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 six month period ended: June 30, 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 August
13, 2005 was 4,497,136,349.
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
JUNE 30, 2005
(Unaudited)
- --------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 205,195
Marketable securities 1,357,497
Other current assets 30,857
------------
Total current assets 1,593,549
Intangibles, net of accumulated amortization of $63,589 210,241
Property and Equipment, net of accumulated depreciation of $419,232 139,476
Other Assets
Notes receivable and deposits 52,612
------------
Total assets $ 1,995,878
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 117,438
Accrued expenses 300,772
Advances from shareholders 152,200
Advances from officer 74,710
Convertible debentures 81,754
------------
Total current liabilities 726,874
------------
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, 5,000,000,000 shares authorized;
4,273,136,349 shares issued and outstanding 4,273,136
Treasury stock, at cost (38,947)
Notes receivable officer (67,299)
Additional paid in capital 17,652,272
Accumulated other comprehensive income 680,233
Deficit accumulated during the development stage (21,230,391)
------------
Total stockholders' equity 1,269,004
------------
Total liabilities and stockholders' equity $ 1,995,878
============
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F-1 See accompanying notes to the consolidated financial statements.
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ADVANCED OPTICS ELECTRONICS, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six Month Periods Ended June 30, 2005 and 2004 and For The Period
From May 22, 1996 (Inception) Through June 30, 2005
(Unaudited)
- --------------------------------------------------------------------------------
May 22, 1996
(Inception)
Through
June 30,
2005 2004 2005
--------------- --------------- ---------------
CONTRACT REVENUES $ -- $ -- $ --
OPERATING EXPENSES
General and administrative 774,570 983,169 11,379,533
Payroll and related 522,991 435,261 2,055,788
Research and development 38,949 471,299 2,140,598
Professional Fees 13,256 51,992 183,637
Depreciation & amortization 25,269 7,287 150,749
Licensing Fees 15,000 15,000 52,976
Inventory write-off -- -- 29,293
Asset impairment -- -- 592,884
--------------- --------------- ---------------
Total operating expenses 1,390,035 1,964,008 16,585,458
LOSS ON CONTRACT -- 82,073 2,255,944
--------------- --------------- ---------------
OPERATING LOSS (1,390,035) (2,046,081) (18,841,402)
--------------- --------------- ---------------
OTHER INCOME (EXPENSES)
Interest income 1,743 15 82,124
Realized loss on marketable equity securities (2,147) 17,747 (130,075)
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 (24,964) (9,697) (1,309,837)
Other income -- -- 551
--------------- --------------- ---------------
Total other income (expenses) (15,246) 8,065 (2,136,689)
--------------- --------------- ---------------
NET LOSS BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE & EXTRAORDINARY LOSS (1,405,281) (2,038,016) (20,978,091)
EXTRAORDINARY LOSS -- -- (189,280)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE -- -- (63,020)
--------------- --------------- ---------------
NET LOSS $ (1,405,281) $ (2,038,016) $ (21,230,391)
=============== =============== ===============
OTHER COMPREHENSIVE (LOSS) GAIN
Unrealized gain (loss) on marketable securities 680,233 (56,343) 680,233
--------------- --------------- ---------------
COMPREHENSIVE LOSS (725,048) (2,094,359) (20,550,158)
=============== =============== ===============
Basic and diluted netloss before cumulative
effect of change in accounting principle available
to common shareholder
per common share and extraordinary loss $ (0.000) $ (0.001)
Extraordinary loss -- --
Cumulative effect of change in accounting principle -- --
--------------- ---------------
Basic and diluted net loss available to common shareholder
per common share $ (0.000) $ (0.001)
=============== ===============
Basic and diluted weighted average common shares
outstanding 3,591,538,375 2,887,373,986
=============== ===============
* 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.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Month Periods Ended June 30, 2005 and 2004
