UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 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
TSET, INC.
----------
(Exact name of registrant as specified in its charter)
NEVADA 87-0440410
------ ----------
(State of other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
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 November 10, 2002, there were 46,891,296 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 ended September 30, 2002.
2
TSET, INC
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, JUNE 30,
2002 2002
------------- --------------
ASSETS
Current Assets
Cash $ 24 $ 21,510
Accounts receivable, net 26,650 700
Prepaids 66,649 101,029
-------------- --------------
TOTAL CURRENT ASSETS 93,322 123,239
-------------- --------------
PROPERTY AND EQUIPMENT 62,723 62,723
Less: Accumulated Depreciation (38,143) (33,348)
-------------- --------------
NET PROPERTY AND EQUIPMENT 24,580 29,375
-------------- --------------
OTHER ASSETS
Intangibles 2,146,076 2,213,917
-------------- --------------
TOTAL OTHER ASSETS 2,146,076 2,213,917
-------------- --------------
TOTAL ASSETS $ 2,263,979 $ 2,366,531
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,324,419 $ 956,684
Accrued expenses 403,962 284,761
Notes payable, current portion 463,165 535,700
-------------- --------------
TOTAL CURRENT LIABILITIES 2,191,546 1,777,145
-------------- --------------
LONG TERM LIABILITIES
Notes payable 210,000 225,466
-------------- --------------
TOTAL LONG TERM LIABILITIES 210,000 225,466
-------------- --------------
-------------- --------------
TOTAL LIABILITIES 2,401,546 2,002,610
-------------- --------------
-------------- --------------
REDEEMABLE WARRANTS 748,500 748,500
-------------- --------------
SHAREHOLDERS' EQUITY
Common stock, authorized 500,000,000
shares of $.001 par value 45,141 43,938
Capital in excess of par value 14,443,929 14,371,113
Deferred equity compensation (26,044) (41,668)
Retained earnings (Accumulated deficit) (15,349,093) (14,757,963)
-------------- --------------
TOTAL SHAREHOLDERS' EQUITY (886,067) (384,579)
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,263,979 $ 2,366,531
============== ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
TSET, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTER ENDED SEPTEMBER 30,
----------------------------------------------------------
2002 2001 2000
------------------- ---------------- ------------------
Sales $ 108,617 $ 25,014 $ -
Cost of sales 92,125 10,014 -
--------------- -------------- ------------------
Gross Profit 16,492 15,000 -
--------------- -------------- ------------------
Selling, General and Administrative expenses
Compensation and benefits 134,790 176,218 289,132 23%
Research and development 30,274 90,191 52,567 5%
Professional services 284,076 644,817 19,498 50%
Depreciation and amortization 72,636 71,674 79,121 13%
Facilities 19,205 25,665 7,535
Other selling general & administrative
expenses 32,871 41,047 85,273 6%
--------------- -------------- ------------------
Total Selling, General and Administrative
expenses 573,850 1,049,612 533,126
--------------- -------------- ------------------
Net Operating Income (Loss) (557,358) (1,034,612) (533,126)
Other Income / (expense) - 269
Interest Expense (33,773) (18,292) -
--------------- -------------- ------------------
Net Income (Loss) Before Taxes (591,130) (1,052,634) (533,126)
--------------- -------------- ------------------
Provision for Taxes - - -
--------------- -------------- ------------------
Net Income (Loss) from continuing operations (591,130) (1,052,634) (533,126)
Income (Loss) from discontinued operations,
net of income tax of $0 - - (360,356)
--------------- -------------- ------------------
Net Income (Loss) $ (591,130) $ (1,052,634) $ (893,482)
=============== ============== ==================
Basic Earnings (Loss) Per Share
Income (loss) from continuing operations (0.01) (0.03) (0.02)
Loss from discontinued operations - - (0.01)
--------------- -------------- ------------------
Net Income (loss) $ (0.01) $ (0.03) $ (0.03)
=============== ============== ==================
Diluted Earnings (Loss) Per Share
Income (loss) from continuing operations (0.01) (0.03) (0.02)
Loss from discontinued operations - - (0.01)
--------------- -------------- ------------------
Net Income (loss) $ (0.01) $ (0.03) $ (0.03)
=============== ============== ==================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
TSET, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE QUARTER ENDED SEPTEMBER 30,
------------------------------------------------
2002 2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES ------------------------------------------------
NET LOSS FROM CONTINUING OPERATIONS $ (591,130) $ (1,052,634) $ (533,126)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
(USED IN) PROVIDED BY OPERATIONS
Depreciation and amortization 72,636 71,674 79,121
Common stock issued for compensation/services 5,674 274,513 6,560
CHANGE IN
Inventory Assets - - (40,000)
Accounts receivable (25,950) - 4,648
Prepaid expenses and other assets 34,380 (97,427) (26,750)
Accounts Payable 268,703 462,312 41,642
Accrued Expenses and other liabilities 119,201 (34,538) 15,776
-----------------------------------------------
NET CASH (USED IN) PROVIDED BY CONTINUING
OPERATIONS (116,486) (376,100) (452,129)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment - - (9,526)
Investment in patent protection - (36,740) -
Investment in discontinued operations - 82,545 (79,999)
NET CASH (USED IN) PROVIDED BY INVESTING -----------------------------------------------
ACTIVITIES - 45,805 (89,525)
-----------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock 183,000 80,000 1,021,000
Proceeds from short-term borrowings 315,321 -
Repayments of short-term borrowings (88,001) - -
NET CASH (USED IN) PROVIDED BY FINANCING -----------------------------------------------
ACTIVITIES 94,999 395,321 1,021,000
-----------------------------------------------
NET (DECREASE) INCREASE IN CASH (21,486) 65,026 479,346
CASH
BEGINNING OF PERIOD 21,510 32,619 102,949
-----------------------------------------------
END OF PERIOD $ 24 $ 97,645 $ 582,295
===============================================
Supplemental schedule of non-cash investing and
financing activities:
Debt satisfied with stock $ - $ - $ 419,143
===============================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT.
