-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, B79ZtTAhYGp6PzTMkr14xOoLHYDCierwpVKI842Yvtx72NSeMe1JBJSwS4j3y//L HPApDsuKAo+2WJrE+JdX/Q== 0000898432-03-000453.txt : 20030515 0000898432-03-000453.hdr.sgml : 20030515 20030515163103 ACCESSION NUMBER: 0000898432-03-000453 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KRONOS ADVANCED TECHNOLOGIES INC CENTRAL INDEX KEY: 0001108248 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL & COMMERCIAL FANS & BLOWERS & AIR PURIFYING EQUIP [3564] IRS NUMBER: 870440410 STATE OF INCORPORATION: NV FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-30191 FILM NUMBER: 03705171 BUSINESS ADDRESS: STREET 1: 333 S STATE ST STREET 2: PMB111 CITY: LAKE OSWEGO STATE: OR ZIP: 97034 BUSINESS PHONE: 5035981900 MAIL ADDRESS: STREET 1: 333 S STATE ST STREET 2: PMB 111 CITY: LAKE OSWEGO STATE: OR ZIP: 97034 FORMER COMPANY: FORMER CONFORMED NAME: TSET INC DATE OF NAME CHANGE: 20000301 10QSB 1 form10-qsb.txt 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 March 31, 2003 Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from __________ to __________ COMMISSION FILE NO. 000-30191 KRONOS ADVANCED TECHNOLOGIES, INC. ---------------------------------- (Exact name of registrant as specified in its charter) NEVADA 87-0440410 ------------- ---------- (State of other jurisdiction (I.R.S. Employer Identification of 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. / / Yes /X/ No As of May 5, 2003, there were 54,527,565 shares outstanding of the issuer's common stock. PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The following comprise our condensed (unaudited) consolidated financial statements for the three months and nine months ended March 31, 2003. KRONOS ADVANCED TECHNOLOGIES, INC. (FORMERLY TSET, INC.) CONSOLIDATED BALANCE SHEETS MARCH 31, JUNE 30, 2003 2002 (Unaudited) -------------- ------------- ASSETS CURRENT ASSETS Cash $ 13,555 $ 21,510 Accounts receivable, net 500 700 Prepaids 36,453 101,029 -------------- ------------- TOTAL CURRENT ASSETS 50,508 123,239 PROPERTY AND EQUIPMENT 64,023 62,723 Less: Accumulated Depreciation (43,571) (33,348) -------------- ------------- NET PROPERTY AND EQUIPMENT 20,452 29,375 OTHER ASSETS Intangibles 2,011,894 2,213,917 TOTAL ASSETS $ 2,082,854 $ 2,366,531 ============== ============= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accrued expenses and payables to directors and officers $ 1,078,112 $ 886,447 Accounts payable 904,815 254,201 Accrued expenses 175,924 100,797 Deferred revenue 148,876 - Notes payable, current portion 428,466 535,700 -------------- ------------- TOTAL CURRENT LIABILITIES 2,736,193 1,777,145 LONG TERM LIABILITIES Notes payable 105,299 225,466 -------------- ------------- TOTAL LIABILITIES 2,841,492 2,002,610 REDEEMABLE WARRANTS 805,300 748,500 SHAREHOLDERS' EQUITY Common stock, authorized 500,000,000 shares of $.001 par value 50,292 43,938 Capital in excess of par value 14,897,686 14,371,113 Deferred equity compensation - (41,668) Retained earnings (Accumulated deficit) (16,511,916) (14,757,963) -------------- ------------- TOTAL SHAREHOLDERS' EQUITY (1,563,937) (384,579) -------------- ------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,082,854 $ 2,366,531 ============== ============= THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. KRONOS ADVANCED TECHNOLOGIES, INC. (FORMERLY TSET, INC.) CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED MARCH 31, MARCH 31, --------- --------- 2003 2002 2003 2002 (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) ----------- ----------- ----------- ----------- Sales $139,737 $ -- $457,899 $65,070 Cost of sales 100,719 -- 226,022 50,070 ----------- ----------- ----------- ----------- Gross Profit 39,018 -- 231,876 15,000 Selling, General and Administrative expenses Compensation and benefits 143,642 141,261 409,376 401,115 Research and development 23,655 58,682 102,337 197,516 Professional services 351,511 225,078 1,038,439 1,750,454 Depreciation and amortization 70,318 71,674 213,746 215,021 Facilities 25,065 26,680 70,278 95,920 Other selling general & administrative expenses 68,657 99,576 145,716 225,481 ----------- ----------- ----------- ----------- Total Selling, General and Administrative expenses 682,848 622,952 1,979,891 2,885,508 ----------- ----------- ----------- ----------- Net Operating Income (Loss) (643,830) (622,952) (1,748,015) (2,870,508) Other Income / (expense) 4 50 108,380 1,537 Interest Expense (46,183) (34,349) (114,317) (69,513) ----------- ----------- ----------- ----------- Net Income (Loss) Before Taxes (690,008) (657,250) (1,753,952) (2,938,484) Provision for Taxes -- -- -- -- ----------- ----------- ----------- ----------- Net Income (Loss) from continuing operations (690,008) (657,250) (1,753,952) (2,938,484) Income (Loss) from discontinued operations, net of -- -- -- -- income tax of $0 Loss on disposal of discontinued operations, net of income tax of $0 -- -- -- -- ----------- ----------- ----------- ----------- Net Income (Loss) $(690,008) $(657,250) $(1,753,952) $(2,938,484) =========== =========== =========== =========== Basic Earnings (Loss) Per Share Income (loss) from continuing operations (0.01) (0.03) (0.04) (0.08) Loss from discontinued operations -- -- -- -- ----------- ----------- ----------- ----------- Net Income (loss) $(0.01) $(0.03) $(0.04) $(0.08) =========== =========== =========== =========== Diluted Earnings (Loss) Per Share Income (loss) from continuing operations (0.01) (0.03) (0.04) (0.08) Loss from discontinued operations -- -- -- -- ----------- ----------- ----------- ----------- Net Income (loss) $(0.01) $(0.03) $(0.04) $(0.08) =========== =========== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. KRONOS ADVANCED TECHNOLOGIES, INC. (FORMERLY TSET, INC.) CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED MARCH 31, -------------------------- 2003 2002 CASH FLOWS FROM OPERATING ACTIVITIES (UNAUDITED) (UNAUDITED) -------------------------- NET LOSS FROM CONTINUING OPERATIONS $(1,753,952) $(2,938,484) ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH (USED IN) PROVIDED BY OPERATIONS Depreciation and amortization 213,746 215,021 Common stock issued for compensation/services 112,281 814,532 CHANGE IN Inventory Assets - - Accounts receivable 200 - Prepaid expenses and other assets 64,576 (176,502) Deferred revenue 148,876 - Accounts Payable 583,376 952,772 Accrued Expenses and other liabilities 184,643 (56,626) -------------------------- NET CASH USED IN CONTINUING OPERATIONS (446,254) (1,189,286) CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment (1,300) - Investment in patent protection (1,500) 15,795 Investment in discontinued operations - (84,014) -------------------------- NET CASH USED IN INVESTING ACTIVITIES (2,800) (68,219) -------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Issuance of common stock 668,500 1,234,607 Proceeds from short-term borrowings 218,889 - Repayments of short-term borrowings (446,290) - -------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 441,099 1,234,607 -------------------------- NET (DECREASE) INCREASE IN CASH (7,955) (22,898) CASH BEGINNING OF PERIOD 21,510 32,619 -------------------------- END OF PERIOD $ 13,555 $ 9,721 ========================== Supplemental schedule of non-cash investing and financing activities: Debt satisfied with stock $ 206,000 $ 100,000 ========================== Note payable issued in satisfaction of accrued liability $ $ 350,000 ========================== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT. KRONOS ADVANCED TECHNOLOGIES, INC. (FORMERLY TSET, INC.) STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
COMMON STOCK --------------------- TOTAL RETAINED SHARE- CAPITAL IN EARNINGS DEFERRED HOLDERS' EXCESS OF (ACCUMULATED EQUITY EQUITY SHARES AMOUNT PAR 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 quarter ended September 30, 2002 (591,130) (591,130) -------------------------------------------------------------------------------- BALANCE at September 30, 2002 (Unaudited) 45,141,296 $45,141 $14,443,929 $(15,349,093) $(26,044) $(886,067) Shares issued in October 2002 for cash 1,750,000 1,750 173,250 175,000 Shares issued in November 2002 for cash 189,884 190 24,810 25,000 Shares issued in December 2002 for cash 350,000 350 34,650 35,000 Shares issued in December 2002 for debt reduction 306,000 306 33,854 34,160 Stock options granted at December 31, 2002 for consulting services 5,225 5,225 Costs associated with equity financing (75,000) (75,000) Amortization of deferred equity compensation 15,624 15,624 Net loss for the quarter ended December 31, 2002 (472,814) (472,814) -------------------------------------------------------------------------------- BALANCE at December 31, 2002 (Unaudited) 47,737,180 $47,737 $14,640,718 $(15,821,907) $(10,420) $(1,143,872) Shares issued in January 2003 for cash 1,000,000 1,000 99,000 100,000 Shares issued in February 2003 for cash 850,000 850 84,150 85,000 Shares issued in March 2003 for cash 704,811 705 73,263 73,968 Costs associated with equity financing (1,400) (1,400) Stock options granted at March 31, 2003 for consulting services 1,955 1,955 Amortization of deferred equity compensation 10,420 10,420 Net loss for the quarter ended March 31, 2003 (690,008) (690,008) -------------------------------------------------------------------------------- BALANCE at March 31, 2003 (Unaudited) 50,291,991 $50,292 $14,897,686 $(16,511,915) $ - $(1,563,937) ================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT. KRONOS ADVANCED TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - ACCOUNTING MATTERS The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments necessary to present fairly the information set forth therein have been included. Operating results for the three-month and nine-month periods ended March 31, 2003 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 from July 1, 2001 to June 7, 2002 (the date of disposal) in these financial statements. The accompanying financial statements should be read in conjunction with the Kronos Advanced Technologies, Inc. Form 10-KSB for the fiscal year ended June 30, 2002 filed on September 28, 2002, the Form 10-QSB for the quarter ended September 30, 