UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2007
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ __, ____ to _____________ __, ____
Commission File Number: 000-30191
KRONOS ADVANCED TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Nevada 87-0440410
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
464 Common Street, Suite 301, Belmont, MA 02478
(Address of principal executive offices) (Zip Code)
(617) 364-5089
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes __No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer ___ Accelerated filer ___ Non-accelerated filer X
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
__ Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of May 18, 2007, there were
242,342,803 shares outstanding of the issuer's common stock.
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following comprise our (unaudited) consolidated financial statements for the
nine months ended March 31, 2007.
KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
March 31, June 30,
2007 2006
(Unaudited) (Audited)
--------------- ----------------
Assets
Current Assets
Cash $ 25,153 $ 598,323
Accounts Receivable 933 10,000
Other Current Assets 21,796 58,028
---------------- ----------------
Total Current Assets 47,882 666,351
---------------- ----------------
Net Property and Equipment 6,882 5,597
Other Assets
Intangibles 1,741,581 1,983,908
---------------- ----------------
Total Other Assets 1,741,581 1,983,908
---------------- ----------------
Total Assets $ 1,796,345 $ 2,655,856
================ ================
Liabilities and Stockholders' Deficit
Current Liabilities
Accrued expenses and payables
to directors and officers $ 43,647 $ 8,843
Accounts payable 437,343 204,632
Accrued interest expenses 238,513 879,144
Accrued expenses 762,947 41,111
Deferred revenue - 20,000
Notes payable, current portion 2,419,809 1,815,000
Notes payable to directors and
officers 202,307 256,544
---------------- ----------------
Total Current Liabilities 4,104,566 3,225,274
---------------- ----------------
Long Term Liabilities
Notes payable 1,716,667 2,575,000
---------------- -----------------
Total Long Term Liabilities 1,716,667 2,575,000
---------------- -----------------
Total Liabilities 5,821,233 5,800,274
---------------- -----------------
Stockholders' Deficit
Common stock, authorized
500,000,000 shares of $0.001 par value
Issued and outstanding - 242,342,803
and 144,499,657, respectively 242,343 144,500
Capital in excess of par value 29,351,278 27,828,241
Accumulated deficit (33,618,508) (31,117,159)
---------------- ----------------
Total Stockholders' Deficit (4,024,887) (3,144,418)
---------------- ----------------
Total Liabilities and
Stockholders' Deficit $ 1,796,345 $ 2,655,856
================ ================
The accompanying notes are an integral part of these financial statements.
1
KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended March 31, Nine months ended March 31,
------------------------------- ------------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Sales $ 34,902 $ - $ 156,384 $ 37,500
Cost of sales 1,754 - 93,373 8,449
------------ ------------ ------------ ------------
Gross Profit 33,148 - 63,011 29,051
------------ ------------ ------------ ------------
Selling, General and
Administrative expenses
Compensation and benefits 379,314 292,043 1,092,306 821,544
Research and development 3,104 92,726 38,101 232,652
Professional services 79,380 134,563 264,483 236,812
Depreciation and amortization 108,632 133,861 336,322 473,451
Insurance 18,272 37,144 112,819 111,432
Facilities 28,975 22,429 70,538 69,024
Other 114,410 88,792 387,855 288,622
------------ ------------ ------------ ------------
Selling, General and
Administrative expenses 732,086 801,558 2,302,423 2,233,537
------------ ------------ ------------ ------------
Net Operating Loss (698,938) (801,558) (2,239,412) (2,204,486)
Interest Expense (87,981) (120,956) (261,936) (424,030)
------------ ------------ ------------ ------------
Net Loss $ (786,919) $ (922,514) $(2,501,349) $(2,628,516)
============ ============ ============ ============
Net Loss Per Share
- Basic and diluted $ (0.00) $ (0.01) $ (0.01) $ (0.03)
============ ============ ============ ============
Weighted average
shares outstanding
- Basic and diluted 226,619,118 107,372,928 185,967,097 88,425,584
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
2
KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended March 31,
-----------------------------------
2007 2006
------------ -------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss from operations $(2,501,349) $ (2,628,516)
Adjustments to reconcile net loss to
net cash used in operations
Depreciation and amortization 336,322 473,451
Stock options granted for
compensation/services 240,942 79,290
Change In
Accounts receivable 9,067 -
Prepaid expenses and other assets 26,232 3,227
Deferred revenue (20,000) -
Accounts payable 240,515 (269,204)
Accrued expenses and other liabilities 108,205 358,085
------------ -------------
Net cash Used in Operations (1,560,067) (1,983,667)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases on property & equipment (2,194) (2,100)
Investment in patent protection (83,087) (172,036)
------------ -------------
Net cash Used in Investing Activities (85,281) (174,136)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock 1,379,938 2,860,000
Repayments of short-term borrowings 130,476 (1,942,783)
Proceeds from short-term borrowings (438,237) -
Proceeds from long-term borrowings - 175,000
Debt acquisition costs - (20,000)
------------ -------------
Net cash Provided by Financing
Activities 1,072,177 1,072,217
------------ -------------
NET DECREASE IN CASH (573,170) (1,085,586)
CASH
Beginning of period 598,323 1,554,906
------------ -------------
End of period $ 25,153 $ 469,320
============ =============
Supplemental schedule of non-cash investing and
financing activities:
Interest paid in cash $ 194,000 $ -
Accounts payable/accrued expenses
converted to notes payable $ 130,476 $ -
The accompanying notes are an integral part of these financial statements.
3
KRONOS ADVANCED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Kronos Advanced
Technologies, Inc. ("Kronos" or the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial information.
Accordingly, they do not include all the information and notes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments necessary to present fairly the
information set forth therein have been included. Operating results for the nine
months ended March 31, 2007 are not necessarily indicative of the results that
may be experienced for the fiscal year ending June 30, 2007.
These consolidated financial statements are those of the Company and its
wholly-owned subsidiary. All significant inter-company accounts and transactions
have been eliminated in the preparation of the consolidated financial
statements.
The accompanying consolidated financial statements should be read in conjunction
with the Company's Form 10-KSB for the fiscal year ended June 30, 2006, which
was filed with the Securities and Exchange Commission on September 28, 2006.
NOTE 2 - REALIZATION OF ASSETS AND GOING CONCERN
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern. The
Company has sustained losses from operations in recent years, and such losses
have continued through the current period ended March 31, 2007. In addition, the
Company has used, rather than provided cash in its operations. The Company is
currently using its resources to attempt to raise capital necessary to
commercialize its technology and develop viable commercial products, and to
provide for its working capital needs. In the event that the Company is unable
to raise new capital, the Company will likely cease its operations.
In view of the matters described in the preceding paragraph, recoverability of a
major portion of the asset amounts shown in the accompanying balance sheet is
dependent upon continued operations of the Company, which in turn is dependent
upon the Company's ability to meet its financing requirements on a continuing
basis, to maintain present financing and to succeed in its future operations.
The consolidated financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the Company be
unable to continue in existence.
Management has taken the following steps with respect to its operating and
financial requirements:
EOL. In December 2005, Kronos executed a non-exclusive License Agreement with
EOL LLC, a Russian Federation corporation ("EOL"). Based in Korolev, Moscow
Region, Russia. EOL is leveraging the Kronos technology to produce, market, and
distribute Kronos commercial air purification products, bacteriological and
virus destruction devices in select Commonwealth of Independent States. The
agreement comes after successful completion of multiple tests in Eastern Europe,
which found the Kronos technology capable of decontaminating rooms infected with
airborne viruses and bacteria. Under the terms of the five-year agreement, EOL
will provide Kronos a fixed percentage royalty on every product sold, as well as
upfront licensing and quarterly maintenance fees. The initial medical products
are currently being marketed in Russia and marketing plans are being implanted
in Ukraine, Kazakhstan, Moldova and Byelorussia. During the nine months ended
March 31, 2007, Kronos earned $99,000 in revenue from the sale of power
supplies, other electrical components and engineering services and from the
royalty from the sale of finished products by EOL.
DESA. In June 2006, the Company executed a License Agreement (the "License
Agreement") with DESA IP, LLC ("DESA"), a wholly owned subsidiary of DESA LLC.
DESA is a global provider of hearth, heating and zone comfort products. DESA is
the first U.S. company to license the technology for embedded applications,
which represents another step forward in the commercialization and globalization
of Kronos' proprietary air movement, filtration and decontamination technology.
This License Agreement provides DESA the opportunity to embed the Kronos
electrostatic air movement technology within fireplaces, hearth systems, zone
heaters and mounted electric fans and heaters. DESA is seeking to take advantage
of the silence, energy efficiency and, in select applications, air filtration
benefits of the Kronos technology. DESA has the rights to distribute these
products across thirty-four countries in North America, Europe and the former
Eastern Block region. In October 2006, DESA approved Kronos' designs for the
first Kronos-based product and committed to the funding of the product
development by Kronos. In January 2007, DESA committed additional funds for
Kronos exploration of a second Kronos-based product application. By May 2007,
various prototype configurations for each of the two product applications were
under test and evaluation by Kronos and DESA.
Global Appliance Manufacturers. In October 2006, a leading global home appliance
manufacturer committed to fund 20% of the cost for Kronos to manufacturer a
silent kitchen range hood product. In addition, the customer has committed to a
4
120 day testing and evaluation period on a non-exclusive basis. The product was
shipped to the customer in October 2006 for testing and evaluation. In January
2007, the prototype design was modified based on customer input and a revised
unit was shipped to the customer. In addition to financial support, the customer
has also provided Kronos with product components for Kronos testing and
evaluation. In February 2007, a second leading global home appliance
manufacturer committed to purchase additional prototype devices for their
testing and evaluation. During the three months ended March 31, 2007, Kronos
earned $34,000 in revenue from the development of prototype devices for this
customer.
Washington Technology Center. In December 2004, Kronos and the University of
Washington were awarded a Phase I grant for a research and technology
development project entitled "Heat Transfer Technology for Microelectronics and
MEMS" by the Washington Technology Center ("WTC"). The objective of the project
is to develop a novel energy-efficient heat transfer technology for cooling
microelectronics. In January 2006, Kronos and the University of Washington
conducted a successful bench scale demonstration of micron cooling of a MEMS
chip. In June 2006, the Company and the University of Washington were awarded a
Phase II grant for continued funding in its novel cooling system for
microelectronics and computer chips. WTC is contributing $100,000 as a Phase II
grant for the project. Kronos will provide $35,000 in funding, $38,000 in
in-kind services, including use of the Kronos Research and Product Development
Facility. In 2007, the testing was expanded to demonstrate micron cooling of a
MEMS chip without electrical interference while the chip was in full operating
mode.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Method. The Company's consolidated financial statements are prepared
using the accrual method of accounting. The Company has elected a June 30 fiscal
year end.