5
TSET, INC
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
COMMON STOCK
------------------------
TOTAL
RETAINED SHARE-
CAPITAL IN EARNINGS DEFERRED HOLDERS'
EXCESS OF PAR (ACCUMULATED EQUITY EQUITY
SHARES AMOUNT VALUE DEFICIT) COMPENSATION (DEFICIT)
-----------------------------------------------------------------------------------
BALANCE at June 30, 2002 43,937,907 $ 43,938 $ 14,371,113 $ (14,757,963) $ (41,668) $ (384,580)
Shares issued in July 2002 for cash 150,000 150 26,100 26,250
Shares issued in August 2002 for cash 790,248 790 116,928 117,718
Shares issued in September 2002 for cash 263,141 263 38,769 39,032
Stock options granted at Sept 30, 2002 for
consulting services 5,674 5,674
Costs associated with equity financing (114,655) (114,655
Amortization of deferred equity compensation 15,624 15,624
Net loss for the year ended June 30, 2002 (591,130) (591,130)
-----------------------------------------------------------------------------------
BALANCE at September 30, 2002 45,141,296 $ 45,141 $ 14,443,929 $ (15,349,093) $ (617,174) $ (886,067
===================================================================================
The accompanying notes are an integral part of this financial statement.
6
TSET, 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 period ended September 30, 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.
The accompanying financial statements should be read in conjunction with the
TSET, Inc. Form 10-KSB for the fiscal year ended June 30, 2002 filed on
September 28, 2002.
RECENT ACCOUNTING PRONOUNCEMENTS. On July 20, 2001, the FASB issued Statement of
Financial Accounting Standard (SFAS) No. 142, "Goodwill and Other Intangible
Assets." This statement makes significant changes to the accounting for business
combinations, goodwill, and intangible assets.
SFAS No. 142 establishes new standards for goodwill acquired in a business
combination, eliminates amortization of goodwill and instead sets forth methods
to periodically evaluate goodwill for impairment. Intangible assets with a
determinable useful life will continue to be amortized over that period. The
Company adopted this statement during the quarter ending September 30, 2002.
Goodwill and intangible assets acquired after June 30, 2001 will be subject
immediately to the non-amortization and amortization provisions of the
statement. The Company does not currently have any goodwill recorded on its
financial statements and it is expected that there will be no immediate impact
on the Company's financial statements as a result of the adoption of this
statement.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations." This statement addresses the
financial accounting and reporting for the retirement of tangible long-lived
assets and the associated asset retirement costs. The Company believes the
adoption of SFAS 143 will have no significant impact on its financial
statements. This statement is effective for financial statements issued in
fiscal years beginning after June 15, 2002.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." This statement
addresses the financial accounting and reporting for the impairment or disposal
of long-lived assets. The Company believes the adoption of SFAS 144 will have no
significant impact on its financial statements. This statement is effective for
financial statements issued in fiscal years beginning after June 15, 2002.
In April 2002, the Financial Accounting Standards Board issued SFAS No. 145,
"Recission of FASB Statements 4, 44, 64, Amendment of FASB Statement 13, and
Technical Corrections." This Statement rescinds FASB Statement No. 4, REPORTING
GAINS AND LOSSES FROM EXTINGUISHMENT OF DEBT, and an amendment of that
Statement, FASB Statement No. 64, EXTINGUISHMENTS OF DEBT MADE TO SATISFY
SINKING-FUND REQUIREMENTS. This Statement also rescinds FASB Statement No. 44,
ACCOUNTING FOR INTANGIBLE ASSETS OF MOTOR CARRIERS. This Statement amends FASB
Statement No. 13, ACCOUNTING FOR LEASES, to eliminate an inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. This Statement also amends other
existing authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed conditions. The
Company believes the adoption of SFAS 145 will have no significant impact on its
financial statements. This statement is effective for financial statements
issued on or after May 15, 2002.
In August 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit, or Disposal Activities." This
Statement addresses financial accounting and reporting for costs associated with
exit or disposal activities. The Company believes the adoption of SFAS 145 will
7
have no significant impact on its financial statements. This statement is
effective for exit or disposal activities initiated after December 31, 2002.
NOTE 2 -- INCOME TAXES
The composition of deferred tax assets and the related tax effects at September
30, 2002 and June 30, 2002 are as follows:
SEPTEMBER 30,
2002
(UNAUDITED) JUNE 30, 2002
_______________ ______________
Benefit from carryforward of
capital and net operating
losses $2,872,231 $2,685,915
Other temporary differences 220,332 220,332
Less:
Valuation allowance (3,052,963) (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:
SEPTEMBER 30, 2002
(UNAUDITED) JUNE 30, 2002
------------------------ -------------------------
% OF % OF
PRE-TAX PRE-TAX
AMOUNT LOSS AMOUNT LOSS
------------ ---------- ------------- ----------
Benefit for income tax
at federal statutory rate $ 200,984 34.0% $ 946,620 34.0%
Benefit for income tax at
state statutory rate 11,782 2.0% 55,494 2.0%
Non-deductible expenses (26,445) (4.5)% (111,274) (4.0)%
Acquired NOL and other - 0.0% 248,489 8.9%
Increase in valuation
allowance (186,316) (31.5)% (1,139,325) (40.9)%
------------ ---------- ------------- ----------
$ - 0.0% $ - 0.0%
============ ========== ============= ==========
The non-deductible expenses shown above related primarily to the amortization of
intangible assets and to the accrual of stock options for compensation using
different valuation methods for financial and tax reporting purposes.
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 September 30, 2002, for federal income tax and alternative minimum tax
reporting purposes, the Company has approximately $6.4 million of unused Federal
net operating losses, $1.0 million of capital losses and $3.3 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 three months ended September 30, 2002, the Company operated
only in the U.S.
8
NOTE 4 - EARNINGS PER SHARE
Weighted average shares outstanding used in the earnings per share calculation
were 44,526,735, 34,224,405, and 25,950,780for the periods ended September 30,
2002, 2001,and 2000, respectively.
