U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to
___________________
Commission file number: 000-30191
TSET, INC.
------------------------------------------------
(Exact name of Registrant as specified in its charter)
NEVADA 87-0440410
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
333 So. State Street, PMB 111 , Lake Oswego, OR 97034
-------------------------------------------------------
(Address of principal executive offices)(Zip Code)
(503) 598-1900
------------------------
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 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. Yes [ X ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS: State the number
of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common stock, par value $0.001, of which 32,826,534 shares
were issued and outstanding as of March 31, 2001.
TSET, INC.
FORM 10-Q
QUARTERLY REPORT
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1. Financial
Statements....................................................3
Consolidated Balance Sheets as of March 31,
2001 and June 30, 2000................................3
Consolidated Statements of Operations for the three
months ended March 31, 2001 and 2000 and the nine
months ended March 31, 2001 and 2000..................4
Consolidated Statements of Cash Flows for the three
months ended March 31, 2001 and 2000 and the nine
months ended March 31, 2001 and 2000..................5
Consolidated Statements of Stockholders' Equity
(Deficit) for the three months ended March 31,
2001 and for the period from June 30, 1997
to March 31, 2001.....................................6
Notes to Consolidated Financial Statements............7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.........11
ITEM 3. Quantitative and Qualitative Disclosure of
Market Risk...........................................15
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.....................................15
ITEM 2. Changes in Securities.................................16
ITEM 3. Defaults upon Senior Securities.......................17
ITEM 4. Submission of Matters to a Vote of Security Holders...17
ITEM 5. Other Information.....................................17
ITEM 6. Exhibits and Reports on Form 8-K......................18
SIGNATURES
2
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
The following comprise our condensed (unaudited)consolidated
financial statements for the three months and nine months ended March
31, 2001 and 2000.
TSET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, June 30,
2001 2000
-------------- ------------
Assets
Current Assets
Cash $ 114,393 $ 102,949
Accounts receivable, net 113,436 130,654
Inventories 784,596 623,991
Prepaid expenses 29,770 36,505
------------- ------------
Total Current Assets 1,042,195 894,099
Property and Equipment 280,905 165,696
Less: Accumulated Depreciation (83,945) (51,129)
------------- ------------
Net Property and Equipment 196,960 114,567
Other Assets
Intangibles, net 5,004,670 8,142,609
------------- ------------
Total Other Assets 5,004,670 8,142,609
------------- ------------
Total Assets $ 6,243,825 $ 9,151,275
============= ============
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $ 438,207 $ 225,521
Accrued expenses 1,435,522 1,288,364
Notes payable, current portion 1,059,924 1,114,832
------------- ------------
Total Current Liabilities 2,933,653 2,628,717
------------- ------------
Long-Term Liabilities
Notes payable - 176,342
------------- ------------
Total Long-Term Liabilities - 176,342
------------- ------------
Minority Interest 568,617 -
------------- ------------
Shareholders' Equity
Common stock, authorized
500,000,000 shares of $.001
par value 33,265 30,652
Capital in excess of par
value 11,835,967 9,615,743
Retained earnings
(accumulated deficit) (9,127,678) (3,300,179)
------------- ------------
Total Shareholders'
Equity (deficit) 2,741,555 6,346,216
------------- ------------
Total Liabilities and
Shareholders' Equity $ 6,243,825 $ 9,151,275
============= ============
The accompanying notes are an integral part of these
statements.
3
TSET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED
March 31, 2001 AND 2000
(UNAUDITED)
For the Three months Ended For the Nine Months Ended
March 31, March 31,
-------------------------- --------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Sales $ 224,345 $ - $ 592,570 $ -
Cost of sales 113,266 - 304,488 -
------------ ------------ ------------ ------------
Gross Margin 111,079 - 288,082 -
------------ ------------ ------------ ------------
Operating expenses:
Compensation and benefits 325,290 566,450 1,253,747 662,500
Marketing 59,996 - 270,626 -
Research and development 17,211 - 131,178 -
Professional services 227,450 803 562,700 803
Amortization of intangibles 141,610 23,730 424,831 23,730
Other general & administrative 258,945 7,163 639,884 8,654
------------ ------------ ------------ ------------
Total operating expense 1,030,502 598,146 3,282,966 695,687
------------ ------------ ------------ ------------
Income or (loss) from Operations ( 919,423) ( 598,146) (2,994,884) ( 695,687)
Other Income / (Expense) 513 37 5,054 58
Interest Expense ( 1,406) - ( 8,279) -
Minority Interests 36,283 - 131,383 -
------------ ------------ ------------ ------------
Net Income (loss) Before Taxes $ ( 884,033) $( 598,109) $ (2,866,726) ( 695,629)
Provision for Income Taxes - - - -
------------ ------------ ------------ ------------
Net Income (loss)
from continuing operations $ ( 884,033) $( 598,109) $ (2,866,726) ( 695,629)
Discontinued Operations (Note 6):
Income (Loss) from discontinued
operations (less applicable
income taxes of $0) ( 170,542) ( 25,892) ( 450,772) ( 25,892)
Loss on disposal of discontinued
operations (less applicable
income taxes of $0) (2,510,000) - (2,510,000) -
------------ ------------ ------------ ------------
Net Income (loss) $ (3,564,576) $ ( 624,001) $ (5,827,499) $ ( 721,521)
============ ============ ============ ============
Basic and Diluted Earnings (Loss)
Per Share:
Income from Continuing Operations $ (0.03) $ (0.02) $ (0.09) (0.03)
Loss on Discontinued Operations (0.08) (0.00) (0.09) (0.00)
------------ ------------ ------------ ------------
Net Income (Loss) $ (0.11) $ (0.02) $ (0.18) $ (0.03)
============ ============ ============ ============
Weighted Average Shares Outstanding
Basic 33,031,507 25,715,889 32,031,543 25,282,783
============ ============ ============ ============
Diluted 33,031,507 25,715,889 32,031,543 25,282,783
============ ============ ============ ============
The accompanying notes are an integral part of these
statements.
