10QSB 1 ati_10q-063005.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended June 30, 2005 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from __________ to __________ Commission File Number 0-230761 ADVANCED TECHNOLOGY INDUSTRIES, INC. ------------------------------------ (Exact name of small business issuer as specified in its charter) District of Delaware 13-4000208 -------------------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 211 Madison Avenue #28B New York, New York 10116 ------------------------ (Address of principal executive offices) 212-532-2736 ------------ (Issuer's telephone number) (Former name of Issuer) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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] The number of outstanding shares of the issuer's only class of common stock as of August 19, 2005 was 92,909,748 . Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] ADVANCED TECHNOLOGY INDUSTRIES, INC. AND SUBSIDIARIES (A Development Stage Company) INDEX TO FORM 10-QSB June 30, 2005 Page Nos. --------- PART I - FINANCIAL INFORMATION ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) 2 At June 30, 2005 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) 3 For the Three and Six Months Ended June 30, 2005 and 2004 For the Period from Inception (October 1, 1999) to June 30, 2005 CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY (UNAUDITED) 4 For the Six Months Ended June 30, 2005 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) 5-6 For the Six Months Ended June 30, 2005 and 2004 For the Period from Inception (October 1, 1999) to June 30, 2005 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 7-28 ITEM 2 - PLAN OF OPERATION 29 ITEM 3 - CONTROLS AND PROCEDURES 30 PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS 32 ITEM 2 - CHANGES IN SECURITIES AND PURCHASES OF EQUITY SECURITIES 33 ITEM 3 - DEFAULTS UPON SENIOR SECURITIES 33 ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 33 ITEM 5 - OTHER INFORMATION 33 ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 34 SIGNATURES AND REQUIRED CERTIFICATIONS 36 1 ADVANCED TECHNOLOGY INDUSTRIES, INC. AND SUBSIDIARIES (A Development Stage Company) CONDENSED CONSOLIDATED BALANCE SHEET AT JUNE 30, 2005 (Unaudited) ASSETS Current Assets: Cash and cash equivalents $ 108,382 Prepaid expenses and other current assets 234,987 ------------ Total Current Assets 343,369 Property and equipment, net 87,697 Note receivable 229,640 Deferred financing costs, net 85,664 Other assets 13,205 Capitalized software 677,042 Due from related parties 60,376 ------------ TOTAL ASSETS $ 1,496,993 ============ LIABILITIES AND STOCKHOLDERS' DEFICIENCY ---------------------------------------- CURRENT LIABILITIES: Loans payable $ 1,001,666 Notes payable - related party 150,000 Accrued liabilities, including $403,927 due to related parties 6,231,091 Due to related parties 1,152,752 ------------ Total Current Liabilities 8,535,509 Convertible debentures (net of debt discount of $741,667) 158,333 ------------ TOTAL LIABILITIES 8,693,842 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' DEFICIENCY: Preferred stock - $.001 par value; 1,000,000 shares authorized; 254,249 shares issued and outstanding 207 Common stock - $.0001 par value; 100,000,000 shares authorized; 92,576,748 shares issued and outstanding 9,257 Additional paid-in capital 34,000,728 Accumulated other comprehensive income 28,260 Deficit accumulated during the development stage (41,235,301) ------------ TOTAL STOCKHOLDERS' DEFICIENCY (7,196,849) ------------ TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 1,496,993 ============ See notes to condensed consolidated financial statements. 2 ADVANCED TECHNOLOGY INDUSTRIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) For the Three Months Ended For the Six Months Ended For the Period June 30, June 30, form Inception ------------------------------ ------------------------------ (October 1, 1999) 2005 2004 2005 2004 to June 30, 2005 ------------- ------------- ------------- ------------- ---------------- REVENUE $ -- $ -- $ -- $ -- $ 9,862 COST AND EXPENSES: Research and development 499,837 139,562 626,531 279,124 1,985,733 In-process research and development -- -- -- -- 23,224,695 Consulting fees 86,993 124,293 129,549 248,586 2,424,760 General and administrative including Compensatory element of stock issuance of $333,431 and $0 for the three months ended June 30, 2005 and 2004, respectively and $527,644 and $329,888 for the six months ended June 30, 2005 and 2004, respectively 936,099 266,192 1,434,419 726,247 12,767,591 Depreciation and amortization 15,421 7,772 30,473 15,544 288,206 Interest and amortization of debt issuance costs 246,486 3,686 313,676 7,372 430,801 Other expenses (20,339) 8,222 6,938 16,444 123,377 ------------- ------------- ------------- ------------- ---------------- TOTAL COSTS AND EXPENSES 1,764,497 549,727 2,541,586 1,293,317 41,245,163 ------------- ------------- ------------- ------------- ---------------- NET LOSS $ (1,764,497) $ (549,727) $ (2,541,586) $ (1,293,317) $ (41,235,301) ============= ============= ============= ============= ================ Basic and diluted loss per common share $ (0.01) $ (0.01) $ (0.01) $ (0.03) ============= ============= ============= ============= Weighted average number of common shares outstanding-Basic and Diluted 194,258,516 41,665,079 190,198,327 41,134,356 ============= ============= ============= ============= See notes to condensed consolidated financial statements. 3 ADVANCED TECHNOLOGY INDUSTRIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY FROM JANUARY 1, 2005 TO JUNE 30, 2005 (Unaudited) Accumulated Other Compre- Accumulated Total ADDITIONAL hensive During the Stockholders' Compre- COMMON STOCK PREFERRED STOCK PAID-IN Income Development Comprehensive hensive SHARES AMOUNT SHARES AMOUNT CAPITAL (Loss) Stage Deficiency Loss ------------------------------------------------------------------------------------------------------------- Balance at January 1, 2005 83,931,775 $ 8,393 243,336 $ 195 $31,291,219 $ (433,723) $(38,693,715) $ (7,827,631) Issuance of stock on a conversion of a accrued expense ($.17) 1,692,388 169 -- -- 287,537 -- -- 287,706 Issuance of stock on a conversion of aaccrued expense ($68.75) -- -- 10,538 11 727,459 -- -- 727,470 Issuance of stock for compensation ($.15) 523,811 52 -- -- 78,519 -- -- 78,571 Issuance of stock for compensation ($.15) 380,952 38 -- -- 57,104 -- -- 57,142 Issuance of stock for consulting fees ($69.23) -- -- 375 1 22,499 -- -- 22,500 Issuance of stock for consulting fees ($.19) 187,500 19 -- -- 35,981 -- -- 36,000 Issuance of common stock for cash ($.10) 500,000 50 -- -- 49,950 -- -- 50,000 Issuance of common stock for cash ($.10) 250,000 25 -- -- 24,975 -- -- 25,000 Issuance of common stock for cash ($.10) 300,000 30 -- -- 29,535 -- -- 29,565 Warrants issued with convertible debentures -- -- -- -- 572,979 -- -- 572,979 Value assigned to beneficial conversions -- -- -- -- 327,021 -- -- 327,021 Issuance of stock on a conversion of a note payable ($. 17) 1,971,428 197 -- -- 137,803 -- -- 138,000 Issuance of common stock for cash ($.10) 250,000 25 -- -- 24,975 -- -- 25,000 Issuance of common stock for services ($.13) 276,394 28 -- -- 35,903 -- -- 35,931 Issuance of common stock for services ($.12) 312,500 31 -- -- 37,469 -- -- 37,500 Issuance of stock to an officer of the Company ($.12) 1,000,000 100 -- -- 119,900 -- -- 120,000 Issuance of stock to an officer of the Company ($.14) 1,000,000 100 -- -- 139,900 -- -- 140,000 Comprehensive Income: Net loss -- -- -- -- -- -- (2,541,586) (2,541,586) (2,541,586) Other comprehensive income (loss), -- -- -- -- -- -- -- -- Foreign currency translation adustment -- -- -- -- -- 461,983 -- 461,983 461,983 ------------------------------------------------------------------------------------------------------------ Balance - June 30, 2005 92,576,748 $ 9,257 254,249 $ 207 $34,000,728 $ 28,260 $(41,235,301) $ (7,196,849) ============================================================================================================ The common stock of LTDN has been retroactively restated to reflect the recapitalization and merger transactions discussed in Note 1. See notes to condensed consolidated financial statements. 4 ADVANCED TECHNOLOGY INDUSTRIES, INC. AND SUBSIDIARIES- OPEN (A DEVELOPMENT STAGE COMPANY) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the Period For the Six from Inception Months Ended October 1, 1999 June 30, to March 31, ---------------- ---------------- 2005 2004 2005 ---------------- ---------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (2,541,586) $ (1,293,317) $ (41,235,300) Adjustments to reconcile net loss to net cash used in operating activities: Acquired-in process technology -- -- 23,224,695 Stock-based compensation 527,653 329,880 5,928,917 Depreciation and amortization 30,473 34,420 270,775 Non-cash consulting -- -- 470,000 Debt discount amortization 158,334 -- 158,334 Amortization of deferred financing costs 18,636 -- 18,636 Write-off of fixed assets -- -- 11,068 Changes in Operating Assets and Liabilities: Prepaid expenses and other current assets (6,298) (3,483) (167,398) Other assets 36,231 (13,204) 23,026 Accrued liabilities 1,144,500 (6,333) 1,846,338 ---------------- ---------------- ---------------- Net Cash Used in Operating Activities (632,057) (952,037) (9,450,910) CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from issuance of common ATI stock -- -- 460,000 Capitalized software (197,666) (174,786) (677,043) Advances to ATI prior to merger -- -- (2,443,619) Capital expenditures -- 34,933 (317,467) ---------------- ---------------- ---------------- Net Cash (Used in) Provided by Investing (197,666) (139,853) (2,978,129) Activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of common stock 129,565 -- 9,986,633 Capitalized financing costs (104,300) -- (104,300) Proceeds from issuance of convertible debenture 900,000 -- 900,000 Proceeds from loans -- 0 886,903 Repayment of loans -- (344,728) (78,954) Notes payable-related party -- -- -- Due from (to) related parties, net (37,022) (1,419,383) 947,158 ---------------- ---------------- ---------------- Net Cash Provided by Financing Activities 888,243 1,075,105 12,537,440 Decrease in Cash 58,520 (16,785) 108,382 Cash - Beginning of Year 49,862 59,520 -- ---------------- ---------------- ---------------- Cash - End of Period $ 108,382 $ 42,268 108,382 ================ ================ ================ See notes to condensed consolidated financial statements. 5 ADVANCED TECHNOLOGY INDUSTRIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the Period For the Six Months Ended From Inception June 30, (October 1, 1999) ------------------------------ Through 2005 2004 June 30, 2005 ------------- ------------- ----------------- Supplementary disclosure of Cash Flows Information: Interest paid $ -- $ -- $ -- ============ ============= ================= Income taxes paid $ -- $ -- $ -- ============ ============= ================= Non-Cash Investing and Financing Transactions: ---------------------------------------------- Conversion of debt and related interest $ 138,000 $ -- $ 362,819 ============ ============= ================= Value allocated to debt discount related to convertible debentures $ 900,000 $ -- $ 900,000 ============ ============= ================= Conversion of advances to affiliate $ -- $ -- $ 1,055,000 ============ ============= ================= Offering costs satisfied by transfer of ATI stock $ -- $ -- $ (125,000) ============ ============= ================= Conversion of accrued liabilities $ 1,015,176 $ -- $ -- ============ ============= ================= In addition, see Note 3 for details related to the acquisition of ATI. See notes to condensed consolidated financial statements. 6