Principles of Consolidation. The consolidated financial statements of the
Company include those of the Company and its subsidiary for the periods in which
the subsidiary was owned/held by the Company. All significant intercompany
accounts and transactions have been eliminated in the preparation of the
consolidated financial statements. At March 31, 2007, we had only one
subsidiary, Kronos Air Technologies, Inc.
Use of Estimates. The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the dates of the financial statements and the reported
amounts of revenues and expenses during the periods. Actual results could differ
from those estimates.
Concentrations of Credit Risk. Financial instruments which can potentially
subject the Company to concentrations of credit risk consist principally of
trade 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 nine months or less when purchased, to
be cash equivalents. The Company maintains cash and cash equivalents with
high-credit, quality financial institutions. At June 30, 2006, the cash balances
held at financial institutions were in excess of federally insured limits.
Accounts Receivable. The Company provides an allowance for potential losses, if
necessary, on trade receivables based on a review of the current status of
existing receivables and management's evaluation of periodic aging of accounts.
Accounts receivable are shown net of allowances for doubtful accounts of $0 at
March 31, 2007 and June 30, 2006, respectively. The Company charges off accounts
receivable against the allowance for losses when an account is deemed to be
uncollectable.
Property and Equipment. Property and equipment are recorded at cost.
Depreciation is provided over the estimated useful lives of the assets, which
range from three to seven years. Expenditures for major renewals and betterments
that extend the original estimated economic useful lives of the applicable
assets are capitalized. Expenditures for normal repairs and maintenance are
charged to expense as incurred. The cost and related accumulated depreciation of
assets sold or otherwise disposed of are removed from the accounts, and any gain
or loss is included in operations.
Intangibles. The Company uses assumptions in establishing the carrying value,
fair value and estimated lives of its long-lived assets and goodwill. The
criteria used for these evaluations include management's estimate of the asset's
continuing ability to generate positive income from operations and positive cash
flow in future periods compared to the carrying value of the asset, the
strategic significance of any identifiable intangible asset in its business
objectives, as well as the market capitalization of the Company. Cash flow
projections used for recoverability and impairment analysis use the same key
assumptions and are consistent with projections used for internal budgeting, and
for lenders and other third parties. If assets are considered to be impaired,
the impairment recognized is the amount by which the carrying value of the
assets exceeds the fair value of the assets. Useful lives and related
amortization or depreciation expense are based on its 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 its 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 its strategic business objectives, and utilization of the asset.
5
Income Taxes. Income taxes are accounted for in accordance with the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 109. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amounts expected to be realized, but no less than
quarterly.
Research and Development Expenses. Costs related to research and development are
charged to research and development expense as incurred.
Net Loss Per Share. Basic loss per share is computed using the weighted average
number of shares outstanding. Diluted loss per share is computed using the
weighted average number of shares outstanding adjusted for the incremental
shares attributed to outstanding options and warrants to purchase common stock,
when their effect is dilutive.
Revenue Recognition. The Company recognizes revenue in accordance with Staff
Accounting Bulletin ("SAB") 104, which requires evidence of an agreement,
delivery of the product or services at a fixed or determinable price, and
assurance of collection within a reasonable period of time. Further, Kronos Air
Technologies, Inc. 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 Company's stock are valued using the Black-Scholes option model.
Stock Options. In December 2004, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 123R,
Share-Based Payment ("SFAS No. 123R"). SFAS No.123R is a revision of SFAS No.
123, Accounting for Stock-Based Compensation, and supersedes Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
its related implementation guidance. SFAS No. 123R focuses primarily on
accounting for transactions in which an entity obtains employee services in
share-based payment transactions. SFAS No.123R requires entities to recognize
stock compensation expense for awards of equity instruments to employees based
on the grant-date fair value of those awards (with limited exceptions). Kronos
elected to implement the provisions of SFAS No. 123R in the fiscal year ended
June 30, 2005.
Recent Accounting Pronouncements
Accounting for Certain Hybrid Financial Instruments. In February 2006, the FASB
issued SFAS Statement No. 155 ("SFAS No. 155"), which is an amendment of SFAS
Statements No. 133 and 140. SFAS No. 155: a) permits fair value remeasurement
for any hybrid financial instrument that contains an embedded derivative that
otherwise would require bifurcation; b) clarifies which interest-only strip and
principal-only strip are not subject to the requirements of Statement 133; c)
establishes a requirement to evaluate interests in securitized financial assets
to identify interests that are freestanding derivatives or that are hybrid
financial instruments that contain an embedded derivative requiring bifurcation;
d) clarifies that concentrations of credit risk in the form of subordination are
not embedded derivatives; and e) amends Statement 140 to eliminate the
prohibition on a qualifying special-purpose entity from holding a derivative
financial instrument that pertains to a beneficial interest other than another
derivative financial instrument. SFAS No. 155 is effective for financial
statements for fiscal years beginning after September 15, 2006. Earlier adoption
of SFAS No. 155 is permitted as of the beginning of an entity's fiscal year,
provided the entity has not yet issued any financial statements for that fiscal
year. SFAS No. 155 has not had any impact on the financial statements of the
Company since adoption.
Accounting for Servicing of Financial Assets. In March 2006, the FASB issued
SFAS Statement No. 156 ("SFAS No. 155"), which amends SFAS Statement No. 140.
This Statement establishes, among other things, the accounting for all
separately recognized servicing assets and servicing liabilities. SFAS No. 155
amends Statement 140 to require that all separately recognized servicing assets
and servicing liabilities be initially measured at fair value, if practicable.
SFAS No. 155 permits, but does not require, the subsequent measurement of
separately recognized servicing assets and servicing liabilities at fair value.
An entity that uses derivative instruments to mitigate the risks inherent in
servicing assets and servicing liabilities is required to account for those
6
derivative instruments at fair value. Under SFAS No. 155, an entity can elect
subsequent fair value measurement to account for its separately recognized
servicing assets and servicing liabilities. By electing that option, an entity
may simplify its accounting because SFAS No. 155 permits income statement
recognition of the potential offsetting changes in fair value of those servicing
assets and servicing liabilities and derivative instruments in the same
accounting period. SFAS No. 155is effective for financial statements for fiscal
years beginning after September 15, 2006. Earlier adoption of SFAS No. 155 is
permitted as of the beginning of an entity's fiscal year, provided the entity
has not yet issued any financial statements for that fiscal year. Management
believes SFAS No. 155 will have no impact on the financial statements of the
Company once adopted.
Accounting for Uncertainty in Income Taxes. In June 2006, the FSAB issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48").
FIN 48 clarifies the accounting for uncertainty in income taxes recognized in
financial statements in accordance with SFAS No. 109, "Accounting for Income
Taxes." FIN 48 prescribes a recognition threshold and measurement attribute of
tax positions taken or expected to be taken on a tax return. FIN 48 is effective
for the first fiscal year beginning after December 15, 2006. Management believes
FIN 48 will have no impact on the financial statements of the Company once
adopted.
Accounting for the Conversion of an Instrument That Became Convertible upon the
Issuer's Exercise of a Call Option. In June 2006, the FSAB ratified Emerging
Issues Task Force 05-1, Accounting for the Conversion of an Instrument That
Became Convertible upon the Issuer's Exercise of a Call Option ("EITF 05-1").
EITF 05-1 addresses instruments that are currently not convertible to equity but
the instrument becomes convertible upon the exercise of the issuer's call
option. EITF 05-1 calls for debt extinguishment treatment if the instrument did
not contain a substantive conversion feature apart from the right to convert
upon the issuer's exercise of its call right at the date of issuance.
Conversely, if such substantive conversion feature did exist at issuance date,
EITF 05-1 requires conversion treatment for those equity securities issued to
satisfy the debt conversion. EITF 05-1 must be applied prospectively as of June
28, 2006. The Company does not expect EITF 05-1 to have a significant impact on
its future financial position or results of operations.
Fair Value Measurements. In September 2006, the FSAB issued SFAS Statement
No.157 ("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a
framework for measuring fair value according to GAAP, and expands disclosures
about fair value measurements. SFAS No. 157 applies under other accounting
pronouncements that require or permit fair value measurements, the FSAB having
previously concluded in those accounting pronouncements that fair value is a
relevant measurement attribute. Accordingly, SFAS No. 157does not require any
new fair value measurements. However, for some entities, the application of SFAS
No. 157 will change current practices. SFAS No. 157 is effective for financial
statements for fiscal years beginning after November 15, 2007. Earlier
application is permitted provided that the reporting entity has not yet issued
financial statements for that fiscal year. Management is currently evaluating
the impact SFAS No. 157 will have on the financial statements of the Company
once adopted.
Accounting for Registration Payment Arrangements. In December 2006, the FASB
approved FASB Staff Position (FSP) No. EITF 00-19-2, "Accounting for
Registration Payment Arrangements" ("FSP EITF 00-19-2"), which specifies that
the contingent obligation to make future payments or otherwise transfer
consideration under a registration payment arrangement, whether issued as a
separate agreement or included as a provision of a financial instrument or other
agreement, should be separately recognized and measured in accordance with SFAS
No. 5, "Accounting for Contingencies". FSP EITF 00-19-2 also requires additional
disclosure regarding the nature of any registration payment arrangements,
alternative settlement methods, the maximum potential amount of consideration
and the current carrying amount of the liability, if any. The guidance in FSP
EITF 00-19-2 amends FASB Statements No. 133, "Accounting for Derivative
Instruments and Hedging Activities", and No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity", and
FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure requirement
for Guarantees, Including Indirect Guarantees of Indebtedness of Others", to
include scope exceptions for registration payment arrangements. FSP EITF 00-19-2
is effective immediately for registration payment arrangements and the financial
instruments subject to those arrangements that are entered into or modified
subsequent to the issuance date of this FSP, or for financial statements issued
for fiscal years beginning after December 15, 2006, and interim periods within
those fiscal years, for registration payment arrangements entered into prior to
the issuance date of this FSP. The Company is currently evaluating the impact,
if any, on the Company's financial position, results of operations or cash
flows.
Fair Value Option for Financial Assets and Financial Liabilities. In February
2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets
and Financial Liabilities-including an amendment of FAS 115" (Statement 159).
Statement 159 allows entities to choose, at specified election dates, to measure
eligible financial assets and liabilities at fair value that are not otherwise
required to be measured at fair value. If a company elects the fair value option
for an eligible item, changes in that item's fair value in subsequent reporting
periods must be recognized in current earnings. Statement 159 is effective for
fiscal years beginning after November 15, 2007. We are currently evaluating the
potential impact of Statement 159 on our financial statements. We do not expect
the impact will be material.