2002 filed on November 14, 2002, and the Form 10-QSB for the quarter ended December 31, 2002 filed on February 14, 2003. This filing, including the accompanying financial statements, have not been reviewed by independent certified public accountants. RECENT ACCOUNTING PRONOUNCEMENTS. In August 2002, the Financial Accounting Standards Board issued SFAS No. 146, "Accounting for Costs Associated with Exit, or Disposal Activities" ("SFAS 146"). This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities. The Company believes the adoption of SFAS 146 will have no significant impact on its financial statements. This statement is effective for exit or disposal activities initiated after December 31, 2002. In December 2002, the Financial Accounting Standards Board issued SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure--An Amendment of SFAS No. 123" ("SFAS 148"). This Statement amends SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company believes the adoption of SFAS 148 will have no significant impact on its financial statements. This statement is effective for interim periods beginning after December 15, 2002 and for fiscal years ending after December 15, 2002. NOTE 2 -- INCOME TAXES The composition of deferred tax assets and the related tax effects at March 31, 2003 and June 30, 2002 are as follows: March 31, 2003 (Unaudited) June 30, 2002 -------------- ------------- Benefit from carryforward of capital and $3,773,288 $3,115,886 net operating losses Other temporary differences 221,381 220,332 Less: Valuation allowance (3,994,669) (3,376,218) 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:
MARCH 31, 2003 (UNAUDITED) JUNE 30, 2002 --------------------- ---------------------- % OF % OF PRE-TAX PRE-TAX AMOUNT LOSS AMOUNT LOSS ------------ ------- ----------- -------- Benefit for income tax at federal statutory rate $ 596,344 34.0% $1,377,158 34.0% Benefit for income tax at state statutory rate 34,960 2.0% 94,927 2.0% Non-deductible expenses (12,853) (0.7)% (111,274) (4.0)% Acquired NOL and other - 0.0% 248,489 8.9% Increase in valuation allowance (618,451) (35.3)% (1,609,296) (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, 2002. The Company is current on all income tax filings. At March 31, 2003, for federal income tax and alternative minimum tax reporting purposes, the Company has approximately $7.0 million of unused Federal net operating losses, $2.3 million of capital losses and $4.8 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 Company licenses, manufactures and distributes air movement and purification devices utilizing the KronosTM technology. All other segments have been disposed of or discontinued. For the nine months ended March 31, 2003, the Company operated only in the U.S. NOTE 4 - EARNINGS PER SHARE Weighted average shares outstanding used in the earnings per share calculation were 49,132,902 and 37,563,025 for the three months ended March 31, 2003 and 2002, respectively and 46,877,432 and 35,836,735 for the nine months ended March 31, 2003 and 2002, respectively. As of March 31, 2003, there were outstanding options to purchase 10,187,775 shares of the Company's common stock and outstanding warrants to purchase 2,300,000 shares of the Company's common stock. These options and warrants have been excluded from the earnings per share calculation as their effect is anti-dilutive. As of March 31, 2002, there were outstanding options and warrants to purchase 6,563,575 and 1,900,000 shares, respectively, of the Company's common stock. These options have been excluded from the earnings per share calculation as their effect is anti-dilutive. NOTE 5 - DISCONTINUED OPERATIONS The Company's consolidated financial statements for all periods have been reclassified to report separately results of operations and operating cash flows from continuing operations and the discontinued operations. The net revenues are included in the financial statements under Net Income (Loss) from Discontinued Operations. Operating results of discontinued operations for the nine-months ended March 31, 2002 are as follows: OPERATING RESULTS OF DISCONTINUED OPERATIONS: OPERATING RESULTS OF DISCONTINUED OPERATIONS: --------------------------------- FOR THE NINE MONTHS ENDED MARCH 31, --------------------------------- 2002 --------------------------------- APERION AUDIO --------------------------------- Sales $733,183 Cost of sales (273,282) Depreciation and amortization (9,927) General and administrative (545,964) ------------ Operating income (loss) (95,990) Other income 22,217 Interest expense (25,584) Provision for future operating losses 79,485 Minority interest 19,871 ------------ Income (Loss) pre-tax 0 Income taxes (benefits) - ------------ Loss from discontinued operations $0 ============ NOTE 6 - NOTES PAYABLE The Company had the following notes payable obligations at December 31 and June 30, 2002: MARCH 31, 2003 JUNE 30, 2002 -------------- ------------- (1) Obligations to Fusion Capital $ -- $ 123,000 (2) Obligation to Aperion Audio 95,466 200,466 (3) Obligation to Jeff Wilson 212,890 360,000 (4) Obligation to the Eagle Rock Group 123,000 70,000 (5) Obligations to others 45,000 7,700 (6) Obligations under capital leases 57,409 -- --------- ---------- Total Notes Payable 533,765 761,166 Current portions: Obligations to Fusion Capital -- 123,000 Obligation to Aperion Audio 95,466 205,000 Obligation to Jeff Wilson 165,000 130,000 Obligation to the Eagle Rock Group 123,000 70,000 Obligations to others 45,000 7,700 --------- ---------- Total current portion 428,466 535,700 --------- ---------- Total long term obligations net of current portion 105,299 225,466 ========= ========== (1) This is a non-interest bearing demand obligation and is only outstanding until Fusion Capital purchases enough common stock from the Company to eliminate the advance position. (2) This is a non-interest bearing note with monthly payments of $15,000. (3) This note is to a former officer and director and bears interest at 12%. The note calls for quarterly payments of at least $10,000 until the principal and interest are paid in full. (4) This note bears interest at a rate of 12%. The payment terms are interest only and the principal was due on March 1, 2003. The Note was subsequently paid off in full in May 2003. (5) This is a non-interest bearing obligation with monthly payments of $5,000. (6) See Note 7 - Capital Leases NOTE 7 - CAPITAL LEASES The Company entered into a capital lease for the purpose of purchasing equipment used in the research center. Certain Officers of the Company personally guaranteed the capital lease if the Company does not full fill its terms of the lease obligations. The following are the details of the assets leased at March 31, 2003 and June 30, 2002 and the future minimum lease payments for such leases. CAPITAL LEASES GROSS ASSETS AND ACCUMULATED AMORTIZATION - -------------------------------------------------------------------------------- March 31, June 30, 2003 2002 ----------- -------- Type of property Electronic equipment $ 32,121 $ - Software 25,288 - Other 5,167 - --------- ----- Total 62,576 - Less: Accumulated amortization - - --------- ----- Capital leases, net $ 62,576 $ - ========= ===== MINIMUM FUTURE LEASE PAYMENTS AND PRESENT VALUES OF THE NET MINIMUM LEASE PAYMENTS Year ended June 30, - --------------------------- ------------------------------------------------- 2003 $ 9,302 2004 23,256 2005 23,256 2006 18,604 -------- Total minimum lease payments 74,418 Less: Executory costs 674 -------- Net minimum lease payments 73,744 Less: Imputed interest 11,168 -------- Present value of net minimum lease payments $ 62,576 ========= NOTE 8 - 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 was retained by Kronos Advanced Technologies team to fully develop and capitalize the Kronos(TM) technology. Pursuant to the agreement that the Company entered into with The Eagle Rock Group, the Company issued to The Eagle Rock Group a ten-year warrant granting them the right to purchase 1,400,000 shares of the Company's common stock at an exercise price of $0.68 per share. The warrants immediately vested and are non-forfeitable. The warrant was valued at $686,000 using the Black-Scholes option valuation model and was initially recorded as deferred equity compensation and amortized into current period professional services expense at a rate of $137,200 per month over the term of the agreement. Amortization for the year ended June 30, 2002 was $686,000. The shares underlying the warrant have piggy-back and demand registration rights, as well as subscription rights in the event that the Company issues any rights to all of its stockholders to subscribe for shares of the Company's common stock. In addition, the warrant contains redemption rights in the event that the Company enters into a transaction that results in a change of control of the Company. In October 2001, the Company entered into a 15-month consulting agreement with Joshua B. Scheinfeld and Steven G. Martin, principals of Fusion Capital, for consulting services with respect to operations, executive employment issues, employee staffing, strategy, capital structure and other matters as specified from time to time. As consideration for their services, the Company issued 360,000 shares of its common stock. In accordance with EITF 96-18, the measurement date was established as the contract date of October 1, 2001 as the share grant was non-forfeitable and fully vested on that date. The stock was valued on that date at $0.28 a share (the closing price for the Company's common stock on the measurement date). The stock issuance has been recorded as a prepaid consulting fee and was being amortized to Professional Fee Expense ratably over the 15-month term of the contract. During the three and nine month periods ending March 31, 2003, the Company recognized professional services expenses of $0 and $40,000, respectively under this agreement compared with $20,000 and $40,000 for the three and nine month periods ended March 31, 2002. In March 2002, the Company entered into a 12-month consulting agreement with The Eagle Rock Group. Pursuant to the agreement, the Company issued a note for the outstanding balance of $120,000 due to The Eagle Rock Group. The note was due on March 1, 2003 and beared interest at the rate of 12% per annum. The Note was subsequently paid off in full in May 2003. 