ADVANCED TECHNOLOGY INDUSTRIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - BUSINESS AND REVERSE MERGER Reverse Merger -------------- On December 15, 2004 (the "Closing Date"), Advanced Technology Industries, Inc. ("ATI") consummated the acquisition of all of the issued and outstanding shares of capital stock of LTDnetwork, Inc., a Delaware corporation ("LTDN"). LTDN and ATI collectively are referred to as "the Company". LTDN and its wholly-owned Australian subsidiary LTDnetwork PTY LTD ("LTD PTY") are development stage companies and their efforts have been primarily devoted to technology identification and acquisition, research and development and raising capital. LTDN and LTD PTY specialize in the development of innovative technologies, software and services for online e-tailers, advertising, media and marketing companies. The acquisition was consummated pursuant to the Amended and Restated Agreement and Plan of Merger, dated as of August 11, 2004, among ATI, LTDN and LTDN Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of ATI ("Acquisition Sub"), as amended by the First Amendment thereto, dated as of December 15, 2004, among ATI, LTDN and Acquisition Sub. Such acquisition was effected pursuant to a merger (the "Merger") of LTDN with and into Acquisition Sub. Pursuant to the terms of the Merger and taking into account the purchase price adjustment in connection therewith, ATI issued to the stockholders of LTDN consideration (the "Merger Consideration") consisting of (i) 193,336 shares of Series A Convertible Preferred Stock, of ATI ("Series A Preferred Stock") and (ii) warrants (the "Warrants") to purchase 487,903 shares of Series A Preferred Stock at an exercise price of $16.33 per share. The exercise period with respect to 25% of the aggregate Warrants will expire on the 14th day following the effective date of the registration statement relating to the Series A Preferred Stock described below, 25% of the aggregate Warrants will expire on the 44th day following such effective date, 25% of the aggregate Warrants will expire on the 74th day following such effective date and 25% of the aggregate Warrants will expire on the 104th day following such effective date. 7 ADVANCED TECHNOLOGY INDUSTRIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - BUSINESS AND REVERSE MERGER (CONTINUED) Reverse Merger (Continued) -------------------------- The terms of the Series A Preferred Stock provide that each share of Series A Preferred Stock will automatically convert into 400 shares of common stock, of ATI ("Common Stock") if the holders of Common Stock approve an amendment (the "Certificate of Incorporation Amendment") to ATI's certificate of incorporation to increase its authorized capital stock from 100,000,000 shares to at least 500,000,000 shares. While the holders of Series A Preferred Stock can vote with the holders of Common Stock on all matters on an as converted basis, such holders of Series A Preferred Stock will not be entitled to vote on the approval of the Certificate of Incorporation Amendment. ATI intends to seek approval for the Certificate of Incorporation Amendment at a special meeting of the stockholders currently anticipated to be held in the third quarter of 2005. If the Certificate of Incorporation Amendment is approved, the shares of Series A Preferred Stock will be automatically converted into an aggregate of 77,334,400 shares of Common Stock and the Warrants will be exercisable for an aggregate of 195,161,200 shares of Common Stock. ATI has agreed to file a registration statement with the Securities and Exchange Commission relating to the resale of the shares of Common Stock issuable upon conversion of the Series A Preferred Stock issued in the Merger within 90 days following the date (the "Trigger Date") the Certificate of Incorporation Amendment is filed with the Delaware Secretary of State. In addition, ATI has agreed to use its reasonable efforts to cause such registration statement to be declared effective within 180 days of the Trigger Date. In the event that the Certificate of Incorporation Amendment is not filed by December 15, 2005, ATI has agreed to register the shares of Series A Preferred Stock issued in the Merger. ATI has agreed to keep any such registration statement effective until the earliest of (a) the sale of all securities eligible to be sold thereunder, (b) the expiration of the period referred to in Rule 144(k) under the Securities Act and (c) two years from the effective date of such registration statement. Because the former stockholders of LTDN own a majority of the merged company and the LTDN management controls the Board of Directors of the merged company, this transaction has been accounted for as a reverse merger with LTDN as the acquirer of ATI (See Note 3). The accompanying consolidated financial statements of the Company reflect the historical results of LTDN, and the consolidated results of operations of ATI subsequent to the acquisition date of December 15, 2004. The common stock of LTDN has been retroactively restated to reflect the recapitalization and merger transactions discussed above. 8 ADVANCED TECHNOLOGY INDUSTRIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - BUSINESS AND REVERSE MERGER (CONTINUED) Organization And Description Of ATI ----------------------------------- The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-QSB. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary to make the financial statements not misleading have been included. Operating results for the three and six-month periods ended June 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. For further information, refer to the consolidated financial statements and footnotes thereto included in the Registrant's Annual Report on Form 10-KSB for the year ended December 31, 2004. Going Concern And Management's Plan ----------------------------------- The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. However, as shown in the accompanying unaudited condensed consolidated financial statements, the Company has incurred losses from operations since inception. Management anticipates incurring substantial additional losses in 2005. Further, the Company may incur additional losses thereafter, depending on its ability to generate revenues from the licensing or sale of its technologies and products, or to enter into any or a sufficient number of joint ventures. The Company has no revenue to date. There is no assurance that the Company can successfully commercialize any of its technologies and products and realize any revenues there from. The Company's technologies and products have never been utilized on a large-scale commercial basis and there is no assurance that any of its technologies or products will receive market acceptance. There is no assurance that the Company can continue to identify and acquire new technologies. As of June 30, 2005, the Company had an accumulated deficit since inception of $41,235,301 and a working capital deficiency and stockholder's deficiency of $8,192,141 and $7,196,849, respectively. In addition the Company is delinquent in paying its payroll taxes in Germany and Australia at June 30, 2005 in the amounts of approximately $199,800 and $356,448, respectively Management's business plan will require additional financing. 9 ADVANCED TECHNOLOGY INDUSTRIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - BUSINESS AND REVERSE MERGER (CONTINUED) Going Concern And Management's Plan (Continued) ----------------------------------------------- While no assurance can be given, management believes the Company can raise adequate capital to keep the Company functioning during 2005. No assurance can be given that the Company can obtain additional working capital, or if obtained, that such funding will not cause substantial dilution to shareholders of the Company. If the Company is unable to raise additional funds, it may be forced to change or delay its contemplated marketing and business plans. Between January 1, 2005 through August 20, 2005, the Company has raised from various financing sources approximately $1,750,000 through the issuance of convertible debt securities ("Debentures") and warrants ("Debenture Warrants") to purchase 25,000,000 shares of Common Stock. Being a development stage company, the Company is subject to all the risks inherent in the establishment of a new enterprise and the marketing and manufacturing of a new product, many of which risks are beyond the control of the Company. All of the factors discussed above raise substantial doubt about the Company's ability to continue as a going concern. These unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability of recorded asset amounts that might be necessary as a result of the above uncertainty. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles Of Consolidation --------------------------- The unaudited condensed consolidated financial statements include the accounts of LTDN and its subsidiaries and ATI and all of its wholly-owned and its majority-owned subsidiaries commencing with the acquisition date of December 15, 2004. All significant intercompany accounts and transactions have been eliminated in consolidation. Investments in unconsolidated affiliates are accounted for using the equity method when the Company owns at least 20%, but no more than 50% of such affiliates and under the cost method when the Company owns less than 20%. Under the equity method, the Company records its proportionate shares of profits and losses based on its percentage interest in earnings. Use Of Estimates ---------------- The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, 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 unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 10 ADVANCED TECHNOLOGY INDUSTRIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Equity Method Of Accounting For Unconsolidated Affiliates --------------------------------------------------------- At June 30, 2005, investments in companies accounted for under the equity method consist of the following inactive foreign development-stage technology companies: % Country of Owned Operations ----- ---------- Flexitech, Ltd. 20.00% Israel Pirocat, Ltd. 20.00% Israel Sibconvers 50.00% Russia Container Engineering, Ltd 50.00% Russia The Company does not have sufficient control over management, the board of directors or financial matters and accordingly the Company does not consolidate such entities. The above companies do not have any revenue nor any significant assets, liabilities, commitments and contingencies. The Company's carrying values in these equity-method investments is zero as of June 30, 2005. Impairment Of Long-Lived Assets ------------------------------- In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal On Long-Lived Assets," the Company reviews the carrying amount of long-lived assets on a regular basis for the existence of facts or circumstances, both internally and externally, that suggest impairment. The Company determines if the carrying amount of a long-lived asset is impaired based on anticipated undiscounted cash flows before interest from the use of the asset. In the event of impairment, a loss is recognized based on the amount by which the carrying amount exceeds the fair value of the asset. Fair value is determined based on appraised value of the assets or the anticipated cash flows from the use of the asset, discounted at a rate commensurate with the risk involved. 