ITEM 1. BUSINESS
GENERAL DESCRIPTION OF BUSINESS
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS. THIS FILING CONTAINS
FORWARD-LOOKING STATEMENTS, INCLUDING STATEMENTS REGARDING, AMONG OTHER THINGS:
(A) OUR PROJECTED SALES AND PROFITABILITY, (B) OUR GROWTH STRATEGIES, (C)
ANTICIPATED TRENDS IN OUR INDUSTRY, (D) OUR FUTURE FINANCING PLANS, (E) OUR
ANTICIPATED NEEDS FOR WORKING CAPITAL, AND (F) THE BENEFITS RELATED TO OUR
OWNERSHIP OF KRONOS AIR TECHNOLOGIES, INC. IN ADDITION, WHEN USED IN THIS
FILING, THE WORDS "BELIEVES," "ANTICIPATES," "INTENDS," "IN ANTICIPATION OF,"
"EXPECTS," AND SIMILAR WORDS ARE INTENDED TO IDENTIFY CERTAIN FORWARD-LOOKING
STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE BASED LARGELY ON OUR
EXPECTATIONS AND ARE SUBJECT TO A NUMBER OF RISKS AND UNCERTAINTIES, MANY OF
WHICH ARE BEYOND OUR CONTROL. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS, INCLUDING, WITHOUT
LIMITATION, THE RISKS OUTLINED UNDER "FACTORS AFFECTING KRONOS' BUSINESS AND
PROSPECTS" AND MATTERS DESCRIBED IN THIS FILING GENERALLY. IN LIGHT OF THESE
RISKS AND UNCERTAINTIES, THERE CAN BE NO ASSURANCE THAT THE FORWARD-LOOKING
STATEMENTS CONTAINED IN THIS FILING WILL IN FACT OCCUR. WE DO NOT UNDERTAKE ANY
OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY REVISIONS TO THESE
FORWARD-LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT ANY FUTURE EVENTS OR
CIRCUMSTANCES.
OUR COMPANY
We are a Nevada corporation. Our principal executive offices are located at 464
Common Street, Suite 301, Belmont, Massachusetts 02478. Our telephone number is
(617) 364-5089. The address of our website is www.kronosati.com. Information on
our website is not part of this filing.
CORPORATE HISTORY
Kronos Advanced Technologies, Inc. ("Kronos" or the "Company") 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, Inc.; 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 is a product development and production company that continues to develop
and patent technology that among other things fundamentally changes the way air
is moved, filtered and sterilized. Kronos is pursuing commercialization of its
proprietary technology in a limited number of markets; and if we are successful
and funds are available, we intend to enter additional markets in the future.
The Company currently has thirteen U.S. patents and three international patents.
To date, our ability to execute our strategy has been restricted by our limited
amount of capital.
Kronos is focused on developing 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 (see "Independent Testing - Product Claims
Platform").
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The Company has begun establishing strategic partners with select companies both
domestically and internationally for standalone and embedded applications of our
proprietary technology. The Company and its partners are in various stages of
developing Kronos-based products.
Standalone Platform
o Residential Products - In December 2006, the Company's Exclusive
License Agreement with HoMedics expired. The Company is in active
discussions with other consumer products companies to market and sell
Kronos-based air purification products through retail, direct selling
and multi-level-marketing distribution channels. In conjunction with
these discussions, the Company has developed and built prototype
devices to customer specifications for their testing and evaluation.
o Medical Products - In December 2005, the Company executed a
non-exclusive license agreement with EOL LLC, a Russian Federation
company ("EOL"), for manufacturing and distributing Kronos-based
commercial standalone products in Russia and other select Commonwealth
of Independent States. The initial medical products are currently
being marketed in Russia and marketing plans are being implanted in
Ukraine, Kazakhstan, Moldova and Byelorussia. In November 2006, the
Ministry of Health Care and Social Development of the Russian
Federation issued a Registration Certificate for the product that
designates the product for medical use. During the fiscal year ended
June 30, 2007, Kronos earned $104,000 in revenue from the sale of
power supplies, other electrical components and engineering services,
and from the royalty from the sale of finished products by EOL. The
Company is in active discussions to enter the U.S. medical market with
one or more medical products distribution companies.
