UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB/Amendment No.1
Amended to reflect the review of Sherb & Co., LLP
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended December 31, 2002
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
KRONOS ADVANCED TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
NEVADA 87-0440410
------------- ----------
(State of other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
464 Common Street, Suite 301, Belmont, MA 02478
--------------------------------------------- --------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 993-9965
--------------------------------------------------- -------------------
(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. /X/ Yes
/ / No
As of February 6, 2003, there were 47,737,180 shares outstanding of the issuer's
common stock.
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following comprise our condensed (unaudited) consolidated financial
statements for the three months and six months ended December 31, 2002.
REVIEW REPORT OF CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders'
Kronos Advanced Technologies, Inc.
We have reviewed the accompanying consolidated balance sheet of Kronos Advanced
Technologies, Inc. and Subsidiary as of December 31, 2002, and the consolidated
related statements of operations, and cash flows for the six months ended, in
accordance with Statements on Standards for Accounting and Review Services
issued by the American Institute of Certified Public Accountants. All
information included in these consolidated financial statements is the
representation of the management of Kronos Advanced Technologies, Inc. and
Subsidiary.
A review consists principally of inquiries of company personnel and analytical
procedures applied to financial data. It is substantially less in scope than an
audit in accordance with auditing standards generally accepted in the United
States of America, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements in order for them to be in
conformity with generally accepted accounting principles.
/s/ Sherb & Co., LLP
--------------------------
Sherb & Co., LLP
Certified Public Accountants
New York, New York
October 17, 2003
2
KRONOS ADVANCED TECHNOLOGIES, INC. (FORMERLY TSET, INC)
CONSOLIDATED BALANCE SHEETS
December 31
2002 June 30,
(Unaudited) 2002
--------------- -----------------
ASSETS
CURRENT ASSETS
Cash $ 163,444 $ 21,510
Accounts receivable, net 27,620 700
Prepaids 49,825 101,029
--------------- -----------------
TOTAL CURRENT ASSETS 240,889 123,239
--------------- -----------------
PROPERTY AND EQUIPMENT 62,723 62,723
Less: Accumulated Depreciation (41,095) (33,348)
--------------- -----------------
NET PROPERTY AND EQUIPMENT 21,628 29,375
--------------- -----------------
OTHER ASSETS
Intangibles 2,078,235 2,213,917
--------------- -----------------
TOTAL OTHER ASSETS 2,078,235 2,213,917
--------------- -----------------
TOTAL ASSETS $ 2,340,752 $ 2,366,531
=============== =================
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Accrued expenses and payables to $ 998,110 $ 886,447
directors and officers
Accounts payable 736,602 254,201
Accrued expenses 162,523 100,797
Deferred revenue 166,734 -
Notes payable, current portion 445,465 535,700
--------------- -----------------
TOTAL CURRENT LIABILITIES 2,509,434 1,777,145
--------------- -----------------
LONG TERM LIABILITIES
Notes payable 169,890 225,466
--------------- -----------------
TOTAL LONG TERM LIABI1ITIES 169,890 225,466
--------------- -----------------
TOTAL LIABILITIES 2,679,324 2,002,610
--------------- -----------------
REDEEMABLE WARRANTS 805,300 748,500
SHAREHOLDERS' DEFICIT
Common stock, authorized 500,000,000
shares of $.001 par value 47,737 43,938
Capital in excess of par value 14,640,718 14,371,113
Deferred equity compensation (10,420) (41,668)
Accumulated deficit (15,821,907) (14,757,963)
--------------- -----------------
TOTAL SHAREHOLDERS DEFICIT (1,143,872) (384,579)
--------------- -----------------
TOTAL LIABILITIES AND
SHAREHOLDERS' DEFICIT $2,340,752 $ 2,366,531
=============== =================
The accompanying notes are an integral part of these financial statements.
3
KRONOS ADVANCED TECHNOLOGIES, INC. (FORMERLY TSET, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended December 31, For the six months ended December 31,
---------------------------------------- -------------------------------------
2002 2001 2002 2001
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ------------- ------------- -------------
Sales $ 209,545 $ 40,056 $ 318,162 $ 65,070
Cost of sales 33,179 40,056 125,304 50,070
---------- ------------ ----------- ------------
Gross Profit 176,366 - 192,858 15,000
---------- ------------ ----------- ------------
Selling, General and Administrative expenses
Compensation and benefits 130,944 83,636 265,733 259,854
Research and development 48,407 48,643 78,682 138,834
Professional services 402,852 880,559 686,928 1,525,376
Depreciation and amortization 70,793 71,674 143,429 143,347
Facilities 26,009 23,284 45,213 48,949
Other selling general & administrative expenses 44,190 105,150 77,059 146,196
---------- ------------ ----------- ------------
Total Selling, General and Administrative expenses 723,195 1,212,945 1,297,044 2,262,556
---------- ------------- ----------- ------------
Net Operating Loss (546,829) (1,212,945) (1,104,185) (2,247,556)
Other Income / (expense) 108,376 1,217 108,376 1,486
Interest Expense (34,361) (16,871) (68,134) (35,163)
---------- ------------- ----------- ------------
Net Loss $(472,814) $ (1,228,599) $(1,063,944) $(2,281,233)
=========== ============ =========== ============
Basic Earnings Loss Per Share
Net loss $ (0.01) $ (0.03) $ (0.02) $ (0.07)
=========== ============ =========== ============
Diluted Earnings Loss Per Share
Net loss $ (0.01) $ (0.03) $ (0.02) $ (0.07)
=========== ============ =========== ============
The accompanying notes are an integral part of these financial statements.
4
KRONOS ADVANCED TECHNOLOGIES, INC. (FORMERLY TSET, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended December 31,
-------------------------------------
2002 2001
CASH FLOWS FROM OPERATING ACTIVITES (Unaudited) (Unaudited)
----------------- ------------------
NET LOSS FROM CONTINUING OPERATIONS $(1,063,944) $ (2,281,233)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
(used in) provided by operations
Depreciation and amortization 143,429 143,347
Common stock issued for compensation/services 101,859 788,361
CHANGE IN
Accounts receivable (26,920) -
Prepaid expenses and other assets 51,205 (170,396)
Deferred revenue 166,734 -
Accounts Payable 353,583 902,790
Accrued Expenses and other 143,800 (112,432)
---------------- ------------------
Net cash used in Continuing Operations (130,255) (729,563)
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in patent protection - (51,211)
Investment in discontinued operations - 73,876
---------------- ------------------
Net cash provided by Investing Activities - 22,665
---------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock 418,000 707,107
Proceeds from short-term borrowings 165,889 33,214
Repayments of short-term borrowings (311,700) -
---------------- ------------------
Net cash provided by Financing Activities 272,189 740,321
---------------- ------------------
NET INCREASE IN CASH 141,934 33,423
CASH
BEGINNING OF PERIOD 21,510 32,619
---------------- ------------------
END OF PERIOD $ 163,444 $ 66,042
================ ==================
Supplemental schedule of non-cash investing
and financing activities:
Debt satisfied with stock $ 206,000 $ 100,000
================ ==================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT.
5
KRONOS ADVANCED TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ACCOUNTING MATTERS
The accompanying unaudited financial statements 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-month and six-month periods ended December 31, 2002 are not necessarily
indicative of the results that may be experienced for the fiscal year ending
June 30, 2003.
These financial statements are those of the Company and its wholly-owned
subsidiaries. All significant inter-company accounts and transactions have been
eliminated in the preparation of the consolidated financial statements. Aperion
Audio, Inc. is disclosed as discontinued operations in these financial
statements from when the Company decided to sell Aperion Audio on July 1, 2001,
until Aperion Audio was sold on June 7, 2002.
The accompanying financial statements should be read in conjunction with the
Kronos Advanced Technologies, Inc. Form 10-KSB for the fiscal year ended June
30, 2002 filed on September 28, 2002 and the Form 10-QSB for the quarter ended
September 30, 2002 filed on November 14, 2002.
