-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AwhLPD/9XEbX4YxrjeHHQyFqoDDtVhm7DmlS7LlhQ5MAOmId7a9A+9VX5cX+ctZf wZ1twTCUrQLBeMu753o0bA== 0001185185-05-000168.txt : 20050516 0001185185-05-000168.hdr.sgml : 20050516 20050516172503 ACCESSION NUMBER: 0001185185-05-000168 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050516 DATE AS OF CHANGE: 20050516 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVANCED OPTICS ELECTRONICS INC CENTRAL INDEX KEY: 0001020657 STANDARD INDUSTRIAL CLASSIFICATION: OPTICAL INSTRUMENTS & LENSES [3827] IRS NUMBER: 880365136 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-24511 FILM NUMBER: 05836180 BUSINESS ADDRESS: STREET 1: 8301 WASHINGTON NE #4 STREET 2: STE F CITY: ALBUQUERQUE STATE: NM ZIP: 87113 BUSINESS PHONE: 5057977878 MAIL ADDRESS: STREET 1: 8301 WASHINGTON NE STREET 2: #4 CITY: ALBUQUERQUE STATE: NM ZIP: 87113 10QSB 1 adot10qsb033105.txt ADOT 10-QSB 033105 U. S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: March 31, 2005 Commission file No.0-24511 ------- ADVANCED OPTICS ELECTRONICS, INC. (Name of small business issuer as specified in its charter) NEVADA 88-0365136 (State of incorporation) (IRS Employer Identification No.) 8301 WASHINGTON NE, SUITE 5, ALBUQUERQUE, NEW MEXICO 87113 (Address of principal executive offices including zip code) Issuer's telephone number: (505) 797-7878 Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of issuer's shares of Common Stock outstanding as of May 13, 2005 was 3,878,136,349. Transitional Small Business Disclosure Format (check one): Yes No X --- --- PART I: FINANCIAL INFORMATION ITEM 1: Financial Statements ADVANCED OPTICS ELECTRONICS, INC. (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED BALANCE SHEET MARCH 31, 2005 (UNAUDITED) - --------------------------------------------------------------------------------
ASSETS CURRENT ASSETS Cash $ 350,667 Marketable securities 1,935,050 Other current assets 16,057 ------------ Total current assets 2,301,774 INTANGIBLES, NET OF ACCUMULATED AMORTIZATION OF $59,386 203,759 PROPERTY AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION OF $410,666 148,042 OTHER ASSETS Notes receivable and deposits 51,737 $ 2,705,312 ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 104,006 Accrued expenses 192,269 Advances from shareholders 134,988 Advances from officer 64,710 Convertible debentures 80,093 ------------ Total current liabilities 576,066 ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred stock, $0.001 par value, 10,000,000 shares authorized; no shares issued and outstanding -- Common stock, $0.001 par value, 4,000,000,000 shares authorized; 3,733,136,349 shares issued and outstanding 3,733,136 Treasury stock, at cost (37,195) Notes receivable officer (67,299) Additional paid in capital 17,929,002 Accumulated other comprehensive income 978,292 Deficit accumulated during the development stage (20,406,690) ------------ Total stockholders' equity 2,129,246 ------------ $ 2,705,312 ============
- -------------------------------------------------------------------------------- F-1 SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2005 AND 2004 AND FOR THE PERIOD FROM MAY 22, 1996 (INCEPTION) THROUGH MARCH 31, 2005 (UNAUDITED) - --------------------------------------------------------------------------------
MAY 22, 1996 (INCEPTION) THROUGH MARCH 31, 2005 2004 2005 --------------- --------------- --------------- CONTRACT REVENUES $ -- $ -- $ -- OPERATING EXPENSES General and administrative 283,447 526,452 10,888,410 Payroll and related 277,358 175,604 1,810,155 Research and development 8,720 239,342 2,110,369 Professional Fees 1,904 21,364 172,285 Depreciation & amortization 12,499 13,992 137,979 Licensing Fees -- -- 37,976 Inventory write-off -- -- 29,293 Asset impairment -- -- 592,884 --------------- --------------- --------------- Total operating expenses 583,928 976,754 15,779,351 LOSS ON CONTRACT -- 47,463 2,255,944 --------------- --------------- --------------- OPERATING LOSS (583,928) (1,024,217) (18,035,295) --------------- --------------- --------------- OTHER INCOME (EXPENSES) Interest income 860 15 81,241 Realized loss on marketable equity securities (2,213) 17,044 (130,141) Other investment gains -- -- 59,784 Loss from investment in Biomoda, Inc. -- -- (289,750) Gain (loss) on disposal of assets -- -- (3,520) Gain (loss) on settlement of debts 10,122 -- (545,966) Interest expense (6,421) (9,651) (1,291,294) Other income -- -- 551 --------------- --------------- --------------- Total other income (expenses) 2,348 7,408 (2,119,095) --------------- --------------- --------------- NET LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE & EXTRAORDINARY LOSS (581,580) (1,016,809) (20,154,390) EXTRAORDINARY LOSS -- -- (189,280) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE -- -- (63,020) --------------- --------------- --------------- NET LOSS $ (581,580) $ (1,016,809) $ (20,406,690) =============== =============== =============== OTHER COMPREHENSIVE GAIN (LOSS) Unrealized gain (loss) on marketable securities 987,983 (25,045) 978,292 --------------- --------------- --------------- COMPREHENSIVE GAIN (LOSS) 406,403 (1,041,854) (19,428,398) =============== =============== =============== BASIC AND DILUTED NET LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE AVAILABLE TO COMMON SHAREHOLDER PER COMMON SHARE AND EXTRAORDINARY LOSS $ (0.000) $ (0.000) EXTRAORDINARY LOSS -- -- CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE -- -- --------------- --------------- BASIC AND DILUTED NET LOSS AVAILABLE TO COMMON SHAREHOLDER $ (0.000) $ (0.000) =============== =============== PER COMMON SHARE BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 3,548,236,349 2,841,154,481 =============== ===============
* Weighted average number of shares used to compute basic and diluted loss per share is the same since the effect of dilutive securities is anti-dilutive. - -------------------------------------------------------------------------------- F-2 SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. ADVANCED OPTICS ELECTRONICS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2005 AND 2004 AND FOR THE PERIOD FROM MAY 22, 1996 (INCEPTION) THROUGH MARCH 31, 2005 (UNAUDITED) - --------------------------------------------------------------------------------
MAY 22, 1996 (INCEPTION) THROUGH MARCH 31, 2005 2004 2005 ------------ ------------ ------------ Cash flows from operating activities: Net loss $ (581,580) $ (1,016,809) $(20,406,690) Adjustments to reconcile net loss to net cash used in operating activities: Intrinsic value of conversion features -- -- 610,603 Write off of organization costs/goodwill -- -- 63,020 Extraordinary loss -- 189,280 Inventory write off -- 29,293 Amortization of discount on convertible notes and preferred stock -- -- 295,209 Loss (Gain) on marketable securities 2,213 (17,044) 130,141 Loss on disposal of assets -- -- 3,520 Loss on investment in Biomoda, Inc. -- -- Issuance of common stock for services -- 228,172 6,504,726 Issuance of Biomoda common stock and options for services -- 165,000 Issuance of notes payable for services -- -- 50,000 Increase in excess of costs and earnings over billings on uncompleted contract -- (47,463) (2,050,000) Increase in allowance for loss on contract -- 47,463 2,050,000 Loss (Gain) on extinguishment of debt (10,122) 545,966 Interest accrued on convertible debentures -- 309,504 Interest earned on note receivable from stockholder and related parties -- (17,823) Depreciation and amortization 12,499 13,992 675,939 Bad debt expense -- -- 15,000 Asset impairment -- -- 592,884 Other non-cash expenses -- -- 33,447 Accrued interest (2,903) 30,667 Changes in operating assets and liabilities: Decrease (Increase) in other current assets 1,389 (22,269) (10,824) Decrease in inventory (35,293) (Decrease) Increase in accounts payable and accrued expenses (51,737) (132,120) (25,797) ------------ ------------ ------------ Net cash used in operating activities (627,338) (948,981) (9,962,479) ------------ ------------ ------------ Cash flows from investing activities: Purchases of property and equipment (3,780) (20,300) (521,860) Additions to Patent, trademark and license fee, net of extraordinary gain (30,775) -- (135,347) Proceeds from sale of property and equipment -- -- 23,800 Investment in Genomed (900,000) (900,000) Investment other -- Investment in Biomoda, Inc. -- (383,845) Proceeds from sale of Biomoda, Inc. stock -- -- 28,930 Advances to Biomoda, Inc. (38,432) Advances from shareholders 14,009 Sale of marketable securities 15,756 137,200 208,543 Purchases of marketable securities (18,770) (167,168) (664,104) Cash of variable entity on consolidation 155 Decrease in certificates of deposit -- -- -- Increase in notes receivable (2,158) (51,737) Purchase of other assets -- -- (245,579) ------------ ------------ ------------ Net cash used in investing activities (39,727) (950,268) (2,665,466) ------------ ------------ ------------