NOTE 4 -- INCOME TAXES
The composition of deferred tax assets and the related tax effects at March 31,
2007 and June 30, 2006 are as follows:
March 31, 2007
(unaudited) June 30, 2006
--------------- ---------------
Benefit from carryforward of capital
and net operating losses $ (8,216,000) $ (7,209,000)
Other temporary differences (157,000) (157,000)
Options issued for services (87,000) (218,000)
Less:
Valuation allowance 8,460,000 7,584,000
--------------- ---------------
Net deferred tax asset $ - $ -
=============== ===============
7
The other temporary differences shown above relate primarily to impairment
reserves for intangible assets, and accrued and deferred compensation. The
difference between the income tax benefit in the accompanying statements of
operations and the amount that would result if the U.S. Federal statutory rate
of 34% were applied to pre-tax loss is as follows:
March 31, 2007
(Unaudited) June 30,2006
------------------------------------ ---------------------------------------
% of % of
Amount Pre-Tax Loss Amount Pre-Tax Loss
------------- ------------ -------------- ------------
Benefit for income tax at:
Federal statutory rate $ (850,000) (34.0)% $ (1,360,000) (34.0)%
State statutory rate (50,000) (2.0)% (80,000) (2.0)%
Non-deductible expenses 24,000 1.0 % 105,000 2.6 %
Increase in valuation allowance 876,000 35.0 % 1,335,000 33.4 %
------------------------------------ -----------------------------------------
$ - 0.0 % $ - 0.0 %
==================================== =========================================
The non-deductible expenses shown above related primarily to the amortization of
intangible assets and to the accrual of stock options for compensation using
different valuation methods for financial and tax reporting purposes.
At March 31, 2007, the Company has approximately $19.6 million of unused Federal
net operating losses, $2.3 million capital losses and $15.5 million State net
operating losses available for carryforward to future years. The benefit from
carryforward of such losses will expire in various years through 2026 and could
be subject to limitations if significant ownership changes occur in the Company.
NOTE 5 - SEGMENTS OF BUSINESS
The Company operates principally in one segment of business: the Company
licenses, manufactures and distributes air movement and purification devices
utilizing the Kronos technology. For the nine months ended March 31, 2007 and
the fiscal year ended June 30, 2006 the Company operated only in the U.S.
NOTE 6 - EARNINGS PER SHARE
Weighted average shares outstanding used in the earnings per share calculation
were 185,967,097 and 88,245,584 for the nine months ended March 31, 2007 and
2006, respectively.
NOTE 7 - NOTES PAYABLE
The Company had the following obligations as of March 31, 2007 and June 30,
2006,
March 31, 2007
(Unaudited) June 30, 2006
--------------- ---------------
Obligation to Cornell Capital(1) $ 1,561,476 $ 1,815,000
Obligation to HoMedics (2) 2,575,000 2,575,000
Obligation to current employees (3) 202,307 256,544
-------------- ---------------
4,338,783 4,646,544
Less:
Current portion 2,622,116 2,071,544
--------------- ---------------
Total long term obligations net of
current portion $ 1,716,667 $ 2,575,000
=============== ===============
(1) This Convertible Debenture bears interest at 12% and is due in full on June
13, 2007.
(2) This note had a 5 year term and bears interest at 6% with no payments
required until February 1, 2007. This note along with an obligation by HoMedics
to provide Kronos with an additional $750,000 in debt financing was issued along
with warrants for the purchase of 40 million shares of the Company's common
stock. In February 2007, HoMedics and Kronos executed a Settlement Agreement and
General Release whereby HoMedics agreed to receive $1 million in a cash payment
to cancel the Loan Agreements and to cancel warrants to purchase 26.5 million
shares of the Company's common stock. Payment is due June 20, 2007 or the
Settlement Agreement becomes null and void.
(3) These notes bear interest at the rate of 12%. They represent obligations to
current employees of the Company, which are due and payable in full.
8
NOTE 8 - COMMITMENTS AND CONTINGENCIES
In October 2004, Kronos entered into agreements for up to $20.5 million in
equity and equity backed debt financing from Cornell Capital Partners LP
("Cornell Capital Partners"). In October 2004, Kronos sold 5 million
unregistered shares of Kronos common stock for gross proceeds of $500,000 to
Cornell Capital Partners. Cornell Capital Partners committed to provide $4
million pursuant to two promissory notes, which was funded as follows: $2
million upon the filing of a registration statement on form SB-2 and $2 million
upon the Securities and Exchange Commission ("SEC") declaring the Registration
Statement effective. Kronos executed a Standby Equity Distribution Agreement for
$20 million of funding. The Company cannot drawdown any funds under the Standby
Equity Distribution Agreement until such time as it files a registration
statement registering additional shares and the registration statement is
declared effective by the SEC. In December 2006, Cornell Capital Partners
converted and exchanged the second promissory note for a convertible debenture
issued by Kronos for the outstanding principal and interest owed on the
Promissory Note of $1.6 million. The convertible debenture is due in full June
13, 2007, bears an interest rate of 12% and under certain limitations is
convertible into shares of Kronos common stock at $0.0075 per share. As of March
31, 2007, Kronos has received $7.3 million in funding under these agreements. As
of March 31, 2007, the Company owed $1.6 million under the convertible
debenture. As of February 2007, Kronos had issued all the shares registered in
the registration statement on form SB-2 in connection with advances under the
Standby Equity Distribution Agreement with Cornell Capital Partners. The Company
has no plans at this time to register additional shares to Cornell Capital
Partners under the terms of the Standby Equity Distribution Agreement. The
Company does not have the current funds to make the June 13, 2007 payment to
Cornell.
In October 2004, Kronos and FKA Distributing Co. d/b/a HoMedics, Inc.,
("HoMedics") agreed to extend repayment of Kronos debt and to provide an
additional $1 million in funding. HoMedics had agreed to provide Kronos with an
additional $1 million in financing consisting of $925,000 in secured debt
financing and $75,000 for the purchase of additional warrants. In December 2005,
$175,000 of the $925,000 was funded. The balance of $750,000 was not funded. In
addition, quarterly debt payments and the maturity date for existing debt were
extended. Quarterly payments due on the outstanding $2.4 million in secured debt
financing, which had been scheduled to begin in August 2004, were due in
February 2007. The maturity date of the $2.4 million in debt has been extended
from May 2008 to October of 2009; the maturity date on the $175,000 was extended
to October 2009. The interest rate was at 6% for the $2.4 million in debt; the
rate was also 6% on the additional debt. HoMedics increased their potential
equity position in Kronos to 30% of Kronos common stock on a fully diluted
basis. In connection with the October 2004 agreements, Kronos issued HoMedics a
warrant to buy 26.5 million shares of Kronos common stock. In February 2007,
HoMedics and Kronos executed a Settlement Agreement and General Release whereby
among other things HoMedics agreed to receive $1 million in a cash payment to
cancel the loan agreements, including all principal and accrued interest, and to
cancel the warrants to purchase 26.5 million shares of the Company's common
stock. The $1 million payment is due June 20, 2007 or the Settlement Agreement
becomes null and void. The Company does not have the current funds to make the
required payments to HoMedics.
Daniel R. Dwight, President and Chief Executive Officer, and the Company entered
into an Employment Agreement effective as of November 15, 2001. The initial term
of Mr. Dwight's Employment Agreement was for 2 years and will automatically
renew for successive 1 year terms unless Kronos or Mr. Dwight provide the other
party with written notice within 3 months of the end of any renewal term. In
addition, Kronos granted Mr. Dwight 1,000,000 immediately vested and
exercisable, ten-year stock options at various exercise prices. The Board of
Directors renewed Mr. Dwight's Employment Agreement on August 13, 2003 and again
on August 15, 2004 and August 15, 2005. In April 2006, the Board of Directors
renewed Mr. Dwight's Employment Agreement and increased his base cash
compensation to $225,000 per year effective April 15, 2006. Mr. Dwight is
eligible for annual incentive bonus compensation in an amount equal to Mr.
Dwight's annual salary based on the achievement of certain bonus objectives. Mr.
Dwight will be entitled to fully participate in any and all 401(k), stock
option, stock bonus, savings, profit-sharing, insurance, and other similar plans
and benefits of employment.
Richard F. Tusing, Chief Operating Officer, and the Company entered into an
Employment Agreement effective as of January 1, 2003. The initial term of Mr.
Tusing's Employment Agreement is for 2 years and will automatically renew for
successive 1 year terms unless Kronos or Mr. Tusing provide the other party with
written notice within 3 months of the end of renewal term. The Board of
Directors renewed Mr. Tusing's Employment Agreement on October 1, 2004, October
1, 2005 and October 1, 2006. Mr. Tusing's Employment Agreement provides for base
cash compensation of $160,000 per year. Mr. Tusing will be entitled to fully
participate in any and all 401(k), stock option, stock bonus, savings,
profit-sharing, insurance, and other similar plans and benefits of employment.
NOTE 9 - SUBSEQUENT EVENTS
In April 2007, Kronos received $200,000 in net proceeds from two accredited
investors under the terms of a convertible debenture. The convertible debentures
are due in full April 27, 2010, bear an interest rate of 12% and are convertible
into shares of Kronos common stock at $0.0075 per share.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTORY STATEMENTS
FORWARD LOOKING STATEMENTS AND ASSOCIATED RISKS
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS. THIS FILING CONTAINS
FORWARD-LOOKING STATEMENTS, INCLUDING STATEMENTS REGARDING, AMONG OTHER
THINGS:(A) OUR PROJECTED SALES AND PROFITABILITY, (B) OUR GROWTH STRATEGIES, (C)
ANTICIPATED TRENDS IN OUR INDUSTRY, (D) OUR FUTURE FINANCING PLANS, (E) OUR
ANTICIPATED NEEDS FOR WORKING CAPITAL, AND (F) THE BENEFITS RELATED TO OUR
OWNERSHIP OF KRONOS AIR TECHNOLOGIES, INC. IN ADDITION, WHEN USED IN THIS
FILING, THE WORDS "BELIEVES," "ANTICIPATES," "INTENDS," "IN ANTICIPATION OF,"
"EXPECTS," AND SIMILAR WORDS ARE INTENDED TO IDENTIFY CERTAIN FORWARD-LOOKING
STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE BASED LARGELY ON OUR
EXPECTATIONS AND ARE SUBJECT TO A NUMBER OF RISKS AND UNCERTAINTIES, MANY OF
WHICH ARE BEYOND OUR CONTROL. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS, INCLUDING, WITHOUT
LIMITATION, THE RISKS OUTLINED UNDER "FACTORS AFFECTING KRONOS' BUSINESS AND
PROSPECTS" AND MATTERS DESCRIBED IN THIS FILING GENERALLY. IN LIGHT OF THESE
RISKS AND UNCERTAINTIES, THERE CAN BE NO ASSURANCE THAT THE FORWARD-LOOKING
STATEMENTS CONTAINED IN THIS FILING WILL IN FACT OCCUR. WE DO NOT UNDERTAKE ANY
OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY REVISIONS TO THESE
FORWARD-LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT ANY FUTURE EVENTS OR
CIRCUMSTANCES.