Embedded Platform
o Commercial Products - In June 2006, the Company executed its first
license for embedded applications of Kronos technology with DESA LLC
("DESA"). The agreement provides DESA the opportunity to embed the
Kronos electrostatic air movement technology within fireplaces, hearth
systems, zone heaters and mounted electric fans and heaters. In
October 2006, DESA approved Kronos' designs for the first Kronos-based
product and committed to the funding of the product development by
Kronos. In January 2007, DESA committed additional funds for Kronos
exploration of a second Kronos-based product application. By May 2007,
various prototype configurations for each of the two product
applications were under test and evaluation by Kronos and DESA.
o Residential Products - In October 2006, a leading global home
appliance manufacturer committed to fund 20% of the cost for Kronos to
manufacturer a silent kitchen range hood product. This next generation
range hood device represented the culmination of more than twelve
months of product design and development effort by Kronos to apply our
technology to this unique embedded residential application. The
product was shipped to the customer in October 2006. In January 2007,
the prototype design was modified based on customer input and a
revised unit was shipped to the customer. In addition to financial
support, the customer has also provided Kronos with product components
for Kronos testing and evaluation. In February 2007, a second global
appliance manufacturer committed to purchase prototypes from Kronos
for testing and evaluation. During the year ended June 30, 2007,
Kronos earned $37,000 in revenue from the development of prototype
devices for the residential range hood market place.
o Microelectronics Products - In June 2007, 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. This Phase III award follows the
Company's Phase 1 and Phase II awards in December 2004 and June 2006,
respectively.
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, bacteria and viral
removal, biohazard destruction, 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;
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o high voltage management, including development of high voltage power
supplies and control of energy surges and electrical discharges;
o control of water and moisture content in air streams, including
dehumidification and humidification; and
o water treatment, including water purification, ionization and water
desalination.
Independent Testing - Product Claims Platform
A number of the scientific claims of the Kronos technology have been tested by
the U. S. and foreign governments, multi-national companies and independent
testing facilities. To date, independent laboratory testing has verified the
filtration and sterilization capability of the Kronos technology.
Filtration Testing Results:
o Aerosol and Air Quality Research Laboratory - up to 99.8% filtration
of 0.02 to 0.20 micron (20 to 200 nanometers) size particles;
o LMS Industries - removal of over 99.97% of 0.10 micron (100
nanometers) and above size particles using HVAC industry's ASHRAE 52.2
testing standard for filtration;
o MicroTest Laboratories - HEPA Clean Room Class 1000 quality
particulate reduction; and
o Intertek - tobacco smoke elimination tests in accordance with
ANSI/AHAM AC-1-1988 standard entitled "American National Standard
Method for Measuring Performance of Portable Household Electric
Cord-Connected Room Air Cleaners," which demonstrated a Clean Air
Delivery Rate ("CADR") for the Kronos air purifier of over 300 for the
larger size Kronos air purifier and 80 for the smaller size using
consumer filtration testing standards for the Association of Home
Appliance Manufacturers ("AHAM").
Sterilization Testing Results:
o Scientific Institution of Health Care, Central Clinical Hospital #2 in
Moscow (clinical trial):
- 100% decontamination of bacteria (Staphylococcus aureus) in under
one hour and 80% decontamination of general bacteria in under 24
hours from a 48m(3) hospital room while people were present.
o Pulmonary Department of Municipal Hospital #2 in Moscow (clinical
trial):
- 100% decontamination of bacteria (Staphylococcus aureus) in under
five hours from a 66m(3) hospital room while four patients were
present; and
- 100% decontamination of mildew fungi in under two hours from a
113.2m(3) hospital room.
o Disinfection Research Institute Sterilization Laboratory in Moscow:
- disinfected a room completely contaminated with Bacteriophage - a
microorganism which lives in the E. Coli bacteria. (Bacteriophage
is widely used in virus testing because the microorganism's
biological structure and size share many functional similarities
with a wide range of viruses); and
- 100% decontamination of room infected with bacteria
(Staphylococcus aureus strain 906 (S. aureus) and Bacillus cereus
strain 96 (B. cereus) - S. aureus is a known cause of
hospital-acquired infections, including skin lesions such as
boils and furunculosis and more serious infections such as
pneumonia and meningitis.
o Institute for Veterinary Medicine in the Ukraine - destroy and
sterilize air which had been inseminated with Anthrax and E.coli
spores;
o New Hampshire Materials Laboratory - up to 95% reduction of hazardous
gases, including numerous carcinogens found in cigarette smoke;
o Battelle PNNL - 95% destruction of Bg (anthrax simulant); and
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o Dr. Sergey Stoylar, a bacteriologist from the American Bacteriological
Society - 100% destruction of Bacillus subtilis 168 (bacteria
simulant).