NOTE 2 -- INCOME TAXES
The composition of deferred tax assets and the related tax effects at December
31, 2002 and June 30, 2002 are as follows:
DECEMBER 31,
2002
(UNAUDITED) JUNE 30, 2002
------------ -------------
Benefit from carryforward of capital $ 2,967,319 $2,685,915
and net operating losses
Other temporary differences 248,527 220,332
Less:
Valuation allowance (3,215,846) (2,906,247)
------------ -----------
Net deferred tax asset
$ - $ -
============ ===========
The other temporary differences shown above relate primarily to gain and loss on
discontinued operations, impairment reserves for intangible assets, accrued
expenses, 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:
DECEMBER 31, 2002
(UNAUDITED) JUNE 30, 2002
--------------------------------- -----------------------------
% OF % OF
AMOUNT PRE-TAX LOSS AMOUNT PRE-TAX LOSS
--------------- --------------- ------------- --------------
Benefit for income tax at federal statutory rate $ 342,429 34.0% $ 946,620 34.0%
Benefit for income tax at state statutory rate 20,074 2.0% 55,494 2.0%
Non-deductible expenses (52,910) (5.3)% (111,274) (4.0)%
Acquired NOL and other - 0.0% 248,489 8.9%
Increase in valuation allowance (309,593) (30.7)% (1,139,325) (40.9)%
---------------- --------------- ------------- --------------
$ - 0.0% $ - 0.0%
================ =============== ============= ==============
6
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.
The Company has filed all of its federal and state income tax returns for all
years through June 30, 2001. The Company is current on all income tax filings.
At December 31, 2002, for federal income tax and alternative minimum tax
reporting purposes, the Company has approximately $7.2 million of unused Federal
net operating losses, $1.0 million of capital losses and $4.0 million of unused
State net operating losses available for carryforward to future years. The
benefit from carryforward of such losses will expire in various years between
2006 and 2022 and could be subject to limitations if significant ownership
changes occur in the Company.
NOTE 3 - SEGMENTS OF BUSINESS
The Company operates principally in one segment of business: The Kronos segment
licenses, manufactures and distributes air movement and purification devices
utilizing the KronosTM technology. All other segments have been disposed of or
discontinued. In the six months ended December 31, 2002, the Company operated
only in the U.S.
NOTE 4 - EARNINGS PER SHARE
Weighted average shares outstanding used in the earnings per share calculation
were 47,021,691 and 35,760,303 for the three months ended December 31, 2002 and
2001, respectively and 45,774,213 and 34,992,354 for the six months ended
December 31, 2002 and 2001, respectively.
As of December 31, 2002, there were outstanding options to purchase 7,818,675
shares of the Company's common stock. These options have been excluded from the
earnings per share calculation as their effect is anti-dilutive. As of December
31, 2001, there were outstanding options to purchase 1,923,975 shares of the
Company's common stock. These options have been excluded from the earnings per
share calculation as their effect is anti-dilutive.
NOTE 5 - DISCONTINUED OPERATIONS
The Company's 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. Operating results of discontinued operations for the six-months
ended December 31, 2001 are as follows:
OPERATING RESULTS OF DISCONTINUED
OPERATIONS:
FOR THE SIX MONTHS ENDED DECEMBER 31,
2001
APERION AUDIO
Sales $410,512
Cost of sales (143,816)
Depreciation and amortization (6,618)
General and administrative (356,892)
--------------------------------------
Operating income (loss) (96,814)
Other income 21,360
Interest expense (16,247)
Provision for future operating losses 73,361
Minority interest 18,340
--------------------------------------
Income (Loss) pre-tax -
Income taxes (benefits) -
--------------------------------------
Loss from discontinued operations $-
======================================
7
NOTE 6 - NOTES PAYABLE
The Company had the following note obligations:
December 31, 2002 June 30, 2002
------------------ --------------
(1) Obligations to Fusion Capital $134,999 $123,000
(2) Obligation to Aperion Audio 140,466 200,466
(3) Obligation to Jeff Wilson 209,890 360,000
(4) Obligation to the Eagle Rock Group 70,000 70,000
(5) Obligations to others 60,000 7,700
------------------ --------------
Total Notes Payable $615,355 $761,166
Current portions:
Obligations to Fusion Capital 134,999 123,000
Obligation to Aperion Audio 140,466 205,000
Obligation to Jeff Wilson 40,000 130,000
Obligation to the Eagle Rock Group 70,000 70,000
Obligations to others 60,000 7,700
------------------ --------------
Total current portion $445,465 $535,700
------------------ --------------
Total long term obligations net of
current portion $169,890 $225,466
================== ==============
(1) This is a non-interest bearing demand obligation and is only outstanding
until Fusion Capital purchases enough common stock from the Company to eliminate
the advance position.
(2) This is a non-interest bearing note with monthly payments of $15,000.
(3) This note is to a former officer and director of the Company and bears
interest at 12%. The note calls for quarterly payments of at least $10,000 until
the principal and interest are paid in full.
(4) This note bears interest at a rate of 12%. The payment terms are interest
only with the principal due on March 1, 2003.
(5) This is a non-interest bearing obligation with monthly payments of $5,000
NOTE 7 - CONSULTING AGREEMENTS
In July 2001, the Company signed a six-month 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 Advanced Technologies team to fully
develop and capitalize the Kronos(TM) technology. Pursuant to the agreement that
the Company entered into with The Eagle Rock Group, the Company issued to The
Eagle Rock Group a ten-year warrant granting them the right to purchase
1,400,000 shares of the Company's common stock at an exercise price of $0.68 per
share. The warrants were immediately vested and non-forfeitable. The warrant was
valued at $686,000 using the Black-Scholes option valuation model and was
initially recorded as deferred equity compensation and amortized into current
period professional services expense at a rate of $137,200 per month over the
term of the agreement. Amortization for the year ended June 30, 2002 was
$686,000. The shares underlying the warrant have piggy-back and demand
registration rights, as well as subscription rights in the event that the
Company issues any rights to all of its stockholders to subscribe for shares of
the Company's common stock. In addition, the warrant contains redemption rights
in the event that the Company enters into a transaction that results in a change
of control of the Company.
8
In October 2001, the Company entered into a 15-month consulting agreement with
Joshua B. Scheinfeld and Steven G. Martin, principals of Fusion Capital, for
consulting services with respect to operations, executive employment issues,
employee staffing, strategy, capital structure and other matters as specified
from time to time. As consideration for their services, the Company issued
360,000 shares of its common stock. In accordance with EITF 96-18, the
measurement date was established as the contract date of October 1, 2001 as the
share grant was non-forfeitable and fully vested on that date. The stock was
valued on that date at $0.28 a share (the closing price for the Company's common
stock on the measurement date). The stock issuance has been recorded as a
prepaid consulting fee and is being amortized to Professional Fee Expense
ratably over the 15-month term of the contract. During the three and six month
periods ending December 31, 2002, the Company recognized professional services
expenses of $20,000 and $40,000, respectively under this agreement compared with
$20,000 and $20,000 for the three and six month periods ended December 31, 2001.
In March 2002, the Company entered into a 12-month consulting agreement with The
Eagle Rock Group. Pursuant to the agreement, the Company issued a note for the
outstanding balance of $120,000 due to The Eagle Rock Group. The note is due on
March 1, 2003 and bears interest at the rate of 12% per annum. The Company also
granted The Eagle Rock Group a 10 year warrant for up to 2,000,000 shares. The
warrant contains redemption rights in the event that the Company enters into a
transaction that results in a change of control of the Company. Of this, 500,000
shares will be earned over a period of 12 months. The exercise price of the
initial 500,000 warrants is $0.42 for 250,000 warrants and $0.205 (the closing
price of the Company's common stock on March 1, 2002) for 250,000 warrants.
These warrants are irrevocable and are fully vested. The measurement date is
March 1, 2002 as the warrants are fully vested and non-forfeitable on that date.
