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, 2004
Commission file No.0-24511
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, 2004 was 2,939,936,349
Transitional Small Business Disclosure Format (check one): Yes __ No X
---
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, 2004
- --------------------------------------------------------------------------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash 1,521,486
Costs in excess of billings on uncompleted contract, net 795,000
Marketable securities 77,051
Other current assets 37,110
------------
Total current assets 2,430,647
PROPERTY AND EQUIPMENT, NET 103,784
OTHER ASSETS
Investment in and advances to Biomoda, Inc. 605,082
Investment in GenoMed, Inc. 900,000
Notes receivable 63,500
------------
TOTAL ASSETS $ 4,103,013
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable 106,784
Accrued expenses 80,707
Convertible debentures 102,977
------------
Total current liabilities 290,468
------------
COMMITMENTS AND CONTINGENCIES --
STOCKHOLDERS' EQUITY
Preferred stock, $0.001 par value, 10,000,000 shares
authorized; no shares issued and outstanding --
Common stock, $0.001 par value, 2,950,000,000 shares
authorized; 2,939,936,349 shares issued and outstanding 2,939,936
Treasury stock, at cost (50,274)
Notes receivable from officer (67,299)
Additional paid in capital 17,074,771
Accumulated other comprehensive income (loss) (38,894)
Deficit accumulated during the development stage (16,045,695)
------------
Total stockholders' equity 3,812,545
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,103,013
============
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Page F-1 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, 2004 and 2003
- --------------------------------------------------------------------------------
(UNAUDITED)
2004 2003
--------------- ---------------
CONTRACT REVENUES $ -- $ --
--------------- ---------------
OPERATING EXPENSES
General and administrative (438,497) (255,587)
Payroll and related (259,657) --
Research and development (107,977) (21,462)
Asset impairment -- --
--------------- ---------------
(806,131) (277,049)
ESTIMATED LOSS ON CONTRACT (34,610) --
--------------- ---------------
OPERATING LOSS (840,741) (277,049)
--------------- ---------------
OTHER INCOME (EXPENSE)
Interest income 6,788 7,840
Gain (loss) on marketable equity securities 703 --
Other investment gains -- --
Equity in losses in Biomoda, Inc. (35,098) (20,966)
Loss on disposal of assets -- --
Gain on extinguishment of debt -- --
Interest expense (46) (20,546)
--------------- ---------------
(27,653) (33,672)
--------------- ---------------
NET LOSS BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE (868,394) (310,721)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE -- --
--------------- ---------------
NET LOSS $ (868,394) $ (310,721)
=============== ===============
BASIC AND DILUTED NET LOSS AVAILABLE TO
COMMON SHAREHOLDER PER COMMON SHARE $ -- $ --
=============== ===============
BASIC AND DILUTED WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 2,933,421,132 1,222,227,575
=============== ===============
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Page F-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 Six Month Periods Ended June 30, 2004 and 2003 and for the Period
May 22, 1996 (Inception) Through June 30, 2004
- --------------------------------------------------------------------------------
(UNAUDITED)
May 22, 1996
(Inception)
Through
June 30,
2004 2003 2004
------------- ------------- ------------
CONTRACT REVENUES $ -- $ -- $ --
------------- ------------- ------------
OPERATING EXPENSES
General and administrative (943,825) (591,506) (10,096,283)
Payroll and related (435,261) -- (1,270,417)
Research and development (215,884) (35,011) (1,608,795)
Asset impairment -- -- (227,570)
------------- ------------- ------------
(1,594,970) (626,517) (13,203,065)
ESTIMATED LOSS ON CONTRACT (82,073) (50,000) (1,337,073)
------------- ------------- ------------
OPERATING LOSS (1,677,043) (676,517) (14,540,138)
------------- ------------- ------------
OTHER INCOME (EXPENSE)
Interest income 12,993 11,960 95,362
Gain (loss) on marketable equity securities 17,747 -- (11,621)
Other investment gains -- -- 59,784
Equity in losses in Biomoda, Inc. (63,617) (22,600) (402,915)
Loss on disposal of assets -- -- (4,306)
Gain on extinguishment of debt -- -- 40,171
Interest expense (9,697) (22,772) (1,219,012)
------------- ------------- ------------
(42,574) (33,412) (1,442,537)
------------- ------------- ------------