Medical Product Approval
In September 2006, the Russian Research Institute of Medical Equipment approved
EOL's Kronos-based Tree(TM) air purification device for use in hospitals and
other healthcare facilities. The device received Category I approval, which
means the product has met the strictest regulations required for a device to be
used in operating rooms and other areas that require a sterile environment. In
November 2006, following the Russian Research Institute approval, the Ministry
of Health Care and Social Development of the Russian Federation issued a
Registration Certificate that designates the Kronos-based Tree(TM) air
purification device for medical use.
Market Segmentation
Kronos' initial business development strategy is to develop and produce products
based on the Kronos technology to six distinct air quality market segments: (1)
air movement and purification (residential, health care, hospitality, and
commercial facilities); (2) air purification for unique spaces (clean rooms,
airplanes, automotive, and cruise ships); (3) embedded cooling and cleaning
(electronic devices and medical equipment); (4) specialized military (naval
vessels, closed vehicles and mobile facilities); (5) industrial scrubbing
(produce storage and diesel and other emissions); and (6) hazardous gas
destruction (incineration and chemical facilities).
Kronos' current focus is on the first three of these market segments, which are
described in more detail below:
o Air Movement and Purification - Indoor air pollution, including sick
building syndrome, second hand cigarette smoke and various bacterial
and viral contaminants, is primarily caused by inadequate ventilation,
chemical contaminants from indoor and outdoor sources and biological
contaminants. There is also a demand for smaller devices that move,
heat and deodorize the indoor air stream. The addressable air movement
and purification segment is made up of four principal target markets:
(1) residential, (2) health care, (3) hospitality and (4) commercial
facilities.
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.
Kronos is currently developing products for the air movement and purification
and air purification for unique spaces markets through specific customer
contracts. Kronos is currently undertaking research and development in the
embedded micro cooling market using Company funds and third party grants. These
contracts and grants are described in more detail in the Technology Application
and Product Development section of this filing.
Technology Application and Product Development
To best serve Kronos' targeted market segments, our Company is developing
specific product applications across two distinct product application platforms.
A Kronos device can be either used as a standalone product or can be embedded.
Standalone products are self-contained and only require the user to plug the
Kronos device into a wall outlet to obtain air movement and filtration for their
home, office or hotel room. Embedded applications of the Kronos technology
require the technology be added into another system, such as a building
ventilation system for more efficient air movement and filtration or into an
electrical device such as computer or medical equipment to replace the cooling
fan or heat sink.
Standalone Platform
Residential Products. Since the October 2002 Exclusive License Agreement with
HoMedics expired in December 31, 2006, the Company has been in active
discussions with other consumer products companies to market and sell
Kronos-based air purification products through retail, direct selling and
multi-level-marketing distribution channels. In conjunction with these
discussions, the Company has developed and built prototype devices to customer
specifications for their testing and evaluation.
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Medical Products. In December 2005, the Company executed a non-exclusive license
agreement with EOL LLC, a Russian Federation company ("EOL"), for manufacturing
and distributing Kronos-based commercial standalone products in Russia and other
select Commonwealth of Independent States. The initial medical products are
currently being marketed in Russia and marketing plans are being implanted in
Ukraine, Kazakhstan, Moldova and Byelorussia. In November 2006, the Ministry of
Health Care and Social Development of the Russian Federation issued a
Registration Certificate for the product that designates the product for medical
use. During the fiscal year ended June 30, 2007, Kronos earned $104,000 in
revenue from the sale of power supplies, other electrical components and
engineering services and from the royalty from the sale of finished products by
EOL.
In August 2006, the Russian Research Institute of Medical Equipment began the
process for product certification of the EOL's Kronos-based Tree(TM) air
purification device for use in medical facilities, including a successful
clinical trial of EOL products in the Pulmonary Department of Municipal Hospital
#2 in Moscow. In October 2006, Scientific Institution of Health Care, Central
Clinical Hospital #2 in Moscow completed a second clinical trial. As a result of
these clinical trials, the Russian Research Institute approved the Kronos-based
Tree(TM) air purification device for use in hospitals and other healthcare
facilities. The device received Category I approval, which means the product has
met the strictest regulations required for a device to be used in operating
rooms and other areas that require a sterile environment. In November 2006,
following the Russian Research Institute approval, the Ministry of Health Care
and Social Development of the Russian Federation issued a Registration
Certificate that designates the Kronos-based Tree(TM) air purification device
for medical use.
The Company is in active discussions to enter the U.S. medical market with one
or more medical products distribution companies.