The value assigned to these warrants is $62,500 and was determined using the
Black-Scholes option valuation model. The 500,000 warrants are for general
consulting services for a 12-month period. The $62,500 will be expensed ratably
over the term of the consulting contract. The remainder of the shares may be
earned contingent upon the occurrence of various events including a successful
capital raise equal to or greater than $1.5 million, securing contracts with the
U.S. military, securing contracts with consumer-oriented distribution
organizations, and the adoption of a branding/marketing campaign which has been
principally developed by The Eagle Rock Group. In October 2002, 400,000 warrants
were earned when the Company secured a contract with consumer-oriented
distribution organization HoMedics. The exercise price for these warrants is
$0.145 (the closing price of the Company's common stock on October 22, 2003.
These warrants are irrevocable and are fully vested. The measurement date is
October 22, 2002 as the warrants are fully vested and non-forfeitable on that
date. The value assigned to these warrants is $56,800 and was determined using
the Black-Scholes option valuation model. The Company recognized this amount as
consulting expense in the quarter ended December 31, 2002. The remaining
potential 1.1 million shares covered by the warrant will be valued if and when
earned under the terms of the contract. The exercise price for the remaining
shares will be the market price on the date the grant is earned. During the
three and six month periods ending December 31, 2002, the Company recognized
professional services expenses of $87,000 and $118,000, respectively, under
these agreements compared with $412,000 and $686,000 for the comparable periods
in the prior year.
NOTE 8 - SUBSEQUENT EVENTS
In January 2003, Kronos received formal notification from the United States
Patent and Trademark Office indicating that its application entitled
Electrostatic Fluid Accelerator has been examined and allowed for issuance as a
U.S. patent (#6,504,308). The patent will provide protection for key aspects of
Kronos'(TM) technology until late in 2019. A number of corresponding
applications have been filed and are pending outside of the United States.
Kronos' Chief Technology Officer, Dr. Igor Krichtafovitch, is the lead inventor
of this proprietary technology.
In January 2003, Kronos extended its work into the transportation industry by
signing a Prototype 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 Kronos(TM) devices will be designed and manufactured
to meet all FAA safety standards, including environmental, flammability and
electromagnetic interference (EMI).
9
NOTE 9 - REALIZATION OF ASSETS
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplate continuation of the Company as a going concern. The Company has
sustained losses from operations in recent years, and such losses have continued
through the current year ended June 30, 2002. In addition, the Company has used,
rather than provided cash in its operations. The Company is currently using its
resources to raise capital necessary to complete development and
commercialization work, 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 financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the Company be
unable to continue in existence.
Management has taken the following steps with respect to its operating and
financial requirements, which it believes are sufficient to provide the Company
with the ability to continue in existence:
1. In December 2001, Kronos Air Technologies was awarded an SBIR contract
sponsored by the U.S. Army. This contract is potentially worth up to $850,000 in
product development and testing support for Kronos Air Technologies. Phase I of
the contract is worth up to $120,000 in funding to investigate and analyze the
feasibility of the Kronos(TM)technology to reduce humidity in heating,
ventilation and air conditioning (HVAC) systems. Dehumidification is essential
to making HVAC systems more energy efficient. Phase II of the contract is worth
up to $730,000 in additional funding for product development and testing. In
August 2002, the U.S. Army requested the company resubmit a detailed Phase II
proposal for review in 2003.
2. In November 2002, Kronos Air Technologies, Inc. and the United States Navy
executed a Small Business Innovation Research Phase II contract to develop and
demonstrate an advanced distributive air management system based on the patented
Kronos(TM) technology. The 24-month contract is worth $581,000 with an option
for an additional $144,000 in funding.
3. In August 2002, we entered into a new Common Stock Purchase Agreement with
Fusion. Pursuant to the common stock purchase agreement, Fusion Capital has
agreed to purchase on each trading day during the term of the agreement, $10,000
of our common stock or an aggregate of $6.0 million. The $6.0 million of our
common stock is to be purchased over a 30-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 the
lesser of (i) the lowest price of our common stock on the purchase date; or (ii)
the average of the three (3) lowest closing sale prices of our common stock
during the twelve (12) consecutive trading days prior to the date of a purchase
by Fusion Capital. However, there can be no assurance of how much cash we will
receive, if any, under the common stock purchase agreement with Fusion Capital.
10
4. In October 2002, Kronos Air Technologies, Inc., and HoMedics USA, Inc.
executed a multiyear, multi-million-dollar Licensing Agreement to bring
Kronos(TM) proprietary technology to the consumer. The agreement provides for
exclusive North American, Australian and New Zealand retail distribution rights
for next generation consumer air movement and purification products based on
patented Kronos(TM) technology. The initial term of the agreement is three and
one half years with the option to extend the agreement for six additional years.
Kronos will be compensated through an initial royalty payment and ongoing
quarterly royalty payments based on a percentage of sales. HoMedics will pay
minimum royalty payments of at least $2 million during the initial term and
on-going royalty payments to extend the agreement. Kronos will retain full
rights to all of its intellectual property.
5. In November 2002, Kronos Air Technologies and HoMedics executed a Development
Agreement to provide Kronos with the financial resources necessary to complete
commercialization of the Kronos(TM)-based consumer product line. Kronos is
working with HoMedics and HoMedics' engineers and designers to complete the
product line for sales and distribution.
6. 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 Kronos(TM) devices will be designed and manufactured to meet
all FAA safety standards, including environmental, flammability and
electromagnetic interference (EMI).
NOTE 10 - COMMITMENTS AND CONTINGENCIES
LITIGATION. 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 preparing for arbitration.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTORY STATEMENTS
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This filing contains forward-looking statements, including statements regarding,
among other things: (a) the growth strategies of Kronos Advanced Technologies
(the "Company" or "Kronos"); (b) anticipated trends in 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 anticipation 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 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
Kronos Advanced Technologies, Inc. is a high technology industrial company
focused on developing, marketing and selling products based on the Company's
proprietary air movement and purification technology. Kronos is actively
commercializing its technology across multiple markets.
Kronos(TM) device can be either used as a standalone product or can be embedded.
Standalone products are self-contained; the user would simply need to plug the
Kronos(TM) device into a wall outlet to obtain air filtration for their home,
office or hotel room. Embedded applications of the Kronos(TM) technology require
the technology be added into another system such as a building ventilation
system for more efficient air movement and filtration or into a piece of medical
equipment to replace the cooling fan.
In December 2002, the shareholders approved an amendment to our Articles of
Incorporation for a name change of our Company to Kronos Advanced Technologies,
Inc. (f/k/a TSET, Inc.). Kronos trades under the ticker symbol KNOS.
TECHNOLOGY DESCRIPTION AND BENEFITS. The Kronos(TM) technology combines
state-of-the-art high voltage electronics and electrodes into an efficient but
simple electrical device. As a result of this combined technology, a
Kronos(TM)-based device can both move and clean air without any moving parts.
Kronos(TM) devices are versatile, energy- and cost-efficient and capable of
multiple design forms. Kronos(TM) devices can be made into any shape or size
and, therefore, have immediate potential to be used as a standalone product or
to replace a range of HVAC products from low end mini-splits for residential
usage to high end HEPA filtration systems for operating and manufacturing clean
rooms.
The proprietary Kronos(TM) technology involves the application of high voltage
management across paired electrical grids to create an ion exchange that moves
and purifies air. Kronos(TM) technology has numerous, valuable characteristics.
It moves air and gases at high velocities while removing odors, smoke and
particulates and killing pathogens, including bacteria and mold. The technology
is cost-effective and is more energy efficient than current alternative fan and
filter (including HEPA filter and ultraviolet light based) technologies.
Many of the scientific claims of the Kronos(TM) technology have been validated
by the U.S. government and multi-national companies, including the U.S.
Department of Energy, the U.S. Department of Defense, General Dynamics,
Underwriters Laboratory, and Intel.
