10QSB 1 adot10q093003.txt ADV OPTICS ELEC 10QSB 093003 U. S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACTS OF 1934 For the quarterly period ended: September 30, 2003 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 each 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 September 30, 2003 was 2,336,982,960 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) CONDENSED BALANCE SHEET September 30, 2003 -------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash $ 1,323,545 Marketable securities 25,234 Costs and estimated earnings in excess of billings on uncompleted contract 2,218,491 Allowance for loss on contract (1,333,491) ------------ 885,000 Other current assets 44,009 ------------ Total current assets 2,277,788 PROPERTY AND EQUIPMENT, NET 79,862 OTHER ASSETS Intangible assets, net 3,605 Investment in Biomoda, Inc. 46,341 Notes receivable from related parties 238,312 ------------ 288,258 $ 2,645,908 ============ LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES Accounts payable $ 125,650 Accrued expenses 4,896 Accrued interest 152,068 Notes payable 0 Convertible debentures 979,464 ------------ Total current liabilities 1,262,078 ============ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' DEFICIT Preferred stock, $0.001 par value, 10,000,000 shares authorized; no shares issued and outstanding -- Common stock, $0.001 par value, 2,500,000,000 shares authorized; 2,336,982,960 shares issued and outstanding 2,336,983 Treasury stock, at cost (11,434) Notes receivable officer (317,203) Additional paid in capital 11,625,016 Other compreshenive income 4,587 Deficit accumulated during the development stage (12,254,119) ------------ Total stockholders' deficit 1,383,830 ------------ $ 2,645,908 ============ -------------------------------------------------------------------------------- 2 See accompanying notes to these condensed financial statements. -------------------------------------------------------------------------------- ADVANCED OPTICS ELECTRONICS, INC. (A Development Stage Company) CONDENSED STATEMENTS OF OPERATIONS For the Three Month Periods Ended September 30, 2003 and 2002 --------------------------------------------------------------------------------
2003 2002 -------------- ------------ CONTRACT REVENUES $ -- $ -- OPERATING EXPENSES General and administrative (561,789) (180,516) Research and development (94,077) (21,660) Asset impairment -- -- -------------- ------------ (655,866) (202,176) ESTIMATED LOSS ON CONTRACT -- -- -------------- ------------ OPERATING LOSS (655,866) (202,176) -------------- ------------ OTHER (EXPENSE) INCOME Interest income -- 3,370 Gain (loss) on marketable equity securities 2,041 -- Other investment gains -- -- Gain (loss) on sale of treasury stock 31,707 -- Loss from investment in Biomoda, Inc. 3,776 (1,158) Gain (loss) on disposal of assets -- -- Interest expense (49,764) (22,434) -------------- ------------ (12,240) (20,222) -------------- ------------ NET LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (668,106) (222,398) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE -- -- -------------- ------------ NET LOSS $ (668,106) $ (222,398) ============== ============ Basic and diluted net loss before cumulative effect of change in accounting principle available to common shareholder per common share $ (0.00) $ (0.00) Cumulative effect of change in accounting principle -- -- -------------- ------------ Basic and diluted net loss available to common shareholder per common share $ (0.00) $ (0.00) -------------- ------------ Basic and diluted weighted average common shares outstanding 2,015,908,862 229,261,072 ============== ============
-------------------------------------------------------------------------------- 3 See accompanying notes to these condensed financial statements. -------------------------------------------------------------------------------- ADVANCED OPTICS ELECTRONICS, INC. (A Development Stage Company) CONDENSED STATEMENTS OF OPERATIONS For the Nine Month Periods Ended September 30, 2003 and 2002 and For The Period From May 22, 1996 (Inception) Through September 30, 2003 --------------------------------------------------------------------------------
May 22, 1996 (Inception) Through September 30, 2003 2002 2003 -------------- ------------ ------------ CONTRACT REVENUES $ -- $ -- $ -- OPERATING EXPENSES General and administrative (1,153,295) (640,881) (7,965,389) Research and development (129,088) (68,169) (1,461,161) Asset impairment -- -- (227,570) -------------- ------------ ------------ (1,282,383) (709,050) (9,654,120) ESTIMATED LOSS ON CONTRACT (50,000) (185,000) (1,255,000) -------------- ------------ ------------ OPERATING LOSS (1,332,383) (894,050) (10,909,120) -------------- ------------ ------------ OTHER (EXPENSE) INCOME Interest income 11,960 11,597 83,342 Gain (loss) on marketable equity securities 2,041 -- (27,327) Other investment gains -- -- 59,784 Gain (loss) on sale of treasury stock 31,707 -- 31,707 Loss from investment in Biomoda, Inc. (18,824) (8,261) (308,574) Gain (loss) on disposal of assets -- 10,000 (4,306) Interest expense (72,536) (77,822) (1,116,605) -------------- ------------ ------------ (45,652) (64,486) (1,281,979) -------------- ------------ ------------ NET LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (1,378,035) (958,536) (12,191,099) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE -- -- (63,020) -------------- ------------ ------------ NET LOSS $ (1,378,035) $ (958,536) $(12,254,119) ============== ============ ============ Basic and diluted net loss before cumulative effect of change in accounting principle available to common shareholder per common share $ (0.00) $ (0.01) $ (0.04) Cumulative effect of change in accounting principle -- -- -- -------------- ------------ ------------ Basic and diluted net loss available to common shareholder per common share $ (0.00) $ (0.01) $ (0.04) ============== ============ ============ Basic and diluted weighted average common shares outstanding 1,340,815,254 185,462,129 316,836,630 ============== ============ ============