As of September 30, 2002, there were outstanding options to purchase 7,641,975
shares of the Company's common stock. These options have been excluded from the
earnings per share calculation as their effect is anti-dilutive. As of September
30, 2001, there were outstanding options to purchase 1,557,075 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
As of September 30, 2002, the Company had no discontinued operations. In early
January 2001, management committed to a formal plan of action to sell or
otherwise dispose of Atomic Soccer. Agreement was reached with a buyer group,
that included current and former Atomic Soccer management, to sell them the
outstanding shares of common stock of Atomic Soccer. The transaction was
effective on April 11, 2001. On September 14, 2001 the board approved a formal
plan of action to sell or otherwise dispose of Aperion Audio (formerly
EdgeAudio). The Company accrued $150,000 for anticipated operating losses during
the phase-out period. At June 30, 2001, the Company recognized an impairment
loss on the intangible asset related to its acquisition of Aperion Audio of
$2,294,000. The sale of TSET-owned shares of Aperion Audio common stock was
completed on June 7, 2002, pursuant to a Settlement Agreement and Mutual
Release. At June 30, 2001, the Company wrote down to $0 the intangible asset
associated with its investment in Aperion Audio creating a negative book value
for this investment of approximately $800,000. The sale will resulted in a gain
of approximately $682,000. For tax purposes, there was no write down in the
Aperion Audio intangible asset, therefore, there will be no tax effect on this
gain. As a result, both Atomic Soccer and Aperion are included in the financial
statements as 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 three-months
ended September 30, are as follows:
OPERATING RESULTS OF DISCONTINUED OPERATIONS:
OPERATING RESULTS OF DISCONTINUED OPERATIONS:
-----------------------------------------------
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------
2001 2000
-----------------------------------------------
APERION APERION
AUDIO ATOMIC AUDIO TOTAL
----------- ------------ ----------- ----------
Sales $175,265 $ 365,848 $ 22,990 $388,838
Cost of sales (63,509) (230,117) (11,810) (241,927)
Depreciation and amortization (3,309) (71,798) (64,934) (136,732)
General and administrative (208,331) (150,895) (233,483) (384,378)
----------- ------------ ----------- ----------
Operating income (loss) (99,883) (86,962) (287,237) (374,199)
Other income 5,090 - - -
Interest expense (7,744) (28,526) (2,615) (31,141)
Provision for future operating
losses 82,030 - - -
Minority interest 20,507 - 44,984 44,984
----------- ------------ ----------- ----------
Income (Loss) pre-tax 0 (115,488) (244,868) (360,356)
Income taxes (benefits) - - - -
----------- ------------ ----------- ----------
Loss from discontinued
operations $0 $(115,488) $(244,868) $ (360,356)
=========== ============ =========== ==========
9
NOTE 6 - NOTES PAYABLE
The Company had the following obligations at September 30 and June 30, 2000:
September 30, 2002 June 30, 2002
------------------ -------------
(1) Obligations to Fusion Capital $ 49,999 $ 123,000
(2) Obligation to Aperion Audio 185,466 200,466
(3) Obligation to Jeff Wilson 360,000 360,000
(4) Eagle Rock 70,000 70,000
Obligations to stockholders 7,700 7,700
------------------ -------------
Total Notes Payable 673,165 761,166
Current portions:
Obligations to Fusion Capital 49,999 123,000
Obligation to Aperion Audio 185,466 205,000
Obligation to Jeff Wilson 150,000 130,000
Eagle Rock 70,000 70,000
Obligations to stockholders 7,700 7,700
------------------ -------------
Total current portion 463,165 535,700
------------------ -------------
Total long term obligations net of
current portion 210,000 225,466
================== =============
(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 director of the Company and bears interest at 4.59%. The
note calls for quarterly payments of $20,000 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.
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 Air 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 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.
On October 1, 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.
10
On March 1, 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. The remaining
potential 1,500,000 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.
NOTE 8 - SUBSEQUENT EVENTS
In October 2002, the Company received a Notice of Allowance 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. It is expected that the patent will issue in due course, providing
protection for key aspects of Kronos' 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 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
KronosTM 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.
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 $585,000 with an option
for an additional $144,000 in funding.
This Phase II contract is an extension of the Phase I and Phase I Option work
that began last year and represents further validation of the Kronos(TM)
technology by the U.S. Department of Defense. The work and funding on Phase II
will begin immediately. 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.
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 research and development 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.
11
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 May 2001, Kronos Air Technologies was awarded a
Small Business Innovation Research contract. This
contract is sponsored by the United States Navy and is
potentially worth up to $816,000 in product
development and testing support for Kronos Air
Technologies. The first phase of the contract was
worth up to $87,000 in funding for manufacturing and
testing a prototype device for air movement and
ventilation onboard naval vessels. In April 2002, the
U.S. Navy and Kronos mutually agreed to exercise the
option on the first phase of the U.S. Navy SBIR
contract. The option was to provide incremental
funding to Kronos to further test and evaluate
Kronos(TM)devices built during the initial SBIR
funding. Testing included demonstrating the ability of
these U.S. Navy Kronos(TM)devices to capture and
destroy biological hazards and to effectively manage
electrical magnetic interference. 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 $585,000 with an option for an
additional $144,000 in funding.
2. 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 One 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 Two
of the contract is worth up to $730,000 in additional
funding for product development and testing. We are
currently under contract for and working on phase One.
In August 2002, the U.S. Army requested the company
resubmit a detailed Phase Two proposal for review in
2003.
3. On July 2, 2001, we 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 Air
Technologies team to fully develop and capitalize on
the Kronos(TM)technology. We believe that The Eagle
Rock Group can assist us in unlocking the potential
value of the Kronos(TM)technology. The Eagle Rock
Group's multi-disciplined approach, which uses
seasoned business executives and leverages
relationships and networks, can accelerate the
Kronos(TM)opportunity versus the timing and
development if we were to continue on a go-it-alone
strategy or if we were to work and coordinate with the
myriad of groups necessary to duplicate The Eagle Rock
Group team. Specifically, The Eagle Rock Group is
working to augment and enhance our efforts in the
following areas (i) capital raising and allocation,
(ii) strategic partner introduction and evaluation,
(iii) distribution channel development, (iv) product
focus and brand development, (v) human resource
placement, and (vi) capital market introduction and
awareness. Pursuant to the agreement that we entered
into with The Eagle Rock Group, we issued to The Eagle
Rock Group a ten-year warrant granting them the right
to purchase 1,400,000 shares of our common stock at an
exercise price of $0.68 per share. The shares
underlying the warrant have piggy-back and demand
registration rights, as well as subscription rights in
the event that we issue any rights to all of our
stockholders to subscribe for shares of our common
stock. In addition, the warrant contains redemption
12
rights in the event that we enter into a transaction
that results in a change of control of our company.
