SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2008
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ __, ____ to _____________ __, ____
Commission File Number: 000-30191 KRONOS ADVANCED TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
/X/ Quarterly Report Pursuant to Section 13Nevada | 87-0440410 |
(State or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended SEPTEMBER 30, 2001
/ / Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from __________ to __________
Commission File No. 000-30191
TSET, INC.
----------
(Exact name of registrant as specified in its charter)
NEVADA 87-0440410
------ ----------
(State of other jurisdiction of | (I.R.S. Employer |
incorporation or organization) (I.R.S. Employer | Identification Number)
14523 WESTLAKE DRIVE, LAKE OSWEGO, OREGON 97034
----------------------------------------- -----
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (503) 598-1900
- --------------------------------------------------- --------------
(1) Registrant has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and
(2) has been subject to such filing requirements for the past 90 days.
No.) |
/X/464 Common Street, Suite 301, Belmont, MA 02478
(Address of principal executive offices) (Zip Code)
(617) 364-5089
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
[X] Yes / /[_] No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] (Do not check if a smaller reporting company) Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
[_] Yes [X] No
As of
November 12, 2001,February 11, 2009, there were
34,643,695487,626,691 shares outstanding of the issuer's common stock.
PART I
ITEM 1. FINANCIAL STATEMENTS
The following comprise our condensed (unaudited) consolidated financial statements for the three months ended September 30, 2001.
2008.
2
TSET, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, JUNE 30,
2001 2001
-------------------- -------------------
(UNAUDITED) (AUDITED)
ASSETS
CURRENT ASSETS
Cash $ 97,645 $ 32,619
Prepaids 60,106 37,679
-------------------- -------------------
TOTAL CURRENT ASSETS 157,751 70,298
-------------------- -------------------
PROPERTY AND EQUIPMENT 62,723 62,723
Less: Accumulated Depreciation (21,848) (18,016)
-------------------- -------------------
NET PROPERTY AND EQUIPMENT 40,875 44,707
-------------------- -------------------
OTHER ASSETS
Intangibles 2,400,423 2,431,524
Deferred financing fees 595,800 520,800
-------------------- -------------------
2,996,223 2,952,324
TOTAL OTHER ASSETS -------------------- -------------------
TOTAL ASSETS $3,194,849 $3,067,329
==================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $785,357 $323,045
Accrued expenses 1,249,730 1,284,268
Notes payable, current portion 629,221 313,900
-------------------- --------------------
TOTAL CURRENT LIABILITIES 2,664,308 1,921,213
Net liabilities of discontinued operations 750,096 667,550
-------------------- -------------------
TOTAL LIABILITIES 3,414,404 2,588,763
-------------------- -------------------
Redeemable warrants 686,000 -
SHAREHOLDERS' EQUITY
Common stock, authorized 500,000,000
shares of $.001 par value 34,240 34,001
Capital in excess of par value 12,498,224 12,418,350
Deferred equity compensation (411,600) -
Retained earnings (Accumulated deficit) (13,026,419) (11,973,785)
-------------------- -------------------
TOTAL SHAREHOLDERS' EQUITY (905,555) 478,566
-------------------- -------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,194,849 $3,067,329
==================== ===================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
TSET, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------
FOR THE QUARTER ENDED SEPTEMBER 30,
--------------------------------------------
2001 2000 (RESTATED)
(UNAUDITED) (UNAUDITED)
-------------------- --------------------
Sales $ 25,014 $ -
Cost of sales 10,014 -
-------------------- --------------------
Gross Profit 15,000 -
-------------------- --------------------
Selling, General and Administrative expenses
Compensation and benefits 176,218 289,132
Research and development 90,191 52,567
Professional services 644,817 19,498
Depreciation and amortization 71,674 79,121
Other selling general & administrative expenses 66,711 92,808
-------------------- --------------------
Total Selling, General and Administrative expenses 1,049,611 533,126
-------------------- --------------------
Net Operating Income (Loss) (1,034,611) (533,126)
Other Income / (expense) 269
Interest Expense (18,292) -
-------------------- --------------------
Net Income (Loss) Before Taxes $ (1,052,634) $ (533,126)
==================== ====================
Provision for Taxes - -
-------------------- --------------------
Net Income (Loss) from continuing operations $ (1,052,634) (533,126)
Income (Loss) from discontinued operations, net
of income tax of $0 - (360,356)
Loss on disposal of discontinued operations, net of
income tax of $0 - -
-------------------- --------------------
Net Income (Loss) $ (1,052,634) $ (893,482)
==================== ====================
Basic Earnings (Loss) Per Share
Income (loss) from continuing operations (0.03) (0.02)
Loss from discontinued operations - (0.01)
-------------------- --------------------
Net Income (loss) $ (1,052,634) $ (0.03)
==================== ====================
Diluted Earnings (Loss) Per Share
Income (loss) from continuing operations (0.03) (0.02)
Loss from discontinued operations - (0.01)
-------------------- --------------------
Net Income (loss) $ (0.03) $ (0.03)
==================== ====================
4
TSET, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE QUARTER ENDED SEPTEMBER 30,
-----------------------------------
2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES (RESTATED)
(UNAUDITED) (UNAUDITED)
-----------------------------------
NET LOSS FROM CONTINUING OPERATIONS $(1,052,634) $ (533,126)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
(USED IN) PROVIDED BY OPERATIONS
Depreciation and amortization 71,674 79,121
Common stock/warrants issued for compensation/services 274,513 6,560
CHANGE IN
Inventory - (40,000)
Accounts receivable - 4,648
Prepaid expenses and other assets (97,427) (26,750)
Accounts payable 462,312 41,642
Accrued expenses and other liabilities (34,538) 15,776
------------------------------
NET CASH (USED IN) PROVIDED BY CONTINUING OPERATIONS (376,100) (452,129)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment - (9,526)
Investment in patent protection (36,740) -
Investment in discontinued operations 82,545 (79,999)
------------------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES 45,805 (89,525)
------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short-term borrowings 315,321 -
Issuance of common stock 80,000 1,021,000
----------------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES 395,321 1,021,000
-----------------------------
NET (DECREASE) INCREASE IN CASH 65,026 479,346
CASH
BEGINNING OF PERIOD 32,619 102,949
-----------------------------
END OF PERIOD $ 97,645 $ 582,295
=============================
Supplemental schedule of non-cash investing and financing activities:
Interest paid in cash $ - $ -
Income taxes $ - $ -
Non-cash financing activities:
Debt satisfied with stock $ - $ 419,143
KRONOS ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
| | September 30, | | | June 30, | |
| | 2008 | | | 2008 | |
| | (Unaudited) | | | (Audited) | |
Assets | | | | | | |
| | | | | | |
Current Assets | | | | | | |
Cash | | $ | 415,971 | | | $ | 871,970 | |
Other Current Assets | | | 109,372 | | | | 151,044 | |
Total Current Assets | | | 525,343 | | | | 1,023,014 | |
Net Property and Equipment | | | 10,298 | | | | 11,244 | |
| | | | | | | | |
Intangibles | | | 1,473,885 | | | | 1,546,493 | |
Total Assets | | $ | 2,009,526 | | | $ | 2,580,750 | |
| | | | | | | | |
| | | | | | | | |
Liabilities and Stockholders' Deficit | | | | | | | | |
| | | | | | | | |
Current Liabilities | | | | | | | | |
Accounts payable | | $ | 404,575 | | | $ | 577,028 | |
Accrued interest expenses | | | 543,485 | | | | 431,300 | |
Accrued expenses | | | 236,527 | | | | 323,751 | |
Accrued expenses and payables to officers | | | 9,617 | | | | 6,303 | |
Deferred revenue | | | 615,383 | | | | 173,074 | |
Notes payable, current portion | | | 4,773,559 | | | | 4,773,559 | |
Discount for Beneficial Conversion Feature | | | - | | | | (3,314,620 | ) |
Notes payable to officers | | | 110,484 | | | | 110,484 | |
Total Current Liabilities | | | 6,693,630 | | | | 3,080,879 | |
| | | | | | | | |
Total Liabilities | | | 6,693,630 | | | | 3,080,879 | |
| | | | | | | | |
Stockholders' Deficit (Common stock, | | | | | | | | |
authorized 500,000,000 shares of | | | | | | | | |
$0.001 par value; Issued and outstanding - | | | | | | | | |
487,626,691 and 487,626,691, respectively) | | | 487,627 | | | | 487,627 | |
Capital in excess of par value | | | 36,837,962 | | | | 36,837,962 | |
Accumulated deficit | | | (42,009,693 | ) | | | (37,825,718 | ) |
Total Stockholders' Deficit | | | (4,684,104 | ) | | | (500,129 | ) |
Total Liabilities and | | | | | | | | |
Stockholders' Deficit | | $ | 2,009,526 | | | $ | 2,580,750 | |
The accompanying notes are an integral part of thisthese financial statement
statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
| | Three months ended September 30, | |
| | 2008 | | | 2007 | |
| | (Unaudited) | | | (Unaudited) | |
Revenues | | $ | 57,691 | | | $ | 25,000 | |
| | | | | | | | |
Cost of revenues | | | - | | | | - | |
Gross Profit | | | 57,691 | | | | 25,000 | |
| | | | | | | | |
Selling, General and | | | | | | | | |
Administrative expenses | | | | | | | | |
Compensation and benefits | | | | | | | | |
(includes equity compensation | | | | | | | | |
of $0 and $132,833 for the | | | | | | | | |
three months ended September 30, | | | | | | | | |
2008 and 2007, respectively) | | | 339,445 | | | | 544,489 | |
Research and development | | | 41,108 | | | | 108,794 | |
Professional services | | | 160,633 | | | | 169,950 | |
Depreciation and amortization | | | 111,721 | | | | 109,395 | |
Insurance | | | 41,153 | | | | 30,000 | |
Facilities | | | 40,209 | | | | 30,550 | |
Other | | | 51,480 | | | | 60,626 | |
Selling, General and | | | | | | | | |
Administrative expenses | | | 785,749 | | | | 1,053,804 | |
Net Operating Loss | | | (728,058 | ) | | | (1,028,804 | ) |
| | | | | | | | |
Accretion of Note | | | (3,314,620 | ) | | | (285,660 | ) |
Interest Expense, Net | | | (141,297 | ) | | | (149,012 | ) |
| | | | | | | | |
Net Loss | | $ | (4,183,975 | ) | | $ | (1,463,476 | ) |
Net Loss Per Share | | | | | | | | |
- Basic and diluted | | $ | (0.01 | ) | | $ | (0.01 | ) |
| | | | | | | | |
Weighted average | | | | | | | | |
shares outstanding | | | | | | | | |
- Basic and diluted | | | 487,626,691 | | | | 242,886,244 | |
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | For the three months ended September 30, | |
| | 2008 | | | 2007 | |
| | (Unaudited) | | | (Unaudited) | |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | |
Net loss from operations | | $ | (4,183,975 | ) | | $ | (1,463,476 | ) |
Adjustments to reconcile net loss to | | | | | | | | |
net cash used in operations: | | | | | | | | |
Accretion of note discount | | | 3,314,620 | | | | 285,660 | |
Stock options granted for | | | | | | | | |
compensation/services | | | - | | | | 198,516 | |
Depreciation and amortization | | | 111,722 | | | | 109,395 | |
Change provided (used) in: | | | | | | | | |
Accounts receivable | | | - | | | | (22,321 | ) |
Prepaid expenses and other assets | | | 41,671 | | | | - | |
Transfer of patents | | | - | | | | - | |
Deferred revenue | | | 442,309 | | | | - | |
Accounts payable | | | (172,453 | ) | | | (54,101 | ) |
Accrued expenses and other liabilities | | | 28,275 | | | | 70,430 | |
Net cash Provided (Used) in Operations | | | (417,831 | ) | | | (875,897 | ) |
| | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | |
Purchases on property & equipment | | | - | | | | (5,396 | ) |
Investment in patent protection | | | (38,168 | ) | | | (62,769 | ) |
Net cash Used in Investing Activities | | | (38,168 | ) | | | (68,165 | ) |
| | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | |
Issuance of common stock | | | - | | | | 23,527 | |
Proceeds from short-term borrowings | | | - | | | | 650,466 | |
Repayments of short-term borrowings | | | - | | | | (12,059 | ) |
Proceeds from long-term borrowings | | | - | | | | - | |
Repayments of long term debt | | | - | | | | - | |
Net cash Provided by Financing | | | | | | | | |
Activities | | | - | | | | 661,934 | |
NET DECREASE IN CASH | | | (455,999 | ) | | | (282,128 | ) |
| | | | | | | | |
CASH | | | | | | | | |
Beginning of period | | | 871,970 | | | | 363,955 | |
End of period | | $ | 415,971 | | | $ | 81,827 | |
Supplemental schedule of non-cash | | | | | | | | |
investing and financing activities: | | | | | | | | |
| | | | | | | | |
Interest paid in cash | | $ | 31,021 | | | $ | 29,571 | |
Taxes Paid in Cash | | $ | - | | | $ | - | |
The accompanying notes are an integral part of these financial statements.
