As filed with the Securities and Exchange Commission on October 31, 2006
Registration No. 333-124167
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POST EFFECTIVE AMENDMENT NO. 1 TO FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
KRONOS ADVANCED TECHNOLOGIES,
Nevada INC. 84-0440410
(State or Other Jurisdiction (Name of Registrant (I.R.S. Employer
of Incorporation in Our Charter) Identification No.)
or Organization)
Daniel R. Dwight
464 Common Street, Suite 301 464 Common Street, Suite 301
Belmont, Massachusetts 02478 Belmont, Massachusetts 02478
(617) 993-9965 6799 (617) 993-9965
(Address and telephone number (Name, address and
of Principal Executive Offices (Primary Standard telephone number
and Principal Place of Business) Industrial of agent for service)
Classification
Code Number)
Copies to:
Clayton E. Parker, Esq. Ronald S. Haligman, Esq.
Kirkpatrick & Lockhart Kirkpatrick & Lockhart
Nicholson Graham LLP Nicholson Graham LLP
201 S. Biscayne Boulevard, Suite 2000 201 S. Biscayne Boulevard, Suite 2000
Miami, Florida 33131 Miami, Florida 33131
Telephone: (305) 539-3300 Telephone: (305) 539-3300
Telecopier: (305) 358-7095 Telecopier: (305) 358-7095
Approximate date of commencement of proposed sale to the public: As
soon as practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933 check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
CALCULATION OF REGISTRATION FEE
================================== ====================== ===================== ====================== =====================
Proposed Maximum Proposed Maximum Amount
---------------------------------- ---------------------- --------------------- ---------------------- ---------------------
Title Of Each Class Amount Offering Price Aggregate Of Registration
---------------------------------- ---------------------- --------------------- ---------------------- ---------------------
Of Securities To Be Registered To Be Registered Per Share(1) Offering Price Fee(2)
---------------------------------- ---------------------- --------------------- ---------------------- ---------------------
Common stock, par value $0.001 164,848,371(2) $0.08 $13,187,869.68 $1,552.21
per share
---------------------------------- ---------------------- --------------------- ---------------------- ---------------------
TOTAL 164,848,371(2) $0.08 $13,187,869.68 $1,552.21(3)
================================== ====================== ===================== ====================== =====================
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933. For the purposes
of this table, we have used the average of the closing bid and asked prices
as of April 18, 2005.
(2) Of these shares, 156,985,871 shares are being registered under a Standby
Equity Distribution Agreement, 62,500 shares were issued as a placement
agent fee pursuant to the Standby Equity Distribution Agreement and
5,000,000 shares were issued pursuant to a private placement. The
Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until this Registration Statement shall
become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
(3) The registration fee was previously paid on April 18, 2005.
MI-219913 v2 0434180-0201
Preliminary Prospectus subject to completion, dated October 31, 2006
PROSPECTUS
KRONOS ADVANCED TECHNOLOGIES INC.
164,848,371 Shares of Common Stock
This Prospectus relates to the sale of up to 164,848,371 shares of
Kronos Advanced Technologies, Inc.'s common stock by certain persons who are, or
will become, stockholders of Kronos. The selling stockholders consist of:
o Cornell Capital Partners, L.P. who intend to sell up to an aggregate amount
of 161,985,871 shares of common stock, which includes 156,985,871 shares of
common stock pursuant to a Standby Equity Distribution Agreement and
5,000,000 shares of common stock previously purchased in a private
placement.
o Newbridge Securities Corporation, an unaffiliated registered broker-dealer
retained by Kronos in connection with the Standby Equity Distribution
Agreement, which intends to sell 62,500 shares of common stock issued as a
placement agent fee.
o A group of accredited investors, who intend to sell 2,800,000 shares of
common stock previously purchased in a private placement.
Please refer to "Selling Stockholders" beginning on page 12.
Kronos is not selling any shares of common stock in this offering and
therefore will not receive any proceeds from this offering. Kronos will,
however, receive proceeds from the sale of common stock under the Standby Equity
Distribution Agreement. All costs associated with this registration will be
borne by Kronos.
The shares of common stock are being offered for sale by the selling
stockholders at prices established on the Over-the-Counter Bulletin Board during
the term of this offering. These prices will fluctuate based on the demand for
the shares of our common stock. On October 25, 2006, the last reported sale
price of our common stock was $0.0152 per share.
Cornell Capital Partners is an "underwriter" within the meaning of the
Securities Act of 1933 in connection with the sale of common stock under the
Standby Equity Distribution Agreement. Pursuant to the Standby Equity
Distribution Agreement, Cornell Capital Partners will purchase shares of Kronos'
common stock for a total discount of 7% of the common stock's market price. In
addition, Kronos paid Cornell Capital Partners a one-time commitment fee of
2,941,175 shares of our common stock, of which 1,470,587 shares were issued to
Cornell Capital Partners on the six (6) month anniversary of the Standby Equity
Distribution Agreement and 1,470,588 shares were issued to Cornell Capital
Partners on the twelve (12) month anniversary of the Standby Equity Distribution
Agreement. The 7% discount on the purchase of the common stock to be received by
Cornell Capital Partners and the commitment fee are underwriting discounts. From
June 14, 2005 (the date of the accompanying registration statement was declared
effective by the Securities and Exchange Commission) through October 25, 2006,
we received net proceeds of $4,701,500 under the Standby Equity Distribution
Agreement and issued 106,007,404 shares of our common stock in connection with
these advances. On June 14, 2005, our stock price was $0.08 per share and on
October 25, 2006, our stock price was $0.0152 per share.
Kronos engaged Newbridge Securities Corporation, an unaffiliated
registered broker-deal, to advise us in connection with the Standby Equity
Distribution Agreement. Newbridge Securities Corporation was paid a fee of
$10,000 by the issuance of 62,500 shares of Kronos' common stock.
Kronos' common stock is deemed to be "penny stock" as that term is
defined in Rule 3a51-1 promulgated under the Securities Act of 1934.
Brokers/Dealers dealing in penny stocks are required to provide potential
investors with a document disclosing the risks of penny stocks. Moreover,
brokers/dealers are required to determine whether an investment in a penny stock
is suitable investment for a prospective investor.
Our common stock is quoted on the Over-the-Counter- Bulletin Board
under the symbol "KNOS.OB."
These securities are speculative and involve a high degree of risk.
With the exception of Cornell Capital Partners, which is an
"underwriter" within the meaning of the Securities Act of 1933, no other
underwriter or person has been engaged to facilitate the sale of shares of
common stock in this offering. This offering will terminate June 13, 2007, which
is 24 months after the accompanying registration statement was initially
declared effective by the Securities and Exchange Commission. None of the
proceeds from the sale of stock by the selling stockholders will be placed in
escrow, trust or any similar account.
The Securities and Exchange Commission and state securities regulators
have not approved or disapproved of these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Please refer to "Risk Factors" beginning on page 6.
The date of this Prospectus is October31, 2006.
TABLE OF CONTENTS
PROSPECTUS SUMMARY.............................................................1
THE OFFERING...................................................................4
RISK FACTORS...................................................................6
FORWARD-LOOKING STATEMENTS....................................................11
SELLING STOCKHOLDER...........................................................12
USE OF PROCEEDS...............................................................15
DILUTION......................................................................16
SUMMARY CONSOLIDATED FINANCIAL INFORMATION....................................17
STANDBY EQUITY DISTRIBUTION AGREEMENT.........................................19
PLAN OF DISTRIBUTION..........................................................22
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.....................24
DESCRIPTION OF BUSINESS.......................................................29
MANAGEMENT....................................................................39
PRINCIPAL STOCKHOLDERS........................................................45
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................46
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER STOCKHOLDER MATTERS.....................................................47
EXPERTS.......................................................................53
LEGAL MATTERS.................................................................53
HOW TO GET MORE INFORMATION...................................................53
CONSOLIDATED FINANCIAL STATEMENTS AT JUNE 30, 2006...........................F-i
PART II.................................................................... II-1
SIGNATURES.................................................................II-10
Our audited financial statements for the fiscal year ended June 30,
2006, were contained in our Annual Report on Form 10-KSB.
i
PROSPECTUS SUMMARY
Kronos Advanced Technologies, Inc. is an application development and
licensing company that has developed and patented technology that fundamentally
changes the way air is moved, filtered and sterilized. Kronos is pursuing
commercialization of its proprietary technology in a limited number of markets;
and if we are successful, we intend to enter additional markets in the future.
Eleven 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. Although no commercial products using the
Kronos technology have been sold to date, the Company has begun establishing
strategic relationships with select companies both domestically and
internationally for standalone and embedded applications of our proprietary
technology.
The Kronos technology combines high voltage electronics and electrodes.
By combining these technologies, a Kronos-based device can both move and clean
air without any moving parts. Kronos devices are versatile, energy- and
cost-efficient and capable of multiple design forms. As a result, Kronos devices
have the potential to be used as a standalone product or to replace a range of
heating, ventilation and air conditioning products for residential usage to high
efficiency particulate air filtration systems for operating and manufacturing
clean rooms.
The proprietary Kronos technology involves the application of high
voltage management across paired electrical grids to create an ion exchange that
moves and purifies air. Kronos technology has numerous valuable characteristics.
It moves air and gases at high velocities while removing odors, smoke and
particulates and killing pathogens, including bacteria, mold and spores. The
technology is cost-effective and is more energy efficient than current
alternative fan and filter (including HEPA filter and ultraviolet light based)
technologies.
A number of the scientific claims of the Kronos technology have been
tested by the U. S. government and a few multi-national companies, including the
U. S. Department of Energy, the U. S. Department of Defense, General Dynamics,
Underwriters Laboratory, and Intel. Independent laboratory testing has verified
the purification capability of the Kronos technology. Tests conducted at
MicroTest Laboratories, LMS Industries and New Hampshire Materials Laboratory
demonstrated HEPA Clean Room Class 1000 quality particulate reduction, removal
of over 99.97% of 0.1 micron and above size particles, and up to 95% reduction
of hazardous gases, including numerous contaminants found in cigarette smoke.
Intertek, one of the global leaders for testing electrical and electronic
products, performed tobacco smoke elimination tests in accordance with ANSI/AHAM
AC-1-1988 standard entitled "American National Standard Method for Measuring
Performance of Portable Household Electric Cord-Connected Room Air Cleaners."
The test demonstrated a Clean Air Delivery Rate (CADR) for the Kronos air
purifier of over 300. These results place the Kronos device in one of the
highest categories of particulate cleaning for standalone devices.
Kronos' business development strategy is to sell and license the Kronos
technology to six distinct market segments: (1) air movement and purification
(residential, health care, hospitality, and commercial facilities); (2) air
purification for unique spaces (cleanrooms, airplanes, automotive, and cruise
ships); (3) specialized military (naval vessels, closed vehicles and mobile
facilities); (4) embedded cooling and cleaning (electronic devices and medical
equipment); (5) industrial scrubbing (produce storage and diesel and other
emissions); and (6) hazardous gas destruction (incineration and chemical
facilities).
Kronos' focus is on the first four of these market segments which are
described in more detail below. Kronos is currently developing products for the
air movement and purification, air purification for unique spaces, and
specialized military markets through specific customer contracts. Kronos is
currently undertaking research and development in the embedded micro cooling
market using Company funds and a third party grant. These contracts and grant
are described in more detail in the Technology Application and Product
Development section of this filing.
o Air Movement and Purification. Indoor air pollution, including "sick
building syndrome" and "building related illness," is primarily caused by
inadequate ventilation, chemical
1
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 target markets: (1) residential, (2) health
care, (3) hospitality and (4) commercial.
o Air Purification for Unique Spaces. Electronics, semiconductor,
pharmaceutical, aerospace, medical and many other producers depend on
cleanroom technology. As products such as electronic devices become
smaller, the chance of contamination in manufacturing becomes higher. For
pharmaceutical companies, clean, safe and contaminant-free products are
imperative to manufacturing and distributing a viable product. Other
potential applications for the Kronos technology include closed
environments such as aircraft, cruise ships and other transportation modes
that require people to breathe contaminated, re-circulated air for extended
periods. Kronos is building on its product development effort with its
strategic partner in the business jet market and the U.S. military to serve
other closed environment applications.
o 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 next 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.
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.
Kronos' common stock is deemed to be "penny stock" as that term is
defined in Rule 3a51-1 promulgated under the Securities Act of 1934.
Brokers/Dealers dealing in penny stocks are required to provide potential
investors with a document disclosing the risks of penny stocks. Moreover,
brokers/dealers are required to determine whether an investment in a penny stock
is suitable investment for a prospective investor.
We cannot predict the actual number of shares of common stock that will
be issued pursuant to the Standby Equity Distribution Agreement, in part,
because the purchase price of the shares will fluctuate based on prevailing
market conditions and we have not determined the total amount of advances we
intend to draw. Nonetheless, we can estimate the number of shares of our common
stock that will be issued using certain assumptions. The sale of shares pursuant
to the Standby Equity Distribution Agreement will have a dilutive impact on our
stockholders. For each share of common stock purchased under the Standby Equity
Distribution Agreement, Cornell Capital Partners will pay us 98% of the lowest
volume weighted average price of our common stock on the Over-The-Counter
Bulletin Board or other principal market on which our common stock is traded for
the 5 days immediately following the notice date. Based on a recent stock price
of $0.0152 per share, Cornell Capital Partners would pay us $0.0149 per share
and we would issue 1,009,395,975 shares of common stock to Cornell Capital
Partners to receive the $15,040,000 remaining balance of our Standby Equity
Distribution Agreement, of which we would receive net proceeds equal to
$14,203,000 (after the 5% retainage fee to Cornell Capital Partners and $85,000
in offering expenses). The sale of shares of our common stock under the Standby
Equity Distribution Agreement will cause the market price of our common stock to
decline.
We are registering 156,985,871 shares of common stock to be resold by
Cornell Capital Partners pursuant to the Standby Equity Distribution Agreement.
The 156,985,871 shares of common stock we are registering under the Standby
Equity Distribution Agreement would represent approximately 69% of our current
outstanding common stock upon issuance. From June 14, 2005, through October 25,
2006, we received net proceeds of $4,701,500 under the Standby Equity
2
Distribution Agreement and issued 106,007,404 shares of our common stock in
connection with these advances. On June 14, 2005, our stock price was $0.08 per
share and on October 25, 2006, our stock price was $0.0152 per share. In the
event we desire to draw down any available amounts remaining under the Standby
Equity Distribution Agreement after we have issued the 156,985,871 shares being
registered in the accompanying registration statement, we will have to file a
new registration statement to cover such additional shares being registered that
we would issue for additional draw downs on the Standby Equity Distribution
Agreement. Further, our Articles of Incorporation currently authorize Kronos to
issue 500 million shares of common stock and as of October 25, 2006, we had
180,164,336 shares of common stock issued and outstanding. In the event we
desire to draw down any available amounts remaining under the Standby Equity
Distribution Agreement after we have issued the 156,985,871 shares being
registered in the accompanying registration statement, we may need to obtain
shareholder approval to amend our Articles of Incorporation to increase our
authorized common stock. Obtaining shareholder approval to increase our
authorized common stock is uncertain due to the dilutive effect of our Standby
Equity Distribution Agreement.
Assuming we issue the number of shares of our common stock being
registered in the accompanying registration statement to be available under the
Standby Equity Distribution Agreement, at a recent stock price of $0.0152 per
share, Cornell Capital Partners would pay us $0.0149 per share and we would
issue 50,978,467 (i.e. the remaining number of available shares previously
registered in the accompanying registration statement declared effective by the
SEC on June 14, 2005) shares of common stock to Cornell Capital Partners, to
receive net proceeds equal to $636,406 (after the 5% retainage fee to Cornell
Capital Partners and $85,000 in offering expenses). In no event will the number
of shares issuable to Cornell Capital Partners pursuant to an advance under the
Standby Equity Distribution Agreement cause it to own in excess of 9.9% of the
then outstanding common stock of Kronos. Because of this beneficial ownership
limitation and depending on Cornell Capital Partner's ability to sell sufficient
shares to reduce its holdings, we may not be able to exercise an advance notice
in the maximum amount of $1.5 million and our ability to draw down on the
Standby Equity Distribution Agreement could be significantly impaired.
The significant downward pressure on our stock price caused by the sale
of a significant number of shares under the Standby Equity Distribution
Agreement could cause our stock price to decline, thus allowing short sellers of
our stock an opportunity to take advantage of any decrease in the value of our
stock. Short selling is where a person sells shares of stock not yet owned by
that person in the anticipation of being able to buy the stock at a later date
at a lower price per share. The presence of short sellers in our common stock
may further depress the price of our common stock. Pursuant to the terms of the
Standby Equity Distribution Agreement, Cornell Capital Partners will not engage
in short selling our common stock. Pursuant to the terms of our Standby Equity
Distribution Agreement, Cornell Capital Partners is not permitted to sell the
shares of our common stock to be issued to it pursuant to an advance notice
during the applicable pricing period and Cornell Capital Partners is not
permitted to sell the shares relating to a particular advance notice until it
has actually received those shares.
We are registering 164,848,371 shares of common stock in this offering.
These shares represent approximately 34% of our authorized capital stock and
would upon issuance represent approximately 70% of the then issued and
outstanding common stock and we anticipate all such shares will be sold in this
offering. From June 14, 2005, through October 25, 2006, we issued 106,007,404
shares of our common stock registered in the accompanying registration statement
pursuant to the Standby Equity Distribution Agreement and received net proceeds
of $4,701,500. If all or a significant block of the shares being registered in
the accompanying registration statement are held by one or more stockholders
working together, then such stockholder or stockholders would have enough shares
to exert significant influence on Kronos in an election of directors.
ABOUT US
Our principal place of business is located at 464 Common Street, Suite
301, Belmont, Massachusetts 02478. Our telephone number is (617)993-9965.
3
THE OFFERING
This offering relates to the sale of common stock by certain persons
who are, or will become, our stockholders. The selling stockholders consist of:
o Cornell Capital Partners, which intends to sell up to an aggregate amount
of 161,985,871 shares of common stock, which includes 156,985,871 pursuant
to a Standby Equity Distribution Agreement and 5,000,000 shares of common
stock previously purchased in a private placement.
o Various accredited investors, which intend to sell up to an aggregate
amount of 2,800,000 shares of common stock pursuant to a private placement.
o Newbridge Securities Corporation, an unaffiliated broker-dealer retained by
Kronos in connection with the Standby Equity Distribution Agreement, which
intends to sell up to 62,500 shares of common stock issued as a placement
agent fee.
Pursuant to the Standby Equity Distribution Agreement, we may, at our
discretion, periodically issue and sell to Cornell Capital Partners shares for a
total purchase price of $20 million. Cornell Capital Partners will purchase the
shares of common stock for a total discount of 7% of the common stock's market.
Cornell Capital Partners intends to sell any shares purchased under the Standby
Equity Distribution Agreement at the then prevailing market price. In the event
we issued advance notices in the aggregate amount of $20 million, our net
proceeds would be approximately $18,915,000.00. From June 14, 2005 through
October 25, 2006, we received net proceeds of $4,701,500 under the Standby
Equity Distribution Agreement and issued 106,007,404 shares of our common stock
in connection with these advances. On June 14, 2005, our stock price was $0.08
per share and on October 25, 2006, our stock price was $0.0152 per share. In no
event will the number of shares issuable to Cornell Capital Partners pursuant to
an advance under the Standby Equity Distribution Agreement cause it to own in
excess of 9.9% of the then outstanding common stock of Kronos. Because of this
beneficial ownership limitation and depending on Cornell Capital Partner's
ability to sell sufficient shares to reduce its holdings, we may not be able to
exercise an advance notice in the maximum amount of $1.5 million and our ability
to draw down on the Standby Equity Distribution Agreement could be significantly
impaired.
You should be aware that there is an inverse relationship between our
stock price and the number of shares to be issued under the Standby Equity
Distribution Agreement. That is, as our stock price declines, we would be
required to issue a greater number of shares under the Standby Equity
Distribution Agreement for a given advance. From June 14, 2005, through October
25, 2006, we issued 106,007,404 shares of our common stock registered in the
accompanying registration statement pursuant to the Standby Equity Distribution
Agreement and received net proceeds of $4,701,500. In addition, in connection
with the First Amendment to Master Loan and Investment Agreement with HoMedics,
we amended two (2) warrants previously issued by us, and issued an additional
warrant and agreed to include anti-dilution protection for HoMedics. HoMedics is
entitled, under certain circumstances, to anti-dilution protection in order to
maintain beneficial ownership of Kronos equal to 30%. These warrants would have
an exercise price equal to $0.10 per share as previously agreed upon by Kronos
and HoMedics and as stated in the amended warrants. As of October 25, 2006,
HoMedics was not entitled to receive any additional warrants under the terms of
the anti-dilution protection.
Based on our recent stock price of $0.0152, Cornell Capital Partners
would pay us $0.0149 per share and we would have to issue to Cornell Capital
Partners 1,009,395,975 shares of our common stock in order to receive net
proceeds equal to $14,203,000 (after the 5% retainage fee to Cornell Capital
Partners and $85,000 in offering expenses) under the Standby Equity Distribution
Agreement, which represents the net balance remaining available to us under the
Standby Equity Distribution Agreement. From June 14, 2005, through October 25,
2006, we have received net proceeds of $4,701,500 under the Standby Equity
Distribution Agreement. We are registering 156,985,871 shares of common stock to
be resold by Cornell Capital Partners pursuant to the Standby Equity
Distribution Agreement. Assuming we issue the 156,985,871 shares of common stock
being registered in the accompanying registration statement to be available
under the Standby Equity Distribution Agreement, at a recent stock price of
$0.0152 per share, Cornell Capital Partners would pay us $0.0149 per share and
we would issue 156,985,871 shares of common stock to Cornell Capital Partners to
receive net proceeds equal to $2,137,135 (after the 5% retainage fee to Cornell
Capital Partners and $85,000 in offering expenses). As of October 25, 2006, we
had 180,164,336 shares of common stock issued and outstanding.
4
Common Stock Offered 164,848,371 shares by selling
stockholder
Offering Price Market price
Common Stock Outstanding Before the Offering 180,164,336 shares
Use of Proceeds We will not receive any
proceeds of the shares
offered by the selling
stockholders.Any proceeds we
receive from the sale of
common stock under the
Standby Equity Distribution
Agreement will be used for
general corporate and working
capital purposes. See "Use of
Proceeds."
Risk Factors The securities offered
hereby involve a high degree
of risk and immediate
substantial dilution. See
"Risk Factors" and "Dilution."
Over-the-Counter Bulletin Board Symbol KNOS.OB
5
RISK FACTORS
We are subject to various risks that may materially harm our business,
financial condition and results of operations. You should carefully consider the
risks and uncertainties described below and the other information in this filing
before deciding to purchase our common stock. If any of these risks or
uncertainties actually occur, our business, financial condition or operating
results could be materially harmed. In that case, the trading price of our
common stock could decline and you could lose all or part of your investment.
o Risks Related To Our Business
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 $4.0 million for the fiscal
year ended June 30, 2006 and a net loss of $7.1 million for the fiscal year
ended June 30, 2005. As a result, at June 30, 2006 and June 30, 2005, we had an
accumulated deficit of $31.1 million and $27.1 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. We will require significant additional financing to
sustain our operations and without it we will not be able to continue
operations.
At June 30, 2006 and June 30, 2005, we had a working capital deficit of
$2.6 million and $3.6 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 fiscal year ended June 30, 2006
and June 30, 2005, we had an operating cash flow deficit of $2.6 million and
$1.8 million, respectively. We currently do not have sufficient financial
resources to fund our operations or pay certain existing obligations or those of
our subsidiary. Therefore, we need substantial additional funds to continue
these operations and pay certain existing obligations.
If obtaining sufficient financing from Cornell Capital Partners and/or
our strategic customers were to be unavailable and if we are unable to
commercialize and sell our products or technologies, we will need to secure
another source of funding in order to satisfy our working capital needs. Even if
we are able to access the funds available under the Standby Equity Distribution
Agreement, we may still need additional capital to fully implement our business,
operating and development plans. At June 30, 2006 and June 30, 2005, we had a
cash balance of $598,000 and $1,555,000, respectively. Should the financing we
require to sustain our working capital needs be unavailable, or prohibitively
expensive when we require it, we would be forced to curtail our business
operations.
Existing stockholders will experience significant dilution from our
sale of shares under the Standby Equity Distribution Agreement and any other
equity financing.
The sale of shares pursuant to the Standby Equity Distribution
Agreement, the exercise of HoMedics stock warrants or any other future equity
financing transaction will have a dilutive impact on our stockholders. As a
result, our net income per share could decrease in future periods, and the
market price of our common stock could decline. In addition, the lower our stock
price is, the more shares of common stock we will have to issue under the
Standby Equity Distribution Agreement. If our stock price is lower, then our
existing stockholders would experience greater dilution. We cannot predict the
actual number of shares of common stock that will be issued pursuant to the
Standby Equity Distribution Agreement or any other future equity financing
transaction, in part, because the purchase price of the shares will fluctuate
based on prevailing market conditions and we do not know the exact amount of
funds we will need.
Competition in the market for air movement and purification devices may
result in the failure of the Kronos products to achieve market acceptance.
Kronos presently faces competition from other companies that are
developing or that currently sell air movement and purification devices. Many of
these competitors have substantially greater financial, research and
development, manufacturing, and sales and marketing resources than we do. Many
6
of the products sold by Kronos' competitors already have brand recognition and
established positions in the markets that we have targeted for penetration. In
the event that the Kronos products do not favorably compete with the products
sold by our competitors, we would be forced to curtail our business operations.
