U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2003
Commission file No.0-24511
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ADVANCED OPTICS ELECTRONICS, INC.
(Name of small business issuer as specified in its charter)
Nevada 88-0365136
(State of incorporation) (IRS Employer Identification No.)
8301 WASHINGTON NE, SUITE 5, ALBUQUERQUE, NEW MEXICO 87113
(Address of principal executive offices including zip code)
Issuer's telephone number: (505) 797-7878
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
---- ----
The number of issuer's shares of Common Stock outstanding as of June 30, 2003
was 1,624,832,960
Transitional Small Business Disclosure Format (check one): Yes No X
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PART I: FINANCIAL INFORMATION
ITEM 1: Financial Statements
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ADVANCED OPTICS ELECTRONICS, INC.
(A Development Stage Company)
CONDENSED BALANCE SHEET
June 30, 2003
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ASSETS
Current Assets
Cash $ 188,373
---------------
Costs and estimated earnings in excess of billings on
uncompleted contract 2,090,442
Allowance for loss on contract (1,255,000)
---------------
835,442
Other current assets 36,833
---------------
Total current assets 1,060,648
Property and Equipment, at cost 426,683
Less accumulated depreciation 338,115
---------------
Property and Equipment, net 88,568
Other Assets
Intangible assets, net 7,074
Patents, net 1
Investment in Biomoda, Inc. 42,565
Notes receivable from related parties 201,652
---------------
251,292
$ 1,400,508
===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable $ 125,973
Accrued expenses 13,114
Accrued interest 163,215
Notes payable 5,347
Convertible debentures 1,138,805
---------------
Total current liabilities 1,446,454
---------------
Commitments and Contingencies
Stockholders' Deficit
Preferred stock, $0.001 par value, 10,000,000 shares
authorized; no shares issued and outstanding -
Common stock, $0.001 par value, 1,950,000,000 shares
authorized; 1,624,832,960 shares issued and outstanding 1,624,833
Treasury stock, at cost (6,634)
Notes receivable officer (317,203)
Additional paid in capital 10,239,071
Deficit accumulated during the development stage (11,586,013)
---------------
Total stockholders' deficit (45,946)
---------------
$ 1,400,508
===============
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Page 2 See accompanying notes to these condensed financial statements.
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ADVANCED OPTICS ELECTRONICS, INC.
(A Development Stage Company)
CONDENSED STATEMENTS OF OPERATIONS
For the Three Month Periods Ended June 30, 2003 and 2002
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2003 2002
--------------- --------------
CONTRACT REVENUES $ - $ -
OPERATING EXPENSES
General and administrative (255,587) (95,251)
Research and development (21,462) (22,908)
Asset impairment - -
--------------- --------------
(277,049) (118,159)
ESTIMATED LOSS ON CONTRACT - (185,000)
--------------- --------------
OPERATING LOSS (277,049) (303,159)
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OTHER (EXPENSE) INCOME
Interest income 7,840 3,523
Gain (loss) on marketable equity securities - -
Other investment gains - -
Loss from investment in Biomoda, Inc. (20,966) (7,103)
Gain (loss) on disposal of assets - -
Interest expense (20,546) (21,338)
--------------- --------------
(33,672) (24,918)
--------------- --------------
NET LOSS BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE (310,721) (328,077)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE - -
--------------- --------------
NET LOSS $ (310,721) $ (328,077)
=============== ==============
Basic and diluted net loss before cumulative effect of
change in accounting principle available to common
shareholder per common share - -
Cumulative effect of change in accounting principle - -
--------------- --------------
Basic and diluted net loss available to common - -
shareholder per common share =============== ==============
Basic and diluted weighted average common shares
outstanding 1,222,227,575 147,536,223
=============== ==============
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Page 3 See accompanying notes to these condensed financial statements.
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ADVANCED OPTICS ELECTRONICS, INC.