-------------------------------------------------------------------------------- 4 See accompanying notes to these condensed financial statements. -------------------------------------------------------------------------------- ADVANCED OPTICS ELECTRONICS, INC. (A Development Stage Company) CONDENSED STATEMENTS OF CASH FLOWS For The Nine Month Periods Ended September 30, 2003 and 2002 and For the Period From May 22, 1996 (Inception) Through September 30, 2003 --------------------------------------------------------------------------------
May 22, 1996 (Inception) Through September 30, 2003 2002 2003 ----------- ---------- ------------ Cash flows from operating activities: Net loss $(1,378,035) $ (958,536) $(12,254,119) Adjustments to reconcile net loss to net cash used in operating activities: Intrinsic value of conversion features -- -- 610,603 Write off of organization costs -- -- 63,020 Amortization of discount on convertible notes and preferred stock -- -- 295,209 Loss on marketable securities (2,041) -- 27,327 Loss (gain) on disposal of assets -- (10,000) 4,306 Loss (gain) on sale of treasury stock (31,707) -- (31,707) Loss on investment in Biomoda, Inc. 18,824 8,261 308,574 Issuance of common stock for services 743,861 396,581 5,161,712 Issuance of notes payable for services -- -- 50,000 Increase in excess of costs and earnings over billings on uncompleted contract (338,142) (228,666) (2,218,491) Increase in allowance for loss on contract 128,491 185,000 1,333,491 Interest accrued on convertible debentures -- 82,848 228,446 Interest earned on note receivable from stockholder and related parties (8,301) -- (23,727) Depreciation and amortization 68,041 69,086 606,001 Bad debt expense -- 17,680 15,000 Asset impairment -- -- 227,570 Other non-cash expenses -- -- 132,119 Accrued interest -- -- 30,667 Changes in operating assets and liabilities: Increase in other current assets (7,176) (11,746) (44,009) Decrease ininventory -- -- -- Increase in accounts payable and accrued expenses (156,239) 69,835 339,756 ----------- ---------- ------------ Net cash used in operating activities (962,424) (379,657) (5,138,252) ----------- ---------- ------------ Cash flows from investing activities: Purchases of property and equipment (10,849) -- (400,681) Proceeds from sale of property and equipment -- 10,000 23,800 Investment in Biomoda, Inc. -- -- (383,845) Proceeds from sale of Biomoda, Inc. stock -- 11,250 28,930 Advances to Biomoda, Inc. (199,880) (13,720) (238,312) Proceeds from the sale of marketable securities 10,412 -- 51,077 Purchases of marketable securities (29,018) -- (99,052) Decrease in certificates of deposit -- -- -- Purchase of other assets -- -- (245,579) ----------- ---------- ------------ Net cash (used in) provided by investing activities (229,335) 7,530 (1,263,662) ----------- ---------- ------------
-------------------------------------------------------------------------------- 5 See accompanying notes to these condensed financial statements. -------------------------------------------------------------------------------- ADVANCED OPTICS ELECTRONICS, INC. (A Development Stage Company) CONDENSED STATEMENTS OF CASH FLOWS (CONT'D) For The Nine Month Periods Ended September 30, 2003 and 2002 and For the Period From May 22, 1996 (Inception) Through September 30, 2003 -------------------------------------------------------------------------------- Cash flows from financing activities: Principal repayments on notes payable and capital leases (38,110) (10,888) (269,987) Proceeds from notes payable -- -- 622,776 Issuance of common stock for cash 2,476,649 292,576 6,650,521 Increase in notes receivable stockholder -- -- (317,203) Proceeds from sale of treasury stock 56,553 7,829 177,159 Purchase of treasury stock (29,646) (8,253) (184,356) Proceeds from issuance of convertible debt -- -- 1,060,000 Principal repayments on convertible debt -- -- (13,451) ----------- ---------- ------------ Net cash provided by financing activities 2,465,446 281,264 7,725,459 ----------- ---------- ------------ Net increase (decrease) in cash 1,273,687 (90,863) 1,323,545 Cash at beginning of period 49,858 90,863 -- ----------- ---------- ------------ Cash at end of period $ 1,323,545 $ -- $ 1,323,545 =========== ========== ============
See accompanying notes to the condensed financial statements for additional information relating to non-cash investing and financial activities during the three month period ended September 30, 2003. -------------------------------------------------------------------------------- 6 See accompanying notes to these condensed financial statements. MANAGEMENTS REPRESENTATION: The management of Advanced Optics Electronics, Inc. (the "Company") without audit has prepared the condensed financial statements included herein. The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Certain information and note disclosures normally included in the condensed financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. In the opinion of the management of the Company, all adjustments considered necessary for fair presentation of the condensed financial statements have been included and were of a normal recurring nature, and the accompanying condensed financial statements present fairly the financial position as of September 30, 2003, and the results of operations for the nine months and three months ended September 30, 2003 and 2002 and cash flows for the nine months ended September 30, 2003 and 2002. It is suggested that these condensed financial statements be read in conjunction with the audited financial statements and notes for the year ended December 31, 2002, included in the Company's Form 10-KSB filed with the Securities and Exchange Commission on March 31, 2003. The interim results are not necessarily indicative of the results for a full year. 