4
TSET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS AND NINE MONTHS ENDED
March 31, 2001 AND 2000
(UNAUDITED)
For the Three months Ended For the Nine Months Ended
March 31, March 31,
-------------------------- --------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) from continuing operations $( 884,033) $( 598,109) $(2,866,726) $( 695,629)
Adjustments to reconcile Net Income to net cash
(used in) provided by operations:
Depreciation and amortization 157,622 24,530 445,355 25,530
Minority Interests ( 36,283) - ( 131,383) -
Provision for doubtful accounts - - - -
Common stock issued as compensation 77,394 - 83,954 -
Change In:
Inventories ( 11,072) - ( 239,649) -
Accounts receivable 49,639 - ( 2,958) -
Prepaid expenses and other assets 487 - ( 493) -
Accounts Payable 32,060 - 330,851 -
Accrued Expenses and other liabilities 132,804 566,450 171,617 662,500
------------ ------------ ------------ ----------
Net cash (used in) provided by
Continuing operations ( 481,382) ( 7,129) (2,209,432) ( 7,599)
Discontinued operations ( 52,102) ( 13,692) ( 271,550) ( 13,692)
------------ ------------ ------------ -----------
Net cash (used in) provided
by Operating Activities ( 533,484) ( 20,821) (2,480,982) ( 21,291)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (58,238) - ( 115,209) -
Cash investment in subsidiaries - ( 286,567) - ( 286,567)
------------ ------------ ------------ -----------
Net cash (used in) provided
by Investing Activities (58,238) ( 286,567) ( 115,209) ( 286,567)
------------ ------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 576,399 399,125 2,138,885 399,275
Minority Interest - - 700,000 -
Proceeds from short-term borrowings 64,378 - 267,011 341
Repayments of short-term borrowings ( 422) - ( 498,262) -
------------ ------------ ------------ -----------
Net cash (used in) provided
by Financing Activities 40,355 399,125 2,607,634 399,616
------------ ------------ ------------ -----------
NET (DECREASE) INCREASE IN CASH 48,633 91,737 11,443 91,758
CASH
Beginning of year 65,760 557 102,950 536
------------ ------------ ------------ -----------
End of year $ 114,393 $ 92,294 114,393 92,294
=========== ============ ============ ===========
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 34,512 6,196 106,444 6,196
Income taxes - - - -
Supplemental schedule of non-cash investing
and financing activities:
Purchase of patent rights - - - 50,000
The accompanying notes are an integral part of these
statements.
5
TSET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED MARCH 31, 2001 AND
THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
Retained Total
Common Stock Capital In Earnings Shareholders'
----------------------- Excess of Par (Accumulated Equity
Shares Amount Value Deficit) (Deficit)
---------- -------- ----------- ------------ ------------
BALANCE at June 30, 1997 23,976,730 $ 23,976 $ 31,743 $ (73,014) $ (17,295)
Net loss for the year ended June
30, 1998 (17,832) (17,832)
---------- -------- ----------- ------------ ------------
BALANCE at June 30, 1998 23,976,730 23,976 31,743 (90,846) (35,127)
Shares of restricted common
stock issued to Pangaea Group,
LLC per CEO management
agreement 1,000,000 1,000 299,000 300,000
Shares of restricted common
stock issued for services
rendered 25,000 25 9,975 10,000
Shares certificate cancelled (4,000) (4) (4)
Net loss for the year ended June
30, 1999 (351,674) (351,674)
---------- -------- ----------- ------------ ------------
BALANCE at June 30, 1999 24,997,730 24,997 340,718 (442,520) (76,805)
Shares reissued from prior
year cancellation 4,000 4 4
Shares issued on August 31,
1999 to acquire the patents and
technology of the utility meter 100,000 100 49,900 50,000
Shares issued on March 14, 2000
to acquire Atomic Soccer USA,
Ltd 1,037,555 1,038 1,805,212 1,806,250
Shares issued on March 14,
2000 to acquire Kronos Air
Technologies, Inc. 2,250,000 2,250 3,344,625 3,346,875
Shares issued on for May 9,
2000 to acquire EdgeAudio.com,
Inc. 1,298,701 1,299 2,548,701 2,550,000
Shares issued on May 9, 2000
to acquire Cancer Detection
International Inc. 180,000 180 353,250 353,430
Shares issued on May 19, 2000
as compensation 14,815 15 49,985 50,000
Shares of restricted common stock
issued on June 30, 2000 for
cash 768,860 769 1,123,352 1,124,121
Net loss for the year ended
June 30, 2000 (2,857,659) (2,857,659)
---------- -------- ----------- ------------ ------------
BALANCE at June 30, 2000 30,651,661 30,652 9,615,743 (3,300,179) 6,346,216
Shares of restricted common
stock authorized on July 20,
2000 for cash 161,538 161 188,839 189,000
Shares issued on August 3,