(A Development Stage Company)
CONDENSED STATEMENTS OF OPERATIONS
For the Six Month Periods Ended June 30, 2003 and 2002 and For The Period
From May 22, 1996 (Inception) Through June 30, 2003
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May 22, 1996
(Inception)
Through
June 30,
2003 2002 2003
-------------- -------------- --------------
CONTRACT REVENUES $ - $ - $ -
OPERATING EXPENSES
General and administrative (591,506) (460,365) (7,403,600)
Research and development (35,011) (46,509) (1,367,084)
Asset impairment - (227,570)
-------------- -------------- --------------
(626,517) (506,874) (8,998,254)
ESTIMATED LOSS ON CONTRACT (50,000) (185,000) (1,255,000)
-------------- -------------- --------------
OPERATING LOSS (676,517) (691,874) (10,253,254)
-------------- -------------- --------------
OTHER (EXPENSE) INCOME
Interest income 11,960 8,227 83,342
Gain (loss) on marketable equity securities - - (29,368)
Other investment gains - - 59,784
Loss from investment in Biomoda, Inc. (22,600) (7,103) (312,350)
Gain (loss) on disposal of assets - 10,000 (4,306)
Interest expense (22,772) (55,388) (1,066,841)
-------------- -------------- --------------
(33,412) (44,264) (1,269,739)
-------------- -------------- --------------
NET LOSS BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE (709,929) (736,138) (11,522,993)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE - - (63,020)
-------------- -------------- --------------
NET LOSS $ (709,929) $ (736,138) $(11,586,013)
============== ============== ==============
Basic and diluted net loss before cumulative effect of
change in accounting principle available to common
shareholder per common share - $ (0.010) $ (0.070)
Cumulative effect of change in accounting principle - - -
-------------- -------------- --------------
Basic and diluted net loss available to common
shareholder per common share - $ (0.010) $ (0.070)
============== ============== ==============
Basic and diluted weighted average common shares
outstanding 1,006,650,730 124,636,280 173,177,853
============== ============== ==============
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Page 4 See accompanying notes to these condensed financial statements.
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ADVANCED OPTICS ELECTRONICS, INC.
(A Development Stage Company)
CONDENSED STATEMENTS OF CASH FLOWS
For The Six Month Periods Ended June 30, 2003 and 2002 and For the Period
From May 22, 1996 (Inception) Through June 30, 2003
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May 22, 1996
(Inception)
Through
June 30,
2003 2002 2003
-------------- -------------- --------------
Cash flows from operating activities:
Net loss $ (709,929) $ (736,138) $(11,586,013)
Adjustments to reconcile net loss to net cash
used in operating activities:
Intrinsic value of conversion features - - 610,603
Write off of organization costs - - 63,020
Amortization of discount on convertible notes and
preferred stock - - 295,209
Loss on marketable securities - - 29,368
Loss (gain) on disposal of assets - (10,000) 4,306
Loss on investment in Biomoda, Inc. 22,600 7,103 312,350
Issuance of common stock for services 335,026 285,320 4,752,877
Issuance of notes payable for services - - 50,000
Increase in excess of costs and earnings over
billings on uncompleted contract (210,093) (164,186) (2,090,442)
Increase in allowance for loss on contract 50,000 185,000 1,255,000
Interest accrued on convertible debentures - 57,002 228,446
Interest earned on note receivable from stockholder
and related parties (8,301) - (23,727)
Depreciation and amortization 45,016 46,244 582,976
Bad debt expense - - 15,000
Asset impairment - - 227,570
Other non-cash expenses - - 132,119
Accrued interest - - 30,667
Changes in operating assets and liabilities:
Increase in other current assets - (8,223) (36,833)
Decrease in inventory - - -
Increase in accounts payable and accrued expenses (193,693) 67,010 302,302
-------------- -------------- --------------
Net cash used in operating activities (669,374) (270,868) (4,845,202)
-------------- -------------- --------------
Cash flows from investing activities:
Purchases of property and equipment - - (389,832)
Proceeds from sale of property and equipment - 10,000 23,800
Investment in Biomoda, Inc. - - (383,845)
Proceeds from sale of Biomoda, Inc. stock - 11,250 28,930
Advances to Biomoda, Inc. (163,220) (5,050) (201,652)
Sale of marketable securities - - 40,665
Purchases of marketable securities - - (70,034)
Decrease in certificates of deposit - - -
Purchase of other assets - - (245,579)
-------------- -------------- --------------
Net cash used in investing activities (163,220) 16,200 (1,197,547)
-------------- -------------- --------------
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Page 5 See accompanying notes to these condensed financial statements.
