EXHIBIT 99.1
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Daniel R. Dwight
President and Chief Executive Officer
Kronos Advanced Technologies, Inc.
464 Common Street, Suite 301
Belmont, MA 02478
To Our Shareholders:
I am pleased to write to you about the exciting accomplishments we have
achieved over the past twelve months and to personally thank you for your
continued support of Kronos Advanced Technologies, Inc. We are proud of the
substantial progress we made transitioning Kronos from a research and
development company to an operating business. During the year, we were awarded
our first patents on the KronosTM technology, obtained viable commercial
contracts, and made further innovations on our proprietary technology. Kronos
successfully raised capital from both financial and strategic partners and
established a stronger, more independent Board of Directors. As a result, the
Company began to earn an initial return on our investment in the KronosTM
technology by signing our first commercial contracts in the consumer, military
and transportation markets and generating an initial $559,000 in revenue.
These accomplishments are the direct result of management's commitment
and focus on building a long term, financially viable operating business capable
of generating sustainable revenue. We believe this commitment and focus will
continue to bring improved value to our stockholders in the future.
Patents and Intellectual Property
We believe that the first ingredient in building a successful operating
business capable of generating sustainable revenue is the ability to build a
protected intellectual property platform. The Kronos research team's diligent
pursuit of patent protection resulted in the following accomplishments in 2003:
o In January 2003, we received formal notification from the U. S.
Patent and Trademark Office indicating that our application entitled
Electrostatic Fluid Accelerator had been examined and allowed for
issuance as a U. S. patent (#6,504,308). The patent provides
protection for key aspects of Kronos' technology until late in 2019.
o In August 2003, we received a Notice of Allowance from the U. S.
Patent and Trademark Office indicating that our patent application
entitled Method of and Apparatus for Electrostatic Fluid
Acceleration Control of a Fluid Flow had been examined and allowed
for issuance as a U. S. patent. This latest patent when formally
issued will provide intellectual property protection for key aspects
of Kronos' technology until late in 2020.
o In addition to the Electrostatic Fluid Accelerator and Method of and
Apparatus for Electrostatic Fluid Acceleration Control of a Fluid
Flow patents, a number of additional patent applications have been
filed for, among other things, the control and management of
electrostatic fluid acceleration. There are a number of
corresponding patent applications, which have been filed and are
pending outside of the United States.
Commercial Contracts
We believe that the second ingredient in building a successful operating
business capable of generating sustainable revenue is the ability to establish
relationships with key strategic partners; partners who have the vision, the
financial resources, and the product development and distribution capabilities
to integrate the KronosTM technology into viable commercial products in a timely
fashion. We believe that establishing new customer relationships and executing
commercial contracts will result in bringing the KronosTM technology to market
through our Standalone and Embedded Product Platforms:
Standalone Platform
o Consumer Retail Products. In October 2002, Kronos and HoMedics
executed a Licensing Agreement granting HoMedics certain rights with
respect to the distribution of the KronosTM proprietary technology
to the consumer. HoMedics is a leading provider of health and
wellness products through major domestic retailers, including
Wal-Mart, Home Depot, Sears, Bed Bath & Beyond, and Linens 'N
Things. The agreement provides for exclusive retail distribution
rights for next generation consumer air movement and purification
products based on the patented KronosTM technology.
Kronos has been working side-by-side with HoMedics to complete a
feature-rich air purification product line. To effectively
capitalize on our competitive advantage in this market, neither
Kronos nor HoMedics are able to release specific product data or
availability. However, we are enthusiastic about our partnership
with HoMedics and are working diligently toward the day when the
KronosTM-based consumer product is on store shelves and each of our
shareholders has our devices silently purifying the air in their
homes.
In comparison to the 2 1/2 years that it took Sharper Image to get
the Ionic Breeze(R) Air Purifier to market, we are extremely pleased
at the rate of our progress. We continue to work on a daily basis
with the HoMedics team, from their engineers, designers, and
manufacturers, to their marketing and sales people in order to
ensure the KronosTM-based air purification product line is as
successful as we can make it. We believe the years of market
research conducted by HoMedics, their expertise in launching highly
successful new products and the marketing resources they are putting
behind this product, combined with the air purification and air
movement capability of the KronosTM technology, will result in a
product line that will be well received by the marketplace.
