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: March 31, 2005
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 May 13,
2005 was 3,878,136,349.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
PART I: FINANCIAL INFORMATION
ITEM 1: Financial Statements
ADVANCED OPTICS ELECTRONICS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
MARCH 31, 2005
(UNAUDITED)
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ASSETS
CURRENT ASSETS
Cash $ 350,667
Marketable securities 1,935,050
Other current assets 16,057
------------
Total current assets 2,301,774
INTANGIBLES, NET OF ACCUMULATED AMORTIZATION OF $59,386 203,759
PROPERTY AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION OF $410,666 148,042
OTHER ASSETS
Notes receivable and deposits 51,737
$ 2,705,312
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 104,006
Accrued expenses 192,269
Advances from shareholders 134,988
Advances from officer 64,710
Convertible debentures 80,093
------------
Total current liabilities 576,066
------------
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, 4,000,000,000 shares authorized;
3,733,136,349 shares issued and outstanding 3,733,136
Treasury stock, at cost (37,195)
Notes receivable officer (67,299)
Additional paid in capital 17,929,002
Accumulated other comprehensive income 978,292
Deficit accumulated during the development stage (20,406,690)
------------
Total stockholders' equity 2,129,246
------------
$ 2,705,312
============
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F-1 SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2005 AND 2004 AND FOR THE PERIOD
FROM MAY 22, 1996 (INCEPTION) THROUGH MARCH 31, 2005
(UNAUDITED)
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MAY 22, 1996
(INCEPTION)
THROUGH
MARCH 31,
2005 2004 2005
--------------- --------------- ---------------
CONTRACT REVENUES $ -- $ -- $ --
OPERATING EXPENSES
General and administrative 283,447 526,452 10,888,410
Payroll and related 277,358 175,604 1,810,155
Research and development 8,720 239,342 2,110,369
Professional Fees 1,904 21,364 172,285
Depreciation & amortization 12,499 13,992 137,979
Licensing Fees -- -- 37,976
Inventory write-off -- -- 29,293
Asset impairment -- -- 592,884
--------------- --------------- ---------------
Total operating expenses 583,928 976,754 15,779,351
LOSS ON CONTRACT -- 47,463 2,255,944
--------------- --------------- ---------------
OPERATING LOSS (583,928) (1,024,217) (18,035,295)
--------------- --------------- ---------------
OTHER INCOME (EXPENSES)
Interest income 860 15 81,241
Realized loss on marketable equity securities (2,213) 17,044 (130,141)
Other investment gains -- -- 59,784
Loss from investment in Biomoda, Inc. -- -- (289,750)
Gain (loss) on disposal of assets -- -- (3,520)
Gain (loss) on settlement of debts 10,122 -- (545,966)
Interest expense (6,421) (9,651) (1,291,294)
Other income -- -- 551
--------------- --------------- ---------------
Total other income (expenses) 2,348 7,408 (2,119,095)
--------------- --------------- ---------------
NET LOSS BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE & EXTRAORDINARY LOSS (581,580) (1,016,809) (20,154,390)
EXTRAORDINARY LOSS -- -- (189,280)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE -- -- (63,020)
--------------- --------------- ---------------
NET LOSS $ (581,580) $ (1,016,809) $ (20,406,690)
=============== =============== ===============
OTHER COMPREHENSIVE GAIN (LOSS)
Unrealized gain (loss) on marketable securities 987,983 (25,045) 978,292
--------------- --------------- ---------------
COMPREHENSIVE GAIN (LOSS) 406,403 (1,041,854) (19,428,398)
=============== =============== ===============
BASIC AND DILUTED NET LOSS BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE AVAILABLE TO COMMON
SHAREHOLDER
PER COMMON SHARE AND EXTRAORDINARY LOSS $ (0.000) $ (0.000)
EXTRAORDINARY LOSS -- --
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE -- --
--------------- ---------------
BASIC AND DILUTED NET LOSS AVAILABLE TO COMMON
SHAREHOLDER $ (0.000) $ (0.000)
=============== ===============
PER COMMON SHARE
BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 3,548,236,349 2,841,154,481
=============== ===============
* Weighted average number of shares used to compute basic and diluted loss
per share is the same since the effect of dilutive securities is
anti-dilutive.