4. On March 1, 2002, the Company entered into a 12-month
consulting agreement with The Eagle Rock Group.
Pursuant to the agreement, the Company granted The
Eagle Rock Group a 10 year warrant for up to 2,000,000
shares of our common stock. Of this, 500,000 shares
will be earned over a period of 12 months. The 500,000
warrants are for general consulting services for a 12
month period. The remainder of the warrants 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.
5. On May 7, 2002, we completed a private placement of
our common stock pursuant to which we sold 1,971,176
shares of our common stock at $0.17 per share to seven
accredited investors for consideration of $335,100
cash and 1,429,695 shares of our common stock at $0.17
per share to six members of our management team for
consideration of $39,987 cash and commitments to
convert $203,061 of debt.
6. In July 2002, Kronos Air Technologies executed a
Memorandum of Understanding with Access Business Group
International L.L.C. for the production of a limited
number of Kronos(TM)devices and for the potential
licensing of Kronos(TM) based air movement and
treatment technologies. Access Business Group is the
product development, manufacturing and logistics
subsidiary of Alticor Inc. and an affiliate of the
Amway Corporation and Quixtar Inc. Under the proposed
arrangement, Kronos will retain full rights to all of
our intellectual property, as well as manufacturing of
our proprietary power-supply. The final agreement is
subject to negotiations between the parties.
7. During our year ended June 30, 2002, we sold 5,059,752
shares of our common stock to Fusion Capital for
$1,194,608 under the terms of a Common Stock Purchase
Agreement dated June 19, 2001. On August 12, 2002, we
entered into a new Common Stock Purchase Agreement
with Fusion.
8. 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.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
LITIGATION. On June 6, 2002, Dutchess Advisors Ltd. initiated legal
proceedings in Middlesex County, Massachusetts, against TSET. The complaint
alleges, among other things, breach of contract, QUANTUM MERUIT, unjust
enrichment and conversion with respect to a letter agreement, dated June 19,
2001, between TSET and Dutchess Advisors Ltd., and seeks, among other things, a
judgment in the amount of $75,000, exclusive of pre-judgment interest, costs and
attorneys' costs. TSET contested the allegations made by Dutchess by serving a
motion to dismiss all claims. Dutchess subsequently filed an amended complaint
with the court on August 16, 2002. Dutchess seeks to recover up to three times
its actual damages as well as its costs and attorneys' fees. TSET filed a motion
13
to dismiss all counts in the amended complaint. TSET believes that it has
meritorious defenses and intends to vigorously defend this matter.
On February 2, 2001, we initiated, together with Kronos Air Technologies,
legal proceedings in Clackamas County, Oregon against W. Alan Thompson, Ingrid
T. Fuhriman, and Robert L. Fuhriman II, each of whom were formerly executive
officers and members of the Board of Directors of Kronos Air Technologies. This
suit alleges, among other things, breach of fiduciary duties and breach of
contract by these individuals, and seeks, among other things, an order from the
court referring the dispute to arbitration in accordance with the terms of these
individuals. We have agreed to a change of venue of this matter to King County,
Washington, and arbitrators have been selected. The parties are in the process
of exchanging and complying with requests for discovery.
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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 TSET, Inc., d/b/a
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
TSET, Inc., through its wholly subsidiary, Kronos Air Technologies, Inc.,
is focused on the development and commercialization of an air movement and
purification technology known as Kronos(TM) that is more fully described below.
The Kronos(TM) technology operates through the application of high-voltage
management across paired electrical grids that creates an ion exchange which
moves air and gases at high velocities while removing odors, smoke, and
particulates, as well as killing pathogens, including bacteria. We believe the
technology is cost-effective and is more energy-efficient than current
alternative fan and filter technologies. The Kronos(TM) technology has been
patented by the United States Patent and Trademark Office. The Kronos(TM)
technology has been patented by the United States Patent and Trademark Office.
Additional U.S. and international patents are pending.
The Kronos(TM) device is comprised of state-of-the-art high-voltage
electronics and electrodes attached to one or more sets of corona and target
electrodes housed in a self-contained casing. The device can be flexible in
size, shape and capacity and can be used in embedded electronic devices,
standalone room devices, and integrated HVAC and industrial applications. The
Kronos(TM) device has no moving parts or degrading elements and is composed of
cost-effective, commercially available components.
The Kronos(TM) technology combines the benefits of silent air movement,
air cleaning, and odor removal. Because the Kronos(TM) air movement system is a
silent, non-turbulent, and energy-efficient air movement and cleaning system, we
believe that it is ideal for air circulation, cleaning and odor removal in all
types of buildings as well as compact, sealed environments such as airplanes,
submarines and cleanrooms. Additionally, because it has no moving parts or fans,
a Kronos(TM) device can instantly block or reverse the flow of air between
adjacent areas for safety in hazardous or extreme circumstances.
On January 18, 2002, we began trading shares of our common stock under a
new ticker symbol (KNOS). At the same time, we announced that our company will
be doing business under the name of Kronos Advanced Technologies. We have asked
our shareholders to vote for the approval of an amendment to our articles of
incorporation for a name change of our company to Kronos Advanced Technologies,
Inc. At our annual meeting on November 20, 2002.
PATENT AND INTELLECTUAL PROPERTY. In October 2002, Kronos received a
Notice of Allowance 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. It is expected that the
patent will issue in due course, providing protection for key aspects of Kronos'
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.
15
This allowance is for the first of a series of 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
application, three 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.
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 device into a wall outlet to obtain air filtration for their
home, office or hotel room. Embedded applications of the Kronos technology
require the technology be added into another device or become part of a larger
system such as a piece of medical equipment to replace the cooling fan or
building ventilation system for more efficient air movement and filtration.
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 the 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' proprietary electronics.
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. Since May 2001, the total potential value of Small Business
Innovation Research (SBIR) contracts awarded to Kronos Air Technologies has been
$1.7 million. In May 2001, Kronos Air Technologies was awarded its first SBIR
contract sponsored by the U.S. Navy. That contract is potentially worth $816,000
in product development and testing support. The first phase of the contract was
worth up to $87,000 in funding for manufacturing and testing prototype devices
for air movement and ventilation onboard naval vessels. The second phase of the
contract is worth up to $729,000 in additional funding.
