Form 10QSB for ADVANCE TECHNOLOGIES INC
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15-Feb-2007
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 year ended September 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) Advance 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 for 2007 had an overall increase of $300 in sales over the fiscal year of 2006. The royalty sales amounted to an increase of $300 for like first quarter periods. The EVS royalties reflect sales of the EVS I product by Kollsman, and with the introduction of EVS II in 2007, we expect additional sales in the Gulfstream retrofit market and with FedEx, Kollsman's newest customer.
The payment in full of the "advanced Royalty" account will be achieved by the second quarter of 2007 based upon current and projected sales. The initial sales to the FedEx customer will most likely occur in 2007. By satisfying of the "Advance Royalty Account", net profit margins will increase by 167% for the same 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.
MAJOR ACTIVITY
Highlights of First Quarter of Year 2007
The Enhanced Vision System project continues with on-going sales by Kollsman to Gulfstream. These sales closely 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.
Recreational Vehicle Systems Inc. has completed their incorporation filing, and they have stated they intend to initiate operations in 2007. RVS has encountered delays of an unknown origin. The License Agreement requires sales within a 3 year period to retain their exclusivity.
I-6 ACTIVITIES
ATI formed a subsidiary company to pursue the Infrared Security System (ISS). 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 continued 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, manufacturers, 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 this effort is our focus for 2007.
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.
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 its shareholders from any debt or obligation that is incurred by I-6 in pursuit of the Infrared Security Market.
GROSS PROFIT
The first Quarter of fiscal year 2007 (4th quarter cy 2006) the Company showed a modest increase in royalty income of $6,600 as compared to $6,300 in the like quarter of last year. The flat revenue was anticipated, and will remain flat until EVS II deliveries begin. The Company expects EVS II will begin deliveries in the first half of CY 2007.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
In the first Quarter of fiscal year 2007 the Company's Operating Expenses declined from $18,911 same quarter last year to $6,476. This reduction in expenses occurred mostly by the elimination of the Executive Compensation Program. That item eliminated $8,250 in incurred expense.
OTHER INCOME AND EXPENSE
Other expenses showed an increase in expenses from $2,373 (2005) to $3,256
(2006) for same quarter. The increase in expense was due in most part to an increase in interest payment on the Company's short term debt. The short term debt increased through the absorbing of the costs associated with the filing of the patent for the Infrared Security System. Eighty percent of the cost has been incurred, with one additional payment to the Patent attorney of $3,000 due February of 2007.
NET PROFIT (LOSS) BEFORE PROVISIONS FOR INCOME TAXES
The Net loss for the first Quarter of 2007 was $3,132 compared to $14,984 in the like first Quarter of Fiscal 2006. The improvement was the result of the elimination of the Executive Compensation Program at the end of Fiscal year 2006.
NET SALES
The Net Sales for the first quarter of 2007 consisted of the royalties received. The royalty payment consisted of $6,600 as compared to $6,300 in the like quarter of 2005.
GROSS PROFIT
Gross profit is the same as Net Profit.
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 82% has been paid) by the second quarter of 2007. This will cause our net income to increase by a factor of 1.67 for each sale.
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 2007 could add between 10-12 thousand dollars to our net earnings annually, and continue to foster an important professional relationship with UIS.
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 and organization costs for I-6.
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 approved by I-6 and their Board of Directors. The option will provide protection to the shareholders against a hostile take over of ATI.
I-6 expects to receive all investment funds from ISS Associate Contractors for certain considerations, but limited to the ISS project. 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 against any attempt to abridge our patent rights. Investments incurred by I-6 will be separately recorded, but will be included as part of Advance Technologies, Inc. for the immediate future.
AI