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F-2 SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
ADVANCED OPTICS ELECTRONICS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2005 AND 2004 AND FOR THE PERIOD
FROM MAY 22, 1996 (INCEPTION) THROUGH MARCH 31, 2005
(UNAUDITED)
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MAY 22, 1996
(INCEPTION)
THROUGH
MARCH 31,
2005 2004 2005
------------ ------------ ------------
Cash flows from operating activities:
Net loss $ (581,580) $ (1,016,809) $(20,406,690)
Adjustments to reconcile net loss to net cash
used in operating activities:
Intrinsic value of conversion features -- -- 610,603
Write off of organization costs/goodwill -- -- 63,020
Extraordinary loss -- 189,280
Inventory write off -- 29,293
Amortization of discount on convertible notes and
preferred stock -- -- 295,209
Loss (Gain) on marketable securities 2,213 (17,044) 130,141
Loss on disposal of assets -- -- 3,520
Loss on investment in Biomoda, Inc. -- --
Issuance of common stock for services -- 228,172 6,504,726
Issuance of Biomoda common stock and options for services -- 165,000
Issuance of notes payable for services -- -- 50,000
Increase in excess of costs and earnings over billings
on uncompleted contract -- (47,463) (2,050,000)
Increase in allowance for loss on contract -- 47,463 2,050,000
Loss (Gain) on extinguishment of debt (10,122) 545,966
Interest accrued on convertible debentures -- 309,504
Interest earned on note receivable from stockholder and
related parties -- (17,823)
Depreciation and amortization 12,499 13,992 675,939
Bad debt expense -- -- 15,000
Asset impairment -- -- 592,884
Other non-cash expenses -- -- 33,447
Accrued interest (2,903) 30,667
Changes in operating assets and liabilities:
Decrease (Increase) in other current assets 1,389 (22,269) (10,824)
Decrease in inventory (35,293)
(Decrease) Increase in accounts payable and accrued expenses (51,737) (132,120) (25,797)
------------ ------------ ------------
Net cash used in operating activities (627,338) (948,981) (9,962,479)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (3,780) (20,300) (521,860)
Additions to Patent, trademark and license fee, net of extraordinary gain (30,775) -- (135,347)
Proceeds from sale of property and equipment -- -- 23,800
Investment in Genomed (900,000) (900,000)
Investment other --
Investment in Biomoda, Inc. -- (383,845)
Proceeds from sale of Biomoda, Inc. stock -- -- 28,930
Advances to Biomoda, Inc. (38,432)
Advances from shareholders 14,009
Sale of marketable securities 15,756 137,200 208,543
Purchases of marketable securities (18,770) (167,168) (664,104)
Cash of variable entity on consolidation 155
Decrease in certificates of deposit -- -- --
Increase in notes receivable (2,158) (51,737)
Purchase of other assets -- -- (245,579)
------------ ------------ ------------
Net cash used in investing activities (39,727) (950,268) (2,665,466)
------------ ------------ ------------
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F-3 SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS.
MAY 22, 1996
(INCEPTION)
THROUGH
MARCH 31,
2005 2004 2005
------------ ------------ ------------
Cash flows from financing activities:
Principal repayments on notes payable and capital leases (269,987)
Proceeds from notes payable -- 622,776
Issuance of common stock for cash 430,080 455,511 11,753,798
Issuance of Biomoda common stock for cash 60,000
(Increase) decrease in note receivable stockholder -- (5,422)
Repayment for advances from officer (25,000) (25,000)
Proceeds from sale of treasury stock 22,234 225,419
Purchase of treasury stock -- (258,377)
Proceeds from issuance of convertible debt 1,270,965
Principal repayments on convertible debt -- (154,000) (395,560)
------------ ------------ ------------
Net cash provided by financing activities 405,080 323,745 12,978,612
------------ ------------ ------------
Net (decrease) increase in cash (261,985) (1,575,504) 350,667
Cash at beginning of period 612,652 3,964,609 --
------------ ------------ ------------
Cash at end of period $ 350,667 $ 2,389,105 $ 350,667
============ ============ ============
Supplemental disclosure of cash flow information -
Cash paid during the year for:
Interest $ -- $ --
============ ============
Income taxes $ -- $ --
============ ============
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F-4 SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS.
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ADVANCED OPTICS ELECTRONICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
MANAGEMENTS' REPRESENTATION:
The management of Advanced Optics Electronics, Inc. (the "Company") without
audit has prepared the consolidated financial statements included herein. The
accompanying unaudited consolidated 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 financial statements have been included
and were of a normal recurring nature, and the accompanying consolidated
financial statements present fairly the financial position as of March 31, 2005,
and the results of operations and cash flows for the three month periods ended
March 31, 2005 and 2004.
It is suggested that these financial statements be read in conjunction with the
audited financial statements and notes for the year ended December 31, 2004,
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
Advanced Optics Electronics, Inc. (the "Company") and its subsidiary, Biomoda,
Inc (Biomoda) are development stage technology companies. The Company's
principal focus is the development and production of large-scale flat panel
displays and Biomoda's is cancer detection and diagnostic tests. The Company's
stock trades on the Over The Counter Bulletin Board under the symbol "ADOT." The
Company plans to focus on producing and selling the large-scale flat panel
displays for outdoor advertising billboards.