11 ADVANCED TECHNOLOGY INDUSTRIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Capitalized Software -------------------- Capitalization of computer software development costs begins upon the establishment of technological feasibility. Technological feasibility for the Company's computer software is generally based upon achievement of a detailed program design free of high risk development issues and the completion of research and development on the product hardware in which it is to be used. The establishment of technological feasibility and the ongoing assessment of recoverability of capitalized computer software development costs require considerable judgment by management with respect to certain external factors, including, but not limited to, technological feasibility, anticipated future gross revenue, estimated economic life and changes in software and hardware technology. Amortization of capitalized computer software development costs commences when the related products become available for general release to customers. Amortization is provided on a product by product basis. The annual amortization is the greater of the amount computed using (a) the ratio that current gross revenue for a product bears to the total of current and anticipated future gross revenue for that product, or (b) the straight-line method over the remaining estimated economic life of the product. The Company periodically performs reviews of the recoverability of such capitalized software development costs. At the time a determination is made that capitalized amounts are not recoverable based on the estimated cash flows to be generated from the applicable software, the capitalized costs of each software product is then valued at the lower of its remaining unamortized costs or net realizable value. Amounts capitalized by LTDN during the six months ended June 30, 2005 and 2004 totaled $197,666 and $174,786 respectively. There was no amortization expense for the three and six months ended June 30, 2005 and 2004 as the software product was not placed into use as of June 30, 2005. Comprehensive Income (Loss) --------------------------- SFAS No. 130, "Accounting for Comprehensive Income," establishes standards for reporting and disclosure of comprehensive income and its components (including revenues, expenses, gains and losses) in a full set of general-purpose financial statements. The items of other comprehensive income that are typically required to be disclosed are foreign currency items, minimum pension liability adjustments, and unrealized gains and losses on certain investments in debt and equity securities. Accumulated other comprehensive loss, at June 30, 2005, consists of foreign currency translation adjustments in the amount of $28,260 12 ADVANCED TECHNOLOGY INDUSTRIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Stock-Based Compensation ------------------------ The Company accounts for stock-based compensation for employees in accordance with Accounting Principals Board ("APB") No. 25 and Financial Interpretation No. 44. Stock and options granted to other parties in connection with providing goods and services to the Company are accounted for under the fair value method as prescribed by SFAS No. 123. In December 2002, the Financial Accounting Standard Board ("FASB") issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an Amendment of SFAS Statement No. 123". This statement amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 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. SFAS No. 148 also requires that those effects be disclosed more prominently by specifying the form, content, and location of those disclosures. The additional disclosures required by SFAS No. 148 are as follows: For the Three Months Ended For the Six Months Ended June 30, June 30, ------------------------------ ---------------------------------- 2005 2004 2005 2004 ------------- ----------- --------------- ------------- (UNAUDITED) (UNAUDITED) Net loss applicable to common stockholders, as reported $ (1,764,497) $ (549,727) $ (2,541,586) $ (1,293,317) Add: Stock-based employee compensation expense included in reported net loss -- -- -- -- Less: Stock-based employee compensation expense net of tax effect under r the fair value-based method of accounting -- -- -- -- ------------- ----------- --------------- ------------- Pro-Forma Net Loss Under Fair Value Method $ (1,764,497) $ (549,727) $ (2,541,586) $ (1,293,317) ============= =========== =============== ============= Loss Per Share-Basic and Diluted, as Reported $ (0.01) $ (0.01) $ (0.01) $ (0.03) ============= =========== =============== ============= Pro-Forma Loss Per Share-Basic and Diluted $ (0.01) $ (0.01) $ (0.01) $ (0.03) ============= =========== =============== ============= 13
ADVANCED TECHNOLOGY INDUSTRIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Translation Of Foreign Currencies --------------------------------- The U.S. dollar is the functional currency for all of the Company's businesses, except its operations in Australia and Europe. Foreign currency denominated assets and liabilities for these units are translated into U.S. dollars based on exchange rates prevailing at the end of each period presented, and revenues and expenses are translated at average exchange rates during the period presented. The effects of foreign exchange gains and losses arising from these translations of assets and liabilities are included as a component of equity. Loss Per Share Of Common Stock ------------------------------ Basic net earnings (losses) per share of common stock are computed by dividing earnings (losses) available to common stockholders by the weighted average number of common shares outstanding during the periods presented. Diluted net earnings (losses) per share reflects per share amounts that result if dilutive common stock equivalents are converted to common stock. Common stock equivalents, consisting of convertible debt, convertible preferred stock, options and warrants, discussed in Note 7, were not included in the calculation of diluted loss per share because their inclusion would have had been anti-dilutive. Basic and diluted loss per share have been calculated assuming the Series A Preferred Stock has been converted under the "if converted method" since each share of Series A Preferred Stock automatically converts into 400 shares of common stock upon the increase in authorized common shares to 500 million. Business Segment ---------------- SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," establishes standards for the way public enterprises report information about operating segments in annual consolidated financial statements and requires reporting of selected information about operating segments in interim financial statements regarding products and services, geographical areas and major customers. The Company has determined that under SFAS No. 131, it operates in three geographic segments (see Note 9). 14 ADVANCED TECHNOLOGY INDUSTRIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) New Accounting Pronouncements ----------------------------- In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123R, "Share-Based Payment." SFAS No. 123R eliminates the alternative to use APB No. 25's intrinsic value method of accounting that was provided in SFAS No 123 as originally issued. SFAS No. 123R requires entities to recognize the cost of employee services in exchange for awards of equity instruments based on the grant-date fair value of those awards (with limited exceptions). That cost will be recognized over the period during which the employee is required to provide the service in exchange for the award. No compensation cost is recognized for equity instruments for which employees do not render the requisite service. SFAS No. 123R requires entities to initially measure the cost of employee services received in exchange for an award of liability instruments based on its current fair value; the fair value of the award will be remeasured at each reporting date through the settlement date. Changes in fair value during the requisite service period will be recognized as compensation cost over that period. The grant date fair value of employee share options and similar instruments will be estimated using option-pricing models adjusted for the unique characteristics of those instruments. SFAS No. 123R is effective as of the beginning of the Company's fiscal year following December 15, 2005 (January 1, 2006). The adoption of SFAS No. 123R will have no effect on the Company's consolidated cash flows or financial position but will have an adverse effect on the Company's consolidated results of operations. In December 2004, the FASB issued FAS No. 153, "Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29." This Statement eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29 and replaces it with an exception for exchanges that do not have commercial substance. This Statement specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of this Statement are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS No. 153 is not expected to have a material impact on the Company's consolidated financial position, liquidity, or results of operations. In April 2004, the EITF issued Statement No. 03-06 "Participating Securities and the Two-Class Method Under FASB Statement No. 128, Earnings Per Share" ("EITF 03-06"). EITF 03-06 addresses a number of questions regarding the computation of earnings per share by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the company when, and if, it declares dividends on its common stock. The issue also provides further guidance in applying the two-class method of calculating earnings per share, clarifying what constitutes a participating security and how to apply the two-class method of computing earnings per share once it is determined that a security is participating, including