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, 2004
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
------ ----------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
464 COMMON STREET, SUITE 301, BELMONT, MASSACHUSETTS 02478
(Address of Principal Executive Offices) (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 X No
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-KSB or any amendment to
this Form 10-KSB. ___
The aggregate market value of the voting common stock held by non-affiliates of
the Registrant on October 8, 2004, was $8,585,338 based on the average bid and
asked prices on such date of $0.14.
The Registrant had 61,323,845 shares of Common Stock, par value $0.001 per
share, outstanding on October 8, 2004.
PART I
ITEM 1. BUSINESS
GENERAL DESCRIPTION OF BUSINESS
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS. THIS FILING CONTAINS
FORWARD-LOOKING STATEMENTS, INCLUDING STATEMENTS REGARDING, AMONG OTHER
THINGS:(A) OUR PROJECTED SALES AND PROFITABILITY, (B) OUR GROWTH STRATEGIES, (C)
ANTICIPATED TRENDS IN OUR INDUSTRY, (D) OUR FUTURE FINANCING PLANS, (E) OUR
ANTICIPATED NEEDS FOR WORKING CAPITAL, AND (F) THE BENEFITS RELATED TO OUR
OWNERSHIP OF KRONOS AIR TECHNOLOGIES, INC. IN ADDITION, WHEN USED IN THIS
FILING, THE WORDS "BELIEVES," "ANTICIPATES," "INTENDS," "IN ANTICIPATION OF,"
"EXPECTS," AND SIMILAR WORDS ARE INTENDED TO IDENTIFY CERTAIN FORWARD-LOOKING
STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE BASED LARGELY ON OUR
EXPECTATIONS AND ARE SUBJECT TO A NUMBER OF RISKS AND UNCERTAINTIES, MANY OF
WHICH ARE BEYOND OUR CONTROL. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS, INCLUDING, WITHOUT
LIMITATION, THE RISKS OUTLINED UNDER "FACTORS AFFECTING KRONOS' BUSINESS AND
PROSPECTS" AND MATTERS DESCRIBED IN THIS FILING GENERALLY. IN LIGHT OF THESE
RISKS AND UNCERTAINTIES, THERE CAN BE NO ASSURANCE THAT THE FORWARD-LOOKING
STATEMENTS CONTAINED IN THIS FILING WILL IN FACT OCCUR. WE DO NOT UNDERTAKE ANY
OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY REVISIONS TO THESE
FORWARD-LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT ANY FUTURE EVENTS OR
CIRCUMSTANCES.
OUR COMPANY
We are a Nevada corporation. Our principal executive offices are located at 464
Common Street, Suite 301, Belmont, Massachusetts 02478. Our telephone number is
(617) 993-9965. The address of our website is www.kronosati.com. Information on
our website is not part of this filing.
CORPORATE HISTORY
Kronos Advanced Technologies, Inc. was originally incorporated under the laws of
the State of Utah on September 17, 1980 as Penguin Petroleum, Inc. Penguin
Petroleum Inc.'s stockholders approved a name change on October 6, 1982 to
Petroleum Corporation of America, Inc. On December 29, 1996, stockholders
approved a reorganization whereby they exchanged their stock on a one-for-one
basis with Technology Selection, Inc., a Nevada corporation. Technology
Selection, Inc.'s shares began trading on the Over-the-Counter Bulletin Board on
August 28, 1996 under the symbol "TSET." On November 19, 1998, Technology
Selection, Inc. changed its name to TSET, Inc. Effective January 12, 2001, we
began doing business as Kronos Advanced Technologies; and, as of January 18,
2002, we changed our ticker symbol to "KNOS." Our recent activities have been
focused on capitalizing on our investment in Kronos Air Technologies, Inc., a
wholly owned subsidiary of Kronos, and we have not, to date, generated
significant operating revenues. We have never been party to any bankruptcy,
receivership, or similar proceedings and, other than noted above, have not been
party to any material reclassification, merger, or consolidation not in the
ordinary course of our business.
BUSINESS STRATEGY
Kronos Advanced Technologies, Inc. is 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 products for
residential usage to high efficiency particulate air 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.
Although no commercial products using the Kronos(TM) technology have been sold
to date, in August 2004, the Company and its strategic consumer products
partner, HoMedics, initiated the transition to mass production of the
Kronos-based consumer standalone product line.
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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 gases, including numerous contaminants found in cigarette smoke.
Intertek, one of the global leaders for testing electrical and electronic
products, performed tobacco smoke elimination tests in accordance with ANSI/AHAM
AC-1-1988 standard entitled "American National Standard Method for Measuring
Performance of Portable Household Electric Cord-Connected Room Air Cleaners."
The test demonstrated a Clean Air Delivery Rate (CADR) for the Kronos air
purifier of over 300. These results place the Kronos(TM) device in one of the
highest categories of particulate cleaning for standalone devices.
Market Segmentation
Kronos' business development strategy is to sell and license the Kronos(TM)
technology to six distinct market segments: (1) air movement and purification
(residential, health care, hospitality, and commercial facilities); (2) air
purification for unique spaces (cleanrooms, airplanes, automotive, and cruise
ships); (3) specialized military (naval vessels, closed vehicles and mobile
facilities); (4) embedded cooling and cleaning (electronic devices and medical
equipment); (5) industrial scrubbing (produce storage and diesel and other
emissions); and (6) hazardous gas destruction (incineration and chemical
facilities).
Kronos' 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 specific customer contracts. 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) residential, (2) health care, (3) hospitality and (4)
commercial. Kronos is seeking to leverage the product development,
production and funding resources of HoMedics, Inc., Kronos' strategic
partner for consumer-based residential applications, to develop and
manufacturer 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 and the U.S. military to serve other closed environment
applications.
o Specialized Military. Military personnel face the worst of all possible
worlds: indoor air pollution, often in very confined spaces for
extended periods, combined with the threat of biological warfare,
nuclear fallout, and other foreign elements. We believe that the
military market segment offers Kronos a unique opportunity to leverage
the technical and funding resources of the U. S. military to expand
Kronos' ability to develop and produce Kronos(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.
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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 August 2004, the Company and HoMedics initiated the transition to
mass production of the Kronos-based consumer standalone product line.
Preparing to meet these goals entails the use of Kronos' technical
resources and HoMedics' product development and international
production expertise. Select third party vendors, including experts in
electronics, software and gas sensors, are integral resources in this
process. While HoMedics is managing production of the finished product,
Kronos is managing the production of our proprietary power supply and
related circuitry. Kronos' focus is twofold: First, Kronos is working
with Flextronics International USA, Inc. to preparing for mass
production the technical hardware and related power supplies for each
of the products in the air purification product line. Second, Kronos is
finalizing and testing with HoMedics component and materials selection
for the finished products. This process combines HoMedics vendor
selection process and international production expertise with Kronos'
technical expertise. We believe the Company has successfully completed
the development of a Kronos-based consumer standalone air purifier that
is an efficient, high quality product which is cost effective and easy
to operate.
The initial term of the agreement is three and one half years from the
initial sale of consumer air purification products by HoMedics, which
shall be no later than December 31, 2006, with the option to extend the
Licensing Agreement for six additional years. Kronos was compensated
through an initial royalty payment and will receive ongoing quarterly
royalty payments based on a percentage of sales. HoMedics will pay
minimum royalty payments of at least $2 million during the initial
three and a half year term and on-going royalty payments to extend the
agreement. Kronos will retain the rights to all of its intellectual
property.
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 market and sell 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. Kronos expects to
secure production of its own commercial line of standalone air
purifiers from HoMedics. By securing products from HoMedics, Kronos
believes it will provide the Company with a higher quality and more
cost effective air purification product line.
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 first eighteen 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
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under the Phase II contract. As of June 30, 2004, the U. S. Navy had
provided Kronos with $355,000 in funding for this effort under the
Phase II contract. The Company believes the remaining $225,000 will be
realized by November 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
intends to deliver its advanced distributive air management system
built under the U.S. Navy SBIR Phase II contract to Northrop Grumman
for testing and evaluation.
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. Kronos is working directly with
Dawnbreaker, a U. S. Government entity established for the purpose of
supporting companies seeking Phase III contracts, and Northrop Grumman.
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
October 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. As of June 30, 2004, the Company
incurred $76,684 in costs that will be reimbursed by the US Army in a
future period.
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 and expects
to deliver finished products by December 2004.
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
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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
Four Patents Allowed for Issuance: Kronos has received notification that four 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 October 2004, Kronos received a Notice of Allowance from the United States
Patent and Trademark Office indicating that its application entitled
"Electrostatic Fluid Accelerator" - Power Supply Management and Control has been
examined and allowed for issuance as a U. S. patent. Kronos expects that the U.
S. Patent will issue in due course. The patent provides protection for key
aspects of Kronos' technology until late in 2021.
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.