The Company is developing a color recognition optical device and plans to
initially focus on marketing it as a color identifier to the visually impaired
and as a teaching aid for small children. The Company's unique and novel
conception and implementation of hardware and firmware determines color
optically and expresses the results with vocal responses. The Company is
intending to establish marketing arrangements for the distribution to retail
locations after a supply has been manufactured and inventoried.
The Company's research and development work have not completed the initial
product. Completion of the product is now expected in the latter half of 2005.
Because of the lack of anticipated revenues in 2005, the Company has taken
excess cash funds and invested these in what they deem to be sound investment in
Genomed that may produce additional funds and gains to the company in 2005.
These funds and gains would then be used for additional product development and
administrative expenses in the initial production stage of the product.
In 2002, the Company's Chief Executive Officer ("CEO") and the Chief Financial
Officer ("CFO") replaced Biomoda's management team, affecting a change in
control. The Company also owns approximately 15.9% of Biomoda's outstanding
common stock. In 2003, the CEO and the CFO each
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F-5
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ADVANCED OPTICS ELECTRONICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
acquired 7.27% of the outstanding common stock of Biomoda. On August 13, 2003,
Biomoda formed a 100% owned subsidiary known as Biomoda Holdings, Inc., a Nevada
corporation, for the purpose of research, development, production and marketing
of medical and biomedical products. As of March 31, 2005, the Company owned
approximately 1,132,000 or 15.9% of the 7,117,000 outstanding shares of Biomoda.
In addition, two of the Company's officers own approximately 12%, collectively,
of Biomoda's outstanding shares. Further, the Company subleases office space and
lab equipment to Biomoda and two of the Company's officers are also officers of
Biomoda. The Company has been the sole source of funding to Biomoda since 2002
through advances made under a line of credit agreement. The Company is
considered the primary beneficiary as it stands to absorb the majority of
Biomoda's, called herein as the variable interest entity, expected losses. Since
Biomoda and the Company are considered entities under common control for
accounting purposes, the Company measures the assets and liabilities of Biomoda
at their carrying amounts in consolidation. (Note 5)
Biomoda's primary focus is on early cancer detection technology. Its novel
cell-targeting technology is globally patented for the detection of
pre-cancerous and cancerous conditions in all human tissue. This technology,
based on a compound called Tetrakis Carboxy Phenyl Porphine (TCPP), was
developed at St. Mary's hospital in Colorado and Los Alamos National
Laboratories. Biomoda obtained a worldwide exclusive license to the TCPP
technology from the University of California in late 1995, and began new
research broadening the scope of the original patent and technology. In November
2000, Biomoda filed a new U.S. provisional patent application defining the
ability of its version of the TCPP to detect pre-cancerous and cancerous
conditions in all human tissue. Biomoda began the commercialization process by
trade marking the technology as CyPath. Management expects to continue assay
validation work and register its product with the FDA in 2005. There are several
business models, product types and regulatory routes that Biomoda is evaluating
including: licensing, ASR, 510K, PMA and IVD kits. Biomoda is evaluating several
cancers with a focus on large markets that are in the need of the most immediate
diagnostic support. These include: lung, bladder and cervical.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include accounts of the Company and the
accounts of the variable interest entity, Biomoda, Inc. (Note 5). All
significant inter-company accounts and transactions have been eliminated in
consolidation.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
("GAAP") requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the consolidated financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Significant estimates made by management are, among others, expected losses of
the variable interest entity, valuation of marketable securities and the
valuation of other assets. Actual results could materially differ from those
estimates.
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F-6
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ADVANCED OPTICS ELECTRONICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
RISKS AND UNCERTAINTIES
The Company operates in a highly competitive industry that is subject to intense
competition. The Company has no operating history and has not generated revenue
from its business operations. As a development stage entity, the Company faces
risks and uncertainties relating to its ability to successfully implement its
business strategy. Among other things, these risks include the ability to
develop and sustain revenue growth; managing expanding operations; competition;
attracting, retaining and motivating qualified personnel; maintaining and
developing new strategic relationships; and the ability to anticipate and adapt
to the changing markets. Therefore, the Company may be subject to uncertainties,
including financial, operational, technological, regulatory and other risks
associated with an emerging business, including the potential risk of business
failure.
DEVELOPMENT STAGE AND GOING CONCERN
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 accompanying consolidated 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 March 31, 2005, the Company has accumulated deficit of
$20,406,690. The Company's total assets exceeded the total liabilities by
$2,129,246. These factors, among others, raise substantial doubt about the
Company's ability to continue as a going concern.
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 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, 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.
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" (SFAS 115). The Company does not have any investments
classified as "trading" or "held to maturity".
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F-7
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ADVANCED OPTICS ELECTRONICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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. As of March 31, 2005, these shares become free trading shares. At March
31, 2005, the Company held approximately 32,793,000 of these shares.