how to allocate undistributed earnings to such a security. EITF 03-06 is effective for fiscal periods beginning after March 31, 2004. The adoption of this statement did not have any effect on the Company's calculation of EPS. 15 ADVANCED TECHNOLOGY INDUSTRIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) New Accounting Pronouncements (Continued) ----------------------------------------- In September 2004, the EITF issued statement EITF Issue No. 04-08, "The Effect of Contingently Convertible Debt on Diluted Earnings per Share" ("EITF 04-08"). Contingently convertible debt instruments are generally convertible into common shares of an issuer after the common stock price has exceeded a predetermined threshold for a specified period of time (the "market price contingency"). EITF 04-08 requires that shares issuable upon conversion of contingently convertible debt be included in diluted earnings per share computations regardless of whether the market price contingency contained in the debt instrument has been met. EITF 04-08 is effective for reporting periods ending after December 15, 2004 and requires restatement of prior periods to the extent applicable. The adoption of this statement did not have an effect on the Company's calculation of EPS. NOTE 3 - MERGER AND CONVERSION AGREEMENT Merger Agreement - LTDN ----------------------- On December 15, 2004, ATI consummated the acquisition of all of the issued and outstanding shares of capital stock of LTDN, through the merger transaction discussed in Note 1. Immediately after the merger, the stockholders of LTDN controlled a majority of the merged company's voting securities and LTDN management controlled the board of directors of the merged company. Accordingly, LTDN is considered to be the accounting acquirer in the transaction. The total consideration for the acquisition of the ATI equity securities was determined as follows: No. of Shares Amount ---------- ------------ Value of ATI common stock 83,931,775 $ 12,589,766 Value of 50,000 shares of ATI preferred stock, based upon a conversion rate of 400 to 1 conversion rate 20,000,000 3,000,000 Value of ATI options/warrants 15,589,766 351,889 Total Purchase Price $ 15,941,655 16 ADVANCED TECHNOLOGY INDUSTRIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 3 - MERGER AND CONVERSION AGREEMENT (CONTINUED) Merger Agreement - LTDN (Continued) ----------------------------------- The fair value used to value the Common Stock was based on the quoted market price of Common Stock at the time the merger transaction was announced. The fair value of the ATI options/warrants was determined using the Black-Scholes valuation model. To determine the fair value of these options/warrants, the following assumptions were used: expected volatility of 127.33%, risk-free interest rate of 3.250%, and expected life of four to ten years. Under the purchase method of accounting, the total estimated purchase price as detailed above was allocated to ATI's net tangible and intangible assets based as follows: Prepaid expenses and other current assets $ 67,589 Property and equipment, net 52,166 Note receivable-Related Party 229,640 Due from related parties 59,946 Loans and notes payable (549,999) Accrued liabilities (5,584,825) Advances from LTDN (1,388,619) Due to related parties (168,938) Acquired in-process technology 23,224,695 Equity securities issued (15,941,655) ------------------ Net Cash $ -- ================= The amount allocated to acquired in-process technology of $23,224,695 has been expensed as a charge against operations and is included in the consolidated statement of operations for the year ended December 31, 2004. The amount allocated to acquired in-process technology relates to products that had not yet reached technological feasibility and that, until completion of development, had no alternative future use. These products require substantial development and testing prior to reaching technological feasibility. However, there can be no assurance that these products will reach technological feasibility or develop into products that may be sold by the Company. The acquired in-process technology has required, and may require substantial development by the Company. 17 ADVANCED TECHNOLOGY INDUSTRIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 3 - MERGER AND CONVERSION AGREEMENT (CONTINUED) Merger Agreement - LTDN (Continued) ----------------------------------- The following unaudited pro forma information has been prepared assuming that this acquisition had taken place at the beginning of the respective periods; it is not necessarily indicative of results that may occur in the future. SIX MONTHS ENDED THREE MONTHS ENDED JUNE 30, JUNE 30, --------------------------- --------------------------- 2005 2004 2005 2004 ---------- ---------- ---------- ---------- (UNAUDITED) Net revenues $ -- $ -- $ -- $ -- Net loss (2,541,585) (3,088,669) (1,764,496) (1,013,982) Basic and diluted loss per common share: Net loss $ (.01) $ (.03) $ (.01) $ (.01)
Prior to the Merger, LTDN advanced monies to ATI to be used for working capital purposes. Loans made by LTDN to ATI for the years ended December 31, 2004, 2003, and 2002 totaled $1,428,000, $720,566, and $295,053, respectively. During the years ended December 31, 2004 and 2003, LTDN converted $130,000, and $925,000 respectively of such loans into 1,300,000, and 9,250,000 respectively, of shares of Common Stock of ATI. LTDN accounted for their interests in ATI's Common Stock under the cost method since LTDN at any point in time prior to December 15, 2004 did not own more than 20% of ATI's equity securities. In 2003, 1,600,000 shares of Common Stock owned by LTDN were sold resulting in proceeds of $160,000. In 2003, 2,300,000 shares of Common Stock owned by LTDN were transferred to consultants in connection with consulting services valued at $230,000. In 2004, 3,000,000 shares of Common Stock owned by LTDN were sold to stockholders of LTDN in connection with the purchase of shares of stocks of LTDN. The value allocated to the ATI shares was $300,000. In 2004, 2,400,000 shares of Common Stock owned by LTDN were transferred to consultants in connection with consulting services valued at $240,000. In 2004, 1,250,000 shares of Common Stock owned by LTDN were transferred to finders valued at $125,000 in connection with the sale of LTDN common stock. 18 ADVANCED TECHNOLOGY INDUSTRIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 4 - PROPERTY AND EQUIPMENT Property and equipment at June 30, 2005 consisted of the following: Office furniture and fixtures $ 47,190 Purchased software 172,053 Computer hardware 173,830 Assets acquired in merger 52,166 ---------- 445,239 Less: Accumulated depreciation (357,542) ---------- Property and equipment, net $ 87,697 ========== Depreciation expense for the three months ended June 30, 2005 and 2004 amounted to $15.421 and $7,772, respectively. Depreciation expense for the six months ended June 30, 2005 and 2004, amounted to $30,473 and $15,544, respectively. NOTE 5 - DEFERRED FINANCING COST At June 30, 2005, deferred financing costs incurred in connection with the sale of a 9% convertible debenture in the amount of $900,000 (Note 6) was: Deferred financing cost $ 104,300 Less: Accumulated amortization (18,636) ---------- Deferred Financing Cost, Net $ 85,664 ========== Amortization of deferred financing cost for the three months ended June 30, 2005 and June 30, 2004 was $17,383 and $-0-, respectively. Amortization of deferred financing cost for the six months ended June 30, 2005 and June 30, 2004 was $18,636 and $-0-, respectively. 19 ADVANCED TECHNOLOGY INDUSTRIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 6 - CONVERTIBLE DEBENTURE During March 2005 the Company raised from an individual $150,000 through the issuance of convertible debt securities ("Debentures") and warrants ("Debenture Warrants) to purchase 1,666,668 shares of Common Stock. On April 5, 2005 the Company entered into an Amendment of the Debentures and the Debenture Warrants relating to the March 2005 financing were increased to 2,142,856. During the second quarter of 2005, the Company has raised from various financing sources approximately $750,000 through the issuance of Debenture and Debenture Warrants to purchase 11,190,474 shares of Common Stock. Subsequent to June 30, 2005, the Company raised from various financing sources approximately $850,000 through the issuance of Debentures and Debenture Warrants to purchase 12,500,000 shares of Common Stock. During July 2005, the Company has also issued an additional $45,000 aggregate principal amount of Debentures to certain holders of the Debentures in consideration for such holders agreeing to certain amendments with respect to the terms of the Debentures. The Debentures bear interest at 9% per annum on a simple non-compounded basis and are due and payable on August 20, 2006. If the Certificate of Incorporation Amendment is approved, and after such approval, the Debentures will be convertible, at the holder's option, into shares of Common Stock. If the Certificate of Incorporation Amendment is not approved by September 30, 2005, the holder of the Debentures will be entitled to require the Company to redeem the Debentures held by such holder at a purchase price equal to 150% of the principal amount of the Debentures plus accrued and unpaid interest to the date of redemption. If such approval is obtained, the Debentures will become convertible as described above at a conversion rate equal to the lesser of $0.07 (subject to adjustment for subsequent lower price issuances by the Company and other customary events including stock splits, reverse stock splits, dividends of Common Stock and spin-offs) and 75% of the average of the 10 lowest closing bid prices of the Common Stock for the 30 trading days immediately preceding the applicable date of conversion. If a holder elects to convert all or a portion of the Debentures and the conversion price is less than $0.07 (subject to adjustment for subsequent lower price issuances by the Company and other customary events including stock splits, reverse stock splits, dividends of Common Stock and spin-offs), in lieu of effecting such conversion, the Company may elect to redeem the amount of the Debentures requested to be so converted at a purchase price equal to 150% of the principal amount of the Debentures plus accrued and unpaid interest to the date of redemption. The holder may accelerate the maturity date of the Debentures following the occurrence of customary events of default, including, without limitation, payment defaults, breaches of certain covenants and representations, certain events of bankruptcy, certain judgment defaults and the suspension of the Common Stock from trading on the Over the Counter Bulletin Board. In connection with the issuance of the Debentures to date, the Company issued warrants to purchase up to 25,000,000 shares of Common Stock, at a per share exercise price of $0.10, such exercise price subject to adjustment for subsequent lower price issuances by