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 were 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 was expensed ratably over the term of the consulting contract. The remainder of the shares could have been earned contingent upon the occurrence of various events that did not occurred before the contract expired, with one exception. In October 2002, 400,000 warrants were earned when the Company secured a contract with consumer-oriented distribution organization HoMedics. The exercise price for these warrants is $0.145 (the closing price of the Company's common stock on October 22, 2003. These warrants are irrevocable and are fully vested. The measurement date is October 22, 2002 as the warrants are fully vested and non-forfeitable on that date. The value assigned to these warrants is $56,800 and was determined using the Black-Scholes option valuation model. The Company recognized this amount as consulting expense in the quarter ended December 31, 2002. During the three and nine month periods ending March 31, 2003, the Company recognized professional services expenses of $10,000 and $98,000, respectively, under these agreements compared with $5,000 and $691,000 for the comparable periods in the prior year. NOTE 9 - SUBSEQUENT EVENTS In May 2003, Kronos entered into an agreement with a strategic customer, HoMedics, Inc., for $3.5 million in secured debt financing. $2.5 million was advanced to Kronos upon execution of the agreement and $1.0 million will be advanced upon the start of production for the Kronos-based air purification product line to be marketed and distributed by HoMedics. These loans are secured by a lien on substantially all of the Kronos assets, including Kronos' intellectual property. As previously announced, Kronos Air Technologies, Inc., a wholly owned subsidiary of Kronos Advanced Technologies, Inc., and HoMedics executed a multiyear, multi-million-dollar licensing agreement to bring Kronos(TM) proprietary technology to the consumer under an exclusive agreement for North American, Australian and New Zealand retail distribution rights for next generation consumer air movement and purification products based on patented Kronos(TM) technology. This funding should assist Kronos to rapidly complete its transition from a development company to an operating entity generating revenue from sale of mass produced Kronos-based products. The terms of the debt include an annual cash interest rate of six percent and a five year term with no payments required for the first twelve months. Proceeds will be used by Kronos to meets its current commitments, including customer commitments in the consumer, military and transportation marketplaces, as well as expansion into additional revenue generating applications for the Kronos technology. In connection with this transaction, Kronos issued a warrant for 6,746,171 shares of Kronos common stock at an exercise price of $0.10 per share. Such warrant vested immediately. Kronos also issued an additional warrant for 6,746,171 shares of Kronos common stock at an exercise price of $0.10 per share. The second warrant is not presently exercisable and becomes exercisable only if (1) the Company does not prepay the entire amount of principal and interest due under the Notes by November 2005; (2) the Company goes in default under any of the investment documents, or (3) Kronos does not earn prior to November 2005, revenues (as defined in the agreement) in an aggregate amount equal to or greater than $3,500,000. The warrants are subject to certain anti-dilution provisions. A more detailed description of the transaction is available in a Report on Form 8-K filed with the Securities and Exchange Commission. Kronos and HoMedics plan to expand their relationship into other consumer products on a global basis. Kronos and HoMedics will seek to market and sell the Kronos-based HoMedics air purification product line globally. Kronos and HoMedics will also seek to develop, market and sell globally other Kronos-based products. In May 2003, the Company executed a Acquisition and Settlement Agreement and Mutual Release to acquire intellectual property rights from High Voltage Integrated, LLC and settled outstanding disputes with Ingrid Fuhriman; Robert Fuhriman II; Alan Thomson, High Voltage Integrated, LLC and Emprise, LLC. Intellectual Property rights acquired include all technology rights owned by High Voltage Integrated, LLC as related to "Electron Wind Technology", specifically including rights to "micro technology, computers and fuel cells". Kronos Air Technologies, Inc., Kronos Advanced Technologies, Inc. and Dr. Igor Krichtafovitch settled all disputes known and unknown with former Kronos Air Technologies Inc. management Ingrid Fuhriman; Robert Fuhriman II; Alan Thomson and with High Voltage Integrated, LLC and Emprise, LLC. In May 2003, the Company's Chief Technology Officer and inventor of the Kronos(TM) technology, Dr. Igor Krichtafovitch, agreed with the Company to release all his ownership and intellectual property rights held by High Voltage Integrated, LLC. In exchange for this release, the Company executed a two year, renewable Employment Agreement with Dr. Krichtafovitch and a settlement agreement that included 500,000 restricted shares of common stock. In May 2003 at the request of the U.S. Army, Kronos re-submitted a Phase II Small Business Innovation Research proposal for review in 2003. Phase I of the contract was worth $120,000 in funding to investigate and analyze the feasibility of the Kronos(TM) technology to reduce humidity in heating, ventilation and air conditioning (HVAC) systems. Dehumidification is essential to making HVAC systems more energy efficient. Phase II of the contract is worth up to $730,000 in additional funding for product development and testing. The Phase II proposal was submitted after Kronos completed additional prototype testing requested by the U.S. Army. NOTE 10 - 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. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence. Management has taken the following steps with respect to its operating and financial requirements, which it believes are sufficient to provide the Company with the ability to continue in existence: 1. In December 2001, Kronos Air Technologies was awarded an SBIR contract sponsored by the U.S. Army. This contract is potentially worth up to $850,000 in product development and testing support for Kronos Air Technologies. Phase I of the contract was worth $120,000 in funding to investigate and analyze the feasibility of the Kronos(TM) technology to reduce humidity in heating, ventilation and air conditioning (HVAC) systems. Dehumidification is essential to making HVAC systems more energy efficient. Phase II of the contract is worth up to $730,000 in additional funding for product development and testing. In May 2003 at the request of the U.S. Army, the Company resubmitted a detailed Phase II proposal for review in 2003. 2. In November 2002, Kronos Air Technologies, Inc. and the United States Navy executed a Small Business Innovation Research Phase II contract to develop and demonstrate an advanced distributive air management system based on the patented Kronos(TM) technology. The 24-month contract is worth $581,000 with an option for an additional $144,000 in funding. 3. In August 2002, we entered into a new Common Stock Purchase Agreement with Fusion. Pursuant to the common stock purchase agreement, Fusion Capital has agreed to purchase on each trading day during the term of the agreement, $10,000 of our common stock or an aggregate of $6.0 million. The $6.0 million of our common stock is to be purchased over a 30-month period, subject to a six-month extension or earlier termination at our sole discretion and subject to certain events. The purchase price of the shares of common stock will be equal to the lesser of (i) the lowest price of our common stock on the purchase date; or (ii) the average of the three (3) lowest closing sale prices of our common stock during the twelve (12) consecutive trading days prior to the date of a purchase by Fusion Capital. However, there can be no assurance of how much cash we will receive, if any, under the common stock purchase agreement with Fusion Capital. 4. In October 2002, Kronos Air Technologies, Inc., and HoMedics USA, Inc. executed a multiyear, multi-million-dollar Licensing Agreement to bring Kronos(TM) proprietary technology to the consumer. The agreement provides for exclusive North American, Australian and New Zealand retail distribution rights for next generation consumer air movement and purification products based on patented Kronos(TM) technology. The initial term of the agreement is three and one half years with the option to extend the agreement for six additional years. Kronos will be compensated through an initial royalty payment and ongoing quarterly royalty payments based on a percentage of sales. HoMedics will pay minimum royalty payments of at least $2 million during the initial term and on-going royalty payments to extend the agreement. Kronos will retain full rights to all of its intellectual property. 5. In November 2002, Kronos Air Technologies and HoMedics executed a Development Agreement to provide Kronos with the financial resources necessary to complete commercialization of the Kronos(TM)-based consumer product line. Kronos is working with HoMedics and HoMedics' engineers and designers to complete the product line for sales and distribution. 6. In January 2003, Kronos extended its work into the transportation industry by signing a Development and Acquisition Agreement with a premier business jet manufacturer. The Kronos(TM) devices will be designed and manufactured to meet all FAA safety standards, including environmental, flammability and electromagnetic interference (EMI). 