2000 as compensation 5,000 5 6,555 6,560
Shares authorized in August
2000 to liquidate certain debt
of Atomic Soccer USA, Ltd 362,259 362 375,981 376,343
Shares of restricted common
stock authorized on September
30, 2000 for cash 832,000 832 831,168 832,000
Shares authorized in September,
2000 to liquidate certain debt
of TSET, Inc. 42,800 43 42,757 42,800
Net loss for the quarter ended
September 30, 2000 ( 893,482) ( 893,482)
---------- -------- ----------- ------------ ------------
BALANCE at September 30, 2000 32,055,258 $ 32,055 $11,061,043 $(4,193,661) $6,899,437
Shares of restricted common
stock authorized on December
8, 2000 for cash 168,492 169 99,831 100,000
Shares of restricted common
stock authorized on December
27, 2000 for cash 39,091 39 22,301 22,340
Net loss for the quarter ended
December 31, 2000 (1,369,441) (1,369,441)
---------- -------- ----------- ------------ ------------
BALANCE at December 31, 2000 32,262,841 $ 32,263 $11,183,175 $(5,563,102) $5,652,336
Shares of restricted common
stock issued on January 9,
2001 for cash 687,500 688 399,312 400,000
Shares of restricted common
stock issued on January 12,
2001 for cash 56,000 56 34,944 35,000
Shares of restricted common
stock issued on January 19,
2000 for cash 10,240 10 6,390 6,400
Shares of restricted common
stock issued on January 19,
2000 as compensation for
services rendered 61,915 62 77,332 77,394
Shares of restricted common
stock authorized on March 23,
2000 for cash 186,302 186 134,814 135,000
Net loss for the quarter ended
December 31, 2000 (3,564,576) (3,564,576)
---------- -------- ----------- ------------ ------------
BALANCE at March 31, 2001 33,264,798 $ 33,265 $11,835,967 $(9,127,678) $2,741,554
========== ======== =========== ============ ============
The accompanying notes are an integral part of these
statements.
6
TSET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 2001
AND 2000
(UNAUDITED)
NOTE 1 - ACCOUNTING MATTERS
The accompanying unaudited financial statements have been
prepared in accordance with generally accepted accounting
principles for interim financial information and the
instructions to Form 10-Q and Article 10 of Regulation S-X.
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 or the nine-month period
ended March 31, 2001 are not necessarily indicative of the
results that may be experienced for the fiscal year ending
June 30, 2001.
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.
The accompanying financial statements should be read in
conjunction with the TSET, Inc. Form 10K for the fiscal year
ended June 30, 2000 filed on October 24, 2000, the TSET,
Inc. Form 10Q for the quarter ended September 30, 2000 filed
on November 20, 2000 and the TSET, Inc. Form 10Q for the
quarter ended December 31, 2000 filed on February 14, 2001.
NOTE 2 - INVENTORIES
Inventories are valued at their lower of cost or
market. The FIFO (first-in, first out) method is used to
determine the cost of inventories. Inventories at March 31,
2001 and June 30, 2000 by major classification, are as
follows:
March 31 June 30
--------- ---------
Raw materials $ 207,687 $ 203,921
Work in process 22,529 22,228
Finished goods 533,886 362,222
Freight in 20,494 35,620
--------- ---------
$ 784,596 $ 623,991
========= =========
NOTE 3 -- INCOME TAXES
The composition of deferred tax assets and the related
tax effects at March 31, 2001, and June 30, 2000 are as follows:
March 31, June 30,
2001 2000
---------- ----------
Benefit from carryforward of net
operating losses $ 863,993 $ 783,073
Other temporary differences 32,016 80,920
Less valuation allowance (896,009) (863,993)
---------- ----------
Net deferred tax asset $ - $ -
========== ==========
7
TSET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
FOR THE THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 2001
AND 2000
(UNAUDITED)
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:
Nine Months Ended March 31,
---------------------------------------------
2001 2000
--------------------- ----------------------
% of % of
Pre-tax Pre-tax
Amount Loss Amount Loss
----------- -------- ----------- ---------
Benefit for income tax at
federal statutory rate $1,981,350 34.0% $ 245,317 34.0%
Non-deductible expenses ( 242,043) ( 4.2%) ( 12,641) ( 1.8%)
Increase in valuation
allowance (1,739,306) (29.8%) ( 232,676) (32.2%)
---------- ------- ---------- -------
Total $ - 0% $ - 0%
========== ======= ========== =======
The non-deductible expenses shown above related
primarily to accrued and deferred compensation and to the
accrual of restricted shares of common stock for
compensation using different valuation methods for financial
and tax reporting purposes.