Our failure to enforce protection of our intellectual property would
have a material adverse effect on our business.
A significant part of our success depends in part on our ability to
obtain and defend our intellectual property, including patent protection for our
products and processes, preserve our trade secrets, defend and enforce our
rights against infringement and operate without infringing the proprietary
rights of third parties, both in the United States and in other countries. Our
limited amount of capital impedes our current ability to protect and defend our
intellectual property. The validity and breadth of our intellectual property
claims in ion wind generation and electrostatic fluid acceleration and control
technology involve complex legal and factual questions and, therefore, may be
highly uncertain. Despite our efforts to protect our intellectual proprietary
rights, existing copyright, trademark and trade secret laws afford only limited
protection. Our industry is characterized by frequent intellectual property
litigation based on allegations of infringement of intellectual property rights.
Although we are not aware of any intellectual property claims against us, we may
be a party to litigation in the future.
Possible future impairment of intangible assets would have a material
adverse effect on our financial condition.
Our net intangible assets of approximately $2.0 million as of June 30,
2006 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 75% of
our total assets as of June 30, 2006. Intangible assets are subject to periodic
review and consideration for potential impairment of value. Among the factors
that could give rise to impairment include a significant adverse change in legal
factors or in the business climate, an adverse action or assessment by a
regulator, unanticipated competition, a loss of key personnel, and projections
or forecasts that demonstrate continuing losses associated with these assets. In
the case of our intangible assets, specific factors that could give rise to
impairment would be, but are not limited to, an inability to obtain patents, the
untimely death or other loss of Dr. Igor Krichtafovitch, the lead inventor of
the Kronos technology and Kronos Air Technologies Chief Technology Officer, or
the ability to create a customer base for the sale or licensing of the Kronos
technology. Should an impairment occur, we would be required to recognize it in
our financial statements. A write-down of these intangible assets could have a
material adverse impact on our total assets, net worth and results of
operations.
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
7
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.
We May Have To Issue Additional Warrants To HoMedics If We Receive Advances
Under The Standby Equity Distribution Agreement
In connection with the First Amendment to Master Loan and Investment
Agreement with HoMedics, we amended two (2) warrants previously issued by us,
issued an additional warrant and agreed to include anti-dilution protection for
HoMedics. HoMedics is entitled, under certain circumstances, to anti-dilution
protection in order to maintain beneficial ownership of Kronos equal to 30%.
These warrants would have an exercise price equal to $0.10 per share as
previously agreed upon by Kronos and HoMedics and as stated in the amended
warrants. As of October 25, 2006, HoMedics was not entitled to receive any
additional warrants under the terms of the anti-dilution protection.
We May Not Be Able To Access Sufficient Funds When Needed Under The Standby
Equity Distribution Agreement And The Price Of Our Common Stock Will Affect Our
Ability To Draw Down On The Standby Equity Distribution Agreement
Currently, we are dependent upon external financing to fund our
operations. Our financing needs are expected to be provided, in large part, by
our Standby Equity Distribution Agreement. The amount of each advance under the
Standby Equity Distribution Agreement is subject to a maximum amount equal to
$1,500,000 and Cornell Capital Partners will retain a fee of 5% of each advance.
Because of this maximum advance restriction, we may not be able to access
sufficient funds when needed. If the market price of our shares of common stock
declines, we would be required to issue more shares of common stock in order to
draw down the same dollar amount of an advance than if our stock price were
higher. Our Articles of Incorporation currently authorize Kronos to issue 500
million shares. In the event that we do not obtain shareholder approval to amend
our Articles of Incorporation and increase our authorized common stock, we will
obtain lower net proceeds from the Standby Equity Distribution if the price of
our common stock declines.
In addition, there is an inverse relationship between the price of our
common stock and the number of shares of common stock, which will be issued
under the Standby Equity Distribution Agreement. Based on our recent stock price
of $0.0152, Cornell Capital Partners would pay us $0.0149 per share and we would
have to issue to Cornell Capital Partners 1,009,395,975 shares of our common
stock in order to receive the remaining $15,040,000 balance of our Standby
Equity Distribution Agreement, of which we would receive net proceeds equal to
$14,203,000 (after the 5% retainage fee to Cornell Capital Partners and $85,000
in offering expenses). If we drew down the entire $20 million under the Standby
Equity Distribution Agreement, Cornell Capital Partners would retain a fee equal
to $1 million, or 5% of our advances. Pursuant to the Standby Equity
Distribution Agreement, Cornell Capital Partners will purchase shares of Kronos
common stock for a total discount of 7% of the common stock's market price. We
are registering 156,985,871 shares of our common stock under the Standby Equity
Distribution Agreement in the accompanying registration statement. From June 14,
2005, through October 25, 2006, we received net proceeds of $4,701,500 under the
Standby Equity Distribution Agreement and issued 106,007,404 shares of our
common stock in connection with these advances. On June 14, 2005, our stock
price was $0.08 per share and on October 25, 2006, our stock price was $0.0152
per share. Our Articles of Incorporation currently authorize Kronos to issue 500
million shares and, as of October 25, 2006, we had 180,164,336 shares of common
stock issued and outstanding. In the event we desire to draw down any available
amounts remaining under the Standby Equity Distribution Agreement after we have
issued the 156,985,871 shares being registered in the accompanying registration
statement, we will have to file a new registration statement to cover such
additional shares that we would issue for additional draw downs on the Standby
Equity Distribution Agreement. Unless we obtain profitable operations, it is
unlikely that we will be able to secure additional financing from external
sources other than our Standby Equity Distribution Agreement. Therefore, if we
are unable to draw down on our Standby Equity Distribution Agreement, we may be
forced to curtail or cease our business operations.
In addition, pursuant to the terms of the Standby Equity Distribution
Agreement, Cornell Capital Partners may not own more than 9.9% of our
outstanding shares of common stock. In the event Cornell Capital Partners is
8
unable to sell the shares of our common stock that are issued after we receive
an advance in order to keep them below 9.9% beneficial ownership, we might not
be able to draw down additional funds when needed under the Standby Equity
Distribution Agreement. Therefore, if we are unable to draw down on our Standby
Equity Distribution Agreement, we may be forced to curtail or cease our business
operations.
Our Common Stock May Be Affected By Limited Trading Volume And May Fluctuate
Significantly
Our common stock is currently traded on the Over-the-Counter Bulletin
Board. Prior to this offering, there has been a limited public market for our
common stock and there can be no assurance that an active trading market for our
common stock will develop. As a result, this could adversely affect our
shareholders' ability to sell our common stock in short time periods, or
possibly at all. Our common stock is thinly traded compared to larger, more
widely known companies in our industry. Thinly traded common stock can be more
volatile than common stock traded in an active public market. The average daily
trading volume of our common stock in September 2006 was 2,102,037 shares. The
high and low bid price of our common stock for the last two years has been $0.72
and $0.016, respectively. Our common stock has experienced, and is likely to
experience in the future, significant price and volume fluctuations, which could
adversely affect the market price of our common stock without regard to our
operating performance. In addition, we believe that factors such as quarterly
fluctuations in our financial results and changes in the overall economy or the
condition of the financial markets could cause the price of our common stock to
fluctuate substantially.
We May Be Unable To Manage Growth
Successful implementation of our business strategy requires us to
manage our growth. Growth could place an increasing strain on our management and
financial resources. To manage growth effectively, we will need to:
o Establish definitive business strategies, goals and objectives.
o Maintain a system of management controls.
o Attract and retain qualified personnel, as well as, develop, train and
manage management-level and other employees.
If we fail to manage our growth effectively, our business, financial
condition or operating results could be materially harmed, and our stock price
may decline.
9
Risks Related To This Offering
Future Sales By Our Stockholder May Adversely Affect Our Stock Price And Our
Ability To Raise Funds In New Stock Offerings
Sales of our common stock in the public market following this offering
could lower the market price of our common stock. Sales may also make it more
difficult for us to sell equity securities or equity-related securities in the
future at a time and price that our management deems acceptable or at all. Some
of our shareholders, including officers and directors are the holders of
"restricted securities". These restricted securities may be resold in the public
market only if registered or pursuant to an exemption from registration. All of
these shares may be resold under Rule 144.
Upon completion of this offering, and assuming all shares registered in
this offering are resold in the public market, there will be an additional
156,985,871 shares of common stock outstanding. All of these shares of common
stock may be immediately resold in the public market upon effectiveness of the
accompanying registration statement.
The Selling Stockholders Intend To Sell Their Shares Of Common Stock In The
Market, Which Sales May Cause Our Stock Price To Decline
The selling stockholders intend to sell in the public market the shares
of common stock being registered in this offering. That means that up to
164,848,371 shares of common stock, the number of shares being registered in
this offering may be sold. Such sales may cause our stock price to decline.
Cornell Capital Partners Will Pay Less Than The Then-Prevailing Market Price And
Will Have An Incentive To Sell Its Shares
Cornell Capital Partners will purchase shares of our common stock
pursuant to the Standby Equity Distribution Agreement at a purchase price that
is less than the then-prevailing market price of our common stock. Cornell
Capital Partners will have an incentive to sell any shares of Kronos common
stock that it purchases pursuant to the Standby Equity Distribution Agreement to
realize a gain on the difference between the purchase price and the
then-prevailing market price of our common stock. The terms of the Standby
Equity Distribution Agreement do not provide Cornell Capital Partners the
ability to sell shares of our common stock corresponding to a particular put if
those shares have not been delivered by Kronos to Cornell Capital Partners. To
the extent Cornell Capital Partners sells its common stock, the common stock
price may decrease due to the additional shares in the market. This could allow
Cornell Capital Partners to sell greater amounts of common stock, the sales of
which would further depress the stock price. From June 14, 2005 through October
25, 2006, we received net proceeds of $4,701,500 under the Standby Equity
Distribution Agreement and issued 106,007,404 shares of our common stock in
connection with these advances. On June 14, 2005, our stock price was $0.08 per
share and on October 25, 2006, our stock price was $0.0152 per share. Based on
our recent stock price of $0.0152, Cornell Capital Partners would pay us $0.0149
per share and we would have to issue to Cornell Capital Partners 1,009,395,975
shares of our common stock in order to receive the remaining $15,040,000 balance
of our Standby Equity Distribution Agreement, of which we would receive net
proceeds equal to $14,203,000 (after the 5% retainage fee to Cornell Capital
Partners and $85,000 in offering expenses).
In addition, pursuant to the Standby Equity Distribution Agreement,
Cornell Capital Partners has the ability to sell shares of Kronos common stock
corresponding to a particular advance notice by Kronos even if such shares of
common stock have not yet been delivered to Cornell Capital Partners. Such sales
may cause our stock price to decline.
The Sale Of Material Amounts Of Common Stock Under The Accompanying Registration
Statement Could Encourage Short Sales By Third Parties
The significant downward pressure on our stock price caused by the sale
of a significant number of shares under the Standby Equity Distribution
Agreement could cause our stock price to decline, thus allowing short sellers of
our stock an opportunity to take advantage of any decrease in the value of our
stock. Short selling is where a person sells shares of stock not yet owned by
that person in the anticipation of being able to buy the stock at a later date
at a lower price per share. The presence of short sellers in our common stock
may further depress the price of our common stock.
10
The Price You Pay In This Offering Will Fluctuate
The price in this offering will fluctuate based on the prevailing
market price of the common stock on the Over-the-Counter Bulletin Board.
Accordingly, the price you pay in this offering may be higher or lower than the
prices paid by other people participating in this offering.
The Issuance Of Shares Of Common Stock Under This Offering Could Result In A
Change Of Control
We are registering 164,848,371 shares of common stock in this offering. These
shares represent approximately 33% of our authorized capital stock and would
upon issuance represent approximately 72% of the then issued and outstanding
common stock and we anticipate all such shares will be sold in this offering. If
all or a significant block of these shares are held by one or more shareholders
working together, then such shareholder or shareholders would have enough shares
to exert significant influence on Kronos in an election of directors.
FORWARD-LOOKING STATEMENTS
Information included or incorporated by reference in this prospectus
may contain forward-looking statements. This information may involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from the future
results, performance or achievements expressed or implied by any forward-looking
statements. Forward-looking statements, which involve assumptions and describe
our future plans, strategies and expectations, are generally identifiable by use
of the words "may," "will," "should," "expect," "anticipate," "estimate,"
"believe," "intend" or "project" or the negative of these words or other
variations on these words or comparable terminology.
This prospectus 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 and (e) our anticipated needs for
working capital. These statements may be found under "Management's Discussion
and Analysis or Plan of Operations" and "Business," as well as in this
prospectus generally. Actual events or results may differ materially from those
discussed in forward-looking statements as a result of various factors,
including, without limitation, the risks outlined under "Risk Factors" and
matters described in this prospectus generally. In light of these risks and
uncertainties, there can be no assurance that the forward-looking statements
contained in this prospectus will in fact occur.
11
SELLING STOCKHOLDER
The following table presents information regarding the selling
stockholders. A description of each selling stockholder's relationship to Kronos
and how each selling stockholder acquired or will acquire the shares to be sold
in this offering is detailed in the information immediately following this
table.
Percentage
Percentage of Shares to be of
Outstanding Acquired Under Outstanding
Shares the Standby Shares
Shares Beneficially Equity Shares Beneficially
Beneficially Owned Owned Before Distribution to be Sold in the Owned After
Selling Stockholder Before Offering Offering(1) Agreement Offering Offering(1)
Cornell Capital Partners, L.P.
8,990,200(2) 4.99% 156,985,871(3) 161,985,871(3) 0%
Richard Sun 1,425,000 * -- 1,425,000 0%
Fred Gumbinner 400,000 * -- 400,000 0%
James Hunt 237,500 * -- 237,500 0%
Walter Mazan 190,000 * -- 190,000 0%
Sheldon Katz 142,500 * -- 142,500 0%
James Cheng 142,500 * -- 142,500 0%
Robert Balcerak 142,500 * -- 142,500 0%
New Vantage Group (3) 120,000 * -- 120,000 0%
Newbridge Securities --
Corporation 62,500 * 62,500 0%
Total 156,985,871 164,848,371
___________________
* Less than 1%.
(1) Applicable percentage of ownership is based on 180,164,336 shares of common
stock outstanding as of October 25, 2006, together with securities
exercisable or convertible into shares of common stock within 60 days of
October 25, 2006. Beneficial ownership is determined in accordance with the
rules of the Securities and Exchange Commission and generally includes
voting or investment power with respect to securities. Shares of common
stock subject to securities exercisable or convertible into shares of
common stock that are currently exercisable or exercisable within 60 days
of October 25, 2006 are deemed to be beneficially owned by the person
holding such securities for the purpose of computing the percentage of
ownership of such person, but are not treated as outstanding for the
purpose of computing the percentage ownership of any other person.
(2) Includes shares available to purchase pursuant to the terms of the Standby
Equity Distribution Agreement.
(3) We are registering 156,985,871 shares of common stock to be resold by
Cornell Capital Partners under the Standby Equity Distribution Agreement.
In the event we desire to draw down any available amounts remaining under
the Standby Equity Distribution Agreement after we have issued the
156,985,871 shares being registered in the accompanying registration
statement, we will have to file a new registration statement to cover such
additional shares that we would issue for additional draw downs under the
Standby Equity Distribution Agreement.
(3) Mr. Bruster Crosby makes the investment decisions for New Vantage Group.
The following information contains a description of the selling
stockholder's relationship to Kronos and how the selling stockholder acquired
the shares to be sold in this offering. The selling stockholders have not held a
position or office, or had any other material relationship, with Kronos, except
as follows:
Shares Acquired In Financing Transaction With Kronos
o Cornell Capital Partners, L.P. Cornell Capital Partners is the investor
under an equity investment agreement, Equity-Backed Promissory Notes and
the Standby Equity Distribution Agreement. All investment decisions of
Cornell Capital Partners are made by its general partner, Yorkville
Advisors, LLC. Mark Angelo, the managing member of Yorkville Advisors,
makes the investment decisions on behalf of Yorkville Advisors. Cornell
Capital Partners acquired all shares being registered in this offering in
financing transactions with Kronos. That transaction is explained below:
o Standby Equity Distribution Agreement. On October 15, 2004, we entered into
a prior Standby Equity Distribution Agreement with Cornell Capital
Partners. On January 28, 2005, we mutually agreed to terminate the prior
Standby Equity Distribution Agreement. On January 28, 2005, we entered into
a new Standby Equity Distribution Agreement with Cornell Capital Partners.
12
On March 28, 2005, we mutually agreed to terminate the January 28, 2005
Standby Equity Distribution Agreement with Cornell Capital Partners. On
April 13, 2005, we entered into a new Standby Equity Distribution Agreement
with Cornell Capital Partners. Pursuant to the Standby Equity Distribution
Agreement, we may, at our discretion, periodically sell to Cornell Capital
Partners shares of our common stock for a total purchase price of up to $20
million. Pursuant to the Standby Equity Distribution Agreement, Cornell
Capital Partners will receive a total underwriting discount on the purchase
of our common stock equal to 7%, which consists of the two (2) discounts
described below. For each share of common stock purchased under the Standby
Equity Distribution Agreement, Cornell Capital Partners will pay Kronos 98%
of the lowest volume weighted average price of our common stock on the
Over-the-Counter Bulletin Board or other principal market on which our
common stock is traded for the 5 trading days immediately following the
notice date. Further, Cornell Capital Partners will retain a fee of 5% of
each advance under the Standby Equity Distribution Agreement. In connection
with the Standby Equity Distribution Agreement, Cornell Capital Partners
will receive a commitment fee in the form of 2,941,175 shares of our common
stock. Pursuant to the Standby Equity Distribution Agreement, of which
1,470,587 shares will be issued to Cornell Capital Partners on the six (6)
month anniversary of the Standby Equity Distribution Agreement and
1,470,588 shares will be issued to Cornell Capital Partners on the twelve
(12) month anniversary of the Standby Equity Distribution Agreement. The 2%
discount on the purchase of the common stock to be received by Cornell
Capital Partners, the commitment fee and the 5% retainage fee are
underwriting discounts.
We are registering 156,985,871 shares in this offering that may be
resold by Cornell Capital Partners pursuant to the Standby Equity Distribution
Agreement in addition to the shares registered in this offering in connection
with the commitment fee under the Standby Equity Distribution Agreement. From
June 14, 2005 through October 25, 2006, we received net proceeds of $4,701,500
under the Standby Equity Distribution Agreement and issued 106,007,404 shares of
our common stock in connection with these advances. On June 14, 2005 our stock
price was $0.08 per share and on October 25, 2006, our stock price was $0.0152
per share.
o $500,000 Equity Investment. On October 15, 2004, Kronos
entered into a Securities Purchase Agreement with Cornell
Capital Partners. Pursuant to the Securities Purchase
Agreement, Kronos sold 5,000,000 shares of Kronos' restricted
common stock to Cornell Capital Partners. In connection with
the sale of shares of common stock to Cornell Capital
Partners, LP, Kronos and Cornell Capital Partners entered into
an Investor Registration Rights Agreement, dated October 15,
2004, whereby Kronos is obligated to file a registration
statement with the United States Securities and Exchange
Commission covering such shares of common stock sold to
Cornell Capital Partners.
o $280,000 Equity Investment. On November 16, 2004, Kronos
entered into a Securities Purchase Agreement with a group of
accredited investors. Pursuant to the Securities Purchase
Agreement, Kronos sold 2,800,000 shares of Kronos' restricted
common stock to these accredited investors. In connection with
the sale of shares of common stock to accredited investors,
Kronos and the investors entered into an Investor Registration
Rights Agreements, dated November 16, 2004.
There Are Certain Risks Related To Sales By Cornell Capital Partners
There are certain risks related to sales by Cornell Capital Partners,
including:
o The outstanding shares are issued based on discount to the
market rate. As a result, the lower the stock price around the
time Cornell Capital Partners is issued shares, the greater
chance that Cornell Capital Partners gets more shares. This
could result in substantial dilution to the interests of other
holders of common stock.
o To the extent Cornell Capital Partners sells its common stock,
the common stock price may decrease due to the additional
shares in the market. This could allow Cornell Capital
Partners to sell greater amounts of common stock, the sales of
which would further depress the stock price.
o The significant downward pressure on the price of the common
stock as Cornell Capital Partners sells material amounts of
common stock could encourage short sales by third parties.
This could place further downward pressure on the price of the
common stock.
13
Newbridge Securities Corporation is a registered broker-dealer that we
engaged to advise us in connection with the Standby Equity Distribution
Agreement. Guy Amico makes the investment decisions on behalf of Newbridge
Securities Corporation. We paid Newbridge Securities Corporation a fee of
$10,000 payable in 62,500 shares of our common stock. Kronos is registering
these shares in this offering. Newbridge Securities Corporation received these
shares in the ordinary course of business and at the time of the issuance of the
shares to be resold, Newbridge Securities Corporation had no agreements or
understandings, directly or indirectly, with any person to distribute these
shares.
14
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be
offered and resold from time to time by the selling stockholders. There will be
no proceeds to us from the resale of shares of common stock in this offering.
However, we will receive the proceeds from the sale of shares of common stock to
Cornell Capital Partners under the Standby Equity Distribution Agreement.
Cornell Capital Partners will purchase shares of Kronos' common stock for a
total discount of 7% of the common stock's market price.
Kronos is registering 156,985,871 shares of common stock for issuance
under the Standby Equity Distribution Agreement. At a recent price of $0.0152
per share, Cornell Capital Partners will pay us $0.0149 per share and Kronos
could receive the remaining $15,040,000 balance of our Standby Equity
Distribution Agreement, of which we would receive net proceeds equal to
$14,203,000 (after the 5% retainage fee to Cornell Capital Partners and $85,000
in offering expenses).
For illustrative purposes, we have set forth below our intended use of
proceeds for the range of proceeds available to us indicated below to be
received under the Standby Equity Distribution Agreement. The table assumes
estimated offering expenses of $85,000 plus 5% retainage payable to Cornell
Capital Partners.
Gross Proceeds $1,000,000 $4,000,000 $10,000,000 $15,000,000
5% Retainage 50,000 200,000 500,000 750,000
Offering Expenses 85,000 85,000 85,000 85,000
---------- ---------- ----------- -----------
Net Proceeds $865,000 $3,715,000 $9,415,000 $14,165,000
========== ========== =========== ===========
Use of Proceeds:
Corporate and Working Capital $865,000 $3,715,000 $9,415,000 $14,165,000
---------- ---------- ----------- -----------
Total $865,000 $3,715,000 $9,415,000 $14,165,000
========== ========== =========== ===========
Kronos has represented to Cornell Capital Partners that the net
proceeds we receive under the Standby Equity Distribution Agreement will be used
for general corporate purposes. The principal reason for us entering into the
Standby Equity Distribution Agreement and this offering is that we estimate that
achievement of our business plan will require substantial additional funding,
including approximately $2,500,000 over the next 12 months. In no event will the
net proceeds we receive under the Standby Equity Distribution Agreement be used
by Kronos for the payment (or loaned to any such person for the payment) of any
judgment, or other liability, incurred by any executive officer, officer,
director or employee of Kronos, except for any liability owed to such person for
services rendered, or if any judgment or other liability is incurred by such
person originating from services rendered to Kronos or Kronos has indemnified
such person from liability.
15
DILUTION
The net tangible book value of our Company as of June 30, 2006 was
($5,128,326) or ($0.0355) per share of common stock outstanding at June 30,
2006. Net tangible book value per share is determined by dividing the tangible
book value of our Company (total tangible assets less total liabilities) by the
number of outstanding shares of our common stock. Since this offering is being
made solely by the selling stockholders and none of the proceeds will be paid to
our Company, our net tangible book value will be unaffected by this offering.
Our net tangible book value, however, will be impacted by the common stock to be
issued under the Standby Equity Distribution Agreement. The amount of dilution
will depend on the offering price and number of shares to be issued under the
standby equity distribution agreement. The following example shows the dilution
to new investors at an offering price of $0.0149 per share, which is 98% of a
recent share price of $0.0152.
If we assume that our Company had issued 1,009,395,975 shares of common
stock under the Standby Equity Distribution Agreement at a recent stock price of
$0.0152 per share in order to receive the remaining balance of gross proceeds
equal to $15,040,000 under the Standby Equity Distribution Agreement, Cornell
Capital Partners would have paid us $0.0149 per share and we would receive net
proceeds equal to $14,203,000 (after a retention fee of $752,000 retained by
Cornell Capital Partners and offering expenses of $85,000), our net tangible
book value as of June 30, 2006 would have been $9,264,674 or $0.01 per share.
Such an offering would represent an immediate increase in net tangible book
value to existing stockholders of $0.0434 per share and an immediate dilution to
new stockholders of $0.0070 per share. The following table illustrates the per
share dilution:
Assumed public offering price per share $0.0149
Net tangible book value per share before this offering $(0.0355)
Increase attributable to new investors $0.0434
--------
Net tangible book value per share after this offering $0.0079
-------
Dilution per share to new stockholders $0.0070
=======
The offering price of our common stock is based on the then-existing
market price. In order to give prospective investors an idea of the dilution per
share they may experience, we have prepared the following table showing the
dilution per share at various assumed offering prices:
Assumed Offering Price No of Shares to be Dilution Per Share to
Issued(1) New Investors
$0.0149 1,009,395,975(2) $0.0070
$0.0112 1,345,861,298(2) $0.0051
$0.0075 2,018,791,946(2) $0.0033
$0.0037 4,037,583,893(2) $0.0016
_______________________
(1) Kronos is registering 156,985,871 shares of common stock for issuance under
the Standby Equity Distribution Agreement.