Embedded Platform
o Military Products. In November 2002, the U. S. Navy awarded Kronos a
Small Business Innovation Research Phase II contract worth $580,000,
plus an option of $145,000. The Phase II contract (commercialization
phase) is an extension of the Phase I and the Phase I Option work
that began in 2001. It is intended that the KronosTM devices being
developed under this contract will be embedded in existing HVAC
systems in order to move air more efficiently than traditional,
fan-based technology.
For the past nine months, Kronos has been working closely with the
Navy's Naval Surface Warfare Center and a major military shipbuilder
to identify specific and immediate applications for the KronosTM
technology. In conjunction with this engineering work, we are
utilizing the services of Dawnbreaker (www.dawnbreaker.com) in order
to effectively transition from Phase II commercialization work to
Phase III production and installation. Dawnbreaker offers their
services, at the government's expense, to select Phase II companies
in order to create partnerships that will lead to Phase III
corporate funding, product sales and ship board installation.
In August 2003, the U. S. Army awarded Kronos the option on its
Small Business Innovation Research Phase I contract bringing the
value of the Phase I contract award to $120,000. In July 2003,
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Kronos obtained a Pre-Award notice from the U. S. Army for a Small
Business Innovation Research Phase II contract worth $730,000.
During the Pre-Award stage, the U. S. Army will need to complete the
necessary documentation for Kronos to begin work on Phase II. The U.
S. Army expects that completion of the documentation will take
approximately 90 days. The Phase II contract is an extension of the
Phase I work that began in 2002. We anticipate the KronosTM devices
manufactured under this contract will further demonstrate the
versatility of the KronosTM technology to meet airflow, system
pressure and reduced humidity requirements for HVAC systems.
We are pleased that the U. S. Military has recognized the unique
advantages of the KronosTM technology which has resulted in the
awarding of over $1.5 million in contracts to Kronos. The Military's
commitment has led to Kronos initiating discussions with a leading
military dehumidification contractor. We are working with this
contractor to assess specific product needs and to accelerate
product commercialization. Humidity is a major cause of corrosion
for military equipment including tanks and aircraft as well as a
quality of life issue for many military personnel. We believe that
the ability of KronosTM technology to remove humidity from the air
with less energy expended and minimal increase in ambient
temperature will provide product opportunities for both the military
and commercial applications.
o Transportation Products. In January 2003, Kronos extended its work
into the transportation industry by signing a Development and
Acquisition Agreement with a premier business jet manufacturer. The
Agreement was the direct result of initial prototype development
work performed by the Kronos Research Team with input from the
customer in 2002. The Company has initiated the next phase of design
and development based on the customer's specific product application
requirements. For competitive reasons, we have been requested not to
discuss the identity or specifics of this particular project at this
time. We believe that this potential application will significantly
aid Kronos in product positioning for other transportation
applications such as commercial aircraft, automobiles, and cruise
ships.
While the potential applications of the KronosTM technology are
many, we believe it is critical to our ultimate success that we get
the first set of products done right! The transition from a research
and development company to an operating business supporting multiple
products in multiple markets does not happen overnight. There are
numerous steps (from performing government and industry standards
testing, to creating a manufacturing process, to preparing product
packaging) which need to be completed before a product can be
successfully launched. You can be assured that we are doing
everything to facilitate product development and production in order
to accelerate Kronos' successful market debut.
Technology Development and Innovation
We believe that the third ingredient in building an operating business
capable of generating sustainable revenue is to create an environment conducive
to constant innovation. Over the past year, the Kronos research team's ability
to innovate led to further development and enhancement of the KronosTM
technology. By focusing on the specific needs of Kronos' newly established
customer base, our team was able to build KronosTM devices that now combine the
key attributes of the KronosTM technology into a single product. These devices
prove that KronosTM can move large volumes of air through a silent, energy
efficient product while removing 99.97% of 0.1 micron particulates in the air
("ultra HEPA" level of filtration).
Our team's innovation was further extended to the optimization of the
Kronos proprietary power supply for mass production. The power supply is the
core element in efficiently generating the ion movement essential to propelling
the air. Our team also made significant improvements in the design and materials
necessary to maximize the air filtration and purification capability of the
KronosTM technology. We believe that this innovation, combined with our ongoing
intellectual property management will allow Kronos to maintain its competitive
advantages through product differentiation and technology protection.
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Financial Results
The focus on developing our intellectual property, securing commercial
contracts and innovating further on our proprietary technology resulted in
Kronos producing an initial $559,000 in revenue in fiscal 2003. This revenue
represented a 503% increase for the fiscal year ended June 30, 2003 compared
with 2002.
