase price for such shares), to one person,
a stockholder of Kronos, in exchange for $300,000 in cash.
In May 2000, we issued 1,298,701 shares of our common stock, valued at
$1.96 per share (the negotiated purchase price for such shares), at an aggregate
value of $2,550,000, to five persons in exchange for 100% of the issued and
outstanding common stock of Aperion Audio.
In May 2000, we issued 180,000 shares of our common stock, valued at $1.96
per share (the negotiated purchase price for such shares), at an aggregate value
of $353,430, to five persons in exchange for 100% of the issued and outstanding
membership interests of Cancer Detection International. In 2001, there was a
20,000 common share adjustment ($39,250) to this purchase, resulting in a net
160,000 shares of our common stock being issued.
In May 2000, we issued 57,971 shares of our common stock, valued at $1.38
per share (the negotiated purchase price for such shares), to one person, a
stockholder of Kronos, in exchange for $80,000 in cash.
In May 2000, we issued 14,815 shares of our common stock, valued at $3.375
per share (the fair market value for our shares as of such date), at an
aggregate value of $50,000, to Richard A. Papworth, a director and executive
officer of Kronos, based on an employment agreement dated May 19, 2000.
In June 2000, we issued 52,980 shares of our common stock, valued at $1.51
per share (the negotiated purchase price for such shares), to one person, a
stockholder of Kronos, in exchange for $80,000 in cash.
In June 2000, we issued 122,699 shares of our common stock, valued at $1.63
per share (the negotiated purchase price for such shares), at an aggregate value
of $200,000, to Erik W. Black, a director and former executive officer of
Kronos.
In July 2000, we issued 161,538 shares of our common stock, valued at $1.17
per share (the negotiated purchase price for such shares), to one person, a
stockholder of Kronos, in exchange for $189,000 in cash.
17
In August 2000, we issued 5,000 shares of our common stock, valued at
$1.312 per share (the fair market value for our shares as of such date), at an
aggregate value of $6,560, to an executive officer of Kronos, as compensation.
In August 2000, we issued 120,000 shares of our common stock, valued at
$1.00 per share (the negotiated purchase price for such shares), to one person,
a stockholder of Kronos, in exchange for $120,000 in cash.
In August 2000, we issued 8,004 shares of our common stock, valued at $1.42
per share (the negotiated exchange value of such shares), at an aggregate value
of $11,366, to one person in liquidation of indebtedness of Atomic Soccer.
In August 2000, we issued 44,667 shares of our common stock, valued at
$1.24 per share (the negotiated exchange value of such shares), at an aggregate
value of $55,388, to two persons in liquidation of indebtedness of Atomic
Soccer.
In September 2000, we issued 309,588 shares of our common stock, valued at
$1.00 per share (the negotiated exchange value of such shares), at an aggregate
value of $309,588, to two persons in liquidation of indebtedness of Atomic
Soccer.
In September 2000, we issued 45,800 shares of our common stock, valued at
$1.00 per share (the negotiated purchase price for such shares), to one person,
a stockholder of Kronos, in exchange for $45,800 in cash.
In September 2000, we issued 559,000 shares of our common stock, valued at
$1.00 per share (the negotiated purchase price for such shares), to one person,
a stockholder of Kronos, in exchange for $559,000 in cash.
In September 2000, we issued 150,000 shares of our common stock, valued at
$1.00 per share (the negotiated purchase price for such shares), to one person,
a stockholder of Kronos, in exchange for $150,000 in cash.
In December 2000, we issued 168,492 shares of our common stock, valued at
$0.59 per share (the negotiated purchase price for such shares), to one person,
a stockholder of Kronos, in exchange for $100,000 in cash.
In December 2000, we issued 39,091 shares of our common stock, valued at
$0.57 per share (the negotiated purchase price of such shares), to two persons,
stockholders of Kronos, in exchange for $22,340 in cash.
In January 2001, we issued 687,500 shares of our common stock, valued at
$0.58 per share (the negotiated purchase price for such shares), to one person,
a stockholder of Kronos, in exchange for $400,000 in cash.
In January 2001, we issued 7,693 shares of our common stock, valued at
$0.65 per share (the negotiated purchase price for such shares), to one person,
a stockholder of Kronos, in exchange for $5,000 in cash.
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In January 2001, we issued 50,000 shares of our common stock, valued at
$0.60 per share (the negotiated purchase price for such shares), to one person,
a stockholder of Kronos, in exchange for $30,000 in cash.
In January 2001, we issued 10,000 shares of our common stock, valued at
$0.64 per share (the negotiated purchase price for such shares), to one person,
a stockholder of Kronos, in exchange for $6,400 in cash.
In January 2001, we issued 40,000 shares of our common stock, valued at
$1.25 per share (the fair market value for our shares as of such date), at an
aggregate value of $50,000, to one person in exchange for legal services
rendered to Kronos Air Technologies.
In January 2001, we issued 4,915 shares of our common stock, valued at
$1.25 per share (the fair market value for our shares as of such date), at an
aggregate value of $6,144, to five persons, directors, executive officers, and
employees of Kronos Air Technologies, as compensation.
In March 2001, we issued 186,302 shares of our common stock, valued at
$0.72 per share (the negotiated purchase price for such shares), to one person,
a stockholder of Kronos, in exchange for $135,000 in cash.
In April 2001, we issued 97,020 shares of our common stock, valued at $1.00
per share (the negotiated exchange value for such shares), at an aggregate value
of $97,020, to two persons, in liquidation of indebtedness of Atomic Soccer.
In April 2001, we issued 38,038 shares of our common stock, valued at $0.46
per share (the negotiated purchase price for such shares), to one person, a
stockholder of Kronos, in exchange for $17,530 in cash.
In April 2001, we issued 2,000 shares of our common stock, valued at $0.885
per share (the fair market value for our shares as of such date), at an
aggregate value of $1,770, to one person, an employee of Kronos Air
Technologies, as compensation.
In April 2001, pursuant to a stock option agreement, we granted five-year
options to acquire 450,000 shares of our common stock, at an exercise price of
$0.885 per share (the fair market value for our shares as of the date of grant),
at an aggregate value of $398,250, to nine persons, including Daniel R. Dwight,
Richard A. Papworth, and Richard F. Tusing all of whom are directors and
executive officers of Kronos, Erik W. Black who is a director and former
executive officer, Jeffrey D. Wilson who is a former director and executive
officer, and Charles D. Strang, who is a former director. All such options
immediately vested.
In April 2001, pursuant to a stock option agreement, we granted ten-year
options to acquire 398,475 shares of our common stock, at an exercise price of
$0.885 per share (the fair market value for our shares as of the date of grant),
at an aggregate value of $352,650 to Richard A. Papworth, who is a director and
executive officer of Kronos, in consideration of the waiver of certain contract
rights. All such options immediately vested.
In April 2001, we granted five-year options to acquire shares of our common
stock, at an exercise price of $1.12 per share (the fair market value for our
shares as of the date of grant), to one person who is an officer of Kronos Air
Technologies, as partial compensation for services pursuant to an accrual
formula set forth in a consulting agreement. As of June 30, 2003, such accrued
options entitled this person to acquire 208,800 shares of our common stock, at
an aggregate value of $233,856. All such options are immediately vested.
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In May 2001, we issued 891,891 shares of our common stock, valued at $0.34
per share (the negotiated purchase price for such shares), to one person, a
stockholder of Kronos, in exchange for $300,000 in cash.
In May 2001, we issued 52,778 shares of our common stock, valued at $0.36
per share (the negotiated purchase price for such shares), to one person, a
stockholder of Kronos, in exchange for $19,000 in cash.
In May 2001, pursuant to a stock option agreement, we granted ten-year
options to acquire 250,000 shares of our common stock, at an exercise price of
$0.710 per share (the fair market value for our shares as of the date of grant),
at an aggregate value of $177,500, to Jeffrey D. Wilson and Charles D. Strang,
each of whom are former directors of Kronos, as compensation for services as
directors. All such options immediately vested.
In May 2001, we granted five-year options to acquire shares of our common
stock, at an exercise price of $0.96 per share (the fair market value for our
shares as of the date of grant), to Daniel R. Dwight and Richard F. Tusing, each
of whom are directors of Kronos, as partial compensation for services pursuant
to an accrual formula set forth in a consulting agreement. As of October 10,
2001, such accrued options entitled these two persons to acquire 821,400 shares
of our common stock, at an aggregate value of $788,544. All such options
immediately vested.
In June 2001, we issued 50,000 shares of our common stock, valued at $0.95
per share (the fair market value for our shares as of such date) at an aggregate
value of $47,500, to Wei Li, a former director of Kronos, as compensation for
his service as a director.
In July 2001, we issued 238,806 shares of our common stock, valued at $0.33
per share (the negotiated purchase price for such shares), to one person, a
stockholder of Kronos, in exchange for $80,000 in cash.
In July 2001, we issued 375,000 shares of our common stock, valued at $0.57
per share (the fair market value of our shares as of such date), at an aggregate
value of $213,750, to one person in settlement of litigation pursuant to a
Mutual Release and Settlement Agreement dated as of July 7, 2001. These shares
were delivered to the escrow agent on May 31, 2002.
In July 2001, we issued 250 shares of our common stock, valued at $0.45 per
share (the fair market value of our shares as of such date), at an aggregate
value of $113, to one person, an employee of Kronos Air Technologies, as
compensation.
In August 2001, we granted a ten-year warrant to acquire 1,400,000 shares
of our common stock, at an exercise price of $0.68 per share (the fair market
value for our shares as of the date of grant), at an aggregate value of
$686,000, to Eagle Rock Group as compensation pursuant to a warrant agreement
dated August 7, 2001, for services provided in connection with a consulting
agreement dated July 2, 2001. Pursuant to such consulting agreement, a principal
of the recipient of the warrant currently serves as a director of Kronos. Such
warrant vested immediately.
On October 1, 2001, we authorized the issuance of 360,000 shares of our
common stock pursuant to a consulting agreement, valued at $0.28 per share (the
fair-market value of our shares as of such date), at an aggregate value of
$100,800, to Fusion Capital, LLC, in exchange for consulting services.
20
On October 1, 2001, we authorized the issuance of 1,000,000 shares of our
common stock pursuant to a pledge, valued at $0.448 per share, at an aggregate
value of $447,982, to Fusion Capital, LLC, in exchange for $447,982 in cash.
On October 1, 2001, we issued 2,250 shares of our common stock, valued at
$0.452 per share (the fair-market value of our shares on April 9, 2001 and 1,250
of our shares on September 7, 2001), at an aggregate value of $4,147.50, to an
employee of Kronos, as compensation.
On November 15, 2001, we granted options to acquire 1,000,000 shares of our
common stock at an exercise price of $0.66 for 250,000 of these options, $0.56
for 250,000 of these options and $0.42 for 500,000 of these options to Daniel R.
Dwight, a senior executive office of the Company, as part of his employment
agreement entitling him to acquire these options at a aggregate value of
$515,000.
In February 2002, we granted options to acquire 4,580,000 shares of our
common stock at an exercise price of $0.68 for 2,650,000 of these options and an
exercise price of $0.25 on the remaining 1,930,000. Of the total amount,
2,850,000 options were granted to Daniel R. Dwight, Richard A. Papworth and
Richard F. Tusing, all of whom are directors and officers of Kronos. The
exercise price for 1,700,000 of these options is $0.68 and the exercise price
for 1,150,000 of these options is $0.25.
On May 7, 2002, we completed a private placement of our common stock
pursuant to which we sold 1,971,976 shares of our common stock at $0.17 per
share to seven accredited investors for consideration of $335,100 cash and
1,429,695 shares of our common stock at $0.17 per share to six members of our
management team and / or directors, including Daniel R. Dwight, Richard A.
Papworth, Richard F. Tusing, Erik W. Black, and James P. McDermott, for
consideration of $39,987 cash and commitments to convert $203,061 of debt.
On June 12, 2002, we issued 500,000 shares of our common stock, valued at
$0.21 per share (the fair-market value of our shares as of such date) at an
aggregate value of $105,000 to two person pursuant to a Settlement agreement,
dated June 7, 2002, with Aperion Audio.
On December 6, 2002, we issued 100,000 shares of our common stock, valued
at $0.115 per share (the fair-market value of our shares as of such date) at an
aggregate value of $11,500 to Aperion Audio for forbearance on the note payable
to Aperion Audio.
On December 24, 2002, we issued 206,000 shares of our common stock, valued
at $0.11 per share (the fair-market value of our shares as of such date) at an
aggregate value of $22,660 for reduction in debt owed to Jeffery A. Wilson.
On March 3, 2003, we granted options to acquire 2,165,000 shares of our
common stock at an exercise price of $0.185. Of the 2,165,000 options, 1,560,000
options were granted to Daniel R. Dwight, Richard A. Papworth and Richard F.
Tusing, all of whom are directors and officers of Kronos.
On March 31, 2003, we issued 49,811 shares of our common stock, valued at
$0.17 per share (the fair-market value of our shares as of such date) at an
aggregate value of $8,468 for reimbursement of expenses to an employee.
21
On May 7, 2003, we issued 2,790,000 shares of our common stock, valued at
$.098 per share (the fair-market value of our shares as of such date) at an
aggregate value of $273,420 to acquire certain intellectual property rights
related to "Electron Wind Generation". These shares were issued with certain
rights allowing the Company to buy back all or a portion of the shares at fixed
prices through the year 2006. The Company has the right to buy back shares at
$0.15 per share in 2003, $.017 per share in 2004, $0.19 in 2005 and $0.20 in
2006.
On May 12, 2003. we issued warrants to purchase 13,492,342 shares of our
common stock at an exercise price of $0.10. The warrants were issued as part of
a secured financing with HoMedics.
On June 30, 2003, we issued 207,533 shares of our common stock, valued at
$0.165 per share (the fair-market value of our shares as of such date) at an
aggregate value of $34,489 for services rendered to two outside consultants.
On June 30, 2003, we granted options to acquire 30,000 options of our
common stock at an exercise price of $0.36 and 18,000 options at an exercise
price of $0.10 to two outside consultants, respectively, for services rendered
and 50,000 options at an exercise price of $0.185 to Jeffery A. Wilson, our
former Chairman and Chief Executive Officer, for services rendered.
22
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with our
consolidated financial statements and the notes thereto appearing elsewhere in
this filing. Certain statements within this Item and throughout this Annual
Report on Form 10-KSB and the documents incorporated herein are "forward-looking
statements."
GENERAL
Kronos Advanced Technologies,Inc. is a high technology industrial company
focused on developing, marketing and selling products based on the Company's
proprietary air movement and purification technology. Kronos is attempting to
actively commercialize its technology in a number of markets.
Recent Developments
HoMedics Contract. In October 2002, Kronos Air Technologies, Inc., and
HoMedics USA, Inc. executed a Licensing Agreement to bring Kronos(TM)
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 patented
Kronos(TM) technology. In May 2003, Kronos and HoMedics agreed to negotiate the
expansion of our relationship into additional Kronos-based stand-alone consumer
products, including fans, heaters, humidifiers and dehumidifiers.
In November 2002, Kronos and HoMedics executed a Development Agreement to
provide Kronos with the financial resources believed necessary to complete
commercialization of the initial Kronos(TM)-based consumer product. Kronos is
working with HoMedics' engineers, designers, manufacturers, and marketing and
sales personnel to complete the initial product line for sales and distribution.
HoMedics is focused on product design and features, completion of manufacturing
tooling and assembly line processes, and product packaging, including prominent
display of the "Kronos" brand. Kronos is focused on completion of the technical
hardware and related power supplies for each of the products in the HoMedics air
purification product line, as well as on developing product features and
benefits unique to this initial consumer product line.
U.S. Navy SBIR Contracts. In November 2002, Kronos executed an agreement
with the U.S. Navy to develop a new ventilation system for naval ships. Working
under a Small Business Innovation Research contract, the Company is in Phase II
(commercialization phase) of this contract, which provides Kronos with up to an
additional $725,000 of developmental funding over the next 24 months. The Phase
II contract is an extension of the Phase I and the Phase I Option work that
began in 2001. It is intended that the Kronos(TM) 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 the initial six
months of the contract, Kronos designed a new generation power supply, improved
the efficiency of the of the core technology to allow for increased air movement
and filtration, and initiated selection with the U. S. Navy and Northrop Grumman
of the specifications for the commercial products to be built under the Phase II
contract. As of June 30, 2003, U. S. Navy had provided Kronos with $150,000 in
funding under the Phase II contract.
23
U.S. Army SBIR Contracts. In July 2003, Kronos Air Technologies obtained a
Pre-Award notice from the U. S. Army for a Small Business Innovation Research
Phase II contract worth $730,000. The Phase II contract is an extension of the
Phase I work that began in 2002. Phase I of the contract provides $120,000 to
investigate and analyze the feasibility of the Kronos(TM) technology to reduce
humidity in heating, ventilation and air conditioning (HVAC) systems.
Dehumidification is essential to making HVAC systems more energy efficient. The
Phase II funding will be used to manufacturer devices that will attempt to
further demonstrate the versatility of the Kronos(TM) technology to meet
airflow, system pressure and reduced humidity requirements for HVAC systems.
Business Jet Manufacturer. 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(TM) 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 initiated the next phase of design and development based on the
customer's specific product application requirements.
Senior Debt Financing. In May 2003, Kronos entered into an agreement with a
strategic customer, HoMedics, Inc., for $3.4 million in secured debt financing.
$2.4 million was paid to Kronos upon execution of the agreement and $1.0 million
will be paid upon the start of production as defined in the Licensing Agreement
for the Kronos-based air purification product line to be marketed and
distributed by HoMedics.
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 recoverablility 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
24
administrative expenses, research and development expenses and capital
expenditures. These expenses are based on management estimates and have been
compared with industry norms (relative to sales) to determine their
reasonableness. We use the same key assumptions for our cash flow evaluation as
we do for internal budgeting, lenders and other third parties, therefore, they
are internally and externally consistent with financial statement and other
public and private disclosures. We are not aware of any negative implications
resulting from the projections used for purposes of evaluating the
appropriateness of the carrying value of these assets. If assets are considered
to be impaired, the impairment recognized is the amount by which the carrying
value of the assets exceeds the fair value of the assets. Useful lives and
related amortization or depreciation expense are based on our estimate of the
period that the assets will generate revenues or otherwise be used by Kronos.
Factors that would influence the likelihood of a material change in our reported
results include significant changes in the asset's ability to generate positive
cash flow, loss of legal ownership or title to the asset, a significant decline
in the economic and competitive environment on which the asset depends,
significant changes in our strategic business objectives, and utilization of the
asset.
Valuation of Deferred Income Taxes. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amount expected to be
realized. The likelihood of a material change in our expected realization of
these assets is dependent on our ability to generate future taxable income, our
ability to deduct tax loss carryforwards against future taxable income, the
effectiveness of our tax planning and strategies among the various tax
jurisdictions that we operate in, and any significant changes in the tax
treatment received on our business combinations.
Revenue Recognition. We recognize revenue in accordance with Securities and
Exchange Commission Staff Bulletin 101 ("SAB 101"). 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 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.
RESULTS OF OPERATIONS
Consolidated Statement of Operations For the Year Ended June 30, 2003.
Our net losses for each of the current years ended June 30, 2003 and June
30, 2002 were $2.8 million. Our net loss from continuing operations for the
current year ended June 30, 2003 was $2.8 million compared with a net loss of
$3.5 million for the prior year. The decrease in the net loss from continuing
operations for the year ended June 30, 2003, as compared to the prior year, was
principally the result of a 503% increase in revenue to $559,000 and a 14%
reduction in operating costs to $2.9 million.
Revenue. Revenues are generated through sales of services for design and
development of Kronos(TM) devices at Kronos Air Technologies, Inc. Revenues for
the year ended June 30, 2003 were $559,000 compared with $93,000 in the prior
year. Current year revenues were primarily from our HoMedics development
agreement, U.S. Navy Small Business Innovative Research Phase II contract, U.S.
Army Small Business Innovative Research Phase I contract and our contract with a
business jet manufacturer.
25
Cost of Sales. Cost of sales for the year ended June 30, 2003 was $314,000
compared with $78,000 for the prior year. Cost of sales is primarily research
and development costs and material and labor associated with our HoMedics
development agreement, U.S. Navy Small Business Innovative Research Phase II
contract, U.S. Army Small Business Innovative Research Phase I contract and
contract with a business jet manufacturer.
Selling, General and Administrative Expenses. Selling, General and
Administrative expenses for the year ended June 30, 2003 decreased $469,000 from
the prior year to $2.9 million. The decrease was principally the result of an
$856,000 reduction in professional services, $108,000 reduction in general
research and development expenses and $27,000 reduction in other selling,
general and administrative expenses off set by a $511,000 increase in
compensation and benefits. The reduction in professional services was primarily
the result of Daniel R. Dwight, our President and Chief Operating Officer, and
Richard F. Tusing, our Chief Operating Officer, terminating their consulting
agreements with Kronos in November 2001 and January 2003, respectively, and the
completion of a 12 month consulting agreement with the Eagle Rock Group, LLC in
March 2003. The increase in compensation and benefits was primarily the result
of Messrs. Dwight and Tusing entering into employment contracts with Kronos in
November 2001 and January 2003, respectively.
Consolidated Balance Sheet as of June 30, 2003
Our total assets at June 30, 2003 were $3.2 million compared with $2.4
million at June 30, 2002. Total assets at June 30, 2003 and June 30, 2002 were
comprised primarily of $2.5 million and $2.2 million, respectively, of
patents/intellectual property. Total current assets at June 30, 2003 and 2002
were $724,000 and $123,000, respectively, while total current liabilities for
those same periods were $1.9 million and $1.8 million, respectively, creating a
working capital deficit of $1.2 million and $1.7 million at each respective
period end. This working capital deficit is primarily due to accrued expenses
and payables to directors and officers.
Shareholders' deficit as of June 30, 2003 and 2002 was ($1.2 million) and
($385,000), respectively, representing a decrease of $849,000. The decrease in
shareholders' equity is primarily the result of incurring a $2.8 million loss
from continuing operations for the twelve months ended June 30, 2003, offset by
the sale and issuance, net of offering costs, of $986,000 of common stock and
the sale of $893,000 of unexercised warrants.
Consolidated Statement of Operations for the Year Ended June 30, 2002
Our net loss for the year ended June 30, 2002 was $2.8 million compared
with a net loss of $9.9 million for the prior year. The decrease in the net loss
for the year ended June 30, 2002, as compared to the prior year, was the result
of a gain on the disposition of Aperion Audio, which was a discontinued
operation and not associated with the air purification business, for $682,000 in
the year ended June 30, 2002 compared with a loss of $6.3 million from the
operation and disposition of discontinued operations for the year ended June 30,
2001. The net loss from continuing operations decreased $107,000 for the year
ended June 30, 2002 compared to the prior year.
Revenue. Revenues are generated through sales of Kronos(TM) devices at
Kronos Air Technologies, Inc. Revenues for the year ended June 30, 2002 were
$93,000 compared with $95,000 in the prior year. Fiscal year 2002 revenues were
primarily from our U.S. Navy Small Business Innovative Research Phase I
contract.
26
Cost of Sales. Cost of sales for the year ended June 30, 2002 was $78,000
compared with $63,000 for the prior year. Cost of sales is primarily research
and development costs associated with our U.S. Navy Small Business Innovative
Research Phase I contract.
Selling, General and Administrative Expenses. Selling, General and
Administrative expenses for the year ended June 30, 2002 decreased $10,000 from
the prior year to $3.4 million of which professional services paid/accrued to
management consultants ($1.6 million), legal ($215,000) and accounting
professionals ($186,000) engaged by the Company were $2.0 million or 60%
compared to 22% in the prior year. The majority of the consulting fees expensed
in the current year ($943,000) relate to the value of warrants and options
issued for consulting services. Compensation and benefits were $520,000 or 15%
compared to 35% in the prior year, depreciation and intangibles amortization
were $287,000 or 8% compared to 17% in the prior year, research and development
was $224,000 or 7% compared to 9% in the prior year, and other general and
administrative expenses were $338,000 or 10% compared to 17% in the prior year.
Consolidated Balance Sheet as of June 30, 2002
Our total assets at June 30, 2002 were $2.4 million compared with $3.1
million at June 30, 2001. Total assets at June 30, 2002 were comprised primarily
of $2.2 million of patents/intellectual property. Total assets at June 30, 2001
were comprised primarily of $2.4 million of patents/intellectual property and
$521,800 of deferred financing fees. Total current assets at June 30, 2002 and
2001 were $123,000 and $70,000, respectively, while total current liabilities
for those same periods were $1.8 million and $1.9 million, respectively,
creating a working capital deficit of $1.7 million at each respective period
end. This working capital deficit is primarily due to accrued expenses for
compensation, management consulting and other professional services.
Shareholders' equity (deficit) as of June 30, 2002 and 2001 was $(385,000) and
$479,000, respectively, representing a decrease of $0.8 million. The decrease in
shareholders' equity (deficit) is primarily the result of incurring a $2.8
million loss from continuing operations for the twelve months ended June 30,
2002, offset by the sale and issuance, net of offering costs, of $1.7 million of
common stock.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have relied principally on the sale of common stock to
finance our operations.
On May 9, 2003, we closed on a $3.5 million secured financing from a
strategic customer, HoMedics, Inc. $2.5 million was advanced to Kronos upon
execution of the agreement and $1.0 million will be advanced upon the start of
production for the Kronos-based air purification product line to be marketed and
distributed by HoMedics.
On May 7, 2002, we completed a successful private placement of our common
stock through which we sold 1,971,176 shares of our common stock at $0.17 per
share to seven accredited investors for consideration of $335,100 cash and
1,429,695 shares of our common stock at $0.17 per share to six members of our
management team and / or directors for consideration of $39,987 cash and
conversion of $203,061 of debt into equity.
27
Kronos SBIR contracts with the U. S. Military, including the U. S. Army
Phase I Option and Phase II and the U. S. Navy Phase II contracts, are
potentially worth up to $1.5 million in product development and testing support
for Kronos Air Technologies. In November 2002, Kronos Air Technologies was
awarded by the U. S. Navy for a Small Business Innovation Research Phase II
contract worth $580,000, plus an option of $150,000. As of June 30, 2003, Kronos
has received $150,000 in funding under the U. S. Navy SBIR Phase II contract. In
July 2003, Kronos Air Technologies obtained a Pre-Award notice from the U. S.