5
TSET, INC
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
COMMON STOCK
-------------------------------
SHARES AMOUNT CAPITAL IN EXCESS OF PAR RETAINED EARNINGS TOTAL SHAREHOLDERS' EQUITY
VALUE (ACCUMULATED DEFICIT) (DEFICIT)
-----------------------------------------------------------------------------------------------------
BALANCE at June 30, 2000
(Restated) 29,651,661 29,652 9,316,743 (2,107,703) 7,238,692
Purchase price adjustment on
Cancer Detection
International, Inc. (20,000) (20) (39,230) (39,250)
Shares issued on July 20,
2000 for cash 161,538 161 188,839 189,000
Shares issued on August 3,
2000 5,000 5 6,555 6,560
Shares issued to liquidate
debt of Atomic Soccer USA, Ltd 362,259 362 375,981 376,343
Shares issued in September
2000 for cash 832,000 832 831,168 832,000
Shares issued in September to
liquidate TSET, Inc. debt 42,800 43 42,757 42,800
Shares issued on December 8,
2000 for cash 168,492 169 99,831 100,000
Shares issued on December 27,
2000 for cash 39,091 39 22,301 22,340
Shares issued on January 8,
2001 for cash 687,500 688 399,312 400,000
Shares issued on January 12,
2001 for cash 57,693 57 34,943 35,000
Shares issued on January 19,
2001 for cash 10,000 10 6,390 6,400
Shares issued on January 19,
2001 for services and comp 44,915 45 56,098 56,143
Shares issued on March 23,
2001 for cash 186,302 186 134,814 135,000
Shares issued on April 9,
2001 as compensation 2,000 2 1,768 1,770
Shares issued on April 9,
2001 to liquidate debt of
Atomic Soccer 97,020 97 96,923 97,020
Shares issued in April 2001
for cash 38,038 38 17,492 17,530
Shares issued on May 3, 2001
for cash 52,778 53 18,947 19,000
Shares issued on May 7, 2001
for cash 891,891 892 299,108 300,000
Shares issued on June 14,
2001 as compensation 50,000 50 47,450 47,500
Shares issued on June 29,
2001 as a financing fee 640,000 640 460,160 460,800
Deferred equity compensation - - (411,600) - (411,600)
Net loss for the year ended
June 30, 2001 - - - (1,052,634) (1,052,634)
-----------------------------------------------------------------------------------------------------
BALANCE at June 30, 2001 34,000,978 $ 34,001 $ 12,418,350 $ (11,973,785) $ 478,566
Shares issued on July 6, 2001
for cash 238,806 239 79,761 80,000
Shares issued on July 20,
2001 as compensation 250 113 113
Deferred equity
compensation - - (411,600) - (411,600)
Net loss for the year ended
June 30, 2001 - - - (1,052,634) (1,052,634)
6
COMMON STOCK
-------------------------------
SHARES AMOUNT CAPITAL IN EXCESS OF PAR RETAINED EARNINGS TOTAL SHAREHOLDERS' EQUITY
VALUE (ACCUMULATED DEFICIT) (DEFICIT)
-----------------------------------------------------------------------------------------------------
BALANCE at September 30,
2001 34,240,034 $ 34,240 $ 12,086,624 $ (13,026,419) $ (905,555)
======================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT.
7
TSET,
KRONOS ADVANCED TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ACCOUNTING MATTERS
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, it changed the Company ticker symbol to "KNOS“ and is currently trading on the Pink Sheets.
NOTE 2 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Kronos have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments necessary to present fairly the information set forth therein have been included. Operating results for the three-monththree month period ended September 30, 20012008 are not necessarily indicative of the results that may be experienced for the fiscal year ending June 30, 2002.
2009.
These consolidated financial statements are those of the Company and its wholly
owned subsidiaries.wholly-owned subsidiary. All significant inter-company accounts and transactions have been eliminated in the preparation of the consolidated financial statements.
EdgeAudio is disclosed as discontinued operations in these financial statements.
The accompanying consolidated financial statements should be read in conjunction with the TSET,Kronos Advanced Technologies, Inc. Form 10K10-KSB for the fiscal year ended June 30, 20012008, which was filed with the Securities and Exchange Commission (the “SEC”) on January 6, 2009.
NOTE 3 - REALIZATION OF ASSETS AND GOING CONCERN
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. The Company has sustained losses from operations in recent years, and such losses have continued through the period ending September 30, 2008. In addition, the Company has used, rather than provided, cash in its operations. The Company has attempted during the period to use its resources 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. On September 29, 2008, Kronos received a notice of event of default from AirWorks with respect to the Secured Convertible Promissory Note due June 19, 2010 (the “Promissory Note”), issued to by the Company to AirWorks. The notice states that (1) an Event of Default under Section 2.1(a) of the Promissory Note has occurred due to the failure of the Company to make interest payments on the Promissory Note and (2) the entire principal amount of, and the interest on, the Promissory Note is declared immediately due and payable in the amount of $3,551,735 plus interest. Airworks and Hilltop are proceeding with the foreclosure of all of the collateralized assets of the Company, including all intellectual property and patent rights, all cash assets, all physical goods and equipment and all contractual rights including license Agreements.
During the period, Management has taken the following steps with respect to its operating and financial requirements:
Tessera. In March 2008, Kronos executed an Intellectual Property Transfer and License Agreement with Tessera Technologies, Inc. (“Tessera”) for the transfer and license of certain intellectual property (IP) rights related to Kronos proprietary technologies to Tessera. Kronos initially received $3.5 million from Tessera in exchange for the transfer of select Kronos patents covering micro-cooling applications and for an exclusive license to the Kronos technology for the field of ionic micro-cooling of integrated circuit devices or discrete electrical components. Kronos retained the rights to use these patents for applications outside of the field of micro-cooling. Tessera has exercised its further right to acquire additional Kronos IP relating to micro-cooling applications for four quarterly payments of $0.5 million each beginning in July 1, 2008. Kronos received a payment of $0.5 million on July 1, 2008, a payment of $0.5 million on October 15, 2001.
RECENT1, 2008, and an accelerated payment of $1.0 million on November 21, 2008, for the remaining payments due on January 1, 2009 and April 1, 2009. The receipt of this $2.0 million constitutes payment in full for the remaining micro-cooling related patents subject to the agreement with Tessera. The Company and Tessera have the option to continue to jointly develop new technologies in this field.
EOL. In December 2005, Kronos executed a non-exclusive License Agreement with EOL LLC, a Russian Federation corporation ("EOL"). Based in Korolev, Moscow Region, Russia. EOL is leveraging the Kronos technology to produce, market, and distribute Kronos commercial air purification products, bacteriological and virus destruction devices in select Commonwealth of Independent States. The agreement comes after successful completion of multiple tests in Eastern Europe, which found the Kronos technology capable of decontaminating rooms infected with airborne viruses and bacteria. Under the terms of the five-year agreement, EOL is providing Kronos a fixed percentage royalty on every product sold, as well as upfront licensing and quarterly maintenance fees. The initial medical products are currently being marketed in Russia and marketing plans are being implanted in Ukraine, Kazakhstan, Moldova and Byelorussia. During the fiscal year ended June 30, 2008, Kronos earned $55,000 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. No revenue was earned from EOL during the three month period ended, September 30, 2008.
Global Appliance Manufacturers. In October 2006, a leading global home appliance manufacturer committed to fund 20% of the cost for Kronos to manufacturer a silent kitchen range hood product. This next generation range hood device represented the culmination of more than twelve months of product design and development efforts 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 years ended June 30, 2008, Kronos earned $34,055 in revenue from the development of prototype devices for the residential range hood market place. No revenue was earned from a global appliance manufacturer during the three month period ended, September 30, 2008.
DESA. In June 2006, the Company executed its first license for embedded applications of Kronos technology with DESA LLC ("DESA"). The agreement provided DESA the opportunity to embed the Kronos electrostatic air movement technology within fireplaces, hearth systems, zone heaters and mounted electric fans and heaters for minimum license payments. 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. Kronos does not have the funds to continue to pursue DESA applications.
Washington Technology Center. 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 2005 and June 2006, respectively.
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING PRONOUNCEMENTS. On July 20, 2001,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, and September 30, 2008, the Company 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.
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 September 30, 2008 and June 30, 2008, the cash balances held at financial institutions were in excess of federally insured limits.
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.
Fair Value of Financial Instruments. Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosures of information about the fair value of certain financial instruments for which it is practicable to estimate the value. For purpose of this disclosure, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation.
The carrying amounts of the Company’s short-term financial instruments, including cash, other current assets, accounts payable, accrued expenses and notes payable approximate fair value at September 30, 2008 due to the relatively short period to maturity for these instruments.
Intangibles. The Company uses assumptions in establishing the carrying value, fair value and estimated lives of the Company’s long-lived assets and goodwill. The criteria used for these evaluations include management's estimate of the assets’ continuing ability to generate positive income from operations and positive cash flow in future periods compared to the carrying value of the asset, the strategic significance of any identifiable intangible asset in its business objectives, as well as the market capitalization of the Company. Cash flow projections used for recoverability and impairment analysis use the same key assumptions and are consistent with projections used for internal budgeting, and for lenders and other third parties. If assets are considered to be impaired, the impairment recognized is the amount by which the carrying value of the assets exceeds the fair value of the assets. Useful lives and related amortization or depreciation expense are based on the Company’s 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 the Company’s reported results include significant changes in the assets’ 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 the Company’s strategic business objectives, and utilization of the asset.
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.
Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141, "Business Combinations,"141(R), “Business Combinations” (“SFAS 141(R)”), and SFAS No. 142, "Goodwill160, “Accounting and Other
Intangible Assets."Reporting of Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS 160”). These statements make significant changes to the accounting
for business combinations, goodwill, and intangible assets.
SFAS No. 141 establishes new standards forwill significantly change the financial accounting and reporting requirements forof business combinationscombination transactions and will require that the purchase method
of accountingnoncontrolling (or minority) interests in consolidated financial statements. SFAS 141(R) is required to be used for all business combinations initiated after June 30,
2001. Use of the pooling-of-interests method will be prohibited. This statementadopted concurrently with SFAS 160 and is effective for business combinations initiatedcombination transactions for which the acquisition date is on or after June 30, 2001.the beginning of the first annual reporting period beginning on or after December 15, 2008. Early adoption is prohibited. The Company is currently assessing the impact that SFAS 141(R) will have on its results of operations and financial position.
In March 2008, the FASB issued SFAS No. 142 establishes new standards161, “ Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133“, which requires additional disclosures about the objectives of the derivative instruments and hedging activities, the method of accounting for goodwill acquired insuch instruments under SFAS No. 133 and its related interpretations, and a business combination, eliminates amortizationtabular disclosure of goodwillthe effects of such instruments and instead sets forth
methods to periodically evaluate goodwillrelated hedged items on our financial position, financial performance, and cash flows. SFAS No. 161 is effective for impairment. Intangible assets with
a determinable useful life will continue to be amortized over that period.the Company beginning January 1, 2009. The Company expects to adoptbelieves that, for the foreseeable future, this statement during the quarter ending September 30,
2002. Goodwill and intangible assets acquired after June 30, 2001 will be
subject immediately to the non-amortization and amortization provisions of the
statement. The Company does not currently have any goodwill recordedno impact on its financial statements and it is expected that there will be no immediate impact
on the Company's financial statements as a result of the adoption of this
statement.
once adopted.
In June 2001,May 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting StandardStandards (SFAS) No. 143, "Accounting162, “The Hierarchy of Generally Accepted Accounting Principles.” The new standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for Asset
Retirement Obligations." This statement addressesselecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (GAAP) for non-governmental entities. We are currently evaluating the effects, if any, that SFAS No. 162 may have on our financial accountingreporting.
NOTE 5 – TESSERA TRANSACTION
On March 31, 2008, Kronos executed an Intellectual Property Transfer and
reportingLicense Agreement with Tessera Technologies, Inc. (“Tessera”) for the
retirementtransfer and license of
tangible long-lived assetscertain intellectual property (“IP”) rights related to Kronos proprietary technologies to Tessera. Kronos received an upfront and
the associated
asset retirement costs. The Company believes the adoptionnonrefundable fee of
SFAS 143 will have
no significant impact on its financial statements.
In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard (SFAS) No. 144, "Accounting$3.5 million from Tessera in exchange for the
Impairmenttransfer of select Kronos patents covering micro-cooling applications, an exclusive license to Kronos’ additional U.S. Patents and patents pending and related foreign patent applications for ionic micro-cooling of integrated circuit devices or
Disposaldiscrete electrical components (“Ionic Micro-cooling”); as well as a twelve month term option license to acquire additional Kronos’ U.S. Patents and related foreign patents for Ionic Micro-cooling. As of
Long-Lived Assets." This statement addressesNovember 20, 2008, Tessera further executed its right to acquire this additional Kronos IP relating to micro-cooling applications for $2.0 million with payments received. Kronos retained the
financial accounting and reportingrights to use all its patents for all applications outside of the field of micro-cooling. Upon the receipt of the $3.5 million from Tessera, Kronos recognized $3,269,231 as revenue for the
impairment or disposalnonrefundable, up-front license and IP transfer granted to Tessera and $230,769 as deferred revenue for term license granted to Tessera. The deferred revenue will be recognized over the twelve month term of
long-lived
assets.the license. For the three month period ending, September 30, 2008, the Company recognized $57,691 in revenue from the initial deferred revenue associated with the first group of patents transferred. The
Company believes$2.0 million received from Tessera, in three installments between July 1, 2008 and November 20, 2008, will be recorded as revenue in a subsequent period. The company deferred $500,000 received on July 1,2008 These payments are for the
adoptionsecond group of
SFAS 144 will have no significant
impact on its financial statements.
8
patents included in the Tessera patent sales transaction.