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ADVANCED OPTICS ELECTRONICS, INC.
(A Development Stage Company)
CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED)
For The Six Month Periods Ended June 30, 2003 and 2002 and For the Period
From May 22, 1996 (Inception) Through June 30, 2003
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Cash flows from financing activities:
Principal repayments on notes payable and
capital leases (32,763) - (264,640)
Proceeds from notes payable - (5,383) 622,776
Issuance of common stock for cash 1,020,372 180,432 5,194,244
Increase in notes receivable stockholder - - (317,203)
Proceeds from sale of treasury stock - 6,679 120,606
Purchase of treasury stock - (7,305) (154,710)
Proceeds from issuance of convertible debt - - 1,060,000
Principal repayments on convertible debt (16,500) - (29,951)
-------------- -------------- --------------
Net cash provided by financing activities 971,109 174,423 6,231,122
-------------- -------------- --------------
Net increase in cash 138,515 (80,245) 188,373
Cash at beginning of period 49,858 90,863 -
-------------- -------------- --------------
Cash at end of period $ 188,373 $ 10,618 $ 188,373
============== ============== ==============
See accompanying notes to the financial statements for additional information relating to non-cash investing and financing
activities during the three month period ended June 30, 2003.
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Page 6 See accompanying notes to these condensed financial statements.
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ADVANCED OPTICS ELECTRONICS, INC.
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
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MANAGEMENTS REPRESENTATION:
The management of Advanced Optics Electronics, Inc. (the "Company") without
audit has prepared the condensed financial statements included herein. The
accompanying unaudited condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information. Certain information and note
disclosures normally included in the condensed financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been omitted. In the opinion of the management of the Company, all
adjustments considered necessary for fair presentation of the condensed
financial statements have been included and were of a normal recurring nature,
and the accompanying condensed financial statements present fairly the financial
position as of June 30, 2003, and the results of operations for the six months
and three months ended June 30, 2003 and 2002 and cash flows for the six months
ended June 30, 2003 and 2002.
It is suggested that these condensed financial statements be read in conjunction
with the audited financial statements and notes for the year ended December 31,
2002, included in the Company's Form 10-KSB filed with the Securities and
Exchange Commission on March 31, 2003. The interim results are not necessarily
indicative of the results for a full year.
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS
Advanced Optics Electronics, Inc. (the "Company") is a development stage
technology company with its principal focus on the development and production of
large-scale flat panel displays and trades on the OTC Bulletin Board under the
symbol "ADOT.OB." The market for the large-scale flat panel displays will
include advertising billboards, flat panel computer monitors and cockpit
displays. The Company plans to focus on producing and selling the large-scale
flat panel displays for outdoor advertising billboards.
The Company has obtained a contract to produce two outdoor advertising
billboards using its flat panel display technology. This is the first commercial
application of the Company's technology. The success of the Company will depend
on its ability to commercialize its technology, complete this contract and
obtain additional contracts. As of June 30, 2003, completion of this contract
was behind schedule.
While management believes the contract will ultimately be completed, there can
be no certainty that this will be accomplished because the technology has not
yet been used in a commercial application. In addition, the Company may be
required to obtain additional capital in order to fund the completion of the
contract.
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Page 7
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ADVANCED OPTICS ELECTRONICS, INC.
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
ORGANIZATION AND NATURE OF OPERATIONS (continued)
Since inception, the Company has primarily been engaged in the research and
development of its product. Once the research and development is complete, the
Company will begin to manufacture and obtain new contracts. The Company is in
the development stage and has not generated revenues from any product sales. The
Company believes that its planned products will produce sufficient revenues in
the future. There are no assurances, however, that the Company will be able to
produce such products, or if produced, that they will be accepted in the market
place.