(Unaudited)
- --------------------------------------------------------------------------------
2005 2004
--------------- ---------------
CONTRACT REVENUES $ -- $ --
OPERATING EXPENSES
General and administrative 491,123 456,717
Payroll and related 245,633 259,657
Research and development 30,229 231,957
Professional Fees 11,352 30,628
Depreciation & amortization 12,770 (6,705)
Licensing Fees 15,000 15,000
Inventory write-off -- --
Asset impairment -- --
--------------- ---------------
Total operating expenses 806,107 987,254
LOSS ON CONTRACT -- 34,610
--------------- ---------------
OPERATING LOSS (806,107) (1,021,864)
--------------- ---------------
OTHER INCOME (EXPENSES)
Interest income 883 --
Realized loss on marketable equity securities 66 703
Other investment gains -- --
Loss from investment in Biomoda, Inc. -- --
Gain (loss) on disposal of assets -- --
Gain (loss) on settlement of debts -- --
Interest expense (18,543) (46)
Other income -- --
--------------- ---------------
Total other income (expenses) (17,594) 657
--------------- ---------------
NET LOSS BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE & EXTRAORDINARY LOSS (823,701) (1,021,207)
EXTRAORDINARY LOSS -- --
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE -- --
--------------- ---------------
NET LOSS $ (823,701) $ (1,021,207)
=============== ===============
OTHER COMPREHENSIVE (LOSS) GAIN
Unrealized gain (loss) on marketable securities 395,007 (13,849)
--------------- ---------------
COMPREHENSIVE LOSS (428,694) (1,035,056)
=============== ===============
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
per common share $ (0.000) $ (0.000)
=============== ===============
Basic and diluted weighted average common shares
outstanding 3,776,180,793 2,933,421,132
=============== ===============
* 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-3 See accompanying notes to the consolidated financial statements.
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ADVANCED OPTICS ELECTRONICS, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2005 AND 2004 AND FOR THE PERIOD
FROM MAY 22, 1996 (INCEPTION) THROUGH JUNE 30, 2005
(Unaudited)
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May 22, 1996
(Inception)
Through
June 30,
2005 2004 2005
------------ ------------ ------------
Cash flows from operating activities:
Net loss $ (1,405,281) $ (2,038,016) $(21,230,391)
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 -- -- 127,928
Loss on disposal of assets -- -- 3,520
Issuance of common stock for services -- -- 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 -- -- (2,050,000)
Increase in allowance for loss on contract -- -- 2,050,000
Loss (Gain) on extinguishment of debt -- -- 556,088
Interest accrued on convertible debentures -- -- 309,504
Interest earned on note receivable from stockholder and
related parties -- -- (17,823)
Depreciation and amortization 25,268 (44,852) 688,708
Bad debt expense -- -- 15,000
Asset impairment -- -- 592,884
Other non-cash expenses -- -- 33,447
Accrued interest -- -- 30,667
Changes in operating assets and liabilities:
Decrease (Increase) in other current assets (13,411) 3,328 (25,624)
Decrease in inventory -- -- (35,293)
(Decrease) Increase in accounts payable and
accrued expenses 47,306 (160,201) 73,246
------------ ------------ ------------
Net cash used in operating activities (1,346,118) (2,239,741) (10,681,259)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (3,780) -- (521,860)
Additions to Patent, trademark and license fee,
net of extraordinary gain (41,460) (52,854) (146,032)
Proceeds from sale of property and equipment -- 50,928 23,800
Investment in Genomed 293,347 (956,343) (606,653)
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 -- -- 192,787
Purchases of marketable securities -- (20,302) (645,334)
Cash of variable entity on consolidation -- -- 155
Decrease in certificates of deposit -- -- --
Increase in notes receivable (3,033) (28,500) (52,612)
Purchase of other assets -- -- (245,579)
------------ ------------ ------------
Net cash used in investing activities 245,074 (1,007,071) (2,380,665)
------------ ------------ ------------
- --------------------------------------------------------------------------------
F-4 See accompanying notes to the financial statements.