Independent laboratory testing has verified the purification capability of
Kronos(TM) technology. Tests conducted at MicroTest Laboratories and at the New
Hampshire Materials Laboratory demonstrated HEPA Clean Room Class 1000 quality
particulate reduction and up to 95% reduction of hazardous gases (in one air
pass through the Kronos(TM) system), including numerous contaminants found in
cigarette smoke.
12
PATENT AND INTELLECTUAL PROPERTY. In January 2003, Kronos received formal
notification from the United States Patent and Trademark Office indicating that
its application entitled Electrostatic Fluid Accelerator has been examined and
allowed for issuance as a U.S. patent (#6,504,308). The patent will provide
protection for key aspects of Kronos'(TM) technology until late in 2019. A
number of corresponding applications have been filed and are pending outside of
the United States. Kronos' Chief Technology Officer, Dr. Igor Krichtafovitch, is
the lead inventor of this proprietary technology.
This patent is for the first in a series of patent and patent applications now
pending with the U.S. Patent and Trademark Office addressing various aspects of
the Kronos' platform. In addition to the Electrostatic Fluid Accelerator patent,
five additional patent applications have been filed for, among other things, the
control and management of Electrostatic Fluid Acceleration. These additional
patent applications are awaiting examination by the Patent Office. Each of these
patent applications is directed towards Kronos' innovative technology used to
move, control and filter air electronically, without the use of fans or moving
parts.
STANDALONE PLATFORM.
HOMEDICS CONTRACT. In October 2002, Kronos Air Technologies, Inc., and HoMedics
USA, Inc. executed a multiyear, multi-million-dollar Licensing Agreement to
bring Kronos(TM) proprietary technology to the consumer. The agreement provides
for exclusive North American, Australian and New Zealand retail distribution
rights for next generation consumer air movement and purification products based
on patented Kronos(TM) technology.
The initial term of the agreement is three and one half years with the option to
extend the agreement for six additional years. Kronos will be compensated
through an initial royalty payment and ongoing quarterly royalty payments based
on a percentage of sales. HoMedics will pay minimum royalty payments of at least
$2 million during the initial term and on-going royalty payments to extend the
agreement. Kronos will retain full rights to all of its intellectual property.
HoMedics commitment includes a multi-million-dollar marketing and advertising
campaign to promote the Kronos(TM)-based product line. The products will be
manufactured and distributed by HoMedics. HoMedics currently distributes their
products through major domestic retailers, including Wal-Mart, Home Depot,
Sears, Bed Bath & Beyond, and Linens 'N Things. Kronos will manufacture and
provide HoMedics with Kronos'(TM) proprietary electronics.
In November 2002, Kronos Air Technologies and HoMedics executed a Development
Agreement to provide Kronos with the financial resources necessary to complete
commercialization of the Kronos(TM)-based consumer product line. Kronos is
working with HoMedics and HoMedics' engineers, designers and manufacturers to
complete the product line for sales and distribution in 2003.
ACCESS BUSINESS GROUP CONTRACT. In July 2002, Kronos Air Technologies executed a
Memorandum of Understanding with Access Business Group International L.L.C.
("Access") for the potential licensing of Kronos(TM) based air movement and
treatment technologies. The Company completed the first phase of the Memorandum
of Understanding. At this time, Kronos and Access have not reached terms and
conditions of a licensing agreement acceptable to Kronos.
EMBEDDED PLATFORM
U.S. NAVY SBIR CONTRACTS. The U.S. Department of Defense and Department of
Energy have provided Kronos Air Technologies with various grants and contracts
to develop, test and evaluate the Kronos(TM) technology for embedded
applications. Kronos has developed several commercial and industrial
applications, including the retrofit of berthing fan systems and embedded air
movement systems for U.S. Navy Aegis Class destroyers. In November 2002, Kronos
executed an agreement with the U.S. Navy to develop a new ventilation system for
naval ships. Working under a Small Business Innovation Research contract, the
Company is in Phase II (commercialization phase) of this contract, which
provides Kronos with up to an additional $725,000 of developmental funding over
the next 24 months.
13
During Phase II, Kronos shall develop and demonstrate a set of fully controlled
devices that represent a "cell" of an advanced distributive air management
system with medium capacity airflow in a U.S. Navy unique environment. The
"cell" will be designed to be easily adjustable to a variety of applications
such as duct size, airflow requirements, and air quality. The goal of this
development work is to significantly reduce or replace altogether the current
HVAC air handling systems on naval ships.
As part of its air management system, Kronos intends to develop and test an air
filtration mechanism capable of performing to HEPA quality standards. We believe
that Kronos(TM) devices could replace current HEPA filters with a permanent,
easily cleaned, low-cost solution. The U.S. Navy unique environment includes
shock exposure, vibration, Electromagnetic Interference/Compatibility (EMI/EMC),
and salt spray. Kronos(TM) devices will be tested and built to meet specific
Navy standards. Testing shall include assessments for system performance,
including control techniques, noise levels, acquisition and lifecycle costs.
We believe that during the option portion of the contract, Kronos(TM)
technology's ability to kill bacteria and other pathogens will be confirmed and
expanded to a wide range of pathogens for space disinfection and bio-terrorist
attacks. A unique ability of the Kronos(TM) technology is to kill all or almost
all airborne pathogens regardless of their nature, genetic structure,
robustness, or method of delivery.
U.S. ARMY SBIR CONTRACT. In December 2001, Kronos Air Technologies was awarded
an SBIR contract sponsored by the U.S. Army. This contract is potentially worth
up to $850,000 in product development and testing support for Kronos Air
Technologies. Phase I of the contract is worth up to $120,000 in funding to
investigate and analyze the feasibility of the KronosTM technology to reduce
humidity in heating, ventilation and air conditioning (HVAC) systems.
Dehumidification is essential to making HVAC systems more energy efficient.
Phase II of the contract is worth up to $730,000 in additional funding for
product development and testing. In August 2002, the U.S. Army requested the
company resubmit a detailed Phase II proposal for review in 2003. The Company is
also evaluating other potential non-military market opportunities to
commercialize dehumidification applications of the Kronos(TM) technology.
PREMIER BUSINESS JET CONTRACT. 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 Kronos(TM) devices will be designed and
manufactured to meet all FAA safety standards, including environmental,
flammability and electromagnetic interference (EMI).
CRITICAL ACCOUNTING POLICIES
USE OF ESTIMATES. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. We provide a reserve against our receivables
for estimated losses that may result from our customers' inability to pay. These
reserves are based on potential uncollectible accounts, aged receivables,
historical losses and our customers' credit-worthiness. Should a customer's
account become past due, we generally will place a hold on the account and
discontinue further shipments and/or services provided to that customer,
minimizing further risk of loss.
14
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 recoverablility of our
intangible assets. We have assumed revenues from the following applications of
the Kronos(TM) technology: consumer stand-alone devices, assisted care/skilled
nursing stand-alone devices, embedded devices in the hospitality industry and in
specialized military applications. Expenses/cash out flows in our projections
include sales and marketing, production, distribution, general and
administrative expenses, research and development expenses and capital
expenditures. These expenses are based on management estimates and have been
compared with industry norms (relative to sales) to determine their
reasonableness. We use the same key assumptions for our cash flow evaluation as
we do for internal budgeting, lenders and other third parties; therefore, they
are internally and externally consistent with financial statement and other
public and private disclosures. We are not aware of any negative implications
resulting from the projections used for purposes of evaluating the
appropriateness of the carrying value of these assets. If assets are considered
to be impaired, the impairment recognized is the amount by which the carrying
value of the assets exceeds the fair value of the assets. Useful lives and
related amortization or depreciation expense are based on our estimate of the
period that the assets will generate revenues or otherwise be used by Kronos.
Factors that would influence the likelihood of a material change in our reported
results include significant changes in the asset's ability to generate positive
cash flow, loss of legal ownership or title to the asset, a significant decline
in the economic and competitive environment on which the asset depends,
significant changes in our strategic business objectives, and utilization of the
asset.