DEVELOPMENT STAGE AND GOING CONCERN
The Company has been in the development stage since its inception on May 22,
1996, and has not generated any revenues from operations and there is no
assurance of any future revenues.
The Company will require substantial additional funding for continuing research
and development, obtaining acceptance in the market place and for the
commercialization of its product. There can be no assurance that the Company
will be able to obtain sufficient additional funds when needed, or that such
funds, if available, will be obtainable on terms satisfactory to the Company.
Management has taken action to address these matters. They include:
o Retention of experienced management personnel with particular skills in
the development and commercialization of such product.
o The Company is aggressively seeking new contracts.
o The Company has an equity method investment in a start-up company,
which management hopes will be profitable.
o The Company is seeking investment capital through the public markets.
Management plans to obtain revenues from product sales, but there is no
commitment by any persons for purchases of any of the proposed products. In the
absence of significant sales and profits, the Company may seek to raise
additional funds to match its working capital requirements through the
additional sales of debt and equity securities, there is no assurance that the
Company will be able to obtain sufficient additional funds when needed, although
such funds, if available, will be obtainable on terms satisfactory to the
Company. The successful outcome of future activities cannot be determined at
this time and there is no assurance that if achieved, the Company will have
sufficient funds to execute its intended business plan or generate positive
operating results.
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Page 8
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ADVANCED OPTICS ELECTRONICS, INC.
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
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1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
DEVELOPMENT STAGE AND GOING CONCERN (continued)
As a result, the accompanying financial statements have been prepared assuming
the Company will continue as a going concern, which contemplates, among other
things, the realization of assets and satisfaction of liabilities in the normal
course of business. As of June 30, 2003, the Company has negative working
capital of $385,806, a deficit accumulated during the development stage of
$11,586,013, losses from operations and lack of operational history, among other
matters, which raise substantial doubt about its ability to continue as a going
concern.
The condensed financial statements do not include any adjustments related to
recoverability and classification of assets carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting Standards No. 128
("SFAS 128"), "Earnings Per Share." Under SFAS 128, basic earnings per share is
computed by dividing income available to common stockholders by the weighted
average number of shares assumed to be outstanding during the period of
computation. Diluted earnings per share is computed similar to basic earnings
per share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the potential
common shares had been issued and if the additional common shares were dilutive
(no shares as of June 30, 2003 and 2002). Because the Company has incurred a net
loss in the six month and three month periods ended June 30, 2003 and 2002,
basic and diluted loss per share are the same as additional potential common
shares would be anti-dilutive.
STOCK BASED COMPENSATION
At June 30, 2003, the Company has two stock-based employee compensation plans.
The Company accounts for those plans under the recognition and measurement
principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"), and related Interpretations.
No stock-based employee compensation cost is reflected in net loss, as all
options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share if the Company had
applied the fair value recognition provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," as
amended to stock-based employee compensation.
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Page 9
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ADVANCED OPTICS ELECTRONICS, INC.
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
STOCK BASED COMPENSATION (continued)
2003 2002
-------------- --------------
Net loss:
As reported $ (709,929) $ (736,138)
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards - (50,000)
---------------- ---------------
Pro forma $ (709,929) $ (786,138)
================ ===============
Basic and diluted net loss per share:
As reported $ - $ (0.07)
================ ===============
Pro forma $ - $ (0.07)
================ ===============
RECENT ACCOUNTING STANDARDS
Recent accounting pronouncements discussed in the notes to the December 31, 2002
audited financial statements, filed previously with the Securities and Exchange
Commission in form 10-KSB, that were required to be adopted during the year
ending December 31, 2003 did not have a significant impact on the Company's
financial statements.
2. STOCKHOLDERS' EQUITY
COMMON STOCK
On June 19, 2003, the Company's Board of Directors authorized the change in the
total number of common shares which the Company is authorized to issue from the
current authorized of 1,500,000,000 to 1,950,000,000 common shares.
During the three month period ended June 30, 2003, the Company sold 516,430,000
shares of common stock for approximately $550,000 in cash; all shares were sold
for less than $0.01.
