Attached files
| file | filename |
|---|---|
| EX-32 - EXHIBIT 32 - CurAegis Technologies, Inc. | c14707exv32.htm |
| EX-23.1 - EXHIBIT 23.1 - CurAegis Technologies, Inc. | c14707exv23w1.htm |
| EX-31.1 - EXHIBIT 31.1 - CurAegis Technologies, Inc. | c14707exv31w1.htm |
| EX-31.2 - EXHIBIT 31.2 - CurAegis Technologies, Inc. | c14707exv31w2.htm |
| EX-10.73 - EXHIBIT 10.73 - CurAegis Technologies, Inc. | c14707exv10w73.htm |
| EX-10.72 - EXHIBIT 10.72 - CurAegis Technologies, Inc. | c14707exv10w72.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| þ | Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Fiscal Year Ended DECEMBER 31, 2010
OR
| o | 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 000-24455
TORVEC, INC.
(Name of Small Business Issuer in its charter)
| NEW YORK | 16-1509512 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
| 1999 Mount Read Blvd., Building 3 Rochester, New York |
14615 |
|
| (Address of principal executive offices) | (Zip Code) |
Issuer’s Telephone Number, including Area Code: (585) 254-1100
Securities registered pursuant to Section 12(b) of the Exchange Act:
| Title of each class | Name of each exchange on which registered | |
| None. | N/A |
Securities registered pursuant to Section 12(g) of the Exchange Act:
$.01 par value common voting stock
(Title of class)
$.01 par value common voting stock
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation
S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
State the aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was last sold, or the
average bid and asked price of such common equity, as of the last business day of the registrant’s
most recently completed second fiscal quarter. $8,153,731.
State the number of shares outstanding of each of the issuer’s classes of common equity, as of
February 28, 2011—45,691,099.
Table of Contents
TORVEC, INC. AND SUBSIDIARIES
(A Development Stage Company)
(A Development Stage Company)
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| Exhibit 10.72 | ||||||||
| Exhibit 10.73 | ||||||||
| Exhibit 23.1 | ||||||||
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| Exhibit 31.2 | ||||||||
| Exhibit 32 | ||||||||
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PART I
| Item 1. | DESCRIPTION OF BUSINESS |
(A) History and Development of Our Inventions
Torvec, Inc. was incorporated as a New York business corporation on September 25, 1996. Upon
its incorporation, the company acquired numerous patents, inventions and know-how created by Vernon
E. Gleasman and his sons, James and Keith Gleasman, a family with more than fifty years of
experience in the automotive industry. Since its inception, the company has endeavored to design,
develop, build and commercialize its automotive technology portfolio.
The company is focusing its commercialization strategies on the following technologies:
The IsoTorque® Differential
The IsoTorque is a fully mechanical, high traction differential that provides an order of
magnitude better performance than existing technologies for automotive and commercial vehicle use.
Because it is fully mechanical, it responds instantly to different driving scenarios, and does not
require electronics or plate clutches that may malfunction or wear out.
While the IsoTorque makes use of all available traction, it also adds to the performance,
handling and safety of any vehicle in which it is equipped. Skid-pad, slalom and emergency lane
changes are significantly improved. Several race teams and original equipment manufacturers have
seen lap time reductions of over a second and a 15-20% improvement in lateral acceleration in side
by side testing.
Due to the IsoTorque’s functionality, torque steer in front wheeled drive vehicles (FWD) is
significantly reduced, making these vehicles more stable, and fishtailing in rear wheeled drive
vehicles (the tendency of the back end of the vehicle to come around on the driver) is prevented.
The IsoTorque also has the potential to save fuel. Modeling has shown that a FWD vehicle equipped
with the IsoTorque will provide 85% of the traction of its all wheeled drive counterpart, while
saving 2 — 3 miles per gallon in fuel economy due to the IsoTorque’s significant weight advantage.
The Rota-Torque Hydraulic Pump
Torvec’s Rota-Torque hydraulic pump is a revolutionary departure from traditional axial piston
pump designs. Torvec’s pump features a non-rotating cylinder block, mechanically operated valving,
a more efficient pumping angle of 25º, reversible flow direction, dry sump (no splashing losses),
an 85% reduction in slipper shoe sliding, and very low parasitic losses. Torvec’s pump is also
substantially more compact and lighter than existing hydraulic pumps. For example, Torvec’s 12.6
Cubic Inch Displacement (206 Cubic Centimeters) pump is approximately 75 lbs. verses the 220 — 240
lbs. conventional pump of the same displacement. The Torvec pump can operate at speeds of 4,000
RPM verses the 2,500 RPM of conventional pumps of the same displacement. Also the Torvec pump
operates at well under 500 RPM without cogging (jumping or shuddering).