(2) Kronos currently has 500 million shares of common stock authorized by its
Articles of Incorporation. In order to issue this number of shares of
common stock, Kronos would have to obtain shareholder approval to amend its
Articles of Incorporation to increase our authorized common stock.
16
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following is a summary of our Financial Statements which are
included elsewhere in this prospectus. You should read the following data
together with the "Management's Discussion and Analysis of Financial Condition
and Results of Operations" section of this prospectus as well as with our
financial statements and the notes therewith.
KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the year ended June 30,
----------------------------------
2006 2005
---------------- ----------------
Sales $ 219,369 $ 430,379
Cost of sales 8,449 375,397
---------------- ----------------
Gross Profit 210,920 54,982
---------------- ----------------
Selling, General and Administrative expenses
Compensation and benefits 1,661,555 1,384,481
Research and development 357,822 167,500
Professional services 343,338 244,570
Depreciation and amortization 618,247 475,250
Facilities 100,982 96,882
Insurance 131,148 173,597
Other selling general and administrative expenses 517,697 229,658
---------------- ----------------
Total Selling, General and Administrative expenses 3,730,789 2,771,938
---------------- ----------------
Net Operating Loss (3,519,869) (2,716,956)
Other Income (Expense)
Loss on Debt Restructure - (3,857,467)
Other Income 8,776 1,414
Interest Expense (489,253) (521,104)
---------------- ----------------
Net Loss $ (4,000,346) $ (7,094,113)
================ ================
Basic and Diluted Loss Per Share:
Net Loss $ (0.04) $ (0.10)
================ ================
Weighted Average Shares Outstanding - Basic and Diluted 98,512,184 67,612,904
================ ================
17
KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
June 30, June 30,
2006 2005
-------------------- --------------------
Assets
Current Assets
Cash $ 598,323 $ 1,554,906
Accounts receivable 10,000 -
Other Current Assets 58,028 263,490
-------------------- --------------------
Total Current Assets 666,351 1,818,396
-------------------- --------------------
Property and Equipment 51,755 46,011
Less: Accumulated Depreciation (46,158) (43,384)
-------------------- --------------------
Net Property and Equipment 5,597 2,627
-------------------- --------------------
Other Assets
Intangibles, net 1,983,908 2,138,814
-------------------- --------------------
Total Other Assets 1,983,908 2,138,814
-------------------- --------------------
Total Assets $ 2,655,856 $ 3,959,837
==================== ====================
Liabilities and Stockholders' Deficit
Current Liabilities
Accrued expenses and payables to officers $ 8,843 $ 28,837
Accounts payable 204,632 479,175
Accrued interest expense 879,144 428,612
Accrued expenses 41,111 58,458
Deferred revenue 20,000 -
Notes payable, current portion 1,815,000 4,028,131
Notes payable to officers 256,544 397,004
-------------------- --------------------
Total Current Liabilities 3,225,274 5,420,217
-------------------- --------------------
Long Term Liabilities
Notes payable 2,575,000 2,400,000
-------------------- --------------------
Total Long Term Liabilities 2,575,000 2,400,000
-------------------- --------------------
Total Liabilities 5,800,274 7,820,217
-------------------- --------------------
Stockholders' Deficit
Common stock, authorized 500,000,000
shares of $.001 par value
Issued and outstanding - 144,499,657
and 72,786,345, respectively 144,500 72,686
Capital in excess of par value 27,828,241 23,183,747
Accumulated deficit (31,117,159) (27,116,813)
-------------------- --------------------
Total Stockholders' Deficit (3,144,418) (3,860,380)
-------------------- --------------------
Total Liabilities and Stockholders' Deficit $ 2,655,856 $ 3,959,837
==================== ====================
18
STANDBY EQUITY DISTRIBUTION AGREEMENT
Summary
On October 15, 2004, we entered into a Standby Equity Distribution
Agreement with Cornell Capital Partners. On January 28, 2005, we mutually agreed
to terminate the Standby Equity Distribution Agreement. On January 28, 2005, we
entered into a new Standby Equity Distribution Agreement with Cornell Capital
Partners. On March 28, 2005, we mutually agreed to terminate the January 28,
2005 Standby Equity Distribution Agreement with Cornell Capital Partners. On
April 13, 2005, we entered into a new Standby Equity Distribution Agreement with
Cornell Capital Partners. Pursuant to the Standby Equity Distribution Agreement,
we may, at our discretion, periodically sell to Cornell Capital Partners shares
of our common stock for a total purchase price of up to $20 million. Pursuant to
the Standby Equity Distribution Agreement, Cornell Capital Partners will receive
a total underwriting discount on the purchase of our common stock equal to 7%,
which consists of the two (2) discounts described below. For each share of
common stock purchased under the Standby Equity Distribution Agreement, Cornell
Capital Partners will pay us 98% of the lowest volume weighted average price of
our common stock on the Over-the-Counter Bulletin Board or other principal
market on which our common stock is traded for the 5 days immediately following
the notice date.
Cornell Capital Partners is a private limited partnership whose
business operations are conducted through its general partner, Yorkville
Advisors, LLC. Further, Cornell Capital Partners will retain a fee of 5% of each
advance under the Standby Equity Distribution Agreement. In addition, we paid
Cornell Capital Partners a commitment fee under the Standby Equity Distribution
Agreement in the form of 2,941,175 shares of common stock, of which 1,470,587
shares which were issued to Cornell Capital Partners on the six (6) month
anniversary of the Standby Equity Distribution Agreement and 1,470,588 shares
were issued to Cornell Capital Partners on the twelve (12) month anniversary of
the Standby Equity Distribution Agreement. The 2% discount on the purchase of
the common stock to be received by Cornell Capital Partners, the commitment fee
and the 5% retainage fee are underwriting discounts. We also paid Cornell
Capital Partners a non-refundable due-diligence fee equal to $2,500 to defray
the costs of performing due diligence on us.
In addition, we engaged Newbridge Securities Corporation, a registered
broker-dealer, to advise us in connection with the Standby Equity Distribution
Agreement. For its services, Newbridge Securities Corporation received a fee of
$10,000 paid in 62,500 shares of our common stock. We paid counsel to Cornell
Capital Partners $15,000 for their legal, administrative and escrow fees. In
addition, on each advance date, we will pay counsel to Cornell Capital Partners
the sum of $500 for additional legal, administrative and escrow fees. Kronos is
registering 156,985,871 shares of common stock for the Standby Equity
Distribution Agreement pursuant to the accompanying registration statement. The
costs associated with this registration will be borne by us. There are no other
significant closing conditions to draws under the Standby Equity Distribution
Agreement.
Standby Equity Distribution Agreement Explained. Pursuant to the
Standby Equity Distribution Agreement, we may periodically sell shares of common
stock to Cornell Capital Partners to raise capital to fund our working capital
needs. The periodic sale of shares is known as an advance. We may request an
advance every 7 trading days with a maximum of $1,500,000 per advance. A closing
will be held 6 trading days after such written notice at which time we will
deliver shares of common stock and Cornell Capital Partners will pay the advance
amount. Pursuant to the Standby Equity Distribution Agreement, within two (2)
business days after an advance notice date, Kronos will credit shares of common
stock to the balance account with the Depository Trust Company of Cornell
Capital Partners' counsel in an amount equal to the amount of the requested
advance divided by the closing bid price of the common stock as of the advance
notice date multiplied by one point one (1.1). Any excess shares will be
credited to the next advance. In no event will the number of shares issuable to
Cornell Capital Partners pursuant to an advance cause it to own in excess of
9.9% of the then outstanding common stock of Kronos.
We may request advances under the Standby Equity Distribution Agreement
once the underlying shares are registered with the Securities and Exchange
Commission. Thereafter, we may continue to request advances until Cornell
Capital Partners has advanced $20 million or 24 months after the effective date
of the accompanying registration statement, whichever occurs first.
The amount of each advance is limited to a maximum draw down of
$1,500,000 every 7 trading days and Cornell Capital Partners will retain a fee
of 5% of each advance in addition to purchasing our stock for 98% of the market
price. At a recent stock price of $0.0152, Cornell Capital Partners would pay us
19
$0.0149 per share and we would have to issue 76,530,612 shares of common stock
to Cornell Capital Partners to draw down the maximum advance amount of
$1,500,000, of which Cornell Capital Partners will retain $75,000 as a retainage
fee. The amount available under the Standby Equity Distribution Agreement is not
dependent on the price or volume of our common stock. Our ability to request
advances are conditioned upon us registering the shares of common stock with the
Securities and Exchange Commission. In addition, we may not request advances if
the shares to be issued in connection with such advances would result in Cornell
Capital Partners owning more than 9.9% of our outstanding common stock.
We do not have any agreements with Cornell Capital Partners regarding
the distribution of such stock, although Cornell Capital Partners has indicated
that it intends to promptly sell any stock received under the Standby Equity
Distribution Agreement. In no event will the number of shares issuable to
Cornell Capital Partners pursuant to an advance under the Standby Equity
Distribution Agreement cause it to own in excess of 9.9% of the then outstanding
common stock of Kronos. Because of this beneficial ownership limitation and
depending on Cornell Capital Partner's ability to sell sufficient shares to
reduce its holdings, we may not be able to exercise an advance notice in the
maximum amount of $1.5 million and our ability to draw down on the Standby
Equity Distribution Agreement could be significantly impaired.
We cannot predict the actual number of shares of common stock that will
be issued pursuant to the Standby Equity Distribution Agreement, in part,
because the purchase price of the shares will fluctuate based on prevailing
market conditions and we have not determined the total amount of advances we
intend to draw. Nonetheless, we can estimate the number of shares of our common
stock that will be issued using certain assumptions. Based on a recent stock
price of $0.0152 per share, Cornell Capital Partners would pay us $0.0149 per
share and we would issue 1,009,395,975 shares of common stock to Cornell Capital
Partners for net proceeds remaining available under the Standby Equity
Distribution Agreement equal to $14,203,000 (after the 5% retainage fee to
Cornell Capital Partners and offering expenses of $85,000). We are registering
156,985,871 shares of common stock to be resold by Cornell Capital Partners
pursuant to Standby Equity Distribution Agreement, of which 50,978,467 remain
unsold to Cornell Capital Partners. Assuming we issue the 50,978,467 shares of
common stock being registered in the accompanying registration statement under
the Standby Equity Distribution Agreement, at a recent stock price of $0.0152
per share, Cornell Capital Partners would pay us $0.0149 per share and we would
receive net proceeds equal to $636,406 (after the 5% retainage fee to Cornell
Capital Partners and $85,000 in offering expenses). The total 156,985,871 shares
we are registering under the Standby Equity Distribution Agreement would
represent approximately 69% of our outstanding common stock upon issuance.
From June 14, 2005, through October 25, 2006, we received net proceeds
of $4,701,500 under the Standby Equity Distribution Agreement and issued
106,007,404 shares of our common stock in connection with these advances. On
June 14, 2005 our stock price was $0.08 per share and on October 25, 2006, our
stock price was $0.0152 per share.
You should be aware that there is an inverse relationship between our
stock price and the number of shares to be issued under the Standby Equity
Distribution Agreement. That is, as our stock price declines, we would be
required to issue a greater number of shares under the Standby Equity
Distribution Agreement for a given advance. The issuance of a larger number of
shares under the Standby Equity Distribution Agreement may result in a change of
control. That is, if all or a significant block of such shares are held by one
or more shareholders working together, then such shareholder or shareholders
would have enough shares to assume control of Kronos by electing its or their
own directors.
You should also be aware that in order for us to utilize the full $20
million available under the Standby Equity Distribution Agreement, it may be
necessary for our shareholders to approve an increase in our authorized common
stock and for us to register additional shares of common stock. Kronos is
authorized in its Articles of Incorporation to issue up to 500,000,000 shares of
common stock. As of October 25, 2006, Kronos had 180,164,336 shares of common
stock outstanding. Kronos is registering 156,985,871 shares of common stock
hereunder to be issued under the Standby Equity Distribution Agreement. You
should be aware that there is an inverse relationship between our stock price
and the number of shares to be issued under the Standby Equity Distribution
Agreement. That is, as our stock price declines, we would be required to issue a
greater number of shares under the Standby Equity Distribution Agreement for a
given advance. In addition, in connection with the First Amendment to Master
Loan and Investment Agreement with HoMedics (as described more completely in the
"Liquidity and Capital Resources" section of "Management's Discussion and
Analysis"), we amended two (2) warrants previously issued by us and agreed to
include anti-dilution protection for HoMedics. HoMedics is entitled, under
certain circumstances, to anti-dilution protection in order to maintain
beneficial ownership of Kronos equal to 30%. These warrants would have an
exercise price equal to $0.10 per share as previously agreed upon by Kronos and
HoMedics and as stated in the amended warrants. As of October 25, 2006, HoMedics
was not entitled to receive any additional warrants under the terms of the
anti-dilution protection.
Proceeds used under the Standby Equity Distribution Agreement will be
used in the manner set forth in the "Use of Proceeds" section of this
prospectus. We cannot predict the total amount of proceeds to be raised in this
transaction because we have not determined the total amount of the advances we
intend to draw.
20
Pursuant to the Standby Equity Distribution Agreement, we have agreed
that during the commitment period of the Standby Equity Distribution Agreement,
and except as set forth in our previously filed documents with the Securities
and Exchange Commission and as set forth in our loan transaction documents with
HoMedics, Inc., we will not (i) issue or sell any of our common stock or
preferred stock without consideration or for a consideration per share less than
the bid price of our common stock on the date of issuance or (ii) issue or sell
any warrant, option, right, contract, call, or other security or instrument
granting the holder the right to acquire our common stock without consideration
or for a consideration per share less than the bid price of our common stock on
the date of issuance.
We expect to incur expenses of approximately $85,000 in connection with
this registration, consisting primarily of professional fees. In connection with
the Standby Equity Distribution Agreement, we paid to Cornell Capital Partners a
one-time commitment fee of in the form of 2,941,175 shares of Kronos common
stock, of which, 1,470,587 shares were issued to Cornell Capital Partners on the
six (6) month anniversary of the Standby Equity Distribution Agreement and
1,470,588 shares were issued on the twelve (12) month anniversary of the Standby
Equity Distribution Agreement. In addition, we issued 62,500 shares of common
stock to Newbridge Securities Corporation, a registered broker-dealer, as a
placement agent fee.
21
PLAN OF DISTRIBUTION
The selling stockholders have advised us that the sale or distribution
of our common stock owned by the selling stockholders may be effected to
purchasers by the selling stockholders, (after the 5% retainage fee to Cornell
Capital Partners and $85,000 in offering expenses) as principals or through one
or more underwriters, brokers, dealers or agents from time to time in one or
more transactions (which may involve crosses or block transactions) on the
over-the-counter market. In the event our stock is traded on any market other
than the over-the-counter market, we will file a post-effective amendment to the
accompanying registration statement. Any of such transactions may be effected at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices, at varying prices determined at the time of sale or at
negotiated or fixed prices, in each case as determined by the selling
stockholders or by agreement between the selling stockholders and underwriters,
brokers, dealers or agents, or purchasers. If the selling stockholders effect
such transactions by selling their shares of common stock to or through
underwriters, brokers, dealers or agents, such underwriters, brokers, dealers or
agents may receive compensation in the form of discounts, concessions or
commissions from the selling stockholders or commissions from purchasers of
common stock for whom they may act as agent (which discounts, concessions or
commissions as to particular underwriters, brokers, dealers or agents may be in
excess of those customary in the types of transactions involved). The selling
stockholders and any brokers, dealers or agents that participate in the
distribution of the common stock may be deemed to be underwriters, and any
profit on the sale of common stock by them and any discounts, concessions or
commissions received by any such underwriters, brokers, dealers or agents may be
deemed to be underwriting discounts and commissions under the Securities Act.
Cornell Capital Partners is an "underwriter" within the meaning of the
Securities Act of 1933 in connection with the sale of common stock under the
Standby Equity Distribution Agreement. Cornell Capital Partners will receive a
total underwriting discount of 7% in connection with its purchase of shares
under the Standby Equity Distribution Agreement, which consists of two (2)
discounts described below. Cornell Capital Partners will pay us 98% of the
lowest volume weighted average price of our common stock on the Over-the-Counter
Bulletin Board or other principal trading market on which our common stock is
traded for the 5 days immediately following the advance date. In addition,
Cornell Capital Partners will retain 5% of each advance under the Standby Equity
Distribution Agreement. The 2% discount, the 5% retention and the one-time
commitment fee are underwriting discounts. We engaged Newbridge Securities
Corporation, a registered broker-dealer, to advise us in connection with the
Standby Equity Distribution Agreement. For its services, Newbridge Securities
Corporation received $10,000, which was paid by the issuance of 62,500 shares of
our common stock. Pursuant to a Placement Agent Agreement, Newbridge Securities
Corporation provided services consisting of reviewing the terms of the Standby
Equity Distribution Agreement and advising us with respect to those terms. The
Placement Agent Agreement is co-terminus with and will terminate upon the same
terms as the Standby Equity Distribution Agreement. Newbridge Securities
Corporation is not participating in the distribution of our common stock.
Pursuant to the terms of the Placement Agent Agreement, Kronos agreed to advise
Newbridge Securities Corporation of any material adverse change in Kronos and to
use commercially reasonable efforts to cause a registration statement connection
with the Standby Equity Distribution Agreement to be declared effective. In
addition, Kronos agreed to indemnify Newbridge Securities Corporation against
any and all claims arising out of or based upon any untrue statement of a
material fact by Kronos contained in the Placement Agent Agreement and/or any
offering materials with respect to the Standby Equity Distribution Agreement.
Cornell Capital Partners was formed in February 2000 as a Delaware
limited partnership. Cornell Capital Partners is a domestic hedge fund in the
business of investing in and financing public companies. Cornell Capital
Partners does not intend to make a market in our stock or to otherwise engage in
stabilizing or other transactions intended to help support the stock price.
Prospective investors should take these factors into consideration before
purchasing our common stock.
In consideration of Cornell Capital Partners' execution and delivery of
the Standby Equity Distribution Agreement, Kronos will indemnify Cornell Capital
Partners, and all of its officers, directors, partners, employees and agents,
from and against any and all actions, causes of actions, suits, claims, losses,
costs, penalties, fees, liabilities and damages incurred by the indemnified
party as a result of, or relating to: (i) any misrepresentation or breach of any
representation or warranty made by Kronos in the Standby Equity Distribution
Agreement or Registration Rights Agreement in connection therewith or any other
document contemplated thereby; (ii) any breach of any covenant, agreement or
obligation of Kronos contained in the Standby Equity Distribution or the
Registration Rights Agreement in connection therewith or any other document
contemplated thereby; or (iii) any cause of action, suit or claim brought
against such indemnified party and arising out of or resulting from the
execution, delivery, performance or enforcement of the Standby Equity
Distribution Agreement or any document in connection therewith.
22
Under the securities laws of certain states, the shares of common stock
may be sold in such states only through registered or licensed brokers or
dealers. The selling stockholders are advised to ensure that any underwriters,
brokers, dealers or agents effecting transactions on behalf of the selling
stockholders are registered to sell securities in all fifty states. In addition,
in certain states the shares of common stock may not be sold unless the shares
have been registered or qualified for sale in such state or an exemption from
registration or qualification is available and is complied with.
We will pay all the expenses incident to the registration, offering and
sale of the shares of common stock to the public hereunder other than
commissions, fees and discounts of underwriters, brokers, dealers and agents. We
have agreed to indemnify Cornell Capital Partners and its controlling persons
against certain liabilities, including liabilities under the Securities Act. We
estimate that the expenses of the offering to be borne by us will be
approximately $85,000. The offering expenses consist of: a SEC registration fee
of $1,550, printing expenses of $2,500, accounting fees of $20,000, legal fees
of $50,000 and miscellaneous expenses of $10,950. We will not receive any
proceeds from the sale of any of the shares of common stock by the selling
stockholders. We will, however, receive proceeds from the sale of common stock
under the Standby Equity Distribution Agreement.
The selling stockholders are subject to the applicable provisions of
the Securities Exchange Act of 1934, as amended, and its regulations, including
Regulation M. The anti-manipulation provisions of Regulation M under the
Exchange Act will apply to purchases and sales of shares of common stock by the
selling stockholders and there are restrictions on market-making activities by
persons engaged in the distribution of the shares. Under Registration M, the
selling stockholders or their agents may not bid for, purchase, or attempt to
induce any person to bid for or purchase, shares of our common stock while such
selling stockholders are distributing shares covered by this prospectus. The
selling stockholders are advised that if a particular offer of common stock is
to be made on terms constituting a material change from the information set
forth above with respect to the Plan of Distribution, then, to the extent
required, a post-effective amendment to the accompanying registration statement
must be filed with the Securities and Exchange Commission.
Cornell Capital Partners is prohibited from short selling and/or other
hedging activity pursuant to the terms of the Standby Equity Distribution
Agreement. Kronos is not aware of any other selling stockholders' intentions
regarding short selling and/or other hedging activity.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following information should be read in conjunction with the
consolidated financial statements of Kronos and the notes thereto appearing
elsewhere in this filing. Statements in this Management's Discussion and
Analysis and elsewhere in this prospectus that are not statements of historical
or current fact constitute "forward-looking statements." For an overview of
Kronos please see the section entitled Description of the Business which follows
this section.
General
Kronos Advanced Technologies, Inc. is an application development and
licensing company that has developed and patented technology that fundamentally
changes the way air is moved, filtered and sterilized. Kronos is pursuing
commercialization of its proprietary technology in a limited number of markets;
and if we are successful, we intend to enter additional markets in the future.
Among the achievements of the Company over the past twelve months included the
following:
o Technology and Intellectual Property:
- secured additional U.S. and international patents for our
proprietary technology and made additional patent filings;
- expanded our product claims platform to include independent
verification of Kronos' technology's ability to decontaminate
rooms infected with bacteria and viruses and sterilize air flows
contaminated with anthrax and E.coli spores and S. aureaus and B.
aureaus bacteria.
o Business Development, Marketing and Sales:
- earned $0.2 million in revenue from military, consumer and
commercial customer contracts;
- executed license agreements with EOL and DESA for applying the
Kronos technology in the health care, residential and commercial
air purification markets; - shipped a prototype device designed
and built under specific customer specifications to a leading
auto manufacturer for their testing and evaluation;
- awarded a Washington Technology Center Phase II grant for
developing a novel approach to cooling micro chips;
- completed the initial design and development of space heaters and
vaporizers, which are undergoing evaluation by potential
strategic partners;
- invited to serve as a member and an industrial partner in the
Federal Aviation Administration's (FAA) Air Transportation
Airliner Cabin Environment Research Center of Excellence (ACER
CoE);
- pursued new opportunities initiated by several leading global
home appliance manufacturers for the development of select
residential applications of our technology, including silent
kitchen range hoods. This opportunity was a direct result of our
initial development work with Ikea.
o Operations:
- Initiated work with EOL and DESA for developing a
viable standalone air purification product for the
health care market and the embedded heater market,
respectively;
- completed testing of a viable consumer standalone air
purification product;
- completed Phase II of our U.S. Army Phase II dehumidification
contract;
24
- expanded into a larger facility to accommodate our growing
customer driven research and product development needs.
Recent Developments
EOL. In December 2005, the Company executed a non-exclusive license
agreement with EOL, LLC, a Russian Federation company, for manufacturing and
distributing Kronos-based commercial standalone products in Russia and other
select Commonwealth of Independent States.
DESA. In June 2006, the Company executed its first license for embedded
applications of Kronos technology with DESA, LLC.
Leading Automotive Manufacturer. In August 2005, Kronos extended its
work into the transportation industry by signing a Prototype Development and
Evaluation Agreement with a leading automotive manufacturer. 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.
U.S. Military and Northrop Grumman. In May 2005, Kronos shipped the
Kronos US Navy SBIR Phase II device to Northrop Grumman for testing and
evaluation. Based on the success of these initial tests, Northrop Grumman
requested additional modifications and improvements to the device. Northrop
Grumman is scheduling further testing. As of June 30, 2006, the U. S. Military
had provided Kronos with $972,000 in funding under SBIR Phase II contracts.
Washington Technology Center. 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 technology
project on a novel cooling system for microelectronics and computer chips.
HoMedics. In September 2006, the Company sent a notice of termination
of its license agreement with HoMedics USA, Inc. HoMedics has indicated that it
does not recognize Kronos' termination of the License Agreement as valid.
HoMedics has requested an amicable and expedient resolution of the parties'
differences. The outcome of this matter cannot be determined at this time.
Disinfection Research Institute Sterilization Laboratory. In January
2006, independent testing at the Disinfection Research Institute Sterilization
Laboratory in Moscow demonstrated the ability of Kronos devices to completely
disinfect a room 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 shares many functional
similarities with a wide range of viruses.) In June 2006, further testing at the
Disinfection Research Institute demonstrated the ability of Kronos devices to
100% decontaminate a room infected with bacteria (Staphylococcus aureus strain
906 (S. aureus)) and Bacillus cereus strain 96 (B. cereus);
Institute for Veterinary Medicine. In November 2005, independent
testing at the Institute for Veterinary Medicine in the Ukraine demonstrated the
ability of Kronos devices to destroy and sterilize air which had been
inseminated with Anthrax and E.coli spores;
Cornell Debt Repayment. In May 2006, the Company completed repayment of
one of two $2 million promissory notes to Cornell Capital Partners. As of June
30, 2006, Kronos owed $1.8 million under the second Promissory Note.