Additional Patent Applications: In addition to the "Electrostatic Fluid
Accelerator," "Method of and Apparatus for Electrostatic Fluid Acceleration
Control of a Fluid Flow," "Electrostatic Fluid Accelerator for and a Method of
Controlling Fluid" and "Electrostatic Fluid Accelerator" - Power Supply
Management and Control 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 mass production and marketing of the Kronos-based HoMedics standalone
consumer product line;
o adaptation of the HoMedics standalone consumer product line for
commercial applications including assisted living, nursing home and
healthcare facilities;
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.
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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 the HoMedics Secured Promissory Notes;
equity funding from the Cornell Capital Equity Investment Agreement, Equity
Backed Promissory Note and Standby Equity Distribution Agreement; 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 2005 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.
The loans have 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, which is accrued and unpaid as
of October 8, 2004, 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.
CORNELL CAPITAL TRANSACTION
In October 2004, Kronos entered into agreements for up to $20.5 million in
equity and equity backed debt financing from Cornell Capital Partners. Kronos
executed an Equity Investment Agreement to secure $500,000 through the sale of 5
million unregistered shares of Kronos common stock. Cornell Capital Partners
committed to provide $4 million pursuant to two Equity Backed Promissory Notes,
which will be funded as follows: $2 million upon filing a Registration Statement
and $2 million upon the SEC declaring the Registration Statement effective.
Kronos executed a Standby Equity Distribution Agreement for $20 million of
funding which Kronos has the option to drawdown against in increments as large
as $1.5 million over the next twenty four months. Kronos intends to use the
proceeds under the the Standby Equity Distribution Agreement to repay the Equity
Backed Promissory Notes. Kronos expects to receive $0.5 million in funding upon
the amendment of the HoMedics debt financing, $2 million over the next 45 - 90
days and an additional $2 million over the next 90 - 120 days under these
agreements.
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EMPLOYEES
On June 30, 2004, Kronos and its subsidiaries had eleven full-time employees. Of
the total number of full-time employees, one works in general management, seven
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. We incurred a net operating loss of $2.5 million for the year ended
June 30, 2004. We incurred a net loss from continuing operations of $2.8 million
for the fiscal year ended June 30, 2003. As a result, at June 30, 2004 and 2003,
we had an accumulated deficit of $20 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 June 30, 2004 and 2003, we had a working capital deficit of $1.2 million and
$1.2 million, respectively. The Report of Independent Registered Public
Accounting Firm for the year ended June 30, 2004, includes an explanatory
paragraph to their audit opinion stating that our recurring losses from
operations and working capital deficiency raise substantial doubt about our
ability to continue as a going concern. For the fiscal years ended June 30, 2004
and 2003, we had an operating cash flow deficit of $2.8 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 Cornell Capital Partners were to be unavailable and if we are unable to
commercialize and sell our products or technologies, we will need to secure
another source of funding in order to satisfy our working capital needs. Even if
we are able to access the funds available under the, U. S. Navy and U.S. Army
SBIR contracts, HoMedics senior debt agreement and / or the Cornell Capital
Equity Investment Agreement, Equity Backed Promissory Notes and Standby Equity
Distribution Agreement, we may still need additional capital to fully implement
our business, operating and development plans. At June 30, 2004 and 2003, we had
a cash balance of $69,000 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 Cornell Capital Equity Investment Agreement and Standby Equity
Distribution Agreement and any other equity financing.
The sale of shares pursuant to our agreement with Cornell Capital Partners, the
exercise of HoMedics stock warrants or any other future equity financing
transaction will have a dilutive impact on our stockholders. As a result, our
net income per share could decrease in future periods, and the market price of
our common stock could decline. In addition, the lower our stock price is, the
more shares of common stock we will have to issue under the Equity Investment
Agreement and Standby Equity Distribution Agreement with Cornell Capital. If our
stock price is lower, then our existing stockholders would experience greater
dilution. We cannot predict the actual number of shares of common stock that
will be issued pursuant to the Standby Equity Distribution Agreement with
Cornell Capital or any other future equity financing transaction, in part,
because the purchase price of the shares will fluctuate based on prevailing
market conditions and we do not know the exact amount of funds we will need.
8
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 $2.3 million as of June 30, 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 91% of our total assets as of June 30, 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.
9
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 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, 2005 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.
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 2004 and
2003 are presented as follows:
FISCAL YEAR 2004
HIGH LOW
First Quarter (July 2003 to September 2003) $0.450 $0.220
Second Quarter (October 2003 to December 2003) $0.370 $0.230
Third Quarter (January 2004 to March 2004) $0.330 $0.180
Fourth Quarter (April 2004 to June 2004) $0.255 $0.155
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
On October 8, 2004, the closing price of our common stock as reported on the
Over-the-Counter Bulletin Board was $0.14 per share. On October 8, 2004, we had
approximately 2,000 beneficial stockholders of our common stock and 61,323,845
shares of our common stock were issued and outstanding.
10
DIVIDENDS
We have not declared or paid dividends on our common stock during fiscal 2003 or
2004 and do not plan to declare or pay dividends on our common stock during
fiscal 2005. Our dividend practices are determined by our Board of Directors and
may be changed from time to time. We will base any issuance of dividends upon
our earnings (if any), financial condition, capital requirements, acquisition
strategies, and other factors considered important by our Board of Directors.
Nevada law and our Articles of Incorporation do not require our Board of
Directors to declare dividends on our common stock. We expect to retain any
earnings generated by our operations for the development and expansion of our
business and do not anticipate paying any dividends to our stockholders for the
foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
Except as otherwise noted, all of the following shares were issued and options
and warrants granted pursuant to the exemption provided for under Section 4(2)
of the Securities Act of 1933, as amended, as a "transaction not involving a
public offering." No commissions were paid, and no underwriter participated, in
connection with any of these transactions. Each such issuance was made pursuant
to individual contracts which are discrete from one another and are made only
with persons who were sophisticated in such transactions and who had knowledge
of and access to sufficient information about Kronos to make an informed
investment decision. Among this information was the fact that the securities
were restricted securities.
All investors participating in private placements for cash were "accredited
investors" within the meaning of Regulation D. In addition, we note that there
are several categories of recipients of these shares. These include investors
for cash, officers, directors, consultants, litigants and former 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 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.
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.
11
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 or were 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 or former 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 persons 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 or were 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.
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.
On October 31, 2003, we authorized the issuance of 360,000 shares of our common
stock pursuant to a consulting agreement, valued at $0.22 per share (the
fair-market value of our shares as of such date), at an aggregate value of
$79,200, to Fusion Capital, LLC, in exchange for consulting services.
In February 2004, we authorized the issuance of 438,493 shares of our common
stock, valued at $0.16 per share, at an aggregate value of $69,230, to Daniel
Dwight, Richard Papworth and Richard Tusing in exchange for Board of Director
services.
In March 2004, we granted options to acquire 2,126,522 options of our common
stock at an exercise price of $0.18 to Alexander Chriss, Daniel Dwight, Igor
Krichtafovitch, and Richard Tusing in exchange for the conversion of $1,063,261
in past due accounts payable into Promissory Notes due on December 31, 2006.
12
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. Among the
achievements of the Company over the past twelve months included the following:
|X| Technology and Intellectual Property:
- secured three additional U.S. patents for our proprietary technology
and made additional U.S. and international patent filings;
- expanded our technical, research and product development team.
|X| Business Development, Marketing and Sales:
- earned over $0.5 million in revenue from military, consumer and
commercial customer contracts;
- obtained Small Business Innovative Research Phase I Option and Phase
II contracts with the U.S. Army for applying the Kronos technology
for dehumidification.
|X| Operations:
- engaged Flextronics to design Kronos electronics for mass
production;
- completed development and testing of a viable consumer standalone
air purification product.
|X| Financial and Other:
- reduced our operating expenses by 28%, our third straight year of
operating cost reductions;
- recruited two new independent Board of Directors making our
independent Directors the majority of our Board.
Recent Developments
HoMedics Contract. In August 2004, the Company and HoMedics, Inc. began
preparing the Kronos-based consumer standalone product line for mass production.
Preparing to meet the goal of mass production entails the use of Kronos'
technical resources and HoMedics' product development and international
production expertise. Select third party vendors, including experts in
electronics, software and gas sensors, are integral resources in this process.
While HoMedics is managing production of the finished product, Kronos is
managing the production of our proprietary power supply and related circuitry.
Kronos' focus is twofold: First, Kronos is working with Flextronics
International USA, Inc. to preparing for mass production the technical hardware
and related power supplies for each of the products in the air purification
product line. Second, Kronos is finalizing and testing with HoMedics component
and materials selection for the finished products. This process combines
HoMedics vendor selection process and international production expertise with
Kronos' technical expertise. We believe the Company has successfully completed
the development of a Kronos-based consumer standalone air purifier that is an
efficient, high quality product which is cost effective and easy to operate.
U.S. 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 $580,000
of developmental funding, plus a U.S. Navy option for $150,000 in additional
funding. 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
eighteen 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, 2004, U. S. Navy had provided Kronos
with $355,000 in funding under the Phase II contract. The Company believes the
balance of the initial contract, $225,000, will be realized by November 2004.