May 22, 1996
(Inception)
Through
June 30,
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 714,350 1,303,250 12,038,068
Issuance of Biomoda common stock for cash -- -- 60,000
(Increase) decrease in note receivable stockholder 17,212 -- 11,790
Repayment for advances from officer (15,000) -- (15,000)
Proceeds from sale of treasury stock -- -- 225,419
Purchase of treasury stock (1,752) (6,543) (260,129)
Proceeds from issuance of convertible debt -- -- 1,270,965
Principal repayments on convertible debt (21,223) (492,820) (416,783)
------------ ------------ ------------
Net cash provided by financing activities 693,587 803,887 13,267,119
------------ ------------ ------------
Net (decrease) increase in cash (407,457) (2,442,925) 205,195
Cash at beginning of period 612,652 3,964,609 --
------------ ------------ ------------
Cash at end of period $ 205,195 $ 1,521,684 $ 205,195
============ ============ ============
Supplemental disclosure of cash flow
information --
Cash paid during the year for:
Interest $ -- $ --
============
Income taxes $ -- $ --
============
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F-5 See accompanying notes to the financial statements.
- --------------------------------------------------------------------------------
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 condensed consolidated financial statements included
herein. The accompanying unaudited condensed 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 condensed
financial statements have been included and were of a normal recurring nature,
and the accompanying condensed consolidated financial statements present fairly
the financial position as of June 30, 2005, the results of operations and cash
flows for the six month periods ended June 30, 2005 and 2004 and the results of
operations for the three month periods ended June 30, 2005 and 2004.
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,
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 a 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")
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F-6
- --------------------------------------------------------------------------------
ADVANCED OPTICS ELECTRONICS, INC.
(A Development Stage Company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
replaced Biomoda's management team, effecting a change in control. The Company
also owns approximately 16% of Biomoda's outstanding common stock. In 2003, the
CEO and the CFO each 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 December 31,
2004, 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 7)
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.
- --------------------------------------------------------------------------------
F-7
- --------------------------------------------------------------------------------
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 June 30, 2005, the Company has accumulated deficit of
$21,230,391. The Company's total assets exceeded the total liabilities by
$1,269,004. 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".
- --------------------------------------------------------------------------------
F-8
- --------------------------------------------------------------------------------
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 January and February, 2005, these shares become free trading
shares. At June 30, 2005, the Company held approximately 19,392,821 of these
shares.
Following is a summary of marketable securities classified as available for sale
as of June 30, 2005:
COST BASIS FAIR VALUE UNREALIZED GAIN
----------- ----------- ---------------
Marketable securities-Common stock $ 523,121 $ 1,357,497 $ 834,376
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 six months
ended June 30, 2005, the Company transferred 14,471,409 shares valued at
approximately $390,366 to consultants 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
- --------------------------------------------------------------------------------
F-9
- --------------------------------------------------------------------------------
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 December 31, 2004, 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 six month periods ended June 30,
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.
Advanced Optics has been the sole source of funding to Biomoda since 2002
through advances made under a line of credit agreement. Such advances totaled
$1,261,869 at June 30, 2005. Advanced Optics is considered the primary
beneficiary as it stands to absorb the majority of the VIE's expected losses.
- --------------------------------------------------------------------------------
F-10
- --------------------------------------------------------------------------------
ADVANCED OPTICS ELECTRONICS, INC.
(A Development Stage Company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Advanced Optics owns 16% of Biomoda and its officers own 12% of Biomoda. The
note between the companies is over 70% of liabilities and six times the total
assets of Biomoda.
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.
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.
Per FIN 46 (R), Interpretation of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, which replaces FASB Interpretation No.
46, Consolidation of Variable Interest Entities, addresses consolidation by
business enterprises of variable interest entities, which have one or more
of the following characteristics:
1. The equity investment at risk is not sufficient to permit the entity to
finance its activities without additional subordinated financial support
provided by any parties, including the equity holders.
2. The equity investors lack one or more of the following essential
characteristics of a controlling financial interest:
a. The direct or indirect ability to make decisions about the entity's
activities through voting rights or similar rights
b. The obligation to absorb the expected losses of the entity
c. The right to receive the expected residual returns of the entity.
3. The equity investors have voting rights that are not proportionate to
their economic interests, and the activities of the entity involve or are
conducted on behalf of an investor with a disproportionately small voting
interest.