- -------------------------------------------------------------------------------- F-3 SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS.
MAY 22, 1996 (INCEPTION) THROUGH MARCH 31, 2005 2004 2005 ------------ ------------ ------------ Cash flows from financing activities: Principal repayments on notes payable and capital leases (269,987) Proceeds from notes payable -- 622,776 Issuance of common stock for cash 430,080 455,511 11,753,798 Issuance of Biomoda common stock for cash 60,000 (Increase) decrease in note receivable stockholder -- (5,422) Repayment for advances from officer (25,000) (25,000) Proceeds from sale of treasury stock 22,234 225,419 Purchase of treasury stock -- (258,377) Proceeds from issuance of convertible debt 1,270,965 Principal repayments on convertible debt -- (154,000) (395,560) ------------ ------------ ------------ Net cash provided by financing activities 405,080 323,745 12,978,612 ------------ ------------ ------------ Net (decrease) increase in cash (261,985) (1,575,504) 350,667 Cash at beginning of period 612,652 3,964,609 -- ------------ ------------ ------------ Cash at end of period $ 350,667 $ 2,389,105 $ 350,667 ============ ============ ============ Supplemental disclosure of cash flow information - Cash paid during the year for: Interest $ -- $ -- ============ ============ Income taxes $ -- $ -- ============ ============
- -------------------------------------------------------------------------------- F-4 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 consolidated financial statements included herein. The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Certain information and note disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. In the opinion of management, all adjustments considered necessary for fair presentation of the financial statements have been included and were of a normal recurring nature, and the accompanying consolidated financial statements present fairly the financial position as of March 31, 2005, and the results of operations and cash flows for the three month periods ended March 31, 2005 and 2004. It is suggested that these financial statements be read in conjunction with the audited financial statements and notes for the year ended December 31, 2004, included in the Company's Form 10-KSB filed with the Securities and Exchange Commission. The interim results are not necessarily indicative of the results for a full year. 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND NATURE OF OPERATIONS Advanced Optics Electronics, Inc. (the "Company") and its subsidiary, Biomoda, Inc (Biomoda) are development stage technology companies. The Company's principal focus is the development and production of large-scale flat panel displays and Biomoda's is cancer detection and diagnostic tests. The Company's stock trades on the Over The Counter Bulletin Board under the symbol "ADOT." The Company plans to focus on producing and selling the large-scale flat panel displays for outdoor advertising billboards. The Company is developing a color recognition optical device and plans to initially focus on marketing it as a color identifier to the visually impaired and as a teaching aid for small children. The Company's unique and novel conception and implementation of hardware and firmware determines color optically and expresses the results with vocal responses. The Company is intending to establish marketing arrangements for the distribution to retail locations after a supply has been manufactured and inventoried. The Company's research and development work have not completed the initial product. Completion of the product is now expected in the latter half of 2005. Because of the lack of anticipated revenues in 2005, the Company has taken excess cash funds and invested these in what they deem to be sound investment in Genomed that may produce additional funds and gains to the company in 2005. These funds and gains would then be used for additional product development and administrative expenses in the initial production stage of the product. In 2002, the Company's Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO") replaced Biomoda's management team, affecting a change in control. The Company also owns approximately 15.9% of Biomoda's outstanding common stock. In 2003, the CEO and the CFO each - -------------------------------------------------------------------------------- F-5 - -------------------------------------------------------------------------------- ADVANCED OPTICS ELECTRONICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- acquired 7.27% of the outstanding common stock of Biomoda. On August 13, 2003, Biomoda formed a 100% owned subsidiary known as Biomoda Holdings, Inc., a Nevada corporation, for the purpose of research, development, production and marketing of medical and biomedical products. As of March 31, 2005, the Company owned approximately 1,132,000 or 15.9% of the 7,117,000 outstanding shares of Biomoda. In addition, two of the Company's officers own approximately 12%, collectively, of Biomoda's outstanding shares. Further, the Company subleases office space and lab equipment to Biomoda and two of the Company's officers are also officers of Biomoda. The Company has been the sole source of funding to Biomoda since 2002 through advances made under a line of credit agreement. The Company is considered the primary beneficiary as it stands to absorb the majority of Biomoda's, called herein as the variable interest entity, expected losses. Since Biomoda and the Company are considered entities under common control for accounting purposes, the Company measures the assets and liabilities of Biomoda at their carrying amounts in consolidation. (Note 5) Biomoda's primary focus is on early cancer detection technology. Its novel cell-targeting technology is globally patented for the detection of pre-cancerous and cancerous conditions in all human tissue. This technology, based on a compound called Tetrakis Carboxy Phenyl Porphine (TCPP), was developed at St. Mary's hospital in Colorado and Los Alamos National Laboratories. Biomoda obtained a worldwide exclusive license to the TCPP technology from the University of California in late 1995, and began new research broadening the scope of the original patent and technology. In November 2000, Biomoda filed a new U.S. provisional patent application defining the ability of its version of the TCPP to detect pre-cancerous and cancerous conditions in all human tissue. Biomoda began the commercialization process by trade marking the technology as CyPath. Management expects to continue assay validation work and register its product with the FDA in 2005. There are several business models, product types and regulatory routes that Biomoda is evaluating including: licensing, ASR, 510K, PMA and IVD kits. Biomoda is evaluating several cancers with a focus on large markets that are in the need of the most immediate diagnostic support. These include: lung, bladder and cervical. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include accounts of the Company and the accounts of the variable interest entity, Biomoda, Inc. (Note 5). All significant inter-company accounts and transactions have been eliminated in consolidation. USE OF ESTIMATES The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates made by management are, among others, expected losses of the variable interest entity, valuation of marketable securities and the valuation of other assets. Actual results could materially differ from those estimates. - -------------------------------------------------------------------------------- F-6 - -------------------------------------------------------------------------------- ADVANCED OPTICS ELECTRONICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- RISKS AND UNCERTAINTIES The Company operates in a highly competitive industry that is subject to intense competition. The Company has no operating history and has not generated revenue from its business operations. As a development stage entity, the Company faces risks and uncertainties relating to its ability to successfully implement its business strategy. Among other things, these risks include the ability to develop and sustain revenue growth; managing expanding operations; competition; attracting, retaining and motivating qualified personnel; maintaining and developing new strategic relationships; and the ability to anticipate and adapt to the changing markets. Therefore, the Company may be subject to uncertainties, including financial, operational, technological, regulatory and other risks associated with an emerging business, including the potential risk of business failure. DEVELOPMENT STAGE AND GOING CONCERN The Company has been in the development stage since Inception, and has not generated any revenues from operations and there is no assurance of any future revenues. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. As of March 31, 2005, the Company has accumulated deficit of $20,406,690. The Company's total assets exceeded the total liabilities by $2,129,246. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. The Company may require additional funding for continuing research and development, obtaining acceptance in the market place and for the commercialization of its product. There can be no assurance that the Company will be able to obtain sufficient additional funds when needed, or that such funds, if available, will be obtainable on terms satisfactory to the Company. Management plans to obtain revenues from product sales, but there are no significant commitments for purchases of any of the proposed products. In the absence of significant sales and profits, the Company may seek to raise additional funds to match its working capital requirements through the additional sales of debt and equity securities, there is no assurance that the Company will be able to obtain sufficient additional funds when needed, although such funds, if available, will be obtainable on terms satisfactory to the Company. The successful outcome of future activities cannot be determined at this time and there is no assurance that if achieved, the Company will have sufficient funds to execute its intended business plan or generate positive operating results. MARKETABLE SECURITIES The Company classifies its investments in marketable securities as "available-for sale" in accordance with the provisions of Statement of Financial Accounting Standards No. 115, "ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES" (SFAS 115). The Company does not have any investments classified as "trading" or "held to maturity". - -------------------------------------------------------------------------------- F-7 - -------------------------------------------------------------------------------- ADVANCED OPTICS ELECTRONICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- On January 8, 2004, the Company entered into a Stock Sale Agreement (the "Agreement") with GenoMed, Inc., a Florida corporation ("GenoMed") whereby the Company purchased approximately 33,300,000 shares of restricted common stock of GenoMed for $900,000 in cash, representing approximately 17.9% of the total outstanding shares of GenoMed immediately after the execution of the Agreement. The Company has accounted for this investment under the cost method as it cannot exercise significant influence over the operating and financial policies of GenoMed. As of March 31, 2005, these shares become free trading shares. At March 31, 2005, the Company held approximately 32,793,000 of these shares. Following is a summary of marketable securities classified as available for sale as of March 31, 2005: COST BASIS FAIR VALUE UNREALIZED GAIN ----------- ---------- --------------- Marketable securities-Common stock $ 956,758 $1,935,050 $978,292 Available-for-sale securities consist of securities in GenoMed and are carried at fair value with the unrealized gain or loss, net of tax, reported in accumulated other comprehensive income. The fair value of marketable securities was determined based on available market information. During the three months ended March 31, 2005, the Company transferred 571,409 shares valued at approximately $15,000 to a consultant in exchange for services. STOCK BASED COMPENSATION The Company accounts for stock-based compensation issued to employees using the intrinsic value based method as prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"), "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES." Under the intrinsic value based method, compensation expense is the excess, if any, of the fair value of the stock at the grant date or other measurement date over the amount an employee must pay to acquire the stock. Compensation expense, if any, is recognized over the applicable service period, which is usually the vesting period. SFAS 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION," if fully adopted, changes the method of accounting for employee stock-based compensation plans to the fair value based method. For stock options and warrants, fair value is determined using an option pricing model that takes into account the stock price at the grant date, the exercise price, the expected life of the option or warrant, stock volatility and the annual rate of quarterly dividends. Compensation expense, if any, is recognized over the applicable service period, which is usually the vesting period. The adoption of the accounting methodology of SFAS 123 is optional and the Company has elected to continue accounting for stock-based compensation issued to employees using APB 25; however, pro forma disclosures, as the Company adopted the cost recognition requirement under SFAS 123, are required to be presented (see below). For stock-based compensation issued to non-employees, the Company uses the fair value method of accounting under the provisions of SFAS 123. FASB Interpretation No. 44 ("FIN 44"), "ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION, AN INTERPRETATION OF APB 25" clarifies the application of APB 25 for (a) the definition of - -------------------------------------------------------------------------------- F-8 - -------------------------------------------------------------------------------- ADVANCED OPTICS ELECTRONICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- employee for purpose of applying APB 25, (b) the criteria for determining whether a plan qualifies as a non compensatory plan, (c) the accounting consequence for various modifications to the terms of a previously fixed stock option or award and (d) the accounting for an exchange of stock compensation awards in a business combination. Management believes that the Company accounts for transactions involving stock compensation in accordance with FIN 44. SFAS 148, "ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE, AN AMENDMENT OF FASB STATEMENT NO. 123," provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. At March 31, 2005, the Company has one stock-based employee compensation plan (the "Plan"), which is described more fully in Note 11. The Company accounts for the Plan under the recognition and measurement principles of APB 25, and related interpretation. No stock-based compensation cost is recognized in net loss. Stock options granted under the Plan have exercise prices equal to the market value of the underlying common stock on the dates of grant. The Company did not grant any option during the three month periods ended March 31, 2005 and 2004. COMPREHENSIVE INCOME The Company reports comprehensive income in accordance with SFAS No. 130, "REPORTING COMPREHENSIVE INCOME." SFAS 130 establishes standards for the reporting and display of comprehensive income and its components. SFAS No. 130 requires unrealized holding gains and