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.
25
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.
Results Of Operations
Consolidated Statement of Operations For the Years Ended June 30, 2006
and 2005.
Our net losses for each of the current years ended June 30, 2006 and
June 30, 2005 were $4,000,000 and $7,094,000, respectively. The decrease in the
net loss for the year ended June 30, 2006, as compared to the prior year, was
principally the result of a $3,857,000 decrease in other income associated with
the restructuring of the HoMedics debt, a $156,000 increase in gross profit to
$211,000 and a $32,000 decrease in interest expense to $489,000, partially
offset by a $959,000 or 35% increase in operating costs to $3,731,000.
Revenue
Revenues are generated through sales of services for design and
development of Kronos devices at Kronos Air Technologies, Inc. Revenues for the
year ended June 30, 2006 were $219,000 compared with $430,000 in the prior year.
Current year revenues were primarily from our DESA and EOL license agreements,
U.S. Navy Small Business Innovative Research Phase II contract, and U.S. Army
Small Business Innovative Research Phase II contracts.
Cost of Sales
Cost of sales for the year ended June 30, 2006 was $8,000 compared with
$375,000 for the prior year. Cost of sales is primarily research and development
costs and material and labor associated with our U.S. Navy Small Business
Innovative Research Phase II contract and U.S. Army Small Business Innovative
Research Phase II contracts.
26
Selling, General and Administrative Expenses
Selling, General and Administrative expenses for the year ended June
30, 2006 increased $959,000 from the prior year to $3,731,000. The increase was
principally the result of a $277,000 increase in compensation and benefits as
the result of an increase in non cash compensation associated with the expensing
of stock options; a $190,000 increase in research and development as the Company
expanded it product application capability and a $143,000 in increase in
depreciation and amortization as the result of an increase in the capitalization
of intellectual property and patenting costs.
Loss on Debt Restructuring. Loss on debt restructuring for the year
ended June 30, 2005 was $3,857,000 and represented the non-cash charge to
operations for the cost to restructure the HoMedics debt, including the cost to
issue 26 million warrants (refer to Note 13 - Commitments and Contingencies).
Interest expense. Interest expenses for the year ended June 30, 2006
was $489,000 compared to $521,000 for the corresponding period of the prior
year.
Consolidated Balance Sheet as of June 30, 2006. Our total assets at
June 30, 2006 were $2,656,000 compared with $3,960,000 at June 30, 2005. Total
assets at June 30, 2006 and June 30, 2005 were comprised primarily of $1,984,000
and $2,139,000, respectively, of patents/intellectual property and $598,000 and
$1,555,000, respectively, of cash. Total current assets at June 30, 2006 and
2005 were $666,000 and $1,818,000, respectively, while total current liabilities
for those same periods were $3,225,000 and $5,420,000, respectively, creating a
working capital deficit of $2,559,000 and $3,602,000 at each respective period
end. This working capital deficit is primarily due to short term borrowings from
Cornell Capital Partners and accrued interest expense.
Stockholders' deficit as of June 30, 2006 was ($3,144,000). The
$4,000,000 net loss for the twelve months ended June 30, 2006 was offset by the
sale and issuance of common stock for cash ($4,110,000) and the issuance of
common options for compensation and services ($606,000).
Consolidated Statement of Operations For the Year Ended June 30, 2005.
Our net losses for each of the current years ended June 30, 2005 and June 30,
2004 were $7,094,000 and $2,495,000, respectively. The increase in the net loss
for the year ended June 30, 2005, as compared to the prior year, was principally
the result of a $3,857,000 increase in other income associated with the
restructuring of the HoMedics debt, a $683,000 or 33% increase in operating
costs to $2,772,000 and a $99,000 or 64% decrease in gross profit, partially
offset by a $95,000 or 15% decrease in interest expense to $0.5 million.
Revenue. Revenues are generated through sales of services for design
and development of Kronos devices at Kronos Air Technologies, Inc. Revenues for
the year ended June 30, 2005 were $430,000 compared with $533,000 in the prior
year. Current year revenues were primarily from our HoMedics development
agreement, U.S. Navy Small Business Innovative Research Phase II contract, and
U.S. Army Small Business Innovative Research Phase II contracts.
Cost of Sales. Cost of sales for the year ended June 30, 2005 was
$375,000 compared with $379,000 for the prior year. Cost of sales is primarily
research and development costs and material and labor associated with our
HoMedics development agreement, U.S. Navy Small Business Innovative Research
Phase II contract and U.S. Army Small Business Innovative Research Phase II
contracts.
Selling, General and Administrative Expenses. Selling, General and
Administrative expenses for the year ended June 30, 2005 increased $683,000 from
the prior year to $2,772,000. The increase was principally the result of a
$274,000 in increase on non-cash compensation as the Company elected to
recognize Statement of Financial Accounting Standards No. 123R, Share-Based
Payment, during the fiscal year ended June 30, 2005; and $270,000 increase in
compensation and benefits and a $107,000 increase in research and development as
the Company expanded it product application capability; partially offset by a
$111,000 reduction in professional services.
Loss on Debt Restructuring. Loss on debt restructuring for the year
ended June 30, 2005 was $3,857,000 and represented the non-cash charge to
operations for the cost to restructure the HoMedics debt, including the cost to
issue 26 million warrants (refer to Note 14 - Commitments and Contingencies).
Interest expense. Interest expenses for the year ended June 30, 2005
was $521,000 compared to $616,000 for the corresponding period of the prior
year. Consolidated Balance Sheet as of June 30, 2005 Our total assets at June
30, 2005 were $3,960,000 compared with $2,497,000 at June 30, 2004. Total assets
27
at June 30, 2005 and June 30, 2004 were comprised primarily of $2,139,000 and
$2,253,000, respectively, of patents/intellectual property and $1,555,000 and
$69,000, respectively, of cash. Total current assets at June 30, 2005 and 2004
were $1,818,000 and $238,000, respectively, while total current liabilities for
those same periods were $5,420,000 and $1,423,000, respectively, creating a
working capital deficit of $3,602,000 and $1,186,000 at each respective period
end. This working capital deficit is primarily due to short term borrowings from
Cornell Capital Partners. Stockholders' deficit as of June 30, 2005 was
($3,860,000). The $7,094,000 net loss for the twelve months ended June 30, 2005
was offset by the value of the warrants issued to HoMedics ($3,361,000), the
sale and issuance of common stock for cash ($968,000) and the issuance of common
stock and options for services ($288,000).
Liquidity And Capital Resources
Historically, we have relied principally on the sale of common stock
and secured debt and customer contracts for research and product development to
finance our operations. In October 2004, Kronos entered into agreements for up
to $20.5 million in equity and equity backed debt financing from Cornell Capital
Partners. In October 2004, Kronos sold 5 million unregistered shares of Kronos
common stock for gross proceeds of $500,000 to Cornell Capital Partners. Cornell
Capital Partners provided $4 million pursuant to two Promissory Notes, which
were funded as follows: $2 million upon the filing an SB-2 Registration
Statement and $2 million upon the SEC declaring the Registration Statement
effective. Kronos executed a Standby Equity Distribution Agreement for $20
million of funding which Kronos has the option to drawdown against in increments
as large as $1.5 million over the next twelve months. In May 2006, Kronos
completed repayment of the first $2 million promissory note. As of June 30,
2006, Kronos has received $6.2 million in funding under these agreements and
owed $1.8 million under the second Promissory Note. 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 has not been 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, will begin 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 will also be October 2009.
The interest rate will remain at 6%.
Net cash flow used in operating activities was $2.6 million for the
year ended June 30, 2006. We were able to satisfy most of our cash requirements
for this period from the proceeds of the $4 million Promissory Notes with
Cornell Capital Partners, the sale of equity to Cornell Capital Partners, our
DESA and EOL license agreements, and our U.S. Army Phase II contract.
We estimate that achievement of our business plan will require
substantial additional funding. We anticipate that the source of funding will be
obtained pursuant to equity funding from the Standby Equity Distribution
Agreement and/or the sale of additional equity in our Company and cash flow
generated from customer revenue. There are no assurances that these sources of
funding will be adequate to meet our cash flow needs.
Going Concern Opinion
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.
28
DESCRIPTION OF BUSINESS
Our Company
We are a Nevada corporation. Our principal executive offices are
located at 464 Common Street, Suite 301, Belmont, Massachusetts 02478. Our
telephone number is (617) 993-9965. The address of our website is
www.kronosati.com. Information on our website is not part of this filing.
Corporate History
Kronos Advanced Technologies, Inc. was originally incorporated under
the laws of the State of Utah on September 17, 1980 as Penguin Petroleum, Inc.
Penguin Petroleum Inc.'s stockholders approved a name change on October 6, 1982
to Petroleum Corporation of America, Inc. On December 29, 1996, stockholders
approved a reorganization whereby they exchanged their stock on a one-for-one
basis with Technology Selection, Inc., a Nevada corporation. Technology
Selection, Inc.'s shares began trading on the Over-the-Counter Bulletin Board on
August 28, 1996 under the symbol "TSET." On November 19, 1998, Technology
Selection, Inc. changed its name to TSET, Inc. Effective January 12, 2001, we
began doing business as Kronos Advanced Technologies; and, as of January 18,
2002, we changed our ticker symbol to "KNOS." Our recent activities have been
focused on capitalizing on our investment in Kronos Air Technologies, Inc., a
wholly owned subsidiary of Kronos, and we have not, to date, generated
significant operating revenues. We have never been party to any bankruptcy,
receivership, or similar proceedings and, other than noted above, have not been
party to any material reclassification, merger, or consolidation not in the
ordinary course of our business.
Business Strategy
Kronos Advanced Technologies, Inc. is an application development and
licensing company that has developed and patented technology that fundamentally
changes the way air is moved, filtered and sterilized. Kronos is pursuing
commercialization of its proprietary technology in a limited number of markets;
and if we are successful, we intend to enter additional markets in the future.
Eleven 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.
Although no commercial products using the Kronos technology have been
sold to date, the Company has begun establishing strategic relationships with
select companies both domestically and internationally for standalone and
embedded applications of our proprietary technology:
Standalone Platform:
o Residential Products - Between March 2005 and October 2005,
the Company (i) expanded production beyond its initial
standalone residential air purification prototypes, (ii)
increased product testing to complete the product claims
platform, (iii) received initial shipment of sample products
from its low cost, contract manufacturers in Mexico and China,
and (iv) completed internal testing of these products under a
testing protocol co-developed by Kronos and a former strategic
partner;
o In September 2006, the Company sent a notice of termination
of its license agreement with HoMedics USA, Inc. HoMedics has
indicated that it does not recognize Kronos' termination of
the License Agreement as valid. HoMedics has requested an
amicable and expedient resolution of the parties'
differences. The outcome of this matter cannot be determined
at this time.
29
o Health Care Products - In December 2005, the Company executed
a non-exclusive license agreement with EOL, LLC, a Russian
Federation company, for manufacturing and distributing
Kronos-based commercial standalone products in Russia and
other select Commonwealth of Independent States;
o Commercial and Other Standalone Products - During the year,
Kronos completed the initial design and development of space
heaters and vaporizers, which are undergoing evaluation by
potential strategic partners.
Embedded Platform:
o Commercial Products - In June 2006, the Company executed its
first license for embedded applications of Kronos technology
with DESA, LLC. 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;
o Residential Products - During the second half of the year,
several leading global home appliance manufacturers initiated
discussions with Kronos for developing select residential
applications of our technology, including silent kitchen range
hoods. Kronos developed initial prototype range hoods for
customer demonstration. In August 2006, a global appliance
manufacturer requested a second prototype be designed and
built to their specifications for which the customer has
agreed to provide a limited amount of development funding;
o Transportation Products - 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;
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;
o Military Products - During the year, the Company completed
work on its contract with the U.S. Army for designing and
developing electrostatic dehumidifiers and shipped product
developed under contract with the U.S. Navy to Northrop
Grumman for further testing and evaluation. 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.
30
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;
o Intertek - tobacco smoke elimination tests in accordance with
ANSI/AHAM AC-1-1988 standard entitled "American National
Standard Method for Measuring Performance of Portable
Household Electric Cord-Connected Room Air Cleaners," which
demonstrated a Clean Air Delivery Rate (CADR) for the Kronos
air purifier of over 300 for the larger size Kronos air
purifier and 80 for the smaller size using consumer filtration
testing standards for the Association of Home Appliance
Manufacturers (AHAM).
Sterilization Testing Results:
o Disinfection Research Institute Sterilization Laboratory in Moscow:
- completely disinfected a room 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);
o Dr. Sergey Stoylar, a bacteriologist from the American Bacteriological
Society - 100% destruction of Bacillus subtilis 168 (bacteria
simulant).
Market Segmentation
Kronos' initial business development strategy is to sell and license
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
31
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.
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 a third party grant. These contracts and grant are described in more
detail in the Technology Application and Product Development section of this
filing.
Technology Application and Product Development
To best serve Kronos' targeted market segments, our Company is
developing specific product applications across two distinct product application
platforms. A Kronos device can be either used as a standalone product or can be
embedded. Standalone products are self-contained and only require the user to
plug the Kronos device into a wall outlet to obtain air movement and filtration
for their home, office or hotel room. Embedded applications of the Kronos
technology require the technology be added into another system such as a
building ventilation system for more efficient air movement and filtration or
into an electrical device such as computer or medical equipment to replace the
cooling fan or heat sink.
Standalone Platform Residential Products
In October 2002, Kronos and HoMedics executed a Licensing Agreement
granting HoMedics certain rights with respect to the distribution of the Kronos
proprietary technology to the consumer. The agreement provided for exclusive
North American, Australian and New Zealand retail distribution rights for next
generation consumer air movement and purification products based on the patented
Kronos technology. In September 2006, the Company sent a notice of termination
of its license agreement with HoMedics USA, Inc. HoMedics has indicated that it
does not recognize Kronos' termination of the License Agreement as valid.
HoMedics has requested an amicable and expedient resolution of the parties'
differences. The outcome of this matter cannot be determined at this time.
We believe the Company has successfully completed the development of a
Kronos-based consumer standalone air purifier that is an efficient, high quality
product which is cost effective and easy to operate. The Company intends to seek
one or more strategic partners to manufacturer, market and distribute Kronos
based residential air purifiers.
Health Care Products. In December 2005, Kronos executed a non-exclusive
License Agreement with EOL, LLC, a Russian Federation corporation. Based in
Korolyov, Moscow Region, Russia, EOL will leverage the Kronos technology to
produce, market, and distribute Kronos commercial air purification and
bacteriological and virus destruction devices in select Commonwealth of
32
Independent States for the health care market. 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. Based on contractual
milestones, EOL is required to: (i) complete initial product design by March
2006; (ii) complete initial product prototypes by June 2006; and (iii) make
initial product available for customer purchase by September 2006. EOL plans to
assemble the finished products in Russia from components supplied both locally
and from contract manufacturers in China. The products will be marketed and
distributed in Russia, Ukraine, Kazakhstan, Moldova and Byelorussia. In March
2006, EOL achieved the first milestone: initial design of a wall mounted air
sterilizer for the health care market. In June 2006, EOL achieved the second
milestone: completion of the initial product prototypes. In August 2006, the
Russian Research Institute of Medical Equipment began the process for product
certification of the EOL device for use in medical facilities.
Commercial and Other Standalone Products. Utilizing our recently
expanded product development resources, Kronos completed the initial design,
development and production of a series of small multifunctional devices that can
be used as space heaters, vaporizers, disinfectors, deodorizers and/or fans.
Based on the proprietary Kronos technology, these devices are currently
undergoing testing and evaluation. Kronos has been meeting with potential
strategic partners for manufacturing, marketing, selling and distributing these
Kronos-based products.
Embedded Platform Commercial Products. In June 2006, the Company
executed a License Agreement with DESA IP, LLC, 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 Kronos 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 will be 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 addition, Kronos has developed an air filtration and purification
mechanism capable of performing to HEPA quality standards, while eliminating
bacteria and viruses. We believe that Kronos devices could replace current HEPA
filters with a permanent, easily cleaned, low-cost solution. Among the technical
advantages of the Kronos technology over HEPA filters is the ability of the
Kronos-based devices to eliminate the energy burden on air handling systems,
which must generate high levels of backpressure necessary to move air through
HEPA-based systems. Kronos-based devices enhance the air flow while providing
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 the second half of fiscal 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. The customer has agreed to
provide a limited amount of development of funding for this project.
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.
U.S. Navy SBIR Contracts. In November 2002, the U. S. Navy awarded
Kronos a Small Business Innovation Research Phase II contract worth $580,000.
The Phase II contract (commercialization phase) was an extension of the Phase I
and the Phase I Option work that began in 2001. During Phase II, Kronos
developed and produced a fully controlled device that represents a "cell" of an
advanced distributive air management system with medium capacity airflow in a U.
S. Navy unique environment. The "cell" has been designed to be easily adjustable
to a variety of parameters such as duct size, airflow requirements, and air
quality. The goal of this development work is to significantly reduce or replace
altogether the current HVAC air handling systems on naval ships. In May 2005,
Kronos shipped the device to Northrop Grumman for testing and evaluation. Based
on the success of these initial tests, Northrop Grumman requested additional
modifications and improvements to the device. Northrop Grumman is scheduling
further testing. As of June 30, 2006, the U. S. Navy had provided Kronos with
$580,000 in funding for this effort.
U.S. Army SBIR Contracts. In August 2003, Kronos was awarded the option
on its U. S. Army Small Business Innovation Research Phase I contract bringing
the value of the Phase I contract award to $120,000. In October 2003, the U.S.
Army awarded Kronos the Small Business Innovation Research Phase II contract to
33
develop Kronos' proprietary Electrostatic Dehumidification Technology ("EDT").
In February 2005, because the Army's focus was on researching a specific aspect
of using an electrostatic process for dehumidification and did not share Kronos'
vision for a broader application for using the unique aspects of EDT for
dehumidification, the Army decided not to pursue their Phase II option. Kronos
believes EDT is a viable solution for commercial dehumidification and will seek
one or more commercial partners to work with us to exploit the benefits of EDT.
As of June 30, 2006, the U. S. Army had provided Kronos with $392,000 in funding
for this effort under the Phase II contract.
Transportation Products. In April 2006, Kronos was invited to serve as
a member and an industrial partner in the Federal Aviation Administration's
(FAA) Air Transportation Airliner Cabin Environment Research Center of
Excellence (ACER CoE). 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 August 2005, Kronos extended its work into the transportation
industry by signing a Prototype Development and Evaluation Agreement with a
leading luxury automotive manufacturer. According to various industry reports,
the amount of time Americans have spent in their cars has risen 236 percent
since 1982 (with one report from Time Magazine noting an average motorist will
spend more than 5 years stuck in traffic alone), providing optimum air
circulation in automobiles is not only a comfort factor, but can also be a
critical means of improving air quality and helping to prevent viruses and
allergens that may otherwise accumulate in filtration systems. The Kronos
product has been designed and manufactured to meet exacting customer standards
for placement inside of automobile passenger cabins. The customer is evaluating
various potential applications for the 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 ("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 Washington Technology Center 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. The
Phase II grant is a follow-on award to the December 2004 Phase I grant to Kronos
and the University of Washington to initiate development of a novel
energy-efficient heat transfer technology for cooling microelectronics.
Thermal management for microelectronics and MEMS systems is a
challenge. Existing cooling devices aren't meeting increasing needs for energy
consumption and heat dissipation. Kronos air handling technology is an emerging
technology that uses an electric field to exert force on ionized gas. Kronos is
attempting to develop an improved microchip air handling system that is smaller
in size, has high speed airflow, allows more targeted delivery of cooling to
areas of highest heat and is compatible with current processes.
Patents and Intellectual Property
Kronos has received notification that eleven 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.
34
U.S. Patents
Date U.S. Patent # Patent Title Description
-------------------------------- ---------------------------- ----------------------------- ----------------------------------
August 2006 Notice of Allowance Corona Discharge Electrode Method of generating air
and Method of Operating flow and air cleaning with
reduced amount of ozone
by-product and with extended
life-span of electrodes
July 2006 Notice of Allowance Method of and Apparatus for Inertialess power supply for
Electrostatic Air Cleaning safe operating and spark
Device prevention
July 2006 Notice of Allowance Electrostatic Air Cleaning Method for improving the
Device efficiency of electrodes for
filtering micron and
sub-micron size particles
May 2006 7,053,565 Electrostatic Fluid Effective powering of the
Accelerator - Power Management electrodes for high level of
air velocity
November 2005 6,963,479 Electrostatic Fluid Advance voltage management
Accelerator - Advanced impacts air filtration and
Geometrics sterilization, air flow and
ozone as well as safe
operation and spark
prevention
August 2005 6,937,455 Spark Management Method and Analysis, detection and
Device preventing of sparks in a
high voltage field -
creating safe, effective
electrostatic technology
products
July 2005 6,919,698 Voltage Management for Materials and geometry
Electrostatic Fluid allowing for spark free
Accelerator operation and use of light
weight, inexpensive
materials as the electrodes
May 2005 6,888,314 Electrostatic Fluid Electrode design geometrics
Accelerator - Electrode and attributes including
Design Geometrics micro channeling to achieve
unique air movement and
purification performance
April 2004 6,727,657 Electrostatic Fluid Synchronization of multiple
Accelerator for and a Method stages of arrays -
of Controlling Fluid increasing air flow and air
flow efficiency
December 2003 6,664,741 Method of use and Apparatus Ratio of voltage for
for Electrostatic Fluid producing ion discharge to
Acceleration Control of a create air movement and base
Fluid Flow level filtration
35
January 2003 6,504,308 Electrostatic Fluid Electrode density core for
Accelerator producing ion discharge to
create air movement and base
level filtration
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' eleven U.S. Patents that have been filed and are
pending outside of the United States. 10 Kronos intends to continue to
aggressively file patent applications in the U.S. and internationally. A number
of additional patent applications have been filed for, among other things, the
control and management of electrostatic fluid acceleration. These additional
patent applications are either being examined or are awaiting examination by the
Patent Office.
Milestones
Our primary business objectives over the prior 12 months was to launch
Kronos-based standalone consumer products and to establish strategic partners
for developing and commercializing embedded product applications. During the
year, despite the success of the Company in developing and testing a viable
consumer product, the Company was not able to achieve its first objective of
having its residential, retail consumer products partner bring that product to
market; in September 2006, the Company sent a notice of termination of its
license agreement with that partner, HoMedics USA, Inc. The Company took this
action to protect the Company's assets and to position the Company to identify
new strategic partner(s) in the residential market place who have the
willingness and viability to bring Kronos-based consumer air purification
products to market.
The Company did achieve its second objective; in June 2006, the Company
executed its first license for embedded applications of Kronos technology with
DESA, LLC.
In addition, during the year the Company (i) executed a non-exclusive
license agreement with EOL, LLC, a Russian Federation company, for manufacturing
and distributing Kronos-based commercial standalone products in Russia and other
select Commonwealth of Independent States; (ii) shipped a prototype device
designed and built under specific customer specifications to a leading auto
manufacturer for their testing and evaluation; (iii) obtain an award from the
Washington Technology Center in conjunction with the University of Washington
and Intel Corporation for continued funding for a research and development
project based on a novel cooling system for microelectronics and computer chips;
(iv) completed the initial design and development of space heaters and
vaporizers, which are undergoing evaluation by potential strategic partners; (v)
was invited to serve as a member and an industrial partner in the Federal
Aviation Administration's (FAA) Air Transportation Airliner Cabin Environment
Research Center of Excellence (ACER CoE); and (v) pursued new opportunities
initiated by several leading global home appliance manufacturers for the
development of select residential applications of our technology, including
silent kitchen range hoods. This later opportunity was a direct result of our
initial development work with Ikea.
The Company was able to achieve these successes through the expansion
of (i) our product claims platform to include independent verification of
Kronos' technology's ability to decontaminate rooms infected with bacteria and
viruses and sterilize air flows contaminated with anthrax and E.coli spores and
S. aureaus and B. aureaus bacteria;(ii) our technical resources and product
engineering to better position Kronos' ability to address specific customer
issues and needs; and (iii) our intellectual property. Regarding the later
point, the Company received notification that an additional four of its patent
applications during the year and three subsequent to the fiscal year end have
been allowed for issuance by the United States Patent and Trademark Office.
Our primary business objectives over the next 12 months are to execute
on our agreements with DESA and EOL, to establish new strategic partner(s) for
marketing and selling Kronos-based, standalone air purification products, and to
establish additional strategic partners for developing and commercializing new
product applications. In order to achieve these objectives the Company will need
to:
36
o expand its product development and engineering resources to better
position Kronos to address specific customer issues and needs; and
o continue implementation of its intellectual property strategies,
including continuation of its U.S. and international patent filing
process to enable a full development and effective management of its
intellectual property rights and assets.
We estimate that achievement of our business plan will require
substantial additional funding. We anticipate that the source of funding will be
obtained pursuant to funding from the Cornell Capital Standby Equity
Distribution Agreement and/or the sale of additional equity in our Company, and
cash flows generated from customer funded product development work and licensing
revenue from the sale of Kronos-based products.