7. In May 2003, Kronos entered into an agreement with a strategic customer, HoMedics USA, Inc., for $3.5 million in secured debt financing. $2.5 million was advanced to Kronos upon execution of the agreement and $1.0 million will be advanced upon the start of production for the Kronos-based air purification product line to be marketed and distributed by HoMedics. These loans are secured by a lien on substantially all of Kronos' assets, including Kronos' intellectual property. As previously announced, Kronos Air Technologies, Inc., a wholly owned subsidiary of Kronos Advanced Technologies, Inc., and HoMedics executed a multiyear, multi-million-dollar licensing agreement to bring Kronos(TM) proprietary technology to the consumer under an exclusive agreement for North American, Australian and New Zealand retail distribution rights for next generation consumer air movement and purification products based on patented Kronos(TM) technology. NOTE 11 - COMMITMENTS AND CONTINGENCIES None. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTORY STATEMENTS FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS This filing contains forward-looking statements, including statements regarding, among other things: (a) the growth strategies of Kronos Advanced Technologies (the "Company" or "Kronos"); (b) anticipated trends in our Company's industry; (c) our Company's future financing plans; and (d) our Company's ability to obtain financing and continue operations. In addition, when used in this filing, the words "believes," "anticipates," "intends," "in anticipation of," and similar words are intended to identify certain forward-looking statements. These forward-looking statements are based largely on our Company's expectations and are subject to a number of risks and uncertainties, many of which are beyond our Company's control. Actual results could differ materially from these forward-looking statements as a result of changes in trends in the economy and our Company's industry, reductions in the availability of financing and other factors. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur. Our Company does not undertake any obligation to publicly release the results of any revision to these forward-looking statements that may be made to reflect any future events or circumstances. GENERAL Kronos Advanced Technologies, Inc. is a high technology industrial company focused on developing, marketing and selling products based on the Company's proprietary air movement and purification technology. Kronos is actively commercializing its technology across multiple markets. Kronos(TM) device can be either used as a standalone product or can be embedded. Standalone products are self-contained; the user would simple need to plug the Kronos(TM) device into a wall outlet to obtain air filtration for their home, office or hotel room. Embedded applications of the Kronos(TM) technology require the technology be added into another system such as a building ventilation system for more efficient air movement and filtration or into a piece of medical equipment to replace the cooling fan. In December 2002, the shareholders approved an amendment to our Articles of Incorporation for a name change of our Company to Kronos Advanced Technologies, Inc. (f/k/a TSET, Inc.). Kronos trades under the ticker symbol KNOS. TECHNOLOGY DESCRIPTION AND BENEFITS. The Kronos(TM) technology combines state-of-the-art high voltage electronics and electrodes into an efficient but simple electrical device. As a result of this combined technology, a Kronos(TM)-based device can both move and clean air without any moving parts. Kronos(TM) devices are versatile, energy- and cost-efficient and capable of multiple design forms. Kronos(TM) devices can be made into any shape or size and, therefore, have immediate potential to be used as a standalone product or to replace a range of HVAC products from low end mini-splits for residential usage to high end HEPA filtration systems for operating and manufacturing clean rooms. The proprietary Kronos(TM) technology involves the application of high voltage management across paired electrical grids to create an ion exchange that moves and purifies air. Kronos(TM) technology has numerous, valuable characteristics. It moves air and gases at high velocities while removing odors, smoke and particulates and killing pathogens, including bacteria and mold. The technology is cost-effective and is more energy efficient than current alternative fan and filter (including HEPA filter and ultraviolet light based) technologies. Many of the scientific claims of the Kronos(TM) technology have been validated by the U.S. government and multi-national companies, including the U.S. Department of Energy, the U.S. Department of Defense, General Dynamics, Underwriters Laboratory, and Intel. Independent laboratory testing has verified the purification capability of Kronos(TM) technology. Tests conducted at MicroTest Laboratories and at the New Hampshire Materials Laboratory demonstrated HEPA Clean Room Class 1000 quality particulate reduction and up to 95% reduction of hazardous gases (in one air pass through the Kronos(TM) system), including numerous contaminants found in cigarette smoke. PATENT AND INTELLECTUAL PROPERTY. In January 2003, Kronos received formal notification from the United States Patent and Trademark Office indicating that its application entitled Electrostatic Fluid Accelerator has been examined and allowed for issuance as a U.S. patent (#6,504,308). The patent will provide protection for key aspects of Kronos'(TM) technology until late in 2019. A number of corresponding applications have been filed and are pending outside of the United States. Kronos' Chief Technology Officer, Dr. Igor Krichtafovitch, is the lead inventor of this proprietary technology. This patent is for the first in a series of patent and patent applications now pending with the U.S. Patent and Trademark Office addressing various aspects of the Kronos' platform. In addition to the Electrostatic Fluid Accelerator patent, five additional patent applications have been filed for, among other things, the control and management of Electrostatic Fluid Acceleration. These additional patent applications are awaiting examination by the Patent Office. Each of these patent applications is directed towards Kronos' innovative technology used to move, control and filter air electronically, without the use of fans or moving parts. STANDALONE PLATFORM. HOMEDICS CONTRACT. In October 2002, Kronos Air Technologies, Inc., and HoMedics USA, Inc. executed a multiyear, multi-million-dollar Licensing Agreement to bring Kronos(TM) proprietary technology to the consumer. The agreement provides for exclusive North American, Australian and New Zealand retail distribution rights for next generation consumer air movement and purification products based on patented Kronos(TM) technology. In May 2003, Kronos and HoMedics agreed to negotiate the expansion of our relationship into additional Kronos-based stand-alone consumer products, including fans, heaters, humidifiers and dehumidifiers. 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 indefinitely. Kronos will retain full rights to all of its intellectual property. HoMedics commitment includes a multi-million-dollar marketing and advertising campaign to promote the Kronos(TM)-based product line. The products will be manufactured and distributed by HoMedics. HoMedics currently distributes their products through major domestic retailers, including Wal-Mart, Home Depot, Sears, Bed Bath & Beyond, and Linens 'N Things. Kronos will manufacture and provide HoMedics with Kronos'(TM) proprietary electronics. In November 2002, Kronos Air Technologies and HoMedics executed a Development Agreement to provide Kronos with the financial resources necessary to complete commercialization of the Kronos(TM)-based consumer product line. Kronos is working with HoMedics and HoMedics' engineers, designers and manufacturers to complete the product line for sales and distribution in 2003. EMBEDDED PLATFORM U.S. NAVY SBIR CONTRACTS. The U.S. Department of Defense and Department of Energy have provided Kronos Air Technologies with various grants and contracts to develop, test and evaluate the Kronos(TM) technology for embedded applications. Kronos has developed several commercial and industrial applications, including the retrofit of berthing fan systems and embedded air movement systems for U.S. Navy Aegis Class destroyers. In November 2002, Kronos executed an agreement with the U.S. Navy to develop a new ventilation system for naval ships. Working under a Small Business Innovation Research contract, the Company is in Phase II (commercialization phase) of this contract, which provides Kronos with up to an additional $725,000 of developmental funding over the next 24 months. During Phase II, Kronos shall develop and demonstrate a set of fully controlled devices that represent a "cell" of an advanced distributive air management system with medium capacity airflow in a U.S. Navy unique environment. The "cell" will be designed to be easily adjustable to a variety of applications such as duct size, airflow requirements, and air quality. The goal of this development work is to significantly reduce or replace altogether the current HVAC air handling systems on naval ships. As part of its air management system, Kronos intends to develop and test an air filtration mechanism capable of performing to HEPA quality standards. We believe that Kronos(TM) devices could replace current HEPA filters with a permanent, easily cleaned, low-cost solution. The U.S. Navy unique environment includes shock exposure, vibration, Electromagnetic Interference/Compatibility (EMI/EMC), and salt spray. Kronos(TM) devices will be tested and built to meet specific Navy standards. Testing shall include assessments for system performance, including control techniques, noise levels, acquisition and lifecycle costs. We believe that during the option portion of the contract, Kronos(TM) technology's ability to kill bacteria and other pathogens will be confirmed and expanded to a wide range of pathogens for space disinfection and bio-terrorist attacks. A unique ability of the Kronos(TM) technology is to kill all or almost all airborne pathogens regardless of their nature, genetic structure, robustness, or method of delivery. U.S. ARMY SBIR CONTRACT. In December 2001, Kronos Air Technologies was awarded an SBIR contract sponsored by the U.S. Army. This contract is potentially worth up to $850,000 in product development and testing support for Kronos Air Technologies. Phase I of the contract was worth $120,000 in funding to investigate and analyze the feasibility of the Kronos(TM) technology to reduce humidity in heating, ventilation and air conditioning (HVAC) systems. Dehumidification is essential to making HVAC systems more energy efficient. Phase II of the contract is worth up to $730,000 in additional funding for product development and testing. In May 2003 at the request of the U.S. Army, the Company resubmit a detailed Phase II proposal for review. PREMIER BUSINESS JET CONTRACT. In January 2003, Kronos extended its work into the transportation industry by signing a Development and Acquisition Agreement with a premier business jet manufacturer. The Agreement was the direct result of initial prototype development work performed by the Kronos Research Team with input from the customer in 2002. The Kronos(TM) devices will be designed and manufactured to meet all FAA safety standards, including environmental, flammability and electromagnetic interference (EMI). The Company has initiated the next phase of design and development based on the customer's specific product application requirements. 