Commercial and Other Standalone Products. Utilizing our expanded product
development resources, Kronos completed the initial design, development and
production of a series of small multifunctional devices that can be used as
space heaters, vaporizers, disinfectors, deodorizers and/or fans. Based on the
proprietary Kronos technology, these devices are currently undergoing testing
and evaluation. Kronos has been meeting with potential strategic partners for
manufacturing, marketing, selling and distributing these Kronos-based products.
Embedded Platform
Commercial Products. In June 2006, the Company executed its first license for
embedded applications of Kronos technology with DESA LLC ("DESA"). The agreement
provides DESA the opportunity to embed the Kronos electrostatic air movement
technology within fireplaces, hearth systems, zone heaters and mounted electric
fans and heaters. In October 2006, DESA approved Kronos' designs for the first
Kronos-based product and committed to the funding of the product development by
Kronos. In January 2007, DESA committed additional funds for Kronos exploration
of a second Kronos-based product application. By May 2007, various prototype
configurations for each of the two product applications were under test and
evaluation by Kronos and DESA.
In addition, Kronos has developed an air filtration and purification mechanism
capable of performing to HEPA quality standards, while eliminating bacteria and
viruses. The Company believes that Kronos devices could replace current HEPA
filters with a permanent, easily cleaned, low-cost solution. Among the technical
advantages of the Kronos technology over HEPA filters is the ability of the
Kronos-based devices to eliminate the energy burden on air handling systems,
which must generate high levels of backpressure necessary to move air through
HEPA-based systems. Kronos-based devices enhance the air flow while providing
better than HEPA level filtration and purification. Kronos is seeking one or
more strategic partners to commercialize, market and distribute Kronos based
commercial embedded air filtration and purification devices.
Residential Products. In October 2006, a leading global home appliance
manufacturer committed to fund 20% of the cost for Kronos to manufacturer a
silent kitchen range hood product. This next generation range hood device
represented the culmination of more than twelve months of product design and
development effort by Kronos to apply our technology to this unique embedded
residential application. The product was shipped to the customer in October
2006. In January 2007, the prototype design was modified based on customer input
and a revised unit was shipped to the customer. In addition to financial
support, the customer has also provided Kronos with product components for
Kronos testing and evaluation. In February 2007, a second global appliance
manufacturer committed to purchase additional prototypes from Kronos for testing
and evaluation. During the year ended June 30, 2007, Kronos earned $37,000 in
revenue from the development of prototype devices for the residential range hood
market place.
Transportation Products. In April 2006, Kronos was invited to serve as a member
and an industrial partner in the Federal Aviation Administration's (the "FAA")
Air Transportation Airliner Cabin Environment Research Center of Excellence. In
this capacity, Kronos is providing 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.
Microelectronics Cooling Products. In December 2004, Kronos and the University
of Washington were awarded a Phase I grant for a research and technology
development project entitled "Heat Transfer Technology for Microelectronics and
MEMS" by the Washington Technology Center (the "WTC"). The objective of the
project is to develop a novel energy-efficient heat transfer technology for
cooling microelectronics. In January 2006, Kronos and the University of
Washington conducted a successful bench scale demonstration of micron cooling of
a MEMS chip. In June 2006, the Company and the University of Washington were
awarded a Phase II grant for continued funding in its novel cooling system for
microelectronics and computer chips. The WTC contributed $100,000 as a Phase II
grant for the project. Kronos provided $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 is leading a team of
scientists and engineers from Kronos and Intel Corporation who are also
collaborating on the project. In September 2006, Kronos hired a former Intel
employee to lead Kronos' development of micro cooling applications.
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In June 2007, the Company and the University of Washington were awarded a Phase
III grant for continued funding. This additional funding is to support the
further development of prototype products. The WTC is contributing $100,000.
Kronos will provide $20,000 in funding and $20,000 in in-kind services,
including use of the Kronos Research and Product Development Facility.
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 currently has thirteen registered patents with the United States Patent
and Trademark Office and three international patents registered with the
Canadian Intellectual Property Office, the Commonwealth of Australia Patent
Office and the Mexican Institute of Industrial Property. These patents are
considered utility patents which describe fundamental innovations in the
generation, management and control of electrostatic fluids, including air
movement, filtration and purification. Each of the patents contain multiple part
claims for both general principles as well as specific designs for incorporating
the Kronos technology into air movement, filtration and purification products.
The patents provide protection for both specific product implementations of the
Kronos technology, as well as more general processes for applying the unique
attributes and performance characteristics of the technology.