GENERAL
Kronos Advanced Technologies, Inc. ("Kronos" or the "Company") is an product
development and production company that has developed and patented technology
that among other things fundamentally changes the way air is moved, filtered and
sterilized. Kronos is pursuing commercialization of its proprietary technology
in a limited number of markets; and if we are successful and funds are
available, we intend to enter additional markets in the future. Twelve of the
Company's U.S. patent applications and two of its international patent
applications have been allowed for issuance. To date, our ability to execute our
strategy has been restricted by our limited amount of capital.
Kronos is focused on prioritizing the Company's limited resources on developing
and licensing Kronos' proprietary technology for air movement and purification
applications to address the indoor air quality market. The Kronos technology has
numerous valuable characteristics for applications in the indoor air quality
market, including moving air and gases at high velocities while filtering odors,
smoke and particulates and sterilizing air from bacteria and virus
contamination. A number of the scientific claims of the Kronos technology have
been tested by the U. S. and foreign governments, multi-national companies and
independent testing facilities.
The Company has begun establishing strategic partners with select companies both
domestically and internationally for standalone and embedded applications of our
proprietary technology. The Company and these partners are in various stages of
developing Kronos-based commercial products.
Standalone Platform:
o Residential Products - On December 31, 2006, the Company's License
Agreement with HoMedics expired. The Company is in active discussions with
other consumer products companies to market and sell Kronos-based air
purification products.
o Medical Products - In December 2005, the Company executed a non-exclusive
license agreement with EOL LLC, a Russian Federation company ("EOL"), for
manufacturing and distributing Kronos-based commercial standalone products
in Russia and other select Commonwealth of Independent States. In September
2006, EOL began to assemble the finished products in Russia from components
supplied both locally and from contract manufacturers in China, as well as
electronic components and power supplies from Kronos. The initial medical
products are currently being marketed in Russia and marketing plans are
being implanted in Ukraine, Kazakhstan, Moldova and Byelorussia. In
November 2006, the Ministry of Health Care and Social Development of the
Russian Federation issued a Registration Certificate for the product that
designates the product for medical use. During the nine months ended March
31, 2007, Kronos earned $99,000 in revenue from the sale of power supplies,
other electrical components and engineering services and from the royalty
from the sale of finished products by EOL.
Embedded Platform:
o Commercial Products - In June 2006, the Company executed its first license
for embedded applications of Kronos technology with DESA LLC ("DESA"). The
agreement provides DESA the opportunity to embed the Kronos electrostatic
air movement technology within fireplaces, hearth systems, zone heaters and
mounted electric fans and heaters. In October 2006, DESA approved Kronos'
designs for the first Kronos-based product and committed to the funding of
the product development by Kronos. In January 2007, DESA committed
10
additional funds for Kronos exploration of a second Kronos-based product
application. By May 2007, various prototype configurations for each of the
two product applications were under test and evaluation by Kronos and DESA.
o Residential Products - In October 2006, a leading global home appliance
manufacturer committed to fund 20% of the cost for Kronos to manufacturer a
silent kitchen range hood product. In addition, the customer committed to a
120 day testing and evaluation period on a non-exclusive basis. This next
generation range hood device represents the culmination of more than 12
months of product design and development effort by Kronos to apply our
technology to this unique embedded residential application. The product was
shipped to the customer in October 2006. In January 2007, the prototype
design was modified based on customer input and a revised unit was shipped
to the customer. In addition to financial support, the customer has also
provided Kronos with product components for Kronos testing and evaluation.
In February 2007, a second global appliance manufacturer committed to
purchase additional prototypes from Kronos for testing and evaluation.
During the three months ended March 31, 2007, Kronos earned $34,000 in
revenue from the development of prototype devices for this customer.
o Microelectronics Products - In June 2006, the Washington Technology Center
awarded the Company in conjunction with the University of Washington and
Intel Corporation continued funding for a research and development project
based on a novel cooling system for microelectronics and computer chips.
Technology Description and Benefits
The proprietary Kronos technology involves the management of corona discharge by
applying high voltage management across paired electrical grids to create an ion
exchange. Applications for efficient high voltage management, efficient corona
discharge and ion exchange include but are not limited to:
o air movement, including dielectric fluid movement and propulsion;
o air purification, including particulate removal, biohazard destruction,
chemical and industrial gas treatment, and odor removal;
o temperature and environmental management, including space heating and
cooling;
o microchip, MEMS and other electronics devices and components cooling; o air
management, including sorting and separation of air streams by particle
content;
o sound generation, including high fidelity sound recreation and active noise
cancellation;
o high voltage management, including development of high voltage power
supplies and control of energy surges and electrical discharges;
o control of water and moisture content in air streams, including
dehumidification and humidification; and o water treatment, including water
purification, ionization and water desalination.
Independent Testing - Product Claims Platform
A number of the scientific claims of the Kronos technology have been tested by
the U. S. and foreign governments, multi-national companies and independent
testing facilities. To date, independent laboratory testing has verified the
filtration and sterilization capability of the Kronos technology.
Filtration Testing Results:
o Aerosol and Air Quality Research Laboratory - up to 99.8% filtration of
0.02 to 0.20 micron (20 to 200 nanometers) size particles;
o LMS Industries - removal of over 99.97% of 0.10 micron (100 nanometers) and
above size particles using HVAC industry's ASHRAE 52.2 testing standard for
filtration;
o MicroTest Laboratories - HEPA Clean Room Class 1000 quality particulate
reduction; and
o Intertek - tobacco smoke elimination tests in accordance with ANSI/AHAM
AC-1-1988 standard entitled "American National Standard Method for
Measuring Performance of Portable Household Electric Cord-Connected Room
11
Air Cleaners," which demonstrated a Clean Air Delivery Rate ("CADR") for
the Kronos air purifier of over 300 for the larger size Kronos air purifier
and 80 for the smaller size using consumer filtration testing standards for
the Association of Home Appliance Manufacturers ("AHAM").
Sterilization Testing Results:
o Scientific Institution of Health Care, Central Clinical Hospital #2 in
Moscow (clinical trial):
- 100% decontamination of bacteria (Staphylococcus aureus) in under one
hour and 80% decontamination of general bacteria in under 24 hours
from a 48m(3) hospital room while people were present.
o Pulmonary Department of Municipal Hospital #2 in Moscow (clinical trial):
- 100% decontamination of bacteria (Staphylococcus aureus) in under five
hours from a 66m(3) hospital room while four patients were present;
and
- 100% decontamination of mildew fungi in under two hours from a
113.2m(3) hospital room.
o Disinfection Research Institute Sterilization Laboratory in Moscow:
- disinfected a room completely contaminated with Bacteriophage - a
microorganism which lives in the E. Coli bacteria. Bacteriophage is
widely used in virus testing because the microorganism's biological
structure and size share many functional similarities with a wide
range of viruses; and
- 100% decontamination of room infected with bacteria (Staphylococcus
aureus strain 906 (S. aureus) and Bacillus cereus strain 96 (B.
cereus) - S. aureus is a known cause of hospital-acquired infections,
including skin lesions such as boils and furunculosis and more serious
infections such as pneumonia and meningitis.
o Institute for Veterinary Medicine in the Ukraine - destroy and sterilize
air which had been inseminated with Anthrax and E.coli spores;
o New Hampshire Materials Laboratory - up to 95% reduction of hazardous
gases, including numerous carcinogens found in cigarette smoke;
o Battelle PNNL - 95% destruction of Bg (anthrax simulant); and
o Dr. Sergey Stoylar, a bacteriologist from the American Bacteriological
Society - 100% destruction of Bacillus subtilis 168 (bacteria simulant).
In September 2006, the Russian Research Institute of Medical Equipment approved
EOL's Kronos-based Tree air purification device for use in hospitals and other
healthcare facilities. The device received Category I approval, which means the
product has met the strictest regulations required for a device to be used in
operating rooms and other areas that require a sterile environment. In November
2006, following the Russian Research Institute approval, the Ministry of Health
Care and Social Development of the Russian Federation issued a Registration
Certificate that designates the Kronos-based Tree air purification device for
medical use.
Market Segmentation
Kronos' initial business development strategy is to develop and produce products
based on the Kronos technology to six distinct air quality market segments: (1)
air movement and purification (residential, health care, hospitality, and
commercial facilities); (2) air purification for unique spaces (clean rooms,
airplanes, automotive, and cruise ships); (3) specialized military (naval
vessels, closed vehicles and mobile facilities); (4) embedded cooling and
cleaning (electronic devices and medical equipment); (5) industrial scrubbing
(produce storage and diesel and other emissions); and (6) hazardous gas
destruction (incineration and chemical facilities).
Kronos' focus is on the first four of these market segments, which are described
in more detail below:
o Air Movement and Purification - Indoor air pollution, including sick
building syndrome, second hand cigarette smoke and various bacterial
and viral contaminants , is primarily caused by inadequate ventilation,
chemical contaminants from indoor and outdoor sources and biological
contaminants. There is also a demand for smaller devices that move,
heat and deodorize the indoor air stream. The addressable air movement
and purification segment is made up of four principal target markets:
(1) residential, (2) health care, (3) hospitality and (4) commercial.
o Air Purification for Unique Spaces - Electronics, semiconductor,
pharmaceutical, aerospace, medical and many other producers depend on
clean room technology. As products, such as electronic devices become
smaller, the chance of contamination in manufacturing becomes higher.
For pharmaceutical companies, clean, safe and contaminant-free products
are imperative to manufacturing and distributing a viable product.
Other potential applications for the Kronos technology include closed
environments, such as automobiles, aircraft, cruise ships and other
transportation modes, that require people to breathe contaminated,
re-circulated air for extended periods.
12
o Embedded Cooling - Heat generation is becoming a major bottleneck in
high density electronics. We believe that the embedded cooling market
segment offers Kronos a near term opportunity to develop an alternative
to fans for air movement and cooling inside of personal computers ,
servers and medical diagnostic equipment and a long term opportunity to
develop micro channel cooling solutions for future generation
microchips.
o Specialized Military - Military personnel face the worst of all
possible worlds: indoor air pollution, often in very confined spaces
for extended periods, combined with the threat of biological warfare,
nuclear fallout, and other foreign elements. We believe that the
military market segment offers Kronos a unique opportunity to leverage
the technical and funding resources of the U. S. military to expand
Kronos' ability to develop and produce Kronos-based air movers and
purifiers for applications that require these products to be embedded
into ventilation systems to address the needs of military personnel.