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 Kronos. We have used certain key assumptions in building the cash flow projections required for evaluating the recoverablility of our intangible assets. We have assumed revenues from the following applications of the Kronos(TM) technology: consumer stand-alone devices, assisted care/skilled nursing stand-alone devices, embedded devices in the hospitality industry and in specialized military applications. Expenses/cash out flows in our projections include sales and marketing, production, distribution, general and administrative expenses, research and development expenses and capital expenditures. These expenses are based on management estimates and have been compared with industry norms (relative to sales) to determine their reasonableness. We use the same key assumptions for our cash flow evaluation as we do for internal budgeting, lenders and other third parties; therefore, they are internally and externally consistent with financial statement and other public and private disclosures. We are not aware of any negative implications resulting from the projections used for purposes of evaluating the appropriateness of the carrying value of these assets. If assets are considered to be impaired, the impairment recognized is the amount by which the carrying value of the assets exceeds the fair value of the assets. Useful lives and related amortization or depreciation expense are based on our estimate of the period that the assets will generate revenues or otherwise be used by Kronos. Factors that would influence the likelihood of a material change in our reported results include significant changes in the asset's ability to generate positive cash flow, loss of legal ownership or title to the asset, a significant decline in the economic and competitive environment on which the asset depends, significant changes in our strategic business objectives, and utilization of the asset. VALUATION OF DEFERRED INCOME TAXES. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The likelihood of a material change in our expected realization of these assets is dependent on future taxable income, our ability to deduct tax loss carryforwards against future taxable income, the effectiveness of our tax planning and strategies among the various tax jurisdictions that we operate in, and any significant changes in the tax treatment received on our business combinations. REVENUE RECOGNITION. We recognize revenue in accordance with SAB 101. Further, Kronos Air Technologies recognizes revenue on the sale of custom-designed contract sales under the percentage-of-completion method of accounting in the ratio that costs incurred to date bear to estimated total costs. For uncompleted contracts where costs and estimated profits exceed billings, the net amount is included as an asset in the balance sheet. For uncompleted contracts where billings exceed costs and estimated profits, the net amount is included as a liability in the balance sheet. Revenue from government grants for research and development purposes is recognized as revenue when received. Sales are reported net of applicable cash discounts and allowances for returns. RESULTS OF OPERATIONS The Company's net loss from continuing operations for the three months ended March 31, 2003 increased by 5% to $690,000, compared with a net loss of $657,000 for the corresponding period for the prior year. The increase in the net loss was primarily the result of a $126,000 increase in professional fees and consulting services offset by $35,000 and $30,000 reductions in research and development and other selling general and administrative expenses, respectively. The Company's net loss from continuing operations for the nine months ended March 31, 2003 was reduced 40% to $1.8 million, compared with a net loss of $2.9 million for the corresponding period for the prior year. The decrease in the net loss was primarily the result of a $712,000 reduction in professional fees and consulting services. REVENUE. Revenues are generated through sales of Kronos(TM) devices at Kronos Air Technologies, Inc. Revenue for the three months and nine months ended March 31, 2003 was $140,000 and $458,000, respectively. Revenue of $0 and $65,000 was recorded during the corresponding periods of the prior year. These revenues were primarily from our HoMedics contracts, our U.S. Navy and U.S. Army Small Business Innovative Research contracts, our contract with a leading business jet manufacturer and our contract with Access Business Group. COST OF SALES. Cost of sales for the three months and nine months ended March 31, 2003 was $101,000 and $226,000, compared to $0 and $50,000 for the corresponding periods in the prior year. Cost of sales is primarily research and development costs associated with our HoMedics contracts, our U.S. Navy and U.S. Army Small Business Innovative Research contracts, our contract with a leading business jet manufacturer and our contract with Access Business Group. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, General and Administrative expenses for the three months ended March 31, 2003 was $683,000 compared to $623,000 for the corresponding period in the prior year. The increase is attributable to an increase in professional fees and consulting services of $126,000 offset by $35,000 and $30,000 reductions in research and development and other selling general and administrative expenses, respectively. Selling, General and Administrative expenses for the nine months ended March 31, 2003 was $2.0 million compared to $2.9 million for the corresponding period in the prior year. The decrease is attributable to decreases in professional fees and consulting services of $712,000, research and development expenses of $95,000 and other selling general and administrative expenses of $80,000. CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2003 Our total assets at March 31, 2003 were $2.1 million, compared with $2.4 million at June 30, 2002. Total assets at March 31, 2003 were comprised primarily of $2.0 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 March 31, 2003 and June 30, 2002 were $51,000 and $123,000, respectively, while total current liabilities for those same periods were $2.7 million and $1.8 million, respectively, creating a working capital deficit of $2.7 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. Subsequent to the March 31, 2003, the Company addressed this deficit by securing $3.5 million in secured debt financing from a strategic customer, HoMedics, Inc. Shareholders' equity as of March 31, 2003 and June 30, 2002 were $(1.6) million and $(0.4) million, respectively, representing a decrease of $1.2 million. The decrease in shareholders' equity is primarily the result of incurring a $1.8 million loss from continuing operations for the nine months ended March 31, 2003, partially offset through the sale and issuance of $0.5 million of common stock. LIQUIDITY AND CAPITAL RESOURCES Historically we have relied principally on the sale of common stock to finance our operations. We have recently signed a $3.5 million loan agreement and a multi-million dollar, multi-year licensing agreement with HoMedics, as well as a Small Business Innovative Research Phase II contract with the U.S. Navy and a development and acquisition agreement with a premier business jet manufacturer. Going forward, in addition to continued sales of common stock, we plan to rely on the proceeds from our HoMedics Licensing Development and Loan Agreements, our Small Business Innovation Research (SBIR) contract with the U.S. Navy and our agreement with a premier business jet manufacturer, as well as other government contracts and grants, cash flow generated from the sale of Kronos(TM) devices and the execution of licensing agreements and other contracts with commercial customers. We have also entered into a common stock purchase agreement with Fusion Capital under which we have the right, subject to certain conditions, but not the requirement 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 $446,000 for the current year nine 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 HoMedics and U.S. Navy and Army SBIR contracts, our contract with a leading business jet manufacturer and our contract with Access Business Group. In July 2002, we entered into a Memorandum of understanding with Access Business Group under the terms of which we were to provide them with three working prototype Kronos(TM) devices for testing and evaluation for $45,000. In August 2002, we entered into a common stock purchase agreement with Fusion Capital. Pursuant to the common stock purchase agreement, Fusion Capital has agreed to purchase on each trading day during the term of the agreement, $10,000 of our common stock or an aggregate of $6.0 million. The $6.0 million of our common stock is to be purchased over a 30-month period, subject to a nine-month extension or earlier termination at our sole discretion and subject to certain