VALUATION OF DEFERRED INCOME TAXES. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
The likelihood of a material change in our expected realization of these assets
is dependent on future taxable income, our ability to deduct tax loss
carryforwards against future taxable income, the effectiveness of our tax
planning and strategies among the various tax jurisdictions that we operate in,
and any significant changes in the tax treatment received on our business
combinations.
REVENUE RECOGNITION. We recognize revenue in accordance with SAB 101. Further,
Kronos Air Technologies recognizes revenue on the sale of custom-designed
contract sales under the percentage-of-completion method of accounting in the
ratio that costs incurred to date bear to estimated total costs. For uncompleted
contracts where costs and estimated profits exceed billings, the net amount is
included as an asset in the balance sheet. For uncompleted contracts where
billings exceed costs and estimated profits, the net amount is included as a
liability in the balance sheet. Revenue from government grants for research and
development purposes is recognized as revenue when received. Sales are reported
net of applicable cash discounts and allowances for returns.
15
RESULTS OF OPERATIONS
The Company's net loss from continuing operations for the three months ended
December 31, 2002 was reduced by 62% to $473,000, compared with a net loss of
$1.2 million for the corresponding period for the prior year. The decrease in
the net loss was primarily the result of a 54% reduction in professional fees
and consulting services and a 57% reduction in other selling general and
administrative expenses. The Company's net loss from continuing operations for
the six months ended December 31, 2002 was reduced 53% to $1.1 million, compared
with a net loss of $2.3 million for the corresponding period for the prior year.
The decrease in the net loss was primarily the result of a 55% reduction in
professional fees and consulting services and a 47% reduction in other selling
general and administrative expenses.
REVENUE. Revenues are generated through sales of Kronos(TM) devices at Kronos
Air Technologies, Inc. Revenue for the three months and six months ended
December 31, 2002 was $210,000 and $318,000, respectively. Revenue of $40,000
and $65,000 was recorded during the corresponding periods of the prior year.
These revenues were primarily from our HoMedics contracts, our U.S. Navy and
U.S. Army Small Business Innovative Research contracts and our contract with
Access Business Group.
COST OF SALES. Cost of sales for the three months and six months ended December
31, 2002 was $33,000 and $125,000, compared to $40,000 and $50,000 for the
corresponding periods in the prior year. Cost of sales is primarily research and
development costs associated with our HoMedics contracts, our U.S. Navy and U.S.
Army Small Business Innovative Research contracts and our contract with Access
Business Group.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, General and
Administrative expenses for the three months and six months ended December 31,
2002 was $0.7 million and $1.2 million, respectively compared to $1.2 million
and $2.3 million for the corresponding periods in the prior year. The decrease
is attributable to a reduction in professional fees and consulting services of
$478,000 and $838,000 and a reduction in other selling general and
administrative expenses of $61,000 and $69,000, respectively.
OTHER INCOME. Other income for the three and six months ended December 31, 2002
was $108,000 and $108,000, respectively compared to $1,000 and $1,000 for the
corresponding periods of the prior year. The increase is mainly attributable to
a gain recognized on the assignment of a $206,000 note payable.
INTEREST EXPENSE. Interest expense for the three and six months ended December
31, 2002 was $34,000 and $68,000, respectively compared to $17,000 and $35,000
for the corresponding periods of the prior year. The increase is mainly
attributable to an increase in interest bearing accounts payable, accrued
salaries and notes payable.
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2002
Our total assets at December 31, 2002 were $2.3 million, compared with $2.4
million at June 30, 2002. Total assets at December 31, 2002 were comprised
primarily of $2.1 million of patents/intellectual property. Total assets at June
30, 2002 were comprised primarily of $2.2 million of patents/intellectual
property. Total current assets at December 31, 2002 and June 30, 2002 were
$241,000 and $123,000, respectively, while total current liabilities for those
same periods were $2.5 million and $1.8 million, respectively, creating a
working capital deficit of $2.3 million and $1.7 million at each respective
period end. This working capital deficit is primarily due to accrued expenses
for compensation, management consulting and other professional services.
Shareholders' deficit as of December 31, 2002 and June 30, 2002 were $(1.1)
million and $(0.4) million, respectively, representing a decrease of $0.7
million. The increase in shareholders' deficit is primarily the result of
incurring a $1.1 million loss from continuing operations for the six months
ended December 31, 2002, partially offset through the sale and issuance of $0.3
million of common stock.
LIQUIDITY AND CAPITAL RESOURCES
Historically we have relied principally on the sale of common stock to finance
our operations. We have recently signed a multi-million dollar, multi-year
licensing agreement with HoMedics as well as a Small Business Innovative
Research Phase II contract with the U.S. Navy and a development and acquisition
agreement with a premier business jet manufacturer. Going forward, in addition
to continued sales of common stock, we plan to rely on the proceeds from our
HoMedics Licensing and Development Agreements, our Small Business Innovation
Research (SBIR) contract with the U.S. Navy and our agreement with a premier
business jet manufacturer, as well as other government contracts and grants,
cash flow generated from the sale of Kronos(TM) devices and the execution of
licensing agreements and other contracts with commercial customers. We have also
entered into a common stock purchase agreement with Fusion Capital under which
we have the right, subject to certain conditions, to draw down approximately
$10,000 per day from the sale of common stock to Fusion Capital.
16
Net cash flow used on operating activities was $130,000 for the current six
month period. We were able to satisfy our cash requirements for this period
through the issuance and sale of our common stock as well as from revenue on our
HoMedics and U.S. Navy and Army SBIR contracts and our contract with Access
Business Group.
In July 2002, we entered into a Memorandum of understanding with Access Business
Group under the terms of which we were to provide them with three working
prototype Kronos(TM) devices for testing and evaluation for $45,000.
In August 2002, we entered into a common stock purchase agreement with Fusion
Capital. Pursuant to the common stock purchase agreement, Fusion Capital has
agreed to purchase on each trading day during the term of the agreement, $10,000
of our common stock or an aggregate of $6.0 million. The $6.0 million of our
common stock is to be purchased over a 30-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 the
lesser of (i) the lowest price of our common stock on the purchase date; or (ii)
the average of the three (3) lowest closing sale prices of our common stock
during the twelve (12) consecutive trading days prior to the date of a purchase
by Fusion Capital. However, there can be no assurance of how much cash we will
receive, if any, under the common stock purchase agreement with Fusion Capital.
In October 2002, Kronos Air Technologies, Inc., and HoMedics USA, Inc. executed
a multiyear, multi-million-dollar Licensing Agreement to bring Kronos(TM)
proprietary technology to the consumer. The initial term of the agreement is
three and one half years with the option to extend the agreement for six
additional years. Kronos has been compensated through an initial royalty payment
and will receive ongoing quarterly royalty payments based on a percentage of
sales. HoMedics will pay minimum royalty payments of at least $2 million during
the initial term and on-going royalty payments to extend the agreement.
In November 2002, Kronos Air Technologies and HoMedics executed a Development
Agreement to provide Kronos with the financial resources necessary to complete
commercialization of the Kronos(TM)-based consumer product line. Kronos is
working with HoMedics and HoMedics' engineers, designers and manufacturers to
complete the product line for sales and distribution.
In November 2002, Kronos Air Technologies, Inc. and the United States Navy
executed a Small Business Innovation Research Phase II contract to develop and
demonstrate an advanced distributive air management system based on the patented
Kronos(TM) technology. The 24-month contract is worth $581,000 with an option
for an additional $144,000 in funding. Funding on Phase II commenced in December
2002.
In January 2003, Kronos extended its work into the transportation industry by
signing a prototype 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 Kronos(TM) devices will be designed and manufactured
to meet all FAA safety standards, including environmental, flammability and
electromagnetic interference (EMI).
GOING CONCERN OPINION
Our independent auditors have added an explanatory paragraph to their audit
opinion issued in connection with the 2002 and 2001 financial statements that
states that we do not have significant cash or other material assets to cover
our operating costs. Our ability to obtain additional funding will largely
determine our ability to continue in business. Accordingly, there is substantial
doubt about our ability to continue as a going concern. Our 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 a
broad basis. While attempting to make this transition, we will be subject to all
the risks inherent in a growing venture, including, but not limited to, the need
to develop and manufacture reliable and effective products, develop marketing
expertise and expand our sales force.