In April 2002, the U.S. Navy and Kronos mutually agreed to exercise the
option on the first phase of the U.S. Navy SBIR contract. The option is to
provide incremental funding to Kronos to further test and evaluate the
Kronos(TM) devices built during the initial SBIR funding. Testing will include
demonstrating the ability of these U.S. Navy Kronos(TM) devices to capture and
destroy biological hazards and to effectively manage electrical magnetic
interference ("EMI").
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 $585,000 with an option
for an additional $144,000 in funding.
This Phase II contract is an extension of the Phase I and Phase I Option
work that began last year and represents further validation of the Kronos(TM)
technology by the U.S. Department of Defense. The work and funding on Phase II
will begin immediately. 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 will develop and test an air
filtration mechanism capable of performing to HEPA quality standards. Kronos(TM)
devices will replace all 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.
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 One 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 Two of the contract is worth up to $730,000 in additional funding for
16
product development and testing. In August 2002, the U.S. Army requested the
Company resubmit a detailed Phase Two proposal for review in 2003.
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.
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 TSET. 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 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 TSET.
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
17
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.
ESTIMATED LOSSES FROM DISCONTINUED OPERATIONS. We provided for an accrual
for the estimated loss on our discontinued Aperion Audio business based upon
management's estimates of the estimated operating losses to be incurred by
Aperion Audio from the date we adopted our plan to dispose of Aperion Audio in
September 2001, through the ultimate disposal date, as well as estimated cost
related to the disposal.
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.
RESULTS OF OPERATIONS
The Company's net loss from continuing operations for the three months
ended September 30, 2002 was $0.6 million, compared with a net loss of $1.1
million for the corresponding period for the prior year. The decrease in the net
loss was primarily the result of a reduction in professional fees and consulting
services and a reduction in compensation expense.
REVENUE. Revenues are generated through sales of Kronos(TM) devices at
Kronos Air Technologies, Inc. Revenue for the three months ended September 30,
2002 was $109,000. Revenue of $25,000 was recorded during the corresponding
period of the prior year. These revenues were primarily from our U.S. Navy and
U.S. Army Small Business Innovative Research contracts and from our contract
with Access Business Group.
COST OF SALES. Cost of sales for the three months ended September 30, 2002
was $92,000, compared to $10,000 for the corresponding period in the prior year.
Cost of sales is primarily research and development costs associated with our
U.S. Navy and U.S. Army Small Business Innovative Research contracts and from
our contract with Access Business Group.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, General and
Administrative expenses for the three months ended September 30, 2002 was $0.6
million, compared to $1.0 million for the corresponding period in the prior
year. The decrease is attributable to a reduction in professional fees and
consulting services of $360,000 and a reduction in compensation expenses of
$40,000.
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 2002
Our total assets at September 30, 2002 were $2.3 million, compared with
$2.4 million at June 30, 2002. Total assets at September 30, 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 September 30, 2002 and June 30, 2002 were
$93,000 and $123,000, respectively, while total current liabilities for those
same periods were $2.2 million and $1.8 million, respectively, creating a
working capital deficit of $2.1 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' equity as of September 30, 2002 and June 30, 2002 were $(0.9)
million and $(0.4) million, respectively, representing a decrease of $0.5
million. The decrease in shareholders' equity is primarily the result of
incurring a $0.6 million loss from continuing operations for the three months
ended September 30, 2002, partially offset through the sale and issuance of $.02
million of common stock.
18
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. Going forward, in
addition to continued sales of common stock, we plan to rely on the proceeds
from Small Business Innovation Research (SBIR) contracts with the U.S. Navy and
Army, as well as other government contracts and grants, and 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.
Net cash flow used on operating activities was $0.1 million for the
current year three months. 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 U.S Army and Navy SBIR contracts and our contract with Access
Business Group.
In May 2002, we completed a private placement of our common stock pursuant
to which we sold 2,559,412 shares of our common stock at $0.17 per share to
eight accredited investors for consideration of $435,100 in cash and 841,459
shares of our common stock at $0.17 per share to five members of our management
team for consideration of commitments to convert $143,048 of debt.
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.
On August 12, 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. Kronos and HoMedics have agreed to execute a Development Agreement to
provide additional funding to Kronos for the development of unique Kronos-based
products that will be marketed and distributed by HoMedics. HoMedics has made a
multi-million dollar commitment to the marketing and advertising of their Kronos
product line over the initial 42 months of the agreement.
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 $585,000 with an option
for an additional $144,000 in funding. Funding on Phase II will begin in
December 2002.
GOING CONCERN OPINION
Our independent auditors have added an explanatory paragraph to their
audit opinion issued in connection with the 2002, 2001 and 2000 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.
19
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 only recently begun implementing our plan to prioritize and
concentrate our management and financial resources to fully capitalize on our
investment in Kronos Air Technologies and have yet to establish any history of
profitable operations. We incurred a net operating loss of $0.6 million for the
three months ended September 30, 2002. 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 September 30, 2002 and June 30, 2002,
we had an accumulated deficit of $15.3 million and $14.8 million, respectively.
Our revenues have not been sufficient to sustain our operations. We expect that
our revenues will not be sufficient to sustain our operations for the
foreseeable future. Our profitability will require the successful
commercialization of our Kronos(TM) technology. No assurances can be given when
this will occur or that we will ever be profitable.
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. Our financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
WE WILL REQUIRE ADDITIONAL FINANCING TO SUSTAIN OUR OPERATIONS AND WITHOUT IT WE
WILL NOT BE ABLE TO CONTINUE OPERATIONS
At September 30, 2002, we had a working capital deficit of $2.1 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.