Army for a SBIR II contract worth $730,000. In August 2003, Kronos Air
Technologies obtained notice from the U. S. Army for the option of the SBIR
Phase I contract worth $50,000. To earn these future amounts, we will have to
complete the required work.
Net cash flow used in operating activities was $2.0 million for the year
ended June 30, 2003. We were able to satisfy most of our cash requirements for
this period from the proceeds of secured debt facility and the issuance and sale
of our common stock.
On June 19, 2001, we entered into a common stock purchase agreement with
Fusion Capital. Pursuant to this agreement, we have sold approximately 6 million
shares of our common stock and have received $1,339,000.
On August 12, 2002, we terminated our common stock purchase agreement dated
June 19, 2001 and entered into a new common stock purchase agreement with Fusion
Capital. Pursuant to the 2002 common stock purchase agreement, Fusion Capital
has agreed to purchase on each trading day during the term of the agreement,
$10,000 of our common stock or an aggregate of $6.0 million. The $6.0 million of
our common stock can be purchased over a 30-month period, subject to a six-month
extension or earlier termination at our sole discretion and subject to certain
events. The purchase price of the shares of common stock will be equal to a
price based upon the future market price of our common stock without any fixed
discount to the then-current market price. Fusion Capital is obligated to
purchase shares under the agreement as long as the share price exceeds a floor
of $0.10. However, there can be no assurance of how much cash we will receive,
if any, under the common stock purchase agreement with Fusion Capital.
We estimate that achievement of our business plan will require substantial
additional funding. We anticipate that the source of funding will be obtained
pursuant to the senior debt funding from HoMedics, Fusion Capital transaction
and/or the sale of additional equity in our Company, cash flow generated from
government grants and contracts, which includes funding from the Small Business
Innovation Research contracts sponsored by the United States Navy and Army
awarded to Kronos Air Technologies, and cash flow generated from customer
revenue. Pursuant to discussions with the companies that we will be licensing
our technology, we anticipate generating cash flow in our 2004 fiscal year from
advance funding from these companies for production development work. There are
no assurances that these sources of funding will be adequate to meet our cash
flow needs.
GOING CONCERN OPINION
Our independent auditors have included an explanatory paragraph to their
audit opinions issued in connection with our 2003 and 2002 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.
28
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements appear beginning at page F-1.
KRONOS ADVANCED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AT JUNE 30, 2003
Report of Independent Certified Public Accountants F-2
Report of Independent Certified Public Accountants F-3
Consolidated Balance Sheets as of June 30, 2003 and June 30, 2002 F-4
Consolidated Statements of Operations for the years ended June 30,
2003 and 2002 F-5
Consolidated Statements of Cash Flows for the years ended June 30,
2003 and 2002 F-6
Consolidated Statement of Changes of Shareholders' Deficit for years
ended June 30, 2003 and 2002 F-7
Notes to Consolidated Financial Statements F-8 to F-23
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Kronos Advanced Technologies, Inc.
We have audited the accompanying consolidated balance sheet of Kronos
Advanced Technologies, Inc. and Subsidiary as of June 30, 2003 and the related
consolidated statements of operations, shareholders' deficit and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, the consolidated financial position of Kronos Advanced
Technologies, Inc. and Subsidiary as of June 30, 2003 and the consolidated
results of its operations and its cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
incurred significant losses and has a working capital deficiency as more fully
described in Note 3. These issues among others raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 3. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/Sherb & Co., LLP
----------------------------
Sherb & Co., LLP
Certified Public Accountants
New York, New York
September 19, 2003
F - 2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Kronos Advanced Technologies, Inc.
We have audited the accompanying consolidated balance sheet of Kronos Advanced
Technologies, Inc. and its subsidiaries as of June 30, 2002, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatements. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Kronos
Advanced Technologies, Inc. and its subsidiaries as of June 30, 2002, and the
consolidated results of their operations and their consolidated cash flows for
the year then ended, in conformity with accounting principles generally accepted
in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company incurred a net loss from continuing operations of $3,465,985 during
the year ended June 30, 2002, and, as of that date, the Company's current
liabilities exceeded its current assets by $1,653,906. These factors, among
others, as discussed in Note 3 of Notes to Consolidated Financial Statements,
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 3. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ GRANT THORNTON LLP
Portland, Oregon
September 4, 2002
F-3
KRONOS ADVANCED TECHNOLGIES, INC.
CONSOLIDATED BALANCE SHEETS
June 30, June 30,
2003 2002
-------------------- --------------------
Assets
Current Assets
Cash $ 641,178 $ 21,510
Accounts receivable, net 48,766 700
Prepaids 34,135 101,029
-------------------- --------------------
Total Current Assets 724,079 123,239
-------------------- --------------------
Property and Equipment 74,673 62,723
Less: Accumulated Depreciation (46,631) (33,348)
-------------------- --------------------
Net Property and Equipment 28,042 29,375
-------------------- --------------------
Other Assets
Intangibles 2,487,473 2,213,917
-------------------- --------------------
Total Other Assets 2,487,473 2,213,917
-------------------- --------------------
Total Assets $ 3,239,594 $ 2,366,531
==================== ====================
Liabilities and Shareholders' Deficit
Current Liabilities
Accrued expenses and payables to
directors and officers $ 1,172,015 $ 886,447
Accounts payable 218,338 254,201
Accrued expenses 174,677 100,797
Deferred revenue 133,751 -
Notes payable, current portion 185,670 535,700
-------------------- --------------------
Total Current Liabilities 1,884,451 1,777,145
-------------------- --------------------
Long Term Liabilities
Notes payable 2,676,479 225,466
Discount on notes payable (893,046) -
-------------------- --------------------
Total Long Term Liabilities 1,783,433 225,466
-------------------- --------------------
Total Liabilities 3,647,884 2,002,611
-------------------- --------------------
Redeemable Warrants 805,300 748,500
-------------------- --------------------
Shareholders' Deficit
Common stock, authorized 500,000,000
shares of $.001 par value
Issued and outstanding -
53,836,524 and 43,937,907, respectively 53,837 43,938
Capital in excess of par value 16,240,378 14,371,113
Deferred equity compensation - (41,668)
Accumulated deficit (17,527,805) (14,757,963)
-------------------- --------------------
Total Shareholders' Deficit (1,233,590) (384,580)
-------------------- --------------------
Total Liabilities and Shareholders' Deficit $ 3,239,594 $ 2,366,531
==================== ====================
The accompanying notes are an integral part of these financial statements.
F-4
KRONOS ADANCED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended June 30,
---------------------------------
2003 2002
---------------- ----------------
Sales $ 558,590 $ 92,589
Cost of sales 314,496 77,589
---------------- ----------------
Gross Profit 244,094 15,000
---------------- ----------------
Selling, General and Administrative expenses
Compensation and benefits 1,031,375 520,021
Research and development 116,251 224,086
Professional services 1,156,903 2,012,485
Depreciation and amortization 284,647 286,696
Facilities 96,579 83,881
Other selling general and administrative expenses 226,716 253,935
---------------- ----------------
Total Selling, General and Administrative expenses 2,912,471 3,381,104
---------------- ----------------
Net Operating Loss (2,668,377) (3,366,104)
Other Income / (Expense) 83,380 639
Interest Expense (184,845) (100,520)
---------------- ----------------
Net Loss Before Taxes (2,769,842) (3,465,985)
Provision for Taxes - -
---------------- ----------------
Net Loss From Continuing Operations (2,769,842) (3,465,985)
Gain on disposal of discontinued operations,
net of income tax of $0 - 681,808
---------------- ----------------
Net Loss $ (2,769,842) $ (2,784,177)
================ ================
Basic Loss Per Share:
Loss from continuing operations $ (0.06) $ (0.09)
Income from discontinued operations - 0.02
---------------- ----------------
Net Loss $ (0.06) $ (0.07)
================ ================
Diluted Loss Per Share:
Loss from continuing operations $ (0.06) $ (0.09)
Income from discontinued operations - 0.02
---------------- ----------------
Net Loss $ (0.06) $ (0.07)
================ ================
Weighted Average Shares Outstanding 48,258,340 37,088,274
================ ================
The accompanying notes are an integral part of these financial statements.
F-5
KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended June 30,
------------------------------------------
2003 2002
-------------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss from continuing operations $ (2,769,842) $ (3,465,985)
Adjustments to reconcile net loss to net cash
used in by operations
Depreciation and amortization 284,647 286,696
Common stock issued for compensation/services 119,925 805,167
Change In:
Accounts receivable (48,066) (700)
Prepaid expenses and other assets 66,894 (63,350)
Deferred revenue 133,751 -
Accounts payable (211,589) 826,700
Accrued expenses and other liabilities 411,059 108,475
-------------------- ------------------
Net cash provided by Continuing Operations (2,013,221) (1,502,997)
-------------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (11,950) -
Investment in patent protection (1,500) (53,757)
-------------------- ------------------
Net cash provided by Investing Activities (13,450) (53,757)
-------------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock 723,000 1,649,695
Proceeds from short-term borrowings 283,889 130,700
Repayments of short-term borrowings (760,550) (155,000)
Proceeds from long-term borrowings 2,400,000 -
Deferred finance costs paid - (79,750)
-------------------- ------------------
Net cash provided by Financing Activities 2,646,339 1,545,645
-------------------- ------------------
NET (DECREASE) INCREASE IN CASH 619,668 (11,109)
CASH
Beginning of period 21,510 32,619
-------------------- ------------------
End of period $ 641,178 $ 21,510
==================== ==================
Supplemental schedule of non-cash investing and financing
activities:
Interest paid in cash $ - $ 22,149
Income taxes $ - $ -
Non-cash investing and financing activities:
Debt satisfied with stock $ 206,000 $ 696,195
Issuance of notes payable for accrued payables $ - $ 471,566
Issuance of stock in legal settlement $ - $ 115,000
Acquisition of intellectual property with stock $ 273,420 $ -
Issuance of warrants for secured financing $ 100,000 $ -
The accompanying notes are an integral part of this financial statement.
F-6
KRONOS ADANCED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
Total
Common Stock Capital in Deferred Shareholders'
--------------------- Excess of Par Accumulated equity Equity
Shares Amount Value Deficit compensation (Deficit)
----------- ---------- ------------- -------------- ------------ -------------
BALANCE at June 30, 2001 34,000,978 $ 34,001 $ 12,418,350 $ (11,973,785) $ - $ 478,566
Shares issued on July 6, 2001 for cash 238,806 239 79,761 - - 80,000
Shares issued on July 20, 2001 as
compensation 250 - 113 - - 113
Shares issued on October 1, 2001 for
consulting services 360,000 360 100,440 - - 100,800
Shares issued on October 1, 2001 as
compensation 2,250 2 1,446 - - 1,448
Shares issued on October 1, 2001 for cash 1,000,000 1,000 446,982 - - 447,982
Shares issued on November 30, 2001 to Fusion
Capital for cash 100,000 100 23,400 - - 23,500
Shares issued on December 10, 2001 to Fusion
Capital for cash 50,000 50 10,950 - - 11,000
Shares issued on December 12, 2001 to Fusion
Capital for cash 100,000 100 20,900 - - 21,000
Shares issued on December 13, 2001 to Fusion
Capital for cash 75,000 75 16,050 - - 16,125
Shares issued on December 14, 2001 to Fusion
Capital for cash 500,000 500 107,000 - - 107,500
Shares issued in January 2002 to Fusion
Capital for cash 925,000 925 194,700 - - 195,625
Shares issued in February 2002 to Fusion
Capital for cash 350,000 350 69,150 - - 69,500
Shares issued in March 2002 to Fusion Capital
for cash 1,683,333 1,684 260,691 - - 262,375
Shares issued in April 2002 to Fusion Capital
for cash 178,571 179 24,821 - - 25,000
Shares issued in May 2002 to Fusion Capital
for cash 97,848 98 14,903 - - 15,001
Shares issued on May 31, 2002 for cash 2,206,394 2,206 372,881 - - 375,087
Shares issued on May 31, 2002 for payment of
debt 1,194,477 1,194 201,867 - - 203,061
Shares issued on May 31, 2002 in settlement of
Foster & Price litigation 375,000 375 213,375 - - 213,750
Shares issued on June 7, 2002 in Aperion Audio
sale and settlement 500,000 500 114,500 - - 115,000
Stock options granted at June 30, 2002 for
consulting services - - 279,384 - - 279,384
Amortization of deferred financing fees - - (600,550) - - (600,550)
Deferred equity compensation at June 30, 2002 - - - - (41,668) (41,668)
Net loss for the year ended June 30, 2002 - - - (2,784,177) - (2,784,177)
----------- ---------- ------------- -------------- ------------ -------------
BALANCE at June 30, 2002 43,937,907 43,938 14,371,113 (14,757,963) (41,668) (384,580)
F-7
Shares issued in July 2002 for cash 150,000 150 26,100 - - 26,250
Shares issued in August 2002 for cash 790,248 790 116,928 - - 117,718
Shares issued in September 2002 for cash 263,141 263 38,769 - - 39,032
Stock options granted at Sept 30, 2002 for
consulting services 5,674 - - 5,674
Shares issued in October 2002 for cash 1,750,000 1,750 173,250 - - 175,000
Shares issued in November 2002 for cash 189,884 190 24,810 - - 25,000
Shares issued in December 2002 for cash 350,000 350 34,650 - - 35,000
Shares issued in December 2002 for debt
reduction 306,000 306 33,854 - - 34,160
Stock options granted at December 31, 2002 for
consulting services 5,225 - - 5,225
Shares issued in January 2003 for cash 1,000,000 1,000 99,000 - - 100,000
Shares issued in February 2003 for cash 850,000 850 84,150 - - 85,000
Shares issued in March 2003 for cash 704,811 705 73,263 - - 73,968
Stock options granted at March 31, 2002 for
consulting services - - 1,955 - - 1,955
Amortization of deferred equity compensation - 41,668 41,668
Shares issued in April 2003 for cash 545,000 545 53,955 - - 54,500
Shares issued for acquisition of intellectual
property rights 2,790,000 2,790 270,630 - - 273,420
Warrants issued to HoMedics - - 993,046 - - 993,046
Costs associated with equity financing - - (216,055) - - (216,055)
Shares issued in June for consulting services 209,533 210 34,489 - - 34,699
Options issued in June for consulting services - - 15,572 - - 15,572
Net loss for the year ended June 30, 2003 - - - (2,769,842) - (2,769,842)
----------- ---------- ------------- -------------- ------------ -------------
BALANCE at June 30, 2003 53,836,524 $ 53,837 $ 16,240,378$ (17,527,805)$ - $ (1,233,590)
=========== ========== ============= ============== ============ =============
The accompanying notes are an integral part of this financial statement.
F-7(a)
KRONOS ADVANCED TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS
Kronos Advanced Technologies, Inc. ("Kronos") is a Nevada corporation (the
"Company"). The Company's shares began trading on the over-the-counter bulletin
board exchange on August 28, 1996 under the symbol "TSET." Effective January 12,
2002, the Company began doing business as Kronos Advanced Technologies, Inc.
and, as of January 18, 2002, we changed the Company ticker symbol to "KNOS." We
have confined most of our recent activities to develop the Kronos (TM)
technology.
NOTE 2 - 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 2002
financial statements in order to conform to the 2003 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 June 30, 2003, 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. We have cash in a bank account in excess of the $100,000
maximum amount insured by the Federal Deposit Insurance (FDIC).
Cash and Cash Equivalents. The Company considers all highly liquid short-term
investments, with a remaining maturity of three months or less when purchased,
to be cash equivalents.
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 June 30, 2003 and June
30, 2002. The Company charges off accounts receivable against the allowance for
losses when an account is deemed to be uncollectable.
F-8
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.
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) 101, 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
F-9
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 Company's 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.
The Company is required under SFAS 123 to disclose pro forma information
regarding option grants made to its employees based on specified valuation
techniques that produce estimated compensation charges. For the purpose of pro
forma disclosures, the estimated fair value of the options is amortized over the
vesting period. The pro forma information is as follows:
June 30,
----------------------------------------------
2003 2002
-------------------- ----------------------
Pro Pro
Reported Forma Reported Forma
--------- ---------- ----------- ----------
Net income (loss) $ (2,770) $ (3,011) $ (2,784) $ (3,602)
Earnings (loss) per Share:
-------------------------------- (0.06) (0.06) (0.07) (0.10)
Basic (0.06) (0.06) (0.07) (0.10)
Diluted
The fair value of each option grant is estimated on the date of grant using
the Black Scholes option-pricing method with the following weighted average
assumptions used for grants as of June 30, 2003:
F-10
2003 2002
-------------------- ----------------------
Risk free interest rate 4.0% 4.0%
Expected dividend yield 0% 0%
Expected lives 3 to 10 years 3 to 10 years
Expected volatility 140% 143%
Other Assets. In 2002, Deferred Financing costs related to a common stock
purchase agreement have been offset against the proceeds on a dollar-for-dollar
basis. Financing costs related to a financing where the proceeds are certain and
are received at established intervals will be offset ratably against the
proceeds as they are received.
Recent Accounting Pronouncements.
In August 2002, the Financial Accounting Standards Board issued SFAS No.
146, "Accounting for Costs Associated with Exit, or Disposal Activities." This
Statement addresses financial accounting and reporting for costs associated with
exit or disposal activities. The adoption of SFAS 146 had no significant impact
on the Company's financial statements. This statement is effective for exit or
disposal activities initiated after December 31, 2002.
In December 2002, the Financial Accounting Standards Board issued SFAS No.
148, "Accounting for Stock-Based Compensation--Transition and Disclosure--An
Amendment of FASB Statement No. 123." This Statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of Statement 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The the adoption of SFAS 148 had no significant impact on the Company's
financial statements. This statement is effective for interim periods beginning
after December 15, 2002 and for fiscal years ending after December 15, 2002.
In April 2003, the Financial Accounting Standards Board issued SFAS No.
149, "Amendment of FASB Statement No. 133 on Derivative Instruments and Hedging
Activities." This Statement amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities under FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Company believes the adoption of SFAS
149 will have not significant impact on its financial statements. The statement
is effective for contracts entered into or modified after June 30, 2003.
In May 2003, the Financial Accounting Standards Board issued SFAS No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity." This Statement establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). SFAS 150 is effective for financial instruments entered into or
modified after May 31, 2003 and, otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. We are currently evaluating
the impact that the adoption of SFAS No. 150 will have on our financial position
and results of operations, however at June 30, 2003 the Company has
approximately $805,300 in Redeemable Warrants that may be potentially classified
as a liability.
F-11
NOTE 3 - REALIZATION OF ASSETS
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplate continuation of the Company as a going concern. The Company has
sustained losses from operations in recent years, and such losses have continued
through the current year ended June 30, 2003. In addition, the Company has used,
rather than provided cash in its operations. The Company is currently using its
resources to raise capital necessary to commercialize its technology and develop
viable commercial products, and to provide for its working capital needs.
In view of the matters described in the preceding paragraph, recoverability
of a major portion of the asset amounts shown in the accompanying balance sheet
is dependent upon continued operations of the Company, which in turn is
dependent upon the Company's ability to meet its financing requirements on a
continuing basis, to maintain present financing and to succeed in its future
operations. The 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(TM) 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(TM)
technology. In November 2002, Kronos and HoMedics executed a Development
Agreement to provide Kronos with the financial resources necessary to
complete commercialization of the initial Kronos(TM)-based consumer product
line. Kronos is working with HoMedics' engineers, designers, manufacturers,
and marketing and sales personnel to complete the initial product line for
sales and distribution. HoMedics is focused on product design and features,
completion of manufacturing tooling and assembly line processes, and
product packaging, including prominent display of the "Kronos" brand.
Kronos is focused on completion of the technical hardware and related power
supplies for each of the products in the air purification product line, as
well as on developing product features and benefits unique to this initial
consumer product line.
The initial term of the agreement is three and one half years 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 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. 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(TM) 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 shall develop, produce and install 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" will be designed to be easily
adjustable to a variety of parameters such as duct size, airflow
requirements, and air quality. As of June 30, 2003, U. S. Navy had provided
Kronos with $150,000 in funding for this effort under the Phase II
contract.
F-12
HoMedics provided debt financing. In May 2003, Kronos entered into an
agreement with HoMedics, Inc. for $3.5 million in financing, including $3.4
million in secured debt financing and $100,000 for the purchase of
warrants. $2.5 million was paid to Kronos upon execution of the agreement
and $1.0 million will be paid upon the start of production as defined in
the Licensing Agreement for the Kronos(TM)-based air purification product
line to be marketed and distributed by HoMedics. In conjunction with
securing this financing, Kronos and HoMedics agreed to negotiate the
expansion of our relationship into additional Kronos(TM)-based stand-alone
consumer products, including fans, heaters, humidifiers and dehumidifiers,
as well as geographic expansion into Europe and Asia.
Fusion Capital. During our year ended June 30, 2003, we sold 6,543,273
shares of our common stock to Fusion Capital for $723,000 under the terms
of our Common Stock Purchase Agreements dated August 12, 2002 and June 19,
2001.
NOTE 4 - BUSINESS COMBINATIONS
On March 13, 2000, the Company acquired Kronos Air Technologies, Inc. (a
development stage company), a Nevada corporation. Kronos Air Technologies is a
research and development company having headquarters in Redmond, Washington.
Kronos Air Technologies owns all of the intellectual property rights, including
certain patents and patents pending, for a technology known as "KronosTM"
(formerly named the "electron wind generator"). The consideration for the
acquisition was 2,250,000 shares of the Company's common stock. The Company
acquired all of the issued and outstanding shares of Kronos Air Technologies.
The transaction was accounted for using the purchase method of accounting,
accordingly, the results of operations from March 13, 2000 are included in the
consolidated statement of operations. The total purchase price of $3.3 million
was determined based upon the market value of stock issued which incorporates
the restrictions on the transferability of the shares and was allocated to the
net assets acquired based on their fair market values at the date of
acquisition. Of the purchase price, $633,000 was allocated to in-process
technology which had not reached technological feasibility and which had no
alternative future use which the Company expensed as of the acquisition date.
The remainder of the purchase price was allocated to purchased technology ($2.1
million) and identifiable intangibles ($0.6 million), which are being amortized
on a straight line basis over 10 years.
On May 4, 2000, the Company acquired Aperion Audio. The Company acquired
all of Aperion Audio's issued and outstanding shares in exchange for 1,298,701
shares of the Company's common stock. This subsidiary was sold on June 7, 2002
generating a gain (after impairment adjustment) of $0.7 million (See note 14).
NOTE 5 - PREPAID AND OTHER CURRENT ASSETS
Prepaid and other current assets at June 30, consist of the following:
2003 2002
------------ -------------
Lease deposits $ 6,056 $ 23,253
Advances to employees - 15,000
Prepaid insurance 27,079 22,456
Prepaid professional fees 1,000 40,320
------------ -------------
Prepaid and other current assets $ 34,135 $ 101,029
============ =============
F-13
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment at June 30, consists of the following:
2003 2002
------------ -------------
Leasehold improvements $ 5,139 $ 5,139
Office furniture and fixtures 54,061 54,061
Machinery and equipment 15,473 3,523
------------ -------------
74,673 62,723
Less accumulated depreciation (46,631) (33,348)
------------ -------------
Net property and equipment $ 28,042 $ 29,375
============ =============
Depreciation expense for the years ended June 30, 2003 and 2002 was
$13,283 and $15,332, respectively.
NOTE 7 - INTANGIBLES
Intangible assets at June 30, consist of the following:
2003 2002
------------ -------------
Marketing intangibles $ 587,711 $ 587,711
Purchased patent technology 2,669,355 2,125,935
Developed patent technology 134,954 133,454
------------ -------------
3,392,020 2,847,100
Less accumulated amortization (904,547) (633,183)
------------ -------------
Net intangible assets $ 2,487,473 $ 2,213,917
============ =============
Purchased patent technology includes property that was acquired in the
Kronos acquisition and relates to a patent application that was pending at the
acquisition date. In January 2003, Kronos received formal notification from the
US Patent and Trademark Office that this patent had been examined and allowed
for issuance. In addition, it includes licensing rights on the above patent that
was purchased in May 2003. The Company purchased license rights to fuel cell,
computer and microprocessor applications of the Kronos(TM) technology for
$543,420 ($270,000 cash and 2,790,000 restricted common shares valued at
$273,420).
Intangible assets are being amortized on a straight line basis over 10
years. Amortization expense for the years ended June 30, 2003 and 2002 was
$271,364 and $271,364, respectively.
F-14
NOTE 8 - ACCRUED EXPENSES
Accrued expenses at June 30, consist of the following:
2003 2002
------------ -------------
Accrued compensation $ 539,656 $ 154,928
Accrued interest 24,467 29,038
Accrued professional services 131,696 80,795
------------ -------------
$ 695,819 $ 264,761
============ =============
Interest on unpaid salaries is accruing at the rate of 12% per annum.
NOTE 9 - NOTES PAYABLE
The Company had the following obligations as of June 30, 2003 and 2002,
2003 2002
------------ -------------
Obligation to Fusion Capital (1) $ - $ 123,000
Obligation to Aperion Audio (2) - 200,466
Obligation to former Director (3) 84,725 360,000
Obligation to The Eagle Rock Group (4) - 70,000
Obligation to HoMedics (5) 2,400,000 -
Obligation for finance leases (6) 72,424 -
Obligations to others (7) 305,000 7,700
------------ -------------
2,862,149 761,166
Less:
Current portion 185,670 535,700
------------ -------------
Total long term obligations net of
current portion $ 2,676,479 $ 225,466
============ =============
(1) This is a non-interest bearing demand obligation and is only
outstanding until Fusion Capital purchases enough stock from the
Company to eliminate the advance position.
(2) This note is non-interest bearing with an initial payment of $35,000
and monthly payments thereafter of $15,000 until the note is paid in
full. This note has been paid in full.
(3) This note is to a former director of the Company and bears
interest at 12%. The note calls for quarterly payments of
principal and interest of $10,000 until the note is paid in full.
(4) This note bears interest at the rate of 12%. Payment terms are for
monthly interest only payments with the balance due on March 1, 2003.
This note has been paid in full.