Following is a summary of marketable securities classified as available for sale
as of March 31, 2005:
COST BASIS FAIR VALUE UNREALIZED GAIN
----------- ---------- ---------------
Marketable securities-Common stock $ 956,758 $1,935,050 $978,292
Available-for-sale securities consist of securities in GenoMed 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 three months
ended March 31, 2005, the Company transferred 571,409 shares valued at
approximately $15,000 to a consultant in exchange for services.
STOCK BASED COMPENSATION
The Company accounts for stock-based compensation issued to employees using the
intrinsic value based method as prescribed by Accounting Principles Board
Opinion No. 25 ("APB 25"), "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES." Under the
intrinsic value based method, compensation expense is the excess, if any, of the
fair value of the stock at the grant date or other measurement date over the
amount an employee must pay to acquire the stock. Compensation expense, if any,
is recognized over the applicable service period, which is usually the vesting
period.
SFAS 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION," if fully adopted, changes
the method of accounting for employee stock-based compensation plans to the fair
value based method. For stock options and warrants, fair value is determined
using an option pricing model that takes into account the stock price at the
grant date, the exercise price, the expected life of the option or warrant,
stock volatility and the annual rate of quarterly dividends. Compensation
expense, if any, is recognized over the applicable service period, which is
usually the vesting period.
The adoption of the accounting methodology of SFAS 123 is optional and the
Company has elected to continue accounting for stock-based compensation issued
to employees using APB 25; however, pro forma disclosures, as the Company
adopted the cost recognition requirement under SFAS 123, are required to be
presented (see below). For stock-based compensation issued to non-employees, the
Company uses the fair value method of accounting under the provisions of SFAS
123.
FASB Interpretation No. 44 ("FIN 44"), "ACCOUNTING FOR CERTAIN TRANSACTIONS
INVOLVING STOCK COMPENSATION, AN INTERPRETATION OF APB 25" clarifies the
application of APB 25 for (a) the definition of
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F-8
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ADVANCED OPTICS ELECTRONICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
employee for purpose of applying APB 25, (b) the criteria for determining
whether a plan qualifies as a non compensatory plan, (c) the accounting
consequence for various modifications to the terms of a previously fixed stock
option or award and (d) the accounting for an exchange of stock compensation
awards in a business combination. Management believes that the Company accounts
for transactions involving stock compensation in accordance with FIN 44.
SFAS 148, "ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE,
AN AMENDMENT OF FASB STATEMENT NO. 123," provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this statement amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results.
At March 31, 2005, the Company has one stock-based employee compensation plan
(the "Plan"), which is described more fully in Note 11. 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.
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 Company did not grant any option during the three month periods ended March
31, 2005 and 2004.
COMPREHENSIVE INCOME
The Company reports comprehensive income in accordance with SFAS No. 130,
"REPORTING COMPREHENSIVE INCOME." SFAS 130 establishes standards for the
reporting and display of comprehensive income and its components. SFAS No. 130
requires unrealized holding gains and losses, net of related tax effects, on
available for sale securities to be included in comprehensive income until
realized.
REPORTING SEGMENTS
Statement of financial accounting standards No. 131, "DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION" (SFAS No. 131), which superseded
statement of financial accounting standards No. 14, Financial reporting for
segments of a business enterprise, establishes standards for the way that public
enterprises report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating segments as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performances. The Company
allocates resources and assesses the performance based upon information from two
reporting units, (1) ADOT and (2) Biomoda, Inc.
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
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F-9
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ADVANCED OPTICS ELECTRONICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
As disclosed in Note 3, the Company is associated with Biomoda, Inc. because two
officers of the Company also serve as officers of Biomoda and other factors
discussed in FIN No. 46R, the Company has complied with the pronouncement and
consolidated the two Company's financial statements. See note 6 for the impact
of adoption of the standard.
2. RECENT PRONOUNCEMENTS
In December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment,
an Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R requires
companies to recognize in the statement of operations the grant- date fair value
of stock options and other equity-based compensation issued to employees. FAS
No. 123R is effective beginning in the Company's second quarter of fiscal 2006.
The Company is evaluating the effects adoption of SFAS 123R will have on its
financial statements.
In December 2004, the FASB issued SFAS Statement No. 153, "Exchanges of
Nonmonetary Assets." The Statement is an amendment of APB Opinion No. 29 to
eliminate the exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of nonmonetary assets
that do not have commercial substance. The Company is evaluating the effects
adoption of SFAS 123R will have on its financial statements.