Subject to the condition that Fusion Capital is not obligated and will not
be permitted to purchase shares of our common stock if the per-share price of
our common stock is below the floor price of $0.10, we have the right to receive
$10,000 per trading day under the common stock purchase agreement unless our
stock price equals or exceeds $3.00, in which case the daily amount may be
increased at our option. The extent to which we rely on Fusion Capital as a
source of funding will depend on a number of factors including, the prevailing
market price of our common stock and the extent to which we are able to secure
working capital form other sources, such as through the sale of our Kronos((TM))
air movement and purification systems. If obtaining sufficient financing from
Fusion Capital were to prove prohibitively expensive and if we are unable to
commercialize and sell the products or technologies of our subsidiaries, we will
need to secure another source of funding in order to satisfy our working capital
needs. Even if we are able to access the funds available under the common stock
purchase agreement, we may still need additional capital to fully implement our
business, operating and development plans. Should the financing we require to
sustain our working capital needs be unavailable, or prohibitively expensive
when we require it, we would be forced to curtail our business operations.
Additional financing could be prohibitively expensive due to the recent economic
downturn in the U.S. economy and the possibility of reduced investor confidence
generally in the financial markets and in emerging growth and technology
companies. In addition, additional financing could be prohibitively expensive
because (i) we have limited assets that have value to pledge as collateral; (ii)
we have negative cash flows with
20
an accumulated deficit; and (iii) and we currently have no definitive
contractual revenue stream from any customers.
THE SALE OF OUR COMMON STOCK TO FUSION CAPITAL MAY CAUSE DILUTION AND THE SALE
OF THE SHARES OF COMMON STOCK ACQUIRED BY FUSION CAPITAL COULD CAUSE THE PRICE
OF OUR COMMON STOCK TO DECLINE
The purchase price for the common stock to be issued to Fusion 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.
21
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.
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 presently have one patent that we have received a notice of allowance.
We have three 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 September 30 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 95% and 94% of our total assets as of
September 30 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
22
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 95% and 94% of out total assets as of September 30
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 the 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 gatheering, analyzing and
disclosing information needed to satisfy the Company's disclosure obligations
under the Exchange Act.
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.
23
PART II
ITEM 1. LEGAL PROCEEDINGS
On June 6, 2002, Dutchess Advisors Ltd. initiated legal proceedings in
Middlesex County, Massachusetts, against TSET. The complaint alleges, among
other things, breach of contract, QUANTUM MERUIT, unjust enrichment and
conversion with respect to a letter agreement, dated June 19, 2001, between TSET
and Dutchess Advisors Ltd., and seeks, among other things, a judgment in the
amount of $75,000, exclusive of pre-judgment interest, costs and attorneys'
costs. TSET contested the allegations made by Dutchess by serving a motion to
dismiss all claims. Dutchess subsequently filed an amended complaint with the
court on August 16, 2002. Dutchess seeks to recover up to three times its actual
damages as well as its costs and attorneys' fees. TSET to filed a motion to
dismiss all counts in the amended complaint. TSET believes that it has
meritorious defenses and intends to vigorously defend this matter.
On February 2, 2001, we initiated, together with Kronos Air Technologies,
legal proceedings in Clackamas County, Oregon against W. Alan Thompson, Ingrid
T. Fuhriman, and Robert L. Fuhriman II, each of whom were formerly executive
officers and members of the Board of Directors of Kronos Air Technologies. This
suit alleges, among other things, breach of fiduciary duties and breach of
contract by these individuals, and seeks, among other things, an order from the
court referring the dispute to arbitration in accordance with the terms of these
individuals. We have agreed to a change of venue of this matter to King County,
Washington, and arbitrators have been selected. The parties are in the process
of exchanging and complying with requests for discovery.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
There were no sales of unregistered securities of the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. 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
24
EXHIBIT
NO. DESCRIPTION LOCATION
-----------------------------------------------------------------------------
Form 10-Q for the quarterly period
ended March 31, 2002 filed on
May 15, 2002
10.1 Employment Agreement, dated Incorporated by reference to
April 16, 1999, by and between Exhibit 10.1 to the Registration
TSET, Inc. and Jeffrey D. Wilson Statement on Form S-1 filed on
August 7, 2001
10.2 Deal Outline, dated December 9, Incorporated by reference to
1999, by and between TSET, Inc. Exhibit 10.2 to the Registration
and Atomic Soccer, USA, Ltd. Statement on Form S-1 filed on
August 7, 2001
10.3 Letter of Intent, dated December Incorporated by reference to
27, 1999, by and between TSET, Exhibit 10.3 to the Registration
Inc. and Electron Wind Statement on Form S-1 filed on
Technologies, Inc. August 7, 2001
10.4 Agreement, dated February 5, Incorporated by reference to
2000, by and between DiAural, LLC and Exhibit 10.4 to the
EdgeAudio, LLC Registration Statement on Form
S-1 filed on August 7, 2001
10.5 Stock Purchase Agreement, dated Incorporated by reference to
March 6, 2000, by and among Exhibit 10.5 to the Registration
TSET, Inc., Atomic Soccer USA, Statement on Form S-1 filed on
Ltd., Todd P. Ragsdale, James August 7, 2001
Eric Anderson, Jewel Anderson,
Timothy Beglinger and Atomic
Millennium Partners, LLC
10.6 Acquisition Agreement, dated Incorporated by reference to
March 13, 2000, by and among Exhibit 10.6 to the Registration
TSET, Inc., High Voltage Statement on Form S-1 filed on
Integrated, LLC, Ingrid August 7, 2001
Fuhriman, Igor Krichtafovitch,
Robert L. Fuhriman and Alan
Thompson
10.7 Letter of Intent, dated April 18, Incorporated by reference to
2000, by and between TSET, Exhibit 10.7 to the Registration
Inc. and EdgeAudio.com, Inc. Statement on Form S-1 filed on
August 7, 2001
10.8 Lease Agreement, dated May 3, Incorporated by reference to
2000, by and between Exhibit 10.8 to the Registration
Kronos Air Technologies, Statement on Form S-1 filed on
Inc. and TIAA Realty, Inc. August 7, 2001
10.9 Agreement and Plan of Incorporated by reference to
Reorganization, Exhibit 10.9 to the Registration
dated May 4, 2000, by and among Statement on Form S-1 filed on
TSET, Inc., EdgeAudio.com, Inc., August 7, 2001
LYNK Enterprises, Inc.,
Robert Lightman, J. David Hogan,
25
EXHIBIT
NO. DESCRIPTION LOCATION
-----------------------------------------------------------------------------
Eric Alexander and
Eterna Internacional, S.A.
de C.V.