(5) This note has a 5 year term and bears interest at 6%. In the first year
no payments for interest or principal are required. Payments on accrued
interest and principal are due quarterly thereafter. This note was
issued along with warrants for the purchase of 13.4 million shares of
the Company's common stock. As a result, the note was recorded with a
discount of $893,000 that is being amortized against earnings using the
interest rate method of amortization.
(6) See note 10
F-15
(7) There are two obligations to others. One is non-interest bearing in
settlement of a claim by Dutchess Capital and requires a monthly
payment of $5,000 until the remaining balance of $35,000 is paid in
full. The other note, for $270,000, is for the acquisition of license
rights of the Kronos(TM) technology (see note 7). This note is
non-interest bearing with quarterly payments of $30,000 until paid in
full.
NOTE 10 - LEASES
The Company has entered into a non-cancelable operating lease for
facilities. Rental expense was approximately $66,500 and $62,000 for years ended
June 30, 2003 and 2002, respectively. Future minimum lease payments under this
operating lease are $61,836 for the year ending June 30, 2004 and $0 thereafter.
The Company has entered into capital leases for equipment. The leases are
for 36 months and contain bargain purchase provisions so that the Company can
purchase the equipment at the end of each lease. The following sets forth the
minimum future lease payments and present values of the net minimum lease
payments under these capital leases:
Year ended June 30,
2004 $ 36,337
2005 36,337
2006 28,112
------------
Total minimum lease payments 100,786
Less: Executory costs -
------------
Net minimum lease payments 100,786
Less: Imputed interest 28,362
------------
Present value of net minimum lease payments $ 72,424
============
In the year ended June 30, 2003, the Company paid $4,008 in principal and
$4,451 in interest on capital leases. 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.
NOTE 11 - EARNINGS (LOSS) PER SHARE
As of June 30, 2003, there were outstanding options to purchase 10,101,675
shares of Kronos common stock and outstanding warrants to purchase 15,792,342
shares of Kronos common stock. These options and warrants have been excluded
from the earnings per share calculation as their effect is anti-dilutive. As of
June 30, 2002, there were outstanding options to purchase 7,641,975 shares of
Kronos common stock and outstanding warrants to purchase 1,900,000 shares of
Kronos common stock. These options and warrants have been excluded from the
earnings per share calculation as their effect is anti-dilutive.
F-16
NOTE 12 - INCOME TAXES
The composition of deferred tax assets and the related tax effects at
June 30, 2003 and 2002 are as follows:
2003 2002
------------- ---------------
Benefit from carryforward of capital and net
operating losses $ 4,034,973 $ 2,685,915
Other temporary differences 188,206 220,332
Less:
Valuation allowance (4,223,178) (2,906,247)
------------- ---------------
Net deferred tax asset $ - $ -
============= ===============
The other temporary differences shown above relate primarily to and accrued
and deferred compensation. The difference between the income tax benefit in the
accompanying statements of operations and the amount that would result if the
U.S. Federal statutory rate of 34% were applied to pre-tax loss is as follows:
June 30,
--------------------------------------------------------------------------------
2003 2002
--------------------------------------------------------------------------------
Amount % of pre-tax Loss Amount % of pre-tax Loss
--------------------------------------------------------------------------------
Benefit for income tax at:
Federal statutory rate $941,746 34.0% $946,620 34.0%
State statutory rate 55,208 2.0% 55,494 2.0%
Non-deductible expenses 319,977 11.7% (111,278) (4.0)%
Acquired NOL and other - 0.0% 248,489 8.9%
Increase in valuation allowance (1,316,931) (47.7)% (1,139,325) (40.9)%
--------------------------------------------------------------------------------
$ - 0.0% $ - 0.0%
================================================================================
The non-deductible expenses shown above related primarily to the
amortization of intangible assets and to the differences in treatment of stock
options issued for compensation for financial and tax purposes.
At June 30, 2003, for federal income tax and alternative minimum tax
reporting purposes, the Company has approximately $8.7 million of unused Federal
net operating losses, $2.3 million capital losses and $7.5 million State net
operating losses available for carryforward to future years. The benefit from
carryforward of such losses will expire in various years between 2006 and 2023
and could be subject to limitations if significant ownership changes occur in
the Company.
NOTE 13 - CONSULTING AGREEMENTS
On July 9, 2001, the Company signed an agreement to utilize the strategic
planning and business plan execution services of The Eagle Rock Group, LLC.
("Eagle Rock"). Pursuant to the agreement that the Company entered into with
Eagle Rock, the Company issued to Eagle Rock a ten-year warrant granting them
the right to purchase 1,400,000 shares of the Company's common stock at an
exercise price of $0.68 per share. The warrant contains redemption rights in the
event that we enter into a transaction that results in a change of control of
the Company. The warrant was valued at $686,000 using the Black-Scholes option
valuation model and was initially recorded as deferred equity compensation and
amortized into current period professional services expense at a rate of
$137,200 per month over the term of the agreement. Amortization for the year
ended June 30, 2002 was $686,000. The shares underlying the warrant have
subscription rights in the event that the Company issues any rights to all of
its stockholders to subscribe for shares of the Company's common stock. In
addition, the warrant contains redemption rights in the event that the Company
enters into a transaction that results in a change of control of the Company.
F-17
On October 1, 2001, the Company entered into a 15 month consulting
agreement with Joshua B. Scheinfeld and Steven G. Martin 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 1, 2001 as the share grant is
non-forfeitable and fully vested on that date. The stock was valued on that date
at $0.28 a share (the closing price for the Company's common stock on the
measurement date). The stock issuance , valued at $100,800 was recorded as a
prepaid consulting fee and was amortized to Professional Fee Expense ratably
over the 15 month term of the contract. Under this contract, expenses of $40,320
and $60,480 were recorded for the years ended June 30, 2003 and 2002,
respectively.
Effective March 11, 2002, the Company entered into a new agreement with the
Eagle Rock Group for a nearly one year period ending March 1, 2003. Pursuant to
the agreement, the Company issued a note for the outstanding balance of $120,000
due to The Eagle Rock Group, which has been paid in full. The Company granted
Eagle Rock a ten-year warrant granting them the right to purchase 900,000 shares
of our common stock. Two hundred and fifty thousand (250,000) warrant shares at
an exercise price of $0.42 and two hundred and fifty thousand (250,000) warrant
shares at an exercise price of $0. 205 (the closing price of the Company's
common stock on March 1, 2002) were earned over a 12-month period and four
hundred thousand (400,000) warrant shares at an exercise price of $0.145 were
earned upon securing of our Licensing Agreement with HoMedics. These warrants
are irrevocable and are fully vested. For the 400,000 warrants earned upon
securing the HoMedics License Agreement, the measurement date is October 22,
2003 as the warrants became fully vested and non-forfeitable on the date. The
value assigned to these 400,000 warrants is $56,800 and was determined using the
Black-Scholes option valuation model. The $56,800 was expensed in the period of
the measurement date. For the other 500,000 warrants, the measurement date is
March 1, 2002 as the warrants are fully vested and non-forfeitable on that date.
The value assigned to these warrants is $62,500 and was determined using the
Black-Scholes option valuation model. The 500,000 warrants are for general
consulting services for a 12 month period. The $62,500 was expensed ratably over
the term of the consulting contract. Under this contract, expenses of $98,467
and $20,833 were recorded for the years ended June 30, 2003 and 2002,
respectively.
NOTE 14 - DISCONTINUED OPERATIONS
On September 14, 2001 the board approved a formal plan of action to sell or
otherwise dispose of Aperion Audio. The Company accrued $150,000 for anticipated
operating losses during the phase-out period. At June 30, 2001, the Company
recognized an impairment loss on the intangible asset related to its acquisition
of Aperion Audio of $2,294,000. The sale of Kronos-owned shares of Aperion Audio
common stock was completed on June 7, 2002, pursuant to a Settlement Agreement
and Mutual Release. The Company sold the shares of Aperion Audio to an Aperion
Audio management group ("the Buyers"). Pursuant to the sale, the Buyers received
500,000 shares of the Company's common stock. Under this agreement/settlement,
the Company agreed to pay the remaining $213,900 of capital contributions
previously agreed to at the time the Company acquired Aperion Audio, as well as
Aperion Audio's legal fees associated with the arbitration of $21,566, in the
form of a non-interest bearing note payable over the next 14 months. In
exchange, the Company received a full release of all liabilities, and claims
including the release of the potential liability for $3,750,000 of additional
consideration to be paid in shares of Kronos Advanced Technologies, Inc. common
stock via an earn-out provision in the Acquisition Agreement. As a result, the
Company has no additional risk of loss or any other commitments other than the
$235,466 fixed payment. As of June 30, 2003 the note to Aperion Audio was paid
in full.
F-18
At June 30, 2001, when the Company wrote down to $0 the intangible asset
associated with its investment in Aperion Audio, it created a negative book
value for this investment of approximately $800,000. The later sale of Aperion
resulted in a gain of $682,000 which is recognized in the June 30, 2002
statement of operations. For tax purposes, there was no write down in the
Aperion Audio intangible asset, therefore, there will be no tax effect on this
gain.
The Company's consolidated financial statements for all periods have been
reclassified to report separately the results of operations and operating cash
flows from continuing operations and the discontinued operations. Aperion Audio
is included in the financial statements as discontinued operations. The net
revenues of Aperion Audio are included in the financial statements under Net
Income (Loss) from Discontinued Operations. Operating results of discontinued
operations for the year ended June 30, 2002 are as follows:
Operating Results of Discontinued Operations:
2002
-------------
Aperion Audio
-------------
Sales $ 853,656
Cost of sales (340,479)
Depreciation and amortization (12,133)
General and administrative (672,127)
------------
Operating loss (171,083)
Other income 22,799
Interest expense (25,584)
Provision for future operating losses 139,094
Minority interest 34,774
------------
Income (Loss) pre-tax -
Income taxes (benefits) -
------------
Loss from discontinued operations $ -
============
NOTE 15 - STOCK OPTIONS AND WARRANTS
On February 12, 2002, the Board of Directors approved the TSET, Inc. Stock
Option Plan under which Kronos' key employees, consultants, independent
contractors, officers and directors are eligible to receive grants of stock
options. Kronos has reserved a total of 6,250,000 shares of common stock under
the Stock Option Plan. Prior to that, the Company had no formal stock option
plan but offered as special compensation to certain officers, directors and
third party consultants the granting of non-qualified options to purchase
Company shares at the market price of such shares as of the option grant date.
The options generally have terms of three to ten years. The Company granted
non-qualified stock options totaling 2,459,700 and 6,084,900 shares in the years
ended June 30, 2003 and 2002, respectively.
F-19
The Company has elected to follow APB No. 25; "Accounting for Stock Issued
to Employees" ("APB 25"), and related interpretations in accounting for its
employee stock options. Under APB 25, 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. Pro forma
information regarding net income per share is required by SFAS No. 123,
"Accounting for Stock-Based Compensation", and has been determined as if the
Company had accounted for its employee stock options under the fair value method
of that statement
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in the Company's opinion the existing available models do
not necessarily provide a reliable single measure of the fair value of the
Company's employee stock options.
Using the Black-Scholes option valuation model, the weighted average grant
date fair value of options granted during the years ended June 30, 2003 and 2002
was $.10 and $0.14 per option share, respectively.
A summary of the Company's stock option activity and related information
for the years ended June 30, 2003 and 2002 is as follows (in thousands, except
per share amounts):
Weighted
Average
Shares Exercise Price
-------- --------------
Outstanding at June 30, 2001 1,557 $ 0.89
Granted 6,085 0.54
Exercised - -
Cancelled - -
------- --------------
Outstanding at June 30, 2002 7,642 0.61
Granted 2,460 0.22
Exercised - -
Cancelled - -
------- --------------
Outstanding as June 30, 2003 10,102 $ 0.52
======= ==============
F-20
A summary of options outstanding and exercisable at June 30, 2003 is as
follows (in thousands, except per share amounts):
Options Outstanding Options Exercisable
--------------------------------------------- --------------------------------
Weighted
Average
Remaining Weighted
Range of Life (in Average Range of
Exercise Prices Options years) Exercise Price Exercise Prices Options
----------------- ------- --------- -------------- ------------------ -------
June 30, 2003
$0.71 - $1.12 127 2.50 $0.96 $0.71 - $1.12 127
$0.21 - $0.49 30 5.00 $0.36 $0.21 - $0.49 30
$0.00 - $0.20 2,303 9.70 $0.18 $0.00 - $0.20 2,303
June 30, 2002
$0.71 - $1.12 2,002 5.31 $0.91 $0.71 - $1.12 2,002
$0.50 - $0.70 3,150 9.00 $0.67 $0.50 - $0.70 3,150
$0.21 - $0.49 2,490 8.97 $0.28 $0.21 - $0.49 2,490
A summary of the Company's stock warrant activity and related information
for the years ended June 30, 2003 and 2002 is as follows (in thousands, except
per share amounts):
Weighted Average
Warrants Exercise Price
----------- ----------------
Outstanding at June 30, 2001 - $ -
1,900 0.58
Granted - -
Exercised - -
Cancelled ---------- ----------------
Outstanding at June 30, 2002 1,900 0.58
Granted 13,892 0.10
Exercised - -
Cancelled - -
---------- ----------------
Outstanding as June 30, 2003 15,792 $ 0.16
========== ================
NOTE 16 - COMMITMENTS AND CONTINGENCIES
In May 2003, Kronos entered into an agreement with a strategic customer,
HoMedics, Inc., for $3.5 million in financing, including $3.4 million in secured
debt financing and $100,000 for the purchase of warrants. $2.5 million was paid
to Kronos upon execution of the agreement and $1.0 million will be paid upon the
start of production as defined in the Licensing Agreement for the Kronos-based
air purification product line to be marketed and distributed by HoMedics. There
is a risk that we will not be successful in achieving production as defined in
the Licensing Agreement. In exchange for providing $3.4 million in debt
financing and $100,000, Kronos provided HoMedics with two warrants: (i) 6.7
million warrants (which equated to 10% of the then fully diluted shares) fully
vested at the time of funding and (ii) 6.7 million warrants (which equated to
10% of the then fully diluted shares) which will vest only if (1) Kronos does
not prepay the entire amount of principal and interest due under the Notes by
November 8, 2005; (2) Kronos is in default under any of the Investment
Documents, or (3) Kronos does not earn, at any time after the date of this
Agreement but prior to November 8, 2005, revenues in an aggregate amount equal
to or greater than $3.5 million. The exercise price was set at the market price
at the time of closing ($0.10). HoMedics may not be diluted below 7.5% for the
first warrant (15% for both warrants) for any funds raised at less than $0.20
per share, excluding options or shares issued to management, directors, and
consultants in the normal course of business. No anti-dilution measures for
funds raised at greater than $0.20 per share.
EMPLOYMENT AGREEMENTS
The Company entered into an Employment agreement with an officer effective
as of November 15, 2001. The initial term of the Employment Agreement is for 2
years and will automatically renew for successive 1 year terms unless written
notice within 3 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 August 13, 2003. 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. In addition, the Company granted 1,000,000 immediately
vested and exercisable, ten-year stock options at various exercise prices.
The Company entered into an Employment agreement with an officer effective
as of January 1, 2003. The initial term of the Employment Agreement is for 2
years and will automatically renew for successive 1 year terms unless written
notice within 3 months of the end of the initial term or any subsequent renewal
term is received by either party. The Employment Agreement provides for base
cash compensation of $160,000 per year.
F-21
NOTE 17 - MAJOR CUSTOMERS
As of June 30, 2003, the Company has two major customers: HoMedics and the
U.S. Navy. Of the $559,000 in revenue recorded in the year ended June 30, 2003,
$432,000 or 77% was derived from these two customers.
NOTE 18 - SEGMENTS OF BUSINESS
The Company operates principally in one segment of business: The Kronos
segment licenses, manufactures and distributes air movement and purification
devices utilizing the Kronos(TM) technology. All other segments have been
disposed of or discontinued. In the year ended June 30, 2003, the Company
operated only in the U.S.
NOTE 19 - RELATED PARTIES
During the year ended June 30, 2003, the Company had a consulting agreement
with a member of the board of directors, who is also an officer of the Company.
The agreement provided for cash and equity compensation per hour of service
provided. At June 30, 2003, the Company had accrued cash compensation under this
agreement of $452,000 and had granted options to acquire 549,700 shares at an
exercise price of $0.96 per share. In addition, as of June 30, 2003, the Company
has outstanding obligations for past compensation to the remaining officers and
directors of $720,000. These unpaid amounts currently accrue interest at the
rate of 12% per annum.
NOTE 20 - STOCKHOLDERS' EQUITY (DEFICIT)
During the year ended June 30, 2003, the Company issued 6,593,000 shares of
its common stock for $731,000 in cash. The Company issued 209,500 shares valued
at $34,700 and options to purchase 224,700 shares of its common stock valued at
$28,000 for consulting services.
In December 2002, the Company issued 206,000 shares in exchange for the
assignment of a $206,000 note payable to Jeff Wilson, a former director. The
Company also issued 100,000 shares to Aperion Audio to modify the payment
schedule on its note payable to Aperion.
In May 2003, the Company issued 2,790,000 shares of its common stock to
acquire intellectual property rights related to computers, microprocessors and
fuel cells. These shares were issued with certain rights allowing the Company to
buy back all or a portion of the shares at fixed prices through the year 2006.
The Company has the right to buy back shares at $0.15 per share in 2003, $.017
per share in 2004, $0.19 in 2005 and $0.20 in 2006..
F-22
NOTE 21 - SUBSEQUENT EVENTS
In August 2003, Kronos received a Notice of Allowance from the United
States Patent and Trademark Office indicating that its patent application
entitled Method of and Apparatus for Electrostatic Fluid Acceleration Control of
a Fluid Flow has been examined and allowed for issuance as a U.S. patent. It is
expected that the U. S. Patent will be issued in due course. This latest patent
when formally issued will provide intellectual property protection for key
aspects of Kronos' technology until late in 2020.
In July 2003, Kronos obtained a Pre-Award notice from the U.S. Army for a
Small Business Innovation Research Phase II contract. During the Pre-Award
stage, the U.S. Army will need to complete the necessary documentation for
Kronos to begin work on Phase II. The U.S. Army expects that completion of the
documentation will take approximately 90 days. The Phase II contract is an
extension of the Phase I work that began in 2002.
In August 2003, Kronos was awarded the option on its U.S. Army Small
Business Innovation Research Phase I contract.
F-23
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
(1) (i) Effective August 22, 2003, we dismissed Grant Thornton LLP ("Grant
Thornton") as our independent certified public accountants.
(ii) Grant Thornton's report on our Company's financial statements for the past
two fiscal years did not contain an adverse opinion or a disclaimer of opinion,
and was not qualified as to uncertainty, audit scope, or accounting principles;
however, the report was modified to include an explanatory paragraph wherein
Grant Thornton expressed substantial doubt about our Company's ability to
continue as a going concern.
(iii) The change of independent accountants was approved by the Registrant's
Board of Directors on August 18, 2003.
(iv) During our most recent two fiscal years, as well as the subsequent interim
period through August 22, 2003, there were no disagreements on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedures, which disagreements if not resolved to their satisfaction
would have caused them to make reference in connection with their opinion to the
subject matter of the disagreement.
(v) During our most recent two fiscal years, as well as the subsequent interim
period through August 22, 2003, Grant Thornton did not advise our Company of any
of the matters identified in paragraph (a)(1)(v) of Item 304 of Regulation S-K.
(vi) We requested Grant Thornton to furnish a letter addressed to the SEC,
stating whether it agrees with the statements made by the Registrant and, if
not, stating the respects in which it does not agree.
(B) NEW INDEPENDENT ACCOUNTANTS
On August 22, 2003, we engaged Sherb & Company, LLP ("Sherb & Company") as our
principal accountant to audit our financial statements. We did not consult Sherb
& Company on any matters described in paragraph (a)(2)(i) or (ii) of Item 304 of
Regulation S-K during our two most recent fiscal years or any subsequent interim
period prior to engaging Sherb & Company.
ITEM 8A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. Within 90 days prior to
the filing date of this report, our Company carried out an evaluation of the
effectiveness of the design and operation of its disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. 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.
29
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our directors and executive officers and their ages as of September 22,
2003, are as follows:
NAME AGE POSITION
-------------------- ----- ----------------------------------------
Daniel R. Dwight 43 Director; President and Chief
Executive Officer
Richard A. Papworth 45 Director; Chief Financial Officer,
Secretary, and Treasurer
Richard F. Tusing 46 Director; Chief Operating Officer
Erik W. Black 33 Director
Spencer I. Browne 53 Director
James P. McDermott 41 Director
M. J. Segal 58 Director
Daniel R Dwight, 43, has served as a Director of Kronos since November
2000, and as a Director and Chief Executive Officer of Kronos Air Technologies
since January 2001. Effective October 16, 2001, Mr. Dwight was appointed
President and Chief Executive Officer of Kronos. He has extensive experience in
private equity and operations in a wide variety of high growth and core
industrial businesses. Mr. Dwight spent 17 years with General Electric including
10 years of operations, manufacturing, and business development experience with
GE's industrial businesses, and seven years of international investment and
private equity experience with GE Capital. He has had responsibility for over a
$1 billion in merger and acquisition and private equity transactions at GE. Mr.
Dwight initiated GE Capital's entry in the Asia private equity market. Between
1995 and 1999, the Asian equity portfolio grew to include consolidations,
leveraged buyouts, growth capital and minority investments in diverse
industries, including information technology, telecommunications services,
consumer products, services and distribution, and contract manufacturing. Since
1982, Mr. Dwight has held other leadership positions domestically and
internationally with GE Capital, as well as senior positions with GE Corporate
Business Development (1989-1992) and GE Corporate Audit Staff (1984-1987). Mr.
Dwight holds an MBA in Finance and Marketing with Honors from The University of
Chicago Graduate School of Business and a B.S. in Accounting with Honors from
the University of Vermont.
Richard A. Papworth, 45, became a Director of Kronos in June 2001, was
appointed Chief Financial Officer of Kronos in May 2000, and has served as a
Director, Chief Financial Officer, and Treasurer of Kronos Air Technologies
since January 2001, and as Assistant Secretary of Kronos Air Technologies since
December 2000. Mr. Papworth has had diverse finance, tax, and accounting
experience in a range of industries, including real estate
development/construction, software development, publishing, distribution,
financial institutions, and investment companies. From 1997-2000, he was
Vice-President and Controller of the U.S. and European operations of Wilshire
Financial Services Group ("WFSG"). From 1996-97, he was Chief Financial Officer
of First Bank of Beverly Hills, a banking subsidiary of WFSG. From 1995-96, Mr.
Papworth was Treasurer for Maintenance Warehouse America Corporation. From
30
1994-95, he maintained a private management and finance consulting practice for
select clients. From 1989-94, Mr. Papworth worked for Morrison Homes, the U.S.
home building division of U.K.-based George Wimpey Plc., during which period he
held various positions including Chief Financial Officer, Treasurer, and
Assistant Treasurer. From 1985-89, he engaged in tax consulting with Deloitte
and Touche. He received a B.S. in accounting (with minors in business,
economics, and Spanish) and a Macc (Masters of Accountancy) with emphasis in tax
law, from Brigham Young University in 1984. Mr. Papworth became licensed as a
certified public accountant in the State of California in 1987. Mr. Papworth
speaks Spanish fluently.
Richard F. Tusing, 46, has served as a Director of Kronos since October
2000 and as a Director of Kronos Air Technologies since January 2001 and was
appointed Chief Operating Officer on January 1, 2002. Mr. Tusing has had
extensive experience in developing new enterprises, negotiating the licensing of
intellectual property rights, and managing technical and financial
organizations, and has more than 20 years of business development, operations,
and consulting experience in the technology and telecommunications industries.
Prior to his services to Kronos, Mr. Tusing spent four years in executive
management with several emerging technology companies, 14 years in various
managerial and executive positions with MCI Communications Corporation, and
three additional years in managerial consulting. From 1982-1996, Mr. Tusing held
multiple managerial and executive positions with MCI Communications Corporation.
From 1994-1996, he served as MCI's Director of Strategy and Technology, managing
MCI's emerging technologies division (having primary responsibility for
evaluating, licensing, investing in, and acquiring third-party technologies
deemed of strategic importance to MCI), and also oversaw the development of
several early-stage and venture-backed software and hardware companies; in this
capacity, Mr. Tusing managed more than 100 scientists and engineers developing
state-of-the-art technologies. From 1992-1994, Mr. Tusing founded MCI Metro,
MCI's entree into the local telephone services business and, as MCI Metro's
Managing Director, managed telecommunications operations, developed financial
and ordering systems, and led efforts in designing its marketing campaigns. From
1990-1992, he served as Director of Finance and Business Development for MCI's
western region. From 1982-1990, Mr. Tusing held other management and leadership
positions within MCI, including service as MCI's Pacific Division's Regional
Financial Controller, Manager of MCI's Western Region's Information Technology
Division, and led MCI's National Corporate Financial Systems Development
Organization. Mr. Tusing received B.S. degrees in business management and
psychology from the University of Maryland in 1979.
Erik W. Black, 33, became a Director of Kronos in June 2001. Mr. Black was
Executive Vice-President - Business Development of Kronos from May 2000 through
December 2001. Before joining Kronos, Mr. Black served from 1997 - 2000 as a
business and corporate strategy consultant to the office of the Chairman on
Funding Selection, Inc., an investment banking and mergers and acquisitions
company. From 1999 - 2000, Mr. Black has worked as an e-business associate
consultant for IBM Global Services. From 1998 - 1999, Mr. Black was the sole
proprietor of E.B. Web Designs, an Internet development services and consulting
company. From 1996 - 1997, Mr. Black worked as the communications coordinator
for the Synthetic Organic Chemical Manufacturers Association in Washington,
D.C., from 1995 - 1996 and as an associate consultant for Robert Charles Lesser
& Co., a real estate consulting firm. He received an M.B.A. and a Masters of
Information Management degrees from Arizona State University in 2000, a Global
Leadership Certificate from Thunderbird - The American Graduate School of
International Management in 2000, and a B.A. from Pomona College in 1995, where
he graduated magna cum laude and was elected to Phi Beta Kappa. Mr. Black speaks
Russian fluently.
31
Spenser I. Browne, 53, became a Director of Kronos in August 2003. Mr.