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Page 10
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ADVANCED OPTICS ELECTRONICS, INC.
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. STOCKHOLDERS' EQUITY (continued)
COMMON STOCK (continued)
During the three month period ended June 30, 2003, the Company issued
106,000,000 shares of common stock for services, which were valued at
approximately $125,000 (based on the closing market price on the date of grant,
which was less than $0.01). The Company recorded such amounts in the
accompanying statement of operations.
During the three month period ended June 30, 2003, in accordance with the
applicable convertible note payable agreement, the Company issued 65,600,000
shares of common stock at conversion prices of less than $0.01 in connection
with the conversion of notes payable of approximately $63,000, including
approximately $17,000 of accrued interest.
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Page 11
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
Forward - Looking Statements
- ----------------------------
This Quarterly Report contains forward-looking statements about the business,
financial condition and prospects of the Company that reflect assumptions made
by management and management's beliefs based on information currently available
to it. The Company can give no assurance that the expectations indicated by such
forward-looking statements will be realized. If any of management's assumptions
should prove incorrect, or if any of the risks and uncertainties underlying such
expectations should materialize, the Company's actual results may differ
materially from those indicated by the forward-looking statements.
The key factors that are not within the Company's control and that may have a
direct bearing on operating results include, but are not limited to, the
acceptance by customers of the Company's products, the Company's ability to
develop new products cost-effectively, the ability of the Company to raise
capital in the future, the development by competitors of products using improved
or alternative technology, the retention of key employees and general economic
conditions.
There may be other risks and circumstances that management is unable to predict.
When used in this Quarterly Report, words such as, "believes," "expects,"
"intends," "plans," "anticipates" "estimates" and similar expressions are
intended to identify forward-looking statements, although there may be certain
forward-looking statements not accompanied by such expressions. All
forward-looking statements are intended to be covered by the safe harbor created
by Section 21E of the Securities Exchange Act of 1934.
OVERVIEW
Advanced Optics Electronics, Inc. is a technology company whose primary focus is
the development, production and sales of its electronic flat panel displays. The
primary initial product will be marketed to users of outdoor advertising
billboards. We believe that our product line has the potential to create a new
segment of the outdoor advertising industry. Our systems software and electronic
displays represent an innovative approach to advertising that takes advantage of
the technological convergence of broadcast and billboard media and the World
Wide Web.
Our goal is to create a product line based on technology that is scalable both
in terms of size and resolution to meet a wide range of requirements related to
site, economics and use from our potential customers. We are also planning to
develop a leasing program and an Owned & Operated group.
THE MAJOR ADVANTAGES AND FEATURES OF THE DISPLAY ARE:
o Brightest display ever available (35,000 nits)
o Widest viewing angle available
o Smallest dot pitch available for outdoor large-scale displays (8 mm
dot pitch)
o High definition picture quality
o Modular assembly (1 meter increments) for scaleable and shapeable
architectures
o True Color (24 bit)
o Full motion video (up to 120 frames per second)
o Transportable for mobile operations
o Weather resistant for outdoor applications
o Modest power requirements
o Minimum 5 year continual use lifetime
o Real-time live video feeds
o Broadcast/simulcast applications
o Supports streaming video
o Uses industry standard DVI protocol for high speed data linking and
digital video interfacing
o Satellite linkable
PROPRIETARY BILLBOARD SOFTWARE CAPABILITIES ARE:
o Manage and update display content remotely
o Works with all image file formats and digital video editors
o Secure Internet or WAN communications
o WEB-based status monitoring
o Provides time, temperature and other dynamic content inserts
The Company was organized as a Nevada corporation on May 22, 1996. On November
7, 1996, the Company acquired the business and patents of PLZTech, a company
involved in the development of flat panel displays. Our operating activities
have related primarily to the initial planning and development of our product
and building our operating infrastructure. We have completed, tested, and
measured the performance of, our prototype and are currently in the
manufacturing process of our production model.