In March 2004, the Emerging Issues Task Force ("EITF") reached a consensus on
Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments." The EITF reached a consensus about the
criteria that should be used to determine when an investment is considered
impaired, whether that impairment is other-than-temporary, and the measurement
of an impairment loss and how that criteria should be applied to investments
accounted for under SFAS No. 115, "ACCOUNTING IN CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES." EITF 03-01 also included accounting considerations
subsequent to the recognition of another-than-temporary impairment and requires
certain disclosures about unrealized losses that have not been recognized as
other-than-temporary impairments. Additionally, EITF 03-01 includes new
disclosure requirements for investments that are deemed to be temporarily
impaired. In September 2004, the Financial Accounting Standards Board (FASB)
delayed the accounting provisions of EITF 03-01; however the disclosure
requirements remain effective for annual reports ending after June 15, 2004. The
Company will evaluate the impact of EITF 03-01 once final guidance is issued.
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F-10
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ADVANCED OPTICS ELECTRONICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. PATENTS
Biomoda has entered into license agreements with a major university and national
laboratory to obtain rights for the purpose of developing, manufacturing, and
selling products using its patented technologies. Under such agreement, Biomoda
will pay royalties at varying rates based upon the level of revenues from
licensed products. The agreement continues as long as any licensed patents
remain in force. Biomoda has not incurred any royalty expense during the period
from January 3, 1990 (inception) to March 31, 2005. Biomoda also pays an annual
fee in the amount of $15,000 to renew such license agreement. As of March 31,
2005, Biomoda was in full compliance with the provisions of this agreement.
4. NOTES RECEIVABLE
Notes Receivable consists of the following at March 31, 2005
Notes receivable bearing a 7% and will mature on March 2005 $27,233
Notes receivable bearing a 6.5% and will mature on December 2005 $24,504
Total $51,737
=======
5. VARIABLE INTEREST ENTITY-BIOMODA, INC.
At March 31, 2005, the Company owned approximately 1,132,000 or 15.9% of the
7,117,000 outstanding shares of Biomoda, Inc. ("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 12%,
collectively, of Biomoda's outstanding shares. Further, the Company subleases
office space and lab equipment to Biomoda and two of the Company's officers are
also officers of Biomoda. Finally, the Company has been the sole source of
funding to Biomoda since 2002 through advances made under a line of credit
agreement. Such advances totaled $1,063,137 at March 31, 2005 and has recorded
interest income on advances of $52,914. These amounts have been eliminated in
consolidation. The Company is considered the primary beneficiary as it stands to
absorb the majority of the VIE's expected losses. Since Biomoda and the Company
are considered entities under common control, the Company measures the assets
and liabilities of Biomoda at their carrying amounts in consolidation.
As of March 31, 2005, the Company has consolidated Biomoda's balance sheet and
its results of the operations for the quarter then ended in the accompanying
financial statements. Biomoda has a stockholders' deficit at March 31, 2005.
General creditors of Biomoda have no recourse against the Company. From
inception through March 31, 2005, Biomoda has generated no revenues
In 2005, Biomoda anticipates being able to raise its own funds in the public
equity market. In this case, Biomoda may be able to sustain its own operations,
repay its obligation to the Company, and hire its own officers. In such case,
the Company may no longer be considered the primary beneficiary and the results
of Biomoda may be deconsolidated. There can be no assurance that Biomoda will be
able to raise sufficient funds to repay its obligation to the Company and become
self-sustaining in its operations.
- --------------------------------------------------------------------------------
F-11
- --------------------------------------------------------------------------------
ADVANCED OPTICS ELECTRONICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. RELATED PARTY TRANSACTIONS
NOTES RECEIVABLE - OFFICER
As of March 31, 2005 and 2004, the Company has net advances to an officer
approximating $67,300. The advances accrue interest at rates ranging from 5% to
6% (interest income was insignificant for the quarter ended March 31, 2005 and
2004) and are due on demand. As these notes receivable are with the shareholder
and a Company officer, the Company has classified these amounts as a decrease to
stockholders' equity at March 31, 2005.
ADVANCES FROM OFFICER
As of March 31, 2005, the Company has advances from officer of $69,710. This is
due on demand and non interest bearing. The Company paid $25,000 during the
quarter ended March 31, 2005.
ADVANCES FROM STOCKHOLDERS
As of March 31, 2005, the Company had advances of approximately $135,000 payable
to two of its stockholders. Such advances historically bore interest at 10% per
annum. No interest expense related to such advances for the three month period
ended March 31, 2004 was recorded. Interest expense was approximately $3,400 and
$124,000 for the three month period ended March 31, 2005 and for the period from
inception through March 31, 2005, respectively.
7. CONVERTIBLE DEBENTURES
On September 15, 2000, the Company entered into an agreement to issue a total of
$10,000,000 in convertible debentures which bear interest at an annual rate of 8
percent. The Company authorized the initial sale of $2,000,000 of the
convertible debentures, and entered into a structured facility with purchasers
(the "Purchasers") in which the Purchasers shall be obligated to purchase the
remaining $8,000,000 of convertible debentures at certain obligation dates, as
defined. The Company's right to require the Purchasers to purchase debentures
commences on the actual effective date of the registration of the Company's
securities in an amount equal to the securities that would be convertible upon
issuance of the debentures. The related agreement provides for a limit on the
amount of obligation debentures that the Company may require the Purchasers to
purchase in a given month.