U.S. Patents
Date U.S. Patent # Patent Title Description Protection
---- ------------- ------------ ----------- ----------
August 7,262,564 Alternative geometry, voltage ratios 2024
2007 Geometries and and power requirements
Voltage Supply for improved operational
Management performance
July 7,248,003 Electric Field effective electric field 2025
2007 Management management for reduced
sparking
October 7,122,070 Method of and inertialess power supply for 2025
2006 Apparatus for safe operation and spark
Electrostatic Fluid prevention
Acceleration
August 7,157,704 Corona Discharge method of generating air 2023
2006 Electrode and Method flow and air cleaning with
of Operating reduced amount of ozone by-
product and with extended
life-span of the electrodes
July 7,150,780 Electrostatic Air method for improving the 2024
2006 Cleaning Device efficiency of electrodes for
filtering micron and sub-
micron size particles
May 7,053,565 Electrostatic Fluid effective powering of the 2024
2006 Accelerator - Power electrodes for high level of
Management air velocity
November 6,963,479 Electrostatic Fluid advanced voltage management 2023
2005 Accelerator - impacts air filtration and
Advanced Geometries sterilization, air flow and
ozone as well as safe operation
and spark prevention
August 6,937,455 Spark Management analysis, detection and 2022
2005 Method and Device prevention of sparks in a
high voltage field -
creating safe, effective
electrostatic technology
products
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|
July 6,919,698 Voltage Management materials and geometry 2023
2005 for Electrostatic allowing for spark free
Fluid Accelerator operation and use of light
weight, inexpensive
materials as the electrodes
May 6,888,314 Electrostatic Fluid electrode design geometries 2022
2005 Accelerator - and attributes including
Electrode Design micro channeling to achieve
Geometries unique air movement and
purification performance
April 6,727,657 Electrostatic Fluid synchronization of multiple 2022
2004 Accelerator for and stages of arrays -
a Method of increasing air flow and air
Controlling Fluid flow efficiency
December 6,664,741 Method of and ratio of voltage for 2022
2003 Apparatus for producing ion discharge to
Electrostatic Fluid create air movement and
Acceleration Control base level filtration
of a Fluid Flow
January 6,504,308 Electrostatic Fluid electrode density core for 2019
2003 Accelerator producing ion discharge to
create air movement and
base level filtration
|
International Patents
In April 2007, Kronos received formal notification from the Canadian
Intellectual Property Office indicating that its application entitled
"Electrostatic Fluid Accelerator" has been examined and allowed for issuance as
a Canadian 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 approved as a
Mexican patent. 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 approved as an
Australian patent. There are a number of other patent applications corresponding
to Kronos' thirteen U.S. Patents that have been filed and are pending outside of
the United States.
Kronos intends to continue to aggressively file patent applications in the U.S.
and internationally. A number of additional patent applications have been filed
for, among other things, the control and management of electrostatic fluid
acceleration. These additional patent applications are either being examined or
are awaiting examination by the Patent Office.
MILESTONES
Our primary business objectives over the prior 12 months was to secure the
funding to support the Company's effort to commercialize its proprietary
technology while continuing to expand our research into new product
applications. In the fiscal year ended June 30, 2007, the Company received
$4,459,000 in funding from investors with an investor option to fund an
additional $13,900,000. In addition during the fiscal year ended June 30, 2007,
the Company received $1,380,000 in funding from Cornell Capital Partners and
$160,000 in customer funded product development work and licensing revenue from
the sale of Kronos-based products. The Company was also able to restructure its
debt during the fiscal year ended June 30, 2007 by settling in full $3,082,000
in outstanding debt inclusive of interest to HoMedics through a $1,000,000
payment under the terms of the Company and HoMedics' Settlement Agreement and
General Release and repayment in full $1,650,000 in debt with Cornell Capital
Partners.
Our second objective was to launch Kronos-based standalone consumer products.
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 objective of
having its residential, retail consumer products partner brought to market. As a
result, in December 2006, the Company allowed its license agreement to expire
with that partner, HoMedics USA, Inc. The expiration of this agreement
positioned the Company to identify and initiate discussion with new strategic
partners in the residential market place who have the willingness and viability
to bring Kronos-based consumer air purification products to market.
Our third objective was to execute on our agreements with EOL and DESA. The
Company provided technical services and electronics to EOL as EOL completed
development of a medical air purifier and began selling the product into the
hospital marketplace. The Company generated $104,000 in revenue during the
fiscal year ended June 30, 2007 through the sale of Kronos proprietary
electronics and from royalties from EOL sale of Kronos-based air purification
devices in Russia and other select Commonwealth of Independent States. The
Company provided technical support for embedded applications of Kronos
technology with DESA by designing and building prototype devices for DESA in the
embedded residential fireplace market.