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Organization and Nature of Operations ------------------------------------- Advanced Optics Electronics, Inc. (the "Company") is a development stage technology company with its principal focus on the development and production of large-scale flat panel displays and trades on the OTC Bulletin Board under the symbol "ADOT." The market for the large-scale flat panel displays will include advertising billboards, flat panel computer monitors and cockpit displays. The Company plans to focus on producing and selling the large-scale flat panel displays for outdoor advertising billboards. The Company has obtained a contract to produce two outdoor advertising billboards using its flat panel display technology. This is the first commercial application of the Company's technology. The success of the Company will depend on its ability to commercialize its technology, complete this contract and obtain additional contracts. As of September 30, 2003, completion of this contract was behind schedule. While management believes the contract will ultimately be completed, there can be no certainty that this will be accomplished because the technology has not yet been used in a commercial application. In addition, the Company may be required to obtain additional capital in order to fund the completion of the contract. 7 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) Organization and Nature of Operations (continued) ------------------------------------------------- Since inception, the Company has primarily been engaged in the research and development of its product. Once the research and development is complete, the Company will begin to manufacture and obtain new contracts. The Company is in the development stage and has not generated revenues from any product sales. The Company believes that its planned products will produce sufficient revenues in the future. There are no assurances, however, that the Company will be able to produce such products, or if produced, that they will be accepted in the market place. Development Stage and Going Concern ----------------------------------- The Company has been in the development stage since its inception on May 22, 1996, and has not generated any revenues from operations and there is no assurance of any future revenues. The Company will require substantial additional funding for continuing research and development, obtaining acceptance in the market place and for the commercialization of its product. There can be no assurance that the Company will be able to obtain sufficient additional funds when needed, or that such funds, if available, will be obtainable on terms satisfactory to the Company. Management has taken action to address these matters. They include: o Retention of experienced management personnel with particular skills in the development and commercialization of such product. o The Company is aggressively seeking new contracts. o The Company has an equity method investment in a start-up company, which management hopes will be profitable. o The Company is seeking investment capital through the public markets. Management plans to obtain revenues from product sales, but there is no commitment by any persons for purchases of any of the proposed products. In the absence of significant sales and profits, the Company may seek to raise additional funds to match its working capital requirements through the additional sales of debt and equity securities, there is no assurance that the Company will be able to obtain sufficient additional funds when needed, although such funds, if available, will be obtainable on terms satisfactory to the Company. The successful outcome of future activities cannot be determined at this time and there is no assurance that if achieved, the Company will have sufficient funds to execute its intended business plan or generate positive operating results. As a result, the accompanying condensed 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 September 30, 2003, a deficit accumulated during the development stage of $12,254,119 losses from operations and lack of operational history, among other matters, which raise substantial doubt about its ability to continue as a going concern. 8 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) Development Stage and Going Concern (continued) ----------------------------------------------- The condensed financial statements do not include any adjustments related to recoverability and classification of assets carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. Stock Based Compensation ------------------------ At September 30, 2003, the Company has two stock-based employee compensation plans. The Company accounts for those plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related Interpretations. No stock-based employee compensation cost is reflected in net loss, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," as amended to stock-based employee compensation.