On September 15, 2000, the Company issued $500,000 of the initial $2,000,000 in
unsecured convertible debentures discussed above. Effective as of the issuance
date, the debentures are convertible into shares of common stock at the lesser
of a 25 percent discount to the average of the three lowest closing bid prices
during the thirty trading days prior to the issue date of this note and a 20
percent discount to the average of the three lowest closing bid prices for the
ninety trading days prior to the conversion date, as defined. The debentures
were issued in exchange for $430,000 in cash, $20,000 in legal services and
$50,000 in commissions. The commissions have been capitalized as debt
origination costs and are being amortized to interest expense over the life of
the debentures. The embedded intrinsic value of the beneficial conversion
feature was estimated to be approximately $239,000, which was immediately
charged to interest expense. The convertible debentures also include detachable
warrants
- --------------------------------------------------------------------------------
F-12
- --------------------------------------------------------------------------------
ADVANCED OPTICS ELECTRONICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
for the purchase of 500,000 shares of common stock at an exercise price of $0.38
per share, which vested upon grant and expire in September 2005. Management has
estimated the fair market value of these warrants at $25,000 (based on the Black
Scholes pricing model pursuant to SFAS 123 and EITF 00-27) and immediately
charged such amounts to interest expense. During the year ended December 31,
2003, the Company settled amounts owed and in connection with such settlement,
the Company recorded a gain on extinguishment of approximately $40,000, which is
included in the accompanying statement of operations.
On November 7, 2000, the Company entered into an agreement that modified
outstanding convertible preferred agreements. The new agreement resulted in the
exchange of outstanding preferred stock for the Company's 7.5% convertible
debentures and other consideration. The total amount of the convertible
debentures approximated $741,000, including $31,000 of interest. The debentures
are convertible into shares of common stock at the lesser of the stock's closing
price on March 8, 2000 and 77.5% of the average of the five lowest closing bid
prices for 20 days before November 2, 2000. The intrinsic value of the
conversion feature was estimated to be approximately $228,000, which was
immediately charged to expense. The convertible debentures also include
detachable warrants for the purchase of 71,000 shares of common stock, the value
of which was insignificant. The principal balance of the convertible debentures
at March 31, 2005 amounts to $80,093.
During 2001, the Company issued convertible debentures totaling $500,000. The
debentures are convertible into shares of common stock at the lesser of (i) 75
percent of the average of the three lowest closing bid prices for 30 days before
August 30 and November 19, 2001 or (ii) 80% of the average of the three lowest
closing bids during the 90 days prior to the conversion date. The embedded
intrinsic value of the beneficial conversion feature was estimated to be
$143,875 and immediately charged to interest expense. These debentures were
retired in 2004.
8. STOCKHOLDERS' EQUITY
COMMON STOCK
During the three months ended March 31, 2005, the Company issued 344,000,000
shares of common stock for cash, which were valued at approximately $430,000.
During the quarter ended March 31, 2005, the Company issued 21,000,000 shares of
common stock for its convertible debentures. Conversion price per share shall be
the lesser of 75% of the average of the three lowest closing bid prices during
the 30 trading days prior to but not including the issue date of the debentures
and 80% of the average of the three lowest closing bid prices during the 90
trading days immediately prior to but not including the conversion date, which
is approximately $0.01 per share. These shares were valued at approximately
$31,000.
During the quarter ended March 31, 2004, the Company sold 39,800,000 shares of
common stock for approximately $455,000 in cash or approximately $0.01 per
share.
During the quarter ended March 31, 2004, the Company issued 19,800,000 shares of
common stock for services, which were valued at approximately $210,000 (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
- --------------------------------------------------------------------------------
F-13
- --------------------------------------------------------------------------------
ADVANCED OPTICS ELECTRONICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
statement of operations.
During the quarter ended March 31, 2004, in accordance with the applicable
convertible debentures agreement, the Company issued 103,000,000 shares of
common stock at conversion prices of less than $0.01 in connection with the
conversion of notes payable approximating $505,000, including approximately
$160,000 of accrued interest.
STOCK OPTIONS
On January 4, 1999, the Company established the Incentive Stock Option Plan (the
"Plan"). Pursuant to the Plan, up to 10,000,000 shares of the Company's common
stock may be granted as options to key employees with exercise prices at least
equal to the fair market value on the date of grant. The exercise dates of the
options are based on the related agreement, as approved by the Board of
Directors. The Plan expires on January 4, 2009. Options awarded under the Plan
mature four years from the date of grant and vest ratably over one to two year
periods.