Since the Torvec pump has a non-rotating cylinder block and mechanical valving, it does not
require the large spring force found in conventional pumps that has to be overcome when operating.
Because of this, Torvec’s pump has very low parasitic losses (requiring 2 inch lbs. to turn over as
against 9 ft-lbs required for even a 2.5 Cubic Inch Displacement (40 Cubic Centimeter conventional
pump). As compared to existing axial piston pumps, Torvec’s pump, by reducing parasitic losses and
increasing efficiency, should reduce fuel usage of commercial equipment.
The Torsteer Vehicle Steer-Drive
Torvec’s Steer-Drive is a unique mechanism that enables tracked vehicles to steer like a car.
Traditional tracked vehicles are steered by changing the relative speeds of the two tracks. For
example, when moving straight forward, both tracks are moving at the same speed; when turning, the
inside track slows down while the outside track speeds up proportionately. The vehicle turns in the
direction of the slower track. Traditional steering systems
combine the functions of driving forward and steering, which limits most tracked vehicles to
less than 20 mph. Torvec’s steering mechanism separates the mechanical function of driving the
vehicle forward from the steering. This separation enables the vehicle to attain relatively high
speeds (up to 50 mph), while providing enough torque to steer the vehicle. The two functions
operate independently and simultaneously. Torsteer also eliminates vehicle wander that can occur
with traditional hydrostatic steering systems.
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Other features that set Torvec’s system apart from traditional tracked vehicle steering system
include its mechanical simplicity, its use of off-the-shelf components, relatively low cost, and
its functional and performance benefits (smooth turning and true pivot turning on vehicle center).
We have used it successfully in tracked vehicles ranging from 5,000 lbs. — 22,000 lbs. and at
speeds from 25 — 50 mph. The latest innovation to the Torsteer-Drive is the incorporation of our
IsoTorque® differential. The addition of the IsoTorque prevents track spin up, much like it does
for wheeled vehicles.
(B) Competition, Industry and Market Acceptance
The company believes that its automotive technology is superior to similar products
manufactured in the worldwide automotive industry and in many instances represents a true paradigm
shift with respect to presently known technology. However, through December 31, 2010, the company
has not generated significant revenues from operations. It has taken the company time to develop
its products so that the company’s automotive technologies are ready for commercialization, mainly
due to a lack of focus in completing product prototypes.
The company’s ability to generate revenue and become profitable is considerably dependent upon
acceptance by automotive manufacturers and/or first-tier suppliers of the technical superiority of
the company’s products, their generally lower manufacturing costs, their generally lighter weight
and beneficial impact upon the competitive, worldwide demand for raw materials and their
environmentally-friendly attributes. The automotive industry, however, has committed substantial
resources to product systems utilizing old technology as well as to new product systems (e.g.
hybrids) which the industry believes may fulfill its short and long term needs. In addition, the
industry historically has been characterized by a resistance to embracing new technologies from
sources outside of the industry’s own research and development units (the “not invented here”
syndrome).
Essentially, the market for all of the company’s automotive technologies is occupied by
competing products manufactured and/or utilized by the very manufacturers and/or first tier
suppliers which the company is attempting to attract. Thus, management is challenged to demonstrate
that the company’s automotive technologies will result in a greater market share for the acquiring
and/or licensing manufacturer and/or first-tier supplier, if not initially, then over a finite
period of years (generally, in no case greater than the existing or expected patent protection for
the technologies). Such demonstration, including significantly the expected revenues and profits to
be achieved by virtue of such increased market share, becomes the basis for an evaluation of the
company’s automotive technologies with such evaluation designed to generate a fair and adequate
price for such technologies.
As the result of recent initiatives, the company is currently working with a number of
domestic and foreign enterprises with respect to its IsoTorque® differential
technology.
In June 2010, the company created a joint venture to introduce its IsoTorque technology to
Chinese automotive enterprises, in which the company owns a 60% interest and To The Point
Consulting LLC and Across China LLC each own 20%. Through December 31, 2010, there has not been any
activity with this joint venture and the company has not contributed any capital.
In January 2011, the company contracted with a West Virginia remanufacturer of components for
mining and associated industrial equipment to develop an IsoTorque differential prototype to
demonstrate its feasibility to alleviate steering problems associated with mining shuttle cars. If
successful, the contract calls for the company to furnish the remanufacturer with all of its
differential requirements during the three year contract term, as mutually extended.