events. The purchase price of the shares of common stock will be equal to the lesser of (i) the lowest price of our common stock on the purchase date; or (ii) the average of the three (3) lowest closing sale prices of our common stock during the twelve (12) consecutive trading days prior to the date of a purchase by Fusion Capital. However, there can be no assurance of how much cash we will receive, if any, under the common stock purchase agreement with Fusion Capital. In October 2002, Kronos Air Technologies, Inc., and HoMedics USA, Inc. executed a multiyear, multi-million-dollar Licensing Agreement to bring Kronos(TM) proprietary technology to the consumer. The initial term of the agreement is three and one half years with the option to extend the agreement for six additional years. Kronos has been compensated through an initial royalty payment and will receive ongoing quarterly royalty payments based on a percentage of sales. HoMedics will pay minimum royalty payments of at least $2 million during the initial term and on-going royalty payments to extend the agreement. In November 2002, Kronos Air Technologies and HoMedics executed a Development Agreement to provide Kronos with the financial resources necessary to complete commercialization of the Kronos(TM)-based consumer product line. Kronos is working with HoMedics and HoMedics' engineers, designers and manufacturers to complete the product line for sales and distribution. In November 2002, Kronos Air Technologies, Inc. and the United States Navy executed a Small Business Innovation Research Phase II contract to develop and demonstrate an advanced distributive air management system based on the patented Kronos(TM) technology. The 24-month contract is worth $581,000 with an option for an additional $144,000 in funding. Funding on Phase II commenced in December 2002. In January 2003, Kronos extended its work into the transportation industry by signing a prototype Development and Acquisition Agreement with a premier business jet manufacturer. The Agreement was the direct result of initial prototype development work performed by the Kronos Research Team with input from the customer in 2002. The Kronos(TM) devices will be designed and manufactured to meet all FAA safety standards, including environmental, flammability and electromagnetic interference (EMI). In May 2003, Kronos entered into an agreement with a strategic customer, HoMedics, Inc., for $3.5 million in secured debt financing. $2.5 million was advanced to Kronos upon execution of the agreement and $1.0 million will be advanced upon the start of production for the Kronos-based air purification product line to be marketed and distributed by HoMedics. These loans are secured by a lien on substantially all of Kronos' assets, including Kronos' intellectual property. In connection with this transaction, Kronos issued a warrant for 6,746,171 shares of Kronos common stock at an exercise price of $0.10 per share. Such warrant vested immediately. Kronos also issued an additional warrant for 6,746,171 shares of Kronos common stock at an exercise price of $0.10 per share. The second warrant is not presently exercisable and becomes exercisable only if (1) the Company does not prepay the entire amount of principal and interest due under the notes by November 2005; (2) the Company goes in default under any of the investment documents, or (3) Kronos does not earn prior to November 2005, revenues (as defined in the agreement) in an aggregate amount equal to or greater than $3,500,000. The warrants are subject to certain anti-dilution provisions. A more detailed description of the transaction is available in a Report on Form 8-K filed with the Securities and Exchange Commission. As previously announced, Kronos Air Technologies, Inc., a wholly owned subsidiary of Kronos Advanced Technologies, Inc., and HoMedics executed a multiyear, multi-million-dollar licensing agreement to bring Kronos(TM) proprietary technology to the consumer under an exclusive agreement for North American, Australian and New Zealand retail distribution rights for next generation consumer air movement and purification products based on patented Kronos(TM) technology. 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. CERTAIN RISK FACTORS Our Company is subject to various risks which may materially harm our business, financial condition and results of operations. Certain risks are discussed below. WE HAVE A LIMITED OPERATING HISTORY WITH SIGNIFICANT LOSSES AND EXPECT LOSSES TO CONTINUE FOR THE FORESEEABLE FUTURE We have begun implementing our plan to prioritize and concentrate our management and financial resources to fully capitalize on our investment in Kronos Air Technologies and have yet to establish any history of profitable operations. We incurred a net operating loss of $690,000 and $1.8 million for the three months and nine months ended March 31, 2003, respectively. We have incurred net losses from continuing operations of $3.5 million and $3.6 million for the fiscal years ended June 30, 2002 and 2001. We have incurred annual operating losses of $2.8 million, $9.9 million and $2.0 million, respectively, during the past three fiscal years of operation. As a result, at March 31, 2003 and June 30, 2002, we had an accumulated deficit of $16.5 million and $14.8 million, respectively. Our revenues have not been sufficient to sustain our operations. Our profitability will require the successful commercialization of our Kronos(TM) technology. No assurances can be given when this will occur or that we will ever be profitable. WE HAVE BEEN SUBJECT TO A GOING CONCERN OPINION FROM OUR INDEPENDENT AUDITORS Our independent auditors have added an explanatory paragraph to their audit opinion issued in connection with the financial statements for the years ended June 30, 2002 and June 30, 2001 relative to our ability to continue as a going concern. Our ability to obtain additional funding will determine our ability to continue as a going concern. Accordingly, there is substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. WE WILL REQUIRE ADDITIONAL FINANCING TO SUSTAIN OUR OPERATIONS AND WITHOUT IT WE WILL NOT BE ABLE TO CONTINUE OPERATIONS At March 31, 2003, we had a working capital deficit of $2.7 million. At June 30, 2002, we had a working capital deficit of $1.7 million. The independent auditor's report for the years ended June 30, 2002 and June 30, 2001, includes an explanatory paragraph to their audit opinion stating that our recurring losses from operations and working capital deficiency raise substantial doubt about our ability to continue as a going concern. For the years ended 2002, 2001 and 2000, we had an operating cash flow deficit of $1.5 million, $1.6 million and $0.3 million, respectively. We do not currently have sufficient financial resources to fund our operations or pay certain existing obligations or those of our subsidiary. Therefore, we need additional funds to continue these operations and pay certain existing obligations. THE SALE OF OUR COMMON STOCK TO FUSION CAPITAL MAY CAUSE DILUTION AND THE SALE OF THE SHARES OF COMMON STOCK ACQUIRED BY FUSION CAPITAL COULD CASE THE PRICE OF OUR COMMON STOCK TO DECLINE The purchase price for the common stock to be issued to Fusion Capital pursuant to the common stock purchase agreement will fluctuate based on the price of our common stock. All shares issued to Fusion Capital will be freely tradable. Fusion Capital may sell none, some or all of the shares of common stock purchased from us at any time. We expect that the shares sold to Fusion Capital will be sold over a period of up to 30 months from the date of the common stock purchase agreement. Depending upon market liquidity at the time, a sale of shares by Fusion Capital at any given time could cause the trading price of our common stock to decline. The sale of a substantial number of shares of our common stock by Fusion Capital, or anticipation of such sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and at a price that we might otherwise wish to effect sales. COMPETITION IN THE MARKET FOR AIR MOVEMENT AND PURIFICATION DEVICES MAY RESULT IN THE FAILURE OF THE KRONOS(TM) PRODUCTS TO ACHIEVE MARKET ACCEPTANCE Kronos Air Technologies presently faces competition from other companies that are developing or that currently sell air movement and purification devices. Many of these competitors have substantially greater financial, research and development, manufacturing, and sales and marketing resources than we do. Many of the products sold by Kronos Air Technologies' competitors already have brand recognition and established positions in the markets that we have targeted for penetration. In the event that the Kronos(TM) products do not favorably compete with the products sold by our competitors, we would be forced to curtail our business operations. OUR FAILURE TO OBTAIN INTELLECTUAL PROPERTY AND ENFORCE PROTECTION WOULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS Our success depends in part on our ability to obtain and defend our intellectual property, including patent protection for our products and processes, preserve our trade secrets, defend and enforce our rights against infringement and operate without infringing the proprietary rights of third parties, both in the United States and in other countries. We have received one patent from the U.S. Patent and Trademark Office. We have five additional U.S. and six 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 $2.0 million and $2.2 million as of March 31, 2003 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 97% and 94% of our total assets as of March 31, 2003 and June 30, 2002, respectively. Intangible assets are subject to periodic review and consideration for potential impairment of value. Among the factors that could give rise to impairment include a significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, and projections or forecasts that demonstrate continuing losses associated with these assets. In the case of our tangible assets, specific factors that could give rise to impairment would be, but are not limited to, an inability to obtain patents, the untimely death or other loss of Dr. Igor Krichtafovitch, the inventor of the Kronos(TM) technology, or