NET LOSS BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE (1,719,617) (709,929) (15,982,675)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE -- -- (63,020)
------------- ------------- ------------
NET LOSS $ (1,719,617) $ (709,929) $(16,045,695)
============= ============= ============
BASIC AND DILUTED NET LOSS AVAILABLE TO
COMMON SHAREHOLDER PER COMMON SHARE $ (0.00) $ (0.00)
============= =============
BASIC AND DILUTED WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 2,887,373,986 1,006,650,730
============= =============
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Page F-3 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, 2004 and 2003 and for the Period
May 22, 1996 (Inception) Through June 30, 2004
- --------------------------------------------------------------------------------
(UNAUDITED)
May 22, 1996
(Inception)
Through
June 30,
2004 2003 2004
------------ ------------ ------------
Cash flows from operating activities:
Net loss $ (1,719,617) $ (709,929) $(16,045,695)
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
(Gain) loss on marketable securities (17,747) -- 11,621
Gain on disposal of assets -- -- 4,306
Loss on investment in Biomoda, Inc. 63,617 1,634 402,915
Issuance of common stock for services 334,992 211,371 6,584,938
Issuance of notes payable for services -- -- 50,000
Increase in allowance for loss on contract 47,463 50,000 1,302,463
Gain on extinguishment of debt -- -- (40,170)
Interest earned on note receivable from stockholder and
related parties -- (4,120) (17,823)
Depreciation and amortization 21,876 21,835 633,440
Bad debt expense -- -- 15,000
Asset impairment -- -- 227,570
Other non-cash expenses -- -- 33,447
Accrued interest (2,903) -- 337,268
Changes in operating assets and liabilities:
Decrease in other current assets 3,328 -- (71,595)
Increase in excess of costs and earnings over billings
on uncompleted contract (47,463) (110,503) (2,097,463)
(Decrease) increase in accounts payable and accrued expenses (94,545) (102,478) 159,599
------------ ------------ ------------
Net cash used in operating activities (1,410,999) (642,190) (7,541,347)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (8,909) -- (463,846)
Proceeds from sale of property and equipment -- -- 23,800
Investment in Biomoda, Inc. -- -- (383,845)
Proceeds from sale of Biomoda, Inc. stock -- -- 28,930
Repayments on advances to Biomoda, Inc. -- -- --
Advances to Biomoda, Inc. (333,724) (11,458) (650,179)
Investment in GenoMed, Inc. (900,000) -- (900,000)
Sale of marketable securities 156,859 -- 197,524
Purchases of marketable securities (215,757) -- (325,091)
Increase in notes receivable -- -- (35,000)
Purchase of other assets -- -- (245,579)
------------ ------------ ------------
Net cash used in investing activities (1,301,531) (11,458) (2,753,286)
------------ ------------ ------------
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Page F-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, 2004 and 2003 and for the Period
May 22, 1996 (Inception) Through June 30, 2004
- --------------------------------------------------------------------------------
(UNAUDITED)
May 22, 1996
(Inception)
Through
June 30,
2004 2003 2004
------------ ------------ ------------
Cash flows from financing activities:
Principal repayments on notes payable and capital leases -- (27,958) (269,987)
Proceeds from notes payable -- -- 622,776
Issuance of common stock for cash 455,511 468,230 10,660,198
(Increase) decrease in note receivable officer -- -- (5,422)
(Increase) decrease in note receivable related party (28,500) -- (28,500)
Proceeds from sale of treasury stock 7,686 -- 184,845
Purchase of treasury stock (6,543) -- (223,196)
Proceeds from issuance of convertible debt -- -- 1,270,965
Principal repayments on convertible debt (154,000) (9,000) (395,560)
------------ ------------ ------------
Net cash provided by financing activities 274,154 431,272 11,816,119
------------ ------------ ------------
Net (decrease) increase in cash (2,438,376) (222,376) 1,521,486
Cash at beginning of period 3,959,862 49,858 --
------------ ------------ ------------
Cash at end of period $ 1,521,486 $ (172,518) $ 1,521,486
============ ============ ============
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Page F-5 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
(UNAUDITED)
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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 financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been omitted. In the opinion of management, 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, 2004,
and the results of operations and cash flows for the three month periods ended
June 30, 2004 and 2003.