the Company and other customary events including stock splits, reverse stock splits, dividends of Common Stock and spin-offs. 20 ADVANCED TECHNOLOGY INDUSTRIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 6 - CONVERTIBLE DEBENTURE (CONTINUED) Each Debenture Warrant is exercisable during the period from the approval of the Certificate of Incorporation Amendment until the second anniversary of the effective date of the registration statement described below. If the average of the closing bid prices of the Common Stock during any period of 20 consecutive trading days is equal to or greater than $0.50 and the closing bid price of the Common Stock is equal to or greater than $0.50 for at least 10 trading days during such period then with respect to each Debenture Warrant that the holder does not exercise during the 15 trading day period following the receipt by the holder of a notice from the Company that such average price and closing bid prices have occurred, the exercise price for such Debenture Warrants will each be adjusted to $0.25 per share (subject to adjustment for customary events including stock splits, reverse stock splits, dividends of Common Stock and spin-offs). Holders of Debenture Warrants are entitled to effect a cashless exercise of the Debenture Warrants if the registration statement (as described below) has not been declared effective prior the first anniversary of the issuance of the Debenture Warrants. The Company has agreed to file a registration statement to register the shares of Common Stock issuable upon the conversion of the Debentures and the exercise of the Debenture Warrants. The Company will be obligated to pay the holder of the Debentures certain liquidated damages in the event that such registration statement is not filed by October 5, 2005 or is not declared effective by November 30, 2005 or the effectiveness of such registration statement is subsequently suspended for more than certain permitted periods. The fair value of the $150,000 debt securities issued in March of 2005 were allocated 72.2% or $108,271 to the Debentures and 27.8% or $41,729 to the Debenture Warrants. The conversion price of the Debentures was below the market price of the Company's Common Stock at March 2, 2005, which resulted in a beneficial conversion feature relating to the $150,000 of $108,271. In Accordance with EITF 00-27 the amount allocated to the beneficial conversion feature was limited to the net proceeds of the offering less the value allocated to the warrants issued to the purchasers. The fair value of the $750,000 debt securities issued during the second quarter of 2005 were allocated 29.2% or $218,750 to the Debentures and 70.8% or $531,250 to the Debenture Warrants. The combined values allocated to the warrants and beneficial conversion feature of $750,000 was recorded as a debt discount and is being amortized over the period ending August 20, 2006. In Accordance with EITF 00-27 the amount allocated to the beneficial conversion feature was limited to the net proceeds of the offering less the value allocated to the warrants issued to the purchasers. Amortization of debt discount for the period ended June 30, 2005 was $158,333. 21 ADVANCED TECHNOLOGY INDUSTRIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 7 - STOCKHOLDERS' EQUITY Preferred Stock --------------- The Company has authorized 1,000,000 shares of preferred stock, par value - $.001 per share. The Board of Directors of the Company has broad discretion to create one or more series of preferred stock and to determine the rights, preferences and privileges of any such series. At June 30, 2005, 254,199 shares of Series A Preferred Stock has been issued Stock Issuances For The Six Months Ended June 30, 2005 ------------------------------------------------------ During February 2005, the Company issued to the President and Chief Executive Officer of the Company 523,811 shares of Common Stock as a bonus valued at $78,571. During February 2005, the Company issued to a Director of the Company 380,952 shares of Common Stock as a bonus valued at $57,142. During February 2005, the Company issued a former Consultant 1,692,388 shares of Common Stock registered on Form S-8 and 10,538 shares of the Company's Series A Preferred Stock in settlement of $1,016,000 of accrued consulting fees. During February 2005, the Company issued 187,500 shares if common stock to a consultant for services provided valued at $36,000. During March 2005, the Company issued to several investors 1,050,000 shares of Common Stock for $104,565. During March 2005, the Company issued 375 shares of Series A Convertible Preferred Stock, valued at $22,500, to a party as a finders fee relating to financings the Company entered into during the first quarter of 2005. During May 2005, the Company issued 276,394 shares of Common Stock to a consultant for services provided valued at 35,931. During June 2005, the Company entered into a conversion agreement with a debt holder whereby the Company issued 1,971,428 shares of restricted Common Stock as full and final payment of $138,000 of accrued liabilities. During June 2005, the Company issued 312,500 shares of Common Stock to a consultant for services provided valued at $37,500. During April 2005, the Company sold to an investor 250,000 shares of Common Stock for $25,000. During June, the Company issued to an officer 2,000,000 shares of its Common Stock pursuant to a June 30, 2005 Bonus Inceptive arrangement. The officer is also entitled to be issued up to 1,000,000 shares of Common Stock upon additional milestones being reached. The total value of the 2,000,000 shares issued was $260,000, which was charge to operations during the quarter ended June 30, 2005. 22 ADVANCED TECHNOLOGY INDUSTRIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 7 - STOCKHOLDERS' EQUITY (CONTINUED) Earnings Per Share ------------------ Securities that could potentially dilute basic earnings per share ("EPS") in the future that were not included in the computation of diluted EPS because to do so would have been anti-dilutive for the periods presented consist of the following: ---------------------------------------------------------------- -------------- Convertible Debentures 12,857,142 ---------------------------------------------------------------- -------------- Options to purchase Common Stock 1,712,777 ---------------------------------------------------------------- -------------- Warrants to purchase Common Stock 15,999,998 ---------------------------------------------------------------- -------------- Convertible Preferred Stock 101,679,699 ---------------------------------------------------------------- -------------- Warrants to purchase Convertible Preferred Stock 195,161,200 ----------- ---------------------------------------------------------------- -------------- Total as of June 30, 2005 327,410,816 =========== ---------------------------------------------------------------- -------------- ---------------------------------------------------------------- -------------- Substantial and potential issuances after June 30, 2005: ---------------------------------------------------------------- -------------- Warrants to purchase Common Stock 12,500,000 ---------------------------------------------------------------- -------------- Convertible Debentures (assuming conversion price of $0.07) 12,142,857 ---------------------------------------------------------------- -------------- Issuance of Common Stock for services 333,000 ---------------------------------------------------------------- -------------- 23 ADVANCED TECHNOLOGY INDUSTRIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 8 - COMMITMENTS AND OTHER MATTERS Consulting Agreement - ERBC --------------------------- By letter dated June 1, 1996, ATI engaged ERBC Holdings, LTD ("ERBC"), a related party, as a consultant to undertake all aspects of ATI's operations in Russia. Pursuant to the letter agreement, ATI agreed to pay ERBC a fee of $115,000 per year which was increased to $240,000 commencing in 2001 In February 2005, the balance outstanding under this agreement of $1,015,176was converted into 1,692,388 shares of Common Stock and 10,538 shares of Series A Preferred Stock. Russian Contracts For Research And Development ---------------------------------------------- ATI is a party to a research and development agreement with a Moscow-based State Scientific Research Institute Scientific Production Company named Lutch pursuant to which such entity has agreed to perform various contract research and development services related to technology obtained by ATI from Nurescell for a total price of $985,000. Through March 31, 2005, the Company paid $100,000 under this agreement. As a continued result of limited funding, no services have been performed under this agreement to date. It is uncertain when or if any services will eventually be completed under this contract. ATI is a party to a research and development agreement with a branch of the Ministry of the Atomic Energy of the Russian Federation pursuant to which such entity has agreed to perform various contract research and development services to develop an industrial fireproof swelling cable coating for a total price of $462,000. As a result of limited funding of this contract, the performance of services were rescheduled to occur commencing with the quarter ended December 31, 2003 and to be completed within one year. The work under the contracts has not been completed as of June 30, 2005 and at this time the completion date can not be determined as a continued result of limited funding. 24 ADVANCED TECHNOLOGY INDUSTRIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 8 - COMMITMENTS AND OTHER MATTERS (CONTINUED) Acquisition Of In-Process Technologies -------------------------------------- In connection with an oral agreement, ATI has agreed to acquire the rights to certain in-process technologies now held by a German bank, for an estimated purchase price of $500,000 payable in cash and/or common stock. Management of ATI has indicated that this transaction is expected to close during the end of 2005 although there is no assurance it will be consummated. As of June 30, 2005, LTDN has paid $352,089 to the German bank as part of this oral agreement. Legal Disputes -------------- During the quarter ended June 30, 2003, ATI was notified that Dr. Jurgen Lempert intended to commence legal proceeding against ATI relating to his termination as Chief Executive Officer of ATI Nuklear. A German court ruled the Dr. Lempert is entitled to collect $69,629. As of June 30, 2005, the Company has accrued such amounts. A noteholder has threatened to sue ATI for repayment of an outstanding note. To date, ATI has not been served with a lawsuit. In the event the noteholder does sue ATI, ATI believes it has sufficient defenses for nonpayment of the note and intends to vigorously defend itself against such claims. James Cassidy and TPG Capital have filed for arbitration against ATI regarding a purported reset provision in an agreement entered into during 1999. TPG believes it is entitled to receive an additional 1,465,671 shares of Common Stock under an agreement previously executed between the parties. Should litigation arise, the Company believes that it has sufficient defenses and intends to vigorously defend itself against such claims. Dr. Alexander Kaul, former Chairman of the Supervisory Board of ATI Nuklear, initiated legal proceedings against ATI for monies he believes are due him under his terminated employment contract. A German court ruled that Dr. Kaul is entitled to collect $67,808. As of June 30, 2005, the Company has accrued such amounts. Peter Goerke, a former Vice President of the Company, initiated legal proceedings against the Company for the value of his remaining employment agreement, accrued wages and expenses. A German court ruled that Mr. Goerke is not entitled to the remaining value of his employment contract and is only entitled to collect $197,486. At June 30, 2005, the Company has accrued such amounts. Mr. Goerke has filed for a lien against certain assets of Cetoni, one of the Company's wholly owned subsidiaries. 