the ability to create a customer base for the sale or licensing of the Kronos(TM) technology. Although no events have occurred that would indicate that an impairment may exist with respect to these intangible assets, should an impairment occur, we would be required to recognize it in our financial statements. Since the intangible assets comprise 97% and 94% of out total assets as of March 31, 2003 and June 30, 2002, respectively, a write-down of these intangible assets could have a material adverse impact on our total assets, net worth and results of operations. WE RELY ON MANAGEMENT AND KRONOS AIR TECHNOLOGIES RESEARCH PERSONNEL, THE LOSS OF WHOSE SERVICES COULD HAVE A MATERIAL ADVERSE EFFECT UPON OUR BUSINESS We rely principally upon the services of our Board of Directors, senior executive management, and certain key employees, including the Kronos Air Technologies research team, the loss of whose services could have a material adverse effect upon our business and prospects. Competition for appropriately qualified personnel is intense. Our ability to attract and retain highly qualified senior management and technical research and development personnel are believed to be an important element of our future success. Our failure to attract and retain such personnel may, among other things, limit the rate at which we can expand operations and achieve profitability. There can be no assurance that we will be able to attract and retain senior management and key employees having competency in those substantive areas deemed important to the successful implementation of our plans to fully capitalize on our investment in Kronos Air Technologies and the Kronos(TM) technology, and the inability to do so or any difficulties encountered by management in establishing effective working relationships among them may adversely affect our business and prospects. Currently, we do not carry key person life insurance for any of our directors, executive management, or key employees. ITEM 3. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Within 90 days prior to the filing date of this report, the Company carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. This evaluation was done under the supervision and with the participation of the Company's President and Chief Financial Officer. Based upon that evaluation, they concluded that the Company's disclosure controls and procedures are effective in gathering, analyzing and disclosing information needed to satisfy the Company's disclosure obligations under the Exchange Act. CHANGES IN INTERNAL CONTROLS. There were no significant changes in the Company's internal controls or in other factors that could significantly affect those controls since the most recent evaluation of such controls. PART II ITEM 1. LEGAL PROCEEDINGS Acquisition and Settlement Agreement and Mutual Release, executed and effective May 9, 2003 between: Ingrid Fuhriman; Robert Fuhriman II; Alan Thomson; High Voltage Integrated, LLC ("HVI"); Emprise, LLC; Dr. Igor Krichtafovitch; Kronos Air Technologies, Inc.; and Kronos Advanced Technologies, Inc, settled all disputes known and unknown between Fuhriman, Fuhriman, Thomson, HVI and Emprise with Kronos Air Technologies, Kronos Advanced Technologies and Dr. Igor Krichtafovitch. In connection with the acquisition of certain intellectual property the Company will pay HVI $270,000 in $30,000 quarterly installments and issued 2,790,000 restricted shares of Kronos common stock. In settlement of all the disputes known and unknown among the parties Kronos paid HVI $30,000. On May 9, 2003, the Company's Chief Technology Officer and inventor of the Kronos(TM) technology, Dr. Igor Krichtafovitch, agreed with the Company to release all his ownership and intellectual property rights held by High Voltage Integrated, LLC. In exchange for this release, the Company executed a two year, renewable employment agreement with Dr. Krichtafovitch and a settlement agreement that included 500,000 restricted shares of common stock. There are no known legal proceedings against Kronos Air Technologies, Inc. or Kronos Advanced technologies, Inc. Kronos Air Technologies and Kronos Advanced Technologies do not have any filed legal claims against any other party. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 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") EXHIBIT NO. DESCRIPTION LOCATION - -------------------------------------------------------------------------------- 3.1 Articles of Incorporation Incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 filed on August 7, 2001 3.2 Bylaws Incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-1 filed on August 7, 2001 4.1 2001 Stock Option Plan Incorporated by reference to Exhibit 4.1 to Registrant's Form 10-Q for the quarterly period ended March 31, 2002 filed on May 15, 2002 5.1 Opinion re: Legality Incorporated by reference to Exhibit 5.1 to Amendment No. 1 to Form S-1 filed on October 19, 2001 10.1 Employment Agreement, dated April 16, Incorporated by reference to 1999, by and between TSET, Inc. and Exhibit 10.1 to the Registration Jeffrey D. Wilson Statement on Form S-1 filed on August 7, 2001 10.2 Deal Outline, dated December 9, 1999, Incorporated by reference to by and between TSET, Inc. and Atomic Exhibit 10.2 to the Registration Soccer, USA, Ltd. Statement on Form S-1 filed on August 7, 2001 10.3 Letter of Intent, dated December 27, Incorporated by reference to 1999, by and between TSET, Inc. and Exhibit 10.3 to the Registration Electron Wind Technologies, Inc. Statement on Form S-1 filed on August 7, 2001 10.4 Agreement, dated February 5, 2000, by Incorporated by reference to and between DiAural, LLC and Exhibit 10.4 to the EdgeAudio, LLC Registration Statement on Form S-1 filed on August 7, 2001 10.5 Stock Purchase Agreement, dated March Incorporated by reference to 6, 2000, by and among TSET, Inc., Exhibit 10.5 to the Registration Atomic Soccer USA, Ltd., Todd P. Statement on Form S-1 filed on Ragsdale, James Eric Anderson, Jewel August 7, 2001 Anderson, Timothy Beglinger and Atomic Millennium Partners, LLC 10.6 Acquisition Agreement, dated March 13, Incorporated by reference to 2000, by and among TSET, Inc., High Exhibit 10.6 to the Registration Voltage Integrated, LLC, Ingrid Statement on Form S-1 filed on Fuhriman, Igor Krichtafovitch, Robert August 7, 2001 EXHIBIT NO. DESCRIPTION LOCATION - -------------------------------------------------------------------------------- L. Fuhriman and Alan Thompson 10.7 Letter of Intent, dated April 18, Incorporated by reference to 2000, by and between TSET, Inc. and Exhibit 10.7 to the Registration EdgeAudio.com, Inc. Statement on Form S-1 filed on August 7, 2001 10.8 Lease Agreement, dated May 3, 2000, Incorporated by reference to by and between Kronos Air Exhibit 10.8 to the Registration Technologies, Inc. and TIAA Realty, Statement on Form S-1 filed on Inc. August 7, 2001 10.9 Agreement and Plan of Reorganization, Incorporated by reference to dated May 4, 2000, by and among TSET, Exhibit 10.9 to the Registration Inc., EdgeAudio.com, Inc., LYNK Statement on Form S-1 filed on Enterprises, Inc., Robert Lightman, J. August 7, 2001 David Hogan, Eric Alexander and Eterna Internacional, S.A. de C.V. 10.10 Letter Agreement, dated May 4, 2000, Incorporated by reference to by and between TSET, Inc. and Cancer Exhibit 10.10 to the Detection International, LLC Registration Statement on Form S-1 filed on August 7, 2001 10.11 Employment Agreement, dated May 19, Incorporated by reference to 2000, by and between TSET, Inc. and Exhibit 10.11 to the Richard A. Papworth Registration Statement on Form S-1 filed on August 7, 2001 10.12 Finders Agreement, dated August 21, Incorporated by reference to 2000, by and among TSET, Inc., Exhibit 10.12 to the Richard F. Tusing and Registration Statement on Form Daniel R. Dwight S-1 filed on August 7, 2001 10.13 Contract Services Agreement, dated Incorporated by reference to June 27, 2000, by and between Chinook Exhibit 10.13 to the Technologies, Inc. and Kronos Air Registration Statement on Form Technologies, Inc. S-1 filed on August 7, 2001 10.14 Letter of Intent, dated July 17, 2000, Incorporated by reference to by and between Kronos Air 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 August 1, Incorporated by reference to 2000, by and among TSET, Inc., Richard Exhibit 10.15 to the F. Tusing and Daniel R. Dwight Registration Statement on Form S-1 filed on August 7, 2001 10.16 Preferred Stock Purchase Agreement, Incorporated by reference to dated September 12, 2000, by and Exhibit 10.16 to the between EdgeAudio.com, Inc. and Bryan Registration Statement on Form Holbrook S-1 filed on August 7, 2001 EXHIBIT NO. DESCRIPTION LOCATION - -------------------------------------------------------------------------------- 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 Enterprises, S-1 filed on August 7, 2001 Inc., Robert Lightman, J. David Hogan, Eric Alexander and Eterna Internacional, S.A. de C.V. 10.19 Agreement Regarding Sale of Preferred Incorporated by reference to Stock, dated November 1, 2000, by and Exhibit 10.19 to the between EdgeAudio.com, Inc. and Bryan Registration Statement on Form Holbrook S-1 filed on August 7, 2001 10.20 Amendment to Subcontract, dated Incorporated by reference to December 14, 2000, by and between Bath Exhibit 10.20 to the Iron Works and High Voltage Registration Statement on Integrated Form S-1 filed on August 7, 2001 10.21 Consulting Agreement, dated January 1, Incorporated by reference to 2001, by and between TSET, Inc. and Exhibit 10.21 to the Dwight, Tusing & Associates Registration Statement on Form S-1 filed on August 7, 2001 10.22 Employment Agreement, dated March 18, Incorporated by reference to 2001, by and between TSET, Inc. and Exhibit 10.22 to the Alex Chriss Registration Statement on Form S-1 filed on August 7, 2001 10.23 Stock Option Agreement, dated April 9, Incorporated by reference to 2001, by and between TSET, Inc. and Exhibit 10.23 to the Jeffrey D. Wilson Registration Statement on Form S-1 filed on August 7, 2001 10.24 Stock Option Agreement, dated April 9, Incorporated by reference to 2001, by and between TSET, Inc. and Exhibit 10.24 to the Jeffrey D. Wilson Registration Statement