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,
2003, included in the Company's Form 10-KSB filed with the Securities and
Exchange Commission. The interim results are not necessarily indicative of the
results for a full year.
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
- -------------------------------------
The Company is a development stage technology company with its principal focus
on the development and production of large-scale flat panel displays. The
Company trades on the Over The Counter Bulletin Board under the symbol "ADOT."
The market for the large-scale flat panel displays includes advertising
billboards, flat panel computer monitors and cockpit displays. The Company plans
to focus on producing and selling the large-scale flat panel displays primarily
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. While management believes this 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 need to obtain additional capital in
order to fund the completion of the contract.
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Page F-6
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ADVANCED OPTICS ELECTRONICS, INC.
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Organization and Nature of Operations (Continued)
- -------------------------------------------------
Since May 22, 1996 ("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
- -----------------
The Company has been in the development stage since Inception, and has not
generated any revenues from operations and there is no assurance of any future
revenues.
The Company may require 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, which include:
o Retention of experienced management personnel with particular skills
in the development and commercialization of such product.
o The Company is seeking new contracts.
o The Company has an equity method investment in a start-up company,
which management hopes will be profitable (see Note 2).
o The Company has a cost method investment in a development stage
company, which management expects will be profitable (see Note 3).
Management plans to obtain revenues from product sales, but there are no
significant commitments 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, and 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 F-7
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ADVANCED OPTICS ELECTRONICS, INC.
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Development Stage (Continued)
- -----------------------------
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, 2004, the Company has positive working capital
approximating $2,140,000 including approximately $1,521,000 of cash. Management
believes that such cash balance will be sufficient to satisfy working capital
needs through December 31, 2004.
Stock Based Compensation
- ------------------------
At June 30, 2004, the Company has one stock-based employee compensation plan
(the "Plan"). The Company accounts for the Plan under the recognition and
measurement principles of APB 25, and related interpretation. No stock-based
compensation cost is recognized in net loss due to all options issued to
employees were at market value or all intrinsic value has been expensed in prior
periods. Stock options granted under the Plan have exercise prices equal to the
market value of the underlying common stock on the dates of grant. The following
table illustrates the effect on net income and loss per share if the Company had
applied the fair value recognition provisions of SFAS 123 to stock-based
employee compensation.
Three Months Six Months Ended
Ended June 30, June 30,
2004 2003 2004 2003
----------- ----------- ----------- ---------
Net loss:
As reported $ (868,394) $ (310,721) $(1,719,617) $(709,929)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards -- -- -- --
Pro forma $ (868,394) $ (310,721) $(1,719,619) $(709,929)
=========== =========== =========== =========
Basic and diluted net loss per share:
As reported $ -- $ -- $ -- $ --
=========== =========== =========== =========
Pro forma $ -- $ -- $ -- $ --
=========== =========== =========== =========
The above pro forma effects of applying SFAS 123 are not necessarily
representative of the impact on reported net loss for future years.
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Page F-8
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ADVANCED OPTICS ELECTRONICS, INC.
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Marketable Securities
- ---------------------
The Company classifies its investments in marketable securities as
"available-for sale" in accordance with the provisions of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." The Company does not have any investments classified as
"trading" or "held to maturity".
Available-for-sale securities consist of equity securities in GenoMed (Note 3)
and are carried at fair value with the unrealized gain or loss, net of tax,
reported in accumulated other comprehensive income. The fair value of marketable
securities was determined based on available market information. During the
quarter ended June 30, 2004, the Company purchased securities approximating
$216,000 and sold securities approximating $157,000, realizing a net gain
approximating $18,000 upon sale.
Revenue Recognition
- -------------------
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin 101 ("SAB 101"), "Revenue Recognition," which outlines the basic
criteria that must be met to recognize revenue and provides guidance for
presentation of revenue and for disclosure related to revenue recognition
policies in financial statements filed with the Securities and Exchange
Commission. As the Company accounts for long-term contracts in accordance to
Statements of Position ("SOP") 81-1 (see below), management believes that the
Company's revenue recognition policy conforms to SAB 101.
In accordance with SOP 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 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 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 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.
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Page F-9
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ADVANCED OPTICS ELECTRONICS, INC.