25 ADVANCED TECHNOLOGY INDUSTRIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 8 - COMMITMENTS AND OTHER MATTERS (CONTINUED) Legal Disputes (Continued) -------------------------- Cnet Networks, Inc. initiated proceedings against LTDN for amounts due it by a former third party affiliate of LTDN. During June 2005, Cnet Networks, Inc. received a judgment in the amount of $100,000 against LTDN. LTDN believes that it is not liable for this amount and intends to appeal the verdict. Additionally, LTDN believes that it has a cause of action against Cnet Networks, Inc. relating to a breach of contract and other claims relating to a contract between it and Cnet Networks, Inc. As of June 30, 2005, LTDN accrued $100,000 related to this judgment. A German court has suspended the corporate registration of Cetoni. The Company does not intend to appeal this decision as it is consistent with the restructuring of all German operations. The Company does not believe this ruling will have a material impact on the Company's operations as Cetoni no linger has any significant tangible or intangible assets. The Company is also subject to various matters of litigation during its normal course of operations. Management believes that the eventual outcome of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations, or cash flows. Lien On Star Can Patents ------------------------ During June 2003, the Company became aware that a lien had been placed against the patents relating to the resealable can by Paxsys Ltd., a Bermuda corporation, in connection with a failed financing. The Company disputes the validity of the claim and intends to take vigorous action to remedy the situation and have the lien removed. Settlement Agreement -------------------- On June 15, 2004, ATI entered into a settlement agreement with a law firm previously engaged by ATI in connection with the settlement of various claims between such parties. Such claims included a claim by such law firm that ATI owed such law firm approximately $721,000 for legal services and interest on the outstanding amount. Pursuant to such settlement agreement each party provided the other with a general release for all claims arising prior to the date of such settlement agreement and ATI agreed to issue to such law firm 2,250,000 shares of Common Stock. Shares issued under these arrangements were valued at $405,000. As part of the settlement agreement, the law firm was entitled to penalty shares in the event certain shares were not registered on Form S-8 by July 1, 2004. As such, the law firm received 65,590 shares of restricted common stock as a penalty. The Settlement Agreement allows for a period of one year, for a repricing of shares in the event that the Common Stock trades below a price of $0.12 per share for a period of 30 consecutive days. In the event that the repricing is triggered, additional shares of Common Stock would be issuable as detailed in the Settlement Agreement. During August 2005, the repricing mechanism was triggered and the Company is obligated to issue 70,000 shares of its restricted Common Stock under the terms of the Settlement Agreement. 26 ADVANCED TECHNOLOGY INDUSTRIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 9 - SEGMENT REPORTING The Company's business is organized on a geographic basis, and the Company's Chief Operating Decision Maker assesses performance and allocates resources on this basis. The information provided in the following section is representative of the information used by the Chief Operating Decision Maker in deciding how to allocate resources and in assessing performance. The Company has three geographic reportable segments: United States of America (U.S.A.), Australia and Germany. The accounting policies of the segments are the same as described in the summary of significant accounting policies. The Company evaluates segment performance based on net income (loss). Segment results for the six months ended June 30, 2005 and 2004 are as follows: 2005: --------------------- U.S.A. Australia Germany Eliminations Consolidated ------------ ----------- ---------- ------------ ------------ Net Loss $ (933,869) $(1,584,571) $ (23,145) $ -- $ (2,541,585) =========== =========== ========== ============ ============ Depreciation and amortization $ -- $ 16,687 13,786 $ -- $ 30,473 =========== =========== ========== ============ ============ Identifiable Assets $ 229,641 $ 1,109,369 $ 157,983 $ -- $ 1,496,993 =========== =========== ========== ============ ============ 2004: --------------------- Net Loss $ -- $(1,293,317) $ -- $ -- $ (1,293,317) =========== =========== ========== ============ ============ Depreciation and amortization $ -- $ 15,544 $ -- $ -- $ 15,544 =========== =========== ========== ============ ============ 27
ADVANCED TECHNOLOGY INDUSTRIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Segment results for the three months ended June 30, 2005 and 2004 are as follows: 2005: --------------------- U.S.A. Australia Germany Eliminations Consolidated ----------- ----------- ---------- ------------ ----------- Net Loss $ (933,869) $ (888,032) $ (57,405) $ -- $(1,764,496) =========== =========== ========== ============ =========== Depreciation and amortization $ -- $ 8,528 6,893 $ -- $ 15,421 =========== =========== ========== ============ =========== Identifiable Assets $ 229,641 $ 1,109,369 $ 157,983 $ -- $ 1,496,993 =========== =========== ========== ============ =========== 2004: --------------------- Net Loss $ -- $ (549,727) $ -- $ -- $ (549,727) =========== =========== ========== ============ =========== Depreciation and amortization $ -- $ 7,772 $ -- $ -- $ 7,772 =========== =========== ========== ============ ===========
At June 30, 2004, all identifiable assets were in Australia. NOTE 10 - SUBSEQUENT EVENTS SUBSEQUENT STOCK ISSUANCES Debt Issuances -------------- On July 19, 2005, pursuant to a Securities Purchase Agreement dated as of July 14, 2005 (the "Securities Purchase Agreement") among the Company and a group of investors (collectively, the "Investors"), the Company has sold an aggregate of $850,000 principal amount of its Debentures and Debenture Warrants to purchase 12,500,000 shares of Common Stock. The Company received net proceeds in such sale of $760,000, after the payment of offering related fees and expenses. The Debentures and Debenture Warrants were issued in a private placement pursuant to Section 4(2) under the Securities Act of 1933, as amended (the "Securities Act"). The terms of these securities are substantial the same to the securities described in Note 6 28 ITEM 2. PLAN OF OPERATION FORWARD LOOKING STATEMENTS. The following discussion and analysis should be read in conjunction with the financial statements and notes thereto included elsewhere in this report on Form 10-QSB and with the annual report of Advanced Technology Industries, Inc. ("we", "us", "ATI" or the "Company") on Form 10-KSB for the fiscal year ended December 31, 2004. This report on Form 10-QSB contains certain statements that are "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Those statements, among other things, include the discussions of the Company's expectations set forth below. Although the Company believes that the expectations reflected in the forward looking statements are reasonable, management can give no assurance that such expectations will prove to have been correct. Generally, forward looking statements relate to business plans or strategies, projected or anticipated benefits or other consequences of such plans or strategies, or projections involving anticipated revenues, expenses, earnings, levels of capital expenditures, liquidity or indebtedness, ability to raise working capital, or other aspects of operating results or financial position. All phases of the operations of the Company are subject to a number of uncertainties, risks and other influences, many of which are outside the control of the Company and any one of which, or a combination of which, could materially affect the results of the Company's operations and whether the forward looking statements made by the Company ultimately prove to be accurate. These influences include, but are not limited to the following: whether or not we can successfully commercialize the products of our subsidiaries; whether or not we are able to acquire new, marketable technologies; whether or not others develop products or services that are more readily accepted than, or compete with, the products or services we currently offer or intend to offer; political turmoil or changes in government policies in the countries in which we do business; whether or not we are able to raise sufficient capital to fund our operations, including funding the development of the technologies owned by our subsidiaries, and other factors or influences that may be out of our control. Although not always the case, forward looking statements can be identified by the use of words such as "believes", "expects", "intends", "projects", "anticipates", "contemplates", or "estimates". The following discussion and analysis should be read in conjunction with the remainder of this Quarterly Report on Form 10-QSB including, but not limited to, the financial statements and notes thereto included herein. COMPANY OPERATIONS We are a development stage company and our efforts have been primarily devoted to technology identification and acquisition, research and development and raising capital. This discussion provides an analysis of our anticipated plan of operation for the next 12 months. We were formed in 1995 to acquire and commercialize new or previously existing but non-commercialized technologies. Directly or through a subsidiary, we may acquire a direct interest in these technologies, a right to use these technologies, and/or an ownership interest in the entity owning these technologies. The acquisition of technologies by us may be made by the issuance of our common stock (the "Common Stock") or other