Browne has over 30 years of corporate governance, operations and entrepreneurial
expertise. He has held various executive and management positions with several
New York Stock Exchange and NASDAQ listed companies. Since 1996, Mr. Browne has
been a principal of Strategic Asset Management, LLC, a privately owned
investment firm, which he founded in 1996. He also currently serves as a
director and chairmen of Internet Commerce Corporation (NASDAQ: ICCA), a
director of Annaly Mortgage Management (NYSE: NLY) and a director of Delta
Financial Corporation (AMEX: DFC). From 1988 until 1996, Mr. Browne served as
President, Chief Executive Officer and a director of Asset Investors Corporation
(AIC), a New York Stock Exchange company (NYSE: ANL) he co-founded in 1986. He
also served as President, Chief Executive Officer and a director of Commercial
Assets, Inc., an affiliate of AIC, from its formation in 1993 until 1996. In
addition, from 1990 until 1996, Mr. Browne served as President and a director of
M.D.C. Holdings, Inc. (NYSE: MDC), the parent company of a major homebuilder in
Colorado. Originally from Philadelphia, Mr. Browne graduated from the Wharton
School of the University of Pennsylvania and Villanova University School of Law.
James P. McDermott, 41 became a Director of Kronos in July 2001. Mr.
McDermott has over 18 years of financial and operational problem-solving
experience. Mr. McDermott is a co-founder and is currently a Managing Director
of Eagle Rock Advisors, LLC, the Manager for The Eagle Rock Group, LLC. From
1992 through 2000, Mr. McDermott held various managerial and executive positions
with PennCorp Financial Group, Inc. and its affiliates. From 1998 through 2000,
Mr. McDermott was Executive Vice-President and Chief Financial Officer of
PennCorp Financial Group. While serving in this position, Mr. McDermott was
one-third of the executive management team that was responsible for developing
and implementing operational stabilization, debt reduction and recapitalization
plans for the company. From 1995 through 1998, Mr. McDermott served as Senior
Vice-President of PennCorp Financial Group. Mr. McDermott worked closely with
the Audit Committee of the Board of Directors on evaluating the PennCorp's
accounting and actuarial practices. In addition, Mr. McDermott was responsible
for developing a corporate-wide technology management program resulting in
technology convergence and cost savings to the company's technology budget. From
1994 through 1998, Mr. McDermott was a principal in Knightsbridge Capital Fund
I, LP, a $92 million investment fund specializing in leverage-equity
acquisitions of insurance and insurance-related businesses. Mr. McDermott was
also the founding Chairman of the e-business Internet service provider,
Kivex.com, and a senior manager of one of the world's leading public accounting
firms, KPMG. Mr. McDermott received a B.S. Degree in Business Administration
from the University of Wisconsin, Madison.
M. J. Segal, 58, became a Director of Kronos in September 2003. Mr. Mr.
Segal has over 35 years of corporate governance, entrepreneurial and investment
banking expertise. Mr. Segal founded the investment banking firm of M.J. Segal
Associates in 1987. Since 1992, the firm has specialized in researching private
equity opportunities in both private and emerging growth public companies. The
Segal group caters primarily to institutional clients, private investment
partnerships and professional money managers. After starting his career as a
stockbroker and financial planner in 1966 with Philadelphia based New York Stock
Exchange firm, Robinson & Company, Mr. Segal joined Josephthal & Co. Inc., a
leading full-service investment banking and brokerage firm in New York. Mr.
Segal has served as senior vice president of the congressionally charted
National Corporation for Housing Partnerships in Washington, D. C. and president
of its investment banking subsidiary and has qualified as a NASD broker/dealer
financial principal. Originally from Philadelphia, Mr. Segal attended the
Wharton School of the University of Pennsylvania and is a graduate of The New
York Institute of Finance.
32
DIRECTORS
Our Board of Directors consists of eight seats. Directors serve for a term
of one year and stand for election at our annual meeting of stockholders. Five
of our current directors were elected at our annual meeting of stockholders held
on December 30, 2002, and two additional directors wereappointed in August and
September 2003, respectively. One vacancy currently exists on the Board of
Directors as of the date of this filing. Pursuant to our Bylaws, a majority of
directors may appoint a successor to fill any vacancy on the Board of Directors.
ADVISORY BOARD
We established an Advisory Board in July 2001 to assist management in the
development of long-range business plans for our Company. Currently, William
Poster and Charles Strang are the only Advisory Board Members.
Mr. Poster is a seasoned entrepreneur with a successful track record as a
founder of several businesses spanning five continents. Mr. Poster has
experience in developing business opportunities in the United States, Europe,
Asia and the Middle East. Mr. Poster recently stepped down as President of
Computer Systems & Communications Corporation, a wholly-owned subsidiary of
General Dynamics. Computer Systems & Communications Corporation is a
cutting-edge communications and technology company that Mr. Poster founded and
later sold to General Dynamics. Mr. Poster is currently a principal with Eagle
Rock Advisors, LLC.
Mr. Strang is a former Kronos Director from January 2001 through December
2002. Mr. Strang was named National Commissioner of NASCAR (National Association
for Stock Car Racing) in 1998 and continues to serve in that capacity. In 1989
Mr. Strang received President Bush's American Vocation Success Award; in 1992
was elected to the Hall of Fame of the National Marine Manufacturers
Association; in 1990 was awarded the Medal of Honor of the Union for
International Motorboating; and is a life member of the Society of Automotive
Engineers. He also currently serves as a Director of the American Power Boat
Association (the U.S. governing body for powerboat racing) and Senior
Vice-President of the Union for International Motorboating (the world governing
body for powerboat racing, with approximately 60 member nations).
We will continue to evaluate additional potential candidates for our
Advisory Board.
COMMITTEES
On September 11, 2001, the Board of Directors established a Compensation
Committee consisting of at least two independent members of the Board of
Directors. The Compensation Committee is charged with reviewing and making
recommendations concerning Kronos' general compensation strategy, reviewing
salaries for officers, reviewing employee benefit plans, and administering
Kronos' stock incentive plan, once adopted and implemented. Messrs. Browne,
McDermott and Segal are the current members of the Compensation Committee.
On September 4, 2003, the Board of Directors established an Executive
Committee. The purpose of the Executive Committee is to exercise all the powers
and authority of the Board of Directors in the management of the property,
affairs and business of the Company. The Committee shall consist of no fewer
than three members, including the Chief Executive Officer of the Company.
Messrs. Browne, Dwight, McDermott, Segal and Tusing are the current members of
the Executive Committee.
33
On September 10, 2003, the Board of Directors established an Audit
Committee consisting of at least two independent members of the Board of
Directors. The Audit Committee is charged with providing independent and
objective oversight of the accounting functions and internal controls of the
Company and its subsidiaries to ensure the objectivity of the Company's
financial statements. Messrs. Browne, McDermott and Segal are the current
members of the Audit Committee.
COMPENSATION OF DIRECTORS
Cash Compensation. Our Bylaws provide that, by resolution of the Board of
Directors, each director may be reimbursed his expenses of attendance at
meetings of the Board of Directors; likewise, each director may be paid a fixed
sum or receive a stated salary as a director. As of the date of this filing, no
director receives any salary or other form of cash compensation for such
service. No director is precluded from serving our Company in any other capacity
and receiving compensation from us in connection therewith.
Share Based Compensation. Each non-executive director is entitled to
receive annually 70,000 fully-vested stock option grants, 7,000 stock option
grants per meeting attended via conference call, 14,000 option grants per
meeting attended in person, 3,500 option grants per meeting for participation on
a committee or 5,000 stock option grants per meeting for chairing a committee,
as compensation for their services as members of our Board of Directors.
As of December 30, 2002, Messrs. Black and McDermott have been granted
79,041 and 70,959 option grants, respectively as compensation for their services
as members of our Board of Directors. Messrs. Tusing, Dwight and Papworth have
each been granted 111,644, 107,808, and 79,041, respectively, shares of our
common stock as compensation for their services as members of our Board of
Directors. Effective August 6, 2003, non-executive directors, including Messrs.
Dwight, Papworth and Tusing will not be compensated separately for their
services as members of our Board of Directors.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires our directors
and executive officers, and persons who own more than 10% of a registered class
of our equity securities to file with the Securities and Exchange commission
initial reports of ownership and reports of changes in ownership of Common Stock
and other of our equity securities. Officers, directors and greater than 10%
shareholders are required by SEC regulations to furnish us copies of all Section
16(a) forms they file.
To our knowledge, based solely on a review of the copies of such reports
furnished to us and written representations that no other reports were required
during the fiscal year ended June 30, 2003, all Section 16(a) filing
requirements applicable to our officers and directors were complied with.
34
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth compensation for the fiscal year ended June
30, 2003 for our executive officers:
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
--------------------------------------- --------------------------------------------------------
Restricted Securities
Name and Other Stock Underlying LTIP All Other
Principal Salary Bonus Compensation Awards Options/SARS Payouts Compensation
Fiscal Position Year $ $ $ $ # $ $
---------------- ----- --------- ---------- -------------- ----------- --------------- -------- --------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
---------------- ----- --------- ---------- -------------- ----------- --------------- -------- --------------
Daniel R. 2003 180,000 118,800(5) 12,288 -- 660,000 -- --
Dwight, 2002 112,500 -- 7,620 -- 2,600,000 -- --
President and 2001 -- -- -- -- -- -- --
Chief
Executive
Officer(1)
Richard A. 2003 120,000 21,000(5) -- -- 300,000 -- --
Papworth Chief 2002 120,000 -- -- -- 300,000 -- --
Financial 2001 120,000 -- -- -- 448,475(3) -- --
Officer(2)
Richard F. 2003 80,000 -- -- -- -- -- --
Tusing, Chief 2002 -- -- -- -- -- -- --
Operating 2001 -- -- -- -- -- -- --
Officer(4)
(1) Mr. Dwight became President and Chief Executive Officer of Kronos
effective October 16, 2001. He executed a two year employment contract on
November 15, 2001. His contract was renewed on August 13, 2003 by the
Board of Directors. His annual salary is $180,000.
(2) Mr. Papworth became Chief Financial Officer effective May 19, 2000. His
annual salary is $120,000.
(3) Mr. Papworth was granted an option to purchase 398,475 restricted shares
of our common stock pursuant to a letter agreement dated April 10, 2001
amending Mr. Papworth's employment agreement, dated May 19, 2000. The
options were fully vested as of April 10, 2001 and the exercise price is
equal to $0.885 per share, which was the closing price of our common
stock as quoted on the Over-the-Counter Bulletin Board on April 9, 2001.
In addition, Mr. Papworth was granted 50,000 options on April 9, 2001.
These options are fully vested and the exercise price is equal to $0.885
per share.
(4) Mr. Tusing became Chief Operating Officer of Kronos effective January 1,
2002. Mr. Tusing executed an employment contract effective January 1,
2003. Prior to this date, Mr. Tusing was compensated as a consultant to
the company. His annual salary is $160,000.
(5) Cash Bonuses were earned but not paid and have been included in accrued
expenses.
35
AGGREGATED OPTIONS/SAR EXERCISES
IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTIONS/SAR VALUES(1)
VALUE OF
NUMBER OF SECURITIES UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES ACQUIRED OPTIONS/SARS AT FISCAL OPTIONS/SARS AT
NAME ON EXERCISE VALUE REALIZED YEAR END(1) FISCAL YEAR END(2)
------------------- ----------------- ----------------- -------------------------- ---------------------
Daniel R. Dwight, -0- -0- Exercisable: 3,581,700 $23,100
President and Unexercisable: -0- -0-
Chief Executive
Officer(3)
Richard A. -0- -0- Exercisable: 1,048,475 $10,500
Papworth Chief Unexercisable: -0- -0-
Financial
Officer(4)
Richard F. -0- -0- Exercisable: 1,549,700 -0-
Tusing, Chief Unexercisable: -0- -0-
Operating
Officer(5)
36
(1) These grants represent options to purchase common stock. No SAR's have
been granted.
(2) The value of the unexercised in-the-money options were calculated by
determining the difference between the fair market value of the common
stock underlying the options and the exercise price of the options as of
June 30, 2003.
(3) Mr. Dwight became President and Chief Executive Officer of Kronos
effective October 16, 2001.
(4) Mr. Papworth became Chief Financial Officer effective May 19, 2000.
(5) Mr. Tusing became Chief Operating Officer of Kronos effective January 1,
2002.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
% TOTAL
NO. OF OPTIONS/SAR'S
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES EXERCISE OR
OPTIONS/SAR'S IN FISCAL BASE PRICE
NAME GRANTED (#) YEAR (%) ($ PER SHARE) EXPIRATION DATE
------------------- ------------- ------------- ------------ -----------------
Daniel R. Dwight 660,000 26.0% $ 0.185 March 3, 2013
President and
Chief Executive
Richard A. Papworth 300,000 11.9% $ 0.185 March 3, 2013
Chief Financial
Richard F. Tusing 118,500 4.7% $ 0.960 December 31, 2004
Chief Operating 128,000 5.0% $ 0.960 June 30, 2005
126,700 5.0% $ 0.960 December 31, 2005
STOCK OPTION PLAN
On February 12, 2002, the Board of Directors approved the TSET, Inc. Stock
Option Plan under which Kronos' key employees, consultants, independent
contractors, officers and directors are eligible to receive grants of stock
options. Kronos has reserved a total of 6,250,000 shares of common stock under
the Stock Option Plan. It is presently administered by Kronos' Board of
Directors. Subject to the provisions of the Stock Option Plan, the Board of
Directors has full and final authority to select the individuals to whom options
will be granted, to grant the options and to determine the terms and conditions
and the number of shares issued pursuant thereto.
EMPLOYMENT AGREEMENTS
Daniel R. Dwight, our President and Chief Executive Officer, and our
Company entered into an Employment agreement effective as of November 15, 2001.
The initial term of Mr. Dwight's Employment Agreement is for 2 years and will
automatically renew for successive 1 year terms unless Kronos or Mr. Dwight
provide the other party with written notice within 3 months of the end of the
initial term or any subsequent renewal term. The Board of Directors renewed Mr.
Dwight's Employment Agreement on August 13, 2003. Mr. Dwight's Employment
Agreement provides for base cash compensation of $180,000 per year. Mr. Dwight
is eligible for annual incentive bonus compensation in an amount equal to Mr.
Dwight's annual salary based on the achievement of certain bonus objectives. In
addition, Kronos granted Mr. Dwight 1,000,000 immediately vested and
exercisable, ten-year stock options at various exercise prices. Mr. Dwight will
be entitled to fully participate in any and all 401(k), stock option, stock
bonus, savings, profit-sharing, insurance, and other similar plans and benefits
of employment.
37
Richard A. Papworth, our Chief Financial Officer, has an Employment
Agreement dated as of May 19, 2000, which continues for an "evergreen" term of
two years, unless Mr. Papworth provides at least 90 days' prior written notice
of his resignation. Mr. Papworth's Employment Agreement provides for base cash
compensation in the amount of $10,000 per month, a signing bonus of $50,000
worth of fully vested and non-forfeitable restricted shares of our common stock,
plus a year-end bonus payable in cash and additional shares, in a "blended"
amount to be determined. Mr. Papworth will be entitled to fully participate in
any and all 401(k), stock option, stock bonus, savings, profit-sharing,
insurance, and other similar plans and benefits of employment; however, as of
the date of this filing, we have not adopted or implemented any such plans. On
April 10, 2001, we entered into a Letter Agreement with Mr. Papworth amending
Mr. Papworth's Employment Agreement. Pursuant to the Letter Agreement, Mr.
Papworth waived the anti-dilution provision of his Employment Agreement in
consideration for an option to purchase 398,475 shares of our restricted common
stock. The option was fully vested as of April 10, 2001 and the exercise price
is equal to $0.885 per share, which was the closing price of our common stock as
quoted on the Over-the-Counter Bulletin Board on April 9, 2001.
Richard F. Tusing, our Chief Operating Officer, and our Company entered
into an Employment agreement effective as of January 1, 2003. The initial term
of Mr. Tusing's Employment Agreement is for 2 years and will automatically renew
for successive 1 year terms unless Kronos or Mr. Tusing provide the other party
with written notice within 3 months of the end of the initial term or any
subsequent renewal term. Mr. Tusing's Employment Agreement provides for base
cash compensation of $160,000 per year. Mr. Tusing will be entitled to fully
participate in any and all 401(k), stock option, stock bonus, savings,
profit-sharing, insurance, and other similar plans and benefits of employment.
EXECUTIVE SEVERANCE AGREEMENTS
The Employment Agreement of Daniel R. Dwight, our Chief Executive Officer,
provides that, upon the occurrence of any transaction as defined as a "change of
control" of Kronos, Mr. Dwight shall receive his salary and benefits for a
period of time that is the greater of (i) one year or (ii) the remainder of Mr.
Dwight's employment term.
The Employment Agreement of Richard A. Papworth, our Chief Financial
Officer, provides that upon the occurrence of any transaction involving a change
of control of Kronos pursuant to which his employment is terminated, any shares
of our common stock to which Mr. Papworth is entitled through any stock option
or other stock ownership plan shall immediately vest and Mr. Papworth will be
entitled to receive all the compensation and benefits of employment that he
would have received for the full term of his employment but for such termination
(i.e., given the 2-year "evergreen" term of his employment, Mr. Papworth would
therefore receive two years' worth of such compensation), the immediate vesting
of shares in any stock option or other stock ownership plan, and the immediate
vesting of all matching contributions made by us in any 401(k), savings,
profit-sharing, or other similar plan or benefit program.
The Employment Agreement of Richard F. Tusing, our Chief Operating Officer,
provides that, upon the occurrence of any transaction as defined as a "change of
control" of Kronos that is not approved by the Board of Directors, Mr. Tusing
shall receive his salary, pro-rata bonus and benefits for a period of time that
is the greater of (i) one year or (ii) the remainder of Mr. Tusing's employment
term.
As of the date of this filing, we have not adopted any separate
executive severance agreements.
38
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL SHAREHOLDERS
The following table presents certain information regarding the beneficial
ownership of all shares of common stock at September 23, 2003 for each executive
officer and director of our Company and for each person known to us who owns
beneficially more than 5% of the outstanding shares of our common stock. The
percentage ownership shown in such table is based upon the 54,336,524 common
shares issued and outstanding at September 23, 2003 and ownership by these
persons of options or warrants exercisable within 60 days of such date. Also
included is beneficial ownership on a fully diluted basis showing all
authorized, but unissued, shares of our common stock at September 23, 2003 as
issued and outstanding. Unless otherwise indicated, each person has sole voting
and investment power over such shares.
COMMON STOCK
BENEFICIALLY OWNED
-------------------------
NAME AND ADDRESS NUMBER PERCENT
---------------- ------------- -----------
Daniel R. Dwight 4,013,626(1) 7.4%
464 Common Street
Suite 301
Belmont, MA 02478
Richard A. Papworth 1,231,155(2) 2.2%
464 Common Street
Suite 301
Belmont, MA 02478
Richard F. Tusing 1,984,762(3) 3.6%
464 Common Street
Suite 301
Belmont, MA 02478
James P. McDermott 294,118 *
464 Common Street
Suite 301
Belmont, MA 02478
Erik W. Black 272,983(4) *
464 Common Street
Suite 301
Belmont, MA 02478
Spencer I. Browne 18,000 *
464 Common Street
Suite 301
Belmont, MA 02478
All Officers and Directors of Kronos 7,814,644 (5) 14.3%%
---------------
* Less than 1%.
(1) Includes options to purchase 3,581,700 shares of common stock that can be
acquired within sixty days of September 23, 2003.
(2) Includes options to purchase 1,048,475 shares of common stock that can be
acquired within sixty days of September 23, 2003.
(3) Includes options to purchase 1,549,700 shares of common stock that can be
acquired within sixty days of September 23, 2003.
(4) Includes options to purchase 50,000 shares of common stock that can be
acquired within sixty days of September 23, 2003.
39
(5) Includes options to purchase 6,229,875 shares of common stock that can be
acquired within sixty days of September 23, 2003.
We are unaware of any arrangement or understanding that may, at
a subsequent date, result in a change of control of our company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We believe that all prior related party transactions have been entered into
upon terms no less favorable to us than those that could be obtained from
unaffiliated third parties. Our reasonable belief of fair value is based upon
proximate similar transactions with third parties or attempts to obtain the
consideration from third parties. All ongoing and future transactions with such
persons, including any loans or compensation to such persons, will be approved
by a majority of disinterested members of the Board of Directors.
On August 11, 2000, we entered into a Consulting Agreement with Daniel R.
Dwight and Richard F. Tusing, pursuant to which Messrs. Dwight and Tusing would
provide management, financial, strategic, and other consulting services to us in
exchange for consulting fees payable in cash and options of our common stock.
Out-of-pocket expenses incurred by Messrs. Dwight and Tusing in connection with
provision of their services under the Consulting Agreement would also be
reimbursed by us. The Consulting Agreement was entered into prior to Messrs.
Dwight's and Tusing's appointment as members of our Board of Directors in
October 2000 and was negotiated at arm's length. We believe that the
compensation and other provisions of the Consulting Agreement were fair,
reasonable, customary, and favorable to us. The Consulting Agreement was renewed
with Dwight, Tusing & Associates on similar terms and conditions with a rate
adjustment as of January 1, 2001, and was amended on April 12, 2001 to decrease
the strike price of the options granted as partial compensation thereunder.
Pursuant to Kronos and Mr. Dwight entering into his Employment Agreement,
effective November 15, 2001, Mr. Dwight's Consulting Agreement is no longer in
effect. Pursuant to Kronos and Mr. Tusing entering into his Employment
Agreement, effective January 1, 2003, Mr. Tusing's Consulting Agreement is no
longer in effect. Pursuant to his Consulting Agreement, Mr. Dwight earned
$208,400 and $179,600, respectively, in the years ended June 30, 2001 and 2002,
respectively. Of the aggregate amount of $388,000, we have paid $223,500 to Mr.
Dwight and the balance of $164,500 remains payable. Pursuant to his Consulting
Agreement, Mr. Tusing earned $207,400 and $377,750, respectively, in the years
ended June 30, 2001 and 2002 and $190,050 through December 31, 2002. Of the
aggregate amount of $775,200 we have paid $349,100 to Mr. Tusing and the balance
of $426,100 remains payable.
Pursuant to Daniel R. Dwight's Employment Agreement, effective November 15,
2001, our company and Mr. Dwight agreed that the Consulting Agreement, dated
January 1, 2001, between our Company and Mr. Dwight was terminated effective
November 15, 2001. We acknowledged and agreed that pursuant to the terms of the
Consulting Agreement, we owed Mr. Dwight past-due amounts equal to $250,582. We
agreed that this past-due amount will accrue interest at 1% per month until paid
in full. Payments from our Company to Mr. Dwight shall be allocated first to
out-of-pocket expenses, second to salary, and third to repayment of the past-due
amount. In addition, we acknowledged and agreed that, pursuant to the Consulting
Agreement and the Finders Agreement, Mr. Dwight has earned 271,700 options that
are fully vested and exercisable under the terms and conditions of the
Consulting Agreement, and a Letter Agreement, dated April 12, 2001 between our
Company and Mr. Dwight.
40
Pursuant to Richard F. Tusing's Employment Agreement, effective January 1,
2003, our company and Mr. Tusing agreed that the Consulting Agreement, dated
January 1, 2001, between our company and Mr. Tusing was terminated effective
January 1, 2003. We acknowledged and agreed that pursuant to the terms of the
Consulting Agreement, we owe Mr. Tusing past-due amounts equal to $452,000. We
agreed that this past-due amount will accrue interest at 1% per month until paid
in full. In addition, we acknowledged and agreed that, pursuant to the
Consulting Agreement, Mr. Tusing has earned 549,700 options that are fully
vested and exercisable under the terms and conditions of the Consulting
Agreement, the Finders Agreement and a Letter Agreement, dated April 12, 2001
between our company and Mr. Tusing.
ITEM 13. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1)(2) FINANCIAL STATEMENTS. See index to consolidated financial
statements and supporting schedules.
(a)(3) EXHIBITS.
41
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
10.1 Employment Agreement, dated April 16, Incorporated by reference to
1999, by and between TSET, Inc. and Exhibit 10.1 to the Registration
Jeffrey D. Wilson Statement on Form S-1 filed on
August 7, 2001
10.2 Deal Outline, dated December 9, 1999, Incorporated by reference to
by and between TSET, Inc. and Atomic Exhibit 10.2 to the Registration
Soccer, USA, Ltd. Statement on Form S-1 filed on
August 7, 2001
10.3 Letter of Intent, dated December 27, Incorporated by reference to
1999, by and between TSET, Inc. and Exhibit 10.3 to the Registration
Electron Wind Technologies, Inc. Statement on Form S-1 filed on
August 7, 2001
10.4 Agreement, dated February 5, 2000, by Incorporated by reference to and
between DiAural, LLC and EdgeAudio, Exhibit 10.4 to the Registration
LLC Statement on Form S-1 filed on
August 7, 2001
10.5 Stock Purchase Agreement, dated March Incorporated by reference to
6, 2000, by and among TSET, Inc., Exhibit 10.5 to the Registration
Atomic Soccer USA, Ltd., Todd P. Statement on Form S-1 filed on
Ragsdale, James Eric Anderson, Jewel August 7, 2001
Anderson, Timothy Beglinger and Atomic
Millennium Partners, LLC
10.6 Acquisition Agreement, dated March 13, Incorporated by reference to
2000, by and among TSET, Inc., High Exhibit 10.6 to the Registration
Voltage Integrated, LLC, Ingrid Statement on Form S-1 filed on
Fuhriman, Igor Krichtafovitch, Robert August 7, 2001
L. Fuhriman and Alan Thompson
10.7 Letter of Intent, dated April 18, 2000, Incorporated by reference to
by and between TSET, Inc. and Exhibit 10.7 to the Registration
EdgeAudio.com, Inc. Statement on Form S-1 filed on
August 7, 2001
10.8 Lease Agreement, dated May 3, 2000, by Incorporated by reference to
and between Kronos Air Technologies, Exhibit 10.8 to the Registration
Inc. and TIAA Realty, Inc. Statement on Form S-1 filed on
August 7, 2001
10.9 Agreement and Plan of Reorganization, Incorporated by reference to
dated May 4, 2000, by and among TSET, Exhibit 10.9 to the Registration
Inc., EdgeAudio.com, Inc., LYNK Statement on Form S-1 filed on
Enterprises, Inc., Robert Lightman, J. August 7, 2001
David Hogan, Eric Alexander and Eterna
Internacional, S.A. de C.V.