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In addition, during the year the Company (i) executed on a Phase II award and
obtained a Phase III award from the Washington Technology Center in conjunction
with the University of Washington and Intel Corporation for a research and
development project based on a novel cooling system for microelectronics and
computer chips; (ii) continued 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 (iii) 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. These opportunities generated $37,000 in
revenue during the fiscal year ended June 30, 2007 and a commitment for an
additional $34,000 in funding in fiscal 2008.
The Company was able to achieve these successes through the expansion of (i) our
product development resources to better position Kronos' ability to address
specific customer issues and needs; (ii) 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 Staphylococcus aureus and Bacillus cereus
bacteria; and (iii) our intellectual property.
Our primary business objectives over the next twelve months are to (i) secure
commitments from one or more distributors of residential standalone air
purifiers for the purchase of Kronos developed and manufactured air purifiers,
(ii) secure access to one or more viable contract manufactures to produce these
products, (iii) execute on our agreements with EOL and DESA, and (iv) secure new
strategic partner(s) for developing new product applications.
In order to achieve these objectives the Company will need to (i) expand our
product development and engineering resources to better position Kronos to
address specific customer issues and needs, (ii) secure commitments from one or
more distributors of residential range hoods for the purchase of Kronos
developed and manufactured air purifiers, and (iii) continue to implement our
intellectual property strategies, including continuation of our U.S. and
international patent filing process to enable a full development and effective
management of our intellectual property rights and assets. We believe that
execution on our business plan will be achieved through the funding from Kronos'
new investors, AirWorks and Hilltop, from customer funded product development
work and from revenue from the sale of Kronos-based products and services.
AIRWORKS AND HILLTOP SECURED CONVERTIBLE DEBT TRANSACTION
In June 2007, Kronos entered into a Funding Agreement with a group of lenders
providing for a loan, at the discretion of the lenders, in the aggregate amount
of up to $18,159,000. At the initial closing, the Company received an initial
advance of $4,259,000. After payment in full of the amounts due under an
outstanding convertible debenture issued to Cornell Capital Partners, the
settlement agreement obligation to HoMedics and the expenses of the transaction,
the remainder of $1,069,000 was used for working capital purposes.
The initial new lenders were: (i) AirWorks Funding LLLP, a newly-formed limited
partnership ("AirWorks"); (ii) Critical Capital Growth Fund, L.P. and various
Sands Brothers Venture Funds, all of which are affiliates of Laidlaw and Co.
(UK) Ltd. (collectively "Sands") and (iii) RS Properties I LLC, a New York-based
private investment company ("RS Properties"). Subsequently, RS Properties
assigned to Hilltop Holding Company, LP, a Delaware limited partnership,
(`Hilltop") its promissory note together with certain other rights and
agreements relating thereto, including, without limitation, its rights and
obligations under the Funding Agreement.
The loan is secured by all of the Company's assets and is convertible into
shares of the Company's common stock at a conversion price of $0.0028 per share,
subject to adjustment under certain circumstances. Future installments under the
Funding Agreement, up to $13,900,000, may be advanced at the discretion of the
lenders, even if not requested by the Company. Under the Funding Agreement and
related notes, the Company pays interest at the rate of 12% per annum. Of the
total amount of the initial advance, interest is paid monthly starting July 1,
2007 on $859,000, which principal amount is due and payable December 31, 2007.
Such amount may be converted into Kronos common stock at the option of the
holder at the $0.0028 conversion price only if not paid in full by December 31,
2007. With respect to all other loan amounts, interest is paid quarterly
starting January 1, 2008 and outstanding principal is due and payable June 19,
2010, unless earlier converted at the option of the lenders. Assuming payment
when due of the $859,000, that the maximum loan amount is advanced under the
Funding Agreement and related notes and that the lenders convert the entire
amount of the loan into Kronos common stock at the noted conversion price, the
lenders would own approximately 93.3% of the Company's total equity on a fully
diluted, as converted basis.
