U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10QSB
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED DECEMBER 31, 1998
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM________ TO _______________
Commission file number 0-25177
Advanced Engine Technologies, Inc.
----------------------------------
(Exact name of small business issuer as specified in its charter)
Colorado 84-1358194
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
9909 Osuna Road NE, Albuquerque, NM 87111
-----------------------------------------
(Address of principal executive offices) (Zip Code)
(505) 323-7341
--------------
(Issuer's telephone number, including area code)
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 No x
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. December 31, 1998 - 21,925,000 shares
of common stock.
Transitional Small Business Disclosure Form Yes No x
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
ADVANCED ENGINE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL REPORT
DECEMBER 31, 1998
<PAGE>
ADVANCED ENGINE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONTENTS
Page
ACCOUNTANTS' REPORT 1
FINANCIAL STATEMENTS
Balance Sheet 2
Statements of Operations 3
Statement of Stockholders' Equity 5
Statements of Cash Flows 6
Notes to Financial Statements 8
<PAGE>
Neff & Company LLP
Accountants' Report
Advanced Engine Technologies, Inc.
(A Development Stage Company)
We have compiled the accompanying balance sheet of Advanced Engine Technologies,
Inc. (a subsidiary of OX2 Engine (Distribution) Ltd. and a development stage
company) as of December 31, 1998 and the related statements of operations,
changes in stockholders' equity and cash flows for the quarter and the six
months ended December 31, 1997 and December 31, 1998, and the period from
September 23, 1996 (inception) through December 31, 1998, in accordance with
Statements on Standards for Accounting and Review Services issued by the
American Institute of Certified Public Accountants.
A compilation is limited to presenting in the form of financial statements
information that is the representation of management. We have not audited or
reviewed the accompanying financial statements and, accordingly, do not express
an opinion or any other form of assurance on them.
/s/ Neff & Company LLP
Albuquerque, New Mexico
January 22, 1999
CERTIFIED PUBLIC ACCOUNTANTS . 7001 PROESPECT PLACE NE . ALBUQUERQUE, NM 87110
(505) 883-6612 . FAX (505) 884-3409
-1-
<PAGE>
ADVANCED ENGINE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
December 31, 1998
ASSETS
CURRENT ASSETS
Cash $ 285,841
Prepaid expenses 15,000
-----------
Total current assets 300,841
FIXED ASSETS
Equipment and furniture 35,503
Less accumulated depreciation (4,141)
Total fixed assets 31,362
INTANGIBLE ASSETS
Patents, copy rights and designs, net of
accumulated amortization of $729 43,021
-----------
Total assets $ 375,224
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
COMMITMENTS AND CONTINGENCIES (Note 3)
STOCKHOLDERS' EQUITY
Common stock-50,000,000 shares authorized,
21,925,000 issued and outstanding; $.0001 value $ 2,192
Additional paid-in capital 1,574,558
Deficit accumulated during the development stage (1,201,526)
-----------
Total liabilities and stockholders' equity $ 375,224
===========
See accompanying notes and accountants' report.
-2-
<PAGE>
ADVANCED ENGINE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
Six Months Ended December 31, 1998 and 1997 and the
Period From September 23, 1996 (Inception)
Through December 31, 1998
9/23/96
(Inception)
Through
1998 1997 12/31/98
---- ---- --------
Operating expenses $ 210,061 163,135 708,345
Research and development expenses 525,000 - 525,000
---------------------------------------
Income (loss) from operations (735,061) (163,135) (1,233,345)
Interest income 7,403 10,977 31,819
---------------------------------------
Net loss $ (727,658) (152,158) (1,201,526)
=======================================
Basic net loss per share $ (0.034) (0.007) (0.059)
=======================================
Weighted average number of common
shares outstanding 21,654,167 21,366,201 20,506,319
=======================================
See accompanying notes and accountants' report.
-3-
<PAGE>
ADVANCED ENGINE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS (CONTINUED)
Quarter Ended December 31, 1998 and 1997
1998 1997
---- ----
Operating expenses $ 101,782 50,906
Research and development expenses 525,000 -
----------------------------
Income (loss) from operations (626,782) (50,906)
Interest income 2,443 6,624
----------------------------
Net loss $ (624,339) (44,282)
============================
Basic net loss per share $ (0.029) (0.002)
============================
Weighted average number of common
shares outstanding 21,708,333 21,509,867
============================
See accompanying notes and accountants' report.