13
U.S. Army SBIR Contracts. In October 2003, Kronos executed an agreement with the
U. S. Army for a Small Business Innovation Research Phase II contract worth
initially $369,000 for the first year with an Army option on the second year
worth $360,000. 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 manufacture 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. As of June 30, 2004, the Company
incurred $76,684 in costs that will be reimbursed by the US Army in a future
period.
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.
In October 2004, Kronos entered into agreements for up to $20.5 million in
equity and equity backed debt financing from Cornell Capital Partners. Kronos
executed an Equity Investment Agreement to secure $500,000 through the sale of 5
million unregistered shares of Kronos common stock. Cornell Capital Partners
committed to provide $4 million pursuant to two Equity Backed Promissory Notes,
which will be funded as follows: $2 million upon filing a Registration Statement
and $2 million upon the SEC declaring the Registration Statement effective.
Kronos executed a Standby Equity Distribution Agreement for $20 million of
funding which Kronos has the option to drawdown against in increments as large
as $1.5 million over the next twenty four months. Kronos intends to use the
proceeds under the Standby Equity Distribution Agreement to repay the Equity
Backed Promissory Notes. Kronos expects to receive $0.5 million in funding upon
the amendment of the HoMedics debt financing, $2 million over the next 45-90
days and an additional $2 million over the next 90-120 days under these
agreements.
14
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
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.
15
RESULTS OF OPERATIONS
Consolidated Statement of Operations For the Year Ended June 30, 2004.
Our net losses for each of the current years ended June 30, 2004 and June 30,
2003 were $2.5 million and $2.8 million, respectively. The decrease in the net
loss for the year ended June 30, 2004, as compared to the prior year, was
principally the result of a $0.8 million or 28% reduction in operating costs to
$2.1 million, partially offset by a $0.4 million or 233% increase in interest
expense to $0.6 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, 2004 were $533,000 compared with $559,000 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 and Phase II contracts and our
contract with a business jet manufacturer.
Cost of Sales. Cost of sales for the year ended June 30, 2004 was $379,000
compared with $314,000 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 and Phase II
contracts and contract with a business jet manufacturer.
Selling, General and Administrative Expenses. Selling, General and
Administrative expenses for the year ended June 30, 2004 decreased $0.8 million
from the prior year to $2.1 million. The decrease was principally the result of
a $801,000 reduction in professional services, and a $191,000 reduction in
compensation and benefits expenses off set by a $156,000 increase in other
selling, general and administrative expense. The reduction in professional
services was primarily the result of (i) a reduction in legal costs as a result
of the completion of the restructuring of the Company in 2003; (ii) a reduction
in accounting and auditing expenses as a result of the change in public
accountants in August 2003; and a reduction in consulting expenses as a result
of Richard F. Tusing, our Chief Operating Officer, as a result of terminating
his consulting agreements and entering into a new employment agreement with
Kronos in January 2003 and (iii) the completion of a twelve month consulting
agreement with the Eagle Rock Group, LLC in March 2003. The increase in other
selling, general and administrative expense was primarily the result of an
increase in Directors and Officers, general liability and product liability
insurance.
Consolidated Balance Sheet as of June 30, 2004
Our total assets at June 30, 2004 were $2.5 million compared with $3.2 million
at June 30, 2003. Total assets at June 30, 2004 and June 30, 2003 were comprised
primarily of $2.3 million and $2.5 million, respectively, of
patents/intellectual property. Total current assets at June 30, 2004 and 2002
were $238,000 and $724,000, respectively, while total current liabilities for
those same periods were $1.4 million and $1.9 million, respectively, creating a
working capital deficit of $1.2 million at each respective period end. This
working capital deficit is primarily due to the current portion of notes payable
due to HoMedics.
Shareholders' deficit as of June 30, 2004 and 2003 was ($1.4 million). The $2.5
million loss from continuing operations for the twelve months ended June 30,
2004 was offset by the sale and issuance, net of offering costs, of $1.5 million
of common stock and by the transfer $0.8 million of warrants from liabilities to
shareholders' deficit.
16
Consolidated Statement of Operations For the Year Ended June 30, 2003.
Our net losses for each of the fiscal years ended June 30, 2003 and June 30,
2002 were $2.8 million. Our net loss from continuing operations for the fiscal
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. June 30, 2003 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.
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.
17
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.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have relied principally on the sale of common stock and secured
debt to finance our operations.
In October 2004, Kronos entered into agreements for up to $20.5 million in
equity and equity backed debt financing from Cornell Capital Partners. Kronos
executed an Equity Investment Agreement to secure $500,000 through the sale of 5
million unregistered shares of Kronos common stock. Cornell Capital Partners
committed to provide $4 million pursuant to two Equity Backed Promissory Notes,
which will be funded as follows: $2 million upon filing a Registration Statement
and $2 million upon the SEC declaring the Registration Statement effective.
Kronos executed a Standby Equity Distribution Agreement for $20 million of
funding which Kronos has the option to drawdown against in increments as large
as $1.5 million over the next twenty four months. Kronos intends to use the
proceeds under the Standby Equity Distribution Agreement to repay the Equity
Backed Promissory Notes. Kronos expects to receive $0.5 million in funding upon
the amendment of the HoMedics debt financing, $2 million over the next 45 - 90
days and an additional $2 million over the next 90 - 120 days under these
agreements.
In May 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.
In May 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.
18
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, 2004, Kronos has received $355,000 in
funding under the U. S. Navy SBIR Phase II contract. In October 2003, Kronos Air
Technologies obtained award notice from the U. S. Army for a SBIR 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"). As of June 30, 2004, the
Company incurred $76,684 in costs that will be reimbursed by the US Army in a
future period.
Net cash flow used in operating activities was $2.8 million for the year ended
June 30, 2004. 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.
In June 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. In August 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 this
second common stock purchase 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 will require substantial
additional funding. We anticipate that the source of funding will be obtained
pursuant to senior debt funding from the HoMedics Secured Promissory Notes;
equity funding from the Cornell Capital Equity Investment Agreement, Equity
Backed Promissory Note and Standby Equity Distribution Agreement;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 2005 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 Report of Independent Registered Public Accounting Firm includes an
explanatory paragraph to their audit opinions issued in connection with our 2004
and 2003 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.
19
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, 2004
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets as of June 30, 2004 and June 30, 2003 F-3
Consolidated Statements of Operations for the years ended June 30,
2004 and 2003 F-4
Consolidated Statements of Cash Flows for the years ended June 30,
2004 and 2003 F-5
Consolidated Statement of Changes of Shareholders' Deficit for years
ended June 30, 2004 and 2003 F-6
Notes to Consolidated Financial Statements F-7 to F-17
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Kronos Advanced Technologies, Inc.
We have audited the accompanying consolidated balance sheet of Kronos Advanced
Technologies, Inc. and Subsidiary as of June 30, 2004 and 2003 and the related
consolidated statements of operations, shareholders' deficit and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Kronos Advanced
Technologies, Inc. and Subsidiary as of June 30, 2004 and 2003 and the results
of their operations and their cash flows for the years then ended, in conformity
with U. S. generally accepted accounting principles generally accepted in the
United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has incurred
significant losses and has a working capital deficiency as more fully described
in Note 3. These issues among others raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 3. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Sherb & Co., LLP
---------------------------------
Sherb & Co., LLP
Certified Public Accountants
New York, New York
September 27, 2004
F - 2
KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
June 30, June 30,
2004 2003
-------------------- --------------------
Assets
Current Assets
Cash $ 69,063 $ 641,178
Accounts receivable, net 97,544 48,766
Other Current Assets 71,050 34,135
-------------------- --------------------
Total Current Assets 237,657 724,079
-------------------- --------------------
Property and Equipment 46,011 74,673
Less: Accumulated Depreciation (39,719) (46,631)
-------------------- --------------------
Net Property and Equipment 6,292 28,042
-------------------- --------------------
Other Assets
Intangibles 2,253,029 2,487,473
-------------------- --------------------
Total Other Assets 2,253,029 2,487,473
-------------------- --------------------
Total Assets $ 2,496,978 $ 3,239,594
==================== ====================
Liabilities and Shareholders' Deficit
Current Liabilities
Accrued expenses and payables to
directors and officers $ 36,258 $ 1,172,015
Accounts payable 272,544 218,338
Accrued expenses 312,346 174,677
Deferred revenue 3,218 133,751
Notes payable, current portion 798,926 185,670
-------------------- --------------------
Total Current Liabilities 1,423,292 1,884,451
-------------------- --------------------
Long Term Liabilities
Notes payable
Notes payable to directors &
officers 1,063,266 -
Other notes payable 1,983,038 2,676,479
Discount on notes payable (589,261) (893,046)
-------------------- --------------------
Total Long Term Liabilities 2,457,044 1,783,433
-------------------- --------------------
Total Liabilities 3,880,336 3,667,884
-------------------- --------------------
Redeemable Warrants - 805,300
-------------------- --------------------
Shareholders' Deficit
Common stock, authorized 500,000,000
shares of $.001 par value
Issued and outstanding - 61,323,845
and 53,836,907, respectively 61,323 53,837
Capital in excess of par value 18,578,018 16,240,378
Accumulated deficit (20,022,700) (17,527,805)
-------------------- --------------------
Total Shareholders' Deficit (1,383,359) (1,233,590)
-------------------- --------------------
Total Liabilities and Shareholders' Deficit $ 2,496,978 $ 3,239,594
==================== ====================
The accompanying notes are an integral part of these financial statements.