The composition of deferred tax assets and the related tax effects
at
September 30 and June 30, 2001 are as follows:
September 30, 2001 June 30, 2001
--------------------- --------------------
Benefit from carryforward of net operating losses $ 2,456,635 $ 2,225,520
Other temporary differences 1,008,189 1,008,189
Less:
Valuation allowance (3,464,824) (3,233,709)
--------------------- --------------------
Net deferred tax asset $ - $ -
===================== ====================
| | September 30, 2008 | | | June 30, 2008 | |
Benefit from carryforward of capital | | | | | | |
and net operating losses | | $ | (9,234,840 | ) | | $ | (8,138,840 | ) |
| | | | | | | | |
Other temporary differences | | | (157,000 | ) | | | (157,000 | ) |
| | | | | | | | |
Options issued for services | | | - | | | | (806,000 | ) |
Less: | | | | | | | | |
Valuation allowance | | | 9,391,840 | | | | 9,101,840 | |
Net deferred tax asset | | $ | - | | | $ | - | |
The other temporary differences shown above relate primarily to
loss on
discontinued operations, 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:
September 30, 2001 June 30, 2001
----------------------------------------------------------------------------
Amount % of pre-tax Loss Amount % of pre-tax
Loss
----------------------------------------------------------------------------
Benefit for income tax at
federal statutory rate $ 357,896 34.0% $3,374,793 34.2
Non-deductible expenses (126,781) (12.0)% (357,007) (3.6)%
Disposed subsidiary NOL - - (578,370) (5.9%)
Increase in valuation allowance (231,115) (22.0)% (2,439,416) (24.7)%
----------------------------------------------------------------------------
$ - 0.0% $ - 0.0%
============================================================================
| | September 30, 2008 | | | June 30, 2008 | |
| | Amount | | | % of pre-tax Loss | | | Amount | | | % of pre-tax Loss | |
Benefit for income tax at: | | | | | | | | | | | | |
Federal statutory rate | | $ | (1,423,000 | ) | | | (34.0 | )% | | $ | (1,481,000 | ) | | | (34.0 | )% |
State statutory rate | | | (84,000 | ) | | | (2.0 | )% | | | (87,000 | ) | | | (2.0 | )% |
Non-deductible expenses | | | 1,217,000 | | | | 29.1 | % | | | 872,160 | | | | 20.0 | % |
(Decrease) Increase in valuation allowance | | | 290,000 | | | | 6.9 | % | | | 695,840 | | | | 16.0 | % |
| | $ | - | | | | 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
As of September 30, 2001, for federal income tax and alternative minimum
tax reporting purposes,2008, the Company hashad approximately $7.2$20.2 million of unused Federal net operating losses, $1.3 million capital losses and $16 million state net operating losses available for carryforward to future years. The benefit from carryforward of such net operating losses will expire in various years between
2011 and 2023through 2026 and could be subject to limitations if significant ownership changes occur in the Company. Of the $7.2 million of unused net operating losses
noted above, approximately $153,000 relates to losses incurred by the Company's
subsidiary, EdgeAudio. In fiscal years prior to June 30, 2000, EdgeAudio did not
file its tax returns on a consolidated basis with the Company. Accordingly, the
$153,000 loss incurred by EdgeAudio is further subject to separate limitations
that restrict the ability of the Company to use such losses.
NOTE 37 - SEGMENTS OF BUSINESS
The Company operates principally inhas only one reportable segment, which consists of business: The Kronos
segment licenses, manufacturesdeveloping, licensing, manufacturing and distributesdistributing air movement and purification devices utilizing the Kronos(TM)Kronos technology. All other segments have been
disposed of or discontinued. Although there are future plans for expansion into
foreign markets, inFor the three months ended September 30, 2008 and the fiscal year ended June 30, 2001,2008 the Company operated only in the U.S.
NOTE 48 - EARNINGS PER SHARE
Weighted average shares outstanding used in the earnings per share calculation were 487,626,691 and 242,886,244 for the three months ended September 30, 2008 and 2007, respectively.
As of September 30, 2001,2008, there were outstanding options to purchase 1,730,97590,259,775 shares of TSETthe Company's common stock and outstanding warrants to purchase 15,792,342 shares of the Company's common stock. These options and warrants have been excluded from the earnings per share calculation as their effect is anti-dilutive. NOTE 5 - DISCONTINUED OPERATIONS
In early January 2001, management committed to a formal planAs of action
to sell or otherwise dispose of Atomic Soccer. Agreement was reached with a
buyer group, that included current and former Atomic Soccer management, to sell
them the outstanding shares of common stock of Atomic Soccer for $1,000. The
9
transaction was effective on April 11, 2001. On September 14, 2001 the board
approved a formal plan of action to sell or otherwise dispose of EdgeAudio. The
Company has accrued $150,000 for anticipated operating loses during the
phase-out period. As a result, both Atomic Soccer and EdgeAudio are included in
the financial statements as discontinued operations.
The Company's audited consolidated financial statements for all periods
have been reclassified to report separately results of operations and operating
cash flows from continuing operations and the discontinued operations. The net
revenues are included in the financial statements under Net Income (Loss) from
Discontinued Operations. The assets and liabilities of EdgeAudio at September 30, 2001 are included in the balance sheet Net Liabilities of Discontinued
Operations. Net assets of discontinued operations at September 30, 2001 and
operating results of discontinued operations for the three-months ended
September 30, are as follows:
Net liabilities of Discontinued Operations
Edge Audio
---------------------
Current Assets $ 375,319
Net Property and Equipment 48,923
Current Liabilities (649,148)
Minority interest (525,190)
---------------------
Net Assets (Liabilities) $ (750,096)
=====================
Operating Results of Discontinued Operations:
For the quarter ended September 30,
2001 2000
------------ --------------- -------------- ---------------
Edge Audio Atomic Edge Audio Total
------------ --------------- --------------- --------------
Sales $ 175,265 $ 365,848 $ 22,990 $ 388,838
Cost of sales (63,509) (230,117) (11,810) (241,927)
Depreciation
and amortization (3,309) (71,798) (64,934) (136,732)
General and
Administrative (208,330) (150,895) (233,483) (384,378)
------------ --------------- --------------- --------------
Operating income
(loss) (99,883) (86,962) (287,237) (374,199)
Other Income 5,090 - - -
Interest expense (7,744) (28,526) (2,615) (31,141)
Provision for future
operating losses 82,030 - - -
Minority interest 20,507 - 44,984 44,984
------------ --------------- ---------------- -------------
Income (Loss) pre-tax 0 (115,488) (244,868) (360,356)
Income taxes - - - -
------------ --------------- --------------- --------------
Loss from disconcinued
operations $ 0 $ (115,488) $ (244,868) $ (360,356)
============ =============== =============== ==============
NOTE 6 - ISSUANCE OF WARRANTS
On July 9, 2001, the Company signed an agreement to utilize the
strategic planning and business plan execution services of The Eagle Rock Group,
LLC. The Eagle Rock Group will work with the Kronos Air Technologies team to
fully develop and capitalize on the Kronos(TM) technology.
The Eagle Rock Group will focus on the following areas (i) capital
raising and allocation (ii) strategic partner introduction and evaluation, (iii)
distribution channel development, (iv) product focus and brand development, (v)
human resource placement, and (vi) capital market introduction and awareness.
Pursuant to the agreement that we entered into with The Eagle Rock
Group, we issued to The Eagle Rock Group a ten-year warrant granting them the
right to purchase 1,400,000 shares of our common stock at an exercise price of
$0.68 per share. The warrant was valued at $686,000 using the Black-Scholes
option valuation model and was recorded pro rata over the initial consulting
period. The shares underlying the warrant have piggy-back and demand
registration rights, as well as subscription rights in the event that we issue
any right to all of our stockholders to subscribe for shares of our common
stock. In addition, the warrant contains redemption rights in the event that we
enter into a transaction that results in a change of control of our company.
NOTE 7 - SUBSEQUENT EVENTS
In September 2001, the Company determined that, among other things, the
Board of Directors never validly approved Jeffrey D. Wilson's Employment
Agreement dated April 20, 1999. Accordingly, the Company determined that Mr.
Wilson's Employment Agreement and a Letter Agreement, dated April 10, 2001
amending the Employment Agreement, are null and void from their inception. As a
consequence, the Company has determined that the issuance of 1,000,000 shares of
common stock pursuant to Mr. Wilson's Employment Agreement and the grant of2007, there were outstanding options to purchase 350,00025,499,538 shares of common stock pursuant to the Letter
Agreement are void as of the effective dates of the Employment Agreement and
Letter Agreement, respectively, and that these shares of common stock and
options are treated as if they were never issued or granted, as the case may be.
Effective October 10, 2001, Mr. Wilson resigned as Chairman of the Board of
Directors and Chief Executive Officer of the Company. Mr. Wilson remains as a
director of the Company.
In October 2001, the Company entered into an agreement with Jeffrey D.
Wilson pursuant to which the Company issued a promissory note to Mr. Wilson in
the amount of $350,000 and will pay $30,000 in cash to Mr. Wilson within sixty
10
days of October 15, 2001. The $380,000 represents all of Mr. Wilson's accrued
salary, bonus and interest. In addition, the Company will also pay Mr. Wilson
his unpaid reimburseable expenses.
In October 2001, the Company entered into a Consulting Agreement with
Jeffrey D. Wilson, pursuant to which Mr. Wilson will provide thirty-five hours
per month of management and other consulting services to the Company in exchange
for consulting fees payable in cash and options of the Company's common stock.
Out-of-pocket expenses incurred by Mr. Wilson in connection with the provision
of his services under the Consulting Agreement will also be reimbursed by the
Company. The Consulting Agreement was negotiated at arm's lengthstock and the
Company's management believes that the compensation and other provisions of the
Consulting Agreement are fair, reasonable, customary, and favorableoutstanding warrants to the
Company.
Effective October 16, 2001, Daniel R. Dwight was appointed President
and Chief Executive Officer of the Company.
Effective October 2001, the Company entered into a consulting agreement
with Steven G. Martin and Joshua B. Scheinfeld for a period of 15 months. Mssrs.
Martin and Scheinfield will be compensated by up to 360,000purchase 42,300,000 shares of the Company's common stock. These options and warrants have been excluded from the earnings per share calculation as their effect is anti-dilutive. NOTE 9 - CONVERTIBLE NOTES PAYABLE AND NOTES PAYABLE
On September 29, 2008, Kronos received a notice of event of default from AirWorks with respect to the Secured Convertible Promissory Note due June 19, 2010 (the “Promissory Note”), issued to by the Company to AirWorks. The notice states that (1) an Event of Default under Section 2.1(a) of the Promissory Note has occurred due to the failure of the Company to make interest payments on the Promissory Note and (2) the entire principal amount of, and the interest on, the Promissory Note is declared immediately due and payable in the amount of $3,551,735 plus interest.
The Company had the following obligations as of September 30, 2008 and June 30, 2008
| | September 30 2008 | | | June 30, 2008 | |
Obligations to AirWorks Funding LLLP (1) | | $ | 3,426,135 | | | $ | 3,426,135 | |
Obligations to Hilltop LLP/RS Properties LP(1) | | | 1,147,425 | | | | 1,147,425 | |
Discount for Beneficial Conversion Feature (2) | | | - | | | | (3,314,620 | ) |
Obligations to Gumbinner and Sun (1) | | | 200,000 | | | | 200,000 | |
Obligation to current employees (3) | | | 110,484 | | | | 110,484 | |
| | | 4,884,044 | | | | 1,569,424 | |
Less: | | | | | | | | |
Current portion | | | 4,884,044 | | | | 1,569,424 | |
Total long term obligations net of | | | | | | | | |
current portion | | $ | - | | | $ | - | |
(1) These notes bear interest at the rate of 12% are secured by the assets of the Company and convertible into shares of Kronos Common Stock at $0.0028 or are payable in full on June 19, 2010. On September 29, 2008, Kronos Advanced Technologies, Inc. (the “Company”) received a notice of event of default from AirWorks Funding LLLP (“AirWorks”) with respect to the Secured Convertible Promissory Note due June 19, 2010 (the “Promissory Note”), issued to by the Company to AirWorks, see Note 20 Subsequent Events.
(2) Under Generally Accepted Accounting Principles, the Company recorded a discount for the Beneficial Conversion Feature (“BCF”) on the convertible debt issued to AirWorks and Hilltop LLP/RS Properties. The amount of the BCF discount was calculated using the Black-Scholes model. Because the maximum value of the BCF discount cannot exceed the full value of the issued debt, the Company recorded the discount at the full value of the debt of $3,400,000 for the period ended June 30, 2007, and an additional BCF of $2,105,000 for the period ended June 30, 2008. The BCF recognized during 2008 was calculated for additional amounts of the notes received from Airworks and Hilltop, $1,905,000, along with the note to Gumbinner and Sun, $200,000. The Company is amortizing the BCF discount over the three year life of the debt. For the fiscal years ended June 30, 2008 Company recorded a discount amortization of $2,156,225. On September 29, 2008, Kronos received a notice of event of default from AirWorks Funding LLLP (“AirWorks”) with respect to the Secured Convertible Promissory Note (the “Promissory Note”) due June 19, 2010, issued by the Company to AirWorks. As a result of the Company being served notice of default, the Company recorded $3,314,620 amortization expense to fully amortize the remaining portion of the discount.
(3) These notes bear interest at the rate of 12%. They represent obligations to current employees of the Company, which are due in full.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
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 and settlement agreement obligation to HoMedics and the expenses of the transaction, the remainder of $1,069,000 was used for working capital purposes.
The 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 $0.003 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 $0.003 conversion price only if not paid in full by December 31, 2007. On March 13, 2008, Critical Capital and Sands Brothers agreed to extend the maturity date of their note until April 30, 2008. On April 1, 2008, the Company repaid Critical Capital and Sands Brothers the full principal amount and interest on the note. 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 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.
The Funding Agreement also gives the lenders the right to designate a majority of the members of the Company's Board of Directors. In accordance with the Funding Agreement, on April 14, 2008, the lenders exercised their right to designate a majority of the members of the Company's Board of Directors and five new additional Board members were appointed to the Kronos Board of Directors: Richard Perlman, Jack Silver, James Price, Marc Kloner and Barry Salzman. 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.