The following is a status of the stock options outstanding for the three month
periods ended March 31, 2005 and 2004
Three Month Ended Three Month Ended
March 31, March 31,
2005 2004
-------------------- --------------------
Weighted Weighted
Average Average
Options Price Options Price
--------- ----- --------- -----
Outstanding, beginning of year 400,000 $0.02 3,175,000 $0.23
Granted -- -- -- --
Exercised -- -- -- --
Cancelled/Terminated -- -- -- --
--------- ----- --------- -----
Outstanding and exercisable 400,000 $0.02 3,175,000 $0.23
========= ===== ========= =====
Weighted average fair value of options
granted =====
- --------------------------------------------------------------------------------
F-14
- --------------------------------------------------------------------------------
ADVANCED OPTICS ELECTRONICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following table summarizes information related to stock options outstanding
at March 31, 2005:
Options Outstanding Options Exercisable
-------------------------------------------- --------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Exercise Price Number Life (Years) Price Number Price
- ---------------------------------------------------------------------------------------------
$0.02 400,000 1.04 $ 0.02 400,000 $ 0.02
------- ------- ------- -------
There were no stock options granted during the three month periods ended 2005
and 2004.
WARRANTS
From time to time, the Company issues warrants to employees and to third parties
pursuant to various agreements.
In January 2002, the Company issued warrants to purchase 300,000 shares of the
Company's common stock to two directors. The exercise price of the warrants is
$0.02 per share (the fair market value of the Company's common stock on the date
of grant) and vested immediately. The warrants expire five years from the date
of issuance.
- --------------------------------------------------------------------------------
F-15
- --------------------------------------------------------------------------------
ADVANCED OPTICS ELECTRONICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following represents a summary of warrants outstanding for the three month
periods ended March 31, 2005 and 2004:
Three Month Ended Three Month Ended
March 31, March 31,
2005 2004
-------------------------- --------------------------
Weighted Weighted
Warrants Average Price Warrants Average Price
-------------------------------------------------------
Outstanding, beginning of year 4,796,000 $0.10 8,646,000 $0.09
Granted -- -- -- --
Exercised -- -- -- --
Cancelled/Terminated (55,000) 1.62 -- --
---------- ----- ---------- -----
Outstanding and exercisable 4,741,000 $0.10 8,646,000 $0.09
========== ===== ========== =====
Weighted average fair value
of warrants granted =====
The following table summarizes information related to warrants outstanding at
March 31, 2005:
Warrants Outstanding Warrants Exercisable
------------------------------------------- ---------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Exercise Price Number Life (Years) Price Number Price
- -----------------------------------------------------------------------------------------------------
$0.02 3,250,000 0.79 $ 0.02 3,250,000 $ 0.02
$0.34 - $0.43 1,491,000 1.97 0.22 1,491,000 0.22
--------- ------- --------- -------
4,741,000 $ 0.10 4,741,000 $ 0.10
- -----------------------------------------------------------------------------------------------------
There were no warrants issued during the three month periods ended March 31,
2004 and 2005.
- --------------------------------------------------------------------------------
F-16
- --------------------------------------------------------------------------------
ADVANCED OPTICS ELECTRONICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. SEGMENTS AND MAJOR CUSTOMERS
The Company has two reportable segments consisting of (1) producing and selling
large-scale flat panel displays for outdoor advertising billboards and its color
identifier for the vision impared; (2) early cancer detection technology. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies.
The following is information for the Company's reportable segments for the
quarter ended March 31 (in thousands):
2005 2004
ADOT Biomoda Unallocated Total ADOT Biomoda Unallocated Total
-------------------------------------------------------------------------------------
Revenue $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Loss on Operations 499 85 -- 584 824 201 -- 1,025
Depreciation
and amortization 8 4 -- 12 11 3 -- 14
Interest expense -- 6 -- 6 10 -- -- 10
Capital expenditure 4 31 -- 35 6 31 -- 37
Net Loss $ 490 $ 92 $ -- $ 582 $ 816 $ 201 $ -- $1,017
10. EARNINGS PER SHARE
Earnings per share for the quarter ended March 31, 2005 and 2004 were determined
by dividing net income for the periods by the weighted average number of both
basic and diluted shares of common stock and common stock equivalents
outstanding. Stocks to be issued are regarded as common stock equivalents and
are considered in diluted earnings per share calculations.
- --------------------------------------------------------------------------------
F-17
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.
2
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. 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
o WEB-based status monitoring
o Provides time, temperature and other dynamic content inserts
3
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 the third/fourth quarter of
2005.