F - 3
KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the year ended June 30,
---------------------------------
2004 2003
---------------- ----------------
Sales $ 533,220 $ 558,590
Cost of sales 379,331 314,496
---------------- ----------------
Gross Profit 153,889 244,094
---------------- ----------------
Selling, General and Administrative expenses
Compensation and benefits 840,205 1,031,375
Research and development 60,517 116,251
Professional services 355,454 1,156,903
Depreciation and amortization 360,955 284,647
Facilities 88,914 96,579
Other selling general and administrative expenses 382,907 226,716
---------------- ----------------
Total Selling, General and Administrative expenses 2,088,952 2,912,471
---------------- ----------------
Net Operating Loss (1,935,065) (2,668,377)
Other Income 56,000 83,380
Interest Expense (615,831) (184,845)
---------------- ----------------
Net Loss $ (2,494,896) $ (2,769,842)
================ ================
Basic Loss Per Share:
Net Loss $ (0.04) $ (0.06)
================ ================
Diluted Loss Per Share:
Net Loss $ (0.04) $ (0.06)
================ ================
Weighted Average Shares Outstanding 57,760,785 48,258,340
================ ================
The accompanying notes are an integral part of these financial statements.
F - 4
KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
Common Stock Capital in Deferred Total
--------------------- Excess of Par Accumulated equity Shareholders'
Shares Amount Value Deficit compensation Deficit
----------- ---------- ------------- -------------- ------------ -------------
BALANCE at June 30, 2002 43,937,907 43,938 14,371,113 (14,757,963) (41,668) (384,580)
Shares issued for cash 6,593,084 6,593 724,875 - - 731,468
Shares issued for debt reduction 306,000 306 33,854 - - 34,160
Amortization of deferred equity compensation - 41,668 41,668
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 for consulting services 209,533 210 34,489 - - 34,699
Options issued for consulting services - - 28,426 - - 28,426
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)
----------- ---------- ------------- -------------- ------------ -------------
Stock options issued for Board Service - - 19,179 - - 19,179
Shares issued for Board services 438,493 438 68,792 - - 69,230
Shares issued for cash 6,705,576 6,705 1,365,513 - - 1,372,218
Reclassification of redeemable warrants - - 805,300 - - 805,300
Shares issued for consulting services 360,000 360 78,840 - - 79,200
Adjustment to stock (16,748) (17) 17 - - -
Net loss for the year ended June 30, 2004 - - - (2,494,896) - (2,494,896)
----------- ---------- ------------- -------------- ------------ -------------
BALANCE at June 30, 2004 61,323,845 $ 61,323 $ 18,578,019 $ (20,022,701)$ - $ (1,383,359)
----------- ---------- ------------- -------------- ------------ -------------
The accompanying notes are an integral part of this financial statement
F - 5
KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended June 30,
------------------------------------------
2004 2003
-------------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (2,494,896) $ (2,769,842)
Adjustments to reconcile net loss to net cash
used in by operations
Depreciation and amortization 360,955 284,647
Accretion of note discount 303,786 -
Common stock issued for compensation/services 167,609 119,925
Change In:
Accounts receivable (48,778) (48,066)
Prepaid expenses and other assets (36,916) 66,894
Deferred revenue (130,533) 133,751
Accounts payable (596,666) (211,589)
Accrued expenses and other liabilities (347,215) 411,059
-------------------- ------------------
Net cash used in Operating Activities (2,822,654) (2,013,221)
-------------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment - (11,950)
Investment in patent protection (104,760) (1,500)
-------------------- ------------------
Net cash used in Investing Activities (104,760) (13,450)
-------------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock 1,372,218 723,000
Proceeds from short-term borrowings 200,000 283,889
Repayments of short-term borrowings (355,396) (760,550)
Proceeds from long-term borrowings 1,138,478 2,400,000
-------------------- ------------------
Net cash provided by Financing Activities 2,355,300 2,646,339
-------------------- ------------------
NET (DECREASE) INCREASE IN CASH (572,114) 619,668
CASH
Beginning of year 641,178 21,510
-------------------- ------------------
End of year $ 69,064 $ 641,178
==================== ==================
Supplemental schedule of non-cash investing and financing
activities:
Interest paid in cash $ 15,667 $ -
Non-cash investing and financing activities:
Debt satisfied with stock $ - $ 206,000
Accounts payable/accrued expenses converted to notes payable $ 1,139,903 $ -
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 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 2003
financial statements in order to conform to the 2004 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, 2004, we had
only one subsidiary, Kronos Air Technologies, Inc.
Use of Estimates. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the financial statements and the reported amounts of
revenues and expenses during the periods. Actual results could differ from those
estimates.
Concentrations of Credit Risk. Financial instruments which can potentially
subject the Company to concentrations of credit risk consist principally of
trade receivables. The Company manages its exposure to risk through ongoing
credit evaluations of its customers and generally does not require collateral.
The Company maintains an allowance for doubtful accounts for potential losses
and does not believe it is exposed to concentrations of credit risk that are
likely to have a material adverse impact on the Company's financial position or
results of operations.
Cash and Cash Equivalents. The Company considers all highly liquid short-term
investments, with a remaining maturity of 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, 2004 and June
30, 2003. The Company charges off accounts receivable against the allowance for
losses when an account is deemed to be uncollectable.
Property and Equipment. Property and equipment are recorded at cost.
Depreciation is provided over the estimated useful lives of the assets, which
range from three to seven years. Expenditures for major renewals and betterments
that extend the original estimated economic useful lives of the applicable
assets are capitalized. Expenditures for normal repairs and maintenance are
charged to expense as incurred. The cost and related accumulated depreciation of
assets sold or otherwise disposed of are removed from the accounts, and any gain
or loss is included in operations.
F - 7
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
sheet. Sales are reported net of applicable cash discounts and allowances for
returns. Revenue from government grants for research and development purposes is
recognized as revenue as long as the Company determines that the government will
not be the sole or principal expected ultimate customer for the research and
development activity or the products resulting from the research and development
activity. Otherwise, such revenue is recorded as an offset to research and
development expenses in accordance with the Audit and Accounting Guide, Audits
of Federal Government Contractors. In either case, the revenue or expense offset
is not recognized until the grant funding is invoiced and any customer
acceptance provisions are met or lapse.
Stock, Options and Warrants Issued for Services. Issuances of shares of the
Company's stock to employees or third-parties for compensation or services is
valued using the closing market price on the date of grant for employees and the
date services are completed for non-employees. Issuances of options and warrants
of the Companies stock are valued using the Black-Scholes option model.
Stock Options. Statement of Financial Accounting Standards No. 148 "Accounting
for Stock-Based Compensation-Transition and Disclosure, an Amendment of FASB
Statement No. 123," amends the disclosure requirements of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), to require more prominent disclosures in both annual and interim
financial statements regarding the method of accounting for stock-based employee
compensation and the effect of the method used on reported results.
The Company accounts for stock-based compensation to employees and
directors using the intrinsic value method of accounting as prescribed under
Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued
to Employees" and related Interpretations. Under the intrinsic value method,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of the grant, no compensation
expense is recognized in the Company's Consolidated Statements of Operations.
F - 8
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,
-----------------------------------------------------
2004 2003
-------------------------- ------------------------
Reported Pro Forma Reported Pro Forma
Net Loss $ (2,495) $ (2,815) $ (2,737) $ (2,978)
Earnings (loss) per Share:
--------------------------
Basic (0.04) (0.04) (0.06) (0.06)
Diluted (0.04) (0.04) (0.06) (0.06)
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, 2004:
2004 2003
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 174% 140%
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. The effect of adopting SFAS
No. 150 has been to reclassify $805,300 in Redeemable Warrants from a
quasi-liability to the equity section of the balance sheet.
F - 9
In December 2003, the FASB revised FASB Statement No. 132, Accounting for
Employers' Disclosures about Pensions and Other Post Retirement Benefits.
Statement No. 132(R) revises employers' disclosures about pension plans and
other postretirement benefit plans. It does not change the measurement or
recognition of those plans required by FASB Statements No. 87, Employers'
Accounting for Pensions, No. 88, Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and
No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions.
This Statement retains the disclosure requirements contained in FASB Statement
No. 132, Employers' Disclosures about Pensions and Other Postretirement
Benefits, which it replaces. It requires additional disclosures to those in the
original Statement 132 about the assets, obligations, cash flows, and net
periodic benefit cost of defined benefit pension plans and other defined benefit
postretirement plans. The required information should be provided separately for
pension plans and for other postretirement benefit plans. The Company does not
believe the adoption of SFAS No. 132(R) will have a material impact on the
Company's financial position, results of operations or cash flows.