losses, net of related tax effects, on available for sale securities to be included in comprehensive income until realized. REPORTING SEGMENTS Statement of financial accounting standards No. 131, "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION" (SFAS No. 131), which superseded statement of financial accounting standards No. 14, Financial reporting for segments of a business enterprise, establishes standards for the way that public enterprises report information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements regarding products and services, geographic areas and major customers. SFAS No. 131 defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performances. The Company allocates resources and assesses the performance based upon information from two reporting units, (1) ADOT and (2) Biomoda, Inc. In January 2003, the FASB issued FIN No. 46, "CONSOLIDATION OF VARIABLE INTEREST ENTITIES, AN INTERPRETATION OF ARB 51." The primary objectives of FIN No. 46 are to provide guidance on the identification of entities for which control is achieved through means other than voting rights (variable interest entities or "VIEs") and how to determine when and which business enterprise should consolidate - -------------------------------------------------------------------------------- F-9 - -------------------------------------------------------------------------------- ADVANCED OPTICS ELECTRONICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- the VIE. This new model for consolidation applies to an entity for which either: (1) the equity investors do not have a controlling financial interest; or (2) the equity investment at risk is insufficient to finance that entity's activities without receiving additional subordinated financial support from other parties. In addition, FIN No. 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. As amended in December 2003, the effective dates of FIN No. 46 for public entities that are small business issuers, as defined ("SBIs"), are as follows: (a) For interests in special-purpose entities: periods ended after December 15, 2003; and (b) For all other VIEs: periods ending after December 15, 2004. The December 2003 amendment of FIN No. 46 also includes transition provisions that govern how an SBI which previously adopted the pronouncement (as it was originally issued) must account for consolidated VIEs. As disclosed in Note 3, the Company is associated with Biomoda, Inc. because two officers of the Company also serve as officers of Biomoda and other factors discussed in FIN No. 46R, the Company has complied with the pronouncement and consolidated the two Company's financial statements. See note 6 for the impact of adoption of the standard. 2. RECENT PRONOUNCEMENTS In December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment, an Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R requires companies to recognize in the statement of operations the grant- date fair value of stock options and other equity-based compensation issued to employees. FAS No. 123R is effective beginning in the Company's second quarter of fiscal 2006. The Company is evaluating the effects adoption of SFAS 123R will have on its financial statements. In December 2004, the FASB issued SFAS Statement No. 153, "Exchanges of Nonmonetary Assets." The Statement is an amendment of APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. The Company is evaluating the effects adoption of SFAS 123R will have on its financial statements. In March 2004, the Emerging Issues Task Force ("EITF") reached a consensus on Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments." The EITF reached a consensus about the criteria that should be used to determine when an investment is considered impaired, whether that impairment is other-than-temporary, and the measurement of an impairment loss and how that criteria should be applied to investments accounted for under SFAS No. 115, "ACCOUNTING IN CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES." EITF 03-01 also included accounting considerations subsequent to the recognition of another-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. Additionally, EITF 03-01 includes new disclosure requirements for investments that are deemed to be temporarily impaired. In September 2004, the Financial Accounting Standards Board (FASB) delayed the accounting provisions of EITF 03-01; however the disclosure requirements remain effective for annual reports ending after June 15, 2004. The Company will evaluate the impact of EITF 03-01 once final guidance is issued. - -------------------------------------------------------------------------------- F-10 - -------------------------------------------------------------------------------- ADVANCED OPTICS ELECTRONICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 3. PATENTS Biomoda has entered into license agreements with a major university and national laboratory to obtain rights for the purpose of developing, manufacturing, and selling products using its patented technologies. Under such agreement, Biomoda will pay royalties at varying rates based upon the level of revenues from licensed products. The agreement continues as long as any licensed patents remain in force. Biomoda has not incurred any royalty expense during the period from January 3, 1990 (inception) to March 31, 2005. Biomoda also pays an annual fee in the amount of $15,000 to renew such license agreement. As of March 31, 2005, Biomoda was in full compliance with the provisions of this agreement. 4. NOTES RECEIVABLE Notes Receivable consists of the following at March 31, 2005 Notes receivable bearing a 7% and will mature on March 2005 $27,233 Notes receivable bearing a 6.5% and will mature on December 2005 $24,504 Total $51,737 ======= 5. VARIABLE INTEREST ENTITY-BIOMODA, INC. At March 31, 2005, the Company owned approximately 1,132,000 or 15.9% of the 7,117,000 outstanding shares of Biomoda, Inc. ("Biomoda"), a development stage company involved in the development of technology for the early detection of lung cancer. In addition, two of the Company's officers own approximately 12%, collectively, of Biomoda's outstanding shares. Further, the Company subleases office space and lab equipment to Biomoda and two of the Company's officers are also officers of Biomoda. Finally, the Company has been the sole source of funding to Biomoda since 2002 through advances made under a line of credit agreement. Such advances totaled $1,063,137 at March 31, 2005 and has recorded interest income on advances of $52,914. These amounts have been eliminated in consolidation. The Company is considered the primary beneficiary as it stands to absorb the majority of the VIE's expected losses. Since Biomoda and the Company are considered entities under common control, the Company measures the assets and liabilities of Biomoda at their carrying amounts in consolidation. As of March 31, 2005, the Company has consolidated Biomoda's balance sheet and its results of the operations for the quarter then ended in the accompanying financial statements. Biomoda has a stockholders' deficit at March 31, 2005. General creditors of Biomoda have no recourse against the Company. From inception through March 31, 2005, Biomoda has generated no revenues In 2005, Biomoda anticipates being able to raise its own funds in the public equity market. In this case, Biomoda may be able to sustain its own operations, repay its obligation to the Company, and hire its own officers. In such case, the Company may no longer be considered the primary beneficiary and the results of Biomoda may be deconsolidated. There can be no assurance that Biomoda will be able to raise sufficient funds to repay its obligation to the Company and become self-sustaining in its operations. - -------------------------------------------------------------------------------- F-11 - -------------------------------------------------------------------------------- ADVANCED OPTICS ELECTRONICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 6. RELATED PARTY TRANSACTIONS NOTES RECEIVABLE - OFFICER As of March 31, 2005 and 2004, the Company has net advances to an officer approximating $67,300. The advances accrue interest at rates ranging from 5% to 6% (interest income was insignificant for the quarter ended March 31, 2005 and 2004) and are due on demand. As these notes receivable are with the shareholder and a Company officer, the Company has classified these amounts as a decrease to stockholders' equity at March 31, 2005. ADVANCES FROM OFFICER As of March 31, 2005, the Company has advances from officer of $69,710. This is due on demand and non interest bearing. The Company paid $25,000 during the quarter ended March 31, 2005. ADVANCES FROM STOCKHOLDERS As of March 31, 2005, the Company had advances of approximately $135,000 payable to two of its stockholders. Such advances historically bore interest at 10% per annum. No interest expense related to such advances for the three month period ended March 31, 2004 was recorded. Interest expense was approximately $3,400 and $124,000 for the three month period ended March 31, 2005 and for the period from inception through March 31, 2005, respectively. 