Also in connection with the Funding Agreement, several Kronos option and warrant
holders delivered standstill agreements pursuant to which such holders agreed
not to exercise their options or warrants before December 31, 2007. Several
stockholders also entered into Voting Agreements with the lenders pursuant to
which they agreed to vote, if and when proposed to shareholders, in favor of:
(i) a slate of directors of the Company's board of directors as proposed by
AirWorks; (ii) adjusting the size of the Company's board of directors such that
upon the election of the slate of directors proposed by AirWorks, such directors
hold a majority of the seats on the Company's board of directors; (iii)
approving an amendment to the Company's articles of incorporation to increase
the Company's authorized common stock to a number of shares necessary to allow
the lenders to convert the entire amount of the financing into shares of common
stock of the Company as provided in the Notes and the Funding Agreement; (iv)
reincorporating the Company in Delaware; (v) a reverse stock split proposed by
AirWorks or the Company's board of directors; and (vi) against any action or
transaction that may reasonably be expected to impede, interfere with, delay,
postpone or attempt to discourage the consummation of any of the foregoing. Such
standstill and voting agreements, combined with the conversion into Kronos
common stock of a sufficient amount of the initial advance under the Funding
Agreement, would give the lenders voting control of the Company.
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The Funding Agreement also gives the lenders the right to designate a majority
of the members of the Company's Board of Directors. Such right has not yet been
exercised. The Funding Agreement also contains usual and customary
representations and warranties and covenants that prohibit the Company from
undertaking certain actions without the consent of AirWorks.
HOMEDICS SENIOR DEBT TRANSACTION
In May 2003, Kronos entered into an agreement with FKA Distributing Co. d/b/a
HoMedics, Inc., ("HoMedics") for $2,500,000 in financing, including $2,400,000
in secured debt financing and $100,000 for the purchase of warrants. $2,500,000
was paid to Kronos upon execution of the agreement. In October 2004, Kronos and
HoMedics agreed to extend repayment of Kronos debt and to provide an additional
$1,000,000 on in funding consisting of $925,000 in secured debt financing and
$75,000 for the purchase of additional warrants. In December 2005, $175,000 of
the $925,000 was funded. The balance of $750,000 was not funded. In addition,
quarterly debt payments and the maturity date for existing debt were extended.
Quarterly payments due on the outstanding $2,400,000 in secured debt financing,
which had been scheduled to begin in August 2004, were due in February 2007. The
maturity date of the $2,400,000 in debt had been extended from May 2008 to
October of 2009; the maturity date on the $175,000 was extended to October 2009.
The interest rate was at 6% for the $2,400,000 in debt; the rate was also 6% on
the additional debt. HoMedics increased their potential equity position in
Kronos to 30% of Kronos common stock on a fully diluted basis. In connection
with the October 2004 agreements, Kronos issued HoMedics a warrant to buy 26.5
million shares of Kronos common stock. In February 2007, HoMedics and Kronos
executed a Settlement Agreement and General Release whereby among other things
HoMedics agreed to receive $1,000,000 in a cash payment to cancel the loan
agreements, including all principal and accrued interest, and to cancel the
warrants to purchase 26.5 million shares of the Company's common stock and the
anti-dilution provisions of the warrants. In June 2007, Kronos made the
$1,000,000 payment under the terms of a Settlement Agreement and General
Release.
CORNELL CAPITAL TRANSACTIONS
In October 2004, Kronos entered into agreements for up to $20,500,000 in equity
and equity backed debt financing from Cornell Capital Partners. Cornell Capital
Partners provided $4,000,000 pursuant to two Promissory Notes, which were funded
as follows: $2,000,000 upon filing a Registration Statement and $2,000,000 upon
the SEC declaring the Registration Statement effective. Kronos executed a
Standby Equity Distribution Agreement for $20,000,000 of funding which Kronos
had the option to drawdown against. As of June 30, 2006, Kronos had repaid the
first Promissory Note in full and as of June 30, 2007 had repaid the second
Promissory Note in full. On June 19, 2007, the Company cancelled the Standby
Equity Distribution Agreement.
EMPLOYEES
On September 26, 2007, Kronos and its subsidiaries had fifteen full-time
employees. Of the total number of full-time employees, one works in general
management, ten in product development, three in research, and one in marketing
and sales and operations. None of the employees are represented by unions. There
has been no disruption of operations due to a labor dispute. We consider our
relations with our employees to be good.
FACTORS AFFECTING KRONOS' BUSINESS AND PROSPECTS
We are subject to various risks which may have a material adverse effect on our
business, financial condition and results of operations, and may result in a
decline in our stock price. Certain risks are discussed below:
We do not have sufficient cash to continue operations and require significant
additional financing to sustain our operations.