In December 2003, the FASB revised FASB Interpretation No. 46, Accounting
for Consolidation of Variable Interest Entities. This Interpretation of
Accounting Research Bulletin No. 51, Consolidated Financial Statements, which
replaces FASB Interpretation No. 46, Consolidation of Variable Interest
Entities, addresses consolidation by business enterprises of variable interest
entities, which have one or more of the following characteristics:1) The equity
investment at risk is not sufficient to permit the entity to finance its
activities without additional subordinated financial support provided by any
parties, including the equity holders. 2) The equity investors lack one or more
of the following essential characteristics of a controlling financial interest:
a. The direct or indirect ability to make decisions about the entity's
activities through voting rights or similar rights; b. The obligation to absorb
the expected losses of the entity; c. The right to receive the expected residual
returns of the entity. 3) The equity investors have voting rights that are not
proportionate to their economic interests, and the activities of the entity
involve or are conducted on behalf of an investor with a disproportionately
small voting interest. The Company does not believe the adoption of FIN 46(R)
will have a material impact on the Company's financial position, results of
operations or cash flows.
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, 2004. 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.
F - 10
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 August 2004, the Company and HoMedics, Inc. began preparing
the Kronos-based consumer standalone product line for mass production.
Preparing to meet the goal of mass production entails the use of Kronos'
technical resources and HoMedics' product development and international
production expertise. Select third party vendors, including experts in
electronics, software and gas sensors, are integral resources in this
process. While HoMedics is managing production of the finished product,
Kronos is managing the production of our proprietary power supply and
related circuitry. Kronos' focus is twofold: First, Kronos is working with
Flextronics International USA, Inc. to preparing for mass production the
technical hardware and related power supplies for each of the products in
the air purification product line. Second, Kronos is finalizing and testing
with HoMedics component and materials selection for the finished products.
This process combines HoMedics vendor selection process and international
production expertise with Kronos' technical expertise. We believe the
Company has successfully completed the development of a Kronos-based
consumer standalone air purifier that is an efficient, high quality product
which is cost effective and easy to operate.
The initial term of the agreement is three and one half years from the
initial sale of consumer air purification products by HoMedics, which shall
be no later than December 31, 2006, with the option to extend the agreement
for six additional years. Kronos will be compensated through an initial
royalty payment and ongoing quarterly royalty payments based on a
percentage of sales. HoMedics will pay minimum royalty payments of at least
$2.0 million during the initial term and on-going royalty payments to
extend the agreement. Kronos will retain full rights to all of its
intellectual property.
US Navy SBIR. In November 2002, Kronos was awarded by the U. S. Navy a
Small Business Innovation Research Phase II contract worth $580,000, plus
an option of $145,000. The Phase II contract (commercialization phase) is
an extension of the Phase I and the Phase I Option work that began in 2001.
It is intended that the Kronos(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, 2004, U.
S. Navy had provided Kronos with $355,000 in funding for this effort under
the Phase II contract.
US Army SRIR Option 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 full value of this contract will be realized by the Company by
October 21, 2004. As of June 30, 2004 the Company incurred $76,684 in costs
that will be reimbursed by the US Army in a future period.
HoMedics provided 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.
Fusion Capital. During our year ended June 30, 2004, we sold 6,505,576
shares of our common stock to Fusion Capital for $1,353,718 under the terms
of our Common Stock Purchase Agreements dated August 12, 2002.
F - 11
NOTE 4 - PREPAID AND OTHER CURRENT ASSETS
Prepaid and other current assets at June 30, consist of the following:
2004 2003
--------------- ---------------
Lease deposits $ 10,365 $ 6,056
Prepaid Professional Fees 12,587 -
Prepaid insurance 4,104 27,079
Prepaid professional fees - 1,000
Work in Progress 43,994 -
--------------- ---------------
Prepaid and other current assets $ 71,050 $ 34,135
=============== ===============
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment at June 30, consists of the following:
2004 2003
--------------- ---------------
Leasehold improvements $ - $ 5,139
Office furniture and fixtures 37,756 54,061
Machinery and equipment 8,255 15,473
--------------- ---------------
46,011 74,673
Less accumulated depreciation (39,719) (46,631)
--------------- ---------------
Net property and equipment $ 6,292 $ 28,042
=============== ===============
Depreciation expense for the years ended June 30, 2004 and 2003 were
$13,283 and $13,283, respectively.
NOTE 6 - INTANGIBLES
Intangible assets at June 30, consists of the following:
2004 2003
--------------- ---------------
Marketing intangibles $ 587,711 $ 587,711
Purchased patent technology 2,669,355 2,669,355
Developed patent technology 239,715 133,454
--------------- ---------------
3,496,781 2,847,100
Less accumulated amortization (1,243,752) (904,547)
--------------- ---------------
Net intangible assets $ 2,253,029 $ 2,487,473
=============== ===============
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, 2004 and 2003 was
$271,364 and $271,364, respectively.
NOTE 7 - ACCRUED EXPENSES
Accrued expenses at June 30, consist of the following:
2004 2003
--------------- ---------------
Accrued compensation $ 55,913 $ 539,656
Accrued interest 166,276 24,467
Accrued professional services 90,157 131,696
--------------- ---------------
$ 312,346 $ 695,819
=============== ===============
Interest on unpaid salaries is accruing at the rate of 12% per annum.
F - 12
NOTE 8 - NOTES PAYABLE
The Company had the following obligations as of June 30, 2004 and 2003,
2004 2003
--------------- ---------------
Obligation to HoMedics (1) $ 2,400,000 $ 2,400,000
Discount on obligation to HoMedics (589,261) (893,046)
Obligation to current Employees (2) 1,139,903 -
Obligation to Fusion Capital (3) 200,000 -
Obligation to former Director (4) - 84,725
Obligation for finance leases (5) 50,327 72,424
Obligations to others (6) 55,000 305,000
--------------- ---------------
3,255,971 1,969,103
Less:
Current portion 798,926 185,670
--------------- ---------------
Total long term obligations net of
current portion $ 2,457,044 $ 1,783,433
=============== ===============
(1) This note has a 5 year term and bears interest at 6% with no payments
required until August 2004. The August payment is accrued and unpaid as
of October 8, 2004. 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.
(2) These notes bear interest at the rates between 0% and 12%. They
represent obligation to current employees of the Company. At July 1,
2004, the interest rate on one note for $76,637 increased from 0% to
17%.
(3) 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.
(4) 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. As of June 30, 2004 this note
has been paid in full.
(5) See Note 9 below.
(6) There was one obligation to others. This obligation was originally
incurred for the acquisition of license rights of the Kronos(TM)
technology (see note 7) with a value of $270,000. This note is
non-interest bearing with quarterly payments of $30,000 until paid in
full. On July 3, 2004 the Company made the required payment for this
note and on October 5, 2004 the Company paid the note in full.
F - 13
NOTE 9 - LEASES
The Company has entered into a non-cancelable operating lease for
facilities. Rental expense was approximately $66,500 and $66,500 for years ended
June 30, 2004 and 2003, respectively. Future minimum lease payments under this
operating lease are $61,800 for the year ending June 30, 2005 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,
2005 $ 36,337
2006 25,903
------------
Total minimum lease payments 62,240
Less: Imputed interest (11,912)
------------
Present value of net minimum
lease payments $ 50,328
------------
In the year ended June 30, 2004, the Company paid $22,095 in principal
and $16,449 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 10 - EARNINGS (LOSS) PER SHARE
As of June 30, 2004, there were outstanding options to purchase
12,813,812 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, 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.
NOTE 11 - INCOME TAXES
The composition of deferred tax assets and the related tax effects at
June 30, 2004 and 2003 are as follows:
2004 2003
--------------- ---------------
Benefit from carryforward of capital
and net operating losses $ 4,841,083 $ 4,034,973
Other temporary differences 156,740 188,206
Less:
Valuation allowance (4,997,823) (4,223,178)
--------------- ---------------
Net deferred tax asset $ - $ -
=============== ===============
F - 14
The other temporary differences shown above relate primarily to
impairment reserves for intangible assets, and accrued and deferred
compensation. The difference between the income tax benefit in the accompanying
statements of operations and the amount that would result if the U.S. Federal
statutory rate of 34% were applied to pre-tax loss is as follows:
June 30,
--------------------------------------------------------------------------------
2004 2003
--------------------------------------------------------------------------------
Amount % of pre-tax Loss Amount % of pre-tax Loss
--------------------------------------------------------------------------------
Benefit for income tax at:
Federal statutory rate $ 785,606 34.0% $ 941,746 34.0%
State statutory rate 46,055 2.0% 55,208 2.0%
Non-deductible expenses 271,209 11.7% 319,977 11.7%
Acquired NOL and other - 0.0% 0 0.0%
Increase in valuation allowance (1,102,870) (47.7)% (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 June 30, 2004, for federal income tax and alternative minimum tax
reporting purposes, the Company has approximately $10.9 million of unused
Federal net operating losses, $2.3 million capital losses and $9.4 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 12 - CONSULTING AGREEMENTS
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
were recorded for the year ended June 30, 2003.