Airworks, effective as of January 1, 2008, in agreement with the Company, agreed to defer payment of quarterly interest expenses for an unspecified period, until the Company received a Notice of Default by Airworks on September 29, 2008.
On September 29, 2008, Kronos received a notice of event of default from AirWorks with respect to the Secured Convertible Promissory Note due June 19, 2010 (the “Promissory Note”), issued to by the Company to AirWorks. The notice states that (1) an Event of Default under Section 2.1(a) of the Promissory Note has occurred due to the failure of the Company to make interest payments on the Promissory Note and (2) the entire principal amount of, and the interest on, the Promissory Note is declared immediately due and payable in the amount of $3,551,735 plus interest.
Daniel R. Dwight, former President and Chief Executive Officer, and the Company entered into an employment agreement effective as of November 15, 2001, and was terminated June 20, 2008. The Company and Mr. Dwight entered into a Severance Agreement dated May 16, 2008, in which the Company recorded $243,750 as a restructuring cost in the results for the year ended June 30, 2008.
Dr. Igor Krichtafovitch resigned effective January 9, 2009. Mr. Krichtafovitch has a two year severance provision in his Employment agreement, which will be recorded as an unsecured liability for $300,000.00.
Richard F. Tusing, as of June 20, 2008, was appointed Acting President, Acting Chief Executive Officer, Chief Operating Officer, Secretary, Treasurer and Chief Financial Officer. The Company entered into an employment agreement with Mr. Tusing effective as of January 1, 2003. The initial term of Mr. Tusing's employment agreement is for two years and will automatically renew for successive one year terms unless Kronos or Mr. Tusing provide the other party with written notice within three 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, October 1, 2005, October 1, 2006, October 1, 2007, and October 1, 2008. 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. Mr. Tusing will resign effective as of close of business on February 13, 2009. Mr. Tusing has a one year severance provision in his Employment agreement, which will be recorded as an unsecured liability for $160,000.00. The Company has appointed Mr. Barry Salzman as the acting President, Secretary and Treasurer of the Company, effective February 13, 2009.
NOTE 11
- SUBSEQUENT EVENTS
The Company received notification from James P. McDermott and M.J. Segal on the dates of December 22, 2008 and December 23, 2008 respectively, that Mr. McDermott and Mr. Segal have resigned from the Kronos Board of Directors.
In March 2008, Kronos executed an Intellectual Property Transfer and License Agreement with Tessera Technologies, Inc. (“Tessera”) for the transfer and license of certain intellectual property (IP) rights related to Kronos proprietary technologies to Tessera. Kronos initially received $3.5 million from Tessera in exchange for the transfer of select Kronos patents covering micro-cooling applications and for an exclusive license to the Kronos technology for the field of ionic micro-cooling of integrated circuit devices or discrete electrical components. Kronos retained the rights to use these patents for applications outside of the field of micro-cooling. Tessera has exercised its further right to acquire additional Kronos IP relating to micro-cooling applications for four quarterly payments of $0.5 million each beginning in July 1, 2008. Kronos received a payment of $0.5 million on July 1, 2008, a payment of $0.5 million on October 1, 2008, and an accelerated payment of $1.0 million on November 21, 2008, for the remaining payments due on January 1, 2009 and April 1, 2009. The receipt of this $2.0 million constitutes payment in full for the remaining micro-cooling related patents subject to the agreement with Tessera. The Company and Tessera have the option to continue to jointly develop new technologies in this field. In December 2008 and January 2009, Kronos made principal and interest payments to Airworks and Hilltop as follows:
Airworks Interest: $65,000 on December 31, 2008, $545,488 on January 09, 2009, and $1,089, January 13, 2009
Airworks principal: $48,750 on January 9, 2009 and $285,000 on February 4, 2009
Hilltop interest: $62,750 on January 9, 2009, and $12,188, January 13, 2009
Hilltop principal: $16,250 on January 9, 2009
Since the Company has not been able to locate a purchaser for its business or assets on satisfactory terms, or otherwise cured the defaults under the Airworks and Hilltop Promissory Notes, the Company is now in the process of transferring control of its assets to Airworks and Hilltop under peaceful possession procedures.
In addition, in light of the Company’s financial condition and the ongoing peaceful possession procedures with its creditors, the Company has determined that it is in its best interests to voluntarily deregister its stock with the SEC. The Company is secured to deregister because it has fewer than 500 shareholders of record and its total assets have not exceeded $10 million on the last day of each of the three most recent fiscal years. Upon filing the applicable forms with the SEC, the Company will no longer be obligated to file certain reports with the SEC, including Forms 10-K, 10-Q and 8-K.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTORY STATEMENTS
FORWARD-LOOKING
FORWARD LOOKING STATEMENTS AND ASSOCIATED RISKS
This filing contains forward-looking statements, including statements
regarding,
THIS REPORT 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 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 REPORT GENERALLY. IN LIGHT OF THESE RISKS AND UNCERTAINTIES, THERE CAN BE NO ASSURANCE THAT THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS REPORT WILL IN FACT OCCUR. WE DO NOT UNDERTAKE ANY OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT ANY FUTURE EVENTS OR CIRCUMSTANCES.
GENERAL
Kronos Advanced Technologies, Inc. was a product development and production company that attempted to develop and patent technology that among other things: (a)things fundamentally change the growth strategiesway air is moved, filtered and sterilized. Fourteen of TSET, Inc. (the
"Company"); (b) anticipated trends inthe Company's U.S. patent applications and three international patent applications have been allowed for issuance. To date, our Company's industry; (c) our Company's
future financing plans; and (d) our Company's ability to obtain financing and
continue operations. In addition, when used in this filing, the words
"believes," "anticipates," "intends," "in anticipationexecute our strategy has been restricted by our limited amount of" and similar words
are intended to identify certain forward-looking statements. These
forward-looking statements are based largely on our Company's expectations and
are subject to a number of risks and uncertainties, many of which are beyond our
Company's control. Actual results could differ materially from these
forward-looking statements as a result of changes in trends capital.
The Kronos technology has numerous valuable characteristics for applications in the economy and
our Company's industry, reductions in the availability of financing and other
factors. In light of these risks and uncertainties, there can be no assurance
that the forward-looking statements contained in this filing will in fact occur.
Our Company does not undertake any obligation to publicly release the results of
any revision to these forward-looking statements that may be made to reflect any
future events or circumstances.
GENERAL
Historically, we had been seeking select business opportunities
globally among a wide range of prospects. Over the past two years, we made
several investments,indoor air quality market, including Kronos Air Technologies and EdgeAudio. After
further evaluation of these investments, we believe our investment in and the
full development of Kronos Air Technologies and the Kronos(TM) technology
represents the single best opportunity for us. As a result, we have prioritized
our management and financial resources to fully capitalize on this investment
opportunity. Effective October 10, 2001, Jeffrey D. Wilson resigned as Chairman
of the Board and Chief Executive Officer of TSET, as well as Chairman of the
Board of Kronos Air Technologies and EdgeAudio, respectively. Mr. Wilson remains
as a director of TSET. Effective October 16, 2001, Daniel R. Dwight was
appointed President and Chief Executive Officer of TSET. A more detailed
explanation of Kronos Air Technologies and the current status of EdgeAudio and
the other investments made by us are discussed below.
We have reorganized our Company to prioritize and focus management and
financial resources on Kronos Air Technologies and the Kronos(TM) technology.
This reorganization has resulted in the decision to sell or to no longer pursue
other investment opportunities previously identified. We sold our investment in
Atomic Soccer in April 2001; decided not to pursue investments in Cancer
Detection International, Electric Management Units, and Cancer Treatment Centers
in July 2001; established a formal plan to dispose of EdgeAudio in September
2001; and terminated by mutual consent of both parties a contract to distribute
Computerized Thermal Imaging equipment in August 2000.
Kronos Air Technologies is focused on the development and
commercialization of an air movement and purification technology known as
Kronos(TM) which is more fully described below. The Kronos(TM) technology
operates through the application of high-voltage management across paired
electrical grids that creates an ion exchange which movemoving air and gases at high velocities while removingfiltering 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”).
Effective June 20, 2008, the Employment Agreement of Daniel R. Dwight, the Company’s former President and Chief Executive officer, was terminated pursuant to terms of the Severance Agreement and Advisory Agreement, dated May 16, 2008. Richard F. Tusing, the Company’s Chief Operating Officer, was appointed acting president, Chief Financial Officer, Treasurer and Secretary of the Company.
On October 24, 2008, the Company terminated the employment of all of its employees except for Mr. Tusing and Igor Krichtafovitch, its Chief Technology Officer. Mr Krichtafovitch resigned effective January 9, 2009. Mr. Tusing is resigning effective close of business on February 13, 2009. The Company has appointed Mr. Barry Salzman as
wellthe acting President, acting Secretary and acting Treasurer for the Company as
killing
pathogens, including bacteria. We believeof February 13, 2009. As a result of the
technology is cost-effective and
is more energy-efficient than current alternative fan and filter technologies.
Kronos(TM) has multiple U.S. and international patents pending.
The Kronos(TM) device is comprised of state-of-the-art high-voltage
electronics and electrodes on a single printed circuit board attached to one or
more sets of corona and target electrodes housed in a self-contained casing. The
device can be flexible in size, shape and capacity and can be used in embedded
electronic devices, standalone room devices, and integrated HVAC and industrial
applications. The Kronos(TM) device has no moving parts or degrading elements
and is composed of cost-effective, commercially available components.
The Kronos(TM) technology combines the benefits of silent air movement,
air cleaning, and odor removal. Because the Kronos(TM) air movement system is a
silent, non-turbulent, and energy-efficient air movement and cleaning system, we
believe that it is ideal for air circulation, cleaning and odor removal in all
types of buildings as well as compact, sealed environments such as airplanes,
submarines and cleanrooms. Additionally, becauseCompany’s financial condition, it has
no moving partsceased substantially all of its operating activities. Kronos is focused on prioritizing its limited resources on either selling or
fans,
a Kronos(TM) device can instantly blocklicensing the Company’s technology or
reverseliquidating the
flow of air between
adjacent areas for safety in hazardous or extreme circumstances.
12
RESULTS OF OPERATIONS
The comparability of our financial statements between years is not
easily susceptible to narrative comparison by virtueassets of the fact that (a) we
were basically inactiveCompany. On September 29, 2008, the Company received a notice of event of default from AirWorks with respect to the time that we discontinued operationsSecured Convertible Promissory Note due June 19, 2010, issued to by the Company to AirWorks. The Company has been, and continues to be, in 1996
untildiscussions with its secured lenders regarding the time that we reactivated operations in mid-1999, (b) from inception we
have not had significant operating revenues,outstanding obligations under the AirWorks and (c) we acquired Kronos Air
Technologies, Atomic Soccer, EdgeAudio,Hilltop promissory notes, the alleged occurrence of an event of default, and Cancer Detection International
towards the endenforcement of the year ending June 30, 2000.
REORGANIZATION
Based on our decision to focus our resources on Kronos Air
Technologies, several actions were taken which impactedrights under the results of
operations. On April 10, 2001, we sold Atomic Soccer. The new ownership group
consisted of Timothy G. Belinger, Todd P. Ragsdale and James Eric Anderson. Atpromissory notes. Following the time of the sale, Messrs. Belinger, Ragsdale and Anderson were members of
Atomic Soccer's Board of Directors. NoneDirectors’ appointment of these individuals were then, or
currently are, officers, directors, employees or affiliates of TSET. AtJames P. McDermott and M. J. Segal to an independent committee to investigate the time
of the sale, Erik W. Black, an officerforegoing, Mr. McDermott and director of TSET, was Atomic Soccer's
Chairman ofMr. Segal resigned from the Board of Directors. Mr. Black resignedSince the Company was not able to locate a purchaser for its business or assets on satisfactory terms, the Company is now in the process of transferring control of its assets to AirWorks and Hilltop in accordance with peaceful possession procedures.
In addition, in light of the Company’s financial condition and the ongoing peaceful possession procedures with its creditors, the Company has determined that it is in its best interests to voluntarily deregister its stock with the SEC. The Company is secured to deregister because it has fewer than 500 shareholders of record and its total assets have not exceeded $10 million on the last day of each of the three most recent fiscal years. Upon filing the applicable forms with the SEC, the Company will no longer be obligated to file certain reports with the SEC, including Forms 10-K, 10-Q and 8-K
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:
| · | air movement, including dielectric fluid movement and propulsion; |
| · | air purification, including particulate removal, bacteria and viral removal, biohazard destruction, and odor removal; |
| · | temperature and environmental management, including space heating and cooling; |
| · | microchip, MEMS and other electronics devices and components cooling; |
| · | air management, including sorting and separation of air streams by particle content; |
| · | sound generation, including high fidelity sound recreation and active noise cancellation; |
| · | high voltage management, including development of high voltage power supplies and control of energy surges and electrical discharges; |
| · | control of water and moisture content in air streams, including dehumidification and humidification; and |
| · | 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. Summary results from Atomic Soccer's
Boardselect independent testing facilities are provided below. The tests were conducted in the U.S. unless otherwise indicated.