Kronos is currently developing products for the air movement and purification,
air purification for unique spaces, and specialized military markets through
specific customer contracts. Kronos is currently undertaking research and
development in the embedded micro cooling market using Company funds and third
party grants. These contracts and grants are described in more detail in the
Technology Application and Product Development section of this filing.
Technology Application and Product Development
To best serve Kronos' targeted market segments, our Company is developing
specific product applications across two distinct product application platforms.
A Kronos device can be either used as a standalone product or can be embedded.
Standalone products are self-contained and only require the user to plug the
Kronos device into a wall outlet to obtain air movement and filtration for their
home, office or hotel room. Embedded applications of the Kronos technology
require the technology be added into another system, such as a building
ventilation system for more efficient air movement and filtration or into an
electrical device such as computer or medical equipment to replace the cooling
fan or heat sink.
Standalone Platform
Medical Products. In December 2005, Kronos executed a non-exclusive License
Agreement with EOL LLC. Based in Korolev, Moscow Region, Russia, EOL is
leveraging the Kronos technology to produce, market, and distribute Kronos
commercial air purification products, bacteriological and virus destruction
devices in select Commonwealth of Independent States. The agreement comes after
successful completion of multiple tests in Eastern Europe, which found the
Kronos technology capable of decontaminating rooms infected with airborne
viruses and bacteria. Under the terms of the five-year agreement, EOL will
provide Kronos a fixed percentage royalty on every product sold, as well as
upfront licensing and quarterly maintenance fees. The initial medical products
are currently being marketed in Russia and marketing plans are being implanted
in Ukraine, Kazakhstan, Moldova and Byelorussia. During the nine months ended
March 31, 2007, Kronos earned $99,000 in revenue from the sale of power
supplies, other electrical components and engineering services and from the
royalty from the sale of finished products by EOL.
In August 2006, the Russian Research Institute of Medical Equipment began the
process for product certification of the EOL's Kronos-based Tree air
purification device for use in medical facilities, including a successful
clinical trial of EOL products in the Pulmonary Department of Municipal Hospital
#2 in Moscow. In October 2006, Scientific Institution of Health Care, Central
Clinical Hospital #2 in Moscow completed a second clinical trial. As a result of
these clinical trials, the Russian Research Institute approved the Kronos-based
Tree air purification device for use in hospitals and other healthcare
facilities. The device received Category I approval, which means the product has
met the strictest regulations required for a device to be used in operating
rooms and other areas that require a sterile environment. In November 2006,
following the Russian Research Institute approval, the Ministry of Health Care
and Social Development of the Russian Federation issued a Registration
Certificate that designates the Kronos-based Tree air purification device for
medical use.
Commercial and Other Standalone Products. Utilizing our expanded product
development resources, Kronos completed the initial design, development and
production of a series of small multifunctional devices that can be used as
space heaters, vaporizers, disinfectors, deodorizers and/or fans. Based on the
proprietary Kronos technology, these devices are currently undergoing testing
and evaluation. Kronos has been meeting with potential strategic partners for
manufacturing, marketing, selling and distributing these Kronos-based products.
Residential Products. Since the October 2002 License Agreement with HoMedics
expired in December 31, 2006, the Company has been in active discussions with
other consumer products companies to market and sell Kronos-based air
purification products.
Embedded Platform
Commercial Products. In June 2006, the Company executed a License Agreement with
DESA. DESA is a global provider of hearth, heating and zone comfort products.
DESA is the first U.S. company to license the technology for embedded
applications, which represents another step forward in the commercialization and
globalization of Kronos' proprietary air movement, filtration and
decontamination technology. This License Agreement provides DESA the opportunity
to embed the Kronos electrostatic air movement technology within fireplaces,
hearth systems, zone heaters and mounted electric fans and heaters. DESA is
seeking to take advantage of the silence, energy efficiency and, in select
applications, air filtration benefits of the Kronos technology. DESA has the
13
rights to distribute these products across thirty-four countries in North
America, Europe and the former Eastern Block region. In October 2006, DESA
approved Kronos' designs for the first Kronos-based product and committed to the
funding of the product development by Kronos. In January 2007, DESA committed
additional funds for Kronos exploration of a second Kronos-based product
application. By May 2007, various prototype configurations for each of the two
product applications were under test and evaluation by Kronos and DESA.
In addition, Kronos has developed an air filtration and purification mechanism
capable of performing to HEPA quality standards, while eliminating bacteria and
viruses. The Company believes that Kronos devices could replace current HEPA
filters with a permanent, easily cleaned, low-cost solution. Among the technical
advantages of the Kronos technology over HEPA filters is the ability of the
Kronos-based devices to eliminate the energy burden on air handling systems,
which must generate high levels of backpressure necessary to move air through
HEPA-based systems. Kronos-based devices enhance the air flow while providing
better than HEPA level filtration and purification. Kronos is seeking one or
more strategic partners to commercial, market and distribute Kronos based
commercial embedded air filtration and purification devices.
Residential Products. During 2006, several leading global home appliance
manufacturers initiated discussions with Kronos with an interest in using the
Kronos technology for developing select residential applications, including
silent kitchen range hoods. With specific customer input, Kronos has designed
and developed initial prototype range hoods for additional customer
demonstration and evaluation. In August 2006, a leading global appliance
manufacturer requested a second prototype be designed and built to their
specifications for further evaluation. In October 2006, the customer committed
to fund 20% of the cost for Kronos to manufacturer a silent kitchen range hood
product. In addition, the customer has committed to a 120 day testing and
evaluation period on a non-exclusive basis. In January 2007, the prototype
design was modified based on customer input and a revised unit was shipped to
the customer. In addition to financial support, the customer has also provided
Kronos with product components for Kronos testing and evaluation. In February
2007, a second global appliance manufacturer committed to purchase additional
prototypes from Kronos. These next generation range hood devices represent the
culmination of more than 12 months of product design and development effort by
Kronos to apply our technology to this unique embedded residential application.
Military Products. The U. S. Department of Defense has provided Kronos with
various grants and contracts to develop, test and evaluate the Kronos technology
for embedded applications. Under a Office of Naval Research grant and SBIR Phase
I and Phase II contracts, the U. S. military had provided Kronos with over $1
million in funding. The Company currently has devices built for the U.S. Navy
under evaluation by Northrop Grumman for potential deployment of U.S. Naval
ships.
Transportation Products. In April 2006, Kronos was invited to serve as a member
and an industrial partner in the Federal Aviation Administration's (the "FAA")
Air Transportation Airliner Cabin Environment Research Center of Excellence. In
this capacity, Kronos will provide its real-time decontamination, air
filtration, purification and technology expertise to evaluate and develop
solutions that proactively address and improve cabin air quality. The program,
led by the FAA, includes senior executives from aerospace equipment
manufacturers and leading American universities.
In December 2005, Kronos shipped a prototype device designed and built under
specific customer specifications to a leading auto manufacturer for their
testing and evaluation. This evaluation led the manufacturer in January 2007 to
seek a follow-on proposal from Kronos to further develop auto based applications
of the Kronos technology.
Microelectronics Cooling Products. In December 2004, Kronos and the University
of Washington were awarded a Phase I grant for a research and technology
development project entitled "Heat Transfer Technology for Microelectronics and
MEMS" by the Washington Technology Center (the "WTC"). The objective of the
project is to develop a novel energy-efficient heat transfer technology for
cooling microelectronics. In January 2006, Kronos and the University of
Washington conducted a successful bench scale demonstration of micron cooling of
a MEMS chip.
In June 2006, the Company and the University of Washington were awarded a Phase
II grant for continued funding in its novel cooling system for microelectronics
and computer chips. The WTC is contributing $100,000 as a Phase II grant for the
project. Kronos will provide $35,000 in funding and $38,000 in in-kind services,
including use of the Kronos Research and Product Development Facility. Dr.
Alexander Mamishev of the University of Washington Electrical Engineering
Department is the principal investigator on the project and will lead a team of
scientists and engineers from Kronos and Intel Corporation who will also
collaborate on the project. In September 2006, Kronos hired a former Intel
employee to lead Kronos' development of micro cooling applications.
Thermal management for microelectronics and MEMS systems is a challenge.
Existing cooling devices aren't meeting increasing needs for energy consumption
and heat dissipation. Kronos air handling technology is an emerging technology
that uses an electric field to exert force on ionized gas. Kronos is attempting
to develop an improved microchip air handling system that is smaller in size,
has high speed airflow, allows more targeted delivery of cooling to areas of
highest heat and is compatible with current processes.
14
Patents and Intellectual Property
Kronos has received notification that twelve of its patent applications have
been allowed for issuance by the United States Patent and Trademark Office and
two of its international patent applications have been allowed for issuance by
the Commonwealth of Australia Patent Office and the Mexican Institute of
Industrial Property, respectively. These patents are considered utility patents
which describe fundamental innovations in the generation, management and control
of electrostatic fluids, including air movement, filtration and purification.
Each of the patents contain multiple part claims for both general principles as
well as specific designs for incorporating the Kronos technology into air
movement, filtration and purification products. The patents provide protection
for both specific product implementations of the Kronos technology, as well as
more general processes for applying the unique attributes and performance
characteristics of the technology.