On October 31, 2003, the Company entered into a 10 month consulting
agreement with Joshua B. Scheinfeld and Steven G. Martin for consulting services
with respect to operations, 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 is 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, valued at $79,200 was
recorded as a prepaid consulting fee and was amortized to Professional Fee
Expense ratably over the 10 month term of the contract. Under this contract,
expenses of $63,360 were recorded for the year ended June 30, 2004.
F - 15
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
were recorded for the year ended June 30, 2003.
NOTE 13 - STOCK OPTIONS AND WARRANTS
On February 12, 2002, the Board of Directors approved the TSET, Inc.
Stock Option Plan under which Kronos' key employees, consultants, independent
contractors, officers and directors are eligible to receive grants of stock
options. Kronos has reserved and issued a total of 6,250,000 shares of common
stock under the Stock Option Plan. Prior to that, the Company had no formal
stock option plan but offered as special compensation to certain officers,
directors and third party consultants the granting of non-qualified options to
purchase Company shares at the market price of such shares as of the option
grant date. The options generally have terms of three to ten years. The Company
granted non-qualified stock options totaling 3,239,782 and 6,084,900 shares in
the years ended June 30, 2004 and 2003, respectively.
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, 2004 and 2003 was $0.18 and $0.10 per option share,
respectively.
A summary of the Company's stock option activity and related information
for the years ended June 30, 2004 and 2003 is as follows (in thousands, except
per share amounts):
Weighted
Average
Shares Exercise Price
--------------- ------------
Outstanding at June 30, 2002 7,642 0.61
Granted 2,460 0.22
Exercised - -
Cancelled - -
--------------- ------------
Outstanding at June 30, 2003 10,102 0.52
Granted 3,240 0.19
Exercised - -
Cancelled (529) 0.89
--------------- ------------
Outstanding as June 30, 2004 12,813 $ 0.42
=============== ============
F - 16
A summary of options outstanding and exercisable at June 30, 2004 and
2003 is follows (in thousands, except per share amounts and years):
Options Outstanding Options Exercisable
-------------------------------------------- ------------------------------
Weighted
Average
Remaining Weighted
Range of Life (in Average Range of
Exercise Prices Options years) Exercise Price Exercise Prices Options
------------------ -------- ---------- -------------- --------------- --------
June 30, 2004
$0.71 - $1.12 1,670 3.5 $0.89 $0.71 - $1.12 1,670
$0.21 - $0.70 5,975 7.3 $0.49 $0.21 - $0.70 5,975
$0.00 - $0.20 5,168 8.8 $0.18 $0.00 - $0.20 5,168
June 30, 2003
$0.71 - $1.12 2,129 3.7 $0.92 $0.71 - $1.12 2,129
$0.21 - $0.70 5,720 8.5 $0.50 $0.21 - $0.70 5,720
$0.00 - $0.20 2,253 9.5 $0.18 $0.00 - $0.20 2,253
A summary of the Company's stock warrant activity and related
information for the years ended June 30, 2004 and 2003 is as follows (in
thousands, except per share amounts):
Weighted Average
Warrants Exercise Price
---------------- -------------
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
Granted - -
Exercised - -
Cancelled -
--------------- ------------
Outstanding as June 30, 2004 15,792 $ 0.16
=============== ============
NOTE 14 - 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.
F - 17
Daniel R. Dwight, our President and Chief Executive Officer, and our
Company entered into an Employment agreement effective as of November 15, 2001.
The initial term of Mr. Dwight's Employment Agreement was for 2 years and will
automatically renew for successive 1 year terms unless Kronos or Mr. Dwight
provide the other party with written notice within 3 months of the end of the
initial term or any subsequent renewal term. The Board of Directors renewed Mr.
Dwight's Employment Agreement on August 13, 2003 and again on August 15, 2004.
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.
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.
NOTE 15 - MAJOR CUSTOMERS
As of June 30, 2004, the Company has two major customers: HoMedics and
the U.S. Navy. Of the $533,220 in revenue recorded in the year ended June 30,
2004, $477,032 or 89% was derived from these two 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 16 - SEGMENTS OF BUSINESS
The Company operates principally in one segment of business: The Kronos
segment licenses, manufactures and distributes air movement and purification
devices utilizing the KronosTM technology. In the year ended June 30, 2004, the
Company operated only in the United States of America.
NOTE 17 - RELATED PARTIES
As of June 30, 2004, the Company has outstanding obligations for past
compensation to the remaining officers and directors of $1,139,903. These unpaid
amounts currently accrue interest at the rates between 17% and 12% per annum.
F - 18
NOTE 18 - STOCKHOLDERS' EQUITY (DEFICIT)
During the year ended June 30, 2004, the Company issued 6,705,576 shares
of its common stock for $1,403,718 in cash. The Company issued 360,000 shares
valued at $79,200 for consulting services and 438,493 shares of its common stock
valued at $69,230 for board service to current members of the Board of
Directors.
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 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 $.017 per share in 2004, $0.19 in
2005 and $0.20 in 2006.
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.
NOTE 19 - SUBSEQUENT EVENTS
In October 2004, Kronos entered into agreements for up to $20.5 million
in equity and equity backed debt financing from Cornell Capital Partners. Kronos
executed an Equity Investment Agreement to secure $500,000 through the sale of 5
million unregistered shares of Kronos common stock. Cornell Capital Partners
committed to provide $4 million pursuant to two Equity Backed Promissory Notes,
which will be funded as follows: $2 million upon filing a Registration Statement
and $2 million upon the SEC declaring the Registration Statement effective.
Kronos executed a Standby Equity Distribution Agreement for $20 million of
funding which Kronos has the option to drawdown against in increments as large
as $1.5 million over the next twenty four months. Kronos intends to use the
proceeds received under the Standby Equity Distribution Agreement to repay the
Equity Backed Promissory Notes.
In October 2004, Kronos and Richard A. Papworth agreed to postpone under
the terms of a Promissory Note repayment of the Note for $76,637 until Kronos
obtains proceeds from Cornell Capital Partners under the terms of our Promissory
Note.
In October 2004, Kronos received a Notice of Allowance from the United
States Patent and Trademark Office indicating that its application entitled
"Electrostatic Fluid Accelerator" - Power Supply Management and Control has been
examined and allowed for issuance as a U. S. patent. Kronos expects that the U.
S. Patent will issue in due course. The patent provides protection for key
aspects of Kronos' technology until late in 2021.
F - 19
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On August 22, 2003, we engaged Sherb & Company, LLP ("Sherb & Company") as our
Independent Registered Public Accounting Firm 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.
20
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our directors and executive officers and their ages as of October 8, 2004, are
as follows:
NAME AGE POSITION
-------------------- ----- ----------------------------------------
Daniel R. Dwight 44 Director; President and Chief
Executive Officer
Richard F. Tusing 46 Director; Chief Operating Officer
Spencer I. Browne 53 Director
James P. McDermott 42 Director
M. J. Segal 60 Director
Daniel R Dwight, 44, has served as a Director of Kronos since November 2000, and
as a Director and Chief Executive Officer of Kronos Air Technologies since
January 2001. Effective October 16, 2001, Mr. Dwight was appointed President and
Chief Executive Officer of Kronos. Effective January 1, 2004, Mr. Dwight was
appointed Acting Chief Financial Officer of Kronos. He has extensive experience
in private equity and operations in a wide variety of high growth and core
industrial businesses. Mr. Dwight spent 17 years with General Electric including
10 years of operations, manufacturing, and business development experience with
GE's industrial businesses, and seven years of international investment and
private equity experience with GE Capital. He has had responsibility for over a
$1 billion in merger and acquisition and private equity transactions at GE. Mr.
Dwight initiated GE Capital's entry in the Asia private equity market. Between
1995 and 1999, the Asian equity portfolio grew to include consolidations,
leveraged buyouts, growth capital and minority investments in diverse
industries, including information technology, telecommunications services,
consumer products, services and distribution, and contract manufacturing. Since
1982, Mr. Dwight has held other leadership positions domestically and
internationally with GE Capital, as well as senior positions with GE Corporate
Business Development (1989-1992) and GE Corporate Audit Staff (1984-1987). Mr.
Dwight holds an MBA in Finance and Marketing with Honors from The University of
Chicago Graduate School of Business and a B.S. in Accounting with Honors from
the University of Vermont.
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.
Spencer 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.
21
James P. McDermott, 42 became a Director of Kronos in July 2001. Mr. McDermott
has over 20 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, 60, became a Director of Kronos in September 2003. Mr. Mr. Segal
has over 35 years of corporate governance, entrepreneurial and investment
banking expertise. Mr. Segal founded the investment banking firm of M.J. Segal
Associates in 1987. Since 1992, the firm has specialized in researching private
equity opportunities in both private and emerging growth public companies. The
Segal group caters primarily to institutional clients, private investment
partnerships and professional money managers. After starting his career as a
stockbroker and financial planner in 1966 with Philadelphia based New York Stock
Exchange firm, Robinson & Company, Mr. Segal joined Josephthal & Co. Inc., a
leading full-service investment banking and brokerage firm in New York. Mr.