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
- --------------------------------------------------------------------------------
F-11
- --------------------------------------------------------------------------------
ADVANCED OPTICS ELECTRONICS, INC.
(A Development Stage Company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
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 June 30, 2005. Biomoda also pays an annual
fee in the amount of $15,000 to renew such license agreement. As of June 30,
2005, Biomoda was in full compliance with the provisions of this agreement. All
patent costs are held in Biomoda. The gross carrying amount is $273,830 and
accumulated amortization is $63,589. Amortization expense for the Company's
current amortizable intangible assets over the next five fiscal years is
estimated to be: 2006 $16,814; 2007 $16,814; 2008 $16,814; 2009 $16,814; 2010
$16,814.
Biomoda has entered into a license agreement with the University of California
to license three patents related to TCCP. As provided in the license agreement
and its amendments, US Patents No. 5,162,231 and No. 5,391,547 are licensed by
the University to Biomoda. The license agreement is in good standing and there
are no defaults of the license provisions.
Biomoda, Inc. has been awarded US Patent No. 6,838,248. The company is also
applying for one CIP and one Divisional Patent.
The following table provides further outlines on the key referenced patents:
- --------------------------------------------------------------------------------
F-12
- --------------------------------------------------------------------------------
ADVANCED OPTICS ELECTRONICS, INC.
(A Development Stage Company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
COUNTRY TITLE PATENT NO. ISSUE DATE EXPIRATION DATE
===============================================================================================================
US COMPOSITIONS AND METHODS OF 6,838,248 1/4/05 1/4/22
DETECTING PRE-CANCEROUS
CONDITIONS IN CELL AND TISSUE Application was filed for
SAMPLES USING 5,10,15,20 - TETRAKIS Continuation In Part addtional
{CARBOXYPHENYL} PORPHINE patent.
- ---------------------------------------------------------------------------------------------------------------
US METHOD USING 5,10,15,20 - TETRAKIS 5,162,231 11/10/1992 11/10/2009
{R-CARBOXYPHENYL} PORPHINE FOR
DETECTING CANCERS OF THE LUNG
- ---------------------------------------------------------------------------------------------------------------
US METHOD USING 5,10,15,20 - TETRAKIS 5,391,547 2/21/1995 2/21/2012
{R-CARBOXYPHENYL} PORPHINE FOR
TREATING CANCERS OF THE LUNG
- ---------------------------------------------------------------------------------------------------------------
Biomoda has received foreign patents in sixteen countries protecting U.S.
Patents No. 5,162,231 and No. 5,391,547, noted above in table. These patents
have been issued in Austria, Belgium, Denmark, France, Germany, Italy,
Netherlands, Spain, Sweden, Australia, Brazil, Canada, Japan, Korea, Russia, and
the United Kingdom and are effective until 6/17/2011.
4. NOTES RECEIVABLE
Notes Receivable consists of the following at June 30, 2005
Notes receivable bearing a 7% and will mature on March 2005 $27,709
Notes receivable bearing a 6.5% and will mature on December 2005 $24,903
-------
Total $52,612
=======
5. VARIABLE INTEREST ENTITY-BIOMODA, INC.
At June 30, 2005, the Company owned approximately 1,132,000 or 15.8% of the
7,147,000 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 $1,194,584 at June 30, 2005 and the Company has
recorded interest income on advances of $67,285. 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.
- --------------------------------------------------------------------------------
F-13
- --------------------------------------------------------------------------------
ADVANCED OPTICS ELECTRONICS, INC.
(A Development Stage Company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
As of June 30, 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 June 30, 2005.
General creditors of Biomoda have no recourse against the Company. From
inception through June 30, 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.
6. RELATED PARTY TRANSACTIONS
Notes Receivable - Officer
- --------------------------
As of June 30, 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 six months ended June 30, 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 June 30, 2005.
Advances From Officer
- ---------------------
As of June 30, 2005, the Company has advances from an officer of $74,710. This
is due on demand and non interest bearing. The Company paid $25,000 during the
six months ended June 30, 2005.