At March 31, 2001, for federal income tax and
alternative minimum tax reporting purposes, the Company has
approximately $3.1 million of unused net operating losses
available for carryforward to future years. The benefit from
carryforward of such net operating losses will expire in
various years between 2011 and 2020 and could be subject to
severe limitations if significant ownership changes occur in
the Company. Of the $3.1 million of unused net operating
losses noted above, approximately $1.1 million relates to
losses incurred by the Company's subsidiaries, Atomic Soccer
USA, Ltd and EdgeAudio, Inc. In fiscal years prior to June
30, 2000, Atomic and EdgeAudio did not file their tax
returns on a consolidated basis with the Company.
Accordingly, the $1.1 million loss incurred by Atomic and
EdgeAudio is further subject to separate limitations that
restrict the ability of the Company to use such losses.
NOTE 4 - SEGMENTS OF BUSINESS
The Company has adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information."
The Company operates principally in three segments of
business: The Kronos segment develops, manufactures and
distributes air movement and purification devices utilizing
the Kronos(TM) technology. The speaker segment manufactures
and distributes home theater speakers and speaker systems.
The sports apparel segment manufactures and distributes
sports apparel to team organizations and retailers (see note
6 regarding the discontinuation of this segment). Although
there are future plans for expansion into foreign markets,
in the nine months ended March 31, 2001, the Company
operated only in the U.S. The following tables provide a
comparison of revenues, net profit, total assets,
amortization expense and interest expense for the nine
months ended March 31, 2001:
8
TSET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
FOR THE THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 2001
AND 2000
(UNAUDITED)
Sports
Apparel Kronos Speaker Other Total
---------- ----------- ---------- ----------- -----------
Revenue $ 714,464 $ 5,000 $ 587,570 $ - $ 1,307,034
Interest expense $ 69,232 $ - $ 8,279 $ - $ 77,511
Amortization $ 203,107 $ 203,523 $ 194,801 $ 26,507 $ 627,938
Net loss $ (450,772) $(1,110,968) $ (851,715) $(3,414,043) $(5,827,499)
Total assets $3,135,537 $ 2,531,611 $2,739,283 $(2,162,606) $ 6,243,825
Segment information has not been provided for prior
years as neither the Kronos or speaker segments had
commenced operations.
NOTE 5 - EARNINGS PER SHARE
Basic (loss) earnings per share is computed using the
weighted average number of shares both authorized to be
issued and issued and outstanding. Diluted (loss) earnings
per share is computed using the weighted average number of
shares outstanding adjusted for the incremental shares
attributed to outstanding options to purchase common stock.
As of March 31, 2001, there were no outstanding options to
purchase TSET, Inc. common stock.
NOTE 6 - DISCONTINUED OPERATIONS
In early January 2001, management committed to a formal
plan of action to sell or otherwise dispose of it sports
apparel segment, Atomic Soccer USA, Ltd. 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 USA, Ltd. The
transaction was effective on April 11, 2001 (see Note 7).
Accordingly, a reserve for the anticipated loss on this
transaction of $2.51 million or $.08 per share was taken in
the quarter ended March 31, 2001.
The Company's unaudited consolidated financial
statements for all periods have been reclassified to report
separately financial position, results of operations and
operating cash flows from continuing operations and the
discontinued sports apparel operation. Atomic net assets at
March 31, 2001 and June 30, 2000 and Atomic operating
results for the quarters and nine-month periods ended March
31, 2001 and 2000 are as follows:
Atomic Soccer Net Assets:
March 31, June 30,
2000 2000
-------------- ------------
Current Assets 663,940 739,057
Net Property and Equipment 56,877 66,458
Goodwill 2,414,720 2,617,826
Current Liabilities ( 935,819) (1,258,853)
Notes payable - ( 176,342)
------------- ------------
Net Assets 2,199,718 1,988,146
============= ============
9
TSET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
FOR THE THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 2001
AND 2000
(UNAUDITED)
Atomic Soccer Operating Results:
For the Three months Ended For the Nine Months Ended
March 31, March 31,
-------------------------- --------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Sales $ 247,899 $ 53,391 $ 714,464 $ 53,391
Cost of sa ( 217,105) ( 38,277) ( 512,282) ( 38,277)
Depreciation and amortization ( 78,100) ( 12,750) ( 215,399) ( 12,750)
General and Administrative ( 102,661) ( 22,060) ( 369,058) ( 22,060)
------------ ------------ ------------ ------------
( 143,667) ( 19,696) ( 394,567) ( 19,696)
Other Income - - 735 -
Interest expense ( 26,875) ( 6,196) ( 69,232) ( 6,196)
------------ ------------ ------------ ------------
Income (Loss) before income taxes ( 170,542) ( 25,892) ( 450,772) ( 25,892)
Income taxes - - - -
------------ ------------ ------------ ------------
Loss from discontinued operations $( 170,542) $ ( 25,892) $ ( 450,772) $ ( 25,892)
============ ============ ============ ============
NOTE 7 - SUBSEQUENT EVENTS
Pursuant to a Letter Agreement dated as of April 11,
2001 (the "Letter Agreement"), the Company transferred
ownership of 100% of the issued and outstanding shares of
common stock of Atomic Soccer to a new ownership group
comprised primarily of Atomic's current and former
management (see note 6). The Letter Agreement contains,
among other things, a complete release of the Company from
any and all liabilities and obligations to Atomic Soccer and
its former stockholders. The shares of Atomic Soccer owned
by the Company were transferred in exchange for cash
consideration of $1,000.00 and a profits participation
interest equal to 15% of Atomic Soccer's "adjusted profits"
(as defined in the Letter Agreement) for seven years in
which Atomic Soccer's profits are $50,000.00 or greater. In
addition, and without prejudice to or diminution of its
rights thereto, the Company may elect to defer to a future
year receipt of the Profits Participation Interest in any
year in which Atomic's adjusted profits do not exceed
$100,000.