Kronos reduced its operating expenses during the twelve-months ending
June 30, 2003 by $469,000 or 14% compared with the prior year. This reduction
was principally the result of a concerted effort to reduce our reliance on
consultants and other professional service firms, as well as the transitioning
of key members of the Company's management team from consulting contracts to
employment agreements.
The reduction in professional costs is primarily the result of the
Company's completion of a Corporate restructuring in 2001 and 2002. During this
period, we resolved all outstanding legal matters and restructured Kronos
Advanced Technologies allowing us to concentrate solely on the commercialization
of the KronosTM technology. In addition, we have changed auditors to
significantly reduce our auditing expenses. We are committed to continue to
effectively manage our costs as we dedicate a larger percentage of our available
resources to product development and new revenue generating sales opportunities.
Along with generating cash flow from the consumer, military and
transportation contracts ($559,000) and the sale of new equity ($723,000),
Kronos secured $3.4 million in secured debt financing from HoMedics. HoMedics
paid $2.4 million upon execution of the financing agreement; $1.0 million is to
be paid upon the start of production of the HoMedics consumer product line.
Corporate Governance
Leading a successful public company extends beyond patents, contracts
and innovative technology to include effective corporate governance. Kronos is
committed to applying the highest standards of corporate governance in all
aspects of our business. Under the guidelines of Sarbanes-Oxley and Kronos'
intention to meet the requirements necessary to move the Company onto a national
exchange, we recently added two new independent Board members, Mr. Spencer
Browne and Mr. Mike Segal. Along with their corporate governance experience,
Messrs. Browne and Segal bring extensive financial and business experience to
the Company. Kronos also established an Audit Committee to go along with the
Compensation Committee established last year.
Fiscal 2004 Outlook
Kronos intends to continue in fiscal 2004 to develop sustainable revenue
streams. More specifically our focus will be twofold:
1. The Company intends to execute on our existing contracts. This means
bringing the HoMedics consumer product to market; delivering the Navy a
commercialized air handling system ready for installation on select naval ships
and preparing for Phase III (mass production); getting the first part of our
Army contract underway; and delivering product to the business jet market.
2. The Company will continue to seek out new markets for the Kronos(TM)
technology that we will serve either through marketing and distributing Kronos'
products on our own or through select strategic partners.
We are actively preparing to bring a standalone commercial product to
market using Company developed marketing and distribution channels. Based on the
technology and product development work for the KronosTM-based consumer product
line, we are seeking to launch a commercial air purification product for the
assisted living, nursing home and hospitality market segments.
We are seeking out partners and are in various stages of discussions
with global suppliers and service companies in the commercial heating,
ventilation and air conditioning ("HVAC"), commercial aircraft, and automobile
market segments at this time. The process of selecting the right partners for
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Kronos is labor intensive and time consuming but crucial to Kronos' future
success. Identifying the right partner involves gaining a full understanding of
the product development, marketing, distribution, and financial resources of the
potential partner. Two other factors that need to be considered are the culture
of the potential partner in relation to Kronos' culture and the commitment of
the partner to developing high quality Kronos(TM)-based air handlers and/or
filters in a timely fashion.
We recently filed our annual report on Form 10-KSB with the SEC which is
attached. I encourage you to read the annual report in its entirety. You should
periodically check our web site for updates and other current information.
Given our progress in fiscal 2003 and what we are anticipating in 2004,
we are more excited than ever about the Company's prospects for generating
sustainable revenue growth and our ability to bring further value to our
stockholders. Again, thank you for your continued support of Kronos Advanced
Technologies.
Sincerely,
/s/ Daniel R. Dwight
Daniel R. Dwight
President and Chief Executive Officer
With the exception of historical information contained in this letter,
this letter includes forward-looking statements and comments. Such statements
are necessarily subject to risks and uncertainties, some of which are
significant in scope and nature beyond the Company's control. Forward-looking
statements, by their nature, involve substantial risks and uncertainties. As a
result, actual results may differ materially depending on many factors,
including those described above. The Company cautions that historical results
are not necessarily indicative of the Company's future performance. Other risks
are summarized under the caption "Factors Affecting Kronos' Business and
Prospects " in the Company's Annual Report on Form 10-KSB for the year ended
June 30, 2003 as filed with the Securities and Exchange Commission.
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