Segal has served as senior vice president of the congressionally charted
National Corporation for Housing Partnerships in Washington, D. C. and president
of its investment banking subsidiary and has qualified as a NASD broker/dealer
financial principal. Originally from Philadelphia, Mr. Segal attended the
Wharton School of the University of Pennsylvania and is a graduate of The New
York Institute of Finance.
DIRECTORS
Our Board of Directors consists of eight seats. Directors serve for a term of
one year and stand for election at our annual meeting of stockholders. Three of
our current directors were elected at our annual meeting of stockholders held on
December 30, 2002, and two additional directors were appointed in August and
September 2003, respectively. Three vacancies 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.
22
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.
During the year the Compensation Committee held three meetings. Each member
attended at least 75% of the meetings.
On September 4, 2003, the Board of Directors established an Executive Committee.
The purpose of the Executive Committee is to exercise all the powers and
authority of the Board of Directors in the management of the property, affairs
and business of the Company. The Committee shall consist of no fewer than three
members, including the Chief Executive Officer of the Company. Messrs. Browne,
Dwight, McDermott, Segal and Tusing are the current members of the Executive
Committee. During the year the Executive Committee held five meetings. Each
member attended at least 75% of the meetings.
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. During the year the Audit Committee held three meetings. Each member
attended at least 75% of the meetings.
COMPENSATION OF DIRECTORS
Cash Compensation. Our Bylaws provide that, by resolution of the Board of
Directors, each director may be reimbursed his expenses of attendance at
meetings of the Board of Directors; likewise, each director may be paid a fixed
sum or receive a stated salary as a director. 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.
For the twelve month period ending June 30, 2004, Messrs. McDermott, Brown and
Segal have earned 243,000, 213,000, and 199,000 stock options, respectively as
compensation for their services as members of our Board of Directors. Messrs.
Tusing and Dwight have each been granted 5,068 shares of our common stock as
compensation for their services as members of our Board of Directors during
fiscal 2004. Effective August 6, 2003, non-executive directors, including
Messrs. Dwight 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, 2004, all Section 16(a) filing
requirements applicable to our officers and directors were complied with.
23
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth compensation for the fiscal year ended June 30,
2004 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. 2004 180,000 -- 14,292 -- 726,206 -- --
Dwight, 2003 180,000 118,800(4) 12,288 -- 660,000 -- --
President and 2002 112,500 -- 7,620 -- 2,600,000 -- --
Chief
Executive
Officer(1)
Richard F. 2004 160,000 -- -- -- 971,756 -- --
Tusing, Chief 2003 80,000 -- -- -- -- -- --
Operating 2002 -- -- -- -- -- -- --
Officer(2)
Richard A. 2004 120,000 -- -- -- -- -- --
Papworth Chief 2003 120,000 21,000(4) -- -- 300,000 -- --
Financial 2002 120,000 -- -- -- 300,000 -- --
Officer(3)
(1) Mr. Dwight became President and Chief Executive Officer of Kronos
effective October 16, 2001. He executed a two year employment contract
on November 15, 2001. His contract was renewed on August 13, 2003 and
again on August 15, 2004 by the Board of Directors. His annual salary
is $180,000.
(2) 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.
(3) Mr. Papworth was the Company's Chief Financial Officer from May 19,
2000 until January 1, 2004. His annual salary was $120,000. On June 30,
2004 Mr. Papworth ended his employment with Kronos.
(4) Cash Bonuses earned but not paid and have been included in accrued
expenses.
AGGREGATED OPTIONS/SAR EXERCISES
IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTIONS/SAR VALUES(1)
VALUE OF
NUMBER OF SECURITIES UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES ACQUIRED OPTIONS/SARS AT FISCAL OPTIONS/SARS AT
NAME ON EXERCISE VALUE REALIZED YEAR END(1) FISCAL YEAR END(2)
------------------- ----------------- ----------------- -------------------------- ---------------------
Daniel R. Dwight, -0- -0- Exercisable: 4,129,806 -0-
President and Unexercisable: -0- -0-
Chief Executive
Officer(3)
Richard F. -0- -0- Exercisable: 2,344,956 -0-
Tusing, Chief Unexercisable: -0- -0-
Operating
Officer(4)
Richard A. -0- -0- Exercisable: 1,048,475 -0-
Papworth Chief Unexercisable: -0- -0-
Financial
Officer(5)
24
(1) These grants represent options to purchase common stock. No SAR's have been
granted.
(2) The value of the unexercised in-the-money options were calculated by
determining the difference between the fair market value of the common stock
underlying the options and the exercise price of the options as of June 30,
2004.
(3) Mr. Dwight became President and Chief Executive Officer of Kronos effective
October 16, 2001.
(4) Mr. Tusing became Chief Operating Officer of Kronos effective January 1,
2002.
(5) Mr. Papworth was the Company's Chief Financial Officer from May 19, 2000
until January 1, 2004. On June 30, 2004 Mr. Papworth ended his employment
with Kronos.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
% TOTAL
NO. OF OPTIONS/SAR'S
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES EXERCISE OR
OPTIONS/SAR'S IN FISCAL BASE PRICE
NAME GRANTED (#) YEAR (%) ($ PER SHARE) EXPIRATION DATE
------------------- ------------- ------------- ------------ -----------------
Daniel R. Dwight 726,206 22.4% $ 0.180 March 22, 2014
President and
Chief Executive
Richard F. Tusing 971,756 30.0% $ 0.180 March 22, 2014
Chief Operating Officer
STOCK OPTION PLAN
On February 12, 2002, the Board of Directors approved the TSET, Inc. Stock
Option Plan under which Kronos' key employees, consultants, independent
contractors, officers and directors are eligible to receive grants of stock
options. Kronos has reserved and issued a total of 6,250,000 shares of common
stock under the Stock Option Plan. It is presently administered by Kronos' Board
of Directors. Subject to the provisions of the Stock Option Plan, the Board of
Directors has full and final authority to select the individuals to whom options
will be granted, to grant the options and to determine the terms and conditions
and the number of shares issued pursuant thereto.
EMPLOYMENT AGREEMENTS
Daniel R. Dwight, our President and Chief Executive Officer, and our Company
entered into an Employment agreement effective as of November 15, 2001. The
initial term of Mr. Dwight's Employment Agreement was for 2 years and will
automatically renew for successive 1 year terms unless Kronos or Mr. Dwight
provide the other party with written notice within 3 months of the end of the
initial term or any subsequent renewal term. The Board of Directors renewed Mr.
Dwight's Employment Agreement on August 13, 2003 and again on August 15, 2004.
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.
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.
25
The Employment Agreement of Richard F. Tusing, our Chief Operating Officer,
provides that, upon the occurrence of any transaction as defined as a "change of
control" of Kronos that is not approved by the Board of Directors, Mr. Tusing
shall receive his salary, pro-rata bonus and benefits for a period of time that
is the greater of (i) one year or (ii) the remainder of Mr. Tusing's employment
term.
As of the date of this filing, we have not adopted any separate executive
severance agreements.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL SHAREHOLDERS
The following table presents certain information regarding the beneficial
ownership of all shares of common stock at October 8, 2004 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 October 8, 2004 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 October 8, 2004 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 4,481,732(1) 7.4%
464 Common Street
Suite 301
Belmont, MA 02478
Richard F. Tusing 2,780,718(2) 3.6%
464 Common Street
Suite 301
Belmont, MA 02478
James P. McDermott 608,077(3) 1.0%
464 Common Street
Suite 301
Belmont, MA 02478
Spencer I. Browne 231,000(4) 0.4%
464 Common Street
Suite 301
Belmont, MA 02478
Milton M. Segal 199,000(5) 0.3%
464 Common Street
Suite 301
Belmont, MA 02478
All Officers and Directors of Kronos 8,301,527 (6) 13.5%
(1) Includes options to purchase 4,129,806 shares of common stock that can be
acquired within sixty days of October 8, 2004.
(2) Includes options to purchase 2,344,956 hares of common stock that can be
acquired within sixty days of October 8, 2004.
(3) Includes options to purchase 313,959 hares of common stock that can be
acquired within sixty days of October 8, 2004.
(4) Includes options to purchase 213,000 hares of common stock that can be
acquired within sixty days of October 8, 2004.
(5) Includes options to purchase 199,000 hares of common stock that can be
acquired within sixty days of October 8, 2004.
26
(6) Includes options to purchase 6,229,875 shares of common stock that can be
acquired within sixty days of October 8, 2004.
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 Richard F.
Tusing, pursuant to which Mr. 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 Mr. 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 Mr. 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 Mr. Tusing 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. 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. 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 under the terms of a Promissory Note issued
to Mr. Tusing on March 31, 2004.