securities, cash or other consideration, or a combination thereof. Our principal activities include identifying, reviewing and assessing technologies for their commercial applicability and potential. During the next 12 months we intend to concentrate on the (i) continued development and marketing of the software products of LTDnetwork, Inc., a development-stage company which commenced operations in 1999 ("LTDN"), (ii) commercialization of the Company's proprietary resealable metal beverage can, (iii) commercialization certain of the Company's consumer products, including products in the following markets: automotive accessory (ToolStar, Ring Memory), healthcare (Pharmaceutical packaging), household goods (butter dish, sugar dispenser, candy dispenser, fruit peeler and fruit peeler with tray), sports (Power Ball and Walk and Roll), office and general consumer markets (Light Boy, Cleaning Center), and (iv) commercialization of products developed by Alfa-Pro Products GmbH, a subsidiary acquired in December 2004, and from the intellectual property acquired from Schlattl GBR in December 2004. Except for a nominal amount of revenue from the sale of Cetoni Umwelttechnologie Entwicklungs GmbH ("Cetoni") products in a prior period, we have not generated any revenue from operations since our inception and we have not been profitable since our inception. We will require additional financing to continue our planned operations during the next 12-month period. Management believes that it will be able to raise the necessary financing to continue planned operations. We will attempt to raise this additional capital through the public or private placement of our securities, debt or equity financing, joint ventures, or the licensing or sale of our technologies and products. However, there is no guarantee that we will be able to successfully raise the required funds for operations or that such funds will be available on terms satisfactory to us. Any inability to raise additional funds would require that we significantly scale back our planned operations. 29 In particular, we need to obtain financing for the production of machine-fabricated samples for distribution to beverage producers who have previously expressed an interest in our resealable beverage can. It is anticipated that production of those samples, marketing and general operational expenses will require less than $450,000. We anticipate that in the event we are required to purchase capital equipment for the full scale production of our resealable beverage cans, an additional $2,000,000 would be required. The production of the machine produced samples has been delayed by a failed financing, the proceeds of which were to be used to complete this production run. Also, we have recently launched our intelliChoice product developed by LTDN. We need to raise additional funds in order to put us in a position to successfully market and distribute such product. We also plan on launching our Qtrax product within the next few months. Ideally, upon the commercialization of our products, including intelliChoice and Qtrax, and implementation of operational cost controls, we would hope that sustainable revenues will be able to be generated so as to avoid the necessity to raise significant funds in the longer term. There can be no assurances as to when and whether we will be able to commercialize our products and technologies and realize any revenues therefrom. No assurance can be given that we can complete the development of any technology or that, if any technology is fully developed, it can be manufactured and marketed on a commercially viable basis. Furthermore, no assurance can be given that any technology will receive market acceptance. Being a development stage company, we are subject to all risks inherent in the establishment of a developing or new business. Between March 1, 2005 and August 19, 2005, the Company has raised from various financing sources approximately $1,750,000 through the issuance of convertible debt securities ("Debentures") and warrants ("Debenture Warrants") to purchase 25,000,000 shares of Common Stock. The Company has also issued an additional $45,000 aggregate principal amount of Debentures to certain holders of the Debentures in consideration for such holders agreeing to certain amendments with respect to the terms of the Debentures. The Debentures bear interest at 9% per annum on a simple non-compounded basis and are due and payable on August 20, 2006. If the holders of Common Stock approve an amendment (the "Certificate of Incorporation Amendment") to ATI's certificate of incorporation to increase its authorized capital stock from 100,000,000 shares to at least 500,000,000 shares, then from and after such approval the Debentures will be convertible, at the holder's option, into shares of Common Stock. If the Certificate of Incorporation Amendment is not approved by September 30, 2005, the holders of the Debentures will be entitled to require the Company to redeem the Debentures held by such holders at a purchase price equal to 150% of the principal amount of the Debentures plus accrued and unpaid interest to the date of redemption. If such approval is obtained, the Debentures will become convertible as described above at a conversion rate equal to the lesser of $0.07 (subject to adjustment for subsequent lower price issuances by the Company and other customary events including stock splits, reverse stock splits, dividends of Common Stock and spin-offs) and 75% of the average of the 10 lowest closing bid prices of the Common Stock for the 30 trading days immediately preceding the applicable date of conversion. Subject to limited exceptions, a holder shall not be entitled to convert a Debenture held by such holder if such conversion would result in such holder beneficially owning more than 4.99% of the shares of Common Stock following such conversion. If a holder elects to convert all or a portion of the Debentures and the conversion price is less than $0.07 (subject to adjustment for subsequent lower price issuances by the Company and other customary events including stock splits, reverse stock splits, dividends of Common Stock and spin-offs), in lieu of effecting such conversion, the Company may elect to redeem the amount of the Debentures requested to be so converted at a purchase price equal to 150% of the principal amount of the Debentures plus accrued and unpaid interest to the date of redemption. The holder may accelerate the maturity date of the Debentures following the occurrence of customary events of default, including, without limitation, payment defaults, breaches of certain covenants and representations, certain events of bankruptcy, certain judgment defaults and the suspension of the Common Stock from trading on the Over the Counter Bulletin Board. The Debentures are secured by a security interest in all of the Company's assets. Each Debenture Warrant is exercisable during the period from the approval of the Certificate of Incorporation Amendment until the second anniversary of the effective date of the registration statement described below. The Debenture Warrants are exercisable at $0.10 per share, such exercise price subject to adjustment for subsequent lower price issuances by the Company and other customary events including stock splits, reverse stock splits, dividends of Common Stock and spin-offs. Subject to limited exceptions, a holder shall not be entitled to convert a Debenture Warrant held by such holder if such conversion would result in such holder beneficially owning more than 4.99% of the shares of 30 Common Stock following such conversion. If the average of the closing bid prices of the Common Stock during any period of 20 consecutive trading days is equal to or greater than $0.50 and the closing bid price of the Common Stock is equal to or greater than $0.50 for at least 10 trading days during such period then with respect to each Debenture Warrant that the holder does not exercise during the 15 trading day period following the receipt by the holder of a notice from the Company that such average price and closing bid prices have occurred, the exercise price for such Debenture Warrants will each be adjusted to $0.25 per share (subject to adjustment for customary events including stock splits, reverse stock splits, dividends of Common Stock and spin-offs). Holders of Debenture Warrants are entitled to effect a cashless exercise of the Debenture Warrants if the registration statement (as described below) has not been declared effective prior the first anniversary of the issuance of the Debenture Warrants. If the Certificate of Amendment is not approved the Debenture Warrants will not become exercisable. The Company has agreed to file a registration statement to register the shares of Common Stock issuable upon the conversion of the Debentures and the exercise of the Debenture Warrants. The Company will be obligated to pay the holder of the Debentures certain liquidated damages in the event that such registration statement is not filed by October 5, 2005 or is not declared effective by November 30, 2005 or the effectiveness of such registration statement is subsequently suspended for more than certain permitted periods. ITEM 3. CONTROLS AND PROCEDURES We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by us in the reports filed under the Securities Exchange Act, is recorded, processed, summarized and reported within the time periods specified by the 's rules and forms of the Securities and Exchange Commission ("SEC"). Disclosure controls are also designed with the objective of ensuring that this information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. Based upon their evaluation as of the end of the period covered by this report, our chief executive officer and chief financial officer concluded that, if we are able to successfully address the material weakness in our internal accounting controls as discussed below, our disclosure controls and procedures are effective to ensure that information required to be included in our periodic SEC filings is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms. Our board of directors were advised by Marcum & Kliegman, LLP, our independent registered public accounting firm, that during their performance of audit procedures for 2004 Marcum & Kliegman LLP identified two material weaknesses as defined in Public Company Accounting Oversight Board Standard No. 2, in our internal control over financial reporting. The material weakness related to the December 31, 2004 financial statement closing process. Certain adjustments were identified in the annual audit process, related to the accounting for stock transactions as well as the lack of segregation of duties in the process of cash receipts and disbursements. In addition, there were instances where accounting analyses did not include evidence of a timely review. The adjustments related to these matters were made by the Company in connection with the preparation of the audited financial statements for the year ended December 