Form 10QSB for ADVANCE TECHNOLOGIES INC 21-Aug-2006
Quarterly Report
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The management discussions contain certain forward-looking statements and information that are based on the beliefs of management as well as assumptions made by and information currently available to management. When used in this document, the words "anticipate," "believe," "estimate," "expect," "intend," "will," "plan," "should," "seek," and similar expressions, are intended to identify forward-looking statements. Such statements reflect the current view of management regarding future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual actions or results may vary materially from those described herein as anticipated, believed, estimated, expected or intended.
The following discussion and analysis should be read in conjunction with the company's consolidated financial statements and related footnotes for the quarter ended June 30, 2006. The discussion of results, causes and trends should not be construed to imply any conclusion that such results or trends will necessarily continue in the future.
Results of Operations
EXECUTIVE SUMMARY
(A) Advanced Technologies Inc. has been receiving sales credit from Kollsman Inc. since 2002. The first 200 units were stipulated as "without royalties". The next 210 units are subject to royalties, but 63% of the income is applied to an "Advance Royalty" account. Advance Technologies net royalty income will increase by virtue of the payment in full of the "advance royalty" account and improving sales.
(B) The first quarter of 2006 had a 45% increase in sales over the first Quarter of 2005. The second quarter of 2006 had a similar increase of +71% over the second quarter of 2005, and a +125% increase in sales over last quarter (the first quarter of 2006). These improved sales do not reflect any sales from FedEx.
The payment in full of the "advanced Royalty" account will be achieved by the end of 2006 or first quarter of 2007. The initial sales to the FedEx customer will most likely occur in 2007. The revenue to the company from Gulfstream & FedEx royalties for 2006 is expected to double the like period of 2005. With the satisfying of the "Advance Royalty Account", net profits will increase by 167% on same sales margins. Increases in total sales from FedEx in 2007 should add to our over all profits.
Advance Technologies Inc. provided consultation and export sales to United Integrated Services Inc., a Taiwan Corporation in 2006. The income from 1/2 of the sales received this quarter was $73,107.00, and the expense incurred was $70,000.00. UIS has indicated they wish to purchase an additional 25 Cameras in August September of 2006. Since the US Department of Commerce export license to Advance Technologies Inc. expires September 30, 2006, there is a 50% probability that the license will expire before the sale can be fully executed. UIS has been notified of the potential problem, and will bear all financial risks if the sale is terminated. UIS has asked Advance Technologies Inc. to apply for an additional export license for future sales.
Advance Technologies Inc. is pursuing a new product (Infrared Security System). The funds for this new venture will be obtained from investment sources without liability to Advance Technologies Inc. Therefore, no incurred expense or set aside provisions for future expense has been made.
(c) There are no off-balance sheet arrangements.
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MAJOR ACTIVITY
Highlights of Third Quarter
The Enhanced Vision System project continues with on going sales by Kollsman to Gulfstream. These sales track the new aircraft deliveries by Gulfstream. The retrofit market for Gulfstream continues at a slow rate, but is projected to improve once the EVS II is certified and in production.
The introduction of EVS II for FedEx remains on schedule, with certification anticipated before the end of 2006. When EVS II is placed in production for FedEx it is expected that the Gulfstream retro-fit program for older models of their G series aircraft, which will use the new EVS II will increase.
United Integrated Services Inc. of Taiwan has informed ATI that they plan on proceeding forward with the purchase and export of the final 25 units of the NV-2000 cameras authorized under our Dept. of Commerce Export license D326061.
Recreational Vehicle Systems Inc. has completed their incorporation filing, and they have stated they intent to initiate operations this fall. The degree of ATI's participation, if any, will evolve over the balance of 2006.
I-6 ACTIVITIES
ATI formed a subsidiary company to pursue the Infrared Security System (ISS) opportunity last quarter. This wholly owned, Infrared Systems International (ISIX or I-6) has been licensed by ATI for the intellectual property pertaining to ISS. The ISS project requires a major effort that encompasses advance technology in the areas of Infrared, Image Processing, Wireless conductivity, Advanced Server Design, and Security Response Providers.