10.10 Letter Agreement, dated May 4, Incorporated by reference to
2000, by and between TSET, Inc. Exhibit 10.10 to the
and Cancer Detection Registration Statement on Form
International, LLC S-1 filed on August 7, 2001
10.11 Employment Agreement, dated Incorporated by reference to
May 19, 2000, by and between Exhibit 10.11 to the
TSET, Inc. and Richard A. Registration Statement on Form
Papworth S-1 filed on August 7, 2001
10.12 Finders Agreement, dated August Incorporated by reference to
21, 2000, by and among TSET, Exhibit 10.12 to the
Inc., Richard F. Tusing and Registration Statement on Form
Daniel R. Dwight S-1 filed on August 7, 2001
10.13 Contract Services Agreement, Incorporated by reference to
dated June 27, 2000, by and Exhibit 10.13 to the
between Chinook Technologies, Registration Statement on Form
Inc. and Kronos Air Technologies, S-1 filed on August 7, 2001
Inc.
10.14 Letter of Intent, dated July 17, Incorporated by reference to
2000, by and between Kronos Air Exhibit 10.14 to the
Technologies, Inc. and Polus Registration Statement on Form
Technologies, Inc. S-1 filed on August 7, 2001
10.15 Consulting Agreement, dated Incorporated by reference to
August 1, 2000, by and among Exhibit 10.15 to the
TSET, Inc., Richard F. Tusing Registration Statement on Form
and Daniel R. Dwight 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 Registration Statement on Form
Bryan
Holbrook S-1 filed on August 7, 2001
10.17 Shareholders Agreement, dated Incorporated by reference to
September 12, 2000, by and among Exhibit 10.17 to the
TSET, Inc., Bryan Holbrook and Registration Statement on Form
EdgeAudio.com, Inc. 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 S-1 filed on August 7, 2001
Enterprises, Inc., Robert Lightman,
J. David Hogan, Eric Alexander and
Eterna Internacional, S.A. de C.V.
10.19 Agreement Regarding Sale of Incorporated by reference to
Preferred Stock, dated November 1, Registration Statement on Form
2000, by Exhibit 10.19 to the S-1 filed on August 7, 2001
and between EdgeAudio.com, Inc.
and Bryan Holbrook
26
EXHIBIT
NO. DESCRIPTION LOCATION
-----------------------------------------------------------------------------
10.20 Amendment to Subcontract, dated Incorporated by reference to
December 14, 2000, by and between Exhibit 10.20 to the
Bath Iron Works and High Voltage Registration Statement on
Integrated Form S-1 filed on
August 7, 2001
10.21 Consulting Agreement, dated Incorporated by reference to
January 1, 2001, by and between Exhibit 10.21 to the
TSET, Inc. and Dwight, Tusing & Registration Statement on Form
Associates S-1 filed on August 7, 2001
10.22 Employment Agreement, dated March Incorporated by reference to
18, 2001, by and between TSET, Inc. Exhibit 10.22 to the
and Alex Chriss Registration Statement on Form
S-1 filed on August 7, 2001
10.23 Stock Option Agreement, dated Incorporated by reference to
April 9, 2001, by and between Exhibit 10.23 to the
TSET, Inc. and Jeffrey D. Wilson Registration Statement on Form
S-1 filed on August 7, 2001
10.24 Stock Option Agreement, dated Incorporated by reference to
April 9, 2001, by and between Exhibit 10.24 to the
TSET, Inc. and Jeffrey D. Wilson Registration Statement on Form
S-1 filed on August 7, 2001
10.25 Stock Option Agreement, dated Incorporated by reference to
April 9, 2001, by and between Exhibit 10.25 to the
TSET, Inc. and Daniel R. Dwight Registration Statement on Form
S-1 filed on August 7, 2001
10.26 Stock Option Agreement, dated Incorporated by reference to
April 9, 2001, by and between Exhibit 10.26 to the
TSET, Inc. and Richard F. Tusing Registration Statement on Form
S-1 filed on August 7, 2001
10.27 Stock Option Agreement, dated Incorporated by reference to
April 9, 2001, by and between Exhibit 10.27 to the
TSET, Inc. and Charles D. Strang Registration Statement on Form
S-1 filed on August 7, 2001
10.28 Stock Option Agreement, dated Incorporated by reference to
April 9, 2001, by and between Exhibit 10.28 to the
TSET, Inc. and Richard A. Papworth Registration Statement on Form
S-1 filed on August 7, 2001
10.29 Stock Option Agreement, dated Incorporated by reference to
April 9, 2001, by and between Exhibit 10.29 to the
TSET, Inc. and Richard A. Papworth Registration Statement on Form
S-1 filed on August 7, 2001
10.30 Stock Option Agreement, dated Incorporated by reference to
April 9, 2001, by and between Registration Statement on Form
TSET, Inc. and Exhibit 10.30 to S-1 filed on August 7, 2001
the Erik W. Black
27
EXHIBIT
NO. DESCRIPTION LOCATION
-----------------------------------------------------------------------------
10.31 Stock Option Agreement, dated Incorporated by reference to
April 9, 2001, by and between Exhibit 10.31 to the
TSET, Inc. and J. Alexander Registration Statement on Form
Chriss S-1 filed on August 7, 2001
10.32 Stock Option Agreement, dated Incorporated by reference to
April 9, 2001, by and between Exhibit 10.32 to the
TSET, Inc. and Charles H. Registration Statement on Form
Wellington S-1 filed on August 7, 2001
10.33 Stock Option Agreement, dated Incorporated by reference to
April 9, 2001, by and between Exhibit 10.33 to the
TSET, Inc. and Igor Krichtafovitch Registration Statement on Form
S-1 filed on August 7, 2001
10.34 Letter Agreement, dated April 10, Incorporated by reference to
2001, by and between TSET, Inc. Exhibit 10.34 to the
and Richard A. Papworth Registration Statement on Form
S-1 filed on August 7, 2001
10.35 Letter Agreement, dated April 12, Incorporated by reference to
2001, by and between TSET, Inc. Exhibit 10.35 to the
and Daniel R. Dwight and Richard Registration Statement on Form
F. Tusing S-1 filed on August 7, 2001
10.36 Finders Agreement, dated April 20, Incorporated by reference to
2001, by and between TSET, Inc. Exhibit 10.36 to the
and Bernard Aronson, d/b/a Bolivar Registration Statement on Form
International Inc. S-1 filed on August 7, 2001
10.37 Indemnification Agreement, dated Incorporated by reference to
May 1, 2001, by and between TSET, Exhibit 10.37 to the