U.S. Patents
Date U.S. Patent # Patent Title Description Protection
---- ------------- ------------ ----------- ----------
March Notice of Electric Field effective electric field 2022
2007 Allowance Management management for reduced
sparking
October 7,122,070 Method of and inertialess power supply for 2025
2006 Apparatus for safe operation and spark
Electrostatic Fluid prevention
Acceleration
August Notice of Corona Discharge method of generating air 2023
2006 Allowance Electrode and Method flow and air cleaning with
of Operating reduced amount of ozone by-
product and with extended
life-span of the electrodes
July Notice of Electrostatic Air method for improving the 2024
2006 Allowance Cleaning Device efficiency of electrodes for
filtering micron and sub-
micron size particles
May 7,053,565 Electrostatic Fluid effective powering of the 2024
2006 Accelerator - Power electrodes for high level of
Management air velocity
November 6,963,479 Electrostatic Fluid advanced voltage management 2023
2005 Accelerator - impacts air filtration and
Advanced Geometries sterilization, air flow and
ozone as well as safe operation
and spark prevention
August 6,937,455 Spark Management analysis, detection and 2022
2005 Method and Device prevention of sparks in a
high voltage field -
creating safe, effective
electrostatic technology
products
July 6,919,698 Voltage Management materials and geometry 2023
2005 for Electrostatic allowing for spark free
Fluid Accelerator operation and use of light
weight, inexpensive
materials as the electrodes
May 6,888,314 Electrostatic Fluid electrode design geometries 2022
2005 Accelerator - and attributes including
Electrode Design micro channeling to achieve
Geometries unique air movement and
purification performance
April 6,727,657 Electrostatic Fluid synchronization of multiple 2022
2004 Accelerator for and stages of arrays -
a Method of increasing air flow and air
Controlling Fluid flow efficiency
December 6,664,741 Method of and ratio of voltage for 2022
2003 Apparatus for producing ion discharge to
Electrostatic Fluid create air movement and
Acceleration Control base level filtration
of a Fluid Flow
January 6,504,308 Electrostatic Fluid electrode density core for 2019
2003 Accelerator producing ion discharge to
create air movement and
base level filtration
15
International Patents
In November 2004, Kronos received formal notification from the Commonwealth of
Australia Patent Office indicating that its application entitled "Electrostatic
Fluid Accelerator" has been examined and allowed for issuance as an Australian
patent. In December 2005, Kronos received formal notification from the Mexican
Institute of Industrial Property indicating that its application entitled
"Electrostatic Fluid Accelerator" has been examined and allowed for issuance as
a Mexican patent. There are a number of other patent applications corresponding
to Kronos' twelve U.S. Patents that have been filed and are pending outside of
the United States.
Kronos intends to continue to aggressively file patent applications in the U.S.
and internationally. A number of additional patent applications have been filed
for, among other things, the control and management of electrostatic fluid
acceleration. These additional patent applications are either being examined or
are awaiting examination by the Patent Office.
CRITICAL ACCOUNTING POLICIES
Use of Estimates. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Allowance for Doubtful Accounts. We provide a reserve against our receivables
for estimated losses that may result from our customers' inability to pay. These
reserves are based on potential uncollectible accounts, aged receivables,
historical losses and our customers' credit-worthiness. Should a customer's
account become past due, we generally will place a hold on the account and
discontinue further shipments and/or services provided to that customer,
minimizing further risk of loss.
Valuation of Goodwill, Intangible and Other Long Lived Assets. We use
assumptions in establishing the carrying value, fair value and estimated lives
of our long-lived assets and goodwill. The criteria used for these evaluations
include management's estimate of the asset's ability to generate positive income
from operations and positive cash flow in future periods compared to the
carrying value of the asset, the strategic significance of any identifiable
intangible asset in our business objectives, as well as the market
capitalization of Kronos. We have used certain key assumptions in building the
cash flow projections required for evaluating the recoverability of our
intangible assets. We have assumed revenues from the following applications of
the Kronos technology: consumer stand-alone devices, assisted care/skilled
nursing stand-alone devices, embedded devices in the hospitality industry and in
specialized military applications. Expenses/cash out flows in our projections
include sales and marketing, production, distribution, general and
administrative expenses, research and development expenses and capital
expenditures. These expenses are based on management estimates and have been
compared with industry norms (relative to sales) to determine their
reasonableness. We use the same key assumptions for our cash flow evaluation as
we do for internal budgeting, lenders and other third parties; therefore, they
are internally and externally consistent with financial statement and other
public and private disclosures. We are not aware of any negative implications
resulting from the projections used for purposes of evaluating the
appropriateness of the carrying value of these assets. If assets are considered
to be impaired, the impairment recognized is the amount by which the carrying
value of the assets exceeds the fair value of the assets. Useful lives and
related amortization or depreciation expense are based on our estimate of the
period that the assets will generate revenues or otherwise be used by Kronos.
Factors that would influence the likelihood of a material change in our reported
results include significant changes in the asset's ability to generate positive
cash flow, loss of legal ownership or title to the asset, a significant decline
in the economic and competitive environment on which the asset depends,
significant changes in our strategic business objectives, and utilization of the
asset.
Valuation of Deferred Income Taxes. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
The likelihood of a material change in our expected realization of these assets
is dependent on our ability to generate future taxable income, our ability to
deduct tax loss carryforwards against future taxable income, the effectiveness
of our tax planning and strategies among the various tax jurisdictions that we
operate in, and any significant changes in the tax treatment received on our
business combinations.
Revenue Recognition. We recognize revenue in accordance with Securities and
Exchange Commission Staff Bulletin 104 ("SAB 104"). Further, Kronos Air
Technologies recognizes revenue on the sale of custom-designed contract sales
under the percentage-of-completion method of accounting in the ratio that costs
incurred to date bear to estimated total costs. For uncompleted contracts where
costs and estimated profits exceed billings, the net amount is included as an
asset in the consolidated balance sheet. For uncompleted contracts where
billings exceed costs and estimated profits, the net amount is included as a
liability in the consolidated balance sheet. Sales are reported net of
applicable cash discounts and allowances for returns.
16
RESULTS OF OPERATIONS
Consolidated Statement of Operations For the Three months March 31, 2007.
Our net losses for each of the three months ended March 31, 2007 and 2006 were
$786,919 and $922,514, respectively. The $135,595 or 15% decrease in the net
loss for the three months ended March 31, 2007, as compared to the prior year
was principally the result of a $34,902 increase in revenue, a $69,472 or 9%
decrease in selling, general and administrative expenses and a $32,975 or 27%
decrease in interest expense.
Revenue. Revenues are generated through sales of services for design and
development of Kronos devices at Kronos Air Technologies, Inc. Revenues for the
three months ended March 31, 2007 were $34,902 compared with $0 for the same
period in the prior year. Revenues for the three months ended March 31, 2007
were from our agreements with EOL and BSH Bosch und Siemens Hausgerate.
Selling, General and Administrative Expenses. Selling, General and
Administrative expenses for the three months March 31, 2007 decreased $69,472 or
9% from the corresponding period of the prior year to $732,086 principally the
result of a $89,622 or 97% decrease in research and development, as the Company
continued to focus its resources on technology commercialization and product
development.
Interest expense. Interest expenses for the three months ended March 31, 2007
was $87,981 compared to $120,956 for the corresponding period of the prior year.
The $32,975 or 27% decrease in interest expense for the three months March 31,
2007, as compared to the prior year, was principally the result of decrease in
notes payable to Cornell Capital Partners.
Consolidated Statement of Operations For the Nine months March 31, 2007.
Our net losses for each of the nine months ended March 31, 2007 and 2006 were
$2,501,349 and $2,628,516, respectively. The $127,167 or 5% decrease in the net
loss for the nine months ended March 31, 2007, as compared to the prior year was
principally the result of a $118,884 or 317% increase in revenue and a $162,094
or 38% decrease in interest expense, partially offset by a $68,886 or 3%
increase in selling, general and administrative expenses.
Revenue. Revenues are generated through sales of services for design and
development of Kronos devices at Kronos Air Technologies, Inc. Revenues for the
nine months ended March 31, 2007 were $156,384 compared with $37,500 for the
same period in the prior year, an increase of $118,884 or 317%. Revenues for the
nine months ended March 31, 2007 were from our agreements with EOL, BSH Bosch
und Siemens Hausgerate, GE Consumer and Industrial and DESA. Revenues for the
nine months ended March 31, 2006 were from fees associated with our prototype
development and acquisition agreement with a luxury automotive manufacturer.
Cost of Sales. Cost of sales for the nine months ended March 31, 2007 was
$93,373 compared with $8,449 for the same period of the prior year. Cost of
sales for the nine months ended March 31, 2007 was primarily product development
costs associated with our EOL, Bosch, GE and DESA agreements. In comparison,
cost of goods sold for the nine months ended March 31, 2006 were from fees
associated with our prototype development and acquisition agreement with a
luxury automotive manufacturer.
Selling, General and Administrative Expenses. Selling, General and
Administrative expenses for the nine months March 31, 2007 increased $68,886
from the corresponding period of the prior year to $2,302,423 principally the
result of a $270,762 increase in compensation and benefits, partially offset by
a $194,551 decrease in research and development, as the Company continued to
focus its resources on technology commercialization and product development.
Interest expense. Interest expenses for the nine months ended March 31, 2007 was
$261,936 compared to $424,030 for the corresponding period of the prior year.
The $162,094 or 38% decrease in interest expense for the nine months March 31,
2007, as compared to the prior year, was principally the result of decrease in
notes payable to Cornell Capital Partners.
Consolidated Balance Sheet as of March 31, 2007
Our total assets at March 31, 2007 were $1,796,345 compared with $2,656,000 at
June 30, 2006. Total assets at March 31, 2007 and June 30, 2006 were comprised
primarily of $1,741,581 and $1,983,908, respectively, of patents/intellectual
property and $25,153 and $598,323, respectively, of cash. Total current assets
at March 31, 2007 and June 30, 2006 were $47,882 and $666,351, respectively,
while total current liabilities for those same periods were $4,104,566 and
$3,225,274, respectively, creating a working capital deficit of $4,056,684 and
$2,559,000 at each respective period end. This working capital deficit is
primarily due to short term borrowings from Cornell Capital Partners and an
increase in accounts payable and accrued expense.
Stockholders' deficit as of March 31, 2007 was $4,024,887. The $2,501,349 net
loss for the nine months ended March 31, 2007 was partially offset by the sale
and issuance of common stock for cash ($1,379,938) and the issuance of options
for services ($240,942).
17
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have relied principally on the sale of common stock and secured
debt and customer contracts for research and product development to finance our
operations. The Company does not currently have sufficient financial resources
to fund our operations, pay certain existing obligations or those of our
subsidiary, including our payroll obligations. Therefore, we need substantial
additional funds to continue these operations and pay our obligations. Should
the financing we require to sustain our working capital needs be unavailable, or
prohibitively expensive, we would be forced to curtail or cease our business
operations. The Company is in active discussions with an alternative funding
source. We do not know at this time the potential outcome of these discussions.
In October 2004, Kronos entered into agreements for up to $20.5 million in
equity and equity backed debt financing from Cornell Capital Partners. In
October 2004, Kronos sold 5 million restricted shares of Kronos common stock for
gross proceeds of $500,000 to Cornell Capital Partners. Cornell Capital Partners
provided $4 million pursuant to two Promissory Notes, which were funded as
follows: $2 million upon the filing a registration statement on form SB-2 and $2
million upon the SEC declaring the registration statement effective. Kronos
executed a Standby Equity Distribution Agreement for $20 million of funding. In
May 2006, Kronos completed repayment of the first $2 million promissory note. As
of March 31, 2007, Kronos has received $7.3 million in funding under these
agreements. In December 2006, Cornell Capital Partners converted and exchanged
the second promissory note for a convertible debenture issued by Kronos for the
outstanding principal and interest owed on the Promissory Note of $1.6 million.