I-6 has been engaged in discussions with several corporations. These discussions cover a broad range of topics. The key subjects are:
investments, equity considerations, technical responsibilities, and project role. The market focus has been for applications to the small to medium size commercial wholesalers, manufactures, and distributors. This market segment has been projected to exceed 1/2 million units in the first five years from start up. The launching of an effort of this magnitude will necessitate a detailed program plan leading to the involvement of one or more Fortune 500 companies.
Additional markets for ISS have been under discussion. In particular, the Homeland Defense market has been the subject of interest. I-6's efforts in this market have been limited to the licensing of one or more Defense Corporations that specialize in HLD to take the Prime contractor role.
Application "White Papers" are being developed as a way to present the capabilities of ISS. These proprietary application papers are prepared for specific potential customers. These info-papers are provided under NDA's to protect I-6 rights. Paper prepared for one or more entities are:
1. Border patrol security
2. Petrol-Chemical security for 3rd world country application.
3. Integrated 24/7 security sites
4. Energy Conservation Initiative
5. Campus Surveillance
6. Farm Security
7. Intruder Detection & Alert
8. Home (private) Security
9. Mobile Vehicle Protection (aircraft, pleasure craft, motor homes)
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I-6 has secured the cooperation of several strategy partners for the development of ISS. These corporations are experts in their core technologies: Wireless mobile transport, Specialized Wireless Server Design, Software design and coding, IR Cameras, Internet protocol, and OEM high rate production. These organizations currently participate under binding non-disclosure agreements. There are no commitments from I-6 for their involvement beyond this early technical assessment phase. When future agreements that bind I-6 to any corporation are executed, the nature of the agreement and the participating party or parties will be announced within proprietary and competition sensitive limits.
Advance Technologies Inc. provided consultation and export sales to United Integrated Services Inc., a Taiwan Corporation in the third quarter of 2006. The income from the sale of 25 units was $73,109. The expense incurred was $73,000. UIS as indicated that they will be purchasing an additional 25 units in August of 2006. This last 25 units completes the contract for the sale of 50 units authorized under the IS Department of Commerce export license. UIS has expressed a desire for AVTX to apply for an Export license for addition sales in 2007.
(c) There are no off-balance sheet arrangements.
ATI continues to utilize the services of an SEC Attorney on retainer, and contract for bookkeeping services on a time and material basis. This has substantially added to our cost of ensuring that we are and remain fully complaint to all SEC regulations.
NINE MONTHS ENDED JUNE 30, 2006 COMPARED WITH THE NINE MONTHS ENDED JUNE
30, 2005
NET SALES
Net sales for the company were approximately $25,007 for the nine month period ending on June 30, 2006 as compared to approximately $12,953 for the same period a year earlier. Consulting fees increased from $2,453 to $3,107 for the same 9 month periods of time. For the three month period of time ending on June 30, 2006 the sales was $13,907 as compared to $6,300 for the same period last year. The sales rate for EVS continues to increase at a modest rate.
GROSS PROFIT
GROSS PROFIT was the same as NET PROFIT since royalty income and consulting fees have NO COST OF GOODS, the gross and net profits are the same.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Operating expense for the nine month period ending June 30, 2006 was $65,104 as compared to $34,546 for the same nine month period ending June 30, 2005. The operating expenses for the three months ending June 30, 2006 were $26,142 versus $7,712 in 2005. The increase in operating cost can be attributed to increase costs associated with Oxley-Sarbanes (approximately $8,000) and $6,000 per quarter for the President/CEO and $2,000 per quarter for the Board of Directors (two member plus the President).
OTHER INCOME AND EXPENSE
For the nine month period this year the expense was $4,462 versus $4,131 last year in 2005.
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NET PROFIT (LOSS) BEFORE PROVISIONS FOR INCOME TAXES
The net loss for the nine month period ending June 30, 2006 was $44,559 versus $25,724 for the same period in 2005. The company's net loss for the three months ending June 30, 2006 was $13,778 versus $2,847 for the like period in 2005. The largest factor in the increased loss results from the inclusion of the President and BOD compensation of $8,000 per quarter. The compensation is in the form of preferred shares.