7. CONVERTIBLE DEBENTURES On September 15, 2000, the Company entered into an agreement to issue a total of $10,000,000 in convertible debentures which bear interest at an annual rate of 8 percent. The Company authorized the initial sale of $2,000,000 of the convertible debentures, and entered into a structured facility with purchasers (the "Purchasers") in which the Purchasers shall be obligated to purchase the remaining $8,000,000 of convertible debentures at certain obligation dates, as defined. The Company's right to require the Purchasers to purchase debentures commences on the actual effective date of the registration of the Company's securities in an amount equal to the securities that would be convertible upon issuance of the debentures. The related agreement provides for a limit on the amount of obligation debentures that the Company may require the Purchasers to purchase in a given month. On September 15, 2000, the Company issued $500,000 of the initial $2,000,000 in unsecured convertible debentures discussed above. Effective as of the issuance date, the debentures are convertible into shares of common stock at the lesser of a 25 percent discount to the average of the three lowest closing bid prices during the thirty trading days prior to the issue date of this note and a 20 percent discount to the average of the three lowest closing bid prices for the ninety trading days prior to the conversion date, as defined. The debentures were issued in exchange for $430,000 in cash, $20,000 in legal services and $50,000 in commissions. The commissions have been capitalized as debt origination costs and are being amortized to interest expense over the life of the debentures. The embedded intrinsic value of the beneficial conversion feature was estimated to be approximately $239,000, which was immediately charged to interest expense. The convertible debentures also include detachable warrants - -------------------------------------------------------------------------------- F-12 - -------------------------------------------------------------------------------- ADVANCED OPTICS ELECTRONICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- for the purchase of 500,000 shares of common stock at an exercise price of $0.38 per share, which vested upon grant and expire in September 2005. Management has estimated the fair market value of these warrants at $25,000 (based on the Black Scholes pricing model pursuant to SFAS 123 and EITF 00-27) and immediately charged such amounts to interest expense. During the year ended December 31, 2003, the Company settled amounts owed and in connection with such settlement, the Company recorded a gain on extinguishment of approximately $40,000, which is included in the accompanying statement of operations. On November 7, 2000, the Company entered into an agreement that modified outstanding convertible preferred agreements. The new agreement resulted in the exchange of outstanding preferred stock for the Company's 7.5% convertible debentures and other consideration. The total amount of the convertible debentures approximated $741,000, including $31,000 of interest. The debentures are convertible into shares of common stock at the lesser of the stock's closing price on March 8, 2000 and 77.5% of the average of the five lowest closing bid prices for 20 days before November 2, 2000. The intrinsic value of the conversion feature was estimated to be approximately $228,000, which was immediately charged to expense. The convertible debentures also include detachable warrants for the purchase of 71,000 shares of common stock, the value of which was insignificant. The principal balance of the convertible debentures at March 31, 2005 amounts to $80,093. During 2001, the Company issued convertible debentures totaling $500,000. The debentures are convertible into shares of common stock at the lesser of (i) 75 percent of the average of the three lowest closing bid prices for 30 days before August 30 and November 19, 2001 or (ii) 80% of the average of the three lowest closing bids during the 90 days prior to the conversion date. The embedded intrinsic value of the beneficial conversion feature was estimated to be $143,875 and immediately charged to interest expense. These debentures were retired in 2004. 8. STOCKHOLDERS' EQUITY COMMON STOCK During the three months ended March 31, 2005, the Company issued 344,000,000 shares of common stock for cash, which were valued at approximately $430,000. During the quarter ended March 31, 2005, the Company issued 21,000,000 shares of common stock for its convertible debentures. Conversion price per share shall be the lesser of 75% of the average of the three lowest closing bid prices during the 30 trading days prior to but not including the issue date of the debentures and 80% of the average of the three lowest closing bid prices during the 90 trading days immediately prior to but not including the conversion date, which is approximately $0.01 per share. These shares were valued at approximately $31,000. During the quarter ended March 31, 2004, the Company sold 39,800,000 shares of common stock for approximately $455,000 in cash or approximately $0.01 per share. During the quarter ended March 31, 2004, the Company issued 19,800,000 shares of common stock for services, which were valued at approximately $210,000 (based on the closing market price on the date of grant, which approximated $0.01 per share). The Company recorded such amounts in the accompanying - -------------------------------------------------------------------------------- F-13 - -------------------------------------------------------------------------------- ADVANCED OPTICS ELECTRONICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- statement of operations. During the quarter ended March 31, 2004, in accordance with the applicable convertible debentures agreement, the Company issued 103,000,000 shares of common stock at conversion prices of less than $0.01 in connection with the conversion of notes payable approximating $505,000, including approximately $160,000 of accrued interest. STOCK OPTIONS On January 4, 1999, the Company established the Incentive Stock Option Plan (the "Plan"). Pursuant to the Plan, up to 10,000,000 shares of the Company's common stock may be granted as options to key employees with exercise prices at least equal to the fair market value on the date of grant. The exercise dates of the options are based on the related agreement, as approved by the Board of Directors. The Plan expires on January 4, 2009. Options awarded under the Plan mature four years from the date of grant and vest ratably over one to two year periods. The following is a status of the stock options outstanding for the three month periods ended March 31, 2005 and 2004
Three Month Ended Three Month Ended March 31, March 31, 2005 2004 -------------------- -------------------- Weighted Weighted Average Average Options Price Options Price --------- ----- --------- ----- Outstanding, beginning of year 400,000 $0.02 3,175,000 $0.23 Granted -- -- -- -- Exercised -- -- -- -- Cancelled/Terminated -- -- -- -- --------- ----- --------- ----- Outstanding and exercisable 400,000 $0.02 3,175,000 $0.23 ========= ===== ========= ===== Weighted average fair value of options granted =====