10.10 Letter Agreement, dated May 4, 2000, by Incorporated by reference to
and between TSET, Inc. and Cancer Exhibit 10.10 to the
Detection International, LLC Registration Statement on Form
S-1 filed on August 7, 2001
10.11 Employment Agreement, dated May 19, Incorporated by reference to
2000, by and between TSET, Inc. and Exhibit 10.11 to the
Richard A. Papworth Registration Statement on Form
S-1 filed on August 7, 2001
10.12 Finders Agreement, dated August 21, Incorporated by reference to
2000, by and among TSET, Inc., Richard Exhibit 10.12 to the
F. Tusing and Daniel R. Dwight Registration Statement on Form
S-1 filed on August 7, 2001
42
10.13 Contract Services Agreement, dated June Incorporated by reference to
27, 2000, by and between Chinook Exhibit 10.13 to the
Technologies, Inc. and Kronos Air Registration Statement on Form
Technologies, Inc. S-1 filed on August 7, 2001
10.14 Letter of Intent, dated July 17, 2000, Incorporated by reference to
by and between Kronos Air Technologies, Exhibit 10.14 to the
Inc. and Polus Technologies, Inc. Registration Statement on Form
S-1 filed on August 7, 2001
10.15 Consulting Agreement, dated August 1, Incorporated by reference to
2000, by and among TSET, Inc., Richard Exhibit 10.15 to the
F. Tusing and Daniel R. Dwight Registration Statement on Form
S-1 filed on August 7, 2001
10.16 Preferred Stock Purchase Agreement, Incorporated by reference to
dated September 12, 2000, by and Exhibit 10.16 to the
between EdgeAudio.com, Inc. and Bryan Registration Statement on Form
Holbrook S-1 filed on August 7, 2001
10.17 Shareholders Agreement, dated September Incorporated by reference to
12, 2000, by and among TSET, Inc., Exhibit 10.17 to the
Bryan Holbrook and EdgeAudio.com, Inc. Registration Statement on Form
S-1 filed on August 7, 2001
10.18 Amendment to Agreement and Plan of Incorporated by reference to
Reorganization dated September 12, Exhibit 10.18 to the
2000, by and among TSET, Inc., Registration Statement on Form
EdgeAudio.com, Inc., LYNK Enterprises, S-1 filed on August 7, 2001
Inc., Robert Lightman, J. David Hogan,
Eric Alexander and Eterna
Internacional, S.A. de C.V.
10.19 Agreement Regarding Sale of Preferred Incorporated by reference to
Stock, dated November 1, 2000, by and Exhibit 10.19 to the
between EdgeAudio.com, Inc. and Bryan Registration Statement on Form
Holbrook S-1 filed on August 7, 2001
10.20 Amendment to Subcontract, dated Incorporated by reference to
December 14, 2000, by and between Exhibit 10.20 to the
Bath Iron Works and High Voltage Registration Statement on Form
Integrated S-1 filed on August 7, 2001
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 Employment Agreement, dated March 18, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.22 to the
Alex Chriss Registration Statement on Form
S-1 filed on August 7, 2001
10.23 Stock Option Agreement, dated April 9, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.23 to the
Jeffrey D. Wilson Registration Statement on Form
S-1 filed on August 7, 2001
10.24 Stock Option Agreement, dated April 9, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.24 to the
Jeffrey D. Wilson Registration Statement on Form
S-1 filed on August 7, 2001
10.25 Stock Option Agreement, dated April 9, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.25 to the
Daniel R. Dwight Registration Statement on Form
S-1 filed on August 7, 2001
10.26 Stock Option Agreement, dated April 9, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.26 to the
Richard F. Tusing Registration Statement on Form
S-1 filed on August 7, 2001
10.27 Stock Option Agreement, dated April 9, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.27 to the
Charles D. Strang Registration Statement on Form
S-1 filed on August 7, 2001
43
10.28 Stock Option Agreement, dated April 9, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.28 to the
Richard A. Papworth Registration Statement on Form
S-1 filed on August 7, 2001
10.29 Stock Option Agreement, dated April 9, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.29 to the
Richard A. Papworth Registration Statement on Form
S-1 filed on August 7, 2001
10.30 Stock Option Agreement, dated April 9, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.30 to the
Erik W. Black Registration Statement on Form
S-1 filed on August 7, 2001
10.31 Stock Option Agreement, dated April 9, Incorporated by reference to
2001, by and between TSET, Inc. and J. Exhibit 10.31 to the
Alexander Chriss Registration Statement on Form
S-1 filed on August 7, 2001
10.32 Stock Option Agreement, dated April 9, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.32 to the
Charles H. Wellington Registration Statement on Form
S-1 filed on August 7, 2001
10.33 Stock Option Agreement, dated April 9, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.33 to the
Igor Krichtafovitch Registration Statement on Form
S-1 filed on August 7, 2001
10.34 Letter Agreement, dated April 10, 2001, Incorporated by reference to
by and between TSET, Inc. and Richard Exhibit 10.34 to the
A. Papworth Registration
Statement on Form S-1
filed on August 7, 2001
10.35 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
10.36 Finders Agreement, dated April 20, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.36 to the
Bernard Aronson, d/b/a Bolivar Registration Statement on Form
International Inc. S-1 filed on August 7, 2001
10.37 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
10.38 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
10.39 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
10.40 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
10.41 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
10.42 Indemnification Agreement, dated May 1, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.42 to the
Erik W. Black Registration Statement on Form
S-1 filed on August 7, 2001
44
10.43 Stock Option Agreement, dated May 3, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.43 to the
Jeffrey D. Wilson Registration Statement on Form
S-1 filed on August 7, 2001
10.44 Common Stock Purchase Agreement, dated Incorporated by reference to
June 19, 2001, by and between TSET, Exhibit 10.44 to the
Inc. and Fusion Capital Fund II, LLC Registration Statement on Form
S-1 filed on August 7, 2001
10.45 Registration Rights Agreement, dated Incorporated by reference to
June 19, 2001, by and between TSET, Exhibit 10.45 to the
Inc. and Fusion Capital Fund II, LLC Registration Statement on Form
S-1 filed on August 7, 2001
10.46 Mutual Release and Settlement Incorporated by reference to
Agreement, dated July 7, 2001, by and Exhibit 10.46 to the
between TSET, Inc. and Foster & Price Registration Statement on Form
Ltd. S-1 filed on August 7, 2001
10.47 Letter Agreement, dated July 9, 2001, Incorporated by reference to
by and between TSET, Inc. and The Eagle Exhibit 10.47 to the
Rock Group, LLC Registration Statement on Form
S-1 filed on August 7, 2001
10.48 Finders Agreement, dated July 17, 2001, Incorporated by reference to
by and between TSET, Inc. and John S. Exhibit 10.48 to the
Bowles Registration Statement on Form
S-1 filed on August 7, 2001
10.49 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
10.50 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
10.51 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
10.52 Consulting Agreement, dated October 10, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.52 to the
Jeffrey D. Wilson Registrant's Form 10-K for the
year ended June 30, 2001 filed
on October 15, 2001
10.53 Employment Agreement, dated April 1, Incorporated by reference to
2002, by and between TSET, Inc. and Exhibit 10.53 to the
Daniel R. Dwight Registrant's Form 10-Q for the
quarterly period ended March 31,
2002 filed on May 15, 2002
10.54 Stock Option Agreement, dated April 1, Incorporated by reference to
2002, by and between TSET, Inc. and Exhibit 10.54 to the
Daniel R. Dwight Registrant's Form 10-Q for the
quarterly period ended March 31,
2002 filed on May 15, 2002
10.55 Agreement, dated March 1, 2002, by and Incorporated by reference to
between TSET, Inc. and The Eagle Rock Exhibit 10.55 to the
Group, LLC Registrant's Form 10-Q for the
quarterly period ended March 31,
2002 filed on May 15, 2002
10.56 Agreement, dated November 13, 2001 by Incorporated by reference to
and between TSET, Inc. and Fusion Exhibit 10.56 to the
Capital Fund II, LLC Registrant's Amendment No. 1 to
Form S-1 filed on August 2, 2002
10.57 Common Stock Purchase Agreement, dated Incorporated by reference to
August 12, 2002 by and between TSET, Exhibit 10.57 to the
Inc. and Fusion Capital Fund II, LLC Registrant's Form S-1 filed on
August 13, 2002
45
10.58 Registration Rights Agreement, dated Incorporated by reference to
August 12, 2002 by and between TSET, Exhibit 10.58 to the
Inc. and Fusion Capital Fund II, LLC Registrant's Form S-1 filed on
August 13, 2002
10.59 Termination Agreement, dated August 1Z, Incorporated by reference to
2002 by and between TSET, Inc. and Exhibit 10.59 to the
Fusion Capital Fund II, LLC Registrant's Amendment No. 1 to
Form S-1 filed on September 16,
2002
10.60 Master Loan and Investment Incorporated by reference to
Agreement, dated May 9, 2003, the Registrant's 8-K filed on
by and among Kronos Advanced May 15, 2003
Technologies, Inc., Kronos Air
Technologies, Inc. and FKA
Distributing Co. d/b/a HoMedics,
Inc., a Michigan corporation
("HoMedics")
10.61 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
10.62 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
10.63 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
10.64 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
10.65 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
10.65 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
11.1 Statement re: Computation of Earnings Not applicable
12.1 Statement re: Computation of Ratios Not applicable
15.1 Letter re: Unaudited Interim Financial Not applicable
Information
16.1 Letter re: Change in Certifying Incorporated by reference to
Accountant the Company's Form 8-K filed on
August 22, 2003
21.1 Subsidiaries of the Registrant Not applicable
23.1 Consent of Independent Auditors Provided herewith
23.2 Consent of Independent Auditors Provided herewith
24.1 Power of Attorney Not applicable
27.1 Financial Data Schedule Not applicable
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 Chie 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
(b) REPORTS ON FORM 8-K.
------------------------------------------------------------------------------
46
On May 15, 2003, Kronos filed a Form 8-K with respect to Item 7 - Financial
Statements, Pro Forma Financial Information and Exhibits and Item 9 - Regulation
FD Disclosure. The date of report on this Form 8-K was May 9, 2003.
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized.
Date: September 29, 2003.
KRONOS ADVANCED TECHNOLOGIES, INC.
By: /s/ Daniel R. Dwight
---------------------------------
Daniel R. Dwight
President, Chief Executive Officer
and Director
By: /s/ Richard A. Papworth
---------------------------------
Richard A. Papworth
Chief Financial Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Erik W. Black
-----------------------------
Erik W. Black Director September 29, 2003
/s/ Spencer I. Browne
-----------------------------
Spencer I. Browne Director September 29, 2003
/s/ Daniel R. Dwight
-----------------------------
Daniel R. Dwight Director, President September 29, 2003
and Chief Executive
Officer
47
/s/ James P. McDermott
-----------------------------
James P. McDermott Director September 29, 2003
/s/ Richard A. Papworth
-----------------------------
Richard A. Papworth Director and Chief September 29, 2003
Financial Officer
/s/ M. J. Segal
-----------------------------
M. J. Segal Director September 29, 2003
/s/ Richard F. Tusing
-----------------------------
Richard F. Tusing Director and Chief September 29, 2003
Operating Officer
48
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated September 4, 2002, accompanying the consolidated
financial statements and included in the Annual Report of Kronos Advanced
Technologies, Inc. on Form 10-KSB for the year ended June 30, 2003. We hereby
consent to the incorporation by reference of said report in the Registration
Statement of Kronos Advanced Technologies, Inc. on Forms S-1 (File No.
33-97991).
/s/ GRANT THORNTON LLP
----------------------
Portland, Oregon
September 29, 2003
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated September 19, 2003, accompanying the
consolidated financial statements and included in the Annual Report of Kronos
Advanced Technologies, Inc. on Form 10-KSB for the year ended June 30, 2003. We
hereby consent to the incorporation by reference of said report in the
Registration Statement of Kronos Advanced Technologies, Inc. on Forms S-1 (File
No. 33-97991).
/s/ SHERB & CO., LLP
New York, New York
September 29, 2003
EXHIBIT 31.1
OFFICER'S CERTIFICATE
PURSUANT TO SECTION 302
CERTIFICATION
I, Daniel R. Dwight, certify that:
1. I have reviewed this Form 10-KSB of Kronos Advanced Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the small business issuer as of, and for, the periods presented in this
report;
4. The small business issuer's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act
Rules 12a-15(f) and 15d-15(f)) for the small business and have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the small business issuer, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report
is being prepared;
b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the small business
issuer's internal control over financial reporting that
occurred during the small business issuer's most recent fiscal
quarter (the small business issuer's fourth fiscal quarter in
the case of an annual report) that has materially affected, or
is reasonably likely to materially affect, the small business
issuer's internal control over financial reporting.
5. The small business issuer's other certifying officers and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the
audit committee of the small business issuer's board of directors (or
persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
small business issuer's ability to record, process, summarize
and report financial information; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the small
business issuer's internal control over financial reporting.
Date: September 29, 2003 By: /s/ Daniel R. Dwight
-------------------------
Daniel R. Dwight
Chief Executive Officer
EXHIBIT 31.2
OFFICER'S CERTIFICATE
PURSUANT TO SECTION 302
CERTIFICATION
I, Richard A. Papworth, certify that:
1. I have reviewed this Form 10-KSB of Kronos Advanced Technologies Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the small business issuer as of, and for, the periods presented in this
report;
4. The small business issuer's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act
Rules 12a-15(f) and 15d-15(f)) for the small business and have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the small business issuer, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report
is being prepared;
b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the small business
issuer's internal control over financial reporting that
occurred during the small business issuer's most recent fiscal
quarter (the small business issuer's fourth fiscal quarter in
the case of an annual report) that has materially affected, or
is reasonably likely to materially affect, the small business
issuer's internal control over financial reporting.
5. The small business issuer's other certifying officers and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the
audit committee of the small business issuer's board of directors (or
persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
small business issuer's ability to record, process, summarize
and report financial information; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the small
business issuer's internal control over financial reporting.
Date: September 29, 2003 By: /s/ Richard A. Papworth
----------------------------
Richard A. Papworth
Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Kronos Advanced Technologies, Inc. (the
"Company") on Form 10-KSB for the year ended June 30, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), each of
the undersigned, in the capacities and on the dates indicated below, hereby
certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that to his knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operation of the
Company.
A signed original of this written statement required by Section 906, or other
document authentications, acknowledging, or otherwise adopting the signature
that appears in typed form within the electronic version of this written
statement required by Section 906, has been provided to Kronos Advanced
Technologies, Inc. and will be retained by Kronos Advanced Technologies, Inc.
and furnished to the Securities and Exchange Commission or its staff upon
request.
/s/ Daniel R. Dwight
--------------------------------------
Daniel R. Dwight
President and Chief Executive Officer
/s/ Richard A. Papworth
--------------------------------------
Richard A. Papworth
Chief Financial Officer
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, 2004
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
---------------------------------------------- --------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 993-9965
-------------------------------------------------- -------------------
(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, 2004, there were 61,323,845 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 months ended March 31, 2004.
KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
March 31, 2004
(Unaudited) June 30, 2003
----------------- ---------------
Assets
Current Assets
Cash $ 274,671 $ 641,178
Accounts receivable, net 31,831 48,766
Prepaids 53,712 34,135
----------------- ---------------
Total Current Assets 360,214 724,078
----------------- ---------------
Net Property and Equipment 18,476 28,042
----------------- ---------------
Other Assets
Intangibles 2,388,710 2,487,473
----------------- ---------------
Total Other Assets 2,388,710 2,487,473
----------------- ---------------
Total Assets $ 2,767,400 $ 3,239,594
================= ===============
Liabilities and Shareholders' Deficit
Current Liabilities
Accrued expenses and payables
to directors and officers $ - $ 1,172,015
Accounts payable 154,067 218,338
Accrued expenses 267,333 174,677
Deferred revenue 3,218 133,751
Notes payable, current portion 657,960 185,670
----------------- ---------------
Total Current Liabilities 1,082,578 1,884,451
----------------- ---------------
Long Term Liabilities
Notes payable to officers and employees 1,063,266 -
Other notes payable 1,961,081 2,676,479
Discount on notes payable (701,608) (893,046)
----------------- ---------------
Total Long Term Liabilities 2,322,739 1,783,433
----------------- ---------------
Total Liabilities 3,405,317 3,667,884
----------------- ---------------
Redeemable Warrants - 805,300
----------------- ---------------
Shareholders' Deficit
Common stock, authorized 500,000,000
shares of $0.001 par value -
61,189,560 and 53,836,524 shares
outstanding on March 31, 2004 and
June 30, 2003, respectively 61,189 53,837
Capital in excess of par value 18,563,617 16,240,378
Accumulated deficit (19,262,723) (17,527,805)
----------------- ---------------
Total Shareholders' Deficit (637,917) (1,233,590)
----------------- ---------------
Total Liabilities and
Shareholders' Deficit $ 2,767,400 $ 3,239,594
================= ===============
The accompanying notes are an integral part of these financial statements.
KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended March 31, For the nine months ended March 31,
----------------------------------------- -----------------------------------------
2004 2003 2004 2003
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------------ ------------------- ------------------ -------------------
Sales $ 100,108 $ 139,737 $ 341,653 $ 457,899
Cost of sales 71,745 100,719 227,550 226,022
------------------ ------------------- ------------------ -------------------
Gross Profit 28,363 39,018 114,103 231,876
------------------ ------------------- ------------------ -------------------
Selling, General and
Administrative expenses
Compensation and benefits 213,805 143,642 626,352 409,376
Research and development 26,877 23,655 65,728 102,337
Professional services 85,755 351,511 203,039 1,038,439
Depreciation and
amortization 72,046 70,318 213,090 213,746
Facilities 23,897 25,065 68,607 70,278
Insurance 36,938 6,691 110,813 35,245
Other 58,873 61,966 162,372 110,471
------------------ ------------------- ------------------ -------------------
Selling, General and
Administrative expenses 518,191 682,848 1,450,001 1,979,891
------------------ ------------------- ------------------ -------------------
Net Operating Loss (489,828) (643,830) (1,335,898) (1,748,015)
Other Income / (expense) - 4 22,000 108,380
Interest Expense (124,598) (46,183) (421,020) (114,317)
------------------ ------------------- ------------------ -------------------
Net Loss Before Taxes (614,426) (690,008) (1,734,918) (1,753,952)
Provision for Taxes - - - -
------------------ ------------------- ------------------ -------------------
Net Loss $ (614,426) $ (690,008) $ (1,734,918) $ (1,753,952)
================== =================== ================== ===================
Basic Loss Per Share $ (0.01) $ (0.01) $ (0.03) $ (0.04)
================== =================== ================== ===================
Diluted Loss Per Share $ (0.01) $ (0.01) $ (0.03) $ (0.04)
================== =================== ================== ===================
Weighted average shares
outstanding 58,988,534 49,132,902 56,627,368 46,877,432
================== =================== ================== ===================
The accompanying notes are an integral part of these financial statements.
KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended March 31,
-----------------------------------
2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES (Unaudited) (Unaudited)
---------------- -----------------
Net loss from operations $ (1,734,918) $ (1,753,952)
Adjustments to reconcile net loss to net
cash (used in) provided by operations
Depreciation and amortization 213,090 213,746
Common stock issued for
compensation/services 148,430 112,281
Change In
Accounts receivable 16,935 200
Prepaid expenses and other assets (19,577) 64,576
Deferred revenue (130,533) 148,876
Accounts Payable (16,437) 583,376
Accrued Expenses and other liabilities 12,710 184,643
---------------- -----------------
Net cash used in Operations (1,510,300) (446,254)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment - (1,300)
Investment in patent protection (104,760) (1,500)
---------------- -----------------
Net cash used in Investing Activities (104,760) (2,800)
---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock 1,376,861 668,500
Proceeds from short-term borrowings - 218,889
Repayments of short-term borrowings (319,746) (446,290)
Accretion of note discount 191,438
---------------- -----------------
Net cash provided by Financing
Activities 1,248,553 441,099
---------------- -----------------
NET DECREASE IN CASH
(366,507) (7,955)
CASH
Beginning of period 641,178 21,510
---------------- -----------------
End of period $ 274,671 $ 13,555
================ =================
Supplemental schedule of non-cash investing
and financing activities:
Interest paid in cash $ 9,430 $ 866
================ =================
Debt satisfied with stock $ - $ 206,000
================ =================
Accounts payable/accrued expense converted
to notes payable $ 1,139,903 $ -
================ =================
The accompanying notes are an integral part of these financial statements.
KRONOS ADVANCED TECHNOLOGIES, INC
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ACCOUNTING MATTERS
The accompanying unaudited financial statements 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, 2004 and are not necessarily
indicative of the results that may be experienced for the fiscal year ending
June 30, 2004.
These 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 financial statements should be read in conjunction with the
Kronos Advanced Technologies, Inc. Form 10-KSB for the fiscal year ended June
30, 2003 filed on September 28, 2003 and Forms 10-QSB filed on November 14, 2003
and February 14, 2004.
RECENT ACCOUNTING PRONOUNCEMENTS. In May 2003, the Financial Accounting
Standards Board issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003 and, otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The effect of adopting SFAS No. 150 has been to reclassify
approximately $805,300 in Redeemable Warrants from a quasi-liability to the
equity section of the balance sheet.
In December 2003, the Financial Accounting Standards Board revised SFAS No. 132,
"Employers Disclosures about Pension and Other Postretirement Benefits." This
statement revises employer's disclosures about pension plans and other
postretirement benefit plans. It does not change the measurement or recognition
of those plans as required by SFAS Nos. 87, 88 or 106. The revision of SFAS No.
132 is effective for financial statements with fiscal years ending after
December 15, 2003. The Company believes that the adoption of the revised SFAS
No. 132 will have no significant impact on its financial statements.
NOTE 2 -- INCOME TAXES
The composition of deferred tax assets and the related tax effects at March 31,
2004 and June 30, 2003 are as follows:
March 31, 2004
(Unaudited) June 30, 2003
------------- -------------
Benefit from carryforward of capital and
net operating losses $ 4,598,857 $ 4,034,973
Other temporary differences 156,740 188,206
Less:
Valuation allowance (4,755,597) (4,223,179)
------------- -------------
Net deferred tax asset $ - $ -
============= =============
The other temporary differences shown above relate primarily to 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, 2004
(Unaudited) June 30,2003
--------------------------- ----------------------------
% of % of
Amount Pre-Tax Loss Amount Pre-Tax Loss
------------- ------------ -------------- ------------
Benefit for income tax at federal statutory rate $ 589,872 34.0% $ 941,746 34.0%
Benefit for income tax at state statutory rate 34,580 2.0% 55,208 2.0%
Non-deductible expenses (91,034) (5.3)% 319,977 11.7%
Increase in valuation allowance (533,418) (30.7)% (1,316,931) (47.7)%
------------- ------------ -------------- ------------
$ - 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, 2004, for federal income tax and alternative minimum tax reporting
purposes, the Company has approximately $10.3 million of unused Federal net
operating losses, $2.3 million of capital losses and $9.1 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 2023 and could be subject to limitations if significant ownership
changes occur in the Company.
NOTE 3 - 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(TM)technology. All other segments have been disposed of or
discontinued. For the nine months ended March 31, 2004, the Company operated
only in the U.S.
NOTE 4 - EARNINGS PER SHARE
Weighted average shares outstanding used in the earnings per share calculation
were 58,998,534 and 49,132,902 for the three months ended March 31, 2004 and
2003, respectively, and 56,627,368 and 46,877,432 for the nine months ended
March 31, 2004 and 2003, respectively.
As of March 31, 2004, there were outstanding options to purchase 13,216,782
shares of the Company's common stock and outstanding warrants to purchase
15,792,342 shares of the Company's common stock. These options and warrants have
been excluded from the earnings per share calculation as their effect is
anti-dilutive. As of March 31, 2003, there were outstanding options and warrants
to purchase 10,187,775 and 2,300,000 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 5 - NOTES PAYABLE
The Company had the following notes payable obligations at March 31, 2004 and
June 30, 2003:
March 31, 2004 June 30, 2003
-------------- -------------
Obligation to HoMedics (1) $ 2,400,000 $ 2,400,000
Obligations to officers and employees (2) 1,139,903 -
Obligations for purchase of intellectual property (3) 85,000 270,00
Obligations under capital leases (4) 57,404 72,424
Obligation to former director (5) - 84,275
Obligations to others (6) - 35,000
-------------- -------------
Total Notes Payable $ 3,682,307 $ 2,862,149
Current portions:
Obligation to HoMedics 471,487 -
Obligations for purchase of intellectual property 85,000 90,000
Obligations to officers and employees 76,637 -
Obligations under capital leases 24,836 20,670
Obligations to others - 35,000
Obligation to former director - 40,000
-------------- -------------
Total current portion $ 657,960 185,670
-------------- -------------
Total long term obligations net of
current portion $ 3,024,347 $ 2,676,479
============== =============
(1) This is a 5 year note bearing interest at 6%. No payments due until
three months after the first anniversary date. Quarterly payments of
principal and interest due thereafter.
(2) This represents notes to Daniel Dwight, Richard Tusing, Igor
Krichtafovitch, J. Alexander Chriss and Richard Papworth. The notes
bear interest at rates of 0% or 12%. One note, for $76,637, is due in
full on June 30, 2004. The remaining notes call for aggregate monthly
principal and interest payments for all notes of $20,000 for each month
in which the Company's beginning cash balance equals or exceeds
$200,000. Subject to certain conditions, including default, these notes
become payable in full. In the event of a debt or equity financing
other than from Fusion Capital, 20% of the proceeds derived from the
financing will be used to pay down the outstanding interest and
principal obligations. Any amounts remaining outstanding are due and
payable on December 31, 2006.
(3) This is a non-interest bearing obligation with quarterly payments of
$30,000 until paid in full.
(4) See Note 6 - Capital Leases
(5) This note was to a former officer and director and bears interest at
12%. The note called for quarterly payments of at least $10,000 with
the remaining amount, if any, due on March 31, 2004. The note was paid
in full on March 31, 2004.
(6) This was a non-interest bearing obligation with monthly payments of
$5,000 until it was paid in full in January 2004.