On May 4, 2001, Kronos Air Technologies delivered
Kronos devises to Bath Iron Works, a division of General
Dynamics, for installation is the crew quarters of a US Nave
Aegis class destroyer. This contract was worth $90,000 and
is the first contract completed by KAT for use of the Kronos
device on naval vessels.
10
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Overview
The Company is a technology/investment holding company
whose current holdings include Kronos Air Technologies,
Inc., EdgeAudio, Inc., Atomic Soccer USA, Ltd (DBA A-
Soccer), and Cancer Detection International.
Kronos Air Technologies, Inc.
KronosT Air Technologies, Inc. ("KAT") is a high
technology company focused on the development and
commercialization of electron wind generation technology
known as KronosT. KronosT technology enables simultaneous
air movement and purification via a device that is
versatile, energy and cost efficient, and exhibits multiple
design attributes, which creates a broad range of
applications. Since its inception, KAT has further
developed, proven the concept for, and commenced
commercialization of the KronosT technology.
The KronosT technology is a revolutionary technology
with U.S. and International patents pending status. The
technology is the application of high voltage management
across a corona electrode array to create an ion exchange
that moves and purifies air. KronosT technology has
numerous, valuable characteristics. It enables the movement
of air and gases at high velocities while removing odors,
smoke, and particulates, as well as killing pathogens,
including bacteria. The KronosT device has no moving parts
or degrading elements and is composed of cost effective,
commercially available components.
The KronosT device is flexible in size and shape and
can adapt to existing infrastructures ranging from embedded
electronic devices and standalone room devices to integrated
HVAC and industrial applications. The KronosT technology is
noiseless, vibrationless, lightweight and is capable of
operating under extreme temperatures and creates an
instantaneous, inertialess, uniform laminar airflow.
Because it is inertialess, (i.e., no moving parts or fan
blades) a KronosT device can instantly block or reverse the
flow of air between adjacent areas for safety in hazardous
circumstances.
KAT's market strategy has been expanded to extract the
maximum value possible from the KronosT technology for its
shareholders. The strategy is to first partition the
various market applications for the KronosT technology into
six key segments. KAT is then developing a targeted
strategy for addressing each market segment that will
include a combination of building internal capabilities,
establishing strategic alliances, and licensing. The
initial six key segments are: (1) specialized military
(naval vessels, closed vehicles and environmental devices);
(2) air movement and purification (residential, hospitality,
health care, and commercial facilities); (3) air
purification for unique spaces (cleanrooms, cruise ships and
airplanes); (4) embedded cooling and cleaning (electronic
devices and medical equipment); (5) industrial scrubbing
(produce storage and diesel and other emissions), and (6)
hazardous gas destruction (incineration and chemical
facilities).
During the quarter, KAT made significant progress in
addressing two of its top priority market segments. In the
specialized military marketplace, KAT begin to generate
revenue for the first time with the sale of KronosT devices
to Lockheed Martin. KAT is also finalizing delivery of its
first commercialized KronosT devices to Bath Iron Works
(BIW), a division of General Dynamics. These air movement
and purification devices will be used in the crew quarters
of a naval destroyer as replacements for bunk fans. These
devices were delivered as scheduled on May 4, 2001.
Further work in the military marketplace included KAT's
submission of a bid to a leading military contractor to
embed KronosT devices in the HVAC systems of naval aircraft
carriers. During December 2000, KAT completed and submitted
a proposal for a Small Business Innovation Research (SBIR)
grant. This grant is sponsored by the U.S. Navy and is
potentially worth up to approximately $1 million in product
development and testing support for KAT.
In the air movement and purification marketplace, KAT
provided prototype KronosT devices to a leading hospitality
provider and several assisted living facilities for
evaluation, testing and feedback on deployment of KronosT
technology in the hospitality and assisted living
marketplaces. In addition, KAT obtained preliminary design
drawings for standalone KronosT devices, which would be
suitable for a number of air movement and purification
applications in the commercial and consumer marketplaces.
During the quarter, KAT engaged the Washington D.C. law
firm, Fulbright and Jaworski, to comprehensively review KAT
intellectual property rights and issues and assist in the
development of a global intellectual property rights
protection and implementation strategy. KAT is also in the
process of addressing issues leading to submission of the
KronosT device for Federal Communications Commission ("FCC")
and Underwriters' Laboratories ("UL") approvals.
11
EdgeAudio, Inc.
EdgeAudio manufactures and sells home theater speaker
systems. Sales of the Speaker Systems and certain
accessories are made directly to consumers via the Internet
from EdgeAudio's web site at www.edgeaudio.com and other
selected third party websites, including Amazon.com and
eCost.com.