The convertible debenture is due in full June 13, 2007, bears and interest rate
of 12% and under certain limitations is convertible into shares of Kronos common
stock at $0.0075 per share. As of March 31, 2007, the Company owed $1.6 million
under the convertible debenture. Kronos has issued all the shares registered to
Cornell Capital Partners under the Company's June 2005 SB-2 registration
statement. The Company has no plans at this time to register additional shares
to Cornell Capital Partners under the terms of the Standby Equity Distribution
Agreement. The Company does not have the current funds to make the June 13, 2007
payment to Cornell.
In October 2004, HoMedics agreed to extend repayment of Kronos debt and to
provide an additional $1 million in funding. HoMedics has agreed to provide
Kronos with an additional $1 million in financing - $925,000 in secured debt
financing and $75,000 for the purchase of additional warrants. In December 2005,
$175,000 of the $925,000 was funded. The balance of $750,000 was not funded. In
addition, quarterly debt payments and the maturity date for existing debt have
been extended. Quarterly payments due on the outstanding $2.4 million in secured
debt financing, which had been scheduled to begin in August 2004, were due in
February 2007. The maturity date of the $2.4 million in debt was extended from
May 2008 to October of 2009; the maturity date on the $175,000 was also October
2009. The interest rate was. In February 2007, HoMedics and Kronos executed a
Settlement Agreement and General Release allowing Kronos to pay $1,000,000 in
exchange for full satisfaction of the $3,130,230 in outstanding principal and
interest owed by Kronos to HoMedics, cancellation of the Warrant #3 for
26,507,658 warrants, cancellation of the anti-dilution protection granted to
HoMedics in Warrant #3 and the First Amendment to the Master Loan and Investment
Agreement, mandatory exercise of Warrants #1 (6,746,171 warrants) and #2
(6,746,171 warrants) if the Kronos stock trades above $0.20 for 20 consecutive
trading days, and a selling limitation on any shares of Kronos common stock
HoMedics obtains through the exercise of Warrant #1 or #2. The Company does not
have the current funds to make the required payments to HoMedics.
Net cash flow used in operating activities was $1.6 million for the nine months
March 31, 2007. We were able to satisfy most of our cash requirements for this
period from the sale of equity to Cornell Capital Partners and our customer
agreements with EOL and DESA.
We estimate that achievement of our business plan will require substantial
additional funding. There are no assurances that funding will be adequate to
meet our cash flow needs.
GOING CONCERN OPINION
The Report of Independent Registered Public Accounting Firm includes an
explanatory paragraph to their audit opinions issued in connection with our 2006
and 2005 financial statements that states that we do not have significant cash
or other material assets to cover our operating costs. Our ability to obtain
additional funding will largely determine our ability to continue in business.
Accordingly, there is substantial doubt about our ability to continue as a going
concern. Our consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
We can make no assurance that we will be able to successfully develop,
manufacturer and sell commercial products on a broad basis. While attempting to
make this transition, we will be subject to all the risks inherent in a growing
venture, including, but not limited to, the need to develop and manufacture
reliable and effective products, develop marketing expertise and expand our
sales force.
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:
18
We do not have sufficient cash to continue operations and require significant
additional financing to sustain our operations.
At March 31, 2007 and June 30, 2006, we had a working capital deficit of $4.1
million and $2.6 million, respectively. The Report of Independent Registered
Public Accounting Firm for the year ended June 30, 2006, includes an explanatory
paragraph to their audit opinion stating that our recurring losses from
operations and working capital deficiency raise substantial doubt about our
ability to continue as a going concern. For the nine months ended March 31, 2007
and fiscal year ended June 30, 2006, we had an operating cash flow deficit of
$1.6 million and $2.6 million, respectively. We currently do not have sufficient
financial resources to fund our operations or pay certain existing obligations
or those of our subsidiary, including payroll. Therefore, we need substantial
additional funds to continue these operations and pay certain existing
obligations.
At March 31, 2007 and June 30, 2006, we had a cash balance of $25,000 and
$598,000, respectively. Should the financing we require to sustain our working
capital needs be unavailable in the next several weeks, we will be forced to
curtail or cease our business operations.
We have a limited operating history with significant losses and expect losses to
continue for the foreseeable future.
We have only recently begun implementing our plan to prioritize and concentrate
our management and financial resources to fully capitalize on our investment in
Kronos Air Technologies and have yet to establish any history of profitable
operations. We incurred a net loss of $2.4 million for the nine months ended
March 31, 2007 and a net loss of $4.0 million for the fiscal year ended June 30,
2006. As a result, at March 31, 2007 and June 30, 2006, we had an accumulated
deficit of $33.5 million and $31.1 million, respectively. Our revenues and cash
flows from operations have not been sufficient to sustain our operations. We
have sustained our operations through the issuance of our common stock and the
incurrence of debt. We expect that our revenues and cash flows from operations
will not be sufficient to sustain our operations for the foreseeable future. Our
profitability will require the successful commercialization of our Kronos
technologies. No assurances can be given that we will be able to successfully
commercialize our Kronos technologies or that we will ever be profitable. If we
do not achieve profitability we could be forced to curtail or cease our business
operations.
Existing stockholders will experience significant dilution from our sale of
shares under any equity financing.
The sale of shares pursuant to the Standby Equity Distribution Agreement (if the
Company were to register additional shares under the terms of the Agreement),
the exercise of HoMedics stock warrants, the conversion of the Cornell
convertible debenture 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. We cannot predict the actual number of shares of common stock that will
be issued any future equity financing transaction, in part, because the purchase
price of the shares will fluctuate based on prevailing market conditions and we
do not know the exact amount of funds we will need.
Competition in the market for air movement and purification devices may result
in the failure of the Kronos products to achieve market acceptance.
Kronos presently faces competition from other companies that are developing or
that currently sell air movement and purification devices. Many of these
competitors have substantially greater financial, research and development,
manufacturing, and sales and marketing resources than we do. Many of the
products sold by Kronos' competitors already have brand recognition and
established positions in the markets that we have targeted for penetration. In
the event that the Kronos products do not favorably compete with the products
sold by our competitors, we would be forced to curtail or cease our business
operations.
Our failure to enforce protection of our intellectual property would have a
material adverse effect on our business.
A significant part of our success depends in part on our ability to obtain and
defend our intellectual property, including patent protection for our products
and processes, preserve our trade secrets, defend and enforce our rights against
infringement and operate without infringing the proprietary rights of third
parties, both in the United States and in other countries. Our limited amount of
capital impedes our current ability to protect and defend our intellectual
property. The validity and breadth of our intellectual property claims in ion
wind generation and electrostatic fluid acceleration and control technology
involve complex legal and factual questions and, therefore, may be highly
uncertain. Despite our efforts to protect our intellectual proprietary rights,
existing copyright, trademark and trade secret laws afford only limited
protection. Our industry is characterized by frequent intellectual property
litigation based on allegations of infringement of intellectual property rights.
Although we are not aware of any intellectual property claims against us, we may
be a party to litigation in the future. If we are unable to enforce protection
of our intellectual property, we could be forced to curtail or cease our
business operations.
Possible future impairment of intangible assets would have a material adverse
effect on our financial condition.
Our net intangible assets of approximately $1.7 million as of March 31, 2007
consist principally of purchased patent technology and marketing intangibles,
which relate to the acquisition of Kronos Air Technologies, Inc. in March 2000
and to the acquisition of license rights to fuel cell, computer and
microprocessor applications of the Kronos technology not included in the
original acquisition of Kronos Air Technologies, Inc. in May 2003 and
capitalized legal costs for securing patents. Intangible assets comprise 97% of
our total assets as of March 31, 2007. Intangible assets are subject to periodic
review and consideration for potential impairment of value. Among the factors
that could give rise to impairment include a significant adverse change in legal
factors or in the business climate, an adverse action or assessment by a
19
regulator, unanticipated competition, a loss of key personnel, and projections
or forecasts that demonstrate continuing losses associated with these assets. In
the case of our intangible assets, specific factors that could give rise to
impairment would be, but are not limited to, an inability to obtain patents, the
untimely death or other loss of Dr. Igor Krichtafovitch, the lead inventor of
the Kronos technology and Kronos Air Technologies Chief Technology Officer, or
the ability to create a customer base for the sale or licensing of the Kronos
technology. Should an impairment occur, we would be required to recognize it in
our financial statements. A write-down of these intangible assets could have a
material adverse impact on our total assets, net worth and results of
operations.
Our common stock is deemed to be "Penny Stock," subject to special requirements
and conditions and may not be a suitable investment.
Our common stock is deemed to be "penny stock" as that term is defined in Rule
3a51-1 promulgated under the Securities Exchange Act of 1934. Penny stocks are
stocks:
- With a price of less than $5.00 per share;
- That are not traded on a "recognized" national exchange;
- Whose prices are not quoted on the Nasdaq automated quotation system
(Nasdaq listed stock must still have a price of not less than $5.00
per share); or
- In issuers with net tangible assets less than $2.0 million (if the
issuer has been in continuous operation for at least three years) or
$5.0 million (if in continuous operation for less than three years),
or with average revenues of less than $6.0 million for the last three
years.
Broker/dealers dealing in penny stocks are required to provide potential
investors with a document disclosing the risks of penny stocks. Moreover,
broker/dealers are required to determine whether an investment in a penny stock
is a suitable investment for a prospective investor. These requirements may
reduce the potential market for our common stock by reducing the number of
potential investors. This may make it more difficult for investors in our common
stock to resell shares to third parties or to otherwise dispose of them. This
could cause our stock price to decline.
We rely on management and research personnel, the loss of whose services could
have a material adverse effect upon our business.
We rely principally upon the services of our senior executive management, and
certain key employees, including the Kronos research team, the loss of whose
services could have a material adverse effect upon our business and prospects.
Competition for appropriately qualified personnel is intense. Our ability to
attract and retain highly qualified senior management and technical research and
development personnel are believed to be an important element of our future
success. Our failure to attract and retain such personnel may, among other
things, limit the rate at which we can expand operations and achieve
profitability. There can be no assurance that we will be able to attract and
retain senior management and key employees having competency in those
substantive areas deemed important to the successful implementation of our plans
to fully capitalize on our investment in the Kronos technology, and the
inability to do so or any difficulties encountered by management in establishing
effective working relationships among them may adversely affect our business and
prospects. Currently, we do not carry key person life insurance for any of our
executive management, or key employees.