2003 2002 ------------ ----------- Net loss: As reported $ (1,378,035) $(958,536) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards -- (7,500) ------------ --------- Pro forma $ (1,378,035) $(966,036) ============ ========= Basic and diluted net loss per share: As reported $ -- $ (0.01) ============ ========= Pro forma $ -- $ (0.01) ============ =========
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) Recent Accounting Standards --------------------------- Recent accounting pronouncements discussed in the notes to the December 31, 2002 audited financial statements, filed previously with the Securities and Exchange Commission in form 10-KSB, that were required to be adopted during the period ending September 30, 2003 did not have a significant impact on the Company's condensed financial statements. 2. STOCKHOLDERS' EQUITY Common Stock ------------ On August 12, 2003, the Company's Board of Directors authorized the change in the total number of common shares, which the Company is authorized to issue from the current authorized of 1,950,000,000 to 2,500,000,000 common shares. 9 During the three month period ended September 30, 2003, the Company sold 467,650,000 shares of common stock for approximately $1,456,000 in cash; all shares were sold for less than $0.01. During the three month period ended September 30, 2003, the Company issued 114,500,000 shares of common stock for services, which were valued at approximately $409,000 (based on the closing market price on the date of grant, which was less than $0.01). The Company recorded such amounts in the accompanying condensed statement of operations. During the three month period ended September 30, 2003, in accordance with the applicable convertible note payable agreement, the Company issued 130,000,000 shares of common stock at conversion prices of less than $0.01 in connection with the conversion of notes payable principal of approximately $177,000 and approximately $50,000 of accrued interest. Treasury Stock -------------- During the nine month period ended September 30, 2003, the Company sold 9,950,000 shares of treasury stock for approximately $57,000 in cash. The related gain of approximately $32,000 was recorded in the accompanying statements of operations. Subsequent Event ---------------- In November 2003, the Company reduced the carrying value of its' convertible debentures by approximately $ 450,000 of principal and accrued interest. Such reduction consisted of the payment of approximately $256,000 in cash, the issuance of approximately 35,000,000 shares of common stock (Valued at approximately $145,000 based on the market price on the date of grant) and a forgiveness of approximately $49,000. The net effect has been to reduce the outstanding debentures by approximately 41%. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION Forward - Looking Statements ---------------------------- This Quarterly Report contains forward-looking statements about the business, financial condition and prospects of the Company that reflect assumptions made by management and management's beliefs based on information currently available to it. The Company can give no assurance that the expectations indicated by such forward-looking statements will be realized. If any of management's assumptions should prove incorrect, or if any of the risks and uncertainties underlying such expectations should materialize, the Company's actual results may differ materially from those indicated by the forward-looking statements. The key factors that are not within the Company's control and that may have a direct bearing on operating results include, but are not limited to, the acceptance by customers of the Company's products, the Company's ability to develop new products cost-effectively, the ability of the Company to raise capital in the future, the development by competitors of products using improved or alternative technology, the retention of key employees and general economic conditions. 10 There may be other risks and circumstances that management is unable to predict. When used in this Quarterly Report, words such as, "believes," "expects," "intends," "plans," "anticipates" "estimates" and similar expressions are intended to identify forward-looking statements, although there may be certain forward-looking statements not accompanied by such expressions. All forward-looking statements are intended to be covered by the safe harbor created by Section 21E of the Securities Exchange Act of 1934. OVERVIEW Advanced Optics Electronics, Inc. is a technology company whose primary focus is the development, production and sales of its electronic flat panel displays. The primary initial product will be marketed to users of outdoor advertising billboards. We believe that our product line has the potential to create a new segment of the outdoor advertising industry. Our systems software and electronic displays represent an innovative approach to advertising that takes advantage of the technological convergence of broadcast and billboard media and the World Wide Web. Our goal is to create a product line based on technology that is scalable both in terms of size and resolution to meet a wide range of requirements related to site, economics