Homedics Senior Debt Transaction
In May 2003, Kronos entered into an agreement with HoMedics, Inc. for
$2.5 million in financing, including $2.4 million in secured debt financing and
$100,000 for the purchase of warrants. $2.5 million was paid to Kronos upon
execution of the agreement. 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
has not been 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, will begin 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 will also be October 2009. The interest rate will remain at 6%.
In connection with the First Amendment to Master Loan and Investment
Agreement, Kronos issued to HoMedics a warrant to purchase 26.5 million shares
of Kronos' common stock. The warrant is exercisable for a period of ten (10)
years from the date of issuance. The exercise price is $0.10 per share. In
consideration for the warrant, HoMedics delivered to Kronos $75,000 by funding
the closing fees owed by Kronos and HoMedics agreed to amend two (2) warrants to
purchase 13.4 million shares of Kronos' common stock previously issued by Kronos
by removing the anti-dilution protection previously granted to HoMedics. Kronos
agreed to include new anti-dilution protection in the new warrant. HoMedics is
entitled, under certain circumstances, to anti-dilution protection in order to
maintain beneficial ownership of Kronos equal to 30%. HoMedics may not be
diluted below 30% for any funds raised at less than $0.20 per share, excluding
options or shares issued to management, directors, and consultants in the normal
course of business or shares issued to Cornell Capital in repayment of the two
Promissory Notes. There are no anti-dilution measures for funds raised at
greater than $0.20 per share. In addition, Kronos agreed to grant HoMedics
piggy-back registration rights and one (1) demand registration right with
respect to any shares of common stock of Kronos that HoMedics may acquire
pursuant to the two (2) previously issued warrants and the warrant issued in
October 2004 in connection with the First Amendment to Master Loan and
Investment Agreement.
Cornell Capital Transaction
In October 2004, Kronos entered into agreements for up to $20.5 million
in equity and equity backed debt financing from Cornell Capital Partners. Kronos
executed an Equity Investment Agreement and received $500,000 in gross proceeds
through the sale of 5 million unregistered shares of Kronos common stock.
Cornell Capital Partners provided $4 million pursuant to two Promissory Notes,
which were funded as follows: $2 million upon filing a Registration Statement
and $2 million upon the SEC declaring the Registration Statement effective.
Kronos executed a Standby Equity Distribution Agreement for $20 million of
funding which Kronos has the option to drawdown against in increments as large
as $1.5 million over the next twelve months. Kronos intends to use the proceeds
under the Standby Equity Distribution Agreement to repay the Promissory Notes.
As of June 30, 2006, Kronos had received $6.2 million under these agreements. As
of June 30, 2006, Kronos had repaid the first promissory Note in full and owed
$1.8 million under the second Promissory Note.
37
Employees
On October 25, 2006, Kronos and its subsidiaries had twelve full-time
employees. Of the total number of full-time employees, one works in general
management, ten in research and product development, one in marketing and sales
and operations, and none are employed in administrative and other support
positions. None of the employees are represented by unions. There has been no
disruption of operations due to a labor dispute. We consider our relations with
our employees to be good.
38
MANAGEMENT
Our directors and executive officers and their ages as of October 25,
2006 are as follows:
Officers And Directors
The following table sets forth the names, ages, and titles of each of
our directors and executive officers as of October 25, 2006. Please note that
each has been involved with the Companies listed below since their inception,
which is greater than five years.
Name Age Director/Position
------------------ ------ -----------------------------------------------
Daniel R. Dwight 46 Director; President and Chief Executive Officer
Richard F. Tusing 48 Director; Chief Operating Officer
James P. McDermott 44 Director
M. J. Segal 62 Director
Daniel R Dwight, 46, has served as a Director of Kronos since November
2000, and as a Director and Chief Executive Officer of Kronos Air Technologies
since January 2001. Effective October 16, 2001, Mr. Dwight was appointed
President and Chief Executive Officer of Kronos. Effective January 1, 2004, Mr.
Dwight was appointed Acting Chief Financial Officer of Kronos. He has extensive
experience in private equity and operations in a wide variety of high growth and
core industrial businesses. Mr. Dwight spent 17 years with General Electric
including 10 years of operations, manufacturing, and business development
experience with GE's industrial businesses, and seven years of international
investment and private equity experience with GE Capital. He has had
responsibility for over a $1 billion in merger and acquisition and private
equity transactions at GE. Mr. Dwight initiated GE Capital's entry in the Asia
private equity market. Between 1995 and 1999, the Asian equity portfolio grew to
include consolidations, leveraged buyouts, growth capital and minority
investments in diverse industries, including information technology,
telecommunications services, consumer products, services and distribution, and
contract manufacturing. Since 1982, Mr. Dwight has held other leadership
positions domestically and internationally with GE Capital, as well as senior
positions with GE Corporate Business Development (1989-1992) and GE Corporate
Audit Staff (1984-1987). Mr. Dwight holds an MBA in Finance and Marketing with
Honors from The University of Chicago Graduate School of Business and a B.S. in
Accounting with Honors from the University of Vermont and is a member of the
Association of Heating, Ventilation, Air conditioning and Refrigeration
Engineers, Inc. (ASHRAE) and a member of the SatCon Technology Corporation Board
of Directors.
Richard F. Tusing, 48, has served as a Director of Kronos since October
2000 and as a Director of Kronos Air Technologies since January 2001 and was
appointed Chief Operating Officer on January 1, 2002. Mr. Tusing has had
extensive experience in developing new enterprises, negotiating the licensing of
intellectual property rights, and managing technical and financial
organizations, and has more than 20 years of business development, operations,
and consulting experience in the technology and telecommunications industries.
Prior to his services to Kronos, Mr. Tusing spent four years in executive
management with several emerging technology companies, 14 years in various
managerial and executive positions with MCI Communications Corporation, and
three additional years in managerial consulting. From 1982-1996, Mr. Tusing held
multiple managerial and executive positions with MCI Communications Corporation.
From 1994-1996, he served as MCI's Director of Strategy and Technology, managing
MCI's emerging technologies division (having primary responsibility for
evaluating, licensing, investing in, and acquiring third-party technologies
deemed of strategic importance to MCI), and also oversaw the development of
several early-stage and venture-backed software and hardware companies; in this
capacity, Mr. Tusing managed more than 100 scientists and engineers developing
state-of-the-art technologies. From 1992-1994, Mr. Tusing founded MCI Metro,
MCI's entree into the local telephone services business and, as MCI Metro's
Managing Director, managed telecommunications operations, developed financial
and ordering systems, and led efforts in designing its marketing campaigns. From
1990-1992, he served as Director of Finance and Business Development for MCI's
western region. From 1982-1990, Mr. Tusing held other management and leadership
positions within MCI, including service as MCI's Pacific Division's Regional
Financial Controller, Manager of MCI's Western Region's Information Technology
Division, and led MCI's National Corporate Financial Systems Development
Organization. Mr. Tusing received B.S. degrees in business management and
psychology from the University of Maryland in 1979.
James P. McDermott, 44, became a Director of Kronos in July 2001. Mr.
McDermott has over 22 years of financial and operational problem-solving
39
experience. Mr. McDermott is a co-founder and is currently a Managing Director
of Eagle Rock Advisors, LLC, the Manager for The Eagle Rock Group, LLC. Mr.
McDermott is also currently President and CEO of AF&L, Inc. and its
subsidiaries. AF&L is a Senior Markets Insurer. From 1992 through 2000, Mr.
McDermott held various managerial and executive positions with PennCorp
Financial Group, Inc. and its affiliates. From 1998 through 2000, Mr. McDermott
was Executive Vice-President and Chief Financial Officer of PennCorp Financial
Group. While serving in this position, Mr. McDermott was one-third of the
executive management team that was responsible for developing and implementing
operational stabilization, debt reduction and recapitalization plans for the
company. From 1995 through 1998, Mr. McDermott served as Senior Vice-President
of PennCorp Financial Group. Mr. McDermott worked closely with the Audit
Committee of the Board of Directors on evaluating the PennCorp's accounting and
actuarial practices. In addition, Mr. McDermott was responsible for developing a
corporate-wide technology management program resulting in technology convergence
and cost savings to the company's technology budget. From 1994 through 1998, Mr.
McDermott was a principal in Knightsbridge Capital Fund I, LP, a $92 million
investment fund specializing in leverage-equity acquisitions of insurance and
insurance-related businesses. Mr. McDermott was also the founding Chairman of
the e-business Internet service provider, Kivex.com, and a senior manager of one
of the world's leading public accounting firms, KPMG. Mr. McDermott received a
B.S. Degree in Business Administration from the University of Wisconsin,
Madison.
M. J. Segal, 62, became a Director of Kronos in September 2003. Mr. Mr.
Segal has over 35 years of corporate governance, entrepreneurial and investment
banking expertise. Mr. Segal founded the investment banking firm of M.J. Segal
Associates in 1987. Since 1992, the firm has specialized in researching private
equity opportunities in both private and emerging growth public companies. The
Segal group caters primarily to institutional clients, private investment
partnerships and professional money managers. After starting his career as a
stockbroker and financial planner in 1966 with Philadelphia based New York Stock
Exchange firm, Robinson & Company, Mr. Segal joined Josephthal & Co. Inc., a
leading full-service investment banking and brokerage firm in New York. Mr.
Segal has served as senior vice president of the congressionally charted
National Corporation for Housing Partnerships in Washington, D. C. and president
of its investment banking subsidiary and has qualified as a NASD broker/dealer
financial principal. Originally from Philadelphia, Mr. Segal attended the
Wharton School of the University of Pennsylvania and is a graduate of The New
York Institute of Finance.
Directors
Our Board of Directors consists of eight seats. Directors serve for a
term of one year and stand for election at our annual meeting of stockholders.
All our current directors were elected at our annual meeting of stockholders
held on December 20, 2005. Four vacancies currently exist on the Board of
Directors as of the date of this filing. Pursuant to our Bylaws, a majority of
directors may appoint a successor to fill any vacancy on the Board of Directors.
Advisory Board
We established an Advisory Board in July 2001 to assist management in
the development of long-range business plans for our Company. Currently, William
Poster and Charles Strang are the only Advisory Board Members.
Mr. Poster is a seasoned entrepreneur with a successful track record as
a founder of several businesses spanning five continents. Mr. Poster has
experience in developing business opportunities in the United States, Europe,
Asia and the Middle East. Mr. Poster recently stepped down as President of
Computer Systems & Communications Corporation, a wholly-owned subsidiary of
General Dynamics. Computer Systems & Communications Corporation is a
cutting-edge communications and technology company that Mr. Poster founded and
later sold to General Dynamics. Mr. Poster is currently a principal with Eagle
Rock Advisors, LLC. Mr. Strang is a former Kronos Director from January 2001
through December 2002. Mr. Strang was named National Commissioner of NASCAR
(National Association for Stock Car Auto Racing, Inc.) in 1998 and continues to
serve in that capacity. In 1989 Mr. Strang received President Bush's American
Vocation Success Award; in 1992 was elected to the Hall of Fame of the National
Marine Manufacturers Association; in 1990 was awarded the Medal of Honor of the
Union for International Motorboating; and is a life member of the Society of
Automotive Engineers. He also currently serves as a Director of the American
Power Boat Association (the U.S. governing body for powerboat racing) and Senior
Vice-President of the Union for International Motorboating (the world governing
body for powerboat racing, with approximately 60 member nations). We will
continue to evaluate additional potential candidates for our Advisory Board.
Committees
On September 11, 2001, the Board of Directors established a
Compensation Committee consisting of at least two independent members of the
Board of Directors. The Compensation Committee is charged with reviewing and
making recommendations concerning Kronos' general compensation strategy,
40
reviewing salaries for officers, reviewing employee benefit plans, and
administering Kronos' stock incentive plan, once adopted and implemented.
Messrs. McDermott and Segal are the current members of the Compensation
Committee. During the year the Compensation Committee held two meetings. Each
member attended at least 75% of the meetings.
On September 4, 2003, the Board of Directors established an Executive
Committee. The purpose of the Executive Committee is to exercise all the powers
and authority of the Board of Directors in the management of the property,
affairs and business of the Company. The Committee shall consist of no fewer
than three members, including the Chief Executive Officer of the Company.
Messrs. Dwight, McDermott, Segal and Tusing are the current members of the
Executive Committee.
On September 10, 2003, the Board of Directors established an Audit
Committee consisting of at least two independent members of the Board of
Directors. The Audit Committee is charged with providing independent and
objective oversight of the accounting functions and internal controls of the
Company and its subsidiaries to ensure the objectivity of the Company's
financial statements. Messrs. McDermott and Segal are the current members of the
Audit Committee. During the year the Audit Committee held three meetings. Each
member attended at least 75% of the meetings.
Compensation Of Directors
Cash Compensation. Our Bylaws provide that, by resolution of the Board
of Directors, each director may be reimbursed his expenses of attendance at
meetings of the Board of Directors; likewise, each director may be paid a fixed
sum or receive a stated salary as a director. During the fiscal year ended June
30, 2006, no director receives any salary or other form of cash compensation for
such service. Effective July 1, 2006, non-executive directors are entitled to
receive $4,500 per quarter as compensation for their services as members of our
Board of Directors.
Share Based Compensation. During the fiscal year ended June 30, 2006,
each non-executive director is entitled to receive annually 70,000 fully-vested
stock option grants, 7,000 stock option grants per meeting attended via
conference call, 14,000 option grants per meeting attended in person, 3,500
option grants per meeting for participation on a committee or 5,000 stock option
grants per meeting for chairing a committee, as compensation for their services
as members of our Board of Directors. Effective July 1, 2006, non-executive
directors entitled to receive quarterly $4,500 and annually 200,000 fully-vested
stock option grants, 2,500 stock option grants per meeting attended via
conference call, 5,000 option grants per meeting attended in person, or 1,250
option grants per meeting for participation on a committee, as compensation for
their services as members of our Board of Directors. For the twelve month period
ending June 30, 2006, Messrs. McDermott and Segal earned 182,000 stock options
each as compensation for their services as members of our Board of Directors.
For the twelve month period ending June 30, 2005, Messrs. McDermott, Brown and
Segal earned 189,000, 154,000, and 189,000 stock options, respectively as
compensation for their services as members of our Board of Directors.
Compliance With Section 16(A) Of The Securities Act Of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires our
directors and executive officers, and persons who own more than 10% of a
registered class of our equity securities to file with the Securities and
Exchange commission initial reports of ownership and reports of changes in
ownership of Common Stock and other of our equity securities. Officers,
directors and greater than 10% stockholders are required by SEC regulations to
furnish us copies of all Section 16(a) forms they file. To our knowledge, based
solely on a review of the copies of such reports furnished to us and written
representations that no other reports were required during the fiscal year ended
June 30, 2006, all Section 16(a) filing requirements applicable to our officers
and directors were complied with.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth compensation for the fiscal year ended
June 30, 2006 for our executive officers:
41
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
--------------------------------------- --------------------------------------------------------
Restricted Securities
Name and Other Stock Underlying LTIP All Other
Principal Salary Bonus Compensation Awards Options/SARS Payouts Compensation
Fiscal Position Year $ $ $ $ # $ $
---------------- ----- --------- ---------- -------------- ----------- --------------- -------- --------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
---------------- ----- --------- ---------- -------------- ----------- --------------- -------- --------------
Daniel R. 2006 189,375 -- 15,083 -- 2,455,000 -- --
Dwight, 2005 180,000 67,500(4) 14,689 -- 750,000 -- --
President and 2004 180,000 -- 14,292 -- 726,206 -- --
Chief
Executive
Officer(1)
Richard F. 2006 160,000 -- -- -- 1,020,000 -- --
Tusing, Chief 2005 160,000 37,530(4) -- -- 450,000 -- --
Operating 2004 160,000 -- -- -- 971,756 -- --
Officer(2)
Richard A. 2006 -- -- -- -- -- -- --
Papworth Chief 2005 -- -- -- -- -- -- --
Financial 2004 120,000 -- -- -- -- -- --
Officer(3)
(1) Mr. Dwight became President and Chief Executive Officer of Kronos effective
October 16, 2001. He executed a two year employment contract on November 15,
2001. His contract was renewed on August 13, 2003 and again on August 15, 2004,
August 15, 2005 and April 13, 2006 by the Board of Directors. Effective April
15, 2006, his annual salary is $225,000.
(2) Mr. Tusing became Chief Operating Officer of Kronos effective January 1,
2002. Mr. Tusing executed an employment contract effective January 1, 2003. The
Board of Directors renewed Mr. Tusing's Employment Agreement on October 1, 2004
and again on October 1, 2005. His annual salary is $160,000.
(3) Mr. Papworth was the Company's Chief Financial Officer from May 19, 2000
until January 1, 2004. His annual salary was $120,000. On July 1, 2004 Mr.
Papworth ended his employment with Kronos.
(4) Cash Bonuses earned in 2005 were paid through the issuance of common stock
at the market closing price on June 30, 2005.
25
AGGREGATED OPTIONS/SAR EXERCISES
IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTIONS/SAR VALUES(1)
VALUE OF
NUMBER OF SECURITIES UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES ACQUIRED OPTIONS/SARS AT FISCAL OPTIONS/SARS AT
NAME ON EXERCISE VALUE REALIZED YEAR END(1) FISCAL YEAR END(2)
------------------- ----------------- ----------------- -------------------------- ---------------------
Daniel R. Dwight, -0- -0- Exercisable: 7,191,206 -0-
President and Unexercisable: -0- -0-
Chief Executive
Officer(3)
Richard F. -0- -0- Exercisable: 3,391,756 -0-
Tusing, Chief Unexercisable: -0- -0-
Operating
Officer(4)
Richard A. -0- -0- Exercisable: 998,475 -0-
Papworth Chief Unexercisable: -0- -0-
Financial
Officer(5)
42
(1) These grants represent options to purchase common stock. No SAR's have been
granted.
(2) The value of the unexercised in-the-money options were calculated by
determining the difference between the fair market value of the common stock
underlying the options and the exercise price of the options as of June 30,
2006.
(3) Mr. Dwight became President and Chief Executive Officer of Kronos effective
October 16, 2001.
(4) Mr. Tusing became Chief Operating Officer of Kronos effective January 1,
2002.
(5) Mr. Papworth was the Company's Chief Financial Officer from May 19, 2000
until January 1, 2004. On July 1, 2004 Mr. Papworth ended his employment with
Kronos.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
% TOTAL
NO. OF OPTIONS/SAR'S
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES EXERCISE OR
OPTIONS/SAR'S IN FISCAL BASE PRICE EXPIRATION
NAME GRANTED (#) YEAR (%) ($ PER SHARE) DATE(1)
------------------- ------------- ------------- ------------ -----------------
Daniel R. Dwight 2,455,000 37.6% $ 0.060 April 13, 2016
President and
Chief Executive
Richard F. Tusing 1,020,000 15.6% $ 0.060 April 13, 2016
Chief Operating
Officer
(1) Expatriation date is the earlier of April 13, 2016 or 90 days
after the date the officer is no longer employed by the Company.
Stock Option Plan
On February 12, 2002, the Board of Directors approved the TSET, Inc.
Stock Option Plan under which Kronos' key employees, consultants, independent
contractors, officers and directors are eligible to receive grants of stock
options. Kronos has reserved and issued a total of 6,250,000 shares of common
stock under the Stock Option Plan. It is presently administered by Kronos' Board
of Directors. Subject to the provisions of the Stock Option Plan, the Board of
Directors has full and final authority to select the individuals to whom options
will be granted, to grant the options and to determine the terms and conditions
and the number of shares issued pursuant thereto.
Employment Agreements
Daniel R. Dwight, our President and Chief Executive Officer, and our
Company entered into an Employment agreement effective as of November 15, 2001.
The initial term of Mr. Dwight's Employment Agreement was for 2 years and will
automatically renew for successive 1 year terms unless Kronos or Mr. Dwight
provide the other party with written notice within 3 months of the end of the
initial term or any subsequent renewal term. The Board of Directors renewed Mr.
Dwight's Employment Agreement on August 13, 2003 and again on August 15, 2004
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. In addition, Kronos granted Mr. Dwight
1,000,000 immediately vested and exercisable, ten-year stock options at various
exercise prices. Mr. Dwight will be entitled to fully participate in any and all
401(k), stock option, stock bonus, savings, profit-sharing, insurance, and other
similar plans and benefits of employment. Richard F. Tusing, our Chief Operating
Officer, and our Company entered into an Employment agreement effective as of
January 1, 2003. The initial term of Mr. Tusing's Employment Agreement is for 2
years and will automatically renew for successive 1 year terms unless Kronos or
Mr. Tusing provide the other party with written notice within 3 months of the
end of the initial term or any subsequent renewal term. The Board of Directors
renewed Mr. Tusing's Employment Agreement on October 1, 2004 and again on
October 1, 2005. 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.
43
Executive Severance Agreements
The Employment Agreement of Daniel R. Dwight, our Chief Executive
Officer, provides that, upon the occurrence of any transaction as defined as a
"change of control" of Kronos, Mr. Dwight shall receive his salary and benefits
for a period of time that is the greater of (i) one year or (ii) the remainder
of Mr. Dwight's employment term. The Employment Agreement of Richard F. Tusing,
our Chief Operating Officer, provides that, upon the occurrence of any
transaction as defined as a "change of control" of Kronos that is not approved
by the Board of Directors, Mr. Tusing shall receive his salary, pro-rata bonus
and benefits for a period of time that is the greater of (i) one year or (ii)
the remainder of Mr. Tusing's employment term. As of the date of this filing, we
have not adopted any separate executive severance agreements.
DESCRIPTION OF PROPERTY
Our principal executive office is located at 464 Common Street, Suite
301, Belmont, Massachusetts. The offices of the Kronos Research and Product
Development facility are located at 15241 NE 90th Street, Redmond, Washington.
Kronos is committed through September 30, 2009 to annual lease payments on
operating leases for 6,000 square feet of office/research and product
development premises. We consider our Research and Product Development facility
to be adequate for our foreseeable needs.
LEGAL PROCEEDINGS
From time to time the Company may be subject to lawsuits in the normal
course of business. Thompson E. Fehr has filed a complaint against Kronos with
respect to prior services rendered to High Voltage , Inc. totaling $47,130. The
Company believes this complaint is without merit and will rigorously defend
itself.
44
PRINCIPAL STOCKHOLDERS
The following table presents certain information regarding the
beneficial ownership of all shares of common stock at October 25, 2006 for each
executive officer and director of our Company and for each person known to us
who owns beneficially more than 5% of the outstanding shares of our common
stock. The percentage ownership shown in such table is based upon the
180,164,336 common shares issued and outstanding at October 25, 2006 and
ownership by these persons of options or warrants exercisable within 60 days of
such date. Also included is beneficial ownership on a fully diluted basis
showing all authorized, but unissued, shares of our common stock at October 25,
2006 as issued and outstanding. Unless otherwise indicated, each person has sole
voting and investment power over such shares.
Common Stock Beneficially Owned
-----------------------------------
Name and Address Number Percent
---------------- ------------------ ---------------
Daniel R. Dwight 8,393,132(1) 4.7%
464 Common Street Suite 301
Belmont, MA 02478
Richard F. Tusing 4,244,508(2) 2.4%
464 Common Street Suite
301 Belmont, MA 02478
James P. McDermott 932,577(3) *
464 Common Street Suite 301
Belmont, MA 02478
Milton J. Segal 573,500(4) *
464 Common Street Suite 301
Belmont, MA 02478
All Officers and Directors of Kronos 14,143,717(5) 7.9%
(four (4) individuals)
______________________________
* Represents less than 1%.
(1) Includes options to purchase 7,191,206 shares of common stock that can
be acquired within sixty days of October 25, 2006.
(2) Includes options to purchase 3,391,756 shares of common stock that can
be acquired within sixty days of October 25, 2006.
(3) Includes options to purchase 638,459 shares of common stock that can
be acquired within sixty days of October 25, 2006.
(4) Includes options to purchase 573,500 shares of common stock that can
be acquired within sixty days of October 25, 2006.
(5) Includes options to purchase 11,794,921 shares of common stock that
can be acquired within sixty days of October 25, 2006.
We are unaware of any arrangement or understanding that may, at a
subsequent date, result in a change of control of our Company.
45
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We believe that all prior related party transactions have been entered
into upon terms no less favorable to us than those that could be obtained from
unaffiliated third parties. Our reasonable belief of fair value is based upon
proximate similar transactions with third parties or attempts to obtain the
consideration from third parties. All ongoing and future transactions with such
persons, including any loans or compensation to such persons, will be approved
by a majority of disinterested members of the Board of Directors.
On March 31, 2004, we entered into Promissory Notes with Daniel R.
Dwight and Richard F. Tusing in exchange for past due compensation, expenses and
interest do and payable for $363,139 and $485,883. The Notes bear a simple
interest rate 1% per month and call for aggregate monthly principal and interest
payments $6,718 and $8,989, respectively, for each month in which the Company's
beginning cash balance equals or exceeds $200,000. Subject to certain
conditions, including default, these notes become payable in full. In the event
of a debt or equity financing, 20% of the proceeds derived from the financing
will be used to pay down the outstanding interest and principal obligations. As
a result of the Cornell Capital financing, the Notes are due and payable in
full. As of June 30, 2006, Kronos had repaid the first promissory Note in full
and owed $1.8 million under the second Promissory Note.