Advances From Stockholders
- --------------------------
As of June 30, 2005, the Company had advances of approximately $152,000 payable
to two of its stockholders. Such advances historically bore interest at 10% per
annum. No interest expense related to such advances for the six month period
ended June, 2004 was recorded. Interest expense was approximately $17,000 and
$140,000 for the six month period ended June 30, 2005 and for the period from
inception through June 30, 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.
- --------------------------------------------------------------------------------
F-14
- --------------------------------------------------------------------------------
ADVANCED OPTICS ELECTRONICS, INC.
(A Development Stage Company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 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, which
value was insignificant. The principal balance of the convertible debentures at
June 30, 2005 amounts to $81,754.
8. STOCKHOLDERS' EQUITY
Common Stock
- ------------
During the six months ended June 30, 2005, the Company issued 884,000,000 shares
of common stock for cash, which were valued at approximately $693,000.
During the six months ended June 30, 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 $21,000.
During the six months ended June 30, 2004, the Company sold 39,800,000 shares of
common stock for approximately $455,000 in cash or approximately $0.01 per
share.
- --------------------------------------------------------------------------------
F-15
- --------------------------------------------------------------------------------
ADVANCED OPTICS ELECTRONICS, INC.
(A Development Stage Company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
During the six months ended June 30, 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 statement of
operations.
During the six months ended June 30, 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 six month
periods ended June 30, 2005 and 2004
Six Months Ended Six Months Ended
June 30, 2005 June 30, 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 $0.23
============
- --------------------------------------------------------------------------------
F-16
- --------------------------------------------------------------------------------
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 June 30, 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 six 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.
The following represents a summary of warrants outstanding for the six month
periods ended June 30, 2005 and 2004:
Six Months Ended Six Months Ended
June 30, 2008 June 30, 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 $0.09
===============
- --------------------------------------------------------------------------------
F-17
- --------------------------------------------------------------------------------
ADVANCED OPTICS ELECTRONICS, INC.
(A Development Stage Company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following table summarizes information related to warrants outstanding at
June 30, 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 six month periods ended June 30, 2004
and 2005.
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 six
months ended June 30 (in thousands):
2005 2004
---------------------------------------------- ----------------------------------------------
ADOT Biomoda Unallocated Total ADOT Biomoda Unallocated Total
---------------------------------------------- ----------------------------------------------
Revenue $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Loss on Operations 1,165 234 -- 1,390 1,677 372 -- 2,046
Depreciation
and amortization 16 9 -- 25 -- 7 -- 7
Interest expense 2 47 -- 25 10 13 -- 10
Capital expenditure 4 41 -- 45 -- 2 -- 2
Net Loss $1,096 $ 282 $ -- $1,405 $1,720 $ 382 $ -- $2,056
10. EARNINGS PER SHARE
Earnings per share for the six month and three month periods ended June 30, 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-18
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.
2
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.
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 completion of our first
sign by the end 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 June 30, 2005, had a deficit accumulated during the development stage of
$21,230,391.
BIOMODA, INC.
Beginning with the 2004 10-KSB, the Company has consolidated the financial
statements of Advanced Optics Electronics, Inc with the financial statements of
Biomoda, Inc.. This has been done in order to comply with FIN 46, a
pronouncement that became effective December 15, 2004. The nature of Biomoda's
business is substantially different from that of Advanced Optics Electronics,
Inc.. The following is a discussion of Biomoda's results of operations,
financial
4
condition and liquidity. More information about Biomoda is available
in Biomoda's 2004 10-KSB which is accessible from the SEC website. The SEC
website (HTTP://WWW.SEC.GOV) contains reports and information statements and
other information regarding Biomoda and other companies that file materials with
the SEC electronically.
Biomoda's initial product is a diagnostic test for lung cancer that will be
performed out of body by using a sputum sample from the patient. This test does
not require any invasive sample taking. The sample will be sent to a clinical
lab where a procedure will be performed to determine the presence, or lack, of
lung cancer or precancerous cells. This diagnostic test can be used for other
cell samples and Biomoda intends to create and market products to diagnose and
screen for other prevalent cancers such as cervical, bladder, and colorectal.