NOTE 6 - CAPITAL LEASES
The Company entered into a capital lease for the purpose of purchasing equipment
used in the research 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
Year ended March 31,
-----------------------------------
2005 36,337
2006 36,337
2007 859
---------
Total minimum lease payments 73,533
Less: Executory costs -
---------
Net minimum lease payments 73,533
Less: Imputed interest 16,129
---------
Present value of net minimum lease payments $ 57,404
=========
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,
2004, the Company paid $5,316 and $15,018, respectively, in principal and $3,769
and $12,234, respectively, in interest on capital leases.
NOTE 7 - CONSULTING AGREEMENTS
In October 2001, the Company entered into a 15-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 1, 2001 as the
share grant was non-forfeitable and fully vested on that date. The stock was
valued on that date at $0.28 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 is being amortized to Professional Fee Expense
ratably over the 15-month term of the contract. During the three and nine month
periods ending March 31, 2003, the Company recognized professional services
expenses of $7,000 and $47,000, respectively under this agreement. No expenses
were recorded under this agreement in the nine months ended March 31, 2004.
Effective March 11, 2002, the Company entered into a new agreement with the
Eagle Rock Group for a nearly one year period ending March 1, 2003. Pursuant to
the agreement, the Company issued a note for the outstanding balance of $120,000
due to The Eagle Rock Group, which has been paid in full. The Company granted
Eagle Rock a ten-year warrant granting them the right to purchase 900,000 shares
of our common stock. Two hundred and fifty thousand (250,000) warrant shares at
an exercise price of $0.42 and two hundred and fifty thousand (250,000) warrant
shares at an exercise price of $0. 205 (the closing price of the Company's
common stock on March 1, 2002) were earned over a 12-month period and four
hundred thousand (400,000) warrant shares at an exercise price of $0.145 were
earned upon securing of our Licensing Agreement with HoMedics. These warrants
are irrevocable and are fully vested. For the 400,000 warrants earned upon
securing the HoMedics License Agreement, the measurement date was October 22,
2002 as the warrants became fully vested and non-forfeitable on that date. The
value assigned to these 400,000 warrants is $56,800 and was determined using the
Black-Scholes option valuation model. The $56,800 was expensed in the period of
the measurement date. For the other 500,000 warrants, the measurement date was
March 1, 2002 as the warrants became fully vested and non-forfeitable on that
date. The value assigned to these warrants is $62,500 and was determined using
the Black-Scholes option valuation model. The 500,000 warrants were for general
consulting services for the twelve month period ending February 28, 2003. The
$62,500 was expensed ratably over the term of the consulting contract. Under
this contract, expenses of $10,417 and $98,464 were recorded for the three and
nine months ended March 31, 2003, respectively. No expenses were recorded under
this contract in the nine months ended March 31, 2004.
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 is being amortized to Professional Fee Expense
ratably over the ten month term of the contract. Under this contract, expenses
of $23,760 and $47,520 were recorded for the three and nine months ended March
31, 2004.
NOTE 8 - REALIZATION OF ASSETS
The accompanying 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 quarter ended March 31, 2004. 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 complete research and
development work, 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 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:
HoMedics Licensing Agreement. 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(TM) 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(TM) technology.
In November 2002, Kronos and HoMedics executed a Development Agreement to
provide Kronos with the financial resources believed necessary to complete
commercialization of the initial Kronos(TM)-based consumer product line. Kronos
is working with HoMedics' technicians, manufacturers, and marketing and sales
personnel to finalize the initial product line for sales and distribution.
HoMedics is focused on completion of manufacturing tooling and assembly line
processes, and product packaging, including prominent display of the "Kronos"
brand.
While HoMedics is managing production of the finished product, Kronos is
managing the production of our proprietary power supply and related circuitry.
Kronos' focus is twofold: First, Kronos is working to complete the technical
hardware and related power supplies for each of the products in the air
purification product line. Kronos has teamed with Flextronics to prepare the
power supply for cost effective mass production. Second, Kronos is finalizing
with HoMedics component and materials selection for the finished products. This
process combines HoMedics vendor selection process with Kronos' technical
expertise.
The initial term of the agreement is three and one half years 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.
US Navy SBIR. In November 2002, Kronos was awarded by the U. S. Navy a Small
Business Innovation Research Phase II contract for $580,000. The Phase II
contract (commercialization phase) is an extension of the Phase I and the Phase
I Option work that began in 2001. It is intended that the Kronos(TM) 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 shall develop, produce and install 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" will be designed to be easily adjustable to a variety of
parameters such as duct size, airflow requirements, and air quality. As of March
31, 2004, the U. S. Navy had provided Kronos with $276,000 in funding for this
effort under the Phase II contract.
HoMedics provided debt financing. In May 2003, Kronos entered into an agreement
with HoMedics, Inc. for $3.5 million in financing, including $3.4 million in
secured debt financing and $100,000 for the purchase of warrants. $2.5 million
was paid to Kronos upon execution of the agreement and $1.0 million will be paid
upon the start of production as defined in the Licensing Agreement for the
Kronos(TM)-based air purification product line to be marketed and distributed by
HoMedics. In conjunction with securing this financing, Kronos and HoMedics
agreed to negotiate the expansion of our relationship into additional
Kronos(TM)-based stand-alone consumer products, including fans, heaters,
humidifiers and dehumidifiers, as well as geographic expansion into Europe and
Asia.
US Army SBIR. On October 21, 2003, Kronos obtained an Award notice from the U.S.
Army for a Small Business Innovation Research Phase II contract. This is a
one-year, $369,000 contract to produce a prototype dehumidification device
utilizing Kronos (TM) technology. As of March 31, 2004 the Company has incurred
$10,000 of development costs relating to this contract. If the Company is
successful in producing a working prototype, an additional one-year contract
will be awarded for further development work.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
In May 2003, Kronos entered into an agreement with a strategic customer,
HoMedics, Inc., for $3.5 million in financing, including $3.4 million in secured
debt financing and $100,000 for the purchase of warrants. $2.5 million was paid
to Kronos upon execution of the agreement and $1.0 million will be paid upon
achieving production effectiveness as defined in the Licensing Agreement for the
Kronos-based air purification product line to be marketed and distributed by
HoMedics. There is a risk that we will not be successful in achieving production
effectiveness as defined in the Licensing Agreement. In exchange for providing
$3.4 million in debt financing and $100,000, Kronos provided HoMedics with two
warrants: (i) 6.7 million warrants (which equated to 10% of the then fully
diluted shares) fully vested at the time of funding and (ii) 6.7 million
warrants (which equated to 10% of the then fully diluted shares) which will vest
only if (1) Kronos does not prepay the entire amount of principal and interest
due under the Notes by November 8, 2005; (2) Kronos defaults under any of the
Investment Documents, or (3) Kronos does not earn, at any time after the date of
this Agreement but prior to November 8, 2005, revenues in an aggregate amount
equal to or greater than $3.5 million. The exercise price was set at the market
price at the time of closing ($0.10). HoMedics may not be diluted below 7.5% for
the first warrant (15% for both warrants) for any funds raised at less than
$0.20 per share, excluding options or shares issued to management, directors,
and consultants in the normal course of business. There are no anti-dilution
measures for funds raised at greater than $0.20 per share.
Employment Agreements
The Company entered into an Employment Agreement with its President and Chief
Executive Officer, Daniel Dwight, effective as of November 15, 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. 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 Employment Agreement provides for base cash compensation of $160,000 per
year.
NOTE 10 - SHAREHOLDERS' EQUITY
During the nine month period ending March 31, 2004 Fusion Capital purchased
approximately 6,554,453 shares for $1,376,861. In addition two current and one
former members of the Board of Directors received 438,493 shares valued at
$69,230 for past Board services rendered. As referenced in Note 7 above, 360,000
shares were issued to consultants for services valued at $79,200.
NOTE 11 - SUBSEQUENT EVENTS
In April 2004, Kronos received formal notification from the United States Patent
and Trademark Office indicating that its application entitled "Electrostatic
Fluid Accelerator for and a Method of Controlling Fluid" has been examined and
allowed for issuance as a U. S. patent (#6,727,657). The patent provides
protection for key aspects of Kronos' technology until late in 2021.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTORY STATEMENTS
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This filing contains forward-looking statements, including statements regarding,
among other things: (a) the growth strategies of Kronos Advanced Technologies
(the "Company" or "Kronos"); (b) anticipated trends in our Company's industry;
(c) our Company's future financing plans; and (d) our Company's ability to
obtain financing and continue operations. In addition, when used in this filing,
the words "believes," "anticipates," "intends," "in anticipation of," and
similar words are intended to identify certain forward-looking statements. These
forward-looking statements are based largely on our Company's expectations and
are subject to a number of risks and uncertainties, many of which are beyond our
Company's control. Actual results could differ materially from these
forward-looking statements as a result of changes in trends in the economy and
our Company's industry, reductions in the availability of financing and other
factors. 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.
Our Company does not undertake any obligation to publicly release the results of
any revision to these forward-looking statements that may be made to reflect any
future events or circumstances.
GENERAL
Kronos Advanced Technologies, Inc. is a high technology industrial company
focused on developing, marketing and selling products using the Company's
proprietary air movement and purification technology. Kronos is pursuing
commercialization of its patented 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(TM) technology combines high voltage electronics and electrodes. By
combining these technologies, a Kronos(TM)-based device can both move and clean
air without any moving parts. Kronos(TM) devices are versatile, energy- and
cost-efficient and capable of multiple design forms. As a result, Kronos(TM)
devices have the immediate potential to be used as a standalone product or to
replace a range of heating, ventilation and air conditioning ("HVAC") products
for residential usage to high efficiency particulate air ("HEPA") filtration
systems for operating and manufacturing clean rooms.
The proprietary Kronos(TM) technology involves the application of high voltage
management across paired electrical grids to create an ion exchange that moves
and purifies air. Kronos(TM) technology has numerous valuable characteristics.
It moves air and gases at high velocities while removing odors, smoke and
particulates and killing pathogens, including bacteria and mold. The technology
is cost-effective and is more energy efficient than current alternative fan and
filter (including HEPA filter and ultraviolet light based) technologies. To
date, no commercial products using the Kronos(TM) technology have been sold.
A number of the scientific claims of the Kronos(TM) 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(TM) 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, including numerous contaminants found in cigarette smoke.
Market Segmentation
Kronos' business development strategy is to sell and license the Kronos(TM)
technology to six distinct market segments: (1) air movement and purification
(health care, hospitality, residential and commercial facilities); (2) air
purification for unique spaces (cleanrooms, automotive, cruise ships and
airplanes); (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' initial focus is on the first three 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 through customer contracts which were executed over the
past twelve months. These contracts are described in more detail in the
Technology Application and Product Development section of this filing.
o Air Movement and Purification. Indoor air pollution, including
"sick building syndrome" and "building related illness," is
primarily caused by inadequate ventilation, chemical contaminants
from indoor and outdoor sources and biological contaminants. The
addressable air movement and purification segment is made up of
four principal applications: (1) health care, (2) hospitality, (3)
commercial and (4) residential. Kronos is seeking to leverage the
product development and funding resources of HoMedics, Inc.,
Kronos' strategic partner for consumer-based residential
applications, to develop standalone products for other air
movement and purification applications.
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(TM) 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 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(TM)-based air movers and purifiers for applications that
require these products to be embedded into ventilation systems to
address the needs of military personnel.
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(TM) 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(TM) device into a wall outlet to obtain air filtration for their
home, office or hotel room. Embedded applications of the Kronos(TM) 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 HoMedics Contract. 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(TM) 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(TM) technology. In November 2002, Kronos and
HoMedics executed a Development Agreement to provide Kronos with
the financial resources believed necessary to complete
commercialization of the initial Kronos(TM)-based consumer product
line.
Kronos is working with HoMedics' technicians, manufacturers, and
marketing and sales personnel to finalize the initial product line
for sales and distribution. HoMedics is focused on completion of
manufacturing tooling and assembly line processes, and product
packaging, including prominent display of the "Kronos" brand.
While HoMedics is managing production of the finished product,
Kronos is managing the production of our proprietary power supply
and related circuitry. Kronos' focus is twofold: First, Kronos is
working to complete the technical hardware and related power
supplies for each of the products in the air purification product
line. Kronos has teamed with Flextronics to prepare the power
supply for cost effective mass production. Second, Kronos is
finalizing with HoMedics component and materials selection for the
finished products. This process combines HoMedics vendor selection
process with Kronos' technical expertise. We believe the Company
has successfully completed the development of a Kronos-based
consumer standalone air purifier that will be an efficient, high
quality product which is cost effective and easy to operate. As a
result of this effort, The Company believes that we will obtain
production effectiveness as defined in the License Agreement with
HoMedics within six months.
The initial term of the agreement is three and one half years with
the option to extend the Licensing Agreement for six additional
years. Kronos was compensated through an initial royalty payment
and will receive ongoing quarterly royalty payments based on a
percentage of sales. HoMedics will pay minimum royalty payments of
at least $2 million during the initial three and a half year term
and on-going royalty payments to extend the agreement. Kronos will
retain the rights to all of its intellectual property.
HoMedics commitment includes funding a marketing and advertising
campaign to promote the Kronos(TM)-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.
Kronos is seeking to leverage its consumer product development
work with HoMedics to develop and produce our own commercial line
of standalone air purifiers. This commercial line of
Kronos(TM)-based air purifiers would attempt 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.
Embedded Platform
o U.S. Navy SBIR Contracts. 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(TM) 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.
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(TM) 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 will attempt to develop, produce and
install 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"
will be 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 initial twelve months of the contract,
Kronos has 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 to be built
under the Phase II contract. As of March 31, 2004, the U. S. Navy
had provided Kronos with $276,000 in funding for this effort under
the Phase II contract. The Company believes the remaining $304,000
will be realized by November 30, 2004.
As part of its air management system, Kronos intends to develop
and test an air filtration mechanism capable of performing to HEPA
quality standards. We believe that Kronos(TM) devices could
replace current HEPA filters with a permanent, easily cleaned,
low-cost solution. The U. S. Navy unique environment includes
shock exposure, vibration, Electromagnetic
Interference/Compatibility (EMI/EMC), and salt spray. Kronos(TM)
devices will be built and tested to meet specific Navy standards.
Testing shall include assessments for system performance,
including control techniques, noise levels, and acquisition and
lifecycle costs.
We believe that during the option portion of the contract,
Kronos(TM) 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(TM) technology can kill all or most airborne
pathogens regardless of their nature, genetic structure,
robustness, or method of delivery.
Kronos has begun the process for obtaining Phase III (production
phase) support for the Kronos(TM)-based advanced distributive air
management system being developed under Phase II. Phase III
contracts may be awarded prior to completion of Phase II contract
work. Kronos is working directly with Dawnbreaker, a U. S.
Government entity established for the purpose of supporting
companies seeking Phase III contracts.
o 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. On October 21, 2003, the U.S. Army awarded Kronos the
Small Business Innovation Research Phase II contract. The first
year of the contract is worth $369,000 with an Army option on the
second year worth $360,000. The contract is to develop Kronos'
proprietary Electrostatic Dehumidification Technology ("EDT").
Kronos initiated work under the Phase II contract in December
2003. The U.S. Army will provide Kronos with funding under the
terms of this contract and the Company believes the full value of
this contract will be realized by October 21, 2004.
The objective of the Phase II effort is to implement and optimize
dehumidification via Kronos electrostatic field technology. The
objective is to be accomplished by: (1) prototype design and
manufacturing, (2) prototype testing in the laboratory environment
and field demonstration, (3) analytical and numerical modeling of
Kronos' EDT process, and (4) project documentation and reporting
including interim and final reports. We anticipate the Kronos(TM)
devices manufactured under this contract will further demonstrate
the versatility of the Kronos(TM) technology to meet airflow,
system pressure and reduced humidity requirements for HVAC
systems. Dehumidification is essential to making HVAC systems more
energy efficient.
Kronos is seeking to leverage its military application development
work with the U. S. Navy and U. S. Army to develop and produce air
handlers and purifiers for commercial and industrial facilities. A
future potential commercial line of Kronos(TM)-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 Business Jet Manufacturer. 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(TM) 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 is working on
completing product design and development based on the customer's
specific product application requirements.
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(TM)-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.
Patents and Intellectual Property
Kronos has received notification that three 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.
In April 2004, Kronos received formal notification from the United States Patent
and Trademark Office indicating that its application entitled "Electrostatic
Fluid Accelerator for and a Method of Controlling Fluid" has been examined and
allowed for issuance as a U. S. patent (#6,727,657). The patent provides
protection for key aspects of Kronos' technology until late in 2021.
In December 2003, Kronos received formal notification from the United States
Patent and Trademark Office indicating that its application entitled "Method of
and Apparatus for Electrostatic Fluid Acceleration Control of a Fluid Flow" has
been examined and allowed for issuance as a U. S. patent (#6,664,741). The
patent provides protection for key aspects of Kronos' technology until late in
2020.
In January 2003, Kronos received formal notification from the United States
Patent and Trademark Office indicating that its application entitled
"Electrostatic Fluid Accelerator" has been examined and allowed for issuance as
a U. S. patent (#6,504,308). The patent provides protection for key aspects of
Kronos' technology until late in 2019.
In addition to the "Electrostatic Fluid Accelerator," "Method of and Apparatus
for Electrostatic Fluid Acceleration Control of a Fluid Flow" and "Electrostatic
Fluid Accelerator for and a Method of Controlling Fluid" patents, 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. There are a number of corresponding patent applications, which
have been filed and are pending outside of the United States.
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
Kronos' technology: consumer stand-alone devices, assisted care/skilled nursing
stand-alone devices, embedded devices in the hospitality industry and in
specialized military applications. Expenses/cash out flows in our projections
include sales and marketing, production, distribution, general and
administrative expenses, research and development expenses and capital
expenditures. These expenses are based on management estimates and have been
compared with industry norms (relative to sales) to determine their
reasonableness. We use the same key assumptions for our cash flow evaluation as
we do for internal budgeting, lenders and other third parties; therefore, they
are internally and externally consistent with financial statement and other
public and private disclosures. We are not aware of any negative implications
resulting from the projections used for purposes of evaluating the
appropriateness of the carrying value of these assets. If assets are considered
to be impaired, the impairment recognized is the amount by which the carrying
value of the assets exceeds the fair value of the assets. Useful lives and
related amortization or depreciation expense are based on our estimate of the
period that the assets will generate revenues or otherwise be used by Kronos.
Factors that would influence the likelihood of a material change in our reported
results include significant changes in the asset's ability to generate positive
cash flow, loss of legal ownership or title to the asset, a significant decline
in the economic and competitive environment on which the asset depends,
significant changes in our strategic business objectives, and utilization of the
asset.
Valuation of Deferred Income Taxes. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
The likelihood of a material change in our expected realization of these assets
is dependent on our ability to generate future taxable income, our ability to
deduct tax loss carryforwards against future taxable income, the effectiveness
of our tax planning and strategies among the various tax jurisdictions that we
operate in, and any significant changes in the tax treatment received on our
business combinations.
Revenue Recognition. We recognize revenue in accordance with Securities and
Exchange Commission Staff Bulletin 101 ("SAB 101"). 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 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.
RESULTS OF OPERATIONS
The Company's net loss from continuing operations for the three months ended
March 31, 2004 decreased by 11% to $614,000, compared with a net loss of
$690,000 for the corresponding period of the prior year. The decrease in the net
loss was primarily the result of a decrease in selling, general and
administrative expenses ($221,000), offset by an increase in interest expense
($94,000). The Company's net loss from continuing operations for the nine months
ended March 31, 2004 decreased by 1% to $1,735,000, compared with a net loss of
$1,754,000 for the corresponding period of the prior year. The decrease in the
net loss was primarily the result of a decrease in selling, general and
administrative expenses ($530,000), offset by an increase in interest expense
($307,000) and a decrease in gross profit ($117,000) and other income ($86,000).
REVENUE. Revenues are generated through sales of Kronos(TM) devices, and fees
earned from licensing the Kronos(TM) technology and providing technical services
to our customers at Kronos Air Technologies, Inc. Revenue for the three months
ended March 31, 2004 was $100,000. These revenues were primarily from our
HoMedics, U. S. Navy SBIR Phase II and U. S. Army SBIR Phase I Option and Phase
II contracts. Revenue of $140,000 recorded during the corresponding period of
the prior year was primarily from a licensing fee earned from our HoMedics
contract, as well as revenue earned from our U. S. Army and U. S. Navy SBIR
Phase I contracts. Revenue for the nine months ended March 31, 2004 was
$342,000. These revenues were primarily from our HoMedics, U. S. Navy SBIR Phase
II and U. S. Army SBIR Phase I and Phase I Option contracts. Revenue of $458,000
recorded during the corresponding period of the prior year was primarily from
our HoMedics, U. S. Navy and U. S. Army SBIR contracts.
COST OF SALES. Cost of sales for the three and nine months ended March 31, 2004
were $72,000 and $228,000, compared to $101,000 and $226,000 for the
corresponding periods of the prior year, respectively. Cost of sales in the
current year was primarily development costs associated with our HoMedics, U. S.
Navy SBIR and U. S. Army SBIR contracts. Prior year cost of sales related to
revenue from U. S. Army and U. S. Navy SBIR Phase I contracts. There was no cost
of sales associated with the licensing fees earned from our HoMedics license
agreement during the corresponding periods of the prior year.
GROSS PROFIT. Gross profit for the three and nine months ended March 31, 2004
was $28,000 and $114,000, compared to $39,000 and $231,000 for the corresponding
periods of the prior year, respectively. The decreases were primarily the result
of higher revenue in the corresponding periods of the prior year, including an
initial licensing fee earned from the HoMedics contract.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the three months ended March 31, 2004 decreased 24%
to $518,000 compared to $683,000 for the corresponding period of the prior year.
This $165,000 decrease was primarily the result of a decrease in professional
services ($266,000) offset by an increase in compensation and benefits
($70,000). The decrease in professional services was the result of a reduction
in legal and auditing ($216,000) and business consulting ($60,000) expenses.
Selling, general and administrative expenses for the nine months ended March 31,
2004 decreased 27% to $1,450,000 compared to $1,980,000 for the corresponding
period of the prior year. This $530,000 decrease was primarily the result of a
decrease in professional services ($835,000) offset by an increase in
compensation and benefits ($217,000). The decrease in professional services was
the result of a reduction in legal and auditing ($441,000) and business
consulting ($406,000) expenses. The increase in compensation and benefits
resulted from the Company converting our Chief Operating Officer from a
consulting agreement to a full time employment contract and the expansion of our
Research and Product Development team.
OTHER INCOME. Other income for the nine months ended March 31, 2004 was $22,000
and represented 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(TM) technology not included in the original acquisition of Kronos Air
Technologies, Inc. Other income for the nine months ended March 31, 2003 was
$108,000 and represented primarily the gain on the payment of a note payable
balance with stock.
INTEREST EXPENSE. Interest expenses for the three and nine months ended March
31, 2004 increased to $125,000 and $421,000 compared to $46,000 and $114,000 for
the corresponding periods of the prior year. The $79,000 and $307,000 increases,
respectively, were primarily the result of the increase in accrued interest
expenses from Company's debt financing obligation to HoMedics and to Kronos'
directors and officers.
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2004
Our total assets at March 31, 2004 and June 30, 2003 were $2.8 million and $3.2
million, respectively. Total assets at March 31, 2004 were comprised primarily
of $2.4 million of patents/intellectual property and $0.3 million of cash. Total
assets at June 30, 2003 were comprised primarily of $2.5 million of
patents/intellectual property and $0.6 million of cash. Total current assets at
March 31, 2004 and June 30, 2003 were $0.4 million and $0.7 million,
respectively, while total current liabilities for those same periods were $1.1
million and $1.9 million, respectively, creating a working capital deficit of
$0.7 million and $1.1 million at each respective period end. This 38% reduction
in the working capital deficit was primarily due to the conversion of $1.2
million of accrued expenses and payables to Company officers being converted to
long term notes payable, offset by an increase ($0.5 million) in the current
portion of notes payable and a decrease ($0.4 million) in current assets.
Shareholders' deficit as of March 31, 2004 and June 30, 2003 were $(0.6) million
and $(1.2) million, respectively, representing a decrease of $0.6 million. The
decrease in shareholders' deficit is primarily the result of a reclassification
of $0.8 million in redeemable warrants to equity based on FAS 150 and the sale
and issuance of $1.5 million of common stock, partially offset through incurring
a $1.7 million loss from continuing operations for the nine months ended March
31, 2004.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flow used on operating activities was $1.5 million for the nine months
ended March 31, 2004. We were able to satisfy our cash requirements for this
period through funding provided by HoMedics under the terms of our secured
financing from them, under the terms of our common stock purchase agreement with
Fusion pursuant to which the Company may sell shares of its common stock and our
revenue generating customer contracts with HoMedics, U. S. Navy and U. S. Army.
As of May 13, 2004, the Company had a cash balance of $78,000. We will require
additional funding to sustain our operations (see discussion contained within
the FACTORS AFFECTING KRONOS' BUSINESS AND PROSPECTS entitled "We will require
significant additional financing to sustain our operations and without it we
will not be able to continue operations").
On May 9, 2003, we closed on a $3.5 million secured financing from a strategic
customer, HoMedics, Inc. $2.5 million was advanced to Kronos upon execution of
the agreement and $1.0 million will be advanced upon the start of production for
the Kronos-based air purification product line to be marketed and distributed by
HoMedics.
Kronos SBIR contracts with the U. S. Military, including the U. S. Army Phase I
Option and Phase II and the U. S. Navy Phase II contracts, are potentially
worth, if all options are exercised, up to $1.5 million in product development
and testing support for Kronos Air Technologies. In November 2002, Kronos Air
Technologies was awarded by the U. S. Navy for a Small Business Innovation
Research Phase II contract worth $580,000, plus an option of $150,000. As of
March 31, 2004, Kronos has received $276,000 in funding under the U. S. Navy
SBIR Phase II contract. On November 7, 2003, the U. S. Army awarded Kronos a
Small Business Innovation Research Phase II contract. The first year of the
contract is worth $369,000 with an Army option on the second year worth
$360,000. To earn these future amounts, we will have to complete the required
work.