-4-
<PAGE>
ADVANCED ENGINE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
Period From September 23, 1996 (Inception)
Through December 31, 1998
<TABLE>
<CAPTION>
Equity
(Deficit)
Accumulated
Additional During the
Common Stock Paid-in Development
Shares Amount Capital Stage Total
------ ------ ------- ----- -----
<S> <C> <C> <C> <C> <C>
Issuance of common stock
to parent corporation for
license rights (Note 3) 20,000,000 $ 2,000 - - 2,000
Issuance of common stock
for services (Note 3) 600,000 60 5,940 - 6,000
Issuance of common stock
for cash (Note 5) 499,200 50 499,150 - 499,200
Net loss - - - (164,233) (164,233)
----------------------------------------------------------------
Balance, June 30, 1997 21,099,200 2,110 505,090 (164,233) 342,967
Issuance of common stock
for cash (Note 5) 500,800 50 500,750 - 500,800
Net loss - - - (309,635) (309,635)
----------------------------------------------------------------
Balance, June 30, 1998 21,600,000 2,160 1,005,840 (473,868) 534,132
Net loss - - - (103,319) (103,319)
----------------------------------------------------------------
Balance, September 30, 1998 21,600,000 2,160 1,005,840 (577,187) 430,813
Issuance of stock for assets
and services (Note 5) 325,000 32 568,718 - 568,750
Net loss - - - (624,339) (624,339)
----------------------------------------------------------------
Balance, December 31, 1998 21,925,000 $ 2,192 1,574,558 (1,201,526) 375,224
================================================================
</TABLE>
See accompanying notes and accountants' report.
-5-
<PAGE>
ADVANCED ENGINE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
Six Months Ended December 31, 1998 and 1997
and the Period From September 23, 1996 (Inception)
Through December 31, 1998
9/23/96
(Inception)
Through
1998 1997 12/31/98
---- ---- --------
Reconciliation of net losses to net cash
provided by operations:
Net loss $(727,658) (152,158) (1,201,526)
Depreciation and amortization 3,068 - 4,870
Issuance of common stock for
assets and services 525,000 - 533,000
Changes in current assets and liabilities:
Stock subscriptions receivable - 50,000 -
Prepaid expenses (15,000) - (15,000)
Accounts payable (31,283) - -
--------------------------------
Net cash flows applied to
operating activities (245,873) (102,158) (678,656)
--------------------------------
Cash flows from investing activities:
Equipment purchases (13,721) (7,166) (35,503)
--------------------------------
Cash flows from financing activities:
Issuance of common stock - 456,208 1,000,000
Loan proceeds - - 50,000
Loan payments - - (50,000)
--------------------------------
Net cash flows provided by
financing activities - 456,208 1,000,000
--------------------------------
Net increase (decrease) in cash (259,594) 346,884 285,841
Cash at beginning of period 545,435 323,022 -
--------------------------------
Cash at end of period $ 285,841 669,906 285,841
================================
See accompanying notes and accountants' report.
-6-
<PAGE>
ADVANCED ENGINE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS (CONTINUED)
Quarter Ended December 31, 1998 and 1997
1998 1997
---- ----
Reconciliation of net losses to net cash
provided by operations:
Net loss $(624,339) (44,282)
Depreciation and amortization 2,167 -
Issuance of common stock for
assets and services 525,000 -
Changes in current assets and liabilities:
Prepaid expenses (15,000) -
----------------------
Net cash flows applied to
operating activities (112,172) (44,282)
-----------------------
Cash flows from investing activities:
Equipment purchases (12,892) (371)
----------------------
Cash flows from financing activities:
Issuance of common stock - 121,000
----------------------
Net increase (decrease) in cash (125,064) 76,347
Cash at beginning of period 410,905 593,559
----------------------
Cash at end of period $ 285,841 669,906
======================
See accompanying notes and accountants' report.
-7-
<PAGE>
ADVANCED ENGINE TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
NOTE 1. NATURE OF BUSINESS
Advanced Engine Technologies, Inc. (the Company), a subsidiary of OX2 Engine
(Distribution) Ltd., was incorporated under the laws of Colorado and began
operations on September 23, 1996. The Company was formed to acquire the rights
to manufacture, distribute and market an OX2 Engine combustion engine throughout
the United States, Canada and Mexico. On October 18, 1996 the Company entered
into a contract with OX2 Engine (Distribution) Ltd., (OX2) a company
incorporated in the Republic of Vanatu, whereby the Company acquired the rights
to manufacture, distribute and market the OX2 combustion engine. As part of this
contract the Company issued 20,000,000 shares of its common stock and was to
issue an additional 19,000,000 upon the completion of certain tests (see Note
3). In addition, OX2 has the right to appoint two of the Company's three
directors. As of December 31, 1998, OX2 owned approximately 62 percent of the
Company's outstanding shares. Accordingly, the accompanying financial statements
represent the separate financial statements of a subsidiary company.
As of December 31, 1998, the Company's operations consisted of obtaining capital
and marketing the OX2 combustion engine. Management does not expect to generate
significant sales revenue until 1999. Accordingly, planned principal operations
have not commenced and the Company is a development stage enterprise.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents. Cash and cash equivalents include all cash balances
and highly liquid debt instruments with an original maturity of three months or
less. The Company's cash is deposited in a Colorado financial institution and is
insured only up to $100,000 by the Federal Deposit Insurance Corporation.