and use from our potential customers. We are also planning to develop a leasing program and an Owned & Operated group. THE MAJOR ADVANTAGES AND FEATURES OF THE DISPLAY ARE: o Brightest display ever available (35,000 nits) o Widest viewing angle available o Smallest dot pitch available for outdoor large-scale displays (8 mm dot pitch) o High definition picture quality o Modular assembly (1 meter increments) for scaleable and shapeable architectures o True Color (24 bit) o Full motion video (up to 120 frames per second) o Transportable for mobile operations o Weather resistant for outdoor applications o Modest power requirements o Minimum 5 year continual use lifetime o Real-time live video feeds o Broadcast/simulcast applications o Supports streaming video o Uses industry standard DVI protocol for high speed data linking and digital video interfacing o Satellite linkable PROPRIETARY BILLBOARD SOFTWARE CAPABILITIES ARE: o Manage and update display content remotely o Works with all image file formats and digital vide editors o Secure Internet or WAN communications o WEB-based status monitoring o Provides time, temperature and other dynamic content inserts The Company was organized as a Nevada corporation on May 22, 1996. On November 7, 1996, the Company acquired the business and patents of PLZTech, a company involved in the development of flat panel displays. Our operating activities have related primarily to the initial planning and development of 11 our product and building our operating infrastructure. We have completed, tested, and measured the performance of, our prototype and are currently in the manufacturing process of our production model. We expect our principal source of revenue to be derived from sales of our electronic display product. To date we have recognized limited revenue, but we have developed a functioning prototype and we anticipate sales by the second quarter 2004. The company has set the price for its units at $395,000 and $1,490,000 respectively for its 2-meter x 3 meter and its 3-meter x 8-meter flat panel displays. The company has completed a marketing film that is being distributed on a national and international basis. The recipients who receive this film are institutional investors and qualified potential buyers of the flat panel displays. Our operating expenses have increased significantly since our inception. This is due to increased engineering and management staff and investments in operating infrastructure. Since our inception we have incurred significant losses and, as of September 30, 2003 had a deficit accumulated during the development stage of $12,254,119 RESULTS OF OPERATIONS OF THE COMPANY Due to our limited operating history, we believe that period-to-period comparisons of our results of operations are not fully meaningful and should not be relied upon as an indication of future performance. Comparison of the Three-month Periods Ended September 30, 2003 and 2002 ----------------------------------------------------------------------- REVENUE. During the quarter ended March 31, 2001, the Company changed the accounting for our contract to the completed contract method. According to this way of accounting for contracts, we are booking no revenue until the completion of the contract. Please note that the revenue for the period May 22, 1996 (Inception) Through September 30, 2003 has been restated and is now $0. Billings and collections through September 30, 2003 have totaled $89,873. PRODUCT DEVELOPMENT. Product development expenses consist primarily of personnel expenses, consulting fees and depreciation of the equipment associated with the development and enhancement of our flat panel displays. Research development and technical costs increased to $94,077 in the third quarter of 2003 from $21,660 in the third quarter of 2002. Continued investment in product development is critical to attaining our strategic objectives and, as such, we expect product development expenses to increase significantly in future periods. We expense product development costs as they are incurred. GENERAL AND ADMINISTRATIVE. General and administrative expenses consist of expenses for executive and administrative personnel, facilities, professional services, travel, general corporate activities, and the depreciation and amortization of office furniture and leasehold improvements. General and administrative costs increased to $561,789 in the third quarter of 2003 from $180,516 in the third quarter of 2002. We expect general and administrative costs to increase in the future as our business prospects develop and we will require more staff. The costs associated with being a publicly traded company and future strategic acquisitions will also be a contributing factor to increases in this expense. OTHER INCOME (EXPENSE). Other income (expense) consists of interest and other income and expense. Other income (expense), net decreased to ($12,240) in the third quarter of 2003 from ($20,222) in the 12 third quarter of 2002 due primarily to the additional interest expense, recognized during the period, partially offset by the gain on the sales of treasury stock. Comparison of the Nine-month Periods Ended September 30, 2003 and 2002 ---------------------------------------------------------------------- PRODUCT DEVELOPMENT. Product development expenses consist primarily of personnel expenses, consulting fees and depreciation of the equipment associated with the development and enhancement of our flat panel displays. Research development and technical costs increased to $129,088 in the first nine months of 2003 from $68,169 in the first nine months of 2002. Continued investment in product development is critical to attaining our strategic objectives and, as such, we expect product development expenses to increase significantly in future periods. We expense product development costs as they are incurred. GENERAL AND ADMINISTRATIVE. General and administrative expenses consist of expenses for executive and administrative personnel, facilities, professional services, travel, general corporate activities, and the depreciation and amortization of office furniture and leasehold improvements. General and administrative costs increased to $1,153,295 in the first nine months of 2003 from $640,881 in the first nine months of 2002. We expect general and administrative costs to increase in the future as our business prospects develop and we will require more staff. The costs associated with being a publicly traded company and future strategic acquisitions will also be a contributing factor to increases in this expense. OTHER INCOME (EXPENSE). Other income (expense) consists of interest and other income and expense. Other income (expense), net decreased to ($45,652) in the third quarter of 2003 from ($64,486) in the third quarter of 2002 due primarily to gain on sale of treasury stock. There was a larger loss on our Biomoda Investment due to the increased activity at Biomoda and the related increased expenses. LIQUIDITY AND CAPITAL RESOURCES Since inception, we have funded our operations primarily through the private placement of equity securities and the issuance of convertible debentures. As of September 30, 2003 we have raised net proceeds of approximately $8,500,000. The cash balance at the end of the quarter of $1,323,545 represents approximately twelve months of cash operating expenses. Subsequent to the end of the third quarter 2003, the Company has retired approximately 41% of its Convertible Debentures. We have also utilized equipment loans and capital lease financing. The equipment loan was completely paid off with in the first two weeks of the third quarter. The Company's holding in Biomoda, Inc may provide additional liquidity. Biomoda is a biomedical development company. The Company's ownership of Biomoda, as of September 30, 2003 was approximately 15.9%. The Company's relationship to its investment in Biomoda changed during the second quarter of 2002. There is now an active leadership role in Biomoda being provided by John Cousins and Leslie Robins, officers of the Company. The Company has gone to the equity method of reporting its investment in 13 Biomoda because of these recent changes in the management relationship between the two companies. Biomoda is currently in the process of raising capital by selling securities under an SB2 that has been filed and declared effective by the Securities and Exchange Commission. The SB2 was declared effective July 11, 2003. Product development expenditures were $94,077 for the quarter ended September 30, 2003. Funds for operations, product development and capital expenditures were provided from the sale of securities and cash reserves. Management believes that sales of securities, cash reserves and contract revenue will provide adequate liquidity and capital resources to meet the anticipated development stage requirements through the end of the second quarter 2004. At that time it is anticipated that sales of flat panel displays will begin and contribute to operating revenues. It is anticipated that these sales will provide the additional capital resources to fund the proportionately higher working capital requirements of production and sales initiatives. The Company currently has no other significant commitments for capital expenditures in 2003. Going Concern ------------- The Company's independent certified public accountants have stated in their report included in the Company's 2002 Form 10-KSB, that the Company has incurred operating losses in the last two years, has a working capital deficit and a stockholders' deficit. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Inflation --------- Management believes that inflation has not had a material effect on the Company's results of operations. Critical Accounting Policies ---------------------------- In December 2001, the SEC requested that all registrants list their three to five most "critical accounting policies" in the MD&A. The SEC indicated that a "critical accounting policy" is one which is both important to the portrayal of the Company's financial condition and results, and requires management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We believe that our following accounting policies fit this definition: REVENUE RECOGNITION - In accordance with Statement of Position 81-1, "Accounting for Performance of Construction-Type and Certain Production-Type Contracts," the Company accounts for revenue and costs related to its