On June 19, 2001, we entered into a common stock purchase agreement with Fusion
Capital. Pursuant to this agreement, we have sold approximately 6 million shares
of our common stock and have received $1.3 million.
On August 12, 2002, we terminated our common stock purchase agreement dated June
19, 2001 and entered into a new common stock purchase agreement with Fusion
Capital. Pursuant to the 2002 common stock purchase agreement, Fusion Capital
has agreed to purchase on each trading day during the term of the agreement,
$10,000 of our common stock or an aggregate of $6.0 million. The $6.0 million of
our common stock can be purchased over a 30-month period, subject to a six-month
extension or earlier termination at our sole discretion and subject to certain
events. The purchase price of the shares of common stock will be equal to a
price based upon the future market price of our common stock without any fixed
discount to the then-current market price. Fusion Capital is obligated to
purchase shares under the agreement as long as the share price exceeds a floor
of $0.10. However, there can be no assurance of how much cash we will receive,
if any, under the common stock purchase agreement with Fusion Capital. Pursuant
to this agreement, we have sold approximately 12.1 million shares of our common
stock and have received $1.9 million.
We estimate that achievement of our business plan and the payment of interest
and principal on the Company's debt will require substantial additional funding.
We anticipate that the source of funding will be obtained pursuant to the senior
debt funding from HoMedics, Fusion Capital and/or the sale of additional equity
in our Company, cash flow generated from government grants and contracts, which
includes funding from the Small Business Innovation Research contracts sponsored
by the U. S. Navy and Army awarded to Kronos Air Technologies, and cash flow
generated from customer revenue. Pursuant to discussions with the companies that
we believe will licensing our technology, we anticipate generating cash flow in
our 2004 fiscal year from advance funding from these companies for production
development work. There are no assurances that these sources of funding will be
adequate to meet our cash flow needs.
GOING CONCERN OPINION
Our independent auditors have included an explanatory paragraph to their audit
opinions issued in connection with our 2003 and 2002 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 operating loss of $1.7 million for the nine months
ended March 31, 2004. We have incurred net losses from continuing operations of
$2.8 million for the fiscal years ended June 30, 2003. As a result, at March 31,
2004 and June 30, 2003, we had an accumulated deficit of $19.3 million and $17.5
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 secured 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(TM) technologies. No
assurances can be given that we will be able to successfully commercialize our
Kronos(TM) technologies or that we will ever be profitable.
We will require significant additional financing to sustain our operations and
without it we will not be able to continue operations.
At March 31, 2004 and June 30, 2003, we had a working capital deficit of $0.7
million and $1.2 million, respectively. The independent auditor's report for the
year ended June 30, 2003, 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, 2004 and for the fiscal year ended
June 30, 2003, we had an operating cash flow deficit of $0.7 million and $2.0
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 Fusion Capital were to be unavailable and if we are unable to commercialize
and sell the 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 Fusion common stock purchase
agreement, we may still need additional capital to fully implement our business,
operating and development plans. At March 31, 2004 and June 30, 2003, we had a
cash balance of $275,000 and $641,000, 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 common stock purchase agreement with Fusion Capital and any
other equity financing.
The sale of shares pursuant to our agreement with Fusion Capital, 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 common stock purchase agreement
with Fusion Capital in order to draw down the full amount. 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 agreement with Fusion 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(TM) 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(TM) 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.
In April 2004, Kronos received formal notification from the United States Patent
and Trademark Office indicating that its application entitled "Electrostatic
Fluid Accelerator for and a Method of Controlling Fluid" has been examined and
allowed for issuance as a U. S. patent (#6,727,657). The patent provides
protection for key aspects of Kronos' technology until late in 2021. In December
2003, Kronos received formal notification from the United States Patent and
Trademark Office indicating that its application entitled "Method of and
Apparatus for Electrostatic Fluid Acceleration Control of a Fluid Flow" has been
examined and allowed for issuance as a U. S. patent (#6,664,741). The patent
provides protection for key aspects of Kronos' technology until late in 2020. In
January 2003, Kronos received formal notification from the United States Patent
and Trademark Office indicating that its application entitled "Electrostatic
Fluid Accelerator" had been examined and allowed for issuance as a U. S. patent
(#6,504,308). The patent will provide protection for key aspects of Kronos'
technology until late in 2019. We have additional U. S. and foreign patent
applications pending. 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 $2.4 million as of March 31, 2004
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(TM) technology not included in the
original acquisition of Kronos Air Technologies, Inc. in May 2003. Intangible
assets comprise 86% of our total assets as of March 31, 2004. 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(TM) technology and
Kronos Air Technologies Chief Technology Officer, or the ability to create a
customer base for the sale or licensing of the Kronos(TM) technology. Should an
impairment occur, we would be required to recognize it in our financial
statements. A write-down of these intangible assets could have a material
adverse impact on our total assets, net worth and results of operations.
Our common stock is deemed to be "Penny Stock," subject to special 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:
o With a price of less than $5.00 per share;
o That are not traded on a "recognized" national exchange;
o 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
o 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(TM) 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 Rule 13a-14. This evaluation was done under
the supervision and with the participation of our Company's President and Chief
Financial Officer. Based upon that evaluation, they concluded that our Company's
disclosure controls and procedures are effective in gathering, analyzing and
disclosing information needed to satisfy our Company's disclosure obligations
under the Exchange Act.
Changes in Internal Controls. There were no significant changes in our Company's
internal controls or in other factors that could significantly affect those
controls since the most recent evaluation of such controls.
PART II
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In January 2004, we issued 438,493 shares of our common stock, valued at $0.16
per share at an aggregate value of $69,230, to three persons in exchange for
past services rendered as members of the Board of Directors.
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
5.1 Opinion re: Legality Incorporated by reference to
Exhibit 5.1 to Amendment No. 1
to Form S-1 filed on October 19,
2001
10.1 Employment Agreement, dated April 16, Incorporated by reference to
1999, by and between TSET, Inc. and Exhibit 10.1 to the Registration
Jeffrey D. Wilson Statement on Form S-1 filed on
August 7, 2001
10.2 Deal Outline, dated December 9, 1999, Incorporated by reference to
by and between TSET, Inc. and Atomic Exhibit 10.2 to the Registration
Soccer, USA, Ltd. Statement on Form S-1 filed on
August 7, 2001
10.3 Letter of Intent, dated December 27, Incorporated by reference to
1999, by and between TSET, Inc. and Exhibit 10.3 to the Registration
Electron Wind Technologies, Inc. Statement on Form S-1 filed on
August 7, 2001
10.17 Shareholders Agreement, dated September Incorporated by reference to
12, 2000, by and among TSET, Inc., Exhibit 10.17 to the
Bryan Holbrook and EdgeAudio.com, Inc. Registration Statement on Form
S-1 filed on August 7, 2001
10.18 Amendment to Agreement and Plan of Incorporated by reference to
Reorganization dated September 12, Exhibit 10.18 to the
2000, by and among TSET, Inc., Registration Statement on Form
EdgeAudio.com, Inc., LYNK Enterprises, S-1 filed on August 7, 2001
Inc., Robert Lightman, J. David Hogan,
Eric Alexander and Eterna
Internacional, S.A. de C.V.
10.19 Agreement Regarding Sale of Preferred Incorporated by reference to
Stock, dated November 1, 2000, by and Exhibit 10.19 to the
between EdgeAudio.com, Inc. and Bryan Registration Statement on Form
Holbrook S-1 filed on August 7, 2001
10.20 Amendment to Subcontract, dated Incorporated by reference to
December 14, 2000, by and between Bath Exhibit 10.20 to the
Iron Works and High Voltage Registration Statement on
Integrated Form S-1 filed on
August 7, 2001
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 Employment Agreement, dated March 18, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.22 to the
Alex Chriss Registration Statement on Form
S-1 filed on August 7, 2001
10.23 Stock Option Agreement, dated April 9, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.23 to the
Jeffrey D. Wilson Registration Statement on Form
S-1 filed on August 7, 2001
10.24 Stock Option Agreement, dated April 9, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.24 to the
Jeffrey D. Wilson Registration Statement on Form
S-1 filed on August 7, 2001
10.25 Stock Option Agreement, dated April 9, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.25 to the
Daniel R. Dwight Registration Statement on Form
S-1 filed on August 7, 2001
10.26 Stock Option Agreement, dated April 9, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.26 to the
Richard F. Tusing Registration Statement on Form
S-1 filed on August 7, 2001
10.27 Stock Option Agreement, dated April 9, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.27 to the
Charles D. Strang Registration Statement on Form
S-1 filed on August 7, 2001
10.28 Stock Option Agreement, dated April 9, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.28 to the
Richard A. Papworth Registration Statement on Form
S-1 filed on August 7, 2001
10.29 Stock Option Agreement, dated April 9, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.29 to the
Richard A. Papworth Registration Statement on Form
S-1 filed on August 7, 2001
10.30 Stock Option Agreement, dated April 9, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.30 to the
Erik W. Black Registration Statement on Form
S-1 filed on August 7, 2001
10.31 Stock Option Agreement, dated April 9, Incorporated by reference to
2001, by and between TSET, Inc. and J. Exhibit 10.31 to the
Alexander Chriss Registration Statement on Form
S-1 filed on August 7, 2001
10.32 Stock Option Agreement, dated April 9, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.32 to the
Charles H. Wellington Registration Statement on Form
S-1 filed on August 7, 2001
10.33 Stock Option Agreement, dated April 9, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.33 to the
Igor Krichtafovitch Registration Statement on Form
S-1 filed on August 7, 2001
10.34 Letter Agreement, dated April 10, 2001, Incorporated by reference to
by and between TSET, Inc. and Richard Exhibit 10.34 to the
A. Papworth Registration Statement on Form
S-1 filed on August 7, 2001
10.35 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
10.36 Finders Agreement, dated April 20, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.36 to the
Bernard Aronson, d/b/a Bolivar Registration Statement on Form
International Inc. S-1 filed on August 7, 2001
10.37 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
10.38 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
10.39 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
10.40 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
10.41 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
10.42 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
10.43 Stock Option Agreement, dated May 3, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.43 to the
Jeffrey D. Wilson Registration Statement on Form
S-1 filed on August 7, 2001
10.44 Common Stock Purchase Agreement, dated Incorporated by reference to
June 19, 2001, by and between TSET, Exhibit 10.44 to the
Inc. and Fusion Capital Fund II, LLC Registration Statement on Form
S-1 filed on August 7, 2001
10.45 Registration Rights Agreement, dated Incorporated by reference to
June 19, 2001, by and between TSET, Exhibit 10.45 to the
Inc. and Fusion Capital Fund II, LLC Registration Statement on Form
S-1 filed on August 7, 2001
10.46 Mutual Release and Settlement Incorporated by reference to
Agreement, dated July 7, 2001, by and Exhibit 10.46 to the
between TSET, Inc. and Foster & Price Registration Statement on Form
Ltd. S-1 filed on August 7, 2001
10.47 Letter Agreement, dated July 9, 2001, Incorporated by reference to
by and between TSET, Inc. and The Eagle Exhibit 10.47 to the
Rock Group, LLC Registration Statement on Form
S-1 filed on August 7, 2001
10.48 Finders Agreement, dated July 17, 2001, Incorporated by reference to
by and between TSET, Inc. and John S. Exhibit 10.48 to the
Bowles Registration Statement on Form
S-1 filed on August 7, 2001
10.49 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
10.50 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
10.51 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
10.52 Consulting Agreement, dated October 10, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.52 to the
Jeffrey D. Wilson Registrant's Form 10-K for the
year ended June 30, 2001 filed
on October 15, 2001
10.53 Consulting Agreement effective Incorporated by reference to
October 1, 2001, by and among TSET, Exhibit 10.53 to the Registrant's
Inc., Steven G. Martin and Joshua Form 10-Q for the quarterly
B. Scheinfeld period ended December 31, 2001
filed on November 19, 2001
10.54 Letter Agreement dated November 13, Incorporated by reference to
2001 by and between TSET, Inc. and Exhibit 10.54 to the Registrant's
Fusion Capital Fund II, LLC Form 10-Q for the quarterly
period ended December 31, 2001
filed on November 19, 2001
10.55 Employment Agreement, effective Incorporated by reference to
November 15, 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
10.56 Agreement, dated November 13, 2001 Incorporated by reference to Exhibit
by and between TSET, Inc. and Fusion 10.56 to the Registrant's Amendment
Capital Fund II, LLC No. 1 to Form S-1 filed on
August 2, 2002
10.57 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
10.58 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
10.59 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
10.60 Master Loan and Investment Incorporated by reference to
Agreement, dated May 9, 2003, the Registrant's 8-K filed on
by and among Kronos Advanced May 15, 2003
Technologies, Inc., Kronos Air
Technologies, Inc. and FKA
Distributing Co. d/b/a HoMedics,
Inc., a Michigan corporation
("HoMedics")
10.61 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
10.62 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
10.63 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
10.64 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
10.65 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
10.66 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
10.67 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
10.68 Promissory Note by and among Kronos Provided herewith
Advanced Technologies, Inc., and
Richard A. Papworth
10.69 Promissory Note by and among Kronos Provided herewith
Advanced Technologies, Inc., and
Daniel R. Dwight
10.70 Promissory Note by and among Kronos Provided herewith
Advanced Technologies, Inc., and
Richard F. Tusing
10.71 Promissory Note by and among Kronos Provided herewith
Advanced Technologies, Inc., and
Igor Krichtafovitch
10.72 Promissory Note by and among Kronos Provided herewith
Advanced Technologies, Inc., and
J. Alexander Chriss
EXHIBIT NO. DESCRIPTION LOCATION
--------------------------------------------------------------------------------
11.1 Statement re: Computation of Earnings Not applicable
12.1 Statement re: Computation of Ratios Not applicable
15.1 Letter re: Unaudited Interim Financial Not applicable
Information
16.1 Letter re: Change in Certifying Incorporated by
Accountant reference to the
Company's Form 8-K
filed on
August 22, 2003
21.1 Subsidiaries of the Registrant Not applicable
24.1 Power of Attorney Not applicable
27.1 Financial Data Schedule Not applicable
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
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 13, 2004 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
Exhibit 10.68
PROMISSORY NOTE
$76,637.00 February 24, 2004
Belmont, Massachusetts
FOR VALUE RECEIVED, KRONOS ADVANCED TECHNOLOGIES, INC., a Nevada
Corporation (the "Borrower"), hereby promises to pay to the order of Richard A.
Papworth (the "Lender"), at 14523 Westlake Drive, Lake Oswego, Oregon 97035, or
such other place or places as he may designate, in lawful money of the United
States of America, the principal sum of Seventy-Six Thousand Six Hundred
Thirty-Seven Dollars (US$76,637.00), together with accrued interest on the
unpaid principal balance hereof from the date of this Note.
Except as set forth below upon the occurrence of an Event of Default
(as defined below), interest shall not accrue on this Note. The entire principal
amount and all accrued interest shall be due and payable by the Borrower on June
30, 2004. Upon the occurrence of an Event of Default by the Borrower, all sums
outstanding under this Note shall thereupon immediately bear interest at the
rate of seventeen percent (17%) per annum. Any failure to make any payment due
under this Note within fifteen (15) days of when such payment is due shall be an
event of default ("Event of Default"). The Borrower does not intend or expect to
pay, nor does the Lender intend or expect to charge, collect or accept, any
interest greater than the highest legal rate of interest which may be charged
under any applicable law. Should the acceleration hereof or any charges made
hereunder result in the computation or earning of interest in excess of such
legal rate, any and all such excess shall be and the same is hereby waived by
the Lender, and any such excess shall be credited by the Lender to the principal
balance hereof.
If any amount hereunder is payable on a day which is a Saturday,
Sunday, legal holiday or a day on which banking institutions in New York, New
York, are authorized or required by law or by local proclamation to close, the
due date thereof shall be extended to the next succeeding business day and
interest thereon shall accrue during the period of such extension at the rate
provided herein.
At the option of the Lender, all sums advanced hereunder together with
accrued interest thereon shall become immediately due and payable, without
notice or demand, upon the commencement of any proceedings under any bankruptcy
laws of any jurisdiction or under any insolvency, reorganization, receivership,
readjustment of debt, dissolution or liquidation law or statute of any
jurisdiction now or hereafter in effect (whether in law or equity) is filed by
or against the Borrower or for all or any part of its property.
No delay or omission on the part of the Lender in the exercise of any
rights hereunder shall operate as a waiver of such right or of any other right
under this Note. A waiver by the Lender of any right or remedy conferred to it
hereunder on any one occasion shall not be construed as a bar to, or waiver of,
any such right or remedy as to any future occasion.
Principal may be prepaid in whole or in part at any time prior to the
maturity of this Note. There is no prepayment fee or penalty.
This Note shall be construed and enforced according to the laws of the
State of Nevada, excluding all principles of choice of laws, conflict of laws or
comity.
The terms of this Note may not be changed orally. This Note shall be
binding on the successors and assigns of the Borrower.
THE BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE
RIGHT WHICH IT MAY HAVE TO A TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE
OF ACTION BASED HEREON, OR ARISING OUT OF, UNDER OR IN ANY WAY CONNECTED WITH
THE DEALINGS BETWEEN THE LENDER AND THE BORROWER, THIS NOTE, OR ANY DOCUMENTS
EXECUTED IN CONNECTION HEREWITH, OR THE FINANCING CONTEMPLATED HEREBY, OR ANY
COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR
ACTIONS OF ANY PARTY HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR
HEREAFTER ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. THIS
PROVISION IS A MATERIAL INDUCEMENT FOR THE LENDER EXTENDING THE LOAN EVIDENCED
BY THIS NOTE.
KRONOS ADVANCED TECHNOLOGIES, INC.
By:
Name: Daniel R. Dwight
Title: President and CEO
Exhibit 10.69
PROMISSORY NOTE
$363,139.00 Belmont, MA
March 31, 2004 Due: December 31, 2006
For value received, the undersigned, Kronos Advanced Technologies,
Inc., a Nevada corporation, (the "Company") and Kronos Air Technologies, Inc.
("Kronos Air"), a Nevada corporation, (the Company and Kronos Air Technologies,
Inc. are hereinafter referred to jointly as "Borrowers") jointly and severally
promise to pay to the order of Daniel R. Dwight (hereinafter, "Lender") at
Lender's offices located at 464 Common Street, Suite 301, Belmont, MA 02478 or
at such other place as the holder of this Promissory Note may from time to time
designate the principal sum of three hundred forty-three thousand three hundred
eighty-nine Dollars ($363,139.00), together with interest thereon at the rate
hereinafter specified, and any and all other sums which may be due and owing to
the holder of this Promissory Note in accordance with the following terms:
1. Repayment. Commencing April 1, 2004 and provided that the
Borrowers have a combined minimum cash balance of two hundred thousand dollars
($200,000), the Borrowers shall repay the lender the last day of each month in
cash six thousand seven hundred and eighteen dollars ($6,718). In the event that
the Borrowers' combined cash balance is less than $200,000, then the $6,718
would be deferred to the next month and added to the payment for the next month
subject to the same minimum cash requirements. Commencing upon the earliest of
the following the Borrowers shall repay the Lender in full in cash for the
outstanding principal and accrued and unpaid interest:
a) In the event of a "Change of Control." For purposes of this Note,
a "Change in Control" shall have the same meaning as set forth in
the Employment Agreement between Lender and the Borrower;
b) In the event of an "Event of Default" (as defined below);
c) In the event that the Borrowers secure cumulative debt or equity
financing from a source other than Fusion Capital in the amount of
$5,000,000 or more; in the event that the Borrowers secure
cumulative debt or equity financing from a source other than
Fusion Capital between $1,000,000 and $5,000,000, then an amount
equal to seven percent (7%) of the net proceeds not to exceed the
total amount owed under this Promissory Note would be additionally
due and owing under this Promissory Note;
d) In the event the Lender is no longer employed by the Borrowers,
this Promissory Note is payable as follows:
i. if the Lender's employment is terminated by the Borrowers for
"Cause" as defined in the Lender's Employment Agreement with the
Borrowers, this Promissory Note will be due and payable in twelve
(12) equal monthly installments commencing thirty (30) days after
the date of termination;
ii. if the Lender's employment with the Borrowers is terminated for
any reason other than "Cause" as defined in the Lender's
Employment Agreement with the Borrowers, then this Promissory Note
will be due and payable in six (6) equal monthly installments
commencing thirty (30) days after the date of termination;
e) In no event shall the outstanding principal and all accrued
interest due under this Promissory Note be repaid to the Lender
later than December 31, 2006.
2. Interest Rate. Interest shall accrue at a rate of one percent
(1%) per month simple interest.
3. Calculation of Interest. Interest on this Note shall be calculated
on the basis of a thirty (30) day per month factor applied to the actual days on
which there exists an unpaid principal balance due under this Promissory Note.
4. Application of Payments. All payments made hereunder shall be
applied first to late penalties or other sums owing the holder, then to accrued
interest, and last to repayment of the principal amount of this Promissory Note.
5. Prepayment. Borrowers may prepay this Promissory Note in whole or in
part at any time or from time to time without penalty or additional interest,
provided that payments are applied as provided in Section 4 above.
6. Default and Remedies. Any failure to make any payment due under this
Promissory Note when due or upon the failure to comply with any other terms and
provisions of this Promissory Note which is not cured within thirty (30) days
after receipt of written notice from the Lender shall be an event of default
under this Promissory Note (an "Event of Default") and shall entitle Lender to
all of the rights and remedies specified herein or otherwise available under
applicable law, without any further notice, any further right to cure, or
obligation to make demand for payment. Upon an Event of Default, the entire
unpaid principal balance of this Promissory Note, together with all accrued but
unpaid interest and other sums due hereunder, shall immediately become due and
payable in full, in cash, and Lender shall have the right to bring suit for such
amount and to exercise any other remedies available.
7. Attorney's Fees. The prevailing party in any litigation shall be
entitled to recover all costs and expenses (including court costs and reasonable
attorneys' fees).
-2-
8. Extensions or Modifications. All parties to this Promissory Note,
whether maker, endorsor or guarantor, agree that the maturity of this Promissory
Note or any payment due hereunder may be extended at any time or from time to
time, this Promissory Note may be modified, and any Event of Default hereunder
may be waived without releasing, discharging or affecting the liability of
Borrowers or any other party not specifically released.
9. Venue. Borrowers agree that venue shall be proper in any state court
in the Commonwealth of Massachusetts in any action or proceeding brought to
construe, interpret or enforce this Promissory Note or any related document.
Borrowers waive the benefit of any and every statute, ordinance or rule of court
which may be lawfully waived conferring upon Borrowers any right or privilege,
stay of execution, or supplementary proceeding or other relief from the
immediate enforcement of a judgment or related proceedings on a judgment. The
Borrowers waive the benefit of any exemption laws. The authority granted herein
shall not be exhausted by any one or more exercises or be extinguished by any
judgment entered, and may be exercised on one or more occasions and in one or
more jurisdictions.
10. Waiver of Defenses; Setoff. The Borrowers agree that neither the
Lender nor any subsequent holder of this Promissory Note shall be subject to any
claims, defenses or setoffs which Borrowers may have against the Lender or any
prior holder, all of which are waived as to the Lender and any subsequent
holders, and all subsequent holders shall have the rights of a holder in due
course with respect to Borrowers even though the subsequent holder might not
qualify under applicable law absent this paragraph as a holder in due course.
11. Waiver of Protest. Borrowers and all parties to this Promissory
Note hereby waive presentment, protest and demand and notice of protest, demand,
dishonor and nonpayment of this Promissory Note.
12. Commercial Loan Transaction. Borrowers warrant and agree that this
Promissory Note is the result of a commercial loan transaction.
13. No Waiver. The delay or failure of any holder to exercise its
rights hereunder shall not be deemed a waiver thereof. No waiver of any rights
of holder shall be effective unless in writing and signed by the holder, and any
waiver of any right shall not apply to any other right or to such right in any
subsequent event or circumstance not specifically included in such waiver.
14. Notices. Any notices required hereunder shall be deemed properly
given if delivered in person or if mailed by registered or certified mail,
postage prepaid, return receipt requested to the parties at the following
addresses:
15. Headings. The section and subsection headings in this Promissory
Note are inserted for convenience only and shall not affect in any way the
meaning or interpretation of this Promissory Note.
-3-
If to Kronos Advanced Technologies, Inc. or Kronos Air Technologies, Inc. to:
Mr. Rich Tusing
Kronos Advanced Technologies, Inc
464 Common Street, Suite 301
Belmont, Massachusetts 02478
with a copy to:
Clayton E. Parker, Esq.
Kirkpatrick & Lockhart LLP
201 South Biscayne Boulevard, Suite 2000
Miami, Florida 33131
If to Lender:
Mr. Daniel R. Dwight
Kronos Advanced Technologies, Inc.
464 Common Street, Suite 301
Belmont, Massachusetts 02478
or to such other address as any party may hereafter give notice of to the other.
16. Choice of Law. This Promissory Note shall be deemed to be made in
the Commonwealth of Massachusetts and shall be governed, construed and enforced
in strict accordance with the laws of the Commonwealth of Massachusetts, without
reference to principles of conflict of laws.
SIGNATURES ON THE FOLLOWING PAGE
-4-
IN WITNESS WHEREOF, Borrowers have caused this Promissory Note to be
executed on their behalf by their respective duly authorized officers and their
respective corporate seals to be affixed and attested by their respective
Secretaries as of the day and year first above written.
ATTEST: KRONOS ADVANCED TECHNOLOGIES, INC.
By: [SEAL]
------------------------------------ --------------------------------
Secretary Name: Spencer I. Browne
Title: Director and Member Board of
Directors'
Compensation Committee
ATTEST: KRONOS AIR TECHNOLOGIES INC.
By: [SEAL]
------------------------------------ --------------------------------
Secretary Name: Richard A. Papworth
Title: Director Finance & Accounting.
-5-
Exhibit 10.70
PROMISSORY NOTE
$485,883.00 Belmont, MA
March 31, 2004 Due: December 31, 2006
For value received, the undersigned, Kronos Advanced Technologies,
Inc., a Nevada corporation, (the "Company") and Kronos Air Technologies, Inc.