Filtration Testing Results:
| · | Environmental Health and Engineering - reduced particle matter by up to 47% compared to days when the Kronos air purifiers were not operating in the waiting room of a pediatric office while patients were present. |
| · | Aerosol and Air Quality Research Laboratory - up to 99.8% filtration of 0.02 to 0.20 micron (20 to 200 nanometers) size particles; |
| · | 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; |
| · | MicroTest Laboratories - HEPA Clean Room Class 1000 quality particulate reduction; and |
| · | 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:
| · | Environmental Health and Engineering (viral analysis by the University of Wisconsin Department of Pediatrics and Medicine): |
| - | collection and removal of a wide range of respiratory viruses, including influenza A, influenza B, human rhinoviruses, human coronavirus, respiratory syncytial virus, adenovirus, and bocavirus, from the waiting room of a pediatric office while patients were present. |
| · | 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. |
| · | 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. |
| · | 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. |
| · | Institute for Veterinary Medicine in the Ukraine - destroy and sterilize air which had been inseminated with Anthrax and E.coli spores; |
| · | New Hampshire Materials Laboratory - up to 95% reduction of hazardous gases, including numerous carcinogens found in cigarette smoke; |
| · | Battelle PNNL - 95% destruction of Bg (anthrax simulant); and |
| · | 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 Directors immediatelyMedical Equipment approved EOL's Kronos-based Tree air purification device for use in hospitals and other healthcare facilities. The device received Category I approval, which means the product has met the strictest regulations required for a device to be used in operating rooms and other areas that require a sterile environment. In November 2006, following the Russian Research Institute approval, the Ministry of Health Care and Social Development of the Russian Federation issued a Registration Certificate that designates the Kronos-based Tree air purification device for medical use.
Market Segmentation
Kronos had an initial business development strategy to attempt 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) embedded cooling and cleaning (electronic devices and medical equipment); (3) air purification for unique spaces (clean rooms, airplanes, automotive, and cruise ships); (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 has granted an exclusive license to Tessera for ionic micro-cooling of integrated circuit devices or discrete electrical components. These contracts are described in more detail in the “Technology Application and Product Development” below.
Technology Application and Product Development
To best serve Kronos' targeted market segments, the Company was 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 2007, Kronos executed a Letter of Intent for the development, manufacture and sale of air purification devices based upon Kronos' proprietary air movement and purification technology with a leading national retailer. Under the terms of the Letter of Intent, the retailer has paid Kronos $250,000 towards the development costs of the new products and would contribute marketing resources to assist in the product development process. In December 2007, Kronos completed design and developed an Alpha Prototype for the customer. In January 2008, the parties initiated negotiations of a definitive Product Development and Purchase Agreement. In February 2008, the retailer filed for bankruptcy. In March 2008, Kronos’ contract manufacturing partner completed development of a Beta Prototype. During the fiscal year ended June 30, 2008, Kronos earned $250,000 in product development fees. No fees have been earned since fiscal 2008.
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 Ukraine and marketing plans are being implanted in 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. During the fiscal year ended June 30, 2008, Kronos earned $55,000 in revenue from licensing fees. No additional revenues have been earned since fiscal 2008.
In August 2006, the Russian Research Institute of Medical Equipment began the process for product certification of the EOL's Kronos-based Tree air purification device for use in medical facilities, including a successful clinical trial of EOL products in the Pulmonary Department of Municipal Hospital #2 in Moscow. In October 2006, Scientific Institution of Health Care, Central Clinical Hospital #2 in Moscow completed a second clinical trial. As a result of these clinical trials, the Russian Research Institute approved the Kronos-based Tree air purification device for use in hospitals and other healthcare facilities. The device received Category I approval, which means the product has met the strictest regulations required for a device to be used in operating rooms and other areas that require a sterile environment. In November 2006, following the Russian Research Institute approval, the Ministry of Health Care and Social Development of the Russian Federation issued a Registration Certificate that designates the Kronos-based Tree air purification device for medical use.
Commercial and Other Standalone Products. Utilizing our expanded product development resources, Kronos completed the initial design, development and production of a series of small multifunctional devices that can be used as space heaters, vaporizers, disinfectors, deodorizers and/or fans.
Embedded Platform
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 was 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. In June 2007, the Company and the University of Washington were awarded a Phase III grant for continued funding. This additional funding was utilized to support the development of prototype products and all Phase III deliverables were completed.
In March 2008, Kronos executed an Intellectual Property Transfer and License Agreement with Tessera Technologies, Inc. (“Tessera”) for the transfer and license of certain intellectual property (IP) rights related to Kronos proprietary technologies to Tessera. Kronos initially received $3.5 million from Tessera in exchange for the transfer of select Kronos patents covering micro-cooling applications and for an exclusive license to the Kronos technology for the field of ionic micro-cooling of integrated circuit devices or discrete electrical components. Kronos retained the rights to use these patents for applications outside of the field of micro-cooling. Tessera has exercised its further right to acquire additional Kronos IP relating to micro-cooling applications for four quarterly payments of $0.5 million each beginning in July 1, 2008. Kronos received a payment of $0.5 million on July 1, 2008, a payment of $0.5 million on October 1, 2008, and an accelerated payment of $1.0 million on November 21, 2008, for the remaining payments due on January 1, 2009 and April 1, 2009. The receipt of this $2.0 million constitutes payment in full for the remaining micro-cooling related patents subject to the agreement with Tessera. The Company and Tessera have the option to continue to jointly develop new technologies in this field.
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. 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. In October 2007, Kronos shipped the additional prototypes to the customer for testing and evaluation. During the year ended June 30, 2008, Kronos earned $34,000 in product development fees. Due to a lack of funding, Kronos is no longer working on this project.
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. During the year ended June 30, 2008, Kronos and DESA developed a plan for product commercialization. Due to a lack of funding, Kronos is no longer working on this project.
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 was seeking one or more strategic partners to commercialize, market and distribute Kronos based commercial embedded air filtration and purification devices; however, due to a lack of funding, the Company is no longer working on this project.
Market Segmentation
Kronos' initial business development strategy was 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) embedded cooling and cleaning (electronic devices and medical equipment); (3) air purification for unique spaces (clean rooms, airplanes, automotive, and cruise ships); (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).
Patents and Intellectual Property
Kronos has received notification that fifteen of its patent applications have been allowed for issuance by the United States Patent and Trademark Office and six of its international patent applications have been allowed for issuance by 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 | 7,410,531 | Method of Controlling | an electrode array corona | 2025 |
2008 | | Fluid Flow | including an array of corona | |
| | | electrodes discharge electrodes | |
| | | and an array of acceleration flow | |
| | | | |
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 | |
| | | | |
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 | |
Kronos has received formal notification from the Canadian Intellectual Property Office, the Mexican Institute of Industrial Property, Commonwealth of Australia Patent Office, the Intellectual Property Office of New Zealand and the Ukrainian Patent Office indicating that six patents have been examined and allowed for issuance as patents. There are a number of other patent applications corresponding to Kronos' fifteen 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.
Intellectual Property Transfer
In March 2008, Kronos transferred U.S. Patents 6,919,698 and 7,157,704 and related foreign patents and patent applications to Tessera in conjunction with the execution of the sale documentIntellectual Property Transfer and License Agreement and the receipt of $3.5 million from Tessera. The Agreement provided Tessera the additional right to acquire U.S. Patents 6,504,308 and 6,888,314 and related foreign and patent applications upon the payment of an additional $2.0 million, which purchase was completed and transferred on November 21, 2008.
CRITICAL ACCOUNTING POLICIES
Allowance for Doubtful Accounts. We provide a reserve against our receivables for estimated losses that may result from our customers' inability to pay. These reserves are based on potential uncollectible accounts, aged receivables, historical losses and our customers' credit-worthiness. Should a customer's account become past due, we generally will place a hold on the account and discontinue further shipments and/or services provided to that customer, minimizing further risk of loss.
Valuation of Goodwill, Intangible and Other Long Lived Assets. We use assumptions in establishing the carrying value, fair value and estimated lives of our long-lived assets and goodwill. The criteria used for these evaluations include management's estimate of the asset's ability to generate positive income from operations and positive cash flow in future periods compared to the carrying value of the asset, the strategic significance of any identifiable intangible asset in our business objectives, as well as the market capitalization of Kronos. We have used certain key assumptions in building the cash flow projections required for evaluating the recoverability of our intangible assets. We have assumed revenues from the following applications of the Kronos technology: consumer stand-alone devices, assisted care/skilled nursing stand-alone devices, embedded devices in the hospitality industry and in specialized military applications. Expenses/cash out flows in our projections include sales and marketing, production, distribution, general and administrative expenses, research and development expenses and capital expenditures. These expenses are based on management estimates and have been compared with industry norms (relative to sales) to determine their reasonableness. We use the same key assumptions for our cash flow evaluation as we do for internal budgeting, lenders and other third parties; therefore, they are internally and externally consistent with financial statement and other public and private disclosures. We are not a memberaware of Atomic Soccer's new ownership group. The sale resulted in a
lossany negative implications resulting from the projections used for purposes of $2,297,000. Duringevaluating 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 fourth quarterestimate of 2001, we determinedthe period that the assets will generate revenues or otherwise be used by Kronos. Factors that would influence the likelihood of EdgeAudio were impaired and we recognized an impairmenta material change in our reported results include significant changes in the asset's ability to generate positive cash flow, loss of $2,294,000. On September 14, 2001,legal ownership or title to the board authorized managementasset, 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 pursuereduce deferred tax assets to the amount expected to be realized. The likelihood of a formal plan for disposalmaterial change in our expected realization of EdgeAudio. The anticipatedthese assets is dependent on our ability to generate future taxable income, our ability to deduct tax loss from operations
duringcarryforwards against future taxable income, the phase-out period is $150,000.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 do not anticipate a lossrecognize revenue in accordance with Securities and Exchange Commission Staff Bulletin 104 ("SAB 104"). Further, Kronos Air Technologies recognizes revenue on the sale of EdgeAudio. 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.
Share-Based Compensation. We also decided to discontinue developmentadopted SFAS No. 123R, “Share-Based Payment” (“SFAS No. 123R”), using the Modified Prospective Approach. Under the Modified Prospective Approach, the amount of Cancer Detection
Internationalcompensation cost recognized includes: (i) compensation cost for all share-based payments granted before but not yet vested based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”) and we have recognized an impairment loss(ii) compensation cost for all share-based payments granted or modified based on the estimated fair value at the date of grant or subsequent modification date in accordance with the remaining
goodwillprovisions of $273,000 associated with that investment.
CONSOLIDATED STATEMENTSSFAS No. 123R.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
SEPTEMBER
Consolidated Statement of Operations For the Three Months Ended September 30, 2001 AND 2000
REVENUE. 2008 (“2008”) Compared with the Three Months Ended September 30, 2007 (“2007”).
Our net losses for 2008 and 2007 were $4,184,000 and $1,463,000, respectively. The $2,721,000, or 186%, increase in the net loss for 2008, as compared to 2007 was principally the result of a $3,029,000 increase in accretion of note discount, partially offset by decreases in compensation of $206,000 and research and development expenses of $68,000 and an increase in revenue for the previous year’s period of $33,000.
Revenue. Revenues are generated through the licensing of Kronos technology and through sales of Kronos(TM)services for design and development of Kronos devices at Kronos Air Technologies, Inc. ForRevenues for 2008 were $57,000 compared with $25,000 for 2007, an increase of $32,000. Revenues for 2008 were from our agreements with Tessera. In comparison, revenues for 2007 were from our agreements with EOL.
Cost of Sales. Cost of sales consists of the three monthscost of the patents transferred and the product development costs associated with our transfer and development agreements. The company incurred no costs associated with patent transfers or product development for the periods ended September 30 2001, our
Company had revenues,2008 or 2007, revenue for these periods was derived from licensing of $25,014, as comparedtechnologies to no revenues for the three months
ended September 30, 2000.
COST OF SALES. For the three months ended September 30, 2001, our
Company had costs of sales of $10,014, as comparedTessera and EOL respectively, and not cost was attributed to no cost of sales for the
three months ended September 30, 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the three months
ended September 30, 2001, selling, generalthese revenues.
Selling, General and administrative expenses amounted
to $1,049,612, as compared to $533,126 for the three months ended September 30,
2000. This increase in selling, generalAdministrative Expenses. Selling, General and administrativeAdministrative expenses for 2008 decrease $268,000, or 25%, to $786,000. The decrease was principally the three months ended September 30, 2001result of $516,486 represents a 96.9% increase
from the corresponding period$206,000, or 37%, decrease in 2000, of which compensation and benefits decreased $112,914primarily as a result of a $393,000, or 39.1%266%, research and development increased $37,624increase in the expense for amortization of stock options that vested, a $288,000, or 71.6%109%, professional services increased $625,319 or 969.8%, depreciation and
amortization decreased $7,447 or 9.4% and other selling, general and
administrative expenses decreased by $26,096 or 28.1%. The increase in professional services as a result of an increase in advisory services from our majority shareholder, as well as legal expenses and a $190,000, or 500%, increase in product development costs.
Accretion of Note Discount. Accretion of note discount for 2008 of $3,341,000 and 2007 of $286,000, represented the amortization of the remaining beneficial conversion feature of the AirWorks, Hilltop, Sun and Gumbinner promissory notes during the period ending September 30, 2008.
Interest Expense. Interest expense for 2008 was $141,000 compared to $149,000 for the corresponding period of the prior year. The $8,000, or 5%, decrease in interest expense for 2008, as compared to 2007, was principally the result of our company utilizing consulting
servicesthe decrease in the debt outstanding principal of $413,000 for comparable periods ending September 30, 2007 to manage the day-to-day operationsSeptember 30, 2008.
Consolidated Balance Sheet as of the company. Consultants to the
Company included the Chief Executive Officer and Executive Vice-President,
Marketing and Sales of Kronos Air Technologies, as well as the Chief Operating
Officer of TSET. Also included in professional services is a pro rata portiion
of The Eagle Rock Group consulting fee of $274,400 which is based on the
valuation of 1.4 million warrants granted for the consulting provided by the
Eagle Rock Group.