17
CERTAIN RISK FACTORS
Our Company is subject to various risks which may materially harm our business,
financial condition and results of operations. Certain risks are discussed
below.
WE HAVE A LIMITED OPERATING HISTORY WITH SIGNIFICANT LOSSES AND EXPECT LOSSES TO
CONTINUE FOR THE FORESEEABLE FUTURE
We have begun implementing our plan to prioritize and concentrate our management
and financial resources to fully capitalize on our investment in Kronos Air
Technologies and have yet to establish any history of profitable operations. We
incurred a net operating loss of $473,000 and $1.1 million for the three months
and six months ended December 31, 2002, respectively. We have incurred net
losses from continuing operations of $3.5 million and $3.6 million for the
fiscal years ended June 30, 2002 and 2001. We have incurred annual operating
losses of $2.8 million, $9.9 million and $2.0 million, respectively, during the
past three fiscal years of operation. As a result, at December 31, 2002 and June
30, 2002, we had an accumulated deficit of $15.8 million and $14.8 million,
respectively. Our revenues have not been sufficient to sustain our operations.
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.
WE HAVE BEEN SUBJECT TO A GOING CONCERN OPINION FROM OUR INDEPENDENT AUDITORS
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, 2002 and June 30, 2001 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. Accordingly, there is substantial doubt about 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 December 31, 2002, we had a working capital deficit of $2.3 million. At June
30, 2002, we had a working capital deficit of $1.7 million. The independent
auditor's report for the years ended June 30, 2002 and June 30, 2001, includes
an explanatory paragraph to their audit opinion stating that our recurring
losses from operations and working capital deficiency raise substantial doubt
about our ability to continue as a going concern. For the years ended 2002, 2001
and 2000, we had an operating cash flow deficit of $1.5 million, $1.6 million
and $0.3 million, respectively. We do not currently have sufficient financial
resources to fund our operations or pay certain existing obligations or those of
our subsidiary. Therefore, we need additional funds to continue these operations
and pay certain existing obligations.
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 CASE THE PRICE OF
OUR COMMON STOCK TO DECLINE
The purchase price for the common stock to be issued to Fusion Capital pursuant
to the common stock purchase agreement will fluctuate based on the price of our
common stock. All shares issued to Fusion Capital will be freely tradable.
Fusion Capital may sell none, some or all of the shares of common stock
purchased from us at any time. We expect that the shares sold to Fusion Capital
will be sold over a period of up to 30 months from the date of the common stock
purchase agreement. Depending upon market liquidity at 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.
COMPETITION IN THE MARKET FOR AIR MOVEMENT AND PURIFICATION DEVICES MAY RESULT
IN THE FAILURE OF THE KRONOS(TM) PRODUCTS TO ACHIEVE MARKET ACCEPTANCE
Kronos Air Technologies presently faces competition from other companies that
are developing or that currently sell air movement and purification devices.
Many of these competitors have substantially greater financial, research and
development, manufacturing, and sales and marketing resources than we do. Many
of the products sold by Kronos Air Technologies' competitors already have brand
recognition and established positions in the markets that we have targeted for
penetration. In the event that the Kronos(TM) products do not favorably compete
with the products sold by our competitors, we would be forced to curtail our
business operations.
18
OUR FAILURE TO OBTAIN INTELLECTUAL PROPERTY AND ENFORCE PROTECTION WOULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS
Our success depends in part on our ability to obtain and defend our intellectual
property, including patent protection for our products and processes, preserve
our trade secrets, defend and enforce our rights against infringement and
operate without infringing the proprietary rights of third parties, both in the
United States and in other countries.
We have received one patent from the U.S. Patent and Trademark Office. We have
four additional U.S. and four foreign patent applications pending. The validity
and breadth of our intellectual property claims in ion wind generation and
electrostatic fluid acceleration and control technology involve complex legal
and factual questions and, therefore, may be highly uncertain. Despite our
efforts to protect our intellectual proprietary rights, existing copyright,
trademark and trade secret laws afford only limited protection.
POSSIBLE FUTURE IMPAIRMENT OF INTANGIBLE ASSETS WOULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR FINANCIAL CONDITION
Our net intangible assets of approximately $2.1 million and $2.2 million as of
December 31 and June 30, 2002 relate only to the acquisition of Kronos Air
Technologies, Inc. and consists principally of purchased patent technology and
marketing intangibles. They comprise 88% and 94% of our total assets as of
December 31 and June 30, 2002, respectively. Intangible assets are subject to
periodic review and consideration for potential impairment of value. Among the
factors that could give rise to impairment include a significant adverse change
in legal factors or in the business climate, an adverse action or assessment by
a regulator, unanticipated competition, a loss of key personnel, and projections
or forecasts that demonstrate continuing losses associated with these assets. In
the case of our tangible assets, specific factors that could give rise to
impairment would be, but are not limited to, an inability to obtain patents, the
untimely death or other loss of Dr. Igor Krichtafovitch, the inventor of the
Kronos(TM) technology, or the ability to create a customer base for the sale or
licensing of the Kronos(TM) technology.
Although no events have occurred that would indicate that an impairment may
exist with respect to these intangible assets, should an impairment occur, we
would be required to recognize it in our financial statements. Since the
intangible assets comprise 88% and 94% of out total assets as of December 31 and
June 30, 2002, respectively, a write-down of these intangible assets could have
a material adverse impact on our total assets, net worth and results of
operations.
WE RELY ON MANAGEMENT AND KRONOS AIR TECHNOLOGIES RESEARCH PERSONNEL, THE LOSS
OF WHOSE SERVICES COULD HAVE A MATERIAL ADVERSE EFFECT UPON OUR BUSINESS
We rely principally upon the services 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. 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, we do not carry key person life insurance for any of our
directors, executive management, or key employees.
ITEM 3. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Within 90 days prior to the
filing date of this report, the Company carried out an evaluation of the
effectiveness of the design and operation of its disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. This evaluation was done under
the supervision and with the participation of the Company's President and Chief
Financial Officer. Based upon that evaluation, they concluded that the Company's
disclosure controls and procedures are effective in gathering, analyzing and
disclosing information needed to satisfy the Company's disclosure obligations
under the Exchange Act.
19
CHANGES IN INTERNAL CONTROLS. There were no significant changes in the company's
internal controls or in other factors that could significantly affect those
controls since the most recent evaluation of such controls.
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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On December 6, 2002, the Company authorized the issuance of 100,000 common
shares, valued at $0.115 (the fair market value of our shares as of that date)
at an aggregate value of $11,500, to Aperion Audio Inc. in exchange for
extending the term of its note payments.
On December 24, 2002, the Company authorized the issuance of 206,000 common
shares, valued at $0.11 (the fair market value of our shares as of that date) at
an aggregate value of $22,660, to TI, Inc. in exchange for taking the assignment
of a note payable to a third party for $206,000.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 30, 2002 the Company's annual stockholders meeting was held in
Boston, MA. There were two matters voted upon and each was passed by the
stockholder vote. The matters, along with the results of the voting for each are
as follows:
MATTER VOTES FOR VOTES AGAINST ABSTENTIONS
--------------------------------------------------------------------------------
Change the name of the Company
to Kronos Advanced Technologies,
Inc. 42,411,330 0 2,846
Board of Directors for a 1 year term:
Daniel Dwight 25,880,480 16,527,896 5,800
Erik Black 42,402,776 5,600 5,800
James McDermott 23,207,324 19,201,052 5,800
Richard Papworth 42,405,976 2,400 5,800
Richard Tusing 42,405,976 2,400 5,800
There are no other directors whose term of office continued after the meeting.
ITEM 5. OTHER INFORMATION
This amended Form 10-QSB for the period ended December 31, 2002 has been
reviewed by Sherb & Co. LLP, the Company's independent certified public
accountant, and includes their review report.