("Kronos Air"), a Nevada corporation, (the Company and Kronos Air Technologies,
Inc. are hereinafter referred to jointly as "Borrowers") jointly and severally
promise to pay to the order of Richard F. Tusing (hereinafter, "Lender") at
Lender's offices located at 464 Common Street, Suite 301, Belmont, MA 02478 or
at such other place as the holder of this Promissory Note may from time to time
designate the principal sum of four hundred eight-five thousand eight hundred
and eighty-three dollars ($485,883.00), together with interest thereon at the
rate hereinafter specified, and any and all other sums which may be due and
owing to the holder of this Promissory Note in accordance with the following
terms:
1. Repayment. Commencing April 1, 2004 and provided that the
Borrowers have a combined minimum cash balance of two hundred thousand dollars
($200,000), the Borrowers shall repay the lender the last day of each month in
cash eight thousand nine hundred and eight-nine dollars ($8,989). In the event
that the Borrowers' combined cash balance is less than $200,000, then the $8,989
would be deferred to the next month and added to the payment for the next month
subject to the same minimum cash requirements. Commencing upon the earliest of
the following the Borrowers shall repay the Lender in full in cash for the
outstanding principal and accrued and unpaid interest:
a) In the event of a "Change of Control." For purposes of this Note,
a "Change in Control" shall have the same meaning as set forth in
the Employment Agreement between Lender and the Company;
b) In the event of an "Event of Default" (as defined below);
c) In the event that the Borrowers secure cumulative debt or equity
financing from a source other than Fusion Capital in the amount of
$5,000,000 or more; in the event that the Borrowers secure
cumulative debt or equity financing from a source other than
Fusion Capital between $1,000,000 and $5,000,000, then an amount
equal to nine percent (9%) of the net proceeds not to exceed the
total amount owed under this Promissory Note would be additionally
due and owing under this Promissory Note;
d) In the event the Lender is no longer employed by the Borrowers,
this Promissory Note is payable as follows:
i. if the Lender's employment is terminated by the Borrowers for
"Cause" as defined in the Lender's Employment Agreement with the
Company, this Promissory Note will be due and payable in twelve
(12) equal monthly installments commencing thirty (30) days after
the date of termination;
ii. if the Lender's employment with the Borrowers is terminated for
any reason other than "Cause" as defined in the Lender's
Employment Agreement with the Borrowers, then this Promissory Note
will be due and payable in six (6) equal monthly installments
commencing thirty (30) days after the date of termination;
e) In no event shall the outstanding principal and all accrued
interest due under this Promissory Note be repaid to the Lender
later than December 31, 2006.
2. Interest Rate. Interest shall accrue at a rate of one percent
(1%) per month simple interest.
3. Calculation of Interest. Interest on this Note shall be calculated
on the basis of a thirty (30) day per month factor applied to the actual days on
which there exists an unpaid principal balance due under this Promissory Note.
4. Application of Payments. All payments made hereunder shall be
applied first to late penalties or other sums owing the holder, then to accrued
interest, and last to repayment of the principal amount of this Promissory Note.
5. Prepayment. Borrowers may prepay this Promissory Note in whole or in
part at any time or from time to time without penalty or additional interest,
provided that payments are applied as provided in Section 4 above.
6. Default and Remedies. Any failure to make any payment due under this
Promissory Note when due or upon the failure to comply with any other terms and
provisions of this Promissory Note which is not cured within thirty (30) days
after receipt of written notice from the Lender shall be an event of default
under this Promissory Note (an "Event of Default") and shall entitle Lender to
all of the rights and remedies specified herein or otherwise available under
applicable law, without any further notice, any further right to cure, or
obligation to make demand for payment. Upon an Event of Default, the entire
unpaid principal balance of this Promissory Note, together with all accrued but
unpaid interest and other sums due hereunder, shall immediately become due and
payable in full, in cash, and Lender shall have the right to bring suit for such
amount and to exercise any other remedies available.
7. Attorney's Fees. The prevailing party in any litigation shall be
entitled to recover all costs and expenses (including court costs and reasonable
attorneys' fees).
-2-
8. Extensions or Modifications. All parties to this Promissory Note,
whether maker, endorsor or guarantor, agree that the maturity of this Promissory
Note or any payment due hereunder may be extended at any time or from time to
time, this Promissory Note may be modified, and any Event of Default hereunder
may be waived without releasing, discharging or affecting the liability of
Borrowers or any other party not specifically released.
9. Venue. Borrowers agree that venue shall be proper in any state court
in the State of Virginia in any action or proceeding brought to construe,
interpret or enforce this Promissory Note or any related document. Borrowers
waive the benefit of any and every statute, ordinance or rule of court which may
be lawfully waived conferring upon Borrowers any right or privilege, stay of
execution, or supplementary proceeding or other relief from the immediate
enforcement of a judgment or related proceedings on a judgment. The Borrowers
waive the benefit of any exemption laws. The authority granted herein shall not
be exhausted by any one or more exercises or be extinguished by any judgment
entered, and may be exercised on one or more occasions and in one or more
jurisdictions.
10. Waiver of Defenses; Setoff. The Borrowers agree that neither the
Lender nor any subsequent holder of this Promissory Note shall be subject to any
claims, defenses or setoffs which Borrowers may have against the Lender or any
prior holder, all of which are waived as to the Lender and any subsequent
holders, and all subsequent holders shall have the rights of a holder in due
course with respect to Borrowers even though the subsequent holder might not
qualify under applicable law absent this paragraph as a holder in due course.
11. Waiver of Protest. Borrowers and all parties to this Promissory
Note hereby waive presentment, protest and demand and notice of protest, demand,
dishonor and nonpayment of this Promissory Note.
12. Commercial Loan Transaction. Borrowers warrant and agree that this
Promissory Note is the result of a commercial loan transaction.
13. No Waiver. The delay or failure of any holder to exercise its
rights hereunder shall not be deemed a waiver thereof. No waiver of any rights
of holder shall be effective unless in writing and signed by the holder, and any
waiver of any right shall not apply to any other right or to such right in any
subsequent event or circumstance not specifically included in such waiver.
14. Notices. Any notices required hereunder shall be deemed properly
given if delivered in person or if mailed by registered or certified mail,
postage prepaid, return receipt requested to the parties at the following
addresses:
15. Headings. The section and subsection headings in this Promissory
Note are inserted for convenience only and shall not affect in any way the
meaning or interpretation of this Promissory Note.
-3-
If to Kronos Advanced Technologies, Inc. or Kronos Air Technologies, Inc. to:
Mr. Daniel R.
Dwight Kronos Advanced Technologies, Inc
464 Common Street, Suite 301
Belmont, MA 02478
with a copy to:
Clayton E. Parker, Esq.
Kirkpatrick & Lockhart LLP
201 South Biscayne Boulevard, Suite 2000
Miami, Florida 33131
If to Lender:
Mr. Richard F. Tusing
Kronos Advanced Technologies, Inc.
464 Common Street, Suite 301
Belmont, MA 02478
or to such other address as any party may hereafter give notice of to the other.
16. Choice of Law. This Promissory Note shall be deemed to be made in
the State of Virginia and shall be governed, construed and enforced in strict
accordance with the laws of the State of Virginia, without reference to
principles of conflict of laws.
SIGNATURES ON THE FOLLOWING PAGE
-4-
IN WITNESS WHEREOF, Borrowers have caused this Promissory Note to be executed on
their behalf by their respective duly authorized officers and their respective
corporate seals to be affixed and attested by their respective Secretaries as of
the day and year first above written.
ATTEST: KRONOS ADVANCED TECHNOLOGIES, INC.
By: [SEAL]
------------------------------------ --------------------------------
Secretary Name: Daniel R. Dwight
Title: President and CEO
ATTEST: KRONOS AIR TECHNOLOGIES, INC.
By: [SEAL]
------------------------------------ --------------------------------
Secretary Name: Daniel R. Dwight
Title: President and CEO
-5-
Exhibit 10.71
PROMISSORY NOTE
$90,363.00 Belmont, MA
March 31, 2004 Due: December 31, 2006
For value received, the undersigned, Kronos Advanced Technologies, Inc., a
Nevada corporation, (the "Company") and Kronos Air Technologies, Inc. ("Kronos
Air"), a Nevada corporation, (the Company and Kronos Air Technologies, Inc. are
hereinafter referred to jointly as "Borrowers") jointly and severally promise to
pay to the order of Igor Krichtafovitch (hereinafter, "Lender") at Lender's
offices located at 8551 154th Avenue, NE Redmond, WA 98052 at such other place
as the holder of this Promissory Note may from time to time designate the
principal sum of ninety thousand three hundred and sixty-three dollars
($90,363.00), together with interest thereon at the rate hereinafter specified,
and any and all other sums which may be due and owing to the holder of this
Promissory Note in accordance with the following terms:
1. Repayment. Commencing April 1, 2004 and provided that the
Borrowers have a combined minimum cash balance of two hundred thousand dollars
($200,000), the Borrowers shall repay the lender the last day of each month in
cash one thousand six hundred and seventy-two dollars ($1,672). In the event
that the Borrowers' combined cash balance is less than $200,000, then the $1,672
would be deferred to the next month and added to the payment for the next month
subject to the same minimum cash requirements. Commencing upon the earliest of
the following the Borrowers shall repay the Lender in full in cash for the
outstanding principal and accrued and unpaid interest:
a) In the event of a "Change of Control." For purposes of this Note,
a "Change in Control" shall have the same meaning as set forth in
the Employment Agreement between Lender and Kronos Air;
b) In the event of an "Event of Default" (as defined below);
c) In the event that the Borrowers secure cumulative debt or equity
financing from a source other than Fusion Capital in the amount of
$5,000,000 or more; in the event that the Borrowers secure
cumulative debt or equity financing from a source other than
Fusion Capital between $1,000,000 and $5,000,000, then an amount
equal to two percent (2%) of the net proceeds not to exceed the
total amount owed under this Promissory Note would be additionally
due and owing under this Promissory Note;
d) In the event the Lender is no longer employed by the Borrowers,
this Promissory Note is payable as follows:
i. i if the Lender's employment is terminated by the Borrowers for
"Cause" as defined in the Lender's Employment Agreement with
Kronos Air or in the event the Lender resigns from employment with
Kronos Air, this Promissory Note will be due and payable in twelve
(12) equal monthly installments commencing thirty (30) days after
the date of termination;
ii. if the Lender's employment with the Borrowers is terminated for
any reason other than "Cause" as defined in the Lender's
Employment Agreement with the Borrowers, then this Promissory Note
will be due and payable in six (6) equal monthly installments
commencing thirty (30) days after the date of termination;
e) In no event shall the outstanding principal and all accrued
interest due under this Promissory Note be repaid to the Lender
later than December 31, 2006.
2. Interest Rate. Interest shall accrue at a rate of one percent
(1%) per month simple interest.
3. Calculation of Interest. Interest on this Note shall be calculated
on the basis of a thirty (30) day per month factor applied to the actual days on
which there exists an unpaid principal balance due under this Promissory Note.
4. Application of Payments. All payments made hereunder shall be
applied first to late penalties or other sums owing the holder, then to accrued
interest, and last to repayment of the principal amount of this Promissory Note.
5. Prepayment. Borrowers may prepay this Promissory Note in whole or in
part at any time or from time to time without penalty or additional interest,
provided that payments are applied as provided in Section 4 above.
6. Default and Remedies. Any failure to make any payment due under this
Promissory Note when due or upon the failure to comply with any other terms and
provisions of this Promissory Note which is not cured within thirty (30) days
after receipt of written notice from the Lender shall be an event of default
under this Promissory Note (an "Event of Default") and shall entitle Lender to
all of the rights and remedies specified herein or otherwise available under
applicable law, without any further notice, any further right to cure, or
obligation to make demand for payment. Upon an Event of Default, the entire
unpaid principal balance of this Promissory Note, together with all accrued but
unpaid interest and other sums due hereunder, shall immediately become due and
payable in full, in cash, and Lender shall have the right to bring suit for such
amount and to exercise any other remedies available.
7. Attorney's Fees. The prevailing party in any litigation shall be
entitled to recover all costs and expenses (including court costs and reasonable
attorneys' fees).
-2-
8. Extensions or Modifications. All parties to this Promissory Note,
whether maker, endorsor or guarantor, agree that the maturity of this Promissory
Note or any payment due hereunder may be extended at any time or from time to
time, this Promissory Note may be modified, and any Event of Default hereunder
may be waived without releasing, discharging or affecting the liability of
Borrowers or any other party not specifically released.
9. Venue. Borrowers agree that venue shall be proper in any state court
in the State of Washington in any action or proceeding brought to construe,
interpret or enforce this Promissory Note or any related document. Borrowers
waive the benefit of any and every statute, ordinance or rule of court which may
be lawfully waived conferring upon Borrowers any right or privilege, stay of
execution, or supplementary proceeding or other relief from the immediate
enforcement of a judgment or related proceedings on a judgment. The Borrowers
waive the benefit of any exemption laws. The authority granted herein shall not
be exhausted by any one or more exercises or be extinguished by any judgment
entered, and may be exercised on one or more occasions and in one or more
jurisdictions.
10. Waiver of Defenses; Setoff. The Borrowers agree that neither the
Lender nor any subsequent holder of this Promissory Note shall be subject to any
claims, defenses or setoffs which Borrowers may have against the Lender or any
prior holder, all of which are waived as to the Lender and any subsequent
holders, and all subsequent holders shall have the rights of a holder in due
course with respect to Borrowers even though the subsequent holder might not
qualify under applicable law absent this paragraph as a holder in due course.
11. Waiver of Protest. Borrowers and all parties to this Promissory
Note hereby waive presentment, protest and demand and notice of protest, demand,
dishonor and nonpayment of this Promissory Note.
12. Commercial Loan Transaction. Borrowers warrant and agree that this
Promissory Note is the result of a commercial loan transaction.
13. No Waiver. The delay or failure of any holder to exercise its
rights hereunder shall not be deemed a waiver thereof. No waiver of any rights
of holder shall be effective unless in writing and signed by the holder, and any
waiver of any right shall not apply to any other right or to such right in any
subsequent event or circumstance not specifically included in such waiver.
14. Notices. Any notices required hereunder shall be deemed properly
given if delivered in person or if mailed by registered or certified mail,
postage prepaid, return receipt requested to the parties at the following
addresses:
15. Headings. The section and subsection headings in this Promissory
Note are inserted for convenience only and shall not affect in any way the
meaning or interpretation of this Promissory Note.
-3-
If to Kronos Advanced Technologies, Inc. or Kronos Air Technologies, Inc. to:
Mr. Daniel R. Dwight
Kronos Advanced Technologies, Inc
464 Common Street, Suite 301
Belmont, MA 02478
with a copy to:
Clayton E. Parker, Esq.
Kirkpatrick & Lockhart LLP
201 South Biscayne Boulevard, Suite 2000
Miami, Florida 33131
If to Lender:
Dr. Igor Krichtafovitch
Kronos Air Technologies, Inc.
8551 154th Avenue, NE
Redmond, WA 98052
or to such other address as any party may hereafter give notice of to the other.
16. Choice of Law. This Promissory Note shall be deemed to be made in
the State of Washington and shall be governed, construed and enforced in strict
accordance with the laws of the State of Washington, without reference to
principles of conflict of laws.
SIGNATURES ON THE FOLLOWING PAGE
-4-
IN WITNESS WHEREOF, Borrowers have caused this Promissory Note to be executed
on their behalf by their respective duly authorized officers and their
respective corporate seals to be affixed and attested by their respective
Secretaries as of the day and year first above written.
ATTEST: KRONOS ADVANCED TECHNOLOGIES, INC.
By: [SEAL]
------------------------------------ --------------------------------
Secretary Name: Daniel R. Dwight
Title: President and CEO
ATTEST: KRONOS AIR TECHNOLOGIES, INC.
By: [SEAL]
------------------------------------ --------------------------------
Secretary Name: Daniel R. Dwight
Title: President and CEO
-5-
Exhibit 10.72
PROMISSORY NOTE
$123,917.00 Belmont, MA
March 31, 2004 Due: December 31, 2006
For value received, the undersigned, Kronos Advanced Technologies,
Inc., a Nevada corporation, (the "Company") and Kronos Air Technologies, Inc.
("Kronos Air"), a Nevada corporation, (the Company and Kronos Air Technologies,
Inc. are hereinafter referred to jointly as "Borrowers") jointly and severally
promise to pay to the order of J. Alexander Chriss (hereinafter, "Lender") at
Lender's offices located at 464 Common Street, Suite 301, Belmont, MA 02478 or
at such other place as the holder of this Promissory Note may from time to time
designate the principal sum of one hundred twenty-three thousand nine hundred
and seventeen dollars ($123,917.00), together with interest thereon at the rate
hereinafter specified, and any and all other sums which may be due and owing to
the holder of this Promissory Note in accordance with the following terms:
1. Repayment. Commencing April 1, 2004 and provided that the
Borrowers have a combined minimum cash balance of two hundred thousand dollars
($200,000), the Borrowers shall repay the lender the last day of each month in
cash two thousand two hundred and ninety-two dollars ($2,292). In the event that
the Borrowers' combined cash balance is less than $200,000, then the $2,292
would be deferred to the next month and added to the payment for the next month
subject to the same minimum cash requirements. Commencing upon the earliest of
the following the Borrowers shall repay the Lender in full in cash for the
outstanding principal and accrued and unpaid interest:
a) In the event of a "Change of Control." For purposes of this Note,
a "Change in Control" shall have the same meaning as set forth in
the Employment Agreement between Lender and Kronos Air;
b) In the event of an "Event of Default" (as defined below);
c) In the event that the Borrowers secure cumulative debt or equity
financing from a source other than Fusion Capital in the amount of
$5,000,000 or more; in the event that the Borrowers secure
cumulative debt or equity financing from a source other than
Fusion Capital between $1,000,000 and $5,000,000, then an amount
equal to two percent (2%) of the net proceeds not to exceed the
total amount owed under this Promissory Note would be additionally
due and owing under this Promissory Note;
d) In the event the Lender is no longer employed by the Borrowers,
this Promissory Note is payable as follows:
i. if the Lender's employment is terminated by the Borrowers for
"Cause" as defined in the Lender's Employment Agreement with
Kronos Air or in the event the Lender resigns from employment with
Kronos Air, this Promissory Note will be due and payable in twelve
(12) equal monthly installments commencing thirty (30) days after
the date of termination;
ii. if the Lender's employment with the Borrowers is terminated for
any reason other than "Cause" as defined in the Lender's
Employment Agreement with the Borrowers, then this Promissory Note
will be due and payable in six (6) equal monthly installments
commencing thirty (30) days after the date of termination;
e) In no event shall the outstanding principal and all accrued
interest due under this Promissory Note be repaid to the Lender
later than December 31, 2006.
2. Interest Rate. Interest shall accrue at a rate of one percent
(1%) per month simple interest.
3. Calculation of Interest. Interest on this Note shall be calculated
on the basis of a thirty (30) day per month factor applied to the actual days on
which there exists an unpaid principal balance due under this Promissory Note.
4. Application of Payments. All payments made hereunder shall be
applied first to late penalties or other sums owing the holder, then to accrued
interest, and last to repayment of the principal amount of this Promissory Note.
5. Prepayment. Borrowers may prepay this Promissory Note in whole or in
part at any time or from time to time without penalty or additional interest,
provided that payments are applied as provided in Section 4 above.
6. Default and Remedies. Any failure to make any payment due under this
Promissory Note when due or upon the failure to comply with any other terms and
provisions of this Promissory Note which is not cured within thirty (30) days
after receipt of written notice from the Lender shall be an event of default
under this Promissory Note (an "Event of Default") and shall entitle Lender to
all of the rights and remedies specified herein or otherwise available under
applicable law, without any further notice, any further right to cure, or
obligation to make demand for payment. Upon an Event of Default, the entire
unpaid principal balance of this Promissory Note, together with all accrued but
unpaid interest and other sums due hereunder, shall immediately become due and
payable in full, in cash, and Lender shall have the right to bring suit for such
amount and to exercise any other remedies available.
7. Attorney's Fees. The prevailing party in any litigation shall be
entitled to recover all costs and expenses (including court costs and reasonable
attorneys' fees).
-2-
8. Extensions or Modifications. All parties to this Promissory Note,
whether maker, endorsor or guarantor, agree that the maturity of this Promissory
Note or any payment due hereunder may be extended at any time or from time to
time, this Promissory Note may be modified, and any Event of Default hereunder
may be waived without releasing, discharging or affecting the liability of
Borrowers or any other party not specifically released.
9. Venue. Borrowers agree that venue shall be proper in any state court
in the Commonwealth of Massachusetts in any action or proceeding brought to
construe, interpret or enforce this Promissory Note or any related document.
Borrowers waive the benefit of any and every statute, ordinance or rule of court
which may be lawfully waived conferring upon Borrowers any right or privilege,
stay of execution, or supplementary proceeding or other relief from the
immediate enforcement of a judgment or related proceedings on a judgment. The
Borrowers waive the benefit of any exemption laws. The authority granted herein
shall not be exhausted by any one or more exercises or be extinguished by any
judgment entered, and may be exercised on one or more occasions and in one or
more jurisdictions.
10. Waiver of Defenses; Setoff. The Borrowers agree that neither the
Lender nor any subsequent holder of this Promissory Note shall be subject to any
claims, defenses or setoffs which Borrowers may have against the Lender or any
prior holder, all of which are waived as to the Lender and any subsequent
holders, and all subsequent holders shall have the rights of a holder in due
course with respect to Borrowers even though the subsequent holder might not
qualify under applicable law absent this paragraph as a holder in due course.
11. Waiver of Protest. Borrowers and all parties to this Promissory
Note hereby waive presentment, protest and demand and notice of protest, demand,
dishonor and nonpayment of this Promissory Note.
12. Commercial Loan Transaction. Borrowers warrant and agree that this
Promissory Note is the result of a commercial loan transaction.
13. No Waiver. The delay or failure of any holder to exercise its
rights hereunder shall not be deemed a waiver thereof. No waiver of any rights
of holder shall be effective unless in writing and signed by the holder, and any
waiver of any right shall not apply to any other right or to such right in any
subsequent event or circumstance not specifically included in such waiver.
14. Notices. Any notices required hereunder shall be deemed properly
given if delivered in person or if mailed by registered or certified mail,
postage prepaid, return receipt requested to the parties at the following
addresses:
-3-
15. Headings. The section and subsection headings in this Promissory
Note are inserted for convenience only and shall not affect in any way the
meaning or interpretation of this Promissory Note.
If to Kronos Advanced Technologies, Inc. or Kronos Air Technologies, Inc. to:
Mr. Rich Tusing
Kronos Advanced Technologies, Inc
464 Common Street, Suite 301
Belmont, MA 02478
with a copy to:
Clayton E. Parker, Esq.
Kirkpatrick & Lockhart LLP
201 South Biscayne Boulevard, Suite 2000
Miami, Florida 33131
If to Lender:
Mr. J. Alexander Chriss
Kronos Advanced Technologies, Inc.
464 Common Street, Suite 301
Belmont, MA 02478
or to such other address as any party may hereafter give notice of to the other.
16. Choice of Law. This Promissory Note shall be deemed to be made in
the Commonwealth of Massachusetts and shall be governed, construed and enforced
in strict accordance with the laws of the Commonwealth of Massachusetts, without
reference to principles of conflict of laws.
SIGNATURES ON THE FOLLOWING PAGE
-4-
IN WITNESS WHEREOF, Borrowers have caused this Promissory Note to be executed on
their behalf by their respective duly authorized officers and their respective
corporate seals to be affixed and attested by their respective Secretaries as of
the day and year first above written.
ATTEST: KRONOS ADVANCED TECHNOLOGIES, INC.
By: [SEAL]
------------------------------------ --------------------------------
Secretary Name: Daniel R. Dwight
Title: President and CEO
ATTEST: KRONOS AIR TECHNOLOGIES, INC.
By: [SEAL]
------------------------------------ --------------------------------
Secretary Name: Daniel R. Dwight
Title: President and CEO
-5-
Exhibit 31.1
OFFICER'S CERTIFICATE
PURSUANT TO SECTION 302
CERTIFICATION
I, Daniel R. Dwight, certify that:
1. I have reviewed this Form 10-QSB of Kronos Advanced Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the small business
issuer as of, and for, the periods presented in this report;
4. The small business issuer's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 12a-15(f) and 15d-15(f))
for the small business and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the small business issuer,
including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report
is being prepared;
b)Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the small business issuer's disclosure
controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the small
business issuer's most recent fiscal quarter (the small business issuer's
fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the small business
issuer's internal control over financial reporting.
5. The small business issuer's other certifying officers and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the small business issuer's auditors and the audit committee of
the small business issuer's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the small business issuer's ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the small business issuer's
internal control over financial reporting.
Date: May 13, 2004 By: /s/ Daniel R. Dwight
----------------
Daniel R. Dwight
Chief Executive Officer
Exhibit 31.2
OFFICER'S CERTIFICATE
PURSUANT TO SECTION 302
CERTIFICATION
I, Daniel R. Dwight, certify that:
1. I have reviewed this Form 10-QSB of Kronos Advanced Technologies Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the small business
issuer as of, and for, the periods presented in this report;
4. The small business issuer's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 12a-15(f) and 15d-15(f))
for the small business and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the small business issuer,
including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report
is being prepared;
b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the small business issuer's disclosure
controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the small
business issuer's most recent fiscal quarter (the small business issuer's
fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the small business
issuer's internal control over financial reporting.
5. The small business issuer's other certifying officers and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the small business issuer's auditors and the audit committee of
the small business issuer's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the small business issuer's ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the small business issuer's
internal control over financial reporting.
Date: May 13, 2004 By: /s/ Daniel R. Dwight
----------------
Daniel R. Dwight
Acting Chief Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Kronos Advanced Technologies, Inc. (the
"Company") on Form 10-QSB for the nine months ended March 31, 2004 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), each
of the undersigned, in the capacities and on the dates indicated below, hereby
certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that to his knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operation of the Company.
A signed original of this written statement required by Section 906, or other
document authentications, acknowledging, or otherwise adopting the signature
that appears in typed form within the electronic version of this written
statement required by Section 906, has been provided to Kronos Advanced
Technologies, Inc. and will be retained by Kronos Advanced Technologies, Inc.
and furnished to the Securities and Exchange Commission or its staff upon
request.
/s/ Daniel R. Dwight
----------------
Daniel R. Dwight
President and Chief
Executive Officer
/s/ Daniel R. Dwight
----------------
Daniel R. Dwight
Acting Chief Financial Officer