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBERSeptember 30, 2001
2008 Compared with June 30, 2008
Our total assets at September 30, 20012008 were $3,194,849$2,009,000 compared with $3,067,329$2,580,000 at June 30, 2001, an increase of $127,520.2008. Total assets at September 30, 20012008 and June 30, 2008 were comprised mainlyprimarily of $595,800 for deferred financing fees$416,000 and $2,400,423$872,000, respectively, of cash and $1,474,000 and $1,546,000, respectively, of patents/intellectual property. Total assets at June 30, 2001 were
comprised principally of $2,431,524 of patents/intellectual property and
$520,800 of deferred financing fees. Total current assets at September 30, 20012008 and June 30, 2001 amounted to $157,7512008 were $525,000 and $70,298,$1,023,000, respectively, while total current liabilities for those samesuch periods amounted to $2,664,308were $6,693,000 and $1,921,213, respectively, creating$3,080,000, respectively. This created a working capital deficit of $2,506,557$6,168,000 at September 30, 2008 and $1,850,915 at each respective period end. Thisa working capital deficit is
principally attributable to the increase in accrued expenses in both years for
compensation and professional services. Total liabilities asof $2,057,000 at September 30,
2001 and June 30, 2001 were $3,414,404 and $2,588,763, respectively,
representing an increase of $825,641. Shareholders' equity2008.
Stockholders' deficit as of September 30,
2001 and2008 was $4,684,000, increased from June 30,
2001 was $(905,555) and $478,566, respectively, representing a
decrease2008 due to the net loss of
$1,384,121. The decrease in shareholders' equity is principally the
result of incurring a $1,052,634 loss from continuing operations$4,184,000 for the
three
months ended September 30, 2001 and from deferred equity compensation from The
Eagle Rock Group warrants. The total valuation of these 1.4 million warrants was
$686,000, of which $274,400 was recorded as a current period expense and the
remaining $411,600 was recorded as a decrease to shareholders' equity. In
addition, equity increased during the three-months period ended September 30,
2001 through the sale and issuance of common stock.
13
2008. 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. Going forward, we plan
Net cash flow used in operating activities was $417,000 for the period ended September 30, 2008. We were able to rely onsatisfy most of our cash requirements for this period from the proceeds from a
Small Business Innovation Research contractof the convertible secured promissory notes with the United States NavyAirWorks, Hilltop and other government contractslenders and grants, and cash flow generatedthe proceeds from the sale of Kronos(TM) devices. We have alsointellectual property assets and patents to Tessera, Inc.
In June 2007, Kronos entered into a common stock purchaseFunding 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 and settlement agreement with Fusionobligation to HoMedics and the expenses of the transaction, the remainder of $1,069,000 was used for working capital purposes.
The lenders are: (i) AirWorks Funding LLLP, a newly-formed limited partnership (“AirWorks”); (ii) Critical Capital underGrowth Fund, L.P. and various Sands Brothers Venture Funds, all of which we haveare affiliates of Laidlaw and Co. (UK) Ltd. (collectively “Sands”) and (iii) Hilltop Holding Company, LP, a Delaware limited partnership, (“Hilltop”).
The loan is secured by all of the right, subject to certain
conditions, to draw down approximately $12,500 per day from the sale of common
stock to Fusion Capital. In addition, in May 2001, Kronos Air Technologies
signed a Small Business Innovation Research contract. This contract is sponsored
by the United States NavyCompany's assets and is potentially worth up to $837,000 in product
development and testing support for Kronos Air Technologies. The first phase of
the contract is worth up to $87,000 in funding for manufacturing and testing a
prototype device for air movement and ventilation on board naval vessels over
the next six months. If awarded to Kronos Air Technologies, the second phase of
the contract would be worth up to $750,000 in additional funding.
At September 30, 2001, we had a working capital deficit of $2,506,557,
which represented a decline of $655,642 from net working capital at June 30,
2001. At September 30, 2001, we had $2.66 million in current liabilities.
Current liabilities was comprised principally of compensation, operating
management consulting fees and other payroll related items of $1.4 million
(53%); other accrued liabilities and advances from shareholders for whichconvertible into shares of the Company's common stock will be issued during the second quarterat a conversion price of $0.6
million (24%); a note payable$0.003 per share, subject to EdgeAudio for working capitaladjustment under certain circumstances. Future installments under the May 4,
2000 acquisition agreementFunding Agreement, up to $13,900,000, may be advanced at the discretion of $0.3 million (11%);the lenders, even if not requested by the Company. Under the Funding Agreement and accounts payables for
professional feesrelated 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 $0.003 conversion price only if not paid in full by December 31, 2007. On March 13, 2008, Critical Capital and Sands Brothers agreed to extend the maturity date of their note until April 30, 2008. On April 1, 2008, the Company repaid Critical Capital and Sands Brothers the full principal amount and interest on the note. With respect to all other vendorsloan 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 $0.3 million (12%). Net cash flow usedthe lenders. Assuming 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 operating activitiesa fully diluted, as converted basis.
The Funding Agreement also gives the lenders the right to designate a majority of the members of the Company's Board of Directors. 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.
On September 29, 2008, the Company received a notice of event of default from AirWorks with respect to the Secured Convertible Promissory Note due June 19, 2010 (the “Promissory Note”), issued to by the Company to AirWorks. The notice states that (1) an Event of Default under Section 2.1(a) of the Promissory Note has occurred due to the failure of the Company to make interest payments on the Promissory Note, and (2) the entire principal amount of, and the interest on, the Promissory Note is declared immediately due and payable in the amount of $3,551,735 plus interest.
The Company has been, and continues to be, in discussions with its secured lenders regarding the outstanding obligations under the AirWorks and Hilltop promissory notes, the alleged occurrence of an event of default, and the enforcement of the rights under the promissory notes. Following the Board of Directors’ appointment of James P. McDermott and M. J. Segal to an independent committee to investigate the foregoing, Mr. McDermott and Mr. Segal resigned from the Board of Directors. Since the Company was $277,847 for the three months ended September 30, 2001.
We werenot able to satisfy some of our cash requirementslocate a purchaser for the three months ended
September 30, 2001 through the issuance and sale of our common stock.
On June 19, 2001, we entered into a common stock purchase agreement
with Fusion Capital. Pursuant to the common stock purchase agreement, Fusion
Capital has agreed subject to certain conditions to purchaseits business or assets on each trading day
during the term of the agreement, $12,500 of our common stock or an aggregate of
$10.0 million. The $10.0 million of our common stock is to be purchased over a
40-month period, subject to a six-month extension or earlier termination at our
sole discretion and subject to certain events. The purchase price of the shares
of common stock will be equal to a price based upon the future market price of
our common stock without any fixed discount to the then-current market price.
However, there can be no assurance of how much cash we will receive, if any,
under the common stock purchase agreement with Fusion Capital.
On November 1, 2001, our Registration Statement on Form S-1 was
declared effective by the Securities and Exchange Commission. As a result,satisfactory terms, the Company may be able to raise capital by selling sharesis now in the process of transferring control of its common stockassets to Fusion CapitalAirWorks and Hilltop in accordance with the common stock purchase agreement.
On November 13, 2001, we entered into a Letter Agreement with Fusion
Capital amending the common stock purchase agreement. Pursuant to the Letter
Agreement, Fusion Capital will provide our Company with a $150,000 advance under
the common stock purchase agreement and our ability to receive advances is
limited.
peaceful possession procedures.
GOING CONCERN OPINION
We
The Report of Independent Registered Public Accounting Firm includes an explanatory paragraph to their audit opinions issued in connection with our 2008 and 2007 financial statements that states that we do not have significant cash or other material assets to cover our operating costs. Our abilitycosts and debt obligations. As a result of the Company’s financial condition, including receipt of the notice of event of default from Airworks and the inability 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
transition from research and development to manufacturing and selling commercial
products on
As a broad basis. While attempting to make this transition, we will be
subject toresult of the Company’s financial condition, it has discontinued substantially all the risks inherent in a growing venture, including, but no
limited to, the need to develop and manufacture reliable and effective products,
develop marketing expertise and expand our sales force.
CERTAIN RISK FACTORS
Ourof its operating activities. The Company is in the process of transferring control of its assets to Airworks and Hilltop, in accordance with peaceful possession procedures.
FACTORS AFFECTING KRONOS' BUSINESS AND PROSPECTS
We are subject to various risks, which may materially harmhave a material adverse effect on our business, financial condition and results of operations.operations, and may result in a decline in our stock price. Certain risks are discussed below.
WE HAVE A LIMITED OPERATING HISTORY WITH SIGNIFICANT LOSSES AND EXPECT LOSSES TO
CONTINUE FOR THE FORESEEABLE FUTURE
below:
We do not have only recently begun implementingsufficient cash to continue operations and require significant additional financing to sustain our planoperations, and are exploring alternatives 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 historysell, license or liquidate the assets of profitable operations. We incurred a net operating loss of $760,212 for the three months endedCompany.
At September 30,
2001. We have incurred net losses from
continuing operations of $3,572,558 and $1,385,595 for the fiscal years ended
June 31, 2001 and 2000. We have incurred net losses from continuing operations
of $778,234 for the three months ended September 30, 2001. We have incurred
annual operating losses of $9,866,083, $1,965,183 and $51,674 respectively,
during the past three fiscal years of operation. As a result, at September 30,
20012008, and June 30,
2001 we had an accumulated deficit of $12,752,019 and
$11,973,785, respectively. Our revenues have not been sufficient to sustain our
operations. We expect that our revenues will not be sufficient to sustain our
14
operations for the foreseeable future. Our profitability will require the
successful commercialization of our Kronos(TM) technology. No assurances can be
given when this will occur or that we will ever be profitable.
Our independent auditors have added an explanatory paragraph to their
audit opinion issued in connection with the financial statements for the years
ended June 30, 2001 and June 30, 2000 relative to our ability to continue as a
going concern. Our ability to obtain additional funding will determine our
ability to continue as a going concern. Our financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
WE WILL REQUIRE ADDITIONAL FINANCING TO SUSTAIN OUR OPERATIONS AND WITHOUT IT WE
WILL NOT BE ABLE TO CONTINUE OPERATIONS
At September 30, 20012008, we had a working capital deficit of $2,506,557.
At June 30, 2001 we had a working capital deficit$6.2 million and $2.1 million, respectively. The Report of $1,850,915. The independent
auditor's reportIndependent Registered Public Accounting Firm for the yearsyear ended June 30, 2001 and June 30, 2000,2008, 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. We haveFor the fiscal years ended June 30, 2008, and 2007, we had an operating cash flow deficit of $10,524$0.2 million and $3.0 million and a cash balance of $872,000 and $364,000, respectively. Kronos has not been successful in 1999, an operating cash flow deficitits attempts to sell, license or liquidate partial or all of $288,262the Company’s assets to satisfy secured lenders’ obligations and therefore it is in 2000
and an operating cash flow deficitthe process of $1,613,573 in 2001. Wetransferring assets to its priority creditors. Since we do not currently
have sufficient financial resources to fund our operations or those of our
subsidiaries. Therefore, we need additional funds to continue these operations.
Subjectsatisfy secured loans and the alleged event of default, the Company is in the process of transferring control of its assets to certain conditions, weits priority creditors in accordance with peaceful possession procedures.
On September 29, 2008, Kronos received a notice of event of default from AirWorks with respect to the Secured Convertible Promissory Note due June 19, 2010, issued by the Company to AirWorks. The notice stated that (1) an Event of Default under Section 2.1(a) of the Promissory Note has occurred due to the failure of the Company to make interest payments on the Promissory Note and (2) the entire principal amount of, and the interest on, the Promissory Note is declared immediately due and payable in the principal amount of $3,551,735 plus interest. The Company requested funding from the senior lenders but was declined. The Company is evaluating the status of the alleged default.
The Funding Agreement with the Company’s secured lenders provides that in the event of default, the lenders have the right to receive $12,500 per
trading dayseek foreclosure of all of the assets of the Company, including all intellectual property and patent rights, all cash assets, all physical goods and equipment and all contractual rights including license Agreements. The Company has not been successful in its attempt to consummate a strategic transaction, the secured lenders have enforced their rights under the common stock purchase agreement unlessFunding Agreement and all of the Company’s remaining assets are in the process of being foreclosed on and transferred to AirWorks and Hilltop.
We have a limited operating history with significant losses and have terminated our stock price
equalsoperations.
We have a limited operating history and have not been able to establish any history of profitable operations. We incurred a net loss of $4.2 million for the quarter ended September 30, 2008, $1.5 million for the fiscal year ended June 30, 2008, and a net loss of $2.35 million for the fiscal year ended June 30, 2007. As a result, at September 30, 2008, June 30, 2008, and June 30, 2007, we had an accumulated deficit of $39.1 million, $37.8 million and $33.5 million, respectively. Our revenues and cash flows from operations have not been sufficient to sustain our operations. On October 24, 2008, the Company terminated all but two of its employees and ceased substantially all of its operating activities. As a subsequent event, On January 9, 2009, Dr Krichtafovitch resigned from the Company. As a subsequent event, Following Acting President R. Tusing is resigning effective the close of business on February 13, 2009 and following Mr. Tusing’s resignation, the Company has appointed Mr. Barry Salzman as the acting president, acting, Secretary and acting Treasurer of the Company.
Existing stockholders will experience significant dilution from the issuance of shares under our secured financing or exceeds $3.00, in which case the daily amount may be increased at our
option. Since we initially registered 5,000,000any equity financing.