We expect our principal source of revenue to be derived from sales of our
electronic display product. To date we have recognized limited revenue, but we
have developed a functioning prototype and we anticipate sales by the fourth
quarter 2003. The company has set the price for its units at $395,000 and
$1,490,000 respectively for its 2 meter x 3 meter and its 3 meter x 8 meter flat
panel displays.
The company has completed a marketing film that is being distributed on a
national and international basis. The recipients who receive this film are
institutional investors and qualified potential buyers of the flat panel
displays.
Our operating expenses have increased significantly since our inception. This is
due to increased engineering and management staff and investments in operating
infrastructure. Since our inception we have incurred significant losses and, as
of June 30, 2003, had a deficit accumulated during the development stage of
$11,586,013.
RESULTS OF OPERATIONS OF THE COMPANY
Due to our limited operating history, we believe that period-to-period
comparisons of our results of operations are not fully meaningful and should not
be relied upon as an indication of future performance.
Comparison of the Three-Month Periods Ended June 30, 2003 and 2002
- ------------------------------------------------------------------
Revenue. During the quarter ended March 31, 2001, the Company changed the
- --------
accounting for our contract to the completed contract method. According to this
way of accounting for contracts, we are booking no revenue until the completion
of the contract. Please note that the revenue for the period May 22, 1996
(Inception) Through June 30, 2003 has been restated and is now $0. Billings and
collections through June 30, 2003 have totaled $89,873.
Product Development. Product development expenses consist primarily of personnel
- --------------------
expenses, consulting fees and depreciation of the equipment associated with the
development and enhancement of our flat panel displays. Research development and
technical costs decreased slightly to $21,462 in the second quarter of 2003 from
$22,908 in the second quarter of 2002. Continued investment in product
development is critical to attaining our strategic objectives and, as such, we
expect product development expenses to increase significantly in future periods.
We expense product development costs as they are incurred.
General and Administrative. General and administrative expenses consist of
- ----------------------------
expenses for executive and administrative personnel, facilities, professional
services, travel, general corporate activities, and the depreciation and
amortization of office furniture and leasehold improvements. General and
administrative costs increased to $255,587 in the second quarter of 2003 from
$95,251 in the second quarter of 2002. We expect general and administrative
costs to increase in the future as our business prospects develop and we will
require more staff. The costs associated with being a publicly traded company
and future strategic acquisitions will also be a contributing factor to
increases in this expense.
Other Income (Expense). Other income (expense) consists of interest and other
- ------------------------
income and expense. Other income (expense), net increased to ($33,672) in the
second quarter of 2003 from ($24,918) in the second quarter of 2002 due
primarily to the impact of our investment in Biomoda. There was a larger loss on
our Biomoda Investment due to the increased activity at Biomoda and the related
increased expenses.
Comparison of the Six-Month Periods Ended June 30, 2003 and 2002
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Product Development. Product development expenses consist primarily of personnel
- --------------------
expenses, consulting fees and depreciation of the equipment associated with the
development and enhancement of our flat panel displays. Research development and
technical costs decreased to $35,011 in the first six months of 2003 from
$46,509 in the first six months of 2002. Continued investment in product
development is critical to attaining our strategic objectives and, as such, we
expect product development expenses to increase significantly in future periods.
We expense product development costs as they are incurred.
General and Administrative. General and administrative expenses consist of
- ----------------------------
expenses for executive and administrative personnel, facilities, professional
services, travel, general corporate activities, and the depreciation and
amortization of office furniture and leasehold improvements. General and
administrative costs increased to $591,506 in the first six months of 2003 from
$460,365 in the first six months of 2002. We expect general and administrative
costs to increase in the future as our business prospects develop and we will
require more staff. The costs associated with being a publicly traded company
and future strategic acquisitions will also be a contributing factor to
increases in this expense.
Other Income (Expense). Other income (expense) consists of interest and other
- ------------------------
income and expense. Other income (expense), net decreased to ($33,412) in the
second quarter of 2003 from ($44,264) in the second quarter of 2002 due
primarily to less interest expensed related to convertible debentures. There was
a larger loss on our Biomoda Investment due to the increased activity at Biomoda
and the related increased expenses.