- -------------------------------------------------------------------------------- F-14 - -------------------------------------------------------------------------------- ADVANCED OPTICS ELECTRONICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The following table summarizes information related to stock options outstanding at March 31, 2005:
Options Outstanding Options Exercisable -------------------------------------------- -------------------------- Weighted Average Weighted Weighted Remaining Average Average Contractual Exercise Exercise Exercise Price Number Life (Years) Price Number Price - --------------------------------------------------------------------------------------------- $0.02 400,000 1.04 $ 0.02 400,000 $ 0.02 ------- ------- ------- -------
There were no stock options granted during the three month periods ended 2005 and 2004. WARRANTS From time to time, the Company issues warrants to employees and to third parties pursuant to various agreements. In January 2002, the Company issued warrants to purchase 300,000 shares of the Company's common stock to two directors. The exercise price of the warrants is $0.02 per share (the fair market value of the Company's common stock on the date of grant) and vested immediately. The warrants expire five years from the date of issuance. - -------------------------------------------------------------------------------- F-15 - -------------------------------------------------------------------------------- ADVANCED OPTICS ELECTRONICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The following represents a summary of warrants outstanding for the three month periods ended March 31, 2005 and 2004:
Three Month Ended Three Month Ended March 31, March 31, 2005 2004 -------------------------- -------------------------- Weighted Weighted Warrants Average Price Warrants Average Price ------------------------------------------------------- Outstanding, beginning of year 4,796,000 $0.10 8,646,000 $0.09 Granted -- -- -- -- Exercised -- -- -- -- Cancelled/Terminated (55,000) 1.62 -- -- ---------- ----- ---------- ----- Outstanding and exercisable 4,741,000 $0.10 8,646,000 $0.09 ========== ===== ========== ===== Weighted average fair value of warrants granted =====
The following table summarizes information related to warrants outstanding at March 31, 2005:
Warrants Outstanding Warrants Exercisable ------------------------------------------- --------------------------- Weighted Average Weighted Weighted Remaining Average Average Contractual Exercise Exercise Exercise Price Number Life (Years) Price Number Price - ----------------------------------------------------------------------------------------------------- $0.02 3,250,000 0.79 $ 0.02 3,250,000 $ 0.02 $0.34 - $0.43 1,491,000 1.97 0.22 1,491,000 0.22 --------- ------- --------- ------- 4,741,000 $ 0.10 4,741,000 $ 0.10 - -----------------------------------------------------------------------------------------------------
There were no warrants issued during the three month periods ended March 31, 2004 and 2005. - -------------------------------------------------------------------------------- F-16 - -------------------------------------------------------------------------------- ADVANCED OPTICS ELECTRONICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 9. SEGMENTS AND MAJOR CUSTOMERS The Company has two reportable segments consisting of (1) producing and selling large-scale flat panel displays for outdoor advertising billboards and its color identifier for the vision impared; (2) early cancer detection technology. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The following is information for the Company's reportable segments for the quarter ended March 31 (in thousands):
2005 2004 ADOT Biomoda Unallocated Total ADOT Biomoda Unallocated Total ------------------------------------------------------------------------------------- Revenue $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- Loss on Operations 499 85 -- 584 824 201 -- 1,025 Depreciation and amortization 8 4 -- 12 11 3 -- 14 Interest expense -- 6 -- 6 10 -- -- 10 Capital expenditure 4 31 -- 35 6 31 -- 37 Net Loss $ 490 $ 92 $ -- $ 582 $ 816 $ 201 $ -- $1,017
10. EARNINGS PER SHARE Earnings per share for the quarter ended March 31, 2005 and 2004 were determined by dividing net income for the periods by the weighted average number of both basic and diluted shares of common stock and common stock equivalents outstanding. Stocks to be issued are regarded as common stock equivalents and are considered in diluted earnings per share calculations. - -------------------------------------------------------------------------------- F-17 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS FORWARD - LOOKING STATEMENTS This Quarterly Report contains forward-looking statements about the business, financial condition and prospects of the Company that reflect assumptions made by management and management's beliefs based on information currently available to it. The Company can give no assurance that the expectations indicated by such forward-looking statements will be realized. If any of management's assumptions should prove incorrect, or if any of the risks and uncertainties underlying such expectations should materialize, the Company's actual results may differ materially from those indicated by the forward-looking statements. The key factors that are not within the Company's control and that may have a direct bearing on operating results include, but are not limited to, the acceptance by customers of the Company's products, the Company's ability to develop new products cost-effectively, the ability of the Company to raise capital in the future, the development by competitors of products using improved or alternative technology, the retention of key employees and general economic conditions. There may be other risks and circumstances that management is unable to predict. When used in this Quarterly Report, words such as, "believes," "expects," "intends," "plans," "anticipates" "estimates" and similar expressions are intended to identify forward-looking statements, although there may be certain forward-looking statements not accompanied by such expressions. All forward-looking statements are intended to be covered by the safe harbor created by Section 27A of the Securities Act of 1933, as amended and by Section 21E of the Securities Exchange Act of 1934, as amended. OVERVIEW GENERAL Advanced Optics Electronics, Inc. (the "Company", "us", "we", or "ADOT") (ADOT-OTC BB) is a technology company based in Albuquerque, New Mexico. Its primary focus is the development, production and sales of its novel and innovative electronic flat panel displays. We maintain an R&D facility and manufacturing plant, and are engaged in building large-scale flat panel displays utilizing its patented technology. We are currently investigating other applications of this core technology and different products related to optics and image recognition and analysis. The Company was organized as a Nevada corporation on May 22, 1996. On November 7, 1996, the Company acquired the business and patents of PLZTech, a company involved in the development of flat panel displays. 