Fixed Assets. Fixed assets are stated at cost. Depreciation expense is
calculated using the straight-line method over the estimated useful lives of the
assets, which range from 5 to 10 years.
Intangible Assets. Intangible assets are amortized on a straight-line basis over
five years. The Company annually assesses the recoverability of the cost of its
intangible assets based on a review of projected undiscounted cash flows related
to the intangible asset.
Income Taxes. The Company accounts for its income taxes using the liability
method. Under this method, deferred tax liabilities and assets are determined
based on the difference between the financial statement carrying amounts and tax
basis of assets and liabilities using enacted tax rates in effect in the years
in which the differences are expected to reverse. The Company has provided a
valuation allowance to offset the benefit of any net operating loss
carryforwards or deductible temporary differences.
-8-
<PAGE>
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Advertising Costs. The Company expenses advertising costs as incurred.
Advertising costs amounted to $135 and $4,661 for the quarter ended December 31,
1998 and 1997, respectively, and $334 and $18,495 for the six months ended
December 31, 1998 and 1997, respectively, and $88,690 from September 23, 1996
(inception) to December 31, 1998.
Loss per share. Loss per share is computed on the basis of the weighted average
number of common shares outstanding during the year and did not include the
effect of potential common stock as their effect would be antidilutive. The
numerator for the computation is the net loss and the denominator is the
weighted average shares of common stock outstanding.
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 3. RELATED PARTY TRANSACTIONS
In April 1996, the Company issued a convertible note to a director in the amount
of $50,000. This note was repaid in September of 1997.
The Company paid consulting fees to its President, who is also a shareholder, in
the amount of $170,228 from September 23, 1996 (inception) to December 31, 1998
including $22,030 and $19,920 for the quarter ended December 31, 1998 and 1997,
respectively, and $41,530 and $49,870 for the six months ended December 31, 1998
and 1997, respectively.
The Company paid administrative fees and reimbursed expenses to a company that
is owned by one of its shareholders in the amount of $28,884 from September 23,
1996 (inception) to December 31, 1998 including $4,061 and $6,336 for the
quarter ended December 31, 1998 and 1997, respectively, and $10,167 and $7,649
for the six months ended December 31, 1998 and 1997, respectively.
In October 1996, the Company issued 600,000 shares of its common stock to one of
its founders in exchange for his services in organizing the Company. The
transaction was recorded at the estimated fair market value of the services
provided ($6,000), as this was more readily determinable.
-9-
<PAGE>
NOTE 3. RELATED PARTY TRANSACTIONS (CONTINUED)
Also in October 1996, the Company entered into a contract with OX2
(Distributions) Ltd. (OX2) whereby the Company acquired the rights to
manufacture, distribute and market the OX2 combustion engine in the United
States, Canada and Mexico for the life of the world wide patent. As part of this
contract the Company issued 20,000,000 shares of its common stock and was to
issue an additional 19,000,000 upon the completion of emission tests. In
December 1998, both parties agreed to cancel the requirement to issue the
additional 19,000,000 shares. The Company is also to pay a royalty of 15 percent
of the gross proceeds of its revenue in its territory and 75 percent for sales
outside the territory. In addition, OX2 has the right to appoint two of the
Company's three directors. As of December 31, 1998, OX2 owned approximately 62
percent of the Company's outstanding shares and OX2 had appointed one director
who is also the Company's President.
NOTE 4. INCOME TAXES
At December 31, 1998 the Company had deferred tax assets amounting to
approximately $460,000. The deferred tax assets consist primarily of the tax
benefit of net operating loss carryforwards and are fully offset by a valuation
allowance of the same amount.
The net change in the valuation allowance for deferred tax assets was an
increase of approximately $240,000 and $18,000 for the quarters ending December
31, 1998 and 1997, respectively. The net change is due primarily to the increase
in net operating loss carryforwards.
At June 30, 1998 the Company had net operating loss carryforwards of
approximately $1,150,000 available to offset future state and federal taxable
income. These carryforwards will expire in 2017 to 2019 for federal tax purposes
and 2002 to 2004 for state tax purposes.
NOTE 5. COMMON STOCK
The Company offered one million shares of its common stock at the price of one
dollar per share in an offering memorandum pursuant to Rule 504 of Regulation D
of the Securities Act of 1933. The Company sold one million shares on this
offering.
On August 6, 1998, the Company entered into a joint venture agreement with
Carroll Shelby under which the Company is to issue 300,000 shares of restricted
common stock in exchange for the design and production of a street vehicle that
utilizes the OX2 combustion engine. These shares were issued in November 1998.