Depreciation and amortization remained relatively constant at $45,016 in the
second quarter of 2003 and $46,244 in the second quarter of 2002.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have funded our operations primarily through the private
placement of equity securities and the issuance of convertible debentures. As of
June 30, 2003 we have raised net proceeds of approximately $7,000,000.
The cash balance at the end of the quarter of $188,373 represents approximately
two months of projected cash operating expenses.
We have also utilized equipment loans and capital lease financing. As of June
30, 2003 we have a balance of approximately $5,300 on the equipment loans. The
equipment loan was completely paid off with in the first two weeks of the third
quarter.
The Company's holding in Biomoda, Inc may provide additional liquidity. Biomoda
is a biomedical development company. The Company's ownership of Biomoda, as of
June 30, 2003 was approximately 15.9%.
The Company's relationship to its investment in Biomoda changed during the
second quarter of 2002. There is now an active leadership role in Biomoda being
provided by John Cousins and Leslie Robins, officers of the Company. The Company
has gone to the equity method of reporting its investment in Biomoda because of
these recent changes in the management relationship between the two companies.
Biomoda is currently in the process of raising capital by selling securities
under an SB2 that has been filed and declared effective by the Securities and
Exchange Commission. The SB2 was declared effective July 11, 2003.
Product development expenditures were $21,462 for the quarter ended June 30,
2003. Funds for operations, product development and capital expenditures were
provided from the sale of securities and cash reserves.
Management believes that sales of securities, cash reserves and contract revenue
will provide adequate liquidity and capital resources to meet the anticipated
development stage requirements through the end of the fourth quarter 2003. At
that time it is anticipated that sales of flat panel displays will begin and
contribute to operating revenues. It is anticipated that these sales will
provide the additional capital resources to fund the proportionately higher
working capital requirements of production and sales initiatives. The Company
currently has no other significant commitments for capital expenditures in 2003.
GOING CONCERN
The Company's independent certified public accountants have stated in their
report included in the Company's 2002 Form 10-KSB, that the Company has incurred
operating losses in the last two years, has a working capital deficit and a
stockholders' deficit. These conditions raise substantial doubt about the
Company's ability to continue as a going concern.
INFLATION
Management believes that inflation has not had a material effect on the
Company's results of operations.
CRITICAL ACCOUNTING POLICIES
In December 2001, the SEC requested that all registrants list their three to
five most "critical accounting policies" in the MD&A. The SEC indicated that a
"critical accounting policy" is one which is both important to the portrayal of
the Company's financial condition and results, and requires management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. We
believe that our following accounting policies fit this definition:
REVENUE RECOGNITION - In accordance with Statement of Position 81-1, "Accounting
for Performance of Construction-Type and Certain Production-Type Contracts," the
Company accounts for revenue and costs related to its long-term contract in
process by the completed-contract method, whereas during the period from May 22,
1996 (inception) to December 31, 1999, revenue and costs were determined by the
percentage-of-completion method. The completed-contract method of accounting was
adopted in 2000 due to the Company's uncertainty regarding contract cost
estimates. The financial statements of the period from May 22, 1996 (inception)
to December 31, 1999, were restated to apply the completed contract method
retroactively. The effect of the accounting change had no effect on net loss or
loss per share previously reported for 1999 or for the period from May 22, 1996
(inception) to December 31, 1999.
Under the completed contract method of accounting, contract revenues and costs
are recognized when the contract is completed, with estimated losses recognized
when it becomes evident that contract costs will exceed contract revenues.
Contract costs include all direct material and labor costs and those indirect
costs related to contract performance, such as indirect labor, supplies,
overhead, equipment depreciation and interest.
Costs in excess of amounts billed are classified as current assets under costs
and estimated earnings in excess of billings on uncompleted contract.
ESTIMATES - Critical estimates made by management are, among others, estimates
for current and deferred taxes, recoverability of intangible assets,
collectibility of contract receivable, estimation of costs for long-term
contracts, allowance for loss on contracts, recoverability of investment in
Biomoda, Inc. and the valuation of other assets. Actual results could materially
differ from those estimates.