Contributing to its efforts to raise brand awareness,
EdgeAudio was featured on the cover of Sound & Vision
magazine and was given write-ups in articles in both that
magazine as well as Home Theater magazine. Marketing
efforts included a major email campaign in December and
print advertising. EdgeAudio also worked closely with its
strategic partners during the quarter to further promote the
EdgeAudio brand. EdgeAudio's newest on-line partner,
eCost.com, included EdgeAudio in its 50,000 piece direct
mail campaign. ECost.com agreed to bear the cost of this
promotional opportunity for EdgeAudio. In conjunction with
its licensee partner, Kimber Kables (DiAural circuit
licensor), EdgeAudio participated in its first Consumer
Electronics show in Las Vegas in January.
EdgeAudio continued to drive new product development
during the quarter. In order to stay ahead of its
competitors, EdgeAudio is staying focused on its plan for a
new product introduction every quarter. During this latest
quarter, EdgeAudio introduced its 8" inch subwoofer as an
alternative to the 12" subwoofer that complimented its
original product line.
In order to enhance customer service support during the
quarter, EdgeAudio completed a staff and management
reorganization. In addition, one member of EdgeAudio's board
of directors resigned to pursue other interests.
Atomic Soccer USA, Ltd
Atomic makes and distributes soccer uniforms under the
"A-Soccer" label, and basketball, volleyball, lacrosse, and
hockey uniforms under the "BAHR" label. During the quarter
ended March 31, 2001, a formal plan to discontinue the
operations of Atomic and sell the company to the Atomic
management team. Pursuant to a Letter Agreement dated as
of April 11, 2001 (the "Letter Agreement"), the Company
transferred ownership of 100% of the issued and outstanding
shares of common stock of Atomic to a new ownership group
comprised primarily of Atomic's current and former
management. The Letter Agreement contains, among other
things, a complete release of the Company from any and all
liabilities and obligations to Atomic and its former
stockholders. The shares of Atomic owned by the Company
were transferred in exchange for cash consideration of
$1,000.00 and a profits participation interest equal to 15%
of Atomic's "adjusted profits" (as defined in the Letter
Agreement) for seven years in which Atomic's profits are
$50,000.00 or greater (the "Profits Participation
Interest"). In addition, and without prejudice to or
diminution of its rights thereto, the Company may elect to
defer to a future year receipt of the Profits Participation
Interest in any year in which Atomic's adjusted profits do
not exceed $100,000. If Atomic fails to pay the Profits
Participation Interest in any year in which such is due,
Atomic will issue to the Company that number of new shares
of Atomic's common stock as will equal 5% of Atomic's then-
issued and outstanding capital stock. Atomic's obligation
to pay to the Company the Profits Participation Interest is
in the nature of a covenant associated with Atomic and its
business and continues in full force and effect,
notwithstanding any merger, consolidation, or subsequent
sale of Atomic (in any case, a "Transaction"), until the
Company receives the full benefit thereof. Atomic is
required to ensure that the terms and conditions of any
Transaction include an assumption of and agreement to timely
comply with the obligation to pay the Profits Participation
Interest to the Company, and, to protect our rights thereto,
no documents relating to a Transaction may be signed by
Atomic without our prior written consent.
12
The Company's management determined that continued
financial and other support of Atomic was not consistent
with its long-term strategic plan of concentrating and
consolidating financial and management resources on business
opportunities having greater potential value to the Company
and its stockholders. The management team believed that the
cash and Profits Participation Interest, together with the
release of the Company from further financial, contractual,
and other obligations and liabilities to Atomic, constituted
fair and reasonable consideration for the transaction.
Cancer Detection International
CDI engages in the business of performing state-of-the-
art blood laboratory analysis for the very early detection
of cancer. CDI utilizes specialized processing and handling
of blood serums to be laboratory assayed in order to
identify the presence and the level of anti-malignin
antibodies in the patient. The blood analysis utilized by
CDI has recently been approved by the FDA and is covered by
Medicare and most other insurances. As of March 31, 2001,
the Company has not begun to implement the CDI business
plan.
Despite the activities of its subsidiaries, the Company
generated no significant revenues. Although the recently
acquired subsidiary, Atomic, has generated limited revenues
during the past several years, EdgeAudio has only recently
begun revenue generating activities. KAT has primarily been
engaged in research and development activities, establishing
sources of supply, training personnel and developing
markets. As a result, the Company's ability to achieve
profitability will depend on its ability to successfully
develop applications for certain of its products, obtain
regulatory approvals, and develop the capacity to
manufacture and extensively market its products.
The Company can make no assurance that its subsidiaries
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,
the Company 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 its sales
force and its
presence on the internet.
Results of Operations
- ---------------------
This discussion summarizes the significant factors
affecting the
consolidated operating results and financial condition of
the Company during the
quarter ended March 31, 2001 and should be read in
conjunction with the
consolidated financial statements and notes thereto included
in this report as well as those included in the Company's
Form 10K for the year ended June 30, 2000.