-10-
<PAGE>
NOTE 5. COMMON STOCK (CONTINUED)
They were valued at $525,000 and expensed as research and development costs. In
addition, the Company will issue an additional 250,000 shares upon completion of
the vehicle utilizing the OX2 combustion engine.
In November 1998 the Company issued 25,000 shares of restricted stock to
purchase patents, copyrights, designs and prototypes to be used with the
Company's technology. This transaction was valued at $43,750 and recorded as an
intangible asset.
Item 2. Management's Discussion and Analysis or Plan of Operation
The Company plans to continue the development of prototypes and marketing during
the remainder of the 1999 fiscal year. Activities will include demonstrations to
prospective original equipment manufacturers of products using internal
combustion engines, work with its joint venture partner to develop an engine for
automobile use and developing additional joint venture partners in order to
market the engine. While prototypes of the OX2 engine exist, there can be no
assurance the Company will be successful with its marketing efforts, the
development of its joint ventures or in the ultimate development of the engine
for commercial applications.
The Company's cash flow requirements to fund these activities and the general
operations of the Company total approximately $235,000 and include approximately
$83,000 for consulting and $40,000 for equipment, among other costs. The Company
expects to fund these costs with its current cash reserves of approximately
$285,000. The Company's cost estimates do not include provisions for any
contingencies or unexpected expenses that may arise or any unanticipated
increases in costs. As a result, the Company's cash reserves may not be adequate
to cover the actual costs of operations during the remainder of the 1999 fiscal
year. Although not anticipated, arrangements have been made for a private
placement if required.
The Company's objective is to sign its first contracts for the production of
small engines by the end of fiscal year 1999 and expects as a result to begin
generating revenue. There are currently no signed contracts that will produce
revenue and there can be no assurance management will be successful in
negotiating these contracts. Should negotiation of these contracts not occur,
the Company will require additional capital to continue its operations.
In accordance with the patent license agreement with its parent, the research
and development required to bring the product to commercial production is
provided by the Company's parent. In addition, development is undertaken by its
joint venture partner as well. As a result, the Company does not expect to carry
out or fund any research and development.
The Company does not currently have any employees other than the officers nor
does it expect to add any in the next year.
-11-
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: 14.2 Amendment to License Agreement with OX2 Engine
27 Financial Data Schedule
(b) Reports on Form 8-K: None
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: February 16, 1999 By: /s/ Murray Bailey
-------------------------------------
President
(Principal Executive, Financial
and Accounting Officer)
-12-
In October 1996 AET entered into a Licensing Agreement with OX2 Engine
(Distribution) Ltd, hereinafter referred to as the "Grantor", for the right to
manufacture, distribute and market the OX2 engine.
Page two items 2.1, 2.1.1 and 2.1.2. of the Agreement deals specifically with
the issuance of AET common shares to the Grantor. To date, 20,000,000 shares
have been issued, however, the Agreement calls for an additional 19,000,000
shares to be issued after certain events take place.
It is now the Grantor's opinion that this issuance of additional shares could
have a negative effect on AET's ability to commercialise the OX2 engine. The
Grantor feels that AET and its public shareholders could incur financial harm if
these additional 19,000,000 shares were issued.
In consideration for the excellent performance by AET in it's effort to
commercialise the OX2 engine and for the strong support shareholders of AET have
given the company, the Grantor has made a decision to rescind that portion of
the Licensing Agreement, calling for the future issuance of additional
19,000,000 shares.
AET has received an executed amendment to the 1996 Licensing Agreement,
effectively cancelling AET's commitment to issue the additional 19,000,000
shares as called for in article 2.1.2 of the Licensing Agreement between AET and
the Grantor in consideration for a sum of $100 US.
The amendment to the Licensing Agreement has been accepted by AET and the
consideration of US$100 has been paid.
The Common Seal of
OX2 Engine (Distribution) LTD.
- ---------------------------------
Director/Officer
Laurie Harrison
The Common Seal of
Advanced Engine Technologies, Inc.
- ---------------------------------
Director/Officer
Murray J. Bailey
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001043225
<NAME> Advanced Engine Technologies Inc.
<MULTIPLIER> 1
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 285,841
<SECURITIES> 00
<RECEIVABLES> 00
<ALLOWANCES> 00
<INVENTORY> 00
<CURRENT-ASSETS> 300,841
<PP&E> 35,503
<DEPRECIATION> 4,141
<TOTAL-ASSETS> 375,224
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 2,192
<OTHER-SE> 373,032
<TOTAL-LIABILITY-AND-EQUITY> 375,224
<SALES> 0
<TOTAL-REVENUES> 2,443
<CGS> 0
<TOTAL-COSTS> 626,728
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (624,339)
<INCOME-TAX> 0
<INCOME-CONTINUING> (624,339)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (624,339)
<EPS-PRIMARY> (.029)
<EPS-DILUTED> (.029)
</TABLE>