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue Recognition (Continued)
- -------------------------------
The contract to produce two outdoor advertising billboards totals $1.7 million,
with $885,000 assigned to the first unit. An estimated loss of approximately
$1,300,000 from production of the first unit has been recognized through June
30, 2004, which includes a current quarter loss approximating $50,000. The
Company's estimated cost to complete, as of June 30, 2004 is $200,000, which is
expected to be funded with cash, billings on the contract and proceeds from the
issuance of the Company's common stock. Per the agreement, the first unit is not
to exceed $885,000, of which $90,000 has been billed and collected in prior
periods. Therefore, all additional costs to complete will be expensed as
incurred.
The anticipated delivery date of the first unit is in November 2004.
Unanticipated delays have postponed delivery resulting in an amended delivery
date. During the contract period, the Company is entitled to bill the customer
as the following milestones are met:
Completion of board design $ 65,000
Production 265,000
Completion 265,000
Acceptance after installation 290,000
--------
$885,000
========
Adjustments to the original estimates of total contract revenues, total contract
costs and the extent of progress toward completion are often required as work
progresses under the contract, and as experience is gained, even though the
scope of the work may not change. The nature of accounting for contracts is such
that refinements of the estimating process for continuously changing conditions
and new developments are a characteristic of the process. Accordingly,
provisions for losses on contracts are made in the period in which they become
evident under the completed-contract method. It is at least reasonably possible
that the estimate of completion costs for this contract will be further revised
in the near-term.
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Page F-10
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ADVANCED OPTICS ELECTRONICS, INC.
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Significant Recent Accounting Standards
- ---------------------------------------
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities, an Interpretation of ARB 51." The primary objectives of FIN No. 46 are
to provide guidance on the identification of entities for which control is
achieved through means other than voting rights (variable interest entities or
"VIEs") and how to determine when and which business enterprise should
consolidate the VIE. This new model for consolidation applies to an entity for
which either: (1) the equity investors do not have a controlling financial
interest; or (2) the equity investment at risk is insufficient to finance that
entity's activities without receiving additional subordinated financial support
from other parties. In addition, FIN No. 46 requires that both the primary
beneficiary and all other enterprises with a significant variable interest in a
VIE make additional disclosures. As amended in December 2003, the effective
dates of FIN No. 46 for public entities that are small business issuers, as
defined ("SBIs"), are as follows: (a) For interests in special-purpose entities:
periods ended after December 15, 2003; and (b) For all other VIEs: periods
ending after December 15, 2004. The December 2003 amendment of FIN No. 46 also
includes transition provisions that govern how an SBI which previously adopted
the pronouncement (as it was originally issued) must account for consolidated
VIEs. The Company is evaluating the effects of FIN No. 46 (as amended) on its
consolidated financial statements.
As disclosed in Note 2, the Company is associated with Biomoda, Inc. Because of
common ownership between the Company and Biomoda and other factors discussed in
FIN No. 46R, the Company is evaluating whether Biomoda requires consolidation
under FIN 46.
Other recent accounting pronouncements issued by the FASB (including its
Emerging Issues Task Force), The American Institute of Certified Public
Accountants, and the Securities and Exchange Commission did not or are not
believed by management to have a material impact on the Company's present or
future financial statements.
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Page F-11
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ADVANCED OPTICS ELECTRONICS, INC.
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
2. INVESTMENTS IN AND ADVANCES TO BIOMODA
As of June 30, 2004, the Company owned approximately 1,132,000 or 16.5% of the
6,832,000 outstanding shares of Biomoda, a development stage company involved in
the development of technology for the early detection of lung cancer. In
addition, two of the Company's officers own approximately 14.3%, collectively,
of the outstanding shares of common stock of Biomoda. As a development stage
company, Biomoda has not had any revenues as of June 30, 2004.
A summary of the investment is as follows:
Original cost $(383,845)
Additional investment (48,000)
Equity in loss of investment 402,915
Sale of investment 28,930
Advances on line of credit, net 605,082
---------
$ 605,082
=========
The Company will continue to provide Biomoda with bridge financing needed to
fund its' day to day operations, until such time that Biomoda has raised
sufficient capital, to fund operations.
Line of Credit
- --------------
In May 2002, the Company and Biomoda entered into a line of credit agreement
(the "LOC"), as amended, with no maximum borrowings, accruing interest at an
annual interest rate of 5% and is due on demand. Interest income related to the
LOC approximated $13,000 and $1,000 for the six-month periods ended June 30,
2004 and 2003, respectively.