Biomoda has determined that its initial markets will be among the developed
nations of Europe and North America and Japan. This has been determined on the
basis of available healthcare delivery and payer infrastructure. Japan is
leading the world in this area and has instituted a nationwide lung
cancer-screening program.
Management of Biomoda expects to continue assay validation work and seek to
register its product with the FDA in 2005. There are several business models,
product types and regulatory routes that Biomoda is evaluating including: ASR,
510K, PMA and IVD kits:
ASR: This is the FDA designation for Analyte Specific Reagent. There are
generally two classes: Class I & Class II. Class I is considered to the lowest
risk. Biomoda's ASR product is a Class I and only requires registration and
meeting the FDA standards. This product is viewed as a component for a assay
developed in-house by Medical Reference Laboratories.
510K: This is the FDA designation for approvals that are based on "Substantial
Equivalence" with previously approved products and does require approval prior
to marketing. There are generally three classes: Class I, Class II, & Class III.
Depending on the indication established with the FDA, Biomoda's product will
either be Class I or Class II, if Biomoda proceeds with this product approval
route. This product will be a kit developed to determine the presence of
abnormal cells in a body fluid sample.
PMA: This is the FDA designation for approvals for new product indications (no
Substantial Equivalence) and does require approval prior to marketing. There are
generally two classes: Class II, & Class III. If Biomoda proceeds with this
approval route, Biomoda's expects this product to be Class III due to indication
of diagnostic for a specific cancer.
IVD: This is an industry designation for In Vitro Diagnostic. Products in the
industry are either reagents or kits. Kits include the key components required
to conduct the assay for the specific indication stated in the package insert.
Reagents are single components used in assays developed by a Reference Labs. The
lab will be required to have met the FDA CLIA (current Clinical Laboratory
Improvement Act) regulations to market a diagnostic.
Biomoda is evaluating several cancers with a focus on large markets that are in
need of the most immediate diagnostic support. These include: lung, bladder and
cervical.
5
Our products are subject to FDA registration or approval and to post-approval
FDA reporting requirements.
Costs in complying with regulatory and legislative matters such as the Clinical
Laboratory Improvement Amendment of 1988 (CLIA), which regulates the quality and
reliability of medical testing in the U.S., adverse changes in zoning laws, tax
laws, or other laws affecting the medical and diagnostic industry may prove to
be a major obstacle, both in respect of time and costs, in our research and
development.
The timing of regulatory filings and approvals, if any, for the Company's
products are made less certain by the Company's strategy of seeking one or more
collaborative arrangements with development and marketing partners, which may
require that a collaborative partner be responsible for seeking and obtaining
regulatory approvals either in foreign countries or in the U.S. Biomoda intends
to market its products throughout the world. There are numerous regulatory
agencies that regulate the sale of diagnostic and therapeutic products, and
these agencies may be affected or influenced by criteria materially different
than those of the FDA. The sale of Biomoda's products may be materially affected
by the policies of these regulatory agencies or the domestic politics of the
countries involved. Biomoda has not applied for and does not now have the
approval of any foreign country to sell its products for diagnostic or
therapeutic use.
Biomoda's lung cancer product validation is projected to be complete by year-end
and a contract manufacturing relationship is projected to be established by
year-end. Based on these benchmarks, ASR registration and product listing can be
completed by that time also. At that juncture reagent sales can begin. This is
estimated to cost an additional $500,000.
Class I/II 510K can be completed as judged appropriate for the business and will
require approximately 6 to 9 months effort to prepare documentation and receive
FDA approval. During that time kit manufacturing can be initiated. Partial
funding will be provided from reagent sales revenue. It is estimated additional
funding of $300,000 will be required.
PMA will require clinical studies to be completed and will be initiated when it
is viewed as appropriate for the business. This will require on the order of 18
months to plan, execute, and document. During that time kit manufacturing can be
initiated. FDA approval will require 6 to 9 months. Partial funding will be
provided from reagent sales. It is estimated additional funding of $2 million
will be required
Biomoda's current intention regarding regulatory strategy, is to initiate
product introductions via an ASR registration and potentially migrate up the
regulatory spectrum as markets require.