46
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND OTHER STOCKHOLDER MATTERS
Our common stock trades on the Over-the-Counter Bulletin Board under
the trading symbol "KNOS." Our high and low bid prices by quarter during fiscal
2006 and 2005 are presented as follows:
Fiscal Year 2006 High Low
---------------------------------------------- ------ ------
First Quarter (July 2005 to September 2005) $0.100 $0.045
Second Quarter (October 2005 to December 2005) $0.175 $0.42
Third Quarter (January 2006 to March 2006) $0.090 $0.052
Fourth Quarter (April 2006 to June 2006) $0.72 $0.037
Fiscal Year 2005 High Low
---------------------------------------------- ------ ------
First Quarter (July 2004 to September 2004)
Second Quarter (October 2004 to December 2004) $0.175 $0.125
Third Quarter (January 2005 to March 2005) $0.200 $0.125
Fourth Quarter (April 2005 to June 2005) $0.150 $0.80
$0.150 $0.063
On October 25, 2006, the closing price of our common stock as reported
on the Over-the-Counter Bulletin Board was $0.0152 per share. On October 25,
2006, we had approximately 2,000 beneficial stockholders of our common stock and
180,164,336 shares of our common stock were issued and outstanding.
Dividends
We have not declared or paid dividends on our common stock during
fiscal 2005 or 2006 and do not plan to declare or pay dividends on our common
stock during fiscal 2007. Our dividend practices are determined by our Board of
Directors and may be changed from time to time. We will base any issuance of
dividends upon our earnings (if any), financial condition, capital requirements,
acquisition strategies, and other factors considered important by our Board of
Directors. Nevada law and our Articles of Incorporation do not require our Board
of Directors to declare dividends on our common stock. We expect to retain any
earnings generated by our operations for the development and expansion of our
business and do not anticipate paying any dividends to our stockholders for the
foreseeable future.
Recent Sales Of Unregistered Securities
Except as otherwise noted, all of the following shares were issued and
options and warrants granted pursuant to the exemption provided for under
Section 4(2) of the Securities Act of 1933, as amended, as a "transaction not
involving a public offering." No commissions were paid, and no underwriter
participated, in connection with any of these transactions. Each such issuance
was made pursuant to individual contracts which are discrete from one another
and are made only with persons who were sophisticated in such transactions and
who had knowledge of and access to sufficient information about Kronos to make
an informed investment decision. Among this information was the fact that the
securities were restricted securities.
All investors participating in private placements for cash were
"accredited investors" within the meaning of Regulation D. In addition, we note
that there are several categories of recipients of these shares. These include
investors for cash, officers, directors, consultants, litigants and former
stockholders of private companies acquired by Kronos. Kronos does not believe
that these categories of recipients should be integrated with each other under
the concept of integration. Under Securities Act Release Nos. 4552 and 4434,
these categories would not involve a single plan of financing and would not be
considered to be made for the same general purpose. As a result, each category
should be reviewed on its own. Given the small number of purchasers in these
categories, Kronos believes that these transactions complied in all respects
with Section 4(2). Kronos believes that this conclusion is true even if the
transactions occurring within each category are integrated with other
transactions occurring within six months or one year of a given transaction.
On July 1, 2004, we granted options to acquire 725,000 shares of our
common stock at an exercise price of $0.15 to Spencer Browne, James McDermott,
William Poster, Milton Segal and Charles Strang in exchange for services as
directors or advisory board members to the Company.
47
In October 2004, we issued five million shares of our common stock,
valued at $0.10 per share at an aggregate value of $500,000 to Cornell Capital
Partners, LLC.
In October 2004, we issued 62,500 shares of our common stock, valued at
$0.10 per share at an aggregate value of $6,250 to Newbridge Securities
Corporation as a placement agent fee in connection with the Standby Equity
Distribution Agreement with Cornell Capital.
In October 2004, we issued to HoMedics a warrant to purchase 26,507,658
shares of Kronos common stock. The warrant is exercisable for a period of ten
(10) years from the date of issuance. The exercise price is $0.10 per share.
In November 2004, we issued 2,000,000 shares of our common stock valued
at $0.10 per share at an aggregate value of $200,000 to Fusion Capital Partners,
LLC. The proceeds were used to eliminate Kronos' non-interest bearing demand
obligation to Fusion Capital.
In November 2004, we issued 2,800,000 shares of our common stock valued
at $0.10 per share at an aggregate value of $280,000 to a group of accredited
investors.
On June 30, 2005, we issued 1,500,000 shares of our common stock valued
at $0.09 per share at an aggregate value of $135,000 to Daniel R. Dwight, Igor
Krichtafovitch, and Richard F. Tusing for 2005 bonuses.
On June 30, 2005, we granted options to acquire 1,725,000 shares of our
common stock at an exercise price of $0.125. Of the 1,725,000 options, 1,200,000
options were granted to Daniel R. Dwight and Richard F. Tusing who are directors
and officers of Kronos.
On July 1, 2005, we granted options to acquire 632,000 shares of our
common stock at an exercise price of $0.125 to Spencer Browne, James McDermott,
William Poster, Milton Segal and Charles Strang in exchange for services as
directors or advisory board members to the Company.
On July 15, 2005, we granted options to acquire 1,428,571 shares of our
common stock at an exercise price of $0.07 to the Wall Street Group 1,428,571.
On March 9, 2006 we granted options to acquire 900,000 shares of our
common stock at an exercise price of $0.06 to various employees for bonuses.
On April 13, 2006, we granted options to acquire 5,625,000 shares of
our common stock at an exercise price of $0.06 for bonuses. Of the 5,625,000
options, an aggregate of 3,475,000 options were granted to Daniel R. Dwight and
Richard F. Tusing who are directors and officers of Kronos.
48
DESCRIPTION OF SECURITIES
General
Common Stock
Holders of our common stock are entitled to one vote for each share
held on all matters submitted to a vote of stockholders, including the election
of directors. Accordingly, holders of a majority of our common stock entitled to
vote in any election of directors may elect all of the directors standing for
election should they choose to do so. Neither our Articles of Incorporation nor
our Bylaws provide for cumulative voting for the election of directors. Holders
of our common stock are entitled to receive their pro rata share of any
dividends declared from time to time by the Board of Directors out of funds
legally available therefor. Holders of our common stock have no preemptive,
subscription, conversion, sinking fund, or redemption rights. All outstanding
shares of our common stock are fully paid and non-assessable. In the event of
liquidation, dissolution, or winding up of Kronos, the holders of common stock
are entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior distribution rights of preferred stock (if any)
then outstanding.
Preferred Stock
Our Articles of Incorporation authorizes 50,000,000 shares of preferred
stock, no par value. No shares of preferred stock are issued and outstanding as
of the date of this prospectus. The Board of Directors is authorized, subject to
any limitations prescribed by the Nevada Revised Statutes, or the rules of any
quotation system or national securities exchange on which our stock may be
quoted or listed, to provide for the issuance of shares of preferred stock in
one or more series; to establish from time to time the number of shares to be
included in each such series; to fix the rights, powers, preferences, and
privileges of the shares of such series, without further vote or action by the
stockholders. Depending upon the terms of the preferred stock established by the
Board of Directors, any or all series of preferred stock could have preference
over the common stock with respect to dividends and other distributions and upon
liquidation of Kronos or could have voting or conversion rights that could
adversely affect the holders of the outstanding common stock. As of the date of
this prospectus, the voting and other rights associated with the preferred stock
have yet to be determined by the Board of Directors. There are no present plans
by the Board of Directors to issue preferred shares or address the rights to be
assigned thereto.
Options
Options to acquire shares in the Company's common stock have been
issued to employees, board members, advisory board members and consultants as
compensation for services provided to the Company. As of October 25, 2006, the
following options had been granted in the amounts and to the individuals shown
below; as of the date hereof, none of such options have been exercised:
Name Number of Options Strike Price Date of Grant Expiration
----- ------------------- -------------- --------------- ------------
Daniel R. Dwight 500,000 (1) $0.060 11/15/2001 11/15/2011
250,000 (1) $0.080 11/15/2001 11/15/2011
250,000 (1) $0.094 11/15/2001 11/15/2011
1,000,000 (2) $0.060 2/12/2002 2/12/2012
600,000 (3) $0.060 2/12/2002 2/12/2012
660,000 (4) $0.060 3/21/2003 3/21/2013
726,206 (5) $0.060 3/22/2004 3/22/2014
750,000 (6) $0.125 6/30/2005 6/30/2015
2,455,000 (7) $0.060 4/13/2006 4/13/2016
Richard F. Tusing 600,000 (2) $0.060 2/12/2002 2/12/2012
350,000 (3) $0.060 2/12/2002 2/12/2012
971,756 (5) $0.060 3/22/2004 3/22/2014
450,000 (6) $0.125 6/30/2005 6/30/2015
1,020,000 (7) $0.060 4/13/2006 4/13/2016
49
Name Number of Options Strike Price Date of Grant Expiration
----- ------------------- -------------- --------------- ------------
Igor Krichtafovitch 600,000 (2) $0.060 2/12/2002 2/12/2012
400,000 (3) $0.060 2/12/2002 2/12/2012
600,000 (4) $0.060 3/21/2003 3/21/2013
500,000 (8) $0.060 5/7/2003 5/7/2013
180,726 (5) $0.060 3/22/2004 3/22/2014
525,000 (6) $0.125 6/30/2005 6/30/2015
2,150,000 (7) $0.060 4/13/2006 4/13/2016
J. Alexander Chriss 350,000 (2) $0.680 2/12/2002 2/12/2012
300,000 (3) $0.250 2/12/2002 2/12/2012
405,000 (4) $0.185 3/21/2003 3/21/2013
247,834 (5) $0.180 3/22/2004 3/22/2014
Richard A. Papworth 398,475 (9) $0.885 4/9/2001 4/9/2011
100,000 (2) $0.680 2/12/2002 2/12/2012
200,000 (3) $0.250 2/12/2002 2/12/2012
300,000 (4) $0.185 3/21/2003 3/21/2013
Vladimir Gorobets 30,000 (3) $0.060 2/12/2002 2/12/2012
100,000 (4) $0.060 3/21/2003 3/21/2013
175,000 (7) $0.060 3/9/2006 3/9/2016
Jacob Oharah 30,000 (3) $0.060 2/12/2002 2/12/2012
50,000 (4) $0.060 3/21/2003 3/21/2013
125,000 (7) $0.060 3/9/2006 3/9/2016
Sergey Karpov 30,000 (10) $0.060 4/7/2004 04/07/14
150,000 (7) $0.060 3/9/2006 3/9/2016
Vladimir Bibikov 25,000 (10) $0.060 6/30/2004 6/30/2014
75,000 (7) $0.060 3/9/2006 3/9/2016
Terence Tam 25,000 (10) $0.060 04/21/04 04/21/14
125,000 (7) $0.060 3/9/2006 3/9/2016
Maciej Ziomkowski 25,000 (10) $0.060 04/21/04 04/21/14
100,000 (7) $0.060 3/9/2006 3/9/2016
Vladislov Korlov 10,000 (10) $0.060 1/3/2015 1/3/2015
75,000 (7) $0.060 3/9/2006 3/9/2016
Charles D. Strang 50,000 (11) $0.710 5/3/2001 5/3/2011
50,000 (11) $0.280 8/14/2002 8/14/2007
18,904 (11) $0.150 12/30/2002 12/30/2007
21,000 (11) $0.150 8/6/2003 8/6/2008
50,000 (11) $0.200 7/1/2004 7/1/2009
50,000 (11) $0.125 7/1/2005 7/1/2010
50,000 (11) $0.060 7/1/2006 7/1/2011
James P. McDermott 20,959 (11) $0.150 12/30/2002 12/30/2007
30,000 (11) $0.150 8/6/2003 8/6/2008
213,000 (11) $0.200 7/1/2004 7/1/2009
189,000 (11) $0.125 7/1/2005 7/1/2010
185,500 (11) $0.060 7/1/2006 7/1/2011
50
Name Number of Options Strike Price Date of Grant Expiration
----- ------------------- -------------- --------------- ------------
Milton Segal 199,000 (11) $0.200 7/1/2004 7/1/2009
189,000 (11) $0.125 7/1/2005 7/1/2010
185,500 (11) $0.060 7/1/2006 7/1/2011
Spencer Browne 213,000 (11) $0.200 7/1/2004 7/1/2009
154,000 (11) $0.125 7/1/2005 7/1/2010
William Poster 35,000 (11) $0.280 7/30/2002 7/30/2007
35,575 (11) $0.150 7/30/2003 7/30/2008
50,000 (11) $0.200 7/1/2004 7/1/2009
50,000 (11) $0.125 7/1/2005 7/1/2010
50,000 (11) $0.060 7/1/2006 7/1/2011
The Wall Street Group 1,428,571 (12) $0.070 7/1/2005 7/1/2015
531,915 (12) $0.047 7/1/2006 7/1/2016
Jeffrey D. Wilson 200,000 (11) $0.710 5/3/2001 5/3/2011
10,000 (13) $0.210 3/31/2002 3/31/2007
50,000 (11) $0.410 4/30/2002 4/30/2007
10,000 (13) $0.190 6/30/2002 6/30/2007
10,000 (13) $0.140 9/30/2002 9/30/2007
42,000 (12) $0.220 10/15/2002 10/15/2007
33,425 (11) $0.180 12/30/2002 12/30/2007
50,000 (12) $0.185 6/30/2003 6/30/2008
Erik W. Black 50,000 (11) $0.380 12/30/2002 12/30/2007
30,000 (11) $0.150 8/6/2003 8/6/2008
39,667 (11) $0.200 10/6/2003 10/6/2008
Capitol Partners 30,000 (12) $0.360 11/27/2001 11/27/2011
Daniel Gladkowski 18,000 (12) $0.100 4/1/2003 4/1/2008
_____________________________________________
(1) Pursuant to an employment agreement dated as of November 15, 2001 and
a corresponding stock option agreement dated as of November 15, 2001.
(2) Compensation bonus for 2000.
(3) Compensation bonus for 2001.
(4) Compensation bonus for 2002.
(5) Compensation for the conversation of accounts payable owed for
services provided to the Company in exchange for long term Promissory
Notes dated as of March 31, 2004.
(6) Compensation bonus for 2004
(7) Compensation bonus for 2005.
(8) Pursuant to the acquisition of license rights to the Kronos technology
dated as of May 7, 2003.
(9) Pursuant to an employment agreement dated as of May 19, 2000.
(10) Initial compensation for joining the Company.
(11) Compensation for services to the Board of Directors.
(12) Pursuant to consulting services provided to the Company.
(13) Pursuant to a Promissory Note dated as of October 10, 2001.
Warrants
On May 9, 2003, we entered in a Warrant Agreement with HoMedics, Inc.
pursuant to which HoMedics was granted a ten-year warrant to acquire 13,492,342
shares at an exercise price of $0.10 per share. The warrant shares were issued
in exchange for providing $3.4 million in debt financing and $100,000. On
51
October 25, 2004, we entered into a Warrant Agreement with HoMedics, pursuant to
which HoMedics was granted a ten-year warrant to acquire 26,507,628 shares at an
exercise price of $0.10 per share. The warrants were issued in exchange for
HoMedics agreeing to extend repayment of Kronos debt and to provide an
additional $1 million in funding - $925,000 in secured debt financing and
$75,000. HoMedics increased their potential equity position in Kronos to 30% of
Kronos common stock on a fully diluted basis.
On August 7, 2001, we entered into a Warrant Agreement with The Eagle
Rock Group, LLC, pursuant to which The Eagle Rock Group was granted a ten-year
warrant to acquire one million four hundred thousand (1,400,000) shares of our
common stock at an exercise price of $0.68 per share (the fair market value on
the date of grant). Effective March 11, 2002, we entered into an agreement with
The Eagle Rock Group extending our relationship with The Eagle Rock Group until
March 1, 2003. Pursuant to the agreement, we agreed to grant to The Eagle Rock
Group a ten-year warrant for the right to purchase nine hundred thousand
(900,000) shares of our common stock: Two hundred and fifty thousand (250,000)
warrant shares at an exercise price of $0.42 and two hundred and fifty thousand
(250,000) warrant shares at an exercise price of $0.205 (the closing price of
the Company's common stock on March 1, 2002) were earned over a 12-month period
and four hundred thousand (400,000) warrant shares at an exercise price of
$0.145 were earned upon securing of our Licensing Agreement with HoMedics. These
warrants are irrevocable and are fully vested.
Transfer Agent
The transfer agent for our common stock is American Stock & Transfer
Company, 6201 15th Avenue, Brooklyn, New York 11219 and its telephone number is
(718) 921-8124.
Limitation Of Liability: Indemnification
As permitted by the Nevada Revised Statutes, our Bylaws provide for the
indemnification of our directors, officers, and employees or of any corporation
in which any such person serves as a director, officer, or employee at our
request, to the fullest extent allowed by the Nevada Revised Statutes, against
expenses (including, without limitation, attorney's fees, judgments, awards,
fines, penalties, and amounts paid in satisfaction of judgment or in settlement
of any action, suit, or proceeding) incurred by any such director, officer, or
employee. The Nevada Revised Statutes currently provides that such liability may
be so limited, except for: (a) acts or omissions which involve intentional
misconduct, fraud, or a knowing violation of law; or (b) the payment of
distributions in violation of Nevada Revised Statutes 78.300. As a result of
this provision, our company and our stockholders may be unable to obtain
monetary damages from such persons for breach of their duty of care. Although
stockholders may continue to seek injunctive and other equitable relief for an
alleged breach of fiduciary duty by such persons, stockholders may have no
effective remedy against the challenged conduct if equitable remedies are
unavailable.
We provide director and officer liability insurance and pays all
premiums and other costs associated with maintaining such insurance coverage. We
have also entered into indemnification agreements with each director and
officer.
Anti-Takeover Effects Of Provisions Of Nevada State Law
We may be or in the future we may become subject to Nevada's control
share law. A corporation is subject to Nevada's control share law if it has more
than 200 stockholders, at least 100 of whom are stockholders of record and
residents of Nevada, and it does business in Nevada or through an affiliated
corporation.
The law focuses on the acquisition of a "controlling interest" which
means the ownership of outstanding voting shares sufficient, but for the control
share law, to enable the acquiring person to exercise the following proportions
of the voting power of the corporation in the election of directors: (i)
one-fifth or more but less than one-third, (ii) one-third or more but less than
a majority, or (iii) a majority or more. The ability to exercise such voting
power may be direct or indirect, as well as individual or in association with
others.
The effect of the control share law is that the acquiring person, and
those acting in association with it, obtains only such voting rights in the
control shares as are conferred by a resolution of the stockholders of the
corporation, approved at a special or annual meeting of stockholders. The
control share law contemplates that voting rights will be considered only once
by the other stockholders. Thus, there is no authority to strip voting rights
from the control shares of an acquiring person once those rights have been
approved. If the stockholders do not grant voting rights to the control shares
acquired by an acquiring person, those shares do not become permanent non-voting
shares. The acquiring person is free to sell its shares to others. If the buyers
of those shares themselves do not acquire a controlling interest, their shares
do not become governed by the control share law.
52
If control shares are accorded full voting rights and the acquiring
person has acquired control shares with a majority or more of the voting power,
any stockholder of record, other than an acquiring person, who has not voted in
favor of approval of voting rights is entitled to demand fair value for such
stockholder's shares.
Nevada's control share law may have the effect of discouraging
takeovers of the corporation.
In addition to the control share law, Nevada has a business combination
law which prohibits certain business combinations between Nevada corporations
and "interested stockholders" for three years after the "interested stockholder"
first becomes an "interested stockholder" unless the corporation's board of
directors approves the combination in advance. For purposes of Nevada law, an
"interested stockholder" is any person who is (i) the beneficial owner, directly
or indirectly, of ten percent or more of the voting power of the outstanding
voting shares of the corporation, or (ii) an affiliate or associate of the
corporation and at any time within the three previous years was the beneficial
owner, directly or indirectly, of ten percent or more of the voting power of the
then outstanding shares of the corporation. The definition of the term "business
combination" is sufficiently broad to cover virtually any kind of transaction
that would allow a potential acquiror to use the corporation's assets to finance
the acquisition or otherwise to benefit its own interests rather than the
interests of the corporation and its other stockholders.
The effect of Nevada's business combination law is to potentially
discourage parties interested in taking control of the Company from doing so if
it cannot obtain the approval of our board of directors.
o EXPERTS
The consolidated financial statements as of and for the years ended
June 30, 2006 and 2005 included in the Prospectus have been audited by Sherb &
Co. LLP, independent registered public accounting firm, to the extent and for
the periods set forth in their report (which contains an explanatory paragraph
regarding Kronos' ability to continue as a going concern) appearing elsewhere
herein and are included in reliance upon such report given upon the authority of
said firm as experts in auditing and accounting.
o LEGAL MATTERS
Burton Bartlett and Glocovac, of Reno, Nevada, will pass upon the
validity of the shares of common stock offered hereby for us.
o HOW TO GET MORE INFORMATION
We have filed with the Securities and Exchange Commission a
registration statement on Form SB-2 under the Securities Act with respect to the
securities offered by this prospectus. This prospectus, which forms a part of
the registration statement, does not contain all the information set forth in
the registration statement, as permitted by the rules and regulations of the
Commission. For further information with respect to us and the securities
offered by this prospectus, reference is made to the registration statement.
Statements contained in this prospectus as to the contents of any contract or
other document that we have filed as an exhibit to the registration statement
are qualified in their entirety by reference to the to the exhibits for a
complete statement of their terms and conditions. The registration statement and
other information may be read and copied at the Commission's Public Reference
Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. The Commission maintains a web site at
http://www.sec.gov that contains reports, proxy and information statements, and
other information regarding issuers that file electronically with the
Commission.
53
KRONOS ADVANCED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AT JUNE 30, 2006
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets as of June 30, 2006 and June 30, 2005 F-3
Consolidated Statements of Operations for the years ended June 30,
2006 and 2005 F-4
Consolidated Statement of Changes of Stockholders' Deficit for years
ended June 30, 2006 and 2005 F-5
Consolidated Statements of Cash Flows for the years ended June 30,
2006 and 2005 F-6
Notes to Consolidated Financial Statements F-7 to F-16
F - 1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors Kronos Advanced Technologies, Inc.
We have audited the accompanying consolidated balance sheet of Kronos Advanced
Technologies, Inc. and Subsidiary as of June 30, 2006 and 2005 and the related
consolidated statements of operations, stockholders' deficit and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Kronos Advanced
Technologies, Inc. and Subsidiary as of June 30, 2006 and 2005 and the results
of their operations and their cash flows for the years then ended, in conformity
with U. S. generally accepted accounting principles generally accepted in the
United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has incurred
significant losses and has a working capital deficiency as more fully described
in Note 3. These issues among others raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 3. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Sherb & Co., LLP
---------------------------------
Sherb & Co., LLP
New York, New York
September 27, 2006
F - 2
KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
June 30, June 30,
2006 2005
-------------------- --------------------
Assets
Current Assets
Cash $ 598,323 $ 1,554,906
Accounts receivable 10,000 -
Other Current Assets 58,028 263,490
-------------------- --------------------
Total Current Assets 666,351 1,818,396
-------------------- --------------------
Property and Equipment 51,755 46,011
Less: Accumulated Depreciation (46,158) (43,384)
-------------------- --------------------
Net Property and Equipment 5,597 2,627
-------------------- --------------------
Other Assets
Intangibles, net 1,983,908 2,138,814
-------------------- --------------------
Total Other Assets 1,983,908 2,138,814
-------------------- --------------------
Total Assets $ 2,655,856 $ 3,959,837
==================== ====================
Liabilities and Stockholders' Deficit
Current Liabilities
Accrued expenses and payables to officers $ 8,843 $ 28,837
Accounts payable 204,632 479,175
Accrued interest expense 879,144 428,612
Accrued expenses 41,111 58,458
Deferred revenue 20,000 -
Notes payable, current portion 1,815,000 4,028,131
Notes payable to officers 256,544 397,004
-------------------- --------------------
Total Current Liabilities 3,225,274 5,420,217
-------------------- --------------------
Long Term Liabilities
Notes payable 2,575,000 2,400,000
-------------------- --------------------
Total Long Term Liabilities 2,575,000 2,400,000
-------------------- --------------------
Total Liabilities 5,800,274 7,820,217
-------------------- --------------------
Stockholders' Deficit
Common stock, authorized 500,000,000
shares of $.001 par value
Issued and outstanding - 144,499,657
and 72,786,345, respectively 144,500 72,686
Capital in excess of par value 27,828,241 23,183,747
Accumulated deficit (31,117,159) (27,116,813)
-------------------- --------------------
Total Stockholders' Deficit (3,144,418) (3,860,380)
-------------------- --------------------
Total Liabilities and Stockholders' Deficit $ 2,655,856 $ 3,959,837
==================== ====================
The accompanying notes are an integral part of these financial statements.
F - 3
KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the year ended June 30,
----------------------------------
2006 2005
---------------- ----------------
Sales $ 219,369 $ 430,379
Cost of sales 8,449 375,397
---------------- ----------------
Gross Profit 210,920 54,982
---------------- ----------------
Selling, General and Administrative expenses
Compensation and benefits 1,661,555 1,384,481
Research and development 357,822 167,500
Professional services 343,338 244,570
Depreciation and amortization 618,247 475,250
Facilities 100,982 96,882
Insurance 131,148 173,597
Other selling general and administrative expenses 517,697 229,658
---------------- ----------------
Total Selling, General and Administrative expenses 3,730,789 2,771,938
---------------- ----------------
Net Operating Loss (3,519,869) (2,716,956)
Other Income (Expense)
Loss on Debt Restructure - (3,857,467)
Other Income 8,776 1,414
Interest Expense (489,253) (521,104)
---------------- ----------------
Net Loss $ (4,000,346) $ (7,094,113)
================ ================
Basic and Diluted Loss Per Share:
Net Loss $ (0.04) $ (0.10)
================ ================
Weighted Average Shares Outstanding - Basic and Diluted 98,512,184 67,612,904
================ ================
The accompanying notes are an integral part of these financial statements.