On March 31, 2004, we entered into Promissory Notes with Daniel R. Dwight and
Richard F. Tusing in exchange for past due compensation, expenses and interest
do and payable for $363,139 and $485,883. The Notes bear a simple interest rate
1% per month and call for aggregate monthly principal and interest payments
$6,718 and $8,989, respectively, for each month in which the Company's beginning
cash balance equals or exceeds $200,000. Subject to certain conditions,
including default, these notes become payable in full. In the event of a debt or
equity financing 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. As of June 30, 2004, no amounts had been paid under the terms
of the Notes.
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.
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
27
10.21 Consulting Agreement, dated January 1, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.21 to the
Dwight, Tusing & Associates Registration Statement on Form
S-1 filed on August 7, 2001
10.22 Letter Agreement, dated April 12, 2001, Incorporated by reference to
by and between TSET, Inc. and Daniel R. Exhibit 10.35 to the
Dwight and Richard F. Tusing Registration Statement on Form
S-1 filed on August 7, 2001
10.23 Indemnification Agreement, dated May 1, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.37 to the
Jeffrey D. Wilson Registration Statement on Form
S-1 filed on August 7, 2001
10.24 Indemnification Agreement, dated May 1, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.38 to the
Daniel R. Dwight Registration Statement on Form
S-1 filed on August 7, 2001
10.25 Indemnification Agreement, dated May 1, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.39 to the
Richard F. Tusing Registration Statement on Form
S-1 filed on August 7, 2001
10.26 Indemnification Agreement, dated May 1, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.40 to the
Charles D. Strang Registration Statement on Form
S-1 filed on August 7, 2001
10.27 Indemnification Agreement, dated May 1, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.41 to the
Richard A. Papworth Registration Statement on Form
S-1 filed on August 7, 2001
10.28 Indemnification Agreement, dated Incorporated by reference to
May 1 2001, by and between TSET, Exhibit 10.42 to the
Inc. and Erik W. Black Registration Statement on Form
S-1 filed on August 7, 2001
10.29 Warrant Agreement, dated July 16, 2001, Incorporated by reference to
by and between TSET, Inc. and The Eagle Exhibit 10.49 to the
Rock Group, LLC Registration Statement on Form
S-1 filed on August 7, 2001
10.30 Agreement and Release, dated October Incorporated by reference to
10, 2001, by and between TSET, Inc. and Exhibit 10.50 to the
Jeffrey D. Wilson Registrant's Form 10-K for the
year ended June 30, 2001 filed
on October 15, 2001
10.31 Promissory Note dated October 10, 2001 Incorporated by reference to
payable to Mr. Jeffrey D. Wilson Exhibit 10.51 to the Registrant's
Form 10-K for the year ended
June 30, 2001 filed on October 15,
2001
10.32 Employment Agreement, effective Incorporated by reference to
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
28
10.33 Common Stock Purchase Agreement, Incorporate by reference to Exhibit
dated August 12, 2002 by and between 10.57 to the Registrant's Form S-1
between TSET, Inc. and Fusion filed on August 13, 2002
Capital Fund II, LLC
10.34 Registration Rights Agreement, dated Incorporated by reference to Exhibit
August 12, 2002 by and between TSET, 10.58 to the Registrant's Form S-1
Inc. and Fusion Capital Fund II, LLC filed on August 13, 2002
10.35 Termination Agreement, dated Incorporated by reference to Exhibit
August 12, 2002 by and between TSET, 10.59 to the Registrant's Amendment
Inc. and Fusion Capital Fund II, LLC No. 1 to Form S-1 filed on
September 16, 2002
10.36 Master Loan and Investment Incorporated by reference to
Agreement, dated May 9, 2003, the Registrant's 8-K filed on
by and among Kronos Advanced May 15, 2003
Technologies, Inc., Kronos Air
Technologies, Inc. and FKA
Distributing Co. d/b/a HoMedics,
Inc., a Michigan corporation
("HoMedics")
10.37 Secured Promissory Note, dated Incorporated by reference to
May 9, 2003, in the principal Exhibit 99.2 to the Registrant's
amount of $2,400,000 payable to 8-K filed on May 15, 2003
HoMedics
10.38 Secured Promissory Note, dated Incorporated by reference to
May 9, 2003, in the principal Exhibit 99.4 to the Registrant's
amount of $1,000,000 payable to 8-K filed on May 15, 2003
HoMedics
10.39 Security Agreement dated May 9, Incorporated by reference to
2003, by and among Kronos Air Exhibit 99.4 to the Registrant's
Technologies, Inc. and HoMedics 8-K filed on May 15, 2003
10.40 Registration Rights Agreement, Incorporated by reference to
dated May 9, 2003, by and between Exhibit 99.5 to the Registrant's
Kronos and HoMedics 8-K filed on May 15, 2003
10.41 Warrant No. 1 dated May 9, 2003, Incorporated by reference to
issued to HoMedics Exhibit 99.7 to the Registrant's
8-K filed on May 15, 2003
10.42 Warrant No. 2 dated May 9, 2003, Incorporated by reference to
issued to HoMedics Exhibit 99.7 to the Registrant's
8-K filed on May 15, 2003
2002
10.43 Consulting Agreement effective Incorporated by reference to
October 31, 2003, by and among Kronos Exhibit 10.67 to the Registrant's
Advanced Technologies, Inc., Form 10-Q for the quarterly period
Steven G. Martin and Joshua B. on ended December 31, 2003 filed on
Scheinfeld February 17, 2004
10.44 Promissory Note by and among Kronos Incorporated by reference to
Advanced Technologies, Inc., and Exhibit 10.67 to the Registrant's
Richard A. Papworth Form 10-Q for the quarterly period
ended March 31, 2004 filed on
May 17, 2004
29
10.45 Promissory Note by and among Kronos Incorporated by reference to
Advanced Technologies, Inc., and Exhibit 10.67 to the Registrant's
Daniel R. Dwight Form 10-Q for the quarterly period
ended March 31, 2004 filed on
May 17, 2004
10.46 Promissory Note by and among Kronos Incorporated by reference to
Advanced Technologies, Inc., and Exhibit 10.67 to the Registrant's
Richard F. Tusing Form 10-Q for the quarterly period
ended March 31, 2004 filed on
May 17, 2004
10.47 Promissory Note by and among Kronos Incorporated by reference to
Advanced Technologies, Inc., and Exhibit 10.67 to the Registrant's
Igor Krichtafovitch Form 10-Q for the quarterly period
ended March 31, 2004 filed on
May 17, 2004
10.48 Promissory Note by and among Kronos Incorporated by reference to
Advanced Technologies, Inc., and Exhibit 10.67 to the Registrant's
J. Alexander Chriss Form 10-Q for the quarterly period
ended March 31, 2004 filed on
May 17, 2004
EXHIBIT NO. DESCRIPTION LOCATION
--------------------------------------------------------------------------------
31.1 Certification of Chief Executive Provided herewith
Officer pursuant to 15 U.S.C.
Section 7241, as adopted pursuant
to Section 302 of the Sarbanes-Oxley
Act of 2002
31.2 Certification of Principal Financial Provided herewith
Officer pursuant to U.S.C. Section
7241, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification by Chief Executive Officer Provided herewith
and Principal Accounting Officer pursuant
to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) REPORTS ON FORM 8-K.
None.
ITEM 14. PRINCIPAL ACCOUNTANT AND SERVICES
The firm Sherb & Co. LLP, independent registered public accounting firm, has
audited our financial statements for the year ended June 30, 2004. The Board of
Directors has appointed Sherb & Co. LLP to serve as our independent registered
public accounting firm for the 2004 year-end audit and to review our quarterly
financial reports for filing with the Securities and Exchange Commission during
fiscal year 2005.
The following table shows the fees paid or accrued by us for the audit and other
services provided by Sherb & Co. LLP for fiscal year 2004 and 2003.
June 30, 2004 June 30, 2003
--------------- ---------------
Audit Fees(1) $ 61,000 $ 56,000
Audit-Related Fees 1,710 1,155
Tax Fees - -
All Other Fees - -
--------------- ---------------
Total $ 62,710 $ 57,155
=============== ===============
(1) Audit fees represent fees for professional services provided in connection
with the audit of our annual financial statements and review of our quarterly
financial statements and audit services provided in connection with other
statutory or regulatory filings
30
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: October 15, 2004.
KRONOS ADVANCED TECHNOLOGIES, INC.
By: /s/ Daniel R. Dwight
------------------------------------
Daniel R. Dwight
President, Chief Executive
Officer and Director
By: /s/ Daniel R. Dwight
------------------------------------
Daniel R. Dwight
Acting Chief Financial Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Spencer I. Browne
-----------------------------
Spencer I. Browne Director October 15, 2004
/s/ Daniel R. Dwight
-----------------------------
Daniel R. Dwight Director, President, October 15, 2004
Chief Executive
Officer and Acting
Chief Financial
Officer
/s/ James P. McDermott
-----------------------------
James P. McDermott Director October 15, 2004
/s/ M. J. Segal
-----------------------------
M. J. Segal Director October 15, 2004
/s/ Richard F. Tusing
-----------------------------
Richard F. Tusing Director and Chief October 15, 2004
Operating Officer