long-term contract in process by the completed-contract method, whereas during the period from May 22, 1996 (inception) to December 31, 1999, revenue and costs were determined by the percentage-of-completion method. The completed-contract method of accounting was adopted in 2000 due to the Company's uncertainty regarding contract cost estimates. The financial statements of the period from May 22, 1996 (inception) to December 31, 1999, were restated to apply the completed contract method retroactively. The effect of the accounting change had no effect on net loss or loss per share previously reported for 1999 or for the period from May 22, 1996 (inception) to December 31, 1999. Under the completed contract method of accounting, contract revenues and costs are recognized when the contract is completed, with estimated losses recognized when it becomes evident that contract costs will exceed contract revenues. Contract costs include all direct material and labor costs and those indirect 14 costs related to contract performance, such as indirect labor, supplies, overhead, equipment depreciation and interest. Costs in excess of amounts billed are classified as current assets under costs and estimated earnings in excess of billings on uncompleted contract. ESTIMATES - Critical estimates made by management are, among others, estimates for current and deferred taxes, recoverability of intangible assets, collectibility of contract receivable, estimation of costs for long-term contracts, allowance for loss on contracts, recoverability of investment in Biomoda, Inc. and the valuation of other assets. Actual results could materially differ from those estimates. ITEM 3. CONTROLS AND PROCEDURES Within 90 days prior to this report, Management carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures, pursuant to Exchange Act Rules 13a-15(c) and 15d-15(c) which includes inquiries made to certain other of our employees. Based on the foregoing, the Principal Executive Officer and Principal Financial Officer concluded that the Company's disclosure controls and procedures are effective to timely alert them to any material information relating to the Company that must be included in the Company's periodic SEC filings. In addition, there have been no significant changes in the Company's internal controls over financial reporting or in other factors that could significantly affect internal controls subsequent to the date of the most recent evaluation. 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 September 30, 2003, the status of the common stock of the Company was: 2,500,000,000 shares authorized and 2,336,982,960 shares issued and outstanding. During the three month period ended September 30, 2003, the Company sold 467,650,000 shares of common stock for $1,456,000 in cash; all shares were sold for less than $0.01. During the three month period ended September 30, 2003, the Company issued 114,500,000 shares of common stock for services, which were valued at $409,000 (based on the closing market price on the date of grant, which was less than $0.01). During the period ended September 30, 2003, in accordance with the applicable convertible note payable agreement, the Company issued 130,000,000 shares of common stock at conversion prices of less than $0.01 in connection with the conversion of notes payable of approximately $177,000 including approximately $50,000 of accrued interest. 15 These transactions were exempt under Section 4(2) of the Securities Act of 1933, as amended. The purchasers were well known to an executive officer of Advanced Optics Electronics, Inc. and each had a net worth or income level to qualify as accredited investors, were experienced in financial and business matters, and no general solicitation was involved in the transaction. Item 3. Defaults upon senior securities - Not applicable Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of the Company's security holders during the third quarter of fiscal year 2003. Item 5. Other Information - Not applicable Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 31.1 Certification of CEO pursuant to Securities Exchange Act rules 13a-15 and 15d-15(c) as adopted pursuant to section 302 of the Sarbanes-Oxley act of 2002. 31.2 Certification of CFO pursuant to Securities Exchange Act rules 13a-15 and 15d-15(c) as adopted pursuant to section 302 of the Sarbanes-Oxley act of 2002. 32.1 Certification of Leslie S. Robins, Chief Executive Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley act of 2002. 32.2 Certification of John J. Cousins, Chief Financial Officer (Principal Accounting Officer) pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley act of 2002. (a) Reports on Form 8-K No reports on Form 8-K were filed during the third quarter of 2003. 16 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report on Form 10QSB to be signed on its behalf by the undersigned, thereunto duly authorized. DATED: NOVEMBER 14, 2003 ADVANCED OPTICS ELECTRONICS, INC. BY: /s/ JOHN J. COUSINS -------------------------------- John J. Cousins Vice President of Finance (Principal Accounting Officer) BY: /s/ LESLIE S. ROBINS -------------------------------- Leslie S. Robins Executive Vice President (Principal Executive Officer) 17