Other Related Party Transactions
- --------------------------------
In May 2002, the Company entered into a sublease agreement with Biomoda to
sublease office space to Biomoda for $300 per month. The sublease is on a
month-to-month basis and Biomoda is to abide with all relevant covenants of the
Company's master lease.
In December 2003, the Company entered into a lease agreement with Biomoda to
lease certain lab equipment for $500 per month. The lease is on a month-to-month
basis.
Rental income related to the above leases for the three and six-month periods
ended June 30, 2004, was approximately $2,400 and $4,800, respectively.
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Page F-12
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ADVANCED OPTICS ELECTRONICS, INC.
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
3. INVESTMENT IN GENOMED, INC.
On January 8, 2004, the Company entered into a Stock Sale Agreement (the
"Agreement") with GenoMed, Inc., a Florida corporation ("GenoMed") whereby the
Company purchased approximately 33,300,000 shares of restricted common stock of
GenoMed for $900,000 in cash, representing approximately 17.9% of the total
outstanding shares of GenoMed immediately after the execution of the Agreement.
The Company has accounted for this investment under the cost method as it cannot
exercise significant influence over the operating and financial policies of
GenoMed. In addition, the Company holds approximately 193,000 shares of free
trading common stock of GenoMed not acquired in connection with the Agreement,
which the Company has classified as marketable securities in the accompanying
condensed financial statements.
4. STOCKHOLDERS' EQUITY
Common Stock
- ------------
During the quarter ended June 30, 2004, the Company issued 22,200,000 shares of
common stock for services, which were valued at approximately $124,000 (based on
the closing market price on the date of grant, which approximated $0.01 per
share). The Company recorded such amounts in the accompanying statement of
operations.
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Page F-13
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATIONS
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 27A of the Securities Act of 1933, as amended and by Section 21E of
the Securities Exchange Act of 1934, as amended.
OVERVIEW
General
- -------
Advanced Optics Electronics, Inc. (the "Company", "us", "we", or "ADOT")
(ADOT-OTC BB) is a technology company based in Albuquerque, New Mexico. Its
primary focus is the development, production and sales of its novel and
innovative electronic flat panel displays. We maintain an R+D facility and
manufacturing plant, and are engaged in building large-scale flat panel displays
utilizing its patented technology. We are currently investigating other
applications of this core technology and different products related to optics
and image recognition and analysis.
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.
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The Company's principal offices are located at 8301 Washington NE, Suite 5,
Albuquerque, New Mexico 87113, and its telephone number is (505) 797-7878.
Company Overview
- ----------------
We are a developmental stage technology company with our primary focus on the
development, production and sales of our large-scale flat panel displays, which
utilize our patented technology. We are currently continuing our research,
development, prototyping, and manufacturing of our products and the underlying
technology. We are in the process of making the transition from a developmental
stage company to producing and selling our product line. We plan to focus on
producing and selling our large-scale flat panel displays for the outdoor
advertising billboard industry, which represents the first time that our
technology is available to this industry. In addition, there are other markets
and applications that represent opportunities for additional sources of
business, and we are beginning to explore these markets and applications, such
as e-cinema, lighting sources, stadium and sports applications and systems,
control and status monitoring.
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
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o WEB-based status monitoring
o Provides time, temperature and other dynamic content inserts
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. The initial
production model is scheduled to be completed in November of 2004.
We expect our principal source of revenue to be derived from sales of our
electronic display product. To date we have not recognized any revenue, but we
have developed a functioning prototype and we anticipate sales by the last
quarter of 2004. 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, 2004, had a deficit accumulated during the development stage of
$16,045,695.
RESULTS OF OPERATIONS
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, 2004 and 2003
- ------------------------------------------------------------------
RESEARCH AND DEVELOPMENT. Research and 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 increased to $107,977 in the second quarter of
2004 from $21,462 in the same period of 2003. 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 approximately $438,000 in the second quarter
of 2004 from $255,500 in the second quarter of 2003. 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
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with being a publicly traded company and potential 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 and the equity interest in Biomoda Inc. Other income
(expense) net decreased to ($27,653) in the second quarter of 2004 from
approximately ($34,000) in the second quarter of 2003 due primarily to a
decrease in interest expense because much of the companies debt has been
retired.