on Form S-1 filed on August 7, 2001 10.25 Stock Option Agreement, dated April 9, Incorporated by reference to 2001, by and between TSET, Inc. and Exhibit 10.25 to the Daniel R. Dwight Registration Statement on Form S-1 filed on August 7, 2001 10.26 Stock Option Agreement, dated April 9, Incorporated by reference to 2001, by and between TSET, Inc. and Exhibit 10.26 to the Richard F. Tusing Registration Statement on Form S-1 filed on August 7, 2001 10.27 Stock Option Agreement, dated April 9, Incorporated by reference to 2001, by and between TSET, Inc. and Exhibit 10.27 to the Charles D. Strang Registration Statement on Form S-1 filed on August 7, 2001 EXHIBIT NO. DESCRIPTION LOCATION - -------------------------------------------------------------------------------- 10.28 Stock Option Agreement, dated April 9, Incorporated by reference to 2001, by and between TSET, Inc. and Exhibit 10.28 to the Richard A. Papworth Registration Statement on Form S-1 filed on August 7, 2001 10.29 Stock Option Agreement, dated April 9, Incorporated by reference to 2001, by and between TSET, Inc. and Exhibit 10.29 to the Richard A. Papworth Registration Statement on Form S-1 filed on August 7, 2001 10.30 Stock Option Agreement, dated April 9, Incorporated by reference to 2001, by and between TSET, Inc. and Exhibit 10.30 to the Erik W. Black Registration Statement on Form S-1 filed on August 7, 2001 10.31 Stock Option Agreement, dated April 9, Incorporated by reference to 2001, by and between TSET, Inc. and J. Exhibit 10.31 to the Alexander Chriss Registration Statement on Form S-1 filed on August 7, 2001 10.32 Stock Option Agreement, dated April 9, Incorporated by reference to 2001, by and between TSET, Inc. and Exhibit 10.32 to the Charles H. Wellington Registration Statement on Form S-1 filed on August 7, 2001 10.33 Stock Option Agreement, dated April 9, Incorporated by reference to 2001, by and between TSET, Inc. and Exhibit 10.33 to the Igor Krichtafovitch Registration Statement on Form S-1 filed on August 7, 2001 10.34 Letter Agreement, dated April 10, Incorporated by reference to 2001, by and between TSET, Inc. and Exhibit 10.34 to the 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. and Exhibit 10.35 to the Daniel R. Dwight and Richard F. Registration Statement on Form 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. and Exhibit 10.36 to the Bernard Aronson, d/b/a Bolivar Registration Statement on Form International Inc. S-1 filed on August 7, 2001 10.37 Indemnification Agreement, dated Incorporated by reference to May 1, 2001, by and between TSET, Inc. Exhibit 10.37 to the 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, Inc. Exhibit 10.38 to the and Daniel R. Dwight Registration Statement on Form S-1 filed on August 7, 2001 EXHIBIT NO. DESCRIPTION LOCATION - -------------------------------------------------------------------------------- 10.39 Indemnification Agreement, dated May Incorporated by reference to 1, 2001, by and between TSET, Inc. and Exhibit 10.39 to the Richard F. Tusing Registration Statement on Form S-1 filed on August 7, 2001 10.40 Indemnification Agreement, dated May Incorporated by reference to 1, 2001, by and between TSET, Inc. and Exhibit 10.40 to the Charles D. Strang Registration Statement on Form S-1 filed on August 7, 2001 10.41 Indemnification Agreement, dated May Incorporated by reference to 1, 2001, by and between TSET, Inc. and Exhibit 10.41 to the Richard A. Papworth Registration Statement on Form S-1 filed on August 7, 2001 10.42 Indemnification Agreement, dated May Incorporated by reference to 1, 2001, by and between TSET, Inc. and Exhibit 10.42 to the Erik W. Black Registration Statement on Form S-1 filed on August 7, 2001 10.43 Stock Option Agreement, dated May 3, Incorporated by reference to 2001, by and between TSET, Inc. and Exhibit 10.43 to the Jeffrey D. Wilson Registration Statement on Form S-1 filed on August 7, 2001 10.44 Common Stock Purchase Agreement, dated Incorporated by reference to June 19, 2001, by and between TSET, Exhibit 10.44 to the Inc. and Fusion Capital Fund II, LLC Registration Statement on Form S-1 filed on August 7, 2001 10.45 Registration Rights Agreement, dated Incorporated by reference to June 19, 2001, by and between TSET, Exhibit 10.45 to the Inc. and Fusion Capital Fund II, LLC Registration Statement on Form S-1 filed on August 7, 2001 10.46 Mutual Release and Settlement Incorporated by reference to Agreement, dated July 7, 2001, by and Exhibit 10.46 to the between TSET, Inc. and Foster & Price Registration Statement on Form Ltd. S-1 filed on August 7, 2001 10.47 Letter Agreement, dated July 9, 2001, Incorporated by reference to by and between TSET, Inc. and The Exhibit 10.47 to 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. and Exhibit 10.48 to the 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. and Exhibit 10.49 to the The Eagle Rock Group, LLC Registration Statement on Form S-1 filed on August 7, 2001 EXHIBIT NO. DESCRIPTION LOCATION - -------------------------------------------------------------------------------- 10.50 Agreement and Release, dated October Incorporated by reference to 10, 2001, by and between TSET, Inc. Exhibit 10.50 to the 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, 2001 Incorporated by reference to payable to Mr. Jeffrey D. Wilson Exhibit 10.51 to the Registrant's Form 10-K for the year ended June 30, 2001 filed on October 15, 2001 10.52 Consulting Agreement, dated October Incorporated by reference to 10, 2001, by and between TSET, Inc. Exhibit 10.52 to the and Jeffrey D. Wilson Registrant's Form 10-K for the year ended June 30, 2001 filed on October 15, 2001 10.53 Consulting Agreement effective Incorporated by reference to October 1, 2001, by and among TSET, Exhibit 10.53 to the Inc., Steven G. Martin and Joshua Registrant's Form 10-Q for the B. Scheinfeld quarterly period ended December 31, 2001 filed on November 19, 2001 10.54 Letter Agreement dated November 13, Incorporated by reference to 2001 by and between TSET, Inc. and Exhibit 10.54 to the Fusion Capital Fund II, LLC Registrant's Form 10-Q for the quarterly period ended December 31, 2001 filed on November 19, 2001 10.55 Employment Agreement, effective Incorporated by reference to November 15, 2001 by and between Exhibit 10.55 to the TSET, Inc. and Daniel R. Dwight Registrant's 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 Fusion Exhibit 10.56 to the Capital Fund II, LLC Registrant's 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 between Exhibit 10.57 to the between TSET, Inc. and Fusion Registrant's Form S-1 Capital Fund II, LLC filed on August 13, 2002 10.58 Registration Rights Agreement, dated Incorporated by reference to August 12, 2002 by and between TSET, Exhibit 10.58 to the Inc. and Fusion Capital Fund II, LLC Registrant's Form S-1 filed on August 13, 2002 10.59 Termination Agreement, dated Incorporated by reference to August 12, 2002 by and between TSET, Exhibit 10.59 to the Inc. and Fusion Capital Fund II, LLC Registrant's Amendment No. 1 to Form S-1 filed on September 16, 2002 EXHIBIT NO. DESCRIPTION LOCATION - -------------------------------------------------------------------------------- 10.60 Master Loan and Investment Incorporated by reference to Agreement, dated May 9, 2003, the Registrant's 8-K filed on by and among Kronos Advanced May 15, 2003 Technologies, Inc., Kronos Air Technologies, Inc. and FKA Distributing Co. d/b/a HoMedics, Inc., a Michigan corporation ("HoMedics") 10.61 Secured Promissory Note, dated Incorporated by reference to May 9, 2003, in the principal Exhibit 99.2 to the Registrant's amount of $2,400,000 payable to 8-K filed on May 15, 2003 HoMedics 10.62 Secured Promissory Note, dated Incorporated by reference to May 9, 2003, in the principal Exhibit 99.4 to the Registrant's amount of $1,000,000 payable to 8-K filed on May 15, 2003 HoMedics 10.63 Security Agreement dated May 9, Incorporated by reference to 2003, by and among Kronos Air Exhibit 99.4 to the Registrant's Technologies, Inc. and HoMedics 8-K filed on May 15, 2003 10.64 Registration Rights Agreement, Incorporated by reference to dated May 9, 2003, by and between Exhibit 99.5 to the Registrant's Kronos and HoMedics 8-K filed on May 15, 2003 10.65 Warrant No. 1 dated May 9, 2003, Incorporated by reference to issued to HoMedics Exhibit 99.7 to the Registrant's 8-K filed on May 15, 2003 10.65 Warrant No. 2 dated May 9, 2003, Incorporated by reference to issued to HoMedics Exhibit 99.7 to the Registrant's 8-K filed on May 15, 2003 EXHIBIT NO. DESCRIPTION LOCATION - -------------------------------------------------------------------------------- 1.1 Statement re: Computation of Earnings Not applicable 12.1 Statement re: Computation of Ratios Not applicable 15.1 Letter re: Unaudited Interim Financial Not applicable Information 18.1 Letter re: Change in Accounting Not applicable Principals 24.1 Power of Attorney Not applicable 27.1 Financial Data Schedule Not applicable 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: May 15, 2003 KRONOS ADVANCED TECHNOLOGEIS, INC. By: /S/ DANIEL R. DWIGHT -------------------------- Daniel R. Dwight President and Chief Executive Officer By: /S/ RICHARD A. PAPWORTH -------------------------- Richard A. Papworth Chief Financial Officer 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 Kronos Advanced Technologies, Inc. (the "Company") on Form 10-QSB for the quarter ended March 31, 2003 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 CERTIFICATION PURSUANT TO SECTION 302 I, Daniel R. Dwight, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Kronos Advanced Technologies, 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 l3a-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: May 15, 2003 By: /S/ DANIEL R. DWIGHT ---------------------- Daniel R. Dwight Chief Executive Officer CERTIFICATION PURSUANT TO SECTION 302 I, Richard A. Papworth, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Kronos Advanced Technologies, 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: May 15, 2003 By: /S/ RICHARD A. PAPWORTH ----------------------------- Richard A. Papworth Chief Financial Officer and Principal Accounting Officer END OF FILING -----END PRIVACY-ENHANCED MESSAGE-----