2 The Company's principal offices are located at 8301 Washington NE, Suite 5, Albuquerque, New Mexico 87113, and its telephone number is (505) 797-7878. COMPANY OVERVIEW We are a developmental stage technology company with our primary focus on the development, production and sales of our large-scale flat panel displays, which utilize our patented technology. We are currently continuing our research, development, prototyping, and manufacturing of our products and the underlying technology. We are in the process of making the transition from a developmental stage company to producing and selling our product line. We plan to focus on producing and selling our large-scale flat panel displays for the outdoor advertising billboard industry. In addition, there are other markets and applications that represent opportunities for additional sources of business, and we are beginning to explore these markets and applications, such as e-cinema, lighting sources, stadium and sports applications and systems, control and status monitoring. Our goal is to create a product line based on technology that is scalable both in terms of size and resolution to meet a wide range of requirements related to site, economics and use from our potential customers. We are also planning to develop a leasing program and an Owned & Operated group. THE MAJOR ADVANTAGES AND FEATURES OF THE DISPLAY ARE: o Brightest display ever available (35,000 nits) o Widest viewing angle available o Smallest dot pitch available for outdoor large-scale displays (8 mm dot pitch) o High definition picture quality o Modular assembly (1 meter increments) for scaleable and shapeable architectures o True Color (24 bit) o Full motion video (up to 120 frames per second) o Transportable for mobile operations o Weather resistant for outdoor applications o Modest power requirements o Minimum 5 year continual use lifetime o Real-time live video feeds o Broadcast/simulcast applications o Supports streaming video o Uses industry standard DVI protocol for high speed data linking and digital video interfacing o Satellite linkable PROPRIETARY BILLBOARD SOFTWARE CAPABILITIES ARE: o Manage and update display content remotely o Works with all image file formats and digital video editors o Secure Internet or WAN communications o WEB-based status monitoring o Provides time, temperature and other dynamic content inserts 3 Our operating activities have related primarily to the initial planning and development of our product and building our operating infrastructure. We have completed, tested, and measured the performance of, our prototype and are currently in the manufacturing process of our production model. The initial production model is scheduled to be completed in the third/fourth quarter of 2005. We expect our principal source of revenue to be derived from sales of our electronic display product. To date we have not recognized any revenue, but we have developed a functioning prototype and we anticipate sales by the end of the last quarter of 2005. The Company has set the price for its units at $395,000 and $1,490,000 respectively for its 2 meter x 3 meter and its 3 meter x 8 meter flat panel displays. The Company has made research and development progress in the first quarter of 2005 but has not completed the initial product as expected due to technical hurdles. Completion of the product is now expected in the third to fourth quarter of 2005. Because of the lack of anticipated revenues in 2004, the Company has taken excess cash funds and invested these in what they deem to be sound investments that may produce additional funds and gains to the Company in 2005 and 2006. These funds and gains would then be used for additional product development and administrative expenses in the initial production stage of the product. These investments include marketable securities of other companies including the bio-medical companies Biomoda and Genomed. Advanced Optics Electronics, Inc. completed filing for its initial patent relating to its hand held color check device known as COLOR-CHEK. The patent covers the Company's unique and novel conception and implementation of hardware and firmware system for determining the color optically and expressing the result with vocal responses. This invention will initially benefit the vision impaired. ADOT is also developing a color coding kit to enhance the color check capabilities of a broader application of the color spectrum. Pricing is targeted in the $70-85 range. The Company is currently in the development stages of a second iteration prototype. The first prototype, of which five were made, was a success from a proof-of-performance standpoint. This next version will incorporate a number of refinements and improvements in software and hardware components and incorporate an initial design of the casing.. Our operating expenses have increased significantly since our inception. This is due to increased engineering and management staff and investments in operating infrastructure. Since our inception we have incurred significant losses and, as of March 31, 2005, had a deficit accumulated during the development stage of $20,416,812. In the fourth quarter of 2004, it was determined that the Company consolidate the financials of Biomoda. This was in response to a new pronouncement FIN 46. RESULTS OF OPERATIONS 4 Due to our limited operating history, we believe that period-to-period comparisons of our results of operations are not fully meaningful and should not be relied upon as an indication of future performance. COMPARISON OF THE THREE-MONTH PERIODS ENDED MARCH 31, 2005 AND 2004 RESEARCH AND DEVELOPMENT. Research and development expenses consist primarily of personnel expenses and consulting fees associated with the development and enhancement of our flat panel displays. These expenses decreased to $8,720 in the first quarter of 2005 from $239,342 in the same period of 2004. Continued investment in product development is critical to attaining our strategic objectives and, as such, we expect product development expenses to increase significantly in future periods. We expense product development costs as they are incurred. GENERAL AND ADMINISTRATIVE AND PAYROLL. General and administrative expenses consist of expenses for facilities, professional services, travel, general corporate activities, and depreciation and amortization of equipment and leasehold improvements. General and administrative and payroll costs decreased to approximately $283,000 in the first quarter of 2005 from $526,000 in the first quarter of 2004. We expect general and administrative costs to increase in the future as our business prospects develop and we will require more staff. The costs associated with being a publicly traded company and potential future strategic acquisitions will also be a contributing factor to increases in this expense. LIQUIDITY AND CAPITAL RESOURCES Since inception, we have funded our operations primarily through the private placement of equity securities and the issuance of convertible debentures. As of March 31, 2005, we have raised such net proceeds of approximately $21,662,000. The cash balance at the end of the quarter of $350,667 represents an estimated three months of future cash operating expenses. We have also utilized equipment loans and capital lease financing. As of March 31, 2005 the only debt financing is a Convertible debenture in the approximate amount of $80,000 (including accrued interest) that we intend to pay off in its entirety in 2005. The Company's holding in Biomoda, Inc ("Biomoda") may provide additional liquidity. Biomoda is a biomedical development company. The Company's direct ownership of Biomoda, as of March 31, 2005 was approximately 15.9%. Two officers of ADOT are also securities holders of Biomoda in addition to the ADOT ownership. Biomoda filed an SB-2 registration statement with the Securities and Exchange Commission, which was declared effective February 11, 2003 offering 6,000,000 shares at $3.00 per share (for an aggregate offering of $18,000,000). It is anticipated that a public market for Biomoda's securities will be established in 2005 at the revised price. Because a market for Biomoda's shares has not been established, the potential value of the Company's investment cannot be measured. Consequently, there can be no assurance that if the Company were to sell such investment that it would be able to on terms favorable to the Company or for the initial offering price. Factors such as dilution, blockage and a lack of a market may be encountered. 