THREE MONTHS ENDED JUNE 30, 2006 COMPARED WITH THE THREE MONTHS ENDED JUNE,
2005:
NET SALES
The sales for the last three months ending on June 30, 2006 were $13,907 as compared to $6,300 for the same period last year. The sales of EVS system is increasing due to improved retrofit sales for Gulfstream aircraft. The certification of the EVS II system by Kollsman is viewed as a positive factor. Neither Kollsman nor Gulfstream have made any sales projections for EVS II.
GROSS PROFIT
Gross profit is the same as Net Profit because the cost of goods for royalties and consultant fees are zero.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The operating expense for the nine month period ending June 30, 2006 was $65,104 versus $34,546 in the same period of 2005. The operating expense for the three months ending June 30, 2006 was $26,142 versus the like period in 2005 of $ 7,712. The principle cause of the increase in operating cost is the introduction of the Compensation Plan in fall of 2005 for the President & BOD. The plan provides the equivalent of $8,000 per quarter of Preferred Shares.
OTHER INCOME AND EXPENSE
For the nine month period ending June 30, 2006 the interest expense was $ 4,462 versus $ 4,131 for the like period in 2005. For the three months ending June 30, 2006 the interest expense was $1,543 versus like period of $1,435.
NET PROFIT (LOSS) BEFORE PROVISON FOR INCOME TAXES
The net loss for the nine month period ending June 30, 2006 was $44,559 versus $25,724 for the like period in 2005. The loss for the last three months ending June 30, 2006 was $13,778 versus $2,847. The President and BOD compensation accounted for $18,000 debit for nine months which included $6,000 loss for last three months.
LIQUIDITY AND CAPITAL RESOURCES
The company's primary source of revenues is from royalties from our EVS licensee Kollsman. Our Royalties reported as revenues are net royalties with the gross revenue at 2.27 times the reported royalties. The reduction to net royalties is caused by the repayment of advance royalties as specified in the Kollsman License Agreement. Based upon current sales, the advance royalties will be fully paid (currently 62% has been paid) by the end of 2006. This will cause our net income to jump by a factor of 2.67 on the same number of sales in 2007.
The other source of income comes from our Agent agreement with United Integrated Service Co. LTD, Taiwan. The collaboration with UIS has allowed our company to be coupled into the Far East market. This Agent relationship in 2006 will add between 4 and 6 thousand dollars to our net earnings annually. $3,107 was earned this quarter, and a similar amount is projected for next quarter. UIS has asked that we apply for another export license for 2007 sales. The small profit margin reflects the low risk nature of the transaction.
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The company has formed a wholly owned subsidiary called I-6. The Infrared Security System has been licensed to I-6. Under terms of the license I-6 has issued a promissory note to the company for $100,000. This note when collected will defer internal expenses, the most notable being for a patent attorney to complete the ISS patent filed last November 6, 2005.
The Board of Directors has offered I-6 a twenty-four month buy-back option for the ISS intellectual property. The option is for $100,000,000. The option offer has been received and acknowledged by I-6 and their Board of Directors. The option will provide protection to the company against any potential hostile take over of ATI.
The company income has not been sufficient for meeting our expenses; as a result our short term debt has increased slightly. I-6 expects to receive all investment funds from ISS Associates for considerations limited to the ISS venture. The company stands to benefit through the success of I-6, but is structured to be insolated from any liability. And with the "Hostile take over provisions", the company is adequately protected. Investments by I-6 will be separately reported, but will be included as part of Advance Technologies Inc. for the immediate future.
OPERATIONS
The Company operated at a substantial loss over the last nine months ($44,559). This loss is directly attributed to the Executive compensation package of $24,000. Since the compensation is in the form of preferred shares, the impact on cash flow and cash reserves is minimized. Since the preferred shares do not enter the market "float" and the shares represent less than 0.7% of the combined preferred and common share base, the compensation package as minimum impact on the Company.
The Oxley-Sarbanes has added substantially to our direct cost. We estimate that our cost of meeting the new standards as between 8-12 thousand dollars.
INVESTING
The company made no investments during this reporting period.
FINANCING
The company believes that no additional financing will be required, and present interim financing will meet all of our short term needs as required until royalties will cover all of our expenses.
Additional funding if required for I-6 will be secured using I-6 collateral as the sole security for any such obligation. This insulates Advance Technologies Inc and their shareholders from any debt or obligation that is incurred by I-6 in pursue of the Infrared Security Market.
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