At June 30 2007 and June 30, 2006, we had a working capital deficit of
$1,208,000 and $2,559,000, respectively. The Report of Independent Registered
Public Accounting Firm for the year ended June 30, 2007, includes an explanatory
paragraph to their audit opinion stating that our recurring losses from
operations and working capital deficiency raise doubt about our ability to
continue as a going concern. For the fiscal years ended June 30, 2007 and 2006,
we had an operating cash flow deficit of $3,029,000 and $2,615,000 and a cash
balance of $364,000 and $598,000, respectively. Funding may be available to
Kronos through AirWorks and Hilltop. However, Kronos has not determined if this
funding will be sufficient, because the lenders, at their sole discretion,
control the timing of and whether such funding will occur.
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We have a limited operating history with significant losses and expect losses to
continue for the foreseeable future.
We have only recently begun implementing our plan to prioritize and concentrate
our management and financial resources to fully capitalize on our investment in
Kronos Air Technologies and have yet to establish any history of profitable
operations. We incurred a net loss of $2,351,000 for the fiscal year ended June
30, 2007 and a net loss of $4,000,000 for the fiscal year ended June 30, 2006.
As a result, at June 30, 2007 and June 30, 2006, we had an accumulated deficit
of $33,469,000 and $31,117,000, respectively. Our revenues and cash flows from
operations have not been sufficient to sustain our operations. We have sustained
our operations through the issuance of our common stock and the incurrence of
debt. We expect that our revenues and cash flows from operations will not be
sufficient to sustain our operations for the foreseeable future. Our
profitability will require the successful commercialization of our Kronos
technologies. No assurances can be given that we will be able to successfully
commercialize our Kronos technologies or that we will ever be profitable. If we
do not achieve profitability we could be forced to curtail or cease our business
operations.
Existing stockholders will experience significant dilution from our sale of
shares under any equity financing.
The sale of shares pursuant to the conversion of the AirWorks and Hilltop
Secured Convertible Promissory Note, the exercise of stock options and 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.
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 greater financial, research and development, manufacturing, and
sales and marketing resources than we do. Many of the products sold by Kronos'
competitors already have brand recognition and established positions in the
markets that we have targeted for penetration. In the event that the Kronos
products do not favorably compete with the products sold by our competitors, we
would be forced to curtail or cease our business operations.
Our failure to enforce protection of our intellectual property would have a
material adverse effect on our business.
A significant part of our success depends in part on our ability to obtain and
defend our intellectual property, including patent protection for our products
and processes, preserve our trade secrets, defend and enforce our rights against
infringement and operate without infringing the proprietary rights of third
parties, both in the United States and in other countries. Our limited amount of
capital impedes our current ability to protect and defend our intellectual
property. The validity and breadth of our intellectual property claims in ion
wind generation and electrostatic fluid acceleration and control technology
involve complex legal and factual questions and, therefore, may be highly
uncertain. Despite our efforts to protect our intellectual proprietary rights,
existing copyright, trademark and trade secret laws afford only limited
protection. Our industry is characterized by frequent intellectual property
litigation based on allegations of infringement of intellectual property rights.
Although we are not aware of any intellectual property claims against us, we may
be a party to litigation in the future. If we are unable to enforce protection
of our intellectual property, we could be forced to curtail or cease our
business operations.
Possible future impairment of intangible assets would have a material adverse
effect on our financial condition.
Our net intangible assets of approximately $1,723,000 as of June 30, 2007
consist principally of purchased patent technology and marketing intangibles,
which relate to the acquisition of Kronos Air Technologies, Inc. in March 2000
and to the acquisition of license rights to fuel cell, computer and
microprocessor applications of the Kronos technology not included in the
original acquisition of Kronos Air Technologies, Inc. in May 2003 and
capitalized legal costs for securing patents. Intangible assets comprise 82% of
our total assets as of June 30, 2007. Intangible assets are subject to periodic
review and consideration for potential impairment of value. Among the factors
that could give rise to impairment include a significant adverse change in legal
factors or in the business climate, an adverse action or assessment by a
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 Kronos-based products. 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.
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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 $2,000,000 (if the
issuer has been in continuous operation for at least three years) or
$5,000,000 (if in continuous operation for less than three years), or
with average revenues of less than $6,000,000 for the last three
years.
Broker/dealers dealing in penny stocks are required to provide potential
investors with a document disclosing the risks of penny stocks. Moreover,
broker/dealers are required to determine whether an investment in a penny stock
is a suitable investment for a prospective investor. These requirements may
reduce the potential market for our common stock by reducing the number of
potential investors. This may make it more difficult for investors in our common
stock to resell shares to third parties or to otherwise dispose of them. This
could cause our stock price to decline.
We rely on management and research personnel, the loss of whose services could
have a material adverse effect upon our business.
We rely principally upon the services of our senior executive management, and
certain key employees, including the Kronos research and product development
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 product 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.