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Table of Contents
| Item 1A. | RISK FACTORS |
The company faces a variety of risks inherent in perfecting its automotive technologies to
production-ready models and in attempting to commercialize these technologies to generate revenues
and profits. Management discusses below certain significant factors that could adversely affect the
company and its prospects. Other factors may exist that the company cannot anticipate or that the
company does not consider significant based upon information currently available. Additionally,
because of the following risks and uncertainties, as well as other factors that could affect the
company’s financial condition, the company’s past financial performance should not be considered as
an indicator of future performance.
(1) The company has limited operating history, has not generated significant revenues since
its founding in 1996 and if revenue-generating sales and/or licenses of its technologies do not
materialize or do not materialize on a timely basis, the company will be compelled to seek
additional equity financing or to incur debt to sustain operations.
(2) The company’s ability to generate significant revenue and sustainable profits is dependent
upon its ability to demonstrate the technological superiority of its automotive technologies, their
lower manufacturing costs, generally fewer parts and lighter weight, greater affinity for
environmentally-sound applications and their beneficial impact upon the worldwide consumption of
increasingly-scarce raw materials to an automotive industry that is heavily invested in
conventional technologies and resistant to new technology unless developed by the auto companies
themselves.
(3) The only market for the company’s automotive products is an automotive industry that is
continuing to recover from the economic downturn of 2008-2009, including curtailed research and
development, significant management and corporate reorganization and delayed new product
development. These circumstances have delayed the company’s ongoing projects with the industry and
may continue to delay them in the immediate and foreseeable future.
(4) In the event the company were unable to sell and/or license any of its automotive
technologies to one or more automotive companies, first-tier suppliers, government agencies and/or
the U.S. military, the company may have to embark upon the commercialization of one or more of its
technologies itself, a situation which would require considerably more capital, personnel,
regulatory compliance, time and other resources than is presently available to the company.
(5) The company’s common stock is traded on the over-the-counter bulletin board (OTCBB), an
electronic inter-dealer quotation system, and is not listed for trading on any domestic or foreign
securities exchange, including the National Association of Securities Dealers, Inc. (NASD).
Consequently, the company is not required to meet certain quantitative and qualitative listing
standards established by such exchanges for the protection of investors.
(6) The market for the company’s common stock is extremely limited, meaning that at any time
and from time to time, there may not be enough sellers in the market to fill purchase orders and/or
enough buyers in the market to fill sell orders for transactions where a given price is stipulated
(i.e. “limit orders”). Such orders, therefore, may expire unfilled.
(7) The company’s common stock is volatile, meaning that purchase and/or sell orders for a
numerically small number of shares (e.g. 500) may have a disproportionate positive or negative
impact on the trading price at any time during any given trading day but especially, during the
first and the last half-hour of trading.
(8) The market for the company’s common stock is disproportionately influenced by market
makers (i.e. broker/dealers) who agree to buy a limited number of the company’s common shares [e.g.
500 share blocks] during the course of a given trading day at various specified prices [ the
“bid”]) who may negatively affect the trading price by periodically “lowering the bid” for the
company’s common stock without regard to company performance and/or disclosure of material events
regarding the company’s activities.
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(9) Unless the trading price for the company’s common stock is $5.00 or more, the stock is
classified as a “penny stock” by the Securities and Exchange Commission. This classification means
that broker/dealers are required to determine whether the company’s stock is a “suitable”
investment for their customers, required to disclose to the customer certain bids, offers and
quotations in our stock at least two days before executing a transaction and additionally are
required to deliver certain information regarding the risks generally associated with penny stocks
(e.g. lack of liquidity, volatility and the potential that the investor will lose his entire
investment) at least two days prior to executing a penny stock transaction. These requirements may
reduce the number of individuals who otherwise may purchase the company’s common stock in the open
market.
| Item 1B. | UNRESOLVED STAFF COMMENTS |
Not Applicable.
| Item 2. | PROPERTIES |
Since September 14, 2007, the company has occupied facilities located at 1999 Mount Read
Blvd., Rochester, New York. The facility consists of approximately 13,650 sq. ft., with executive
and engineer offices, conference rooms, manufacturing and assembly space, automotive bays,
dynamometer and lift facilities and approximately thirty acres of land suitable for vehicle testing
and demonstration. On April 29, 2008, the company executed a five-year lease for the premises (with
a December 1, 2007 lease commencement date) providing for rent to be paid at a rate of $5,687 per
month ($68,244 per annum) and in addition, requiring the company to pay the company’s proportionate
share of yearly real estate taxes and yearly common area operating costs. Under the lease, monthly
rental payments commenced June 1, 2008. The lease contains three 5-year renewal options and grants
an option to the company to lease up to an additional 7,000 sq. ft. of adjacent manufacturing and
assembly space.