20
ITEM 6. EXHIBITS
EXHIBIT NO. DESCRIPTION LOCATION
-------------------------------------------------------------------------------------------------
2.1 Articles of Merger for Technology Incorporated by reference to
Selection, Inc. with the Nevada Exhibit 2.1 to the Registrant's
Secretary of State Registration Statement on Form
S-1 filed on August 7, 2001 (the
"Registration Statement")
3.1 Articles of Incorporation Incorporated by reference to
Exhibit 3.1 to the Registration
Statement on Form S-1 filed on
August 7, 2001
3.2 Bylaws Incorporated by reference to
Exhibit 3.2 to the Registration
Statement on Form S-1 filed on
August 7, 2001
4.1 2001 Stock Option Plan Incorporated by reference to
Exhibit 4.1 to
Registrant's Form
10-Q for the
quarterly period
ended March 31,
2002 filed on May
15, 2002
5.1 Opinion re: Legality Incorporated by reference to
Exhibit 5.1 to Amendment No. 1
to Form S-1 filed on October 19,
2001
10.1 Employment Agreement, dated April 16, Incorporated by reference to
1999, by and between TSET, Inc. and Exhibit 10.1 to the Registration
Jeffrey D. Wilson Statement on Form S-1 filed on
August 7, 2001
10.2 Deal Outline, dated December 9, 1999, Incorporated by reference to
by and between TSET, Inc. and Atomic Exhibit 10.2 to the Registration
Soccer, USA, Ltd. Statement on Form S-1 filed on
August 7, 2001
10.3 Letter of Intent, dated December 27, Incorporated by reference to
1999, by and between TSET, Inc. and Exhibit 10.3 to the Registration
Electron Wind Technologies, Inc. Statement on Form S-1 filed on
August 7, 2001
10.4 Agreement, dated February 5, 2000, by Incorporated by reference to
and between DiAural, LLC and Exhibit 10.4 to the Registration
EdgeAudio, LLC Statement on Form S-1 filed on
August 7, 2001
10.5 Stock Purchase Agreement, dated March Incorporated by reference to
6, 2000, by and among TSET, Inc., Exhibit 10.5 to the Registration
Atomic Soccer USA, Ltd., Todd P. Statement on Form S-1 filed on
Ragsdale, James Eric Anderson, Jewel August 7, 2001
Anderson, Timothy Beglinger and Atomic
Millennium Partners, LLC
10.6 Acquisition Agreement, dated March 13, Incorporated by reference to
2000, by and among TSET, Inc., High Exhibit 10.6 to the Registration
Voltage Integrated, LLC, Ingrid Statement on Form S-1 filed on
Fuhriman, Igor Krichtafovitch, Robert August 7, 2001
L. Fuhriman and Alan Thompson
21
EXHIBIT NO. DESCRIPTION LOCATION
-------------------------------------------------------------------------------------------------
10.7 Letter of Intent, dated April 18, 2000, Incorporated by reference to
by and between TSET, Inc. and Exhibit 10.7 to the Registration
EdgeAudio.com, Inc. Statement on Form S-1 filed on
August 7, 2001
10.8 Lease Agreement, dated May 3, 2000, by Incorporated by reference to
and between Kronos Air Technologies, Exhibit 10.8 to the Registration
Inc. and TIAA Realty, Inc. Statement on Form S-1 filed on
August 7, 2001
10.9 Agreement and Plan of Reorganization, Incorporated by reference to
dated May 4, 2000, by and among TSET, Exhibit 10.9 to the Registration
Inc., EdgeAudio.com, Inc., LYNK Statement on Form S-1 filed on
Enterprises, Inc., Robert Lightman, J. August 7, 2001
David Hogan, Eric Alexander and Eterna
Internacional, S.A. de C.V.
10.10 Letter Agreement, dated May 4, 2000, by Incorporated by reference to
and between TSET, Inc. and Cancer Exhibit 10.10 to the
Detection International, LLC Registration Statement on Form
S-1 filed on August 7, 2001
10.11 Employment Agreement, dated May 19, Incorporated by reference to
2000, by and between TSET, Inc. and Exhibit 10.11 to the
Richard A. Papworth Registration Statement on Form
S-1 filed on August 7, 2001
10.12 Finders Agreement, dated August 21, Incorporated by reference to
2000, by and among TSET, Inc., Richard Exhibit 10.12 to the
F. Tusing and Daniel R. Dwight Registration Statement on Form
S-1 filed on August 7, 2001
10.13 Contract Services Agreement, dated June Incorporated by reference to
27, 2000, by and between Chinook Exhibit 10.13 to the
Technologies, Inc. and Kronos Air Registration Statement on Form
Technologies, Inc. S-1 filed on August 7, 2001
10.14 Letter of Intent, dated July 17, 2000, Incorporated by reference to
by and between Kronos Air Technologies, Exhibit 10.14 to the
Inc. and Polus Technologies, Inc. Registration Statement on Form
S-1 filed on August 7, 2001
10.15 Consulting Agreement, dated August 1, Incorporated by reference to
2000, by and among TSET, Inc., Richard Exhibit 10.15 to the
F. Tusing and Daniel R. Dwight Registration Statement on Form
S-1 filed on August 7, 2001
10.16 Preferred Stock Purchase Agreement, Incorporated by reference to
dated September 12, 2000, by and Exhibit 10.16 to the
between EdgeAudio.com, Inc. and Bryan Registration Statement on Form
Holbrook S-1 filed on August 7, 2001
22
EXHIBIT NO. DESCRIPTION LOCATION
-------------------------------------------------------------------------------------------------
10.17 Shareholders Agreement, dated September Incorporated by reference to
12, 2000, by and among TSET, Inc., Exhibit 10.17 to the
Bryan Holbrook and EdgeAudio.com, Inc. Registration Statement on Form
S-1 filed on August 7, 2001
10.18 Amendment to Agreement and Plan of Incorporated by reference to
Reorganization dated September 12, Exhibit 10.18 to the
2000, by and among TSET, Inc., Registration Statement on Form
EdgeAudio.com, Inc., LYNK Enterprises, S-1 filed on August 7, 2001
Inc., Robert Lightman, J. David Hogan,
Eric Alexander and Eterna
Internacional, S.A. de C.V.