There was a larger loss on our Biomoda Investment due to the increased activity
at Biomoda and the related increased expenses.
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, 2004 we have raised net proceeds of approximately $11,865,000.
The cash balance at the end of the quarter of $1,521,486 represents
approximately six months of cash operating expenses.
We have also utilized equipment loans and capital lease financing. As of June
30, 2004 the only debt financing is a Convertible debenture in the approximate
amount of $103,000 (including accrued interest) that we intend to pay off in its
entirety in the fourth quarter of 2004.
The Company's holding in Biomoda, Inc ("Biomoda") may provide additional
liquidity. Biomoda is a biomedical development company. The Company's direct
ownership of Biomoda, as of June 30, 2004 was approximately 16.5%. Two officers
of ADOT are also securities holders of Biomoda in addition to the ADOT
ownership. Biomoda filed a revised SB-2 registration statement with the
Securities and Exchange Commission, which was declared effective July 11, 2003.
Biomoda is offering 5,000,000 shares at $6.00 per share (for an aggregate
offering of $30,000,000). It is anticipated that a public market for Biomoda's
securities will be established in the fourth quarter of 2004. Because a market
for Biomoda's shares has not been established the potential value of the
Company's investment cannot be measured. Consequently there can be no assurance
that if the Company was to sell such investment that it would be able to on
terms favorable to the Company or for the initial offering price. Factors such
as dilution, blockage and a lack of a market may be encountered.
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 changes in the management relationship between the two companies. ADOT has
committed to providing bridge financing until sufficient capital is raised
through the sale of Securities of Biomoda.
During the six months ended June 30, 2004, $8,900 was spent for the purchase
of computers and software. Research and development expenditures were
approximately $108,000 in the second quarter of 2004. Funds for operations,
research and development and capital expenditures were provided from the sale of
securities and cash reserves.
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During the first quarter 2004, we have purchased 33,300,000 shares of Genomed,
Inc., which represents approximately 18% of the outstanding shares of Genomed,
Inc. The shares are restricted and must be held for one year. Genomed is a
publicly traded biotech company working in genomics based disease management.
Management believes that sales of securities, cash reserves and anticipated
contract revenue will provide adequate liquidity and capital resources to meet
the anticipated development stage requirements through the end of the fourth
quarter 2004. 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 2004.
INFLATION
Management believes that inflation has not had a material effect on the
Company's results of operations.
ITEM 3. CONTROLS AND PROCEDURES
EVALUATION OF CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including
our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), we
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the
Exchange Act as of a date (the "Evaluation Date") within 90 days prior to filing
the Company's June 30, 2004 Form 10-QSB. Based upon that evaluation, the CEO and
CFO concluded that, as of June 30, 2004, the Company's disclosure controls and
procedures were of limited effectiveness.
Consequently, in March 2004, the Company has hired an independent third party
contractor to evaluate and revise its existing control policies and procedures,
including our disclosure controls and procedures, and to implement more
effective and efficient controls and procedures.
Changes in Controls and Procedures
- ----------------------------------
There were no significant changes made in our internal controls over financial
reporting during the quarter ended June 30, 2004 that have materially affected
or are reasonably likely to materially affect these controls. The Company,
however, is evaluating changes to its existing controls or adding controls to
improve the design effectiveness of its system.
Limitations On the Effectiveness of Internal Control
- ----------------------------------------------------
The Company's management, including the CEO, does not expect that our disclosure
controls and procedures or our internal control over financial reporting will
necessarily prevent all fraud and
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material errors. An internal control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations on all internal control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within the Company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, and/or by management override of the control. The design of any
system of internal control is also based in part upon certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions. Over time, controls may become inadequate because of changes in
circumstances, and/or the degree of compliance with the policies and procedures
may deteriorate
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, 2004, the status of the common stock of the Company was:
2,950,000,000 shares authorized and 2,939,936,349 shares issued and outstanding.
During the three month period ended June 30, 2004, the Company issued 22,200,000
shares of common stock for services, which were valued at $124,320 (based on the
closing market price on the date of grant, which was approximately $0.01).
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 - None
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 2004.
Item 5. Other Information - Not applicable
Item 6. Exhibits and Reports on Form 8-K
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(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 2004.
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SIGNATURES
In accordance with Section 13 or 15(d) 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 16, 2004
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)
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