RESULTS OF OPERATIONS
The Company is currently in the process of final assembly, testing and system
integration of approximately 1500 of its display subassemblies. This will create
a 2 meter by 3 meter display. It is anticipated that this work can be completed
in the third quarter of 2005. The company currently employs four full-time
electronic technicians and a supervisor working specifically on this project.
Additional research and development is anticipated and planned in electrical and
6
mechanical realms. These include but are not limited to: power systems and
distribution, heat dissipation, and weatherproofing.
The Company expects its display product to be finalized and ready for market in
the fourth quarter of 2005.
The Company hired a full time controller in 2005 in order to support our efforts
in meeting new reporting requirements. The Company has hired two additional
technicians in 2005. There are no explicit plans to hire additional personnel at
this time but, from time to time, the Company expects to hire additional
personnel in order to carry out its business strategy.
Comparison of the Six and Three-month Periods Ended June 30, 2005 and 2004
- --------------------------------------------------------------------------
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 $30,229 in the second quarter of
2005 from $231,957 in the same period of 2004 and decreased to $38,949 from
$471,299 for the year to date from 2004 to 2005. This significant change is the
result of reclassifying Biomoda's payroll costs as a separate item in 2005 and
the substantial completion of design engineering activity for the panel display.
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 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 increased to approximately $737,000 in the
second quarter of 2005 from $716,000 in the second quarter of 2004 and decreased
to $1,298,000 in 2005 from $1,418,000 in 2004, year to date. Considering the
payroll reclassification, the reduction is in general and administrative costs,
primarily in various types of consulting, public relations and legal expense. 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.
BIOMODA, INC.
Biomoda's plan of operation for the next twelve months is to verify and refine
its assay, design their kit, prepare for clinical studies, and initiate a
dialogue with the FDA relative to their approval submission. Biomoda, Inc. is
relying on a bridge financing arrangement with Advanced Optics Electronics,
Inc., and also intends to raise additional funds from its effective Form SB-2
Registration Statement during the next six months. Biomoda is currently leasing
Laboratory equipment from Advanced Optics Electronics, Inc. on a month to month
basis and intends to purchase this equipment when adequate funds are raised.
Biomoda has recorded no revenue from its inception through June 30, 2005. The
accumulated deficit is $2,758,317. In 2005, the net loss was $281,828 and since
inception, it is $2,758,317. The loss from operations was $234,438 in 2005 and
$2,570,732 since inception. Most of its
7
expense is related to product development. Product development expenses consist
primarily of personnel expenses, consulting fees and lab expenses. Research
development and technical costs were $148,534 in 2005 and $1,569,234 since
inception. Biomoda believes, however, that continued investment in product
development is critical to attaining its strategic objectives and, as a result,
expect product development expenses to increase significantly in future periods.
Biomoda expenses product development costs as they are incurred.
General and administrative expenses consist of expenses for executive and
administrative personnel, facilities, professional services, travel and general
corporate activities. General and administrative costs were $63,385 in 2005 and
$396,312 since inception. Biomoda expects general and administrative costs to
increase in the future as its business matures and develops.
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, 2005, we have raised such net proceeds of approximately $22,000,000.
The cash balance at June 30, 2005 of $205,195 represents an estimated two months
of future cash operating expenses.
We have also utilized equipment loans and capital lease financing. As of June
30, 2005 the only debt financing is a Convertible debenture in the approximate
amount of $83,000 (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. The Company's direct ownership of Biomoda, as of June 30, 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 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
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 first six months of 2004, we purchased 33,300,000 restricted shares
under Rule 144 of Genomed, Inc., which represents approximately 17.6% of the
outstanding shares of Genomed, Inc. At June 30, 2005, the Company held
19,392,821 shares. Genomed is a publicly traded biotech company working in
genomics based disease management.
8
The investment in Genomed was made as an interim cash management decision.
Management's opinion is that the investment represented the potential to
increase the resources the Company has to fund ongoing operations. The Company
made this decision based on its determination that Genomed has very promising
technology and prospects. The company intends to liquidate its investment over
time in order to fund its core operations.