The discussion herein with respect to the consolidated
statements of
operations does not contain comparable information with the
same periods in the prior year and no analysis of the same
is being given herein since it is not properly susceptible
to narrative comparison by virtue of the facts that (a) as
indicated in Item 1 of Form 10-K, the Company was basically
inactive from the time that it discontinued operations in
1996 until the time that it was reactivated mid-1999 and (b)
from inception through June 30, 2000 it had no significant
revenues from operations.
13
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months and nine months ended March 31,
2001
Revenue and cost of sales
Revenues are generated through sales of home theater
speaker systems and accessories at EdgeAudio and Kronos
devices at KAT. Sales for the quarter ended March 31, 2001
were $224,345 while cost of sales were $113,266 resulting in
a gross profit for the quarter of $111,079 and a gross
margin of 49.5%.
KAT accounted for $5,000 in sales by delivering two Kronos
devices to a division of Lockheed Martin. The peak sales
season for EdgeAudio is in the quarter ending December 31.
Sales for the nine months ended March 31, 2001 were
$592,570 while cost of sales were $304,488 resulting in a
gross profit of $288,082 and a gross margin of 48.6%.
Operating expenses
Operating expenses for the quarter ended March 31, 2001
amounted to $1,030,502 of which compensation and benefits
were 32%, marketing was 6%, research and development (other
than compensation and benefits) was 2%, professional
services were 22%, intangibles amortization was 14% and
other general and administrative expenses accounted for 25%.
Primarily as a result of the above, the net loss from
continuing operations for the quarter ended March 31, 2001
was $(884,033). Losses from discontinued operations and
anticipated losses from the sale of discontinued operations
contributed $2,680,542 to the overall quarterly net loss of
$(3,564,576), thereby increasing the Company's accumulated
deficit to $(9,127,678) at March 31, 2001. Operating
expenses for the nine months ended March 31, 2001 amounted
to $3,282,966 of which compensation and benefits were 38%,
marketing was 8%, research and development (other than
compensation and benefits) was 4%, professional services
were 17%, intangibles amortization was 13% and other general
and administrative expenses accounted for 19%.
CONSOLIDATED BALANCE SHEET AT MARCH 31, 2001
Total assets of the Company at March 31, 2001 were
$6,243,825 of which $784,596 of inventory, $2,419,668 of
patents/intellectual property, and 2,585,002 of goodwill
accounted for approximately 13%, 39% and 41%, respectively.
Total current assets at March 31, 2001 and June 30, 2000
amounted to $1,042,195 and $894,099, respectively, while
total current liabilities for those same periods amounted to
$2,933,653 and $2,628,717, respectively, creating a working
capital deficit of $(1,891,459) and $(1,734,618) at each
respective period end. This working capital deficit is
mainly attributable to Atomic current notes payable incurred
to finance operating deficits during its development stage
and early operating stage and accrued stock and other
compensation. Total liabilities as at March 31, 2001 and
June 30, 2000 were $2,933,653 and $2,805,059, respectively,
representing a increase of $128,594 or 4.6%. Shareholders
equity (including the above accumulated deficit) as at March
31, 2001 and June 30, 2000 was $2,741,555 and $6,346,216,
respectively, representing a decrease of $(3,604,661) or
(56.8)%.
Liquidity and Capital Resources
- -------------------------------
Net working capital at March 31, 2001 of $(1,891,459)
represented a decline from net working capital at June 30,
2000 of $(156,841) or (9.0)%. The current ratio improved
slightly from 34% at June 30, 2000 to 35% at March 31, 2001.
The Company's return on average equity was (78.4)% during
the nine months ended March 31, 2001. Net cash flow used on
operating activities was $533,484 for the quarter ended
March 31, 2001 and $2,480,982 for the nine months ended
March 31, 2001.
14
The Company was able to satisfy its cash requirements
for the quarter ended March 31, 2001 though the issuance and
sale of its common stock. It will continue to satisfy cash
needs in this manner and with bridge financing in the near
term. The Company is engaged in alternative fund raising
activities and is attempting to gain access to additional
capital markets that could provide financial resources.
Funding from one or more of those sources will provide
working capital until the Company can provide such from its
ongoing operations. There is no assurance that these fund
raising efforts will be successful.
Important Factors Relating To Forward-Looking Statements
This document contains numerous forward-looking
statements about the Company's business and future. The
United States Private Securities Litigation Reform Act of
1995 provides a "safe harbor" for certain forward-looking
statements. Our forward-looking statements are expressed in
good faith and we believe that there is a reasonable basis
for us to make them. However, readers are cautioned not to
place undue reliance an such statements about our: 1) plans;
2) objectives; 3) goals; 4) strategies; 5) expectations for
the future; 6) future performance and events; 7) underlying
assumptions for all of the above; and 8) other statements
that are not statements of historical fact.
The Company makes these forward-looking statements
based on its analysis of internal and external historical
trends and future expectations. However, such statements
involve risks and uncertainties that could cause our actual
results to materially differ from our forward-looking
statements and there can be no assurance that we will
achieve the results set forth in these forward-looking
statements. In addition to other factors, the following are
important factors that could cause our actual results to
materially differ from our forward-looking statements: 1)
the results of our product testing; 2) the time and costs
involved in obtaining regulatory approvals for our systems
and products; 3) develop or acquire new technologies; 4)
competitive factors; 5) the availability of financing on
terms and conditions acceptable to us; 6) the availability
of personnel with requisite skills; and 7) the terms of any
new collaborative, licensing and other arrangements that we
may establish.