The issuance of shares for sale by Fusion
Capital pursuant to the commonconversion of the AirWorks and Hilltop Secured Convertible Promissory Note, the exercise of stock purchase agreement, the selling price of
our common stock to Fusion Capitaloptions and warrants or any other future equity financing transaction will have to average at least $2.00a dilutive impact on our stockholders. As a result, our net income per share for us to receive the maximum proceeds of $10,000,000 without registering
additional shares of common stock or filing a post-effective amendment with
respect to the number of shares registered. Assuming a purchase price of $0.36
per share (the closing sale price of the common stock on November 15, 2001)could decrease in future periods, and the purchase by Fusion Capital of the full 5,000,000 shares under the common
stock purchase agreement, proceeds to us would only be $1,800,000 unless we
choose to register more than 5,000,000 shares, which we have the right, but not
the obligation, to do. The extent we rely on Fusion Capital as a source of
funding will depend on a number of factors including, the prevailing market price of our common stock and the extentcould decline.
Our failure to which we are able to secure working
capital from other sources, such as through the saleenforce protection of our Kronos(TM) air
movement and purification systems. If obtaining sufficient financing from Fusion
Capital were to prove prohibitively expensive and if we are unable to
commercialize and sell the products or technologies of our subsidiaries, 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 common stock
purchase agreement, we may still need additional capital to fully implement our
business, operating and development plans. Should the financing we require to
sustain our working capital needs be unavailable or prohibitively expensive when
we require it, the consequencesintellectual property would behave a material adverse effect on our business, operating results, financial condition and prospects.
WE HAVE VERY LIMITED MANUFACTURING, SALES AND MARKETING CAPABILITIES FOR OUR
KRONOS(TM) PRODUCTS AND OUR FAILURE TO DEVELOP ANY OF THESE CAPABILITIES WOULD
HAVE business.
A MATERIAL ADVERSE EFFECT ON OUR BUSINESS
We have only recently begun to manufacture and market prototype
versionssignificant part of our Kronos Air Technologiessuccess depends in part on our ability to obtain and defend our intellectual property, including patent protection for our products and we have no experience
manufacturing, marketing or distributing commercial quantitiesprocesses, 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 Kronos Air
Technologies products. Kronos Air Technologies currently doesintellectual 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. We do not have any
commercial-scale manufacturing facilities. Kronos Air Technologies does notsufficient funds to enforce protection of our intellectual property.
Possible future impairment of intangible assets would have
any relationships with third parties to contract manufacture, market or
distribute the Kronos(TM) products. If Kronos Air Technologies is unable to
acquire adequate manufacturing capabilities and hire sales and marketing
personnel or if it cannot enter into satisfactory arrangements with third
parties to manufacture, market and distribute the Kronos(TM) products on
commercially reasonable terms, the consequences would be a material adverse effect on our business, operating results, financial condition and prospects.
There can be no assurance that we will be able to acquire adequate manufacturing
capabilities and hire salescondition.
Our net intangible assets of approximately $1.5 million as of September 30, 2008, consist principally of purchased patent technology and marketing personnel or be ableintangibles, which relate to enter into
satisfactory arrangements with third parties to manufacture, market and
distribute the Kronos(TM) products.
COMPETITION IN THE MARKET FOR AIR MOVEMENT AND PURIFICATION DEVICES MAY RESULT
IN THE FAILURE OF THE KRONOS(TM) PRODUCTS TO ACHIEVE MARKET ACCEPTANCEacquisition of Kronos Air Technologies, presently facesInc. 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 73% of our total assets as of September 30, 2008. 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, from other
companiesa loss of key personnel, and projections or forecasts that are developing or that currently sell air movement and
purification devices. Manydemonstrate continuing losses associated with these assets. Should impairment occur, we would be required to recognize it in our financial statements. A write-down of these competitorsintangible assets could have substantially greater
financial, researcha material adverse impact on our total assets, net worth and development, manufacturing,results of operations.
Our common stock is deemed to be "penny stock," subject to special requirements and
salesconditions and
marketing
resources than we do. Many of the products sold by Kronos Air Technologies'
competitors already have brand recognition and established positions in the
15
markets that we have targeted for penetration. There canmay not be no assurance that
the Kronos(TM) products will compete favorably with the products sold by our
competitors.
OUR COMMON STOCK IS DEEMED TO BE "PENNY STOCK," SUBJECT TO SPECIAL REQUIREMENTS
AND CONDITIONS, AND MAY NOT BE A SUITABLE INVESTMENT
a suitable investment. Our common stock is deemed to be "penny stock" as that term is defined in Rule 3a51-1 promulgated under the Securities Exchange Act of 1934. Penny stocks are stocks:
o With a price of less than $5.00 per share;
o That are not traded on a "recognized" national exchange;
o Whose prices are not quoted on the Nasdaq automated quotation
system (Nasdaq listed stock must still have a price of not
less than $5.00 per share); or
o In issuers with net tangible assets less than $2.0 million (if
the issuer has been in continuous operation for at least three
years) or $5.0 million (if in continuous operation for less
than three years), or with average revenues of less than $6.0
million for the last three years.
| - | with a price of less than $5.00 per share; |
| - | that are not traded on a national stock exchange; |
| - | 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
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable to smaller reporting companies.
ITEM 4T. CONTROLS AND KRONOS AIR TECHNOLOGIES RESEARCH PERSONNEL, THE LOSS
OF WHOSE SERVICES COULD HAVE A MATERIAL ADVERSE EFFECT UPON OUR BUSINESS
We rely principally uponPROCEDURES
Evaluation of Disclosure Controls and Procedures. As of September 30, 2008, the servicesCompany carried out an evaluation, under the supervision of our Board of Directors, senior
executive management, and certain key employees, including the Kronos Air
Technologies research team, the loss of whose services could have a material
adverse effect upon our business and prospects. We are in the process of
identifying suitable candidates for certain other senior management positions
deemed essential to the future successful development of Kronos Air Technologies
and the Kronos(TM) technology. 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 Kronos Air Technologies and the
Kronos(TM) technology, and the inability to do so or any difficulties
encountered by management in establishing effective working relationships among
them may adversely affect our business and prospects. Currently, ourActing Chief Executive Officer performs servicesand Chief Financial Officer (one individual), of the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act")) pursuant to Rule 13a-15 of the Exchange Act. It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. Based on that evaluation, the Company's Acting Chief Executive Officer and Chief Financial Officer (one individual), concluded that the Company's disclosure controls and procedures were effective at this reasonable assurance level as of September 30, 2008.
Changes in Internal Controls over Financial Reporting. In connection with the evaluation of the Company's internal controls over financial reporting during the Company's three months ended September 30, 2008, the Company's Acting Chief Executive Officer and Chief Financial Officer (one individual) has determined that there were no changes to the Company's internal controls over financial reporting during the quarter that have materially affected or is reasonably likely to affect the Company's internal control over financial reporting.
ITEM 1. 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 consulting agreement.
Currently, we do not carry key person life insurancecomplaint in the state of Utah, in the Second Judicial District Court in Weber County, against Kronos with respect to prior services rendered to High Voltage Integrated, Inc. (HVI), based on unpaid patent counsel services totaling $47,130 by Fehr to HVI. Fehr has filed total damages claims of $444,900.00. The Company believes this complaint is without merit and is vigorously defending itself.
Daniel R. Dwight filed a lawsuit on October 17, 2008, in the state of Massachusetts, in Suffolk County Superior Court, against Kronos for anylack of our directors,
executive management, or key employees.
THE SALE OF OUR COMMON STOCK TO FUSION CAPITAL MAY CAUSE DILUTION AND THE SALE
OF THE SHARES OF COMMON STOCK ACQUIRED BY FUSION CAPITAL COULD CAUSE THE PRICE
OF OUR COMMON STOCK TO DECLINE
The purchase price for the common stock to be issued to Fusion Capitalpayments pursuant to the common stock purchase agreement will fluctuate based onSeverance Agreement dated May 16, 2008 for claims of $187, 437 plus interest and attorney fees. The Company believes its obligations to its Secured Lenders supercede the price of our common stock. All shares issuedpayment obligations to Fusion Capital will be freely
tradable. Fusion Capital may sell none, some or allMr. Dwight.
In addition, the Company received correspondence from Frederic R. Gumbinner and Richard A. Sun, as second secured lien holders, concerning claims for late payments and subsequent related penalties with respect to outstanding loans by Mr. Gumbinner and Mr. Sun. The Company has responded that the obligation to its senior secured lien holders supercedes and takes priority to the claims of the
shares of common
stock purchased from us at any time. We expect thatsecond secured lien holders and the
shares sold to Fusion
Capital will be sold over a period of up to 40 months fromexisting intercreditor agreements among the
date ofsecured lenders sets for the
common stock purchase agreement. Depending upon market liquidity atapplicable rights, obligations and responsibilities between the
time, a
sale of shares by Fusion Capital at any given time could cause the trading price
of our common stock to decline. The sale of a substantial number of shares of
our common stock by Fusion Capital, or anticipation of such sales, could make it
more difficult for us to sell equity or equity-related securities in the future
at a time and at a price that we might otherwise wish to effect sales.
16
OUR FAILURE TO FILE FEDERAL AND STATE INCOME TAX RETURNS FOR CALENDAR YEARS 1997
THROUGH 2001 MAY RESULT IN THE IMPOSITION OF INTEREST AND PENALTIES
We failed to file federal and state income tax returns for calendar
years 1997 through 2001, respectively. We believe that we had operating losses
for each year during the period 1997 through 2001, and that there are no
expected income taxes due and owing for those years. We anticipate filing all
past due returns by December 31, 2001. When filed, these returns could be
subject to review and potential examination by the respective taxing
authorities. Should any of these returns come under examination by federal or
state authorities, our positions on certain income tax issues could be
challenged. The impact, if any, of the potential future examination cannot be
determined at this time. If our positions are successfully challenged, the
results may have a material impact on our financial position and results of
operations.
17
PART II
ITEM 1. LEGAL PROCEEDINGS
On February 2, 2001, we initiated, together with Kronos Air
Technologies, legal proceedings in Clackamas County, Oregon against W. Alan
Thompson, Ingrid T. Fuhriman, and Robert L. Fuhriman II, each of whom were
formerly executive officers and members of the Board of Directors of Kronos Air
Technologies. This suit alleges, among other things, breach of fiduciary duties
and breach of contract by these individuals, and seeks, among other things, an
order from the court referring the dispute to arbitration in accordance with the
terms of these individuals. We have agreed to a change of venue of this matter
to King County, Washington, and arbitrators have been selected. The parties are
in the process of exchanging and complying with requests for discovery.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 6, 2001, we authorized the issuance of 238,806 common shares,
valued at $.335 per share (the fair market value for our shares as of such
date), at an aggregate value of $80,000, to Periopolis, Inc., in exchange for
$80,000 cash.
On July 20, 2001, we issued 250 common shares, valued at $.452 per
share (the fair market value for our shares as of such date), at an aggregate
value of $250 to an employee of TSET, as compensation.
lenders. ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
As described above, on September 29, 2008, Kronos received a notice of event of default from AirWorks with respect to the Secured Convertible Promissory Note due June 19, 2010 (the “Promissory Note”), issued to by the Company to AirWorks. The notice states that (1) an Event of Default under Section 2.1(a) of the Promissory Note has occurred due to the failure of the Company to make interest payments on the Promissory Note and (2) the entire principal amount of, and the interest on, the Promissory Note is declared immediately due and payable in the amount of $3,551,735 plus interest. See Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional details regarding this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5.6. EXHIBITS EXHIBIT NO. | DESCRIPTION | LOCATION
- -------------- ----------------------------------------------------------- -------------------------------------------------
|
2.1 | Articles of Merger for Technology Selection, Inc. with | Incorporated by reference to |
| Selection, Inc. with the Nevada | Exhibit 2.1 to the the Nevada Registrant's |
| Secretary of State Registrant's | Registration Statement on Form |
| | S-1 filed on August 7, 2001 (the "REGISTRATION
STATEMENT" |
| | "Registration Statement") |
| | |
3.1 | Articles of Incorporation | Incorporated by reference to |
| | Exhibit 3.1 to the Registration |
| | Statement on Form S-1 filed on
August 7, 2001
|
| | |
3.2 | Bylaws | Incorporated by reference to |
| | Exhibit 3.2 to the Registration |
| | Statement on Form S-1 filed on
August 7, 2001
5.1 Opinion re: Legality Incorporated |
| | |
| | |
31 | Certification of Principal Executive | Provided herewith |
| Officer and Principal Financial Officer | |
| pursuant to U.S.C. Section | |
| 7241, as adopted pursuant to Section | |
| 302 of the Sarbanes-Oxley Act of 2002 | |
| | |
| | |
32 | Certification by referencePrincipal Executive | Provided herewith |
| Officer and Principal Financial Officer | |
| pursuant to Exhibit 5.118 U.S.C. Section 1350, as | |
| adopted pursuant to Amendment No. 1 to Form S-1 filed on October
19, 2001
10.1 Employment Agreement, dated April 16, 1999, by and Incorporated by reference to Exhibit 10.1 to
between TSET, Inc. and Jeffrey D. WilsonSection 906 of the Registration Statement on Form S-1 filed on
August 7, 2001
10.2 Deal Outline, dated December 9, 1999, by and between Incorporated by reference to Exhibit 10.2 to
TSET, Inc. and Atomic Soccer, USA, Ltd. the Registration Statement on Form S-1 filed on
August 7, 2001
18
EXHIBIT
NO. DESCRIPTION LOCATION
- -------------- ----------------------------------------------------------- -------------------------------------------------
10.3 Letter | |
| Sarbanes-Oxley Act of Intent, dated December 27, 1999, by and between Incorporated by reference to Exhibit 10.3 to
TSET, Inc. and Electron Wind Technologies, Inc. the Registration Statement on Form S-1 filed on
August 7, 2001
10.4 Agreement, dated February 5, 2000, by and between Incorporated by reference to Exhibit 10.4 to
DiAural, LLC and EdgeAudio, LLC the Registration Statement on Form S-1 filed on
August 7, 2001
10.5 Stock Purchase Agreement, dated March 6, 2000, by and Incorporated by reference to Exhibit 10.5 to
among TSET, Inc., Atomic Soccer USA, Ltd., Todd P. the Registration Statement on Form S-1 filed on
Ragsdale, James Eric Anderson, Jewel Anderson, Timothy August 7, 2001
Beglinger and Atomic Millennium Partners, LLC
10.6 Acquisition Agreement, dated March 13, 2000, by and among Incorporated by reference to Exhibit 10.6 to
TSET, Inc., High Voltage Integrated, LLC, Ingrid the Registration Statement on Form S-1 filed on
Fuhriman, Igor Krichtafovitch, Robert L. Fuhriman and August 7, 2001
Alan Thompson
10.7 Letter of Intent, dated April 18, 2000, by and between Incorporated by reference to Exhibit 10.7 to
TSET, Inc. and EdgeAudio.com, Inc. the Registration Statement on Form S-1 filed on
August 7, 2001
10.8 Lease Agreement, dated May 3, 2000, by and between Kronos Incorporated by reference to Exhibit 10.8 to
Air Technologies, Inc. and TIAA Realty, Inc. the Registration Statement on Form S-1 filed on
August 7, 2001
10.9 Agreement and Plan of Reorganization, dated May 4, 2000, Incorporated by reference to Exhibit 10.9 to
by and among TSET, Inc., EdgeAudio.com, Inc., LYNK the Registration Statement on Form S-1 filed on
Enterprises, Inc., Robert Lightman, J. David Hogan, Eric August 7, 2001
Alexander and Eterna Internacional, S.A. de C.V.