GenoMed uses medical genomics to improve patient outcomes. GenoMed is working to
translate knowledge of medical genomics--the study of which genes cause
disease--into clinical practice.
During the six months ended June 30, 2005, approximately $4,000 was spent for
the purchase of computers and software and approximately $41,000 for patent
development. Research and development expenditures were approximately $39,000 in
the first half of 2005. Funds for operations, research and development and
capital expenditures were provided from the sale of securities and cash
reserves.
MARKETABLE SECURITIES PORTFOLIO
As of June 30, 2005, the Company had a marketable securities portfolio valued at
$1,357,497. The Company's monthly burn-rate, the amount of money spent each
month, is approximately $170,000. This represents approximately 12 months of
operating funds. The Company is actively pursuing potential financing options as
it looks to secure additional funds to both stabilize and grow its business
operations. Management will review any financing options at its disposal and
will judge each potential source of funds on its individual merits. There can be
no assurance that the Company will be able to secure additional funds from debt
or equity financing, or if it can, that it will be on terms favorable to the
Company or existing stockholders.
There are no expected purchases or sales of significant equipment.
Management believes that inflation has not had a material effect on the
Company's results of operations.
BIOMODA, INC.
Biomoda's total assets are $256,390 at June 30, 2005. Of this, $240,241 is
patent costs, net of accumulated amortization of $63,589. Its liabilities of
1,360,646 primarily consist of its debt to Advanced Optics of $1,261,869 and
advances from shareholders of $152,200. Stockholders' deficit as of June 30,
2005 is $2,780,413.
In 2005, pursuant to a registration statement on Form SB-2 (the "Registration
Statement") under the Securities Act of 1933, as amended, Biomoda is offering
for sale up to 6,000,000 shares of its common stock at a price of $3 per share.
The Registration Statement was declared effective on February 11, 2005. The
Offering will terminate on the earlier of February 11, 2008 or the date on which
the maximum number of shares have been sold.
Since inception, Biomoda has funded operations primarily through private
placement of equity securities to third parties and to ADOT and loans from
Advanced Optics Electronics, Inc. As of
9
June 30, 2004 it had raised net proceeds of approximately $2,175,199, of which
approximately $363,845 was invested and or loaned by ADOT in 1998. On May 1,
2002, Biomoda entered into a line of credit agreement (the "Agreement") with
Advanced Optics Electronics, Inc., an affiliated entity, ("Advanced Optics")
with an annual interest rate of 5%. On May 1, 2003 the agreement was extended.
Biomoda had negative cash flows of $1,178 for the six months ended June 30, 2005
resulting from $246,421 used in Biomoda's operating activities, $41,461 used in
Biomoda's investing activities and $259,572 of cash provided by financing
activities. Cash used in operating activities of $246,421 for the six months
ended June 30, 2005 was primarily due to $253,486 in operating expenses, of
which $63,385 is General and Administrative, $148,534 is Research and
Development and $13,256 is professional fees. Cash used in investing activities
of $77,922 for the period was solely due to payments for patents and
intangibles. Cash provided by financing activities of $259,572 for the six
months was due to the proceeds from a line of credit from Advanced Optics
Biomoda has been in the development stage since it began operations on January
3, 1990 and has not generated any revenues from operations and there is no
assurance of any future revenues. As of December 31, 2004, Biomoda had
accumulated deficit of approximately $2,758,000 and a working capital deficit of
approximately $1,651,000. In addition, Biomoda did not generate any cash from
operations and had no cash reserve dedicated to fund expenditures. These factors
create an uncertainty as to Biomoda's ability to continue as a going concern.
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, 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 six months ended June 30, 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
10
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
As of June 30, 2005, the status of the common stock of the Company was:
5,000,000,000 shares authorized and 4,273,136,349 shares issued and outstanding.
During the six month period ended June 30, 2005, the Company issued 884,000,000
shares for cash of approximately $693,000 and 21,000,000 shares of common stock
for debentures in the approximate amount of $21,122.
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 second quarter of 2005.
Item 5. Other Information - Not applicable
Item 6. Exhibits
11
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.
12
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 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)