31, 2004, the unaudited financial statements for the quarter ended March 31, 2005 and the unaudited financial statements for the quarter ended June 30, 2005. Given these material weaknesses, management devoted additional resources to resolving questions that arose during our year-end audit. As a result, we are confident that our consolidated financial statements for the quarter ended June 30, 2005 fairly present, in all material respects, our financial condition and results of operations. The material weaknesses have been discussed in detail among management, our board of directors and our independent auditors, and we are committed to addressing and resolving these maters fully and promptly, by putting in place the personnel, processes, technology and other resources appropriate to support our revenue recognition and financial close processes. In that regard we have retained a CPA who assisted us in the preparation of our financial statements, and the Forms 10-QSB for the quarter ended March 2005 and the quarter ended June 30, 2005. We intend to complete a review of our financial disclosure process and define and implement additional needed improvements. In addition to the matters discussed above, the independent registered public accounting firm responsible for the audit of our financial statements as of and for the year ending December 31, 2006 must attest to and issue a report on management's assessment of the design and operational effectiveness of our internal control over financial reporting. Although we intend to conduct a rigorous review of our internal control over financial reporting to help achieve compliance with the Section 404 requirements of the Sarbanes-Oxley Act, if our independent registered public accounting firm is not satisfied with our internal control over financial reporting or with the level at which it is documents, 31 designed, operated or reviewed, they may decline to attest to management's assessment or may issue a qualified report identifying either a significant deficiency or a material weakness in our internal controls. This could result in significant additional expenditures responding to the Section 404 internal control audit, a diversion of management attention and potentially an adverse reaction to our common stock. (b) Changes in Internal Controls and Procedures. None. 32 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In May 2004, TPG Capital Corporation filed a claim against the Company with the International Centre for Dispute Resolution. TPG Capital Corporation claims it is entitled to receive additional shares of Common Stock for certain services provided to the Company with the Company's merger with Aberdeen Acquisition Corporation. An agreement executed by the Company and TPG Capital Corporation in 1999 provided that on the first anniversary of such merger the amount of Common Stock previously issued to TPG Capital Corporation in connection with such services would be adjusted such that the aggregate stock held by TPG Capital Corporation would have a value of at least $500,000. At such time, such provision would have resulted in 1,465,671 shares of Common Stock being issued to TPG Capital Corporation. TPG Capital Corporation claims it is entitled to such number of shares plus additional shares in connection with interest and the difference between the Company's current stock price and such stock price on such one year anniversary. The Company believes that is has certain defenses to such claims based on certain actions taken by TPG Capital Corporation. This case is current schedule to be heard by a third party arbitrator on October 20, 2005. A German court has suspended the corporate registration of Cetoni. The Company does not intend to appeal this decision as it is consistent with the restructuring of all German operations. The Company does not believe this ruling will have a material impact on the Company's operations as Cetoni no longer has any significant tangible or intangible assets The Company is subject to various matters of litigation during its normal course of operations. Management believes that the eventual outcome of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations, or cash flows. ITEM 2. CHANGES IN SECURITIES AND PURCHASES OF EQUITY SECURITIES. During May 2005, the Company issued 276,394 shares of Common Stock to a consultant for services provided valued at $35,931. During June 2005, the Company entered into a conversion agreement with a debt holder whereby the Company agreed to issue 1,977,585 shares of restricted Common Stock as full and final payment of $138,000. During June 2005, the Company issued 312,500 shares of Common Stock to a consultant for services provided valued at $37,500. Such shares were issued on Form S-8. INCENTIVE BONUS AGREEMENTS During June 2005, the Company made an incentive bonus offer to an existing officer of the Company whereby the Company would issue shares of Common Stock, registered under Form S-8, to the officer upon certain milestones being reached. During June, the Company became obligated to issue to said officer 2,000,000 shares of its Common Stock as part of this bonus arrangement. The officer is also entitled to be issued up to 1,000,000 shares of Common Stock upon additional milestones being reached. Liquidity and Capital Resources At June 30, 2005, the Company had a working capital deficiency of approximately $8,192,000. In addition, the Company continues to incur recurring losses from operations and has an accumulated deficit since inception of approximately $41,235,000. The accompanying financial statements have been prepared assuming that that the Company will continue as a going concern. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans with respect to these matters include restructuring its existing debt, raising additional capital through future issuances of stock and/or equity, and finding sufficient profitable markets for its products to generate sufficient cash to meet its business obligations. However, there can be no assurance that the Company will be able to obtain sufficient funds to continue the development of its product and marketing plan. The accompanying financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. A noteholder has threatened to sue the Company for repayment of an outstanding note. To date, the Company has not been served with a lawsuit. In the event the noteholder does sue the Company, the Company believes it has sufficient defenses and intends to vigorously defend itself against such claims. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. 33 ITEM 6. EXHIBITS Exhibit 3.1 Certificate of Incorporation of the Registrant (2) Exhibit 3.2 Certificate of Designations for the Series A Convertible Preferred Stock of the Registrant (1) Exhibit 3.3 Amendment No. 1 to the Certificate of Designations for the Series A Convertible Preferred Stock of the Registrant (3) Exhibit 3.4 Amended and Restated By-laws of the Registrant (4) Exhibit 4.1 Warrant Agreement, dated as of December 15, 2004, between the Registrant and LTDnetwork, Inc. (1) Exhibit 4.2 Registration Rights Agreement, dated as of December 15, 2004, between the Registrant and LTDnetwork, Inc. (1) Exhibit 4.3 Securities Purchase Agreement dated as of March 1, 2005 between the Registrant and The Gross Foundation, Inc.(3) Exhibit 4.4 Amendment No. 1 dated as of April 5, 2005 to the Securities Purchase Agreement and the Transaction Documents between the Registrant and The Gross Foundation, Inc.(3) Exhibit 4.5 Form of 9% Convertible Debenture issued to The Gross Foundation, Inc.(3) Exhibit 4.6 Form of Warrant issued to The Gross Foundation, Inc.(3) Exhibit 4.7 Registration Rights Agreement dated as of March 1, 2005 between the Registrant and The Gross Foundation, Inc.(3) Exhibit 4.8 Securities Purchase Agreement dated as of April 14, 2005 between the Registrant and Double U Master Fund, L.P.(3) Exhibit 4.9 Form of 9% Convertible Debenture issued to Double U Master Fund, L.P.(3) Exhibit 4.10 Form of Warrant issued to Double U Master Fund, L.P.(3) Exhibit 4.11 Registration Rights Agreement dated as of April 14, 2005 between the Registrant and Double U Master Fund, L.P.(3) Exhibit 4.12 Securities Purchase Agreement dated as of April 14, 2005 between the Registrant and Platinum Partners Value Arbitrage Exhibit 4.13 Fund, L.P.(3) Exhibit 4.14 Form of 9% Convertible Debenture issued to Platinum Partners Value Arbitrage Fund, L.P.(3) Exhibit 4.15 Form of Warrant issued to Platinum Partners Value Arbitrage Fund, L.P.(3) Registration Rights Agreement dated as of April 18, 2005 Exhibit 4.16 between the Registrant and Platinum Partners Value Arbitrage Fund, L.P.(3) Exhibit 4.17 Securities Purchase Agreement dated as of April 18, 2005 between the Registrant and JM Investors, Inc.(3) Exhibit 4.18 Form of 9% Convertible Debenture issued to JM Investors, Inc.(3) Form of Warrant issued to JM Investors, Inc.(3) Exhibit 4.19 Registration Rights Agreement dated as of April 18, 2005 between the Registrant and JM Investors, Inc.(3) Exhibit 4.20 Securities Purchase Agreement dated as of July 14, 2005 between the Registrant and the investors named therein (4) 34 Exhibit 4.21 Form of 9% Convertible Debenture issued to certain investors on July 19, 2005 (3) Exhibit 4.22 Form of Warrant issued to certain investors on July 19, 2005 (4) Exhibit 4.23 Registration Rights Agreement dated as of July 14, 2005 between the Registrant and the investors named therein (4) Exhibit 4.24 Amendment No. 1 dated as of July 19, 2005 to the Registration Rights Agreements between the Registrant and the investors named therein and the related Debentures (4) Exhibit 4.25 Security Agreement dated as of July 19, 2005 between the Registrant and the investors named therein (4) Exhibit 21.1 List of Subsidiaries (3) Exhibit 31.1 Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* Exhibit 31.2 Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* Exhibit 32.1 Certification of the Principal Executive Officer and the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* * Filed herewith (1) Incorporated herein by reference to the Registrant's Current Report on Form 8-K as filed with the Securities and Exchange Commission on December 17, 2004 (2) Incorporated herein by reference to the Registrant's Current Report on Form 8-K as filed with the Securities and Exchange Commission on May 15, 2000. (3) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB for the year ended December 31, 2004 as filed with the Securities and Exchange Commission on May 23, 2005. (4) Incorporated herein by reference to the Registrant's Current Report on Form 8-K as filed with the Securities and Exchange Commission on July 20, 2005 . SIGNATURES 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. ADVANCED TECHNOLOGY INDUSTRIES, INC. Dated: August 22, 2005 By: /s/ Allan Klepfisz --------------------------------------- Allan Klepfisz, Chief Executive Officer Dated: August 22, 2005 By: /s/ James Samuelson --------------------------------------- James Samuelson Chief Financial Officer 35