F - 4
KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
Common Stock Capital in Total
----------------------- Excess of Par Accumulated Stockholders'
Shares Amount Value Deficit Deficit
----------- ---------- ------------- -------------- ------------
BALANCE at June 30, 2004 61,323,845 $ 61,323 $ 18,578,019 $ (20,022,700) $(1,383,358)
Shares issued for cash 9,800,000 9,800 957,700 - 967,500
Shares issued for services to officers 1,500,000 1,500 133,500 - 135,000
Shares issued for consulting services 62,500 63 6,187 - 6,250
Value of warrants issued in conjunction
with debt restructure - - 3,361,171 - 3,361,171
Stock options issued for Board Service - - 147,170 - 147,170
Net loss for the year ended June 30, 2005 - - - (7,094,113) (7,094,113)
----------- ---------- ------------- -------------- ------------
BALANCE at June 30, 2005 72,686,345 72,686 23,183,747 (27,116,813) (3,860,380)
Shares issued for cash 71,813,312 71,814 4,038,186 - 4,110,000
Stock options issued for employee services - - 500,477 - 500,477
Stock options issued for Board Service - - 26,548 - 26,548
Stock options issued for consulting services - - 79,283 - 79,283
Net loss for the year ended June 30, 2006 - - - (4,000,346) (4,000,346)
----------- ---------- ------------- -------------- ------------
BALANCE at June 30, 2006 144,499,657 $ 144,500 $ 27,828,241 $ (31,117,159) $(3,144,418)
============ ========== ============= ============== ============
The accompanying notes are an integral part of this financial statement
F - 5
KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended June 30,
----------------------------------------
2006 2005
-------------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (4,000,346) $ (7,094,113)
Adjustments to reconcile net loss to net cash
used in operations
Depreciation and amortization 618,245 475,250
Accretion of note discount - 92,965
Loss on debt restructuring - 3,857,467
Common stock issued for compensation/services 606,308 282,170
Change In:
Accounts receivable (10,000) 97,544
Prepaid expenses and other assets 12,337 102,447
Deferred revenue 20,000 (3,218)
Accounts payable (294,537) 199,224
Accrued expenses and other liabilities 433,185 174,710
-------------------- ------------------
Net cash used in Operating Activities (2,614,808) (1,815,554)
-------------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (5,745) -
Investment in patent protection (247,440) (279,245)
-------------------- ------------------
Net cash used in Investing Activities (253,185) (279,245)
-------------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock for cash 4,110,000 973,750
Proceeds from short-term borrowings - 100,000
Repayments of short-term borrowings (2,353,590) (1,120,095)
Proceeds from long-term borrowings 175,000 4,000,000
Debt Acquisition Costs (20,000) (373,013)
-------------------- ------------------
Net cash provided by Financing Activities 1,911,410 3,580,642
-------------------- ------------------
NET (DECREASE) INCREASE IN CASH (956,583) 1,485,843
CASH
Beginning of year 1,554,906 69,063
-------------------- ------------------
End of year $ 598,323 $ 1,554,906
==================== ==================
Supplemental schedule:
Interest paid in cash $ 250,124 $ 129,886
==================== ==================
The accompanying notes are an integral part of this financial statement.
F - 6
KRONOS ADVANCED TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS
Kronos Advanced Technologies, Inc. ("Kronos") is a Nevada corporation (the
"Company"). The Company's shares began trading on the over-the-counter bulletin
board exchange on August 28, 1996 under the symbol "TSET." Effective January 12,
2002, the Company began doing business as Kronos Advanced Technologies, Inc.
and, as of January 18, 2002, we changed the Company ticker symbol to "KNOS." We
have confined most of our recent activities to develop the Kronos technology.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Method. The Company's consolidated financial statements are prepared
using the accrual method of accounting. The Company has elected a June 30 fiscal
year end.
Principles of Consolidation. The consolidated financial statements of the
Company include those of the Company and its subsidiary for the periods in which
the subsidiary was owned/held by the Company. All significant intercompany
accounts and transactions have been eliminated in the preparation of the
consolidated financial statements. At June 30, 2006, 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 three months or less when purchased,
to be cash equivalents. The Company maintains cash and cash equivalents with
high-credit, quality financial institutions. At June 30, 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
June 30, 2006 and June 30, 2005. The Company charges off accounts receivable
against the allowance for losses when an account is deemed to be uncollectable.
Property and Equipment. Property and equipment are recorded at cost.
Depreciation is provided over the estimated useful lives of the assets, which
range from three to seven years. Expenditures for major renewals and betterments
that extend the original estimated economic useful lives of the applicable
assets are capitalized. Expenditures for normal repairs and maintenance are
charged to expense as incurred. The cost and related accumulated depreciation of
assets sold or otherwise disposed of are removed from the accounts, and any gain
or loss is included in operations.
Intangibles. The Company uses assumptions in establishing the carrying value,
fair value and estimated lives of our long-lived assets and goodwill. The
criteria used for these evaluations include management's estimate of the asset's
continuing ability to generate positive income from operations and positive cash
flow in future periods compared to the carrying value of the asset, the
strategic significance of any identifiable intangible asset in our business
objectives, as well as the market capitalization of the Company. Cash flow
projections used for recoverability and impairment analysis use the same key
assumptions and are consistent with projections used for internal budgeting, and
for lenders and other third parties. If assets are considered to be impaired,
the impairment recognized is the amount by which the carrying value of the
assets exceeds the fair value of the assets. Useful lives and related
amortization or depreciation expense are based on our estimate of the period
that the assets will generate revenues or otherwise be used by Kronos. Factors
that would influence the likelihood of a material change in our reported results
include significant changes in the asset's ability to generate positive cash
flow, loss of legal ownership or title to the asset, a significant decline in
the economic and competitive environment on which the asset depends, significant
changes in our strategic business objectives, and utilization of the asset.
F - 7
Income Taxes. Income taxes are accounted for in accordance with the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 109. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amounts expected to be realized, but no less than
quarterly.
Research and Development Expenses. Costs related to research and development are
charged to research and development expense as incurred.
Net Loss Per Share. Basic loss per share is computed using the weighted average
number of shares outstanding. Diluted loss per share is computed using the
weighted average number of shares outstanding adjusted for the incremental
shares attributed to outstanding options and warrants to purchase common stock,
when their effect is dilutive.
Revenue Recognition. The Company recognizes revenue in accordance with Staff
Accounting Bulletin (SAB) 104, which requires evidence of an agreement, delivery
of the product or services at a fixed or determinable price, and assurance of
collection within a reasonable period of time. Further, Kronos Air Technologies
recognizes revenue on the sale of the custom-designed contract sales under the
percentage-of-completion method of accounting in the ratio that costs incurred
to date bear to estimated total costs. For uncompleted contracts where costs and
estimated profits exceed billings, the net amount is included as an asset in the
balance sheet. For uncompleted contracts where billings exceed costs and
estimated profits, the net amount is included as a liability in the balance
sheet. Sales are reported net of applicable cash discounts and allowances for
returns. Revenue from government grants for research and development purposes is
recognized as revenue as long as the Company determines that the government will
not be the sole or principal expected ultimate customer for the research and
development activity or the products resulting from the research and development
activity. Otherwise, such revenue is recorded as an offset to research and
development expenses in accordance with the Audit and Accounting Guide, Audits
of Federal Government Contractors. In either case, the revenue or expense offset
is not recognized until the grant funding is invoiced and any customer
acceptance provisions are met or lapse.
Stock, Options and Warrants Issued for Services. Issuances of shares of the
Company's stock to employees or third-parties for compensation or services is
valued using the closing market price on the date of grant for employees and the
date services are completed for non-employees. Issuances of options and warrants
of the Companies stock are valued using the Black-Scholes option model.
Stock Options. In December 2004, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 123R,
Share-Based Payment ("SFAS No. 123R"). This Statement is a revision of SFAS No.
123, Accounting for Stock-Based Compensation, and supersedes Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
its related implementation guidance. SFAS No. 123R focuses primarily on
accounting for transactions in which an entity obtains employee services in
share-based payment transactions. The Statement requires entities to recognize
stock compensation expense for awards of equity instruments to employees based
on the grant-date fair value of those awards (with limited exceptions). Kronos
elected to implement the provisions of SFAS No. 123R in the fiscal year ended
June 30, 2005.
Accounting Changes and Error Corrections - In May 2005, the FASB issued FASB
Statement No. 154, which replaces APB Opinion No.20 and FASB No. 3. This
Statement provides guidance on the reporting of accounting changes and error
corrections. It established, unless impracticable retrospective application as
the required method for reporting a change in accounting principle in the
absence of explicit transition requirements to a newly adopted accounting
principle. The Statement also provides guidance when the retrospective
application for reporting of a change in accounting principle is impracticable.
The reporting of a correction of an error by restating previously issued
financial statements is also addressed by this Statement. This Statement is
effective for financial statements for fiscal years beginning after December 15,
2005. Earlier application is permitted for accounting changes and corrections of
errors made in fiscal years beginning after the date of this Statement is
issued. Management believes this Statement will have no impact on the financial
statements of the Company once adopted.
F - 8
Accounting for Certai Hybrid Financial Instruments - In February 2006, the FASB
issued FASB Statement No. 155, which is an amendment of FASB Statements No. 133
and 140. This Statement; 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, 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. This Statement is effective for financial statements for
fiscal years beginning after September 15, 2006. Earlier adoption of this
Statement 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 this Statement will have no impact on the financial
statements of the Company once adopted.
Accounting for Servicing of Financial Assets - In March 2006, the FASB issued
FASB Statement No. 156, which amends FASB Statement No. 140. This Statement
establishes, among other things, the accounting for all separately recognized
servicing assets and servicing liabilities. This Statement amends Statement 140
to require that all separately recognized servicing assets and servicing
liabilities be initially measured at fair value, if practicable. This Statement
permits, but does not require, the subsequent measurement of separately
recognized servicing assets and servicing liabilities at fair value. An entity
that uses derivative instruments to mitigate the risks inherent in servicing
assets and servicing liabilities is required to account for those derivative
instruments at fair value. Under this Statement, an entity can elect subsequent
fair value measurement to account for its separately recognized servicing assets
and servicing liabilities. By electing that option, an entity may simplify its
accounting because this Statement permits income statement recognition of the
potential offsetting changes in fair value of those servicing assets and
servicing liabilities and derivative instruments in the same accounting period.
This Statement is effective for financial statements for fiscal years beginning
after September 15, 2006. Earlier adoption of this Statement 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 this
Statement will have no impact on the financial statements of the Company once
adopted.
In June 2006, the FASB 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 Statement of
Financial Accounting Standard (SFAS) No. 109, "Accounting for Income Taxes."
This Interpretation prescribes a recognition threshold and measurement attribute
of tax positions taken or expected to be taken on a tax return. This
Interpretation is effective for the first fiscal year beginning after December
15, 2006. Management believes this Statement will have no impact on the
financial statements of the Company once adopted.
In June 2006, the FASB 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.
NOTE 3 - REALIZATION OF ASSETS
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern. The
Company has sustained losses from operations in recent years, and such losses
have continued through the current year ended June 30, 2006. 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 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.
F - 9
Management has taken the following steps with respect to its operating and
financial requirements, which it believes are sufficient to provide the Company
with the ability to continue in existence:
EOL. In December 2005, Kronos executed a non-exclusive License Agreement with
EOL, LLC, a Russian Federation corporation. Based in Korolev, Moscow Region,
Russia, EOL will leverage the Kronos technology to produce, market, and
distribute Kronos commercial air purification products, bacteriological and
virus destruction devices and space heaters 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. Based on contractual milestones, EOL is required to: (i)
complete initial product design by March 2006; (ii) complete initial product
prototypes by June 2006; and (iii) make product available for customer purchase
by September 2006. EOL plans to assemble the finished products in Russia from
components supplied both locally and from contract manufacturers in China. The
products will be marketed and distributed in Russia, Ukraine, Kazakhstan,
Moldova and Byelorussia. In March 2006, EOL achieved the first milestone:
initial design of a wall mounted air sterilizer for the health care market. In
June 2006, EOL achieved the second milestone: completion of the initial product
prototypes. In August 2006, the Russian Research Institute of Medical Equipment
began the process for product certification of the EOL device for use in medical
facilities.
DESA. In June 2006, the Company executed a License Agreement with DESA IP, LLC,
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 will be 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.
U.S. Navy. In November 2002, the U. S. Navy awarded Kronos a Small Business
Innovation Research Phase II contract worth $580,000, plus an option of
$145,000. The Phase II contract (commercialization phase) is an extension of the
Phase I and the Phase I Option work that began in 2001. In May 2005, Kronos
shipped the Kronos device to Northrop Grumman for testing and evaluation. Based
on the success of these initial tests, Northrop Grumman requested additional
modifications and improvements to the device. Northrop Grumman is scheduling
further testing. As of June 30, 2006, the U. S. Navy had provided Kronos with
$580,000 in funding for this effort since inception.
Leading Automotive Manufacturer. In August 2005, Kronos extended its work into
the transportation industry by signing a Prototype Development and Evaluation
Agreement with a leading luxury automotive manufacturer. The Kronos product has
been designed and manufactured to meet customer standards for placement inside
of automobile passenger cabins. The customer is evaluating various potential
applications for the technology.
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. The Washington Technology Center 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. The Phase II grant is a follow-on
award to the December 2004 Phase I grant to Kronos and the University of
Washington to initiate development of a novel energy-efficient heat transfer
technology for cooling microelectronics.
In September 2006, the Company sent a notice of termination of its license
agreement with HoMedics USA, Inc. HoMedics has indicated that it does not
recognize Kronos' termination of the License Agreement as valid. HoMedics has
requested an amicable and expedient resolution of the parties' differences. The
outcome of this matter cannot be determined at this time.
F - 10
NOTE 4 - OTHER CURRENT ASSETS
Other current assets at June 30, consist of the following:
2006 2005
--------------- ---------------
Debt acquisition costs $ 10,000 $ 203,125
Payroll deposit - 50,000
Lease deposits 7,138 10,365
Prepaid insurance 40,890 -
--------------- ---------------
Prepaid and other current assets $ 58,028 $ 263,490
=============== ===============
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment at June 30, consists of the following:
2006 2005
--------------- ---------------
Office furniture and fixtures $ 43,500 $ 37,756
Machinery and equipment 8,255 8,255
--------------- ---------------
51,755 46,011
Less accumulated depreciation (46,158) (43,384)
--------------- ---------------
Net property and equipment $ 5,597 $ 2,627
=============== ===============
Depreciation expense for the years ended June 30, 2006 and 2005 were $2,774, and
$3,655, respectively.
NOTE 6 - INTANGIBLES
Intangible assets at June 30, consists of the following:
2006 2005
--------------- ----------------
Marketing intangibles $ 587,711 $ 587,711
Purchased patent technology 2,669,355 2,669,355
Developed patent technology 766,401 518,960
--------------- ----------------
4,023,467 3,776,026
Less accumulated amortization (2,039,559) (1,637,212)
--------------- ----------------
Net intangible assets $ 1,983,908 $ 2,138,814
=============== ================
Purchased patent technology includes property that was acquired in the Kronos
acquisition.
Intangible assets are being amortized on a straight line basis over 10 years.
Amortization expense for the years ended June 30, 2006 and 2005 was $402,347 and
$393,460, respectively.
Amortization of the Company's Intangible Assets shown above for the fiscal years
ended June 30,
2007 2008 2009 2010 2011
----------- ----------- ----------- ----------- -----------
Marketing intangibles $ 587,711 $ 587,711 $ 587,711 $ 587,711 $ 587,711
Purchased patent technology 2,669,355 2,669,355 2,669,355 2,669,355 2,669,355
Developed patent technology 766,400 766,400 766,400 766,400 766,400
----------- ----------- ----------- ----------- -----------
4,023,466 4,023,466 4,023,466 4,023,466 4,023,466
Less accumulated amortization (2,441,905) (2,844,252) (3,246,599) (3,559,997) (3,695,408)
----------- ----------- ----------- ----------- -----------
Net intangible assets $1,581,561 $1,179,214 $ 776,867 $ 463,469 $ 328,058
=========== =========== =========== =========== ===========
NOTE 7 - ACCRUED EXPENSES
Accrued expenses at June 30, consisted of the following:
2006 2005
--------------- ---------------
Accrued professional services $ 38,500 $ 37,014
Accrued compensation and other 2,611 21,444
--------------- ---------------
$ 41,111 $ 58,458
Accrued interest 879,144 428,612
--------------- ---------------
$ 920,255 $ 487,070
=============== ===============
F - 11
NOTE 8 - NOTES PAYABLE
The Company had the following obligations as of June 30,
2006 2005
--------------- ---------------
Obligations to Cornell Capital(1) $ 1,815,000 $ 4,000,000
Obligation to HoMedics (2) 2,575,000 2,400,000
Obligation to current employees (3) 256,544 397,004
Obligation for finance leases (4) - 28,131
-------------- ---------------
4,646,544 6,825,135
Less:
Current portion 2,071,544 4,425,135
--------------- ---------------
Total long term obligations net of
current portion $ 2,575,000 $ 2,400,000
=============== ===============
(1) These notes have a one year term and bear interest at 12% with weekly
payments.
(2) This note has a 5 year term and bears interest at 6% with no payments
required until the earlier of Kronos receipt of royalty payments from HoMedics
sale of Kronos-based air purification products or two years. This note was
issued along with warrants for the purchase of 13.4 million shares of the
Company's common stock.
(3) These notes bear interest at the rate of 12%. They represent obligation to
current employees of the Company, which are due by December 31, 2006.
(4) See Note 9 below.
Payout of the Company's Notes Payable obligations listed above for the fiscal
years ended June 30,
2007 2008 2009 2010 2011
----------- ---------- ---------- ---------- ----------
Obligations to Cornell Capital $1,815,000 $ - $ - $ - $ -
Obligation to current employees 256,544 - - - -
Obligation to HoMedics 594,231 792,308 792,308 396,153 -
----------- ---------- ---------- ---------- ----------
$2,665,775 $ 792,308 $ 792,308 $ 396,153 $ -
=========== ========== ========== ========== ==========
NOTE 9 - LEASES
The Company has entered into a non-cancelable operating lease for facilities.
Rental expense was approximately $66,600 and $66,500 for years ended June 30,
2006 and 2005 respectively. Effective October 1, 2005, Kronos is committed
through September 30, 2009 to annual lease payments on operating leases for
6,000 square feet of office/research and product development premises of for
rent during fiscal,
2007 2008 2009 2010
---------- --------- --------- ---------
Lease payments $ 60,564 $62,388 $ 64,260 $ -
========== ======== ========= =========
In the year ended June 30, 2006 the Company paid $28,131 in principal and $8,482
in interest on capital leases. Of the equipment that was purchased using capital
leases, $10,650 was capitalized and the remaining $65,781 was expensed through
research and development and cost of sales.
NOTE 10 - NET LOSS PER SHARE
As of June 30, 2006, there were outstanding options to purchase 22,783,112
shares of the Company's common stock and outstanding warrants to purchase
42,300,000 shares of the Company's common stock. These options and warrants have
been excluded from the loss per share calculation as their effect is
anti-dilutive. As of June 30, 2005 there were outstanding options to purchase
14,989,782 shares of Kronos common stock and outstanding warrants to purchase
42,300,000 shares of Kronos common stock. These options and warrants have been
excluded from the loss per share calculation as their effect is anti-dilutive.
F - 12
NOTE 11 - INCOME TAXES
The composition of deferred tax assets and the related tax effects are as
follows at June 30,
2006 2005
--------------- ---------------
Benefit from carryforward of capital
and net operating losses $ (7,209,000) $ (6,092,000)
Other temporary differences (157,000) (157,000)
Options issued for services (218,000) -
Less:
Valuation allowance 7,584,000 6,249,000
--------------- ---------------
Net deferred tax asset $ - $ -
=============== ===============
The other temporary differences shown above relate primarily to impairment
reserves for intangible assets, and accrued and deferred compensation. The
difference between the income tax benefit in the accompanying statements of
operations and the amount that would result if the U.S. Federal statutory rate
of 34% were applied to pre-tax loss is as follows:
June 30,
--------------------------------------------------------------------------------
2006 2005
--------------------------------------------------------------------------------
Amount % of pre-tax Loss Amount % of pre-tax Loss
--------------------------------------------------------------------------------
Benefit for income tax at:
Federal statutory rate $ (1,360,000) (34.0%) $ (2,412,000) (34.0%)
State statutory rate (80,000) (2.0%) (142,000) (2.0%)
Non-deductible expenses 105,000 2.6% 1,303,030 18.4%
Increase in valuation allowance 1,335,000 33.4% 1,251,000 17.6%
--------------------------------------------------------------------------------
$ - 0.0% $ - 0.0%
================================================================================
The non-deductible expenses shown above related primarily to the amortization of
intangible assets and to the accrual of stock options for compensation using
different valuation methods for financial and tax reporting purposes.
At June 30, 2006, the Company has approximately $17.6 million of unused Federal
net operating losses, $2.3 million capital losses and $13.4 million State net
operating losses available for carryforward to future years. The benefit from
carryforward of such losses will expire in various years through 2026 and could
be subject to limitations if significant ownership changes occur in the Company.
NOTE 12 - STOCK OPTIONS AND WARRANTS
On February 12, 2002, the Board of Directors approved the TSET, Inc. Stock
Option Plan under which Kronos' key employees, consultants, independent
contractors, officers and directors are eligible to receive grants of stock
options. Kronos has reserved and issued a total of 6,250,000 shares of common
stock under the Stock Option Plan. Prior to that, the Company had no formal
stock option plan but offered as special compensation to certain officers,
directors and third party consultants the granting of non-qualified options to
purchase Company shares at the market price of such shares as of the option
grant date. The options generally have terms of three to ten years. The Company
granted non-qualified stock options totaling 8,585,571 and 2,510,000 shares in
the years ended June 30, 2006 and 2005, respectively.
As of July 1, 2004, the Company elected to follow Statement of Financial
Accounting Standards No. 123R, Share-Based Payment ("SFAS No. 123R") to
recognize stock compensation expense for awards of equity instruments to
employees based on the grant-date fair value of those awards (with limited
exceptions).
On April 13, 2006, the non-executive directors of the Board of Directors upon
the recommendation of the Compensation Committee modified the exercise price on
the 7,812,482 stock options issued to employees between November 15, 2001 and
January 3, 2005. The exercise prices were changed from a range of $0.150 to
$0.680 to a new range of exercise prices of $0.060 to $0.094. The base exercise
price of $0.060 was set at the trailing three month average closing price of the
stock prior to April 13, 2006, which represented an 8% premium to the closing
price on April 12, 2006. This modification resulted in an expense of $453,905
for the year ended June 30, 2006.
F - 13
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
the Company's opinion the existing available models do not necessarily provide a
reliable single measure of the fair value of the Company's employee stock
options. Using the Black-Scholes option valuation model, the weighted average
grant date fair value of options granted during the years ended June 30, 2006
and 2005 was $0.058 and $0.068 per option share, respectively.
A summary of the Company's stock option activity and related information for the
years ended June 30, 2006 and 2005 is as follows (in thousands, except per share
amounts):
Weighted
Average
Shares Exercise Price
--------------- ------------
Outstanding at June 30, 2004 12,813 0.42
Granted 2,510 0.15
Exercised - -
Cancelled (273) 0.84
--------------- ------------
Outstanding as June 30, 2005 15,050 $ 0.37
Granted 8,585 0.07
Exercised - -
Cancelled (852) 0.84
--------------- ------------
Outstanding as June 30, 2006 22,783 $ 0.24
=============== ============
A summary of options outstanding and exercisable at June 30, 2006 and 2005 is
follows (in thousands, except per share amounts and years):
Options Outstanding Options Exercisable
-------------------------------------------- ------------------------------
Weighted
Average
Remaining Weighted
Range of Life (in Average Range of
Exercise Prices Options years) Exercise Price Exercise Prices Options
------------------ -------- ---------- -------------- --------------- --------
June 30, 2006
$0.71 - $1.12 648 2.4 $0.82 $0.71 - $1.12 648
$0.21 - $0.70 1,290 4.5 $0.42 $0.21 - $0.70 1,290
$0.00 - $0.20 20,845 7.6 $0.08 $0.00 - $0.20 20,845
June 30, 2005
$0.71 - $1.12 1,472 2.9 $0.87 $0.71 - $1.12 1,472
$0.21 - $0.70 5,925 6.3 $0.49 $0.21 - $0.70 5,925
$0.00 - $0.20 7,653 8.0 $0.17 $0.00 - $0.20 7,653
A summary of the Company's stock warrant activity and related information for
the years ended June 30, 2006 and 2005 is as follows (in thousands, except per
share amounts):
Weighted Average
Warrants Exercise Price
---------------- -------------
Outstanding at June 30, 2004 15,792 $0.16
Granted 26,508 $0.10
Exercised - -
Cancelled - -
--------------- ------------
Outstanding as June 30, 2005 42,300 $ 0.12
Granted - -
Exercised - -
Cancelled - -
--------------- ------------
Outstanding as June 30, 2006 42,300 $ 0.12
=============== ============
F - 14
NOTE 13 - 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. 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 an SB-2 Registration Statement
and $2 million upon the SEC declaring the Registration Statement effective.