5 The Company's relationship to its investment in Biomoda changed during the second quarter of 2002. There is now an active leadership role in Biomoda being provided by John Cousins and Leslie Robins, officers of the Company. The consolidated financial statements include the accounts of Biomoda and its wholly owned subsidiary, Biomoda Holdings, Inc. All significant inter-company accounts and transactions have been eliminated in consolidation. During the three months ended March 31, 2005, approximately $4,000 was spent for the purchase of computers and software. Research and development expenditures were approximately $277,000 in the first quarter of 2005. Funds for operations, research and development and capital expenditures were provided from the sale of securities and cash reserves. During the first quarter of 2004, we purchased 33,300,000 restricted shares under Rule 144 of Genomed, Inc., which represented approximately 17.9% of the outstanding shares of Genomed at that time. At March 31, 2005, the Company held 33,292,821 shares. The Company has accounted for this investment under the cost method as it cannot exercise significant influence over the operating and financial policies of GenoMed. As of March 31, 2005, these shares become free trading shares. At March 31, 2005, the Company held approximately 32,793,000 of these shares. Available-for-sale securities consist of securities in GenoMed and are carried at fair value with the unrealized gain or loss, net of tax, reported in accumulated other comprehensive income. The fair value of marketable securities was determined based on available market information. During the three months ended March 31, 2005, the Company transferred 571,409 shares valued at approximately $15,000 to a consultant in exchange for services. Management believes that sales of securities, cash reserves and anticipated contract revenue will provide adequate liquidity and capital resources to meet the anticipated development stage requirements through the end of the fourth quarter 2005. At that time it is anticipated that sales of flat panel displays will begin and contribute to operating revenues. It is anticipated that these sales will provide the additional capital resources to fund the proportionately higher working capital requirements of production and sales initiatives. The Company currently has no other significant commitments for capital expenditures in 2005. INFLATION Management believes that inflation has not had a material effect on the Company's results of operations. ITEM 3. CONTROLS AND PROCEDURES EVALUATION OF CONTROLS AND PROCEDURES Under the supervision and with the participation of our management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), we evaluated the effectiveness of 6 the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act as of a date (the "Evaluation Date") within 90 days prior to filing the Company's March 31, 2005 Form 10-QSB. Based upon that evaluation, the CEO and CFO concluded that, as of March 31, 2005, the Company's disclosure controls and procedures were of limited effectiveness. CHANGES IN CONTROLS AND PROCEDURES There were no significant changes made in our internal controls over financial reporting during the quarter ended March 31, 2005 that have materially affected or are reasonably likely to materially affect these controls. The Company, however, is evaluating changes to its existing controls or adding controls to improve the design effectiveness of its system. LIMITATIONS ON THE EFFECTIVENESS OF INTERNAL CONTROL The Company's management, including the CEO, does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material errors. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations on all internal control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, and/or by management override of the control. The design of any system of internal control is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in circumstances, and/or the degree of compliance with the policies and procedures may deteriorate. PART II. OTHER INFORMATION Item 1. Legal proceedings The Company may on occasion be a party to litigation involving claims made by or against the company arising in the ordinary course of business. The officers and directors know of no legal proceedings pending or contemplated by any person, entity or governmental authority which would have a material adverse effect on the Company. Item 2. Changes in securities Common Stock 7 As of March 31, 2005, the status of the common stock of the Company was: 4,000,000,000 shares authorized and 3,733,136,349 shares issued and outstanding. During the three month period ended March 31, 2005, the Company issued 344,000,000 shares for cash of approximately $430,080 and 21,000,000 shares of common stock for debentures in the approximate amount of $31,122. Item 3. Defaults upon senior securities - None Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of the Company's security holders during the first quarter of fiscal year 2005. Item 5. Other Information - Not applicable Item 6. Exhibits 31.1 Certification of CEO pursuant to Securities Exchange Act rules 13a-15 and 15d-15(c) as adopted pursuant to section 302 of the Sarbanes-Oxley act of 2002. 31.2 Certification of CFO pursuant to Securities Exchange Act rules 13a-15 and 15d-15(c) as adopted pursuant to section 302 of the Sarbanes-Oxley act of 2002. 32.1 Certification of Leslie S. Robins, Chief Executive Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley act of 2002. 32.2 Certification of John J. Cousins, Chief Financial Officer (Principal Accounting Officer) pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley act of 2002. 8 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report on Form 10QSB to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: May 13, 2005 ADVANCED OPTICS ELECTRONICS, INC. BY:/S/JOHN J. COUSINS ------------------------------- John J. Cousins Vice President of Finance (Principal Accounting Officer) BY:/S/LESLIE S. ROBINS ------------------------------- Leslie S. Robins Executive Vice President (Principal Executive Officer) EX-31 2 ex311.txt EX311 EXHIBIT 31.1 CERTIFICATION OF CEO PURSUANT TO SECURITIES EXCHANGE ACT RULES 13A-14 AND 15D-14 AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Leslie Robins, the Chief Executive Officer of Advanced Optics Electronics, Inc., certify: 1. I have reviewed this quarterly report on Form 10-QSB of Advanced Optics Electronics, Inc. (the "registrant"); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I am responsible for establishing and maintaining our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15e)) for the registrant and have: (a) Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report was being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures as the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 16, 2005, 2005 /s/ Leslie Robins ------------------------------------------------ Leslie Robins, Chief Executive Officer EX-31 3 ex312.txt EX312 EXHIBIT 31.2 CERTIFICATION OF CEO PURSUANT TO SECURITIES EXCHANGE ACT RULES 13A-14 AND 15D-14 AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, John Cousins, the Chief Financial Officer of Advanced Optics Electronics, Inc., certify: 1. I have reviewed this quarterly report on Form 10-QSB of Advanced Optics Electronics, Inc. (the "registrant"); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15e)) for the registrant and have: (a) Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report was being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures as the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 16, 2005, 2005 /s/ John Cousins --------------------------------------------- John Cousins, Chief Financial Officer EX-32 4 ex321.txt EX321 EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SS.1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Advanced Optics Electronics, Inc. (the "Company") on Form 10-QSB for the three months ended March 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Leslie Robins, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934;and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /S/ LESLIE ROBINS --------------------------- Chief Executive Officer May 16, 2005 A signed original of this written statement required by Section 906, an other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-32 5 ex322.txt EX322 EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SS.1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Advanced Optics Electronics, Inc. (the "Company") on Form 10-QSB for the three months ended March 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John Cousins, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934;and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /S/ JOHN COUSINS --------------------------- Chief Financial Officer May 16, 2005 A signed original of this written statement required by Section 906, an other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----