Inc. and Jeffrey D. Wilson Registration Statement on Form
S-1 filed on August 7, 2001
10.38 Indemnification Agreement, dated Incorporated by reference to
May 1, 2001, by and between TSET, Exhibit 10.38 to the
Inc. and Daniel R. Dwight Registration Statement on Form
S-1 filed on August 7, 2001
10.39 Indemnification Agreement, dated Incorporated by reference to
May 1, 2001, by and between TSET, Exhibit 10.39 to the
Inc. and Richard F. Tusing Registration Statement on Form
S-1 filed on August 7, 2001
10.40 Indemnification Agreement, dated Incorporated by reference to
May 1, 2001, by and between TSET, Exhibit 10.40 to the
Inc. and Charles D. Strang Registration Statement on Form
S-1 filed on August 7, 2001
10.41 Indemnification Agreement, dated Incorporated by reference to
May 1, 2001, by and between TSET, Exhibit 10.41 to the
Inc. and Richard A. Papworth Registration Statement on Form
S-1 filed on August 7, 2001
10.42 Indemnification Agreement, dated Incorporated by reference to
28
EXHIBIT
NO. DESCRIPTION LOCATION
-----------------------------------------------------------------------------
May 1, 2001, by and between TSET, Exhibit 10.42 to the
Inc. and Erik W. Black Registration Statement on Form
S-1 filed on August 7, 2001
10.43 Stock Option Agreement, dated May Incorporated by reference to
3, 2001, by and between TSET, Inc. Exhibit 10.43 to the
and Jeffrey D. Wilson Registration Statement on Form
S-1 filed on August 7, 2001
10.44 Common Stock Purchase Agreement, Incorporated by reference to
dated June 19, 2001, by and Exhibit 10.44 to the
between TSET, Inc. and Fusion Registration Statement on Form
Capital Fund II, LLC S-1 filed on August 7, 2001
10.45 Registration Rights Agreement, Incorporated by reference to
dated June 19, 2001, by and Exhibit 10.45 to the
between TSET, Inc. and Fusion Registration Statement on Form
Capital Fund II, LLC S-1 filed on August 7, 2001
10.46 Mutual Release and Settlement Incorporated by reference to
Agreement, dated July 7, 2001, Exhibit 10.46 to the
by and between TSET, Inc. and Registration Statement on Form
Foster & Price Ltd. S-1 filed on August 7, 2001
10.47 Letter Agreement, dated July 9, Incorporated by reference to
2001, by and between TSET, Inc. Exhibit 10.47 to the
and The Eagle Rock Group, LLC Registration Statement on Form
S-1 filed on August 7, 2001
10.48 Finders Agreement, dated July 17, Incorporated by reference to
2001, by and between TSET, Inc. Exhibit 10.48 to the
and John S. Bowles Registration Statement on Form
S-1 filed on August 7, 2001
10.49 Warrant Agreement, dated July 16, Incorporated by reference to
2001, by and between TSET, Inc. Exhibit 10.49 to the
and The Eagle Rock Group, LLC Registration Statement on Form
S-1 filed on August 7, 2001
10.50 Agreement and Release, dated Incorporated by reference to
October 10, 2001, by and between Exhibit 10.50 to the
TSET, Inc. and 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, Incorporated by reference to
2001 payable to Mr. Jeffrey D. Exhibit 10.51 to the
Wilson Registrant's Form 10-K for
the year ended June 30,
2001 filed on October 15,
2001
10.52 Consulting Agreement, dated Incorporated by reference to
October 10, 2001, by and between Exhibit 10.52 to the
TSET, Inc. and Jeffrey D. Wilson Registrant's Form 10-K for the
year ended June 30, 2001 filed
29
EXHIBIT
NO. DESCRIPTION LOCATION
-----------------------------------------------------------------------------
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 September 30, 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 September 30, 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
by and between TSET, Inc. and Exhibit 10.56 to the Registrant's
Fusion Capital Fund II, LLC Amendment No. 1 to Form S-1 filed
on August 2, 2002
10.57 Common Stock Purchase Agreement, Incorporate by reference to
dated August 12, 2002 by and Exhibit 10.57 to the Registrant's
between between TSET, Inc. and Form S-1 filed on August 13, 2002
Fusion Capital Fund II, LLC
10.58 Registration Rights Agreement, Incorporated by reference to
dated August 12, 2002 by and Exhibit 10.58 to the Registrant's
between TSET, Inc. and Fusion Form S-1 filed on August 13, 2002
Capital Fund II, LLC
10.59 Termination Agreement, dated Incorporated by reference to
August 12, 2002 by and between Exhibit 10.59 to the Registrant's
TSET, Inc. and Fusion Capital Amendment No. 1 to Form S-1 filed
Fund II, LLC on September 16, 2002
11.1 Statement re: Computation of Not applicable
Earnings
12.1 Statement re: Computation of Not applicable
Ratios
15.1 Letter re: Unaudited Interim Not applicable
Financial
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
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATED: NOVEMBER 14, 2002 TSET, 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
31
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of TSET, Inc. (the "Company") on
Form 10-QSB for the quarter ended September 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), each of
the undersigned, in the capacities and on the dates indicated below, hereby
certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that to his knowledge:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operation of the
Company.
/s/ Daniel R. Dwight
--------------------------------------
Daniel R. Dwight
President and Chief Executive Officer
/s/ Richard A. Papworth
--------------------------------------
Richard A. Papworth
Chief Financial Officer
32
CERTIFICATION
PURSUANT TO SECTION 302
I, Daniel R. Dwight, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of TSET, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 By: /s/ Daniel R. Dwight
---------------------
Daniel R. Dwight
Chief Executive Officer
33
CERTIFICATION
PURSUANT TO SECTION 302
I, Richard A. Papworth, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of TSET, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 By: /s/ Richard A. Papworth
------------------------
Richard A. Papworth
Chief Financial Officer and
Principle Accounting Officer
34