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 end of the
last quarter of 2005. 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 made research and development progress in the first quarter of
2005 but has not completed the initial product as expected due to technical
hurdles. Completion of the product is now expected in the third to fourth
quarter of 2005. Because of the lack of anticipated revenues in 2004, the
Company has taken excess cash funds and invested these in what they deem to be
sound investments that may produce additional funds and gains to the Company in
2005 and 2006. These funds and gains would then be used for additional product
development and administrative expenses in the initial production stage of the
product. These investments include marketable securities of other companies
including the bio-medical companies Biomoda and Genomed.
Advanced Optics Electronics, Inc. completed filing for its initial patent
relating to its hand held color check device known as COLOR-CHEK. The patent
covers the Company's unique and novel conception and implementation of hardware
and firmware system for determining the color optically and expressing the
result with vocal responses. This invention will initially benefit the vision
impaired. ADOT is also developing a color coding kit to enhance the color check
capabilities of a broader application of the color spectrum. Pricing is targeted
in the $70-85 range. The Company is currently in the development stages of a
second iteration prototype. The first prototype, of which five were made, was a
success from a proof-of-performance standpoint. This next version will
incorporate a number of refinements and improvements in software and hardware
components and incorporate an initial design of the casing..
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 March 31, 2005, had a deficit accumulated during the development stage of
$20,416,812.
In the fourth quarter of 2004, it was determined that the Company consolidate
the financials of Biomoda. This was in response to a new pronouncement FIN 46.
RESULTS OF OPERATIONS
4
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 MARCH 31, 2005 AND 2004
RESEARCH AND DEVELOPMENT. Research and development expenses consist primarily of
personnel expenses and consulting fees associated with the development and
enhancement of our flat panel displays. These expenses decreased to $8,720 in
the first quarter of 2005 from $239,342 in the same period of 2004. 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 AND PAYROLL. General and administrative expenses
consist of expenses for facilities, professional services, travel, general
corporate activities, and depreciation and amortization of equipment and
leasehold improvements. General and administrative and payroll costs decreased
to approximately $283,000 in the first quarter of 2005 from $526,000 in the
first quarter of 2004. 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 potential future
strategic acquisitions will also be a contributing factor to increases in this
expense.
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
March 31, 2005, we have raised such net proceeds of approximately $21,662,000.
The cash balance at the end of the quarter of $350,667 represents an estimated
three months of future cash operating expenses.
We have also utilized equipment loans and capital lease financing. As of March
31, 2005 the only debt financing is a Convertible debenture in the approximate
amount of $80,000 (including accrued interest) that we intend to pay off in its
entirety in 2005.
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 March 31, 2005 was approximately 15.9%. Two officers
of ADOT are also securities holders of Biomoda in addition to the ADOT
ownership. Biomoda filed an SB-2 registration statement with the Securities and
Exchange Commission, which was declared effective February 11, 2003 offering
6,000,000 shares at $3.00 per share (for an aggregate offering of $18,000,000).
It is anticipated that a public market for Biomoda's securities will be
established in 2005 at the revised price. 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 were 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.
5
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
consolidated financial statements include the accounts of Biomoda and its wholly
owned subsidiary, Biomoda Holdings, Inc. All significant inter-company accounts
and transactions have been eliminated in consolidation.
During the three months ended March 31, 2005, approximately $4,000 was spent for
the purchase of computers and software. Research and development expenditures
were approximately $277,000 in the first quarter of 2005. Funds for operations,
research and development and capital expenditures were provided from the sale of
securities and cash reserves.
During the first quarter of 2004, we purchased 33,300,000 restricted shares
under Rule 144 of Genomed, Inc., which represented approximately 17.9% of the
outstanding shares of Genomed at that time. At March 31, 2005, the Company held
33,292,821 shares.
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. As of March 31, 2005, these shares become free trading shares. At
March 31, 2005, the Company held approximately 32,793,000 of these shares.
Available-for-sale securities consist of securities in GenoMed 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 three months
ended March 31, 2005, the Company transferred 571,409 shares valued at
approximately $15,000 to a consultant in exchange for services.
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 2005. 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 2005.
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
6
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 March 31, 2005
Form 10-QSB. Based upon that evaluation, the CEO and CFO concluded that, as of
March 31, 2005, the Company's disclosure controls and procedures were of limited
effectiveness.
CHANGES IN CONTROLS AND PROCEDURES
There were no significant changes made in our internal controls over financial
reporting during the quarter ended March 31, 2005 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 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
7
As of March 31, 2005, the status of the common stock of the Company was:
4,000,000,000 shares authorized and 3,733,136,349 shares issued and outstanding.
During the three month period ended March 31, 2005, the Company issued
344,000,000 shares for cash of approximately $430,080 and 21,000,000 shares of
common stock for debentures in the approximate amount of $31,122.
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 first quarter of fiscal year 2005.
Item 5. Other Information - Not applicable
Item 6. 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.
8
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: May 13, 2005
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)