ITEM 3. Quantitative and Qualitative Disclosure of Market
Risk
The Company does not own any market risk sensitive
instruments and does not operate in any foreign countries
that would make is susceptible to foreign currency risk.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings -
On January 13, 2000, the Company initiated legal
proceedings in Clackamas County, Oregon against Foster &
Price Ltd., an Isle of Man corporation (the "Defendant"),
seeking, among other things, a judicial declaration that a
certain Term Sheet signed by the Company and the Defendant
was lawfully terminated by the Company due to the
Defendant's failure to perform certain terms thereunder and
is null and void, and that the Company and the Defendant
have no further contractual obligations between them. The
Defendant claimed entitlement to the issuance of 10,000,000
shares of the Company's common stock, notwithstanding the
Defendant's nonperformance of certain important obligations
under the Term Sheet. Discussions between the Company and
the Defendant failed to produce a mutually satisfactory
resolution of the matter, whereupon the Company initiated
the litigation. This litigation is currently in the
discovery phase. The Company believes that the Defendant's
demands are without merit and intends to vigorously seek
judicial declaration in its favor.
15
On February 2, 2001, the Company initiated legal
proceedings in Clackamas County, Oregon against W. Alan
Thompson, Ingrid T. Fuhriman, and Robert L. Fuhriman II
(collectively the "Defendants"), formerly executive officers
and members of the board of directors of the Company's
wholly-owned subsidiary, Kronos Air Technologies, Inc. This
suit alleges, among other things, breach of fiduciary duties
and breach of contract by the Defendants, and seeks, among
other things, an order from the court referring the dispute
to arbitration in accordance with the terms of the
Defendants' respective employment agreements, which were
terminated by the Company on January 30, 2001, and other
appropriate equitable relief.
On March 8, 2001, the Company and its wholly-owned
subsidiary, Kronos Air Technologies, Inc. ("KAT"), initiated
legal proceedings in Clackamas County, Oregon against Weihao
Long, a former management-level employee of KAT. This suit
alleges, among other things, various breaches of fiduciary
duty and confidentiality obligations, and seeks, among other
things, appropriate legal and equitable relief.
ITEM 2. Changes in Securities
During the quarter ended March 31, 2001, the Company
authorized the following equity securities, some of which
were issued, none of which were registered as of the date of
their issuance:
On January 8, 2001, the Company authorized the issuance
of 687,500 common shares valued at $0.58 per share to one
entity, an accredited investor, in exchange for cash. The
above shares were issued pursuant to the exemption provided
for under Section 4(2) of the Securities Act of 1933, as
amended, as a "transaction not involving a public offering."
No commissions were paid on the transaction.
On January 12, 2001, the Company authorized the
issuance of 56,000 common shares valued at $0.63 per share
to two persons, both of which are accredited investors, in
exchange for cash. The above shares were issued pursuant to
the exemption provided for under Section 4(2) of the
Securities Act of 1933, as amended, as a "transaction not
involving a public offering." No commissions were paid on
the transaction.
On January 19, 2001, the Company authorized the
issuance of 10,240 common shares valued at $0.63 per share
to one person, an accredited investor, in exchange for cash.
The above shares were issued pursuant to the exemption
provided for under Section 4(2) of the Securities Act of
1933, as amended, as a "transaction not involving a public
offering." No commissions were paid on the transaction.
On January 19, 2001, the Company authorized the
issuance of 40,000 common shares valued at $1.25 per share
to one person in exchange for services. The above shares
were issued pursuant to the exemption provided for under
Section 4(2) of the Securities Act of 1933, as amended, as a
"transaction not involving a public offering." No
commissions were paid on the transaction.
On January 19, 2001, the Company authorized the
issuance of 21,915 common shares valued at $1.25 per share
to seven persons as compensation. The above shares were
issued pursuant to the exemption provided for under Section
4(2) of the Securities Act of 1933, as amended, as a
"transaction not involving a public offering." No
commissions were paid on the transaction.
On March 23, 2001, the Company authorized the issuance
of 186,301 common shares valued at $0.72 per share to one
person, an accredited investor, in exchange for cash. The
above shares were issued pursuant to the exemption provided
for under Section 4(2) of the Securities Act of 1933, as
amended, as a "transaction not involving a public offering."
No commissions were paid on the transaction.
16
ITEM 3. Defaults upon Senior Securities - None
ITEM 4. Submission of Matters to a Vote of Security Holders
- - None
ITEM 5. Other Information - None
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
17
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange
Act, the registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on
this 21st day of May 2001.
TSET, INC.
By /s/ Jeffrey D. Wilson
--------------------------------
Jeffrey D. Wilson, Chairman of
the Board of Directors and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed
below on May 21 by the following persons on behalf of the
registrant and in the capacities indicated.
/s/ Jeffrey D. Wilson Chief Executive Officer
- ------------------------------------ and Chairman of the
Jeffrey D. Wilson Board of Directors
/s/ Richard A. Papworth Chief Financial Officer
- ------------------------------------
Richard A. Papworth
/s/ Erik W. Black Executive Vice President
- ------------------------------------
Erik W. Black
18