Kronos executed a Standby Equity Distribution Agreement for $20 million of
funding which Kronos has the option to drawdown against in increments as large
as $1.5 million over the next twelve months. As of June 30, 2006, Kronos has
received $6.2 million in funding under these agreements. As of June 30, 2006,
the Company owed $1.8 million under the second Promissory Note.
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 has not been
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,
will begin 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 will also be October 2009. The interest rate will remain at 6% for the
$2.4 million in debt; the rate will also be 6% on the additional debt. HoMedics
increased their potential equity position in Kronos to 30% of Kronos common
stock on a fully diluted basis. In connection with the October 2004 agreements,
Kronos issued HoMedics a warrant to buy 26.5 million shares of Kronos common
stock. As a result of this debt restructuring, the Company recognized a loss of
$3,857,467 which represents the reacquisition price less the net carrying value
of the debt restructuring. The reacquisition price is made up of $2,400,000
which is the amount of the new debt and $3,361,161 which represents the value of
the warrants using the Black-Scholes method. The net carrying value is the
$2,400,000 which is the old debt less the unamortized debt discount of $496,296.
Daniel R. Dwight, President and Chief Executive Officer, and the Company entered
into an Employment agreement effective as of November 15, 2001. The initial term
of Mr. Dwight's Employment Agreement was for 2 years and will automatically
renew for successive 1 year terms unless Kronos or Mr. Dwight provide the other
party with written notice within 3 months of the end of the initial term or any
subsequent renewal term. 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. In addition, Kronos granted Mr. Dwight 1,000,000 immediately
vested and exercisable, ten-year stock options at various exercise prices. Mr.
Dwight will be entitled to fully participate in any and all 401(k), stock
option, stock bonus, savings, profit-sharing, insurance, and other similar plans
and benefits of employment.
Richard F. Tusing, 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 the initial term or any subsequent
renewal term. The Board of Directors renewed Mr. Tusing's Employment Agreement
on October 1, 2004 and October 1, 2005. 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 14 - MAJOR CUSTOMERS
As of June 30, 2006 the Company had six major customers: DESA, EOL, HoMedics,
leading automotive manufacturer, the U.S. Navy and the U.S. Army. Of the
$219,369 in revenue recorded in the year ended June 30, 2006, $219,369 or 100%
was derived from these six customers.
As of June 30, 2005 the Company had three major customers: HoMedics, the U.S.
Navy and the U.S. Army. Of the $430,379 in revenue recorded in the year ended
June 30, 2005, $430,379 or 100% was derived from these three customers.
F - 15
NOTE 15 - SEGMENTS OF BUSINESS
The Company operates principally in one segment of business: The Kronos segment
licenses, manufactures and distributes air movement and purification devices
utilizing the Kronos technology. In the year ended June 30, 2006, the Company
operated only in the United States of America.
NOTE 16 - RELATED PARTIES
As of June 30, 2006, the Company has outstanding obligations for past
compensation to management of $256,544. As of June 30, 2005, the Company has
outstanding obligations for past compensation management of $397,904. These
unpaid amounts currently accrue interest at the rate of 12% per annum.
NOTE 17 - STOCKHOLDERS' DEFICIT
During the year ended June 30, 2006, the Company issued 71,813,312 shares of its
common stock for $4,110,000 in cash.
During the year ended June 30, 2005, the Company issued 9,800,000 shares of its
common stock for $967,500 in cash. The Company issued 1,500,000 shares valued at
$135,000 for services to officers and employees and 62,500 shares valued at
$6,250 for consulting services.
NOTE 18 - SUBSEQUENT EVENTS (Unaudited)
In September 2006, the Company sent a notice of termination of its license
agreement with HoMedics USA, Inc. HoMedics has indicated that it does not
recognize Kronos' termination of the License Agreement as valid. HoMedics has
requested an amicable and expedient resolution of the parties' differences. The
outcome of this matter cannot be determined at this time.
In July and August 2006, the Company received notification that three more of
its patent applications have been allowed for issuance by the United States
Patent and Trademark Office.
In August and September 2006, Kronos issued 17,044,241 shares of common stock
for $550,000 to Cornell under the terms of our Standby Equity Distribution
Agreement. The proceeds were used for working capital and making payments on the
second Promissory Note.
F - 16
This prospectus does not constitute an offer to sell, PROSPECTUS or a
solicitation of an offer to buy any securities:
[ ] except the common stock offered by this prospectus;
[ ] in any jurisdiction in which the offer or 164,848,371 solicitation is not
authorized; Shares of Common Stock
[ ] in any jurisdiction where the dealer or other salesperson is not
qualified to make the offer or KRONOS ADVANCED solicitation; TECHNOLOGIES,
INC.
[ ] to any person to whom it is unlawful to make the offer or solicitation;
or ____________, 2006
[ ] to any person who is not a United States resident or who is outside the
jurisdiction of the United States.
The delivery of this prospectus or any accompanying sale does not imply that:
[ ] there have been no changes in the affairs of Kronos Advanced
Technologies, Inc. after the date of this prospectus; or
[ ] the information contained in this prospectus is correct after the date of
this prospectus.
Until October 31, 2006, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Indemnification Of Directors And Officers
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of Kronos
pursuant to the foregoing, or otherwise, Kronos has been advised that in the
opinion of the SEC such indemnification is against public policy as expressed in
the Securities Act of 1933 and is, therefore, unenforceable.
Other Expenses Of Issuance And Distribution
The following table sets forth estimated expenses expected to be
incurred in connection with the issuance and distribution of the securities
being registered. Kronos will pay all expenses in connection with this offering.
Securities and Exchange Commission Registration Fee $ 3,000
Printing and Engraving Expenses $ 2,500
Accounting Fees and Expenses $ 20,000
Legal Fees and Expenses $ 50,000
Miscellaneous $ 9,500
----------
TOTAL $ 85,000
==========
Recent Sales Of Unregistered Securities
Except as otherwise noted, all of the following shares were issued and
options and warrants granted pursuant to the exemption provided for under
Section 4(2) of the Securities Act of 1933, as amended, as a "transaction not
involving a public offering." No commissions were paid, and no underwriter
participated, in connection with any of these transactions. Each such issuance
was made pursuant to individual contracts which are discrete from one another
and are made only with persons who were sophisticated in such transactions and
who had knowledge of and access to sufficient information about Kronos to make
an informed investment decision. Among this information was the fact that the
securities were restricted securities.
All investors participating in private placements for cash were
"accredited investors" within the meaning of Regulation D. In addition, we note
that there are several categories of recipients of these shares. These include
investors for cash, officers, directors, consultants, litigants and former
stockholders of private companies acquired by Kronos. Kronos does not believe
that these categories of recipients should be integrated with each other under
the concept of integration. Under Securities Act Release Nos. 4552 and 4434,
these categories would not involve a single plan of financing and would not be
considered to be made for the same general purpose. As a result, each category
should be reviewed on its own. Given the small number of purchasers in these
categories, Kronos believes that these transactions complied in all respects
with Section 4(2). Kronos believes that this conclusion is true even if the
transactions occurring within each category are integrated with other
transactions occurring within six months or one year of a given transaction.
On July 1, 2004, we granted options to acquire 725,000 shares of our
common stock at an exercise price of $0.15 to Spencer Browne, James McDermott,
William Poster, Milton Segal and Charles Strang in exchange for services as
directors or advisory board members to the Company.
In October 2004, we issued five million shares of our common stock,
valued at $0.10 per share at an aggregate value of $500,000 to Cornell Capital
Partners, LLC.
II-1
In October 2004, we issued 62,500 shares of our common stock, valued at
$0.10 per share at an aggregate value of $6,250 to Newbridge Securities
Corporation as a placement agent fee in connection with the Standby Equity
Distribution Agreement with Cornell Capital.
In October 2004, we issued to HoMedics a warrant to purchase 26,507,658
shares of Kronos common stock. The warrant is exercisable for a period of ten
(10) years from the date of issuance. The exercise price is $0.10 per share.
In November 2004, we issued 2,000,000 shares of our common stock valued
at $0.10 per share at an aggregate value of $200,000 to Fusion Capital Partners,
LLC. The proceeds were used to eliminate Kronos' non-interest bearing demand
obligation to Fusion Capital.
In November 2004, we issued 2,800,000 shares of our common stock valued
at $0.10 per share at an aggregate value of $280,000 to a group of accredited
investors.
On June 30, 2005, we issued 1,500,000 shares of our common stock valued
at $0.09 per share at an aggregate value of $135,000 to Daniel R. Dwight, Igor
Krichtafovitch, and Richard F. Tusing for 2005 bonuses.
On June 30, 2005, we granted options to acquire 1,725,000 shares of our
common stock at an exercise price of $0.125. Of the 1,725,000 options, 1,200,000
options were granted to Daniel R. Dwight and Richard F. Tusing who are directors
and officers of Kronos.
On July 1, 2005, we granted options to acquire 632,000 shares of our
common stock at an exercise price of $0.125 to Spencer Browne, James McDermott,
William Poster, Milton Segal and Charles Strang in exchange for services as
directors or advisory board members to the Company.
On July 15, 2005, we granted options to acquire 1,428,571 shares of our
common stock at an exercise price of $0.07 to the Wall Street Group 1,428,571
On March 9, 2006 we granted options to acquire 900,000 shares of our
common stock at an exercise price of $0.06 to various employees for bonuses.
On April 13, 2006, we granted options to acquire 5,625,000 shares of
our common stock at an exercise price of $0.06 for bonuses. Of the 5,625,000
options, an aggregate of 3,475,000 options were granted to Daniel R. Dwight and
Richard F. Tusing who are directors and officers of Kronos.
II-2
EXHIBIT DESCRIPTION LOCATION
------- ---------------------------------------------- ------------------------------------------------------
2.1 Articles of Merger for Technology Selection, Incorporated by reference to Exhibit.2.1 to the
Inc. with the Nevada Secretary of State Registrant's Registration Statement on Form S-1 filed
on August 7, 2001 (the "Registration Statement")
3.1 Articles of Incorporation 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 Exhibit 3.2 to the
Registration Statement on Form S-1 filed on August 1,
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, filed on May 15, 2002
5.1 Opinion re: legality Provided herein
10.21 Consulting Agreement, dated January 1,.2001, Incorporated by reference to Exhibit.10.21 to the
by and between TSET, Inc. and Dwight, Tusing & Registration Statement on Form S-1 filed on August 7,
Associates 2001
10.22 Letter Agreement, dated April 12,.2001, by and Incorporated by reference to Exhibit.10.35 to the
between TSET, Inc. and Daniel R. Dwight and Registration Statement on Form S-1 filed on August 7,
Richard F. Tusing 2001
10.23 Indemnification Agreement, dated May.1, 2001, Incorporated by reference to 2001, by Exhibit 10.37
by and between TSET, Inc. and Jeffrey D. Wilson to the Registration Statement on Form S-1 filed on
August 7, 2001
10.24 Indemnification Agreement, dated May.1, 2001, Incorporated by reference to Exhibit.10.38 to the
by and between TSET, Inc. and Daniel R. Dwight Registration Statement on Form S-1 filed on August 7,
2001
10.25 Indemnification Agreement, dated May.1, 2001, Incorporated by reference to Exhibit.10.39 to the
by and between TSET, Inc. and Richard F. Tusing Registration Statement on Form S-1 filed on August 7,
2001
10.26 Indemnification Agreement, dated May.1, 2001, Incorporated by reference to Exhibit.10.40 to the
by and between TSET, Inc. and Charles D. Strang Registration Statement on Form S-1 filed on August 7,
2001
10.27 Indemnification Agreement, dated May.1, 2001, Incorporated by reference to Exhibit.10.41 to the
by and between TSET, Inc. and Richard A. Registration Statement on Form S-1 filed on August 7,
Papworth 2001
10.28 Indemnification Agreement, dated May 1.2001, Incorporated by reference to Exhibit.10.42 to the
by and between TSET, Inc. and Erik W. Black Registration Statement on Form S-1 filed on August 7,
2001
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10.29 Warrant Agreement, dated July 16,.2001, by and Incorporated by reference to Exhibit.10.49 to the
between TSET, Inc. and The Eagle Rock Group, Registration Statement on Form S-1 filed on August 7,
LLC 2001
10.30 Agreement and Release, dated October.10, 2001, Incorporated by reference to Exhibit.10.50 to the
by and between TSET, Inc. and Jeffrey D. Wilson Registrant's Form 10-K.for the year ended June 30,
2001 filed on October 15, 2001
10.31 Promissory Note dated October 10, 2001.payable Exhibit 10.51 to the Registrant's Form.10-K for the
to Mr. Jeffrey D. Wilson year ended June 30, 2001 filed on October 15, 2001
10.32 Employment Agreement, effective November 15, Incorporated by reference to Exhibit.10.55 to the
2001 by and between TSET, Inc. and Daniel R. Registrant's Form 10-Q.for the quarterly period ended
Dwight March 31, 2002 filed on May 15, 2002
10.33 Common Stock Purchase Agreement dated August Incorporated by reference to Exhibit.10.57 to the
12, 2002 by the between TSET, Inc. and Fusion Registrant's Amendment No. 1 to Form S-1 filed on
Capital Fund II, LLC August 13, 2003
10.34 Registration Rights Agreement, dated August Incorporated by reference to Exhibit.10.58 to the
12, 2002 by and between TSET, Inc. and Fusion Registrant's Amendment No. 1 to Form S-1 filed on
Capital Fund II, LLC August 13, 2002
10.35 Termination Agreement, dated August.12, 2002 Incorporated by reference to Exhibit.10.59 to the
by and between TSET, Inc. and Fusion Capital Registrant's Amendment No. 1 to Form S-1 filed on
Fund II, LLC September 16, 2002
10.36 Master Loan and Investment Agreement, dated Incorporated by reference to the Registrant's 8-K
May 9, 2003, by and among Kronos Advanced filed on May 15, 2003
Technologies, Inc., Kronos Air Technologies,
Inc. and FKA Distributing Co. d/b/a HoMedics,
Inc., a Michigan corporation ("HoMedics")
10.37 Secured Promissory Note, dated May 9,.2003, in Incorporated by reference to Exhibit.99.2 to the
the principal amount of.$2,400,000 payable to Registrant's 8-K filed on May 15, 2003
HoMedics
10.38 Secured Promissory Note, dated May 9,.2003, in Incorporated by reference to Exhibit.99.4 to the
the principal amount of.$1,000,000 payable to Registrant's 8-K filed on May 15, 2003
HoMedics
10.39 Security Agreement dated May 9, 2003,.by and Incorporated by reference to Exhibit.99.4 to the
among Kronos Air Technologies, Inc. and Registrant's 8-K filed on May 15, 2003
HoMedics
10.40 Registration Rights Agreement, dated May 9, Incorporated by reference to Exhibit.99.5 to the
2003, by and between Kronos and HoMedics Registrant's 8-K filed on May 15, 2003
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10.41 Warrant No. 1 dated May 9, 2003,.issued at Incorporated by reference to Exhibit.99.7 to the
HoMedics 8-K filed on May Registrant's 15, 2003
10.42 Warrant No. 2 dated May 9, 2003,.issued at Incorporated by reference to Exhibit.99.7 to the
HoMedics Registrant's 8-K filed on May 15, 2003
10.43 Consulting Agreement effective October.31, Incorporated by reference to Exhibit.10.67 to the
2003, by and among Kronos Advanced Registrant's Form 10-Q.for the quarterly period ended
Technologies, Inc., Steven G. Martin and December 31, 2003 filed on February 17, 2004
Joshua B. on Scheinfeld
10.44 Promissory Note by and among Kronos Advanced Incorporated by reference to Exhibit.10.67 to the
Technologies, Inc., and Richard A. Papworth Registrant's Form 10-Q.for the quarterly period ended
December 31, 2003 filed on February 17, 2004
10.45 Promissory Note by and among Kronos Advanced Incorporated by reference to Exhibit.10.67 to the
Technologies, Inc., and Daniel R. Dwight Registrant's Form 10-Q.for the quarterly period ended
September 30, 2004 filed on May 17, 2004
10.46 Promissory Note by and among Kronos Advanced Incorporated by reference to Exhibit.10.67 to the
Technologies, Inc., and Richard F. Tusing Registrant's Form 10-Q.for the quarterly period ended
September 30, 2004 filed on May 17, 2004
10.47 Promissory Note by and among Kronos Advanced Incorporated by reference to Exhibit.10.67 to the
Technologies, Inc., and Igor Krichtafovitch Registrant's Form 10-Q.for the quarterly period ended
September 30, 2004 filed on May 17, 2004
10.48 Promissory Note by and among Kronos Advanced Incorporated by reference to Exhibit.10.67 to the
Technologies, Inc., and J. Alexander Chriss Registrant's Form 10-Q.for the quarterly period ended
September 30, 2004 filed on May 17, 2004
10.49 Standby Equity Distribution Agreement, dated Incorporated by reference to Exhibit.99.1 to the
October 15, 2004, by and between Kronos Registrant's Form 8-K.filed on November 12, 2004
Advanced Technologies, Inc. and Cornell
Capital Partners, LP
10.50 Registration Rights Agreement, dated October Incorporated by reference to Exhibit.99.2 to the
15, 2004, by and between Kronos Advanced Registrant's Form 8-K.filed on November 12, 2004
Technologies, Inc. and Cornell Capital Partners, LP
10.51 Escrow Agreement, dated October 15,.2004 by Incorporated by reference to Exhibit.99.2 to the
and between Kronos Advanced Technologies, Inc. Registrant's Form 8-K.filed on November 12, 2004
and Cornell Capital Partners, Inc.
II-5
10.52 Placement Agent Agreement, dated October 15, Incorporated by reference to Exhibit.99.4 to the
2004, by and between Kronos Advanced Registrant's Form 8-K.filed on November 12, 2004 and
Technologies, Inc. Cornell Capital Partners, Inc.
10.53 Securities Purchase Agreement, dated October Incorporated by reference to Exhibit.99.5 to the
15, 2004, by and between Kronos Advanced Registrant's Form 8-K.filed on November 12, 2004
Technologies, Inc. and Cornell Capital
Partners, LP
10.54 Investor Registration Rights Agreement, dated Incorporated by reference to Exhibit.99.6 to the
October 15, 2004, by and between Kronos Registrant's Form 8-K.filed on November 12, 2004
Advanced Technologies, Inc. and Cornell Capital Partners, LP
10.55 Escrow Agreement, dated October 15,.2004, by Incorporated by reference to Exhibit.99.7 to the
and between Kronos Advanced Technologies, Inc. Registrant's Form 8-K.filed on November 12, 2004
and Cornell Capital Partners, LP
10.56 Form of Equity-Back Promissory Note in the Incorporated by reference to Exhibit.99.8 to the
principal amount of $2,000,000 Registrant's Form 8-K filed on November 12, 2004
10.57 First Amendment to Master Loan and Investment Incorporated by reference to Exhibit.99.9 to the
Agreement, dated October.25, 2004, by and Registrant's Form 8-K.filed on November 12, 2004
among Kronos Advanced Form Technologies, Inc., f/k/a TSET, Inc., a
Nevada corporation, Kronos Air Technologies, Inc., a
Nevada corporation and FKA Distributing Co. d/b/a
HoMedics, Inc., a Michigan corporation
10.58 Secured Promissory Note, dated October.25, Incorporated by reference to Exhibit.99.10 to the
2004, payable to FKA Distributing Co., d/b/a Registrant's Form 8-K.filed on November 12, 2004
HoMedics, Inc., a Michigan corporation, in the principal amount of $925,000
10.59 Amended and Restated Warrant No. 1,.dated Incorporated by reference to Exhibit.99.11 to the
October 25, 2004, issued to FKA Distributing Registrant's Form 8-K.filed on November 12, 2004
Co. d/b/a HoMedics, Inc.
10.60 Amended and Restated Warrant No. 2,.dated Incorporated by reference to Exhibit.99.12 to the
October 25, 2004, issued to FKA Distributing Registrant's Form 8-K.filed on November 12, 2004
Co. d/b/a HoMedics, Inc.
10.61 Warrant No. 3, dated October 25, 2004,.issued Incorporated by reference to Exhibit.99.13 to the
to FKA Distributing Co. d/b/a. HoMedics, Inc. Registrant's Form 8-K.filed on November 12, 2004
10.62 Amended and Restated Registration Rights 99.14 to the Registrant's Form 8-K.filed on November
Agreement, dated October 25, 2004, 12, 2004 by and between Kronos Advanced Technologies,
Inc., a Nevada corporation and FKA Distributing Co.
d/b/a HoMedics, a Michigan corporation
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10.63 Termination Agreement dated March 28, 2005, by Incorporated by reference to Exhibit 10.63 to the
and between Kronos Advanced Technologies, Inc. Registrant's Form 8-K filed on April 19, 2005
and Cornell Capital Partners, LP
10.64 Standby Equity Distribution Agreement, dated Incorporated by reference to Exhibit 10.64 to the
April 13, 2005, by and between Kronos Advanced Registrant's Form 8-K filed on April 19, 2005
Technologies, Inc. and Cornell Capital
Partners, LP
10.65 Registration Rights Agreement, dated April 13, Incorporated by reference to Exhibit 10.65 to the
2005, by and between Kronos Advanced Registrant's Form 8-K filed on April 19, 2005
Technologies, Inc. and Cornell Capital
Partners, LP
10.66 Escrow Agreement, dated April 13, 2005, by and Incorporated by reference to Exhibit 10.66 to the
between Kronos Advanced Technologies, Inc. and Registrant's Form 8-K filed on April 19, 2005
Cornell Capital Partners, Inc.
10.67 Placement Agent Agreement, dated April 13, Incorporated by reference to Exhibit 10.67 to the
2005, by and between Kronos Advanced Registrant's Form 8-K filed on April 19, 2005
Technologies, Inc. and Cornell Capital
Partners, LP
10.68 Form of Equity-Back Promissory Note in the Incorporated by reference to Exhibit 10.68 to the
principal amount of $2,000,000 dated March 7, Registrant's Form 8-K filed on April 19, 2005
2005 between Kronos Advanced Technologies,
Inc. and Cornell Capital Partners, LP
10.69 Form of Equity-Back Promissory Note in the Incorporated by reference to Exhibit 10.69 to the
principal amount of $2,000,000 dated June 22, Registrant's Form 8-K filed on September 28, 2005
2005 between Kronos Advanced Technologies,
Inc. and Cornell Capital Partners, LP
23.1 Consent of Sherb & Co., LLP Provided herein
23.2 Consent of Burton Bartlett and Glocovac (Included in Exhibit 5.1)
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Undertakings
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of the securities
offered would not exceed that which was registered) and any deviation from the
low or high end of the estimated maximum offering range may be reflected in the
form of a prospectus filed with the Commission pursuant to Rule 424(b) under the
Securities Act if, in the aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement, and
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(4) For determining liability of the undersigned small business issuer
under the Securities Act to any purchaser in the initial distribution of the
securities, the undersigned undertakes that in a primary offering of securities
of the undersigned small business issuer pursuant to this registration
statement, regardless of the underwriting method used to sell the securities to
the purchaser, if the securities are offered or sold to such purchaser by means
of any of the following communications, the undersigned small business issuer
will be a seller to the purchaser and will be considered to offer or sell such
securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned small
business issuer relating to the offering required to be filed pursuant to Rule
424 ;
(ii) Any free writing prospectus relating to the offering prepared by
or on behalf of the undersigned small business issuer or used or referred to by
the undersigned small business issuer;
(iii) The portion of any other free writing prospectus relating to the
offering containing material information about the undersigned small business
issuer or its securities provided by or on behalf of the undersigned small
business issuer; and
(iv) Any other communication that is an offer in the offering made by
the undersigned small business issuer to the purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
II-8
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
Each prospectus filed pursuant to Rule 424(b) as part of a registration
statement relating to an offering, other than registration statements relying on
Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be
deemed to be part of and included in the registration statement as of the date
it is first used after effectiveness. Provided, however, that no statement made
in a registration statement or prospectus that is part of the registration
statement or made in a document incorporated or deemed incorporated by reference
into the registration statement or prospectus that is part of the registration
statement will, as to a purchaser with a time of contract of sale prior to such
first use, supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement or made in
any such document immediately prior to such date of first use.
II-9
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, on October 31, 2006.
KRONOS ADVANCED TECHNOLOGIES, INC.
By: /s/ Daniel R. Dwight
----------------------------------
Name: Daniel R. Dwight
Title: Chief Executive Officer, President
Acting Chief Financial Officer,
Acting Principal Accounting Officer,
and Director
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
Signature Title Date
--------- ------------------------------- ----------------
/s/ Daniel R. Dwight
--------------------
Daniel R. Dwight Director, President, Chief October 31, 2006
Executive Officer, Acting Chief
Financial Officer and Acting
Principal Accounting Officer
/s/ James P. McDermott
-----------------------
James P. McDermott Director October 31, 2006
/s/ M.J. Segal
---------------
M.J. Segal Director October 31, 2006
/s/ Richard R. Tusing
----------------------
Richard R. Tusing Director and Chief Operating October 31, 2006
Officer
II-10