ITEM 3. CONTROLS AND PROCEDURES
Within 90 days prior to this report, Management carried out an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures, pursuant to Exchange Act Rules 13a-15(c) and 15d-15(c). Based on
the foregoing, the Principal Executive Officer and Principal Financial Officer
concluded that, as of June 30, 2003, the Company's disclosure controls and
procedures are effective to timely alert them to any material information
relating to the Company that must be included in the Company's periodic SEC
filings. In addition, there have been no significant changes in the Company's
internal controls over financial reporting during the quarter ended June 30,
2003 or in other factors that are reasonably likely to significantly affect
these controls. Thus, no corrective actions with regard to significant
deficiencies or material weaknesses were necessary. Based on the most recent
evaluation as of June 30, 2003, the CEO and CFO have concluded that there are no
significant deficiencies in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the
Company's ability to record, process, summarize and report financial information
and such officers have identified no material weaknesses in internal control
over financial reporting.
Disclosure controls and procedures, no matter how well designed and implemented,
can provide only reasonable assurance of achieving an entity's disclosure
objectives. The likelihood of achieving such objectives is affected by
limitations inherent in disclosure controls and procedures. These include the
fact that human judgment in decision-making can be faulty and that breakdowns in
internal control can occur because of human failures such as simple errors or
mistakes or intentional circumvention of the established process.
PART II. OTHER INFORMATION
Item 1. Legal proceedings
The company may on occasion be a party to litigation involving claims made by or
against the Company arising in the ordinary course of business. The officers and
directors know of no legal proceedings pending or contemplated by any person,
entity or governmental authority which would have a material adverse effect on
the Company.
Item 2. Changes in securities
Common Stock
As of June 30, 2003, the status of the common stock of the Company was:
1,950,000,000 shares authorized and 1,624,832,960 shares issued and outstanding.
During the three month period ended June 30, 2003, the Company sold 516,430,000
shares of common stock for $552,142 in cash; all shares were sold for less than
$0.01.
During the three month period ended June 30, 2003, the Company issued
106,000,000 shares of common stock for services, which were valued at $123,655
(based on the closing market price on the date of grant, which was less than
$0.01).
During the period ended June 30, 2003, in accordance with the applicable
convertible note payable agreement, the Company issued 65,600,000 shares of
common stock at conversion prices of less than $0.01 in connection with the
conversion of notes payable of approximately $63,000, including approximately
$17,000 of accrued interest.
These transactions were exempt under Section 4(2) of the Securities Act of 1933,
as amended. The purchasers were well known to an executive officer of Advanced
Optics Electronics, Inc. and each had a net worth or income level to qualify as
accredited investors, were experienced in financial and business matters, and no
general solicitation was involved in the transaction.
Item 3. Defaults upon senior securities - Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of the Company's security holders
during the second quarter of fiscal year 2003.
Item 5. Other Information - Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification of CEO pursuant to Securities Exchange Act rules 13a-15 and
15d-15(c) as adopted pursuant to section 302 of the Sarbanes-Oxley act of
2002.
31.2 Certification of CFO pursuant to Securities Exchange Act rules 13a-15 and
15d-15(c) as adopted pursuant to section 302 of the Sarbanes-Oxley act of
2002.
32.1 Certification of Leslie S. Robins, Chief Executive Officer pursuant to
18 U.S.C. section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley act of 2002.
32.2 Certification of John J. Cousins, Chief Financial Officer (Principal
Accounting Officer) pursuant to 18 U.S.C. section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley act of 2002.
(a) Reports on Form 8-K
No reports on Form 8-K was filed during the second quarter of 2003.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report on Form 10QSB to be signed on its behalf by the undersigned,
thereunto duly authorized.
DATED: AUGUST 14, 2003
ADVANCED OPTICS ELECTRONICS, INC.
BY:/s/John J. Cousins
-------------------
John J. Cousins
Vice President of Finance
(Principal Accounting Officer)
BY:/s/Leslie S. Robins
--------------------
Leslie S. Robins
Executive Vice President
(Principal Executive Officer)