10.19 Agreement Regarding Sale of Preferred Incorporated by reference to
Stock, dated November 1, 2000, by and Exhibit 10.19 to the
between EdgeAudio.com, Inc. and Bryan Registration Statement on Form
Holbrook S-1 filed on August 7, 2001
10.20 Amendment to Subcontract, dated Incorporated by reference to
December 14, 2000, by and between Bath Exhibit 10.20 to the
Iron Works and High Voltage Registration Statement on
Integrated Form S-1 filed on
August 7, 2001
10.21 Consulting Agreement, dated January 1, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.21 to the
Dwight, Tusing & Associates Registration Statement on Form
S-1 filed on August 7, 2001
10.22 Employment Agreement, dated March 18, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.22 to the
Alex Chriss Registration Statement on Form
S-1 filed on August 7, 2001
10.23 Stock Option Agreement, dated April 9, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.23 to the
Jeffrey D. Wilson Registration Statement on Form
S-1 filed on August 7, 2001
10.24 Stock Option Agreement, dated April 9, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.24 to the
Jeffrey D. Wilson Registration Statement on Form
S-1 filed on August 7, 2001
10.25 Stock Option Agreement, dated April 9, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.25 to the
Daniel R. Dwight Registration Statement on Form
S-1 filed on August 7, 2001
10.26 Stock Option Agreement, dated April 9, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.26 to the
Richard F. Tusing Registration Statement on Form
S-1 filed on August 7, 2001
10.27 Stock Option Agreement, dated April 9, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.27 to the
Charles D. Strang Registration Statement on Form
S-1 filed on August 7, 2001
23
EXHIBIT NO. DESCRIPTION LOCATION
-------------------------------------------------------------------------------------------------
10.28 Stock Option Agreement, dated April 9, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.28 to the
Richard A. Papworth Registration Statement on Form
S-1 filed on August 7, 2001
10.29 Stock Option Agreement, dated April 9, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.29 to the
Richard A. Papworth Registration Statement on Form
S-1 filed on August 7, 2001
10.30 Stock Option Agreement, dated April 9, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.30 to the
Erik W. Black Registration Statement on Form
S-1 filed on August 7, 2001
10.31 Stock Option Agreement, dated April 9, Incorporated by reference to
2001, by and between TSET, Inc. and J. Exhibit 10.31 to the
Alexander Chriss Registration Statement on Form
S-1 filed on August 7, 2001
10.32 Stock Option Agreement, dated April 9, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.32 to the
Charles H. Wellington Registration Statement on Form
S-1 filed on August 7, 2001
10.33 Stock Option Agreement, dated April 9, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.33 to the
Igor Krichtafovitch Registration Statement on Form
S-1 filed on August 7, 2001
10.34 Letter Agreement, dated April 10, 2001, Incorporated by reference to
by and between TSET, Inc. and Richard Exhibit 10.34 to the
A. Papworth Registration Statement on Form
S-1 filed on August 7, 2001
10.35 Letter Agreement, dated April 12, 2001, Incorporated by reference to
by and between TSET, Inc. and Daniel R. Exhibit 10.35 to the
Dwight and Richard F. Tusing Registration Statement on Form
S-1 filed on August 7, 2001
10.36 Finders Agreement, dated April 20, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.36 to the
Bernard Aronson, d/b/a Bolivar Registration Statement on Form
International Inc. S-1 filed on August 7, 2001
10.37 Indemnification Agreement, dated May 1, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.37 to the
Jeffrey D. Wilson Registration Statement on Form
S-1 filed on August 7, 2001
10.38 Indemnification Agreement, dated May 1, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.38 to the
Daniel R. Dwight Registration Statement on Form
S-1 filed on August 7, 2001
24
EXHIBIT NO. DESCRIPTION LOCATION
-------------------------------------------------------------------------------------------------
10.39 Indemnification Agreement, dated May 1, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.39 to the
Richard F. Tusing Registration Statement on Form
S-1 filed on August 7, 2001
10.40 Indemnification Agreement, dated May 1, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.40 to the
Charles D. Strang Registration Statement on Form
S-1 filed on August 7, 2001
10.41 Indemnification Agreement, dated May 1, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.41 to the
Richard A. Papworth Registration Statement on Form
S-1 filed on August 7, 2001
10.42 Indemnification Agreement, dated May 1, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.42 to the
Erik W. Black Registration Statement on Form
S-1 filed on August 7, 2001
10.43 Stock Option Agreement, dated May 3, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.43 to the
Jeffrey D. Wilson Registration Statement on Form
S-1 filed on August 7, 2001
10.44 Common Stock Purchase Agreement, dated Incorporated by reference to
June 19, 2001, by and between TSET, Exhibit 10.44 to the
Inc. and Fusion Capital Fund II, LLC Registration Statement on Form
S-1 filed on August 7, 2001
10.45 Registration Rights Agreement, dated Incorporated by reference to
June 19, 2001, by and between TSET, Exhibit 10.45 to the
Inc. and Fusion Capital Fund II, LLC Registration Statement on Form
S-1 filed on August 7, 2001
10.46 Mutual Release and Settlement Incorporated by reference to
Agreement, dated July 7, 2001, by and Exhibit 10.46 to the
between TSET, Inc. and Foster & Price Registration Statement on Form
Ltd. S-1 filed on August 7, 2001
10.47 Letter Agreement, dated July 9, 2001, Incorporated by reference to
by and between TSET, Inc. and The Eagle Exhibit 10.47 to the
Rock Group, LLC Registration Statement on Form
S-1 filed on August 7, 2001
10.48 Finders Agreement, dated July 17, 2001, Incorporated by reference to
by and between TSET, Inc. and John S. Exhibit 10.48 to the
Bowles Registration Statement on Form
S-1 filed on August 7, 2001
10.49 Warrant Agreement, dated July 16, 2001, Incorporated by reference to
by and between TSET, Inc. and The Eagle Exhibit 10.49 to the
Rock Group, LLC Registration Statement on Form
S-1 filed on August 7, 2001
25
EXHIBIT NO. DESCRIPTION LOCATION
-------------------------------------------------------------------------------------------------
10.50 Agreement and Release, dated October Incorporated by reference to
10, 2001, by and between TSET, Inc. and Exhibit 10.50 to the
Jeffrey D. Wilson Registrant's Form 10-K for the
year ended June 30, 2001 filed
on October 15, 2001
10.51 Promissory Note dated October 10, 2001 Incorporated by reference to
payable to Mr. Jeffrey D. Wilson Exhibit 10.51 to 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, Incorporated by reference to
2001, by and between TSET, Inc. and Exhibit 10.52 to the
Jeffrey D. Wilson Registrant's Form 10-K for the
year ended June 30, 2001 filed
on October 15, 2001
10.53 Consulting Agreement effective Incorporated by reference to
October 1, 2001, by and among TSET, Exhibit 10.53 to the Registrant's
Inc., Steven G. Martin and Joshua Form 10-Q for the quarterly
B. Scheinfeld period ended December 31, 2001
filed on November 19, 2001
10.54 Letter Agreement dated November 13, Incorporated by reference to
2001 by and between TSET, Inc. and Exhibit 10.54 to the Registrant's
Fusion Capital Fund II, LLC Form 10-Q for the quarterly
period ended December 31, 2001
filed on November 19, 2001
10.55 Employment Agreement, effective Incorporated by reference to
November 15, 2001 by and between Exhibit 10.55 to the Registrant's
TSET, Inc. and Daniel R. Dwight Form 10-Q for the quarterly period
ended March 31, 2002 filed on
May 15, 2002
10.56 Agreement, dated November 13, 2001 Incorporated by reference to Exhibit
by and between TSET, Inc. and Fusion 10.56 to the Registrant's Amendment
Capital Fund II, LLC No. 1 to Form S-1 filed on
August 2, 2002
10.57 Common Stock Purchase Agreement, Incorporate by reference to Exhibit
dated August 12, 2002 by and between 10.57 to the Registrant's Form S-1
between TSET, Inc. and Fusion filed on August 13, 2002
Capital Fund II, LLC
10.58 Registration Rights Agreement, dated Incorporated by reference to Exhibit
August 12, 2002 by and between TSET, 10.58 to the Registrant's Form S-1
Inc. and Fusion Capital Fund II, LLC filed on August 13, 2002
10.59 Termination Agreement, dated Incorporated by reference to Exhibit
August 12, 2002 by and between TSET, 10.59 to the Registrant's Amendment
Inc. and Fusion Capital Fund II, LLC No. 1 to Form S-1 filed on
September 16, 2002
26
EXHIBIT NO. DESCRIPTION LOCATION
-------------------------------------------------------------------------------------------------
11.1 Statement re: Computation of Earnings Not applicable
12.1 Statement re: Computation of Ratios Not applicable
15.1 Letter re: Unaudited Interim Financial Not applicable
Information
18.1 Letter re: Change in Accounting Not applicable
Principals
24.1 Power of Attorney Not applicable
27.1 Financial Data Schedule Not applicable
31.1 Certification of Chief Executive Provided herewith
Officer pursuant to 15 U.S.C.
Section 7241, as adopted pursuant
to Section 302 of the Sarbanes-Oxley
Act of 2002
31.2 Certification of Principal Financial Provided herewith
Officer pursuant to U.S.C. Section
7241, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification by Chief Executive Provided herewith
Officer and Principal Accounting Officer
pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
27
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: October 25, 2003 KRONOS ADVANCED TECHNOLOGEIS, INC.
By: /S/ DANIEL R. DWIGHT
----------------------
Daniel R. Dwight
President and Chief Executive Officer
By: /S/ RICHARD A. PAPWORTH
------------------------
Richard A. Papworth
Chief Financial Officer
28