10.10 Letter Agreement, dated May 4, 2000, by and between TSET, Incorporated by reference to Exhibit 10.10 to
Inc. and Cancer Detection International, LLC the Registration Statement on Form S-1 filed on
August 7, 2001
10.11 Employment Agreement, dated May 19, 2000, by and between Incorporated by reference to Exhibit 10.11 to
TSET, Inc. and Richard A. Papworth the Registration Statement on Form S-1 filed on
August 7, 2001
10.12 Finders Agreement, dated August 21, 2000, by and among Incorporated by reference to Exhibit 10.12 to
TSET, Inc., Richard F. Tusing and Daniel R. Dwight the Registration Statement on Form S-1 filed on
August 7, 2001
10.13 Contract Services Agreement, dated June 27, 2000, by and Incorporated by reference to Exhibit 10.13 to
between Chinook Technologies, Inc. and Kronos Air the Registration Statement on Form S-1 filed on
Technologies, Inc. August 7, 2001
10.14 Letter of Intent, dated July 17, 2000, by and between Incorporated by reference to Exhibit 10.14 to
Kronos Air Technologies, Inc. and Polus Technologies, Inc. the Registration Statement on Form S-1 filed on
August 7, 2001
10.15 Consulting Agreement, dated August 1, 2000, by and among Incorporated by reference to Exhibit 10.15 to
TSET, Inc., Richard F. Tusing and Daniel R. Dwight the Registration Statement on Form S-1 filed on
August 7, 2001
10.16 Preferred Stock Purchase Agreement, dated September 12, Incorporated by reference to Exhibit 10.16 to
2000, by and between EdgeAudio.com, Inc. and Bryan the Registration Statement on Form S-1 filed on
Holbrook August 7, 2001
10.17 Shareholders Agreement, dated September 12, 2000, by and Incorporated by reference to Exhibit 10.17 to
among TSET, Inc., Bryan Holbrook and EdgeAudio.com, Inc. the Registration Statement on Form S-1 filed on
August 7, 2001
19
EXHIBIT
NO. DESCRIPTION LOCATION
- -------------- ----------------------------------------------------------- -------------------------------------------------
10.18 Amendment to Agreement and Plan of Reorganization dated Incorporated by reference to Exhibit 10.18 to
September 12, 2000, by and among TSET, Inc., the Registration Statement on Form S-1 filed on
EdgeAudio.com, Inc., LYNK Enterprises, Inc., Robert August 7, 2001
Lightman, J. David Hogan, Eric Alexander and Eterna
Internacional, S.A. de C.V.
10.19 Agreement Regarding Sale of Preferred Stock, dated Incorporated by reference to Exhibit 10.19 to
November 1, 2000, by and between EdgeAudio.com, Inc. and the Registration Statement on Form S-1 filed on
Bryan Holbrook August 7, 2001
10.20 Amendment to Subcontract, dated December 14, 2000, Incorporated by reference to Exhibit 10.20 to the
by and between Bath Iron Works and High Voltage Registration Statement on Form S-1 filed on
Integrated August 7, 2001
10.21 Consulting Agreement, dated January 1, 2001, by and Incorporated by reference to Exhibit 10.21 to
between TSET, Inc. and Dwight, Tusing & Associates the Registration Statement on Form S-1 filed on
August 7, 2001
10.22 Employment Agreement, dated March 18, 2001, by and Incorporated by reference to Exhibit 10.22 to
between TSET, Inc. and Alex Chriss the Registration Statement on Form S-1 filed on
August 7, 2001
10.23 Stock Option Agreement, dated April 9, 2001, by and Incorporated by reference to Exhibit 10.23 to
between TSET, Inc. and Jeffrey D. Wilson the Registration Statement on Form S-1 filed on
August 7, 2001
10.24 Stock Option Agreement, dated April 9, 2001, by and Incorporated by reference to Exhibit 10.24 to
between TSET, Inc. and Jeffrey D. Wilson the Registration Statement on Form S-1 filed on
August 7, 2001
10.25 Stock Option Agreement, dated April 9, 2001, by and Incorporated by reference to Exhibit 10.25 to
between TSET, Inc. and Daniel R. Dwight the Registration Statement on Form S-1 filed on
August 7, 2001
10.26 Stock Option Agreement, dated April 9, 2001, by and Incorporated by reference to Exhibit 10.26 to
between TSET, Inc. and Richard F. Tusing the Registration Statement on Form S-1 filed on
August 7, 2001
10.27 Stock Option Agreement, dated April 9, 2001, by and Incorporated by reference to Exhibit 10.27 to
between TSET, Inc. and Charles D. Strang the Registration Statement on Form S-1 filed on
August 7, 2001
10.28 Stock Option Agreement, dated April 9, 2001, by and Incorporated by reference to Exhibit 10.28 to
between TSET, Inc. and Richard A. Papworth the Registration Statement on Form S-1 filed on
August 7, 2001
10.29 Stock Option Agreement, dated April 9, 2001, by and Incorporated by reference to Exhibit 10.29 to
between TSET, Inc. and Richard A. Papworth the Registration Statement on Form S-1 filed on
August 7, 2001
10.30 Stock Option Agreement, dated April 9, 2001, by and Incorporated by reference to Exhibit 10.30 to
between TSET, Inc. and Erik W. Black the Registration Statement on Form S-1 filed on
August 7, 2001
10.31 Stock Option Agreement, dated April 9, 2001, by and Incorporated by reference to Exhibit 10.31 to
between TSET, Inc. and J. Alexander Chriss the Registration Statement on Form S-1 filed on
August 7, 2001
10.32 Stock Option Agreement, dated April 9, 2001, by and Incorporated by reference to Exhibit 10.32 to
between TSET, Inc. and Charles H. Wellington the Registration Statement on Form S-1 filed on
August 7, 2001
20
EXHIBIT
NO. DESCRIPTION LOCATION
- -------------- ----------------------------------------------------------- -------------------------------------------------
10.33 Stock Option Agreement, dated April 9, 2001, by and Incorporated by reference to Exhibit 10.33 to
between TSET, Inc. and Igor Krichtafovitch the Registration Statement on Form S-1 filed on
August 7, 2001
10.34 Letter Agreement, dated April 10, 2001, by and between Incorporated by reference to Exhibit 10.34 to
TSET, Inc. and Richard A. Papworth the Registration Statement on Form S-1 filed on
August 7, 2001
10.35 Letter Agreement, dated April 12, 2001, by and between Incorporated by reference to Exhibit 10.35 to
TSET, Inc. and Daniel R. Dwight and Richard F. Tusing the Registration Statement on Form S-1 filed on
August 7, 2001
10.36 Finders Agreement, dated April 20, 2001, by and between Incorporated by reference to Exhibit 10.36 to
TSET, Inc. and Bernard Aronson, d/b/a Bolivar the Registration Statement on Form S-1 filed on
International Inc. August 7, 2001
10.37 Indemnification Agreement, dated May 1, 2001, by and Incorporated by reference to Exhibit 10.37 to
between TSET, Inc. and Jeffrey D. Wilson the Registration Statement on Form S-1 filed on
August 7, 2001
10.38 Indemnification Agreement, dated May 1, 2001, by and Incorporated by reference to Exhibit 10.38 to
between TSET, Inc. and Daniel R. Dwight the Registration Statement on Form S-1 filed on
August 7, 2001
10.39 Indemnification Agreement, dated May 1, 2001, by and Incorporated by reference to Exhibit 10.39 to
between TSET, Inc. and Richard F. Tusing the Registration Statement on Form S-1 filed on
August 7, 2001
10.40 Indemnification Agreement, dated May 1, 2001, by and Incorporated by reference to Exhibit 10.40 to
between TSET, Inc. and Charles D. Strang the Registration Statement on Form S-1 filed on
August 7, 2001
10.41 Indemnification Agreement, dated May 1, 2001, by and Incorporated by reference to Exhibit 10.41 to
between TSET, Inc. and Richard A. Papworth the Registration Statement on Form S-1 filed on
August 7, 2001
10.42 Indemnification Agreement, dated May 1, 2001, by and Incorporated by reference to Exhibit 10.42 to
between TSET, Inc. and Erik W. Black the Registration Statement on Form S-1 filed on
August 7, 2001
10.43 Stock Option Agreement, dated May 3, 2001, by and between Incorporated by reference to Exhibit 10.43 to
TSET, Inc. and Jeffrey D. Wilson the Registration Statement on Form S-1 filed on
August 7, 2001
10.44 Common Stock Purchase Agreement, dated June 19, 2001, by Incorporated by reference to Exhibit 10.44 to
and between TSET, Inc. and Fusion Capital Fund II, LLC the Registration Statement on Form S-1 filed on
August 7, 2001
10.45 Registration Rights Agreement, dated June 19, 2001, by Incorporated by reference to Exhibit 10.45 to
and between TSET, Inc. and Fusion Capital Fund II, LLC the Registration Statement on Form S-1 filed on
August 7, 2001
10.46 Mutual Release and Settlement Agreement, dated July 7, Incorporated by reference to Exhibit 10.46 to
2001, by and between TSET, Inc. and Foster & Price Ltd. the Registration Statement on Form S-1 filed on
August 7, 2001
10.47 Letter Agreement, dated July 9, 2001, by and between Incorporated by reference to Exhibit 10.47 to
TSET, Inc. and The Eagle Rock Group, LLC the Registration Statement on Form S-1 filed on
August 7, 2001
10.48 Finders Agreement, dated July 17, 2001, by and between Incorporated by reference to Exhibit 10.48 to
TSET, Inc. and John S. Bowles the Registration Statement on Form S-1 filed on
August 7, 2001
10.49 Warrant Agreement, dated July 16, 2001, by and between Incorporated by reference to Exhibit 10.49 to
TSET, Inc. and The Eagle Rock Group, LLC the Registration Statement on Form S-1 filed on
August 7, 2001
10.50 Agreement and Release, dated October 10, 2001, by and Incorporated by reference to Exhibit 10.50 to
between TSET, Inc. and Jeffrey D. Wilson the Registrant's Form 10-K for the year ended
June 30, 2001 filed on October 15, 2001
21
EXHIBIT
NO. DESCRIPTION LOCATION
- -------------- ----------------------------------------------------------- -------------------------------------------------
10.51 Promissory Note dated October 10, 2001 payable to Mr. Incorporated by reference to Exhibit 10.51 to
Jeffrey D. Wilson the Registrant's Form 10-K for the year ended
June 30, 2001 filed on October 15, 2001
10.52 Consulting Agreement, dated October 10, 2001, by and Incorporated by reference to Exhibit 10.52 to
between TSET, Inc. and Jeffrey D. Wilson the Registrant's Form 10-K for the year ended
June 30, 2001 filed on October 15, 2001
10.53 Consulting Agreement, effective October 1, 2001,
by and among Steven G. Martin and Joshua B. Scheinfeld Provided herewith
10.54 Letter Agreement dated November 13, 2001 by and between
TSET, Inc. and Fusion Capital Fund II, LLC Provided herewith
11.1 Statement re: Computation of Earnings Not applicable
27.1 Financial Data Schedule Not applicable
2002 | |
22
SIGNATURES
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
DATED: NOVEMBER 16, 2001 TSET, INC.
By: /s/ Daniel R. Dwight
----------------------------------------
Daniel R. Dwight
President and Chief Executive Officer
23
| DATED: February 11, 2008 | KRONOS ADVANCED TECHNOLOGIES, INC. |
| | |
| | By: /s/ Richard F. Tusing |
| | Richard F. Tusing acting President, acting Chief Executive Officer, acting Principal Executive Officer, Chief Financial Officer, Principal Financial Officer, Chief Operating Officer, Treasurer, Secretary, and Director |