ITEM 3. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. As of the end of the period
covered by this report, the Company carried out an evaluation, under the
supervision and with the participation of the Company's Principal Executive
Officer / Principal Financial Officer of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. The Company's
disclosure controls and procedures are designed to provide a reasonable level of
assurance of achieving the Company's disclosure control objectives. The
Company's Principal Executive Officer / Principal Financial Officer has
concluded that the Company's disclosure controls and procedures are, in fact,
effective at this reasonable assurance level as of the period covered. In
addition, the Company reviewed its internal controls, and there have been no
significant changes in its internal controls or in other factors that could
significantly affect those controls subsequent to the date of evaluation or from
the end of the reporting period to the date of this Form 10-QSB.
Changes in Internal Controls. In connection with the evaluation of the Company's
internal controls during the Company's first fiscal nine months March 31, 2007,
the Company's Principal Executive Officer / Principal Financial Officer has
determined that there are no changes to the Company's internal controls over
financial reporting that has materially affected, or is reasonably likely to
materially effect, the Company's internal controls over financial reporting
during the fiscal nine months March 31, 2007, or subsequent to the date of their
last evaluation, or from the end of the reporting period to the date of this
Form 10-QSB.
20
PART II
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company may be subject to law suits in the normal course
of business.
Thompson E. Fehr has filed a complaint in the state of Utah against Kronos with
respect to prior services rendered to High Voltage Integrated, Inc. totaling
$47,130. The Company believes this complaint is without merit and will
rigorously defend itself.
Allstate Insurance Company, as subrogee of David Buell, plans to file a
complaint in the state of Michigan against HoMedics, Inc. and Kronos with
respect to damages related to a fire in the home of Mr. Buell which resulted in
$244,155 in damages. Kronos believes at this time that the matter will be
addressed by the Company's insurance carrier, Argonaut Group.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the nine months ended March 31, 2007, we issued 86,643,146 registered
shares of Kronos common stock to Cornell Capital Partners under our Standby
Equity Distribution Agreement. The proceeds from the issuance of these shares
were used for working capital purposes ($801,438) and to repay debt ($494,500).
During the nine months ended March 31, 2007, we issued 11,200,000 restricted
shares of Kronos common stock to Cornell Capital Partners as a payment of
$84,000 in principal under our convertible debenture dated December 13, 2006.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
21
ITEM 5. EXHIBITS
EXHIBIT NO. DESCRIPTION LOCATION
-------------------------------------------------------------------------------------------------
2.1 Articles of Merger for Technology Incorporated by reference to
Selection, Inc. with the Nevada Exhibit 2.1 to the Registrant's
Secretary of State Registration Statement on Form
S-1 filed on August 7, 2001 (the
"Registration Statement")
3.1 Articles of Incorporation Incorporated by reference to
Exhibit 3.1 to the Registration
Statement on Form S-1 filed on
August 7, 2001
3.2 Bylaws Incorporated by reference to
Exhibit 3.2 to the Registration
Statement on Form S-1 filed on
August 7, 2001
4.1 2001 Stock Option Plan Incorporated by reference to
Exhibit 4.1 to Registrant's Form
10-Q for the quarterly period
ended March 31, 2002 filed on
May 15, 2002
10.21 Indemnification Agreement, dated May 1, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.38 to the
Daniel R. Dwight Registration Statement on Form
S-1 filed on August 7, 2001
10.22 Indemnification Agreement, dated May 1, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.39 to the
Richard F. Tusing Registration Statement on Form
S-1 filed on August 7, 2001
10.23 Employment Agreement, effective Incorporated by reference to
February 11, 2001 by and between Exhibit 10.55 to the Registrant's
TSET, Inc. and Daniel R. Dwight Form 10-Q for the quarterly period
ended March 31, 2002 filed on
May 15, 2002
10.24 Master Loan and Investment Incorporated by reference to
Agreement, dated May 9, 2003, the Registrant's 8-K filed on
by and among Kronos Advanced May 15, 2003
Technologies, Inc., Kronos Air
Technologies, Inc. and FKA
Distributing Co. d/b/a HoMedics,
Inc., a Michigan corporation
("HoMedics")
10.25 Secured Promissory Note, dated Incorporated by reference to
May 9, 2003, in the principal Exhibit 99.2 to the Registrant's
amount of $2,400,000 payable to 8-K filed on May 15, 2003
HoMedics
10.26 Secured Promissory Note, dated Incorporated by reference to
May 9, 2003, in the principal Exhibit 99.4 to the Registrant's
amount of $1,000,000 payable to 8-K filed on May 15, 2003
HoMedics
10.27 Security Agreement dated May 9, Incorporated by reference to
2003, by and among Kronos Air Exhibit 99.4 to the Registrant's
Technologies, Inc. and HoMedics 8-K filed on May 15, 2003
10.28 Registration Rights Agreement, Incorporated by reference to
dated May 9, 2003, by and between Exhibit 99.5 to the Registrant's
Kronos and HoMedics 8-K filed on May 15, 2003
10.29 Warrant No. 1 dated May 9, 2003, Incorporated by reference to
issued to HoMedics Exhibit 99.7 to the Registrant's
8-K filed on May 15, 2003
10.30 Warrant No. 2 dated May 9, 2003, Incorporated by reference to
issued to HoMedics Exhibit 99.7 to the Registrant's
8-K filed on May 15, 2003
2002
10.31 Promissory Note by and among Kronos Incorporated by reference to
Advanced Technologies, Inc., and Exhibit 10.67 to the Registrant's
Daniel R. Dwight Form 10-Q for the quarterly period
ended March 31, 2004 filed on
May 17, 2004
22
10.32 Promissory Note by and among Kronos Incorporated by reference to
Advanced Technologies, Inc., and Exhibit 10.67 to the Registrant's
Richard F. Tusing Form 10-Q for the quarterly period
ended March 31, 2004 filed on
May 17, 2004
10.33 Promissory Note by and among Kronos Incorporated by reference to
Advanced Technologies, Inc., and Exhibit 10.67 to the Registrant's
Igor Krichtafovitch Form 10-Q for the quarterly period
ended March 31, 2004 filed on
May 17, 2004
10.34 Securities Purchase Agreement, dated Incorporated by reference to
October 15, 2004, by and between Kronos Exhibit 99.5 to the Registrant's
Advanced Technologies, Inc. and Cornell Form 8-K filed on November 12, 2004
Capital Partners, LP
10.35 Investor Registration Rights Agreement, Incorporated by reference to
dated October 15, 2004, by and between Exhibit 99.6 to the Registrant's
Kronos Advanced Technologies, Inc. and Form 8-K filed on November 12, 2004
Cornell Capital Partners, LP
10.36 Escrow Agreement, dated October 15, 2004, Incorporated by reference to
by and between Kronos Advanced Exhibit 99.7 to the Registrant's
Technologies, Inc. and Cornell Capital Form 8-K filed on November 12, 2004
Partners, LP
10.37 Amended and Restated Warrant No. 1, Incorporated by reference to
dated October 25, 2004, issued to FKA Exhibit 99.11 to the Registrant's
Distributing Co. d/b/a HoMedics, Inc. Form 8-K filed on November 12, 2004
10.38 Amended and Restated Warrant No. 2, Incorporated by reference to
dated October 25, 2004, issued to FKA Exhibit 99.12 to the Registrant's
Distributing Co. d/b/a HoMedics, Inc. Form 8-K filed on November 12, 2004
10.39 Warrant No. 3, dated October 25, 2004, Incorporated by reference to
issued to FKA Distributing Co. d/b/a Exhibit 99.13 to the Registrant's
HoMedics, Inc.
10.40 Amended and Restated Registration Rights Incorporated by reference to
Agreement, dated October 25, 2004, by Exhibit 99.14 to the Registrant's
And between Kronos Advanced Form 8-K filed on November 12, 2004
Technologies Inc., a Nevada corporation
and FKA Distributing Co. d/b/a HoMedics,
a Michigan corporation
10.41 Termination Agreement dated March 28, Incorporated by reference to
2005, by and between Kronos Advanced Exhibit 10.63 to the Registrant's
Technologies, Inc. and Cornell Capital Form SB-2 filed on April 19, 2005
Partners, LP
10.42 Standby Equity Distribution Agreement, Incorporated by reference to
dated April 13, 2005, by and between Exhibit 10.64 to the Registrant's
Kronos Advanced Technologies, Inc. and Form SB-2 filed on April 19, 2005
Cornell Capital Partners, LP
10.43 Registration Rights Agreement, dated Incorporated by reference to
April 13, 2005, by and between Kronos Exhibit 10.65 to the Registrant's
Advanced Technologies, Inc. and Cornell Form SB-2 filed on April 19, 2005
Capital Partners, LP
10.44 Escrow Agreement, dated April 13, 2005, Incorporated by reference to
by and between Kronos Advanced Exhibit 10.66 to the Registrant's
Technologies, Inc. and Cornell Capital Form SB-2 filed on April 19, 2005
Partners, LP
10.45 Placement Agent Agreement, dated April Incorporated by reference to
13, 2005, by and between Kronos Advanced Exhibit 10.67 to the Registrant's
Technologies, Inc. and Cornell Capital Form SB-2 filed on April 19, 2005
Partners, LP
10.46 Form of Equity-Back Promissory Note in Incorporated by reference to
the principal amount of $2,000,000 dated Exhibit 10.68 to the Registrant's
March 7, 2005 between Kronos Advanced Form SB-2 filed on April 19, 2005
Technologies, Inc. and Cornell Capital
Partners, LP
10.47 Form of Equity-Back Promissory Note in Incorporated by reference to
the principal amount of $2,000,000 dated Exhibit 10.59 to the Registrant's
June 22, 2005 between Kronos Advanced Form 10-KSB filed on September
Technologies, Inc. and Cornell Capital 28, 2005
Partners, LP
23
10.48 Form of Convertible Debenture in the Incorporated by reference to
principal amount of $1,645,476 dated Exhibit 10.1 to the Registrant's
December 13, 2006 between Kronos Advanced Form 8-K filed on December 15, 2007
Technologies, Inc. and Cornell Capital
Partners, LP
31.1 Certification of Chief Executive Provided herewith
Officer pursuant to 15 U.S.C.
Section 7241, as adopted pursuant
to Section 302 of the Sarbanes-Oxley
Act of 2002
31.2 Certification of Principal Financial Provided herewith
Officer pursuant to U.S.C. Section
7241, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32 Certification by Chief Executive Officer Provided herewith
and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
24
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATED: May 18, 2007 KRONOS ADVANCED TECHNOLOGIES, INC.
By: /s/ DANIEL R. DWIGHT
----------------------
Daniel R. Dwight
President and Chief Executive Officer
By: /s/ DANIEL R. DWIGHT
------------------------
Daniel R. Dwight
Chief Financial Officer