Rental payments and certain other payments due to the landlord are to be paid in cash or
common shares of the company, based upon the closing price per share on the
15th day of the calendar month immediately prior to the date any installment
payment of monthly rent or other payment is due landlord.
The company believes that, given its present circumstances, the facilities located at Mount
Read Blvd. are sufficient to meet the company’s anticipated plant requirements for the next twelve
months. This situation could change if the company were to receive one or more orders requiring
volume production of one or more of its technologies and the company were to elect to fill any such
orders itself. See “Management’s Discussion and Analysis.”
| Item 3. | LEGAL PROCEEDINGS |
On October 31, 2008, the company commenced an action in New York Supreme Court, County of New
York, Commercial Division against Ice Engineering, LLC seeking the total balance owed by Ice
Engineering to the company pursuant to an assignment agreement entered into by the parties,
effective June 15, 2007, whereby the company assigned all of its rights and interest in an ice
technology license granted by Dartmouth College to Ice Engineering in exchange for a 2.8% royalty
interest and a cash reimbursement of $3,500,000. The suit was commenced after the company had been
paid approximately $800,000.
On January 27, 2010, the company and Ice Engineering settled this litigation. Under the
settlement agreement, the company’s assignment of the ice technology license is made permanent; the
company elected to forego its right to royalties and agreed to receive $1,100,000, with $300,000
paid to the company by Ice Engineering on January 27, 2010 and $800,000 paid to the company by Ice
Engineering by February 26, 2010.
There are no other litigation matters, actions and/or proceedings to which the company is a
party or to which its properties are subject.
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Table of Contents
| Item 4. | REMOVED AND RESERVED |
| Item 5. | MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES |
(A) Market Information
Effective September 23, 1998, the company’s $.01 par value common stock, as a class, was
registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934.
As a result, shares of the company’s common stock which had been owned for one year or more became
eligible for trading on the over-the-counter bulletin board maintained by the National Association
of Securities Dealers, Inc. on December 22, 1998 (“NASD”). The company’s stock began trading on
January 21, 1999 at $12.00 per share. The company has approximately 20 market makers for its common
stock.
The company’s stock is traded on the over-the-counter bulletin board (OTCBB). The OTCBB is an
electronic inter-dealer quotation system that displays real-time quotes, last-sale prices and
volume information for shares of over-the-counter companies which file current financial reports
with the Securities and Exchange Commission or, if applicable, such companies’ banking or insurance
regulators. The NASD oversees the OTCBB.
The following table presents the range of high and low closing prices for the company’s $.01
par value common stock for each quarter during its last two calendar years. The source of the high
and low closing price information is the OTCBB. The market represented by the OTCBB is extremely
limited, is heavily influenced by market makers and the price for our common stock quoted on the
OTCBB is not necessarily a reliable indication of the value of our common stock. The company also
believes that the price of its common stock is significantly impacted by short-selling. Quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent
actual transactions.
| 2010 | High | Low | ||||||
1st Quarter |
$ | 0.51 | $ | 0.38 | ||||
2nd Quarter |
$ | 0.48 | $ | 0.30 | ||||
3rd Quarter |
$ | 0.45 | $ | 0.32 | ||||
4th Quarter |
$ | 2.94 | $ | 0.44 | ||||
| 2009 | High | Low | ||||||
1st Quarter |
$ | 1.65 | $ | 0.70 | ||||
2nd Quarter |
$ | 0.90 | $ | 0.52 | ||||
3rd Quarter |
$ | 1.05 | $ | 0.51 | ||||
4th Quarter |
$ | 0.79 | $ | 0.40 | ||||
(B) Holders of Common Stock
As of December 31, 2010, the company had approximately 300 shareholders of record and an
estimated 3,400 beneficial owners of its common stock. As of December 31, 2010, the company had
45,685,678 common shares issued and outstanding.
(C) Dividend Policy on Common Stock
The company has not paid any dividends on its common stock since its inception. The
declaration or payment of dividends, if any, on the company’s common stock is within the discretion
of the board of directors and will depend upon the company’s earnings, capital requirements,
financial condition and other relevant factors. Given the
company’s current financial condition, the board of directors does not anticipate payment of
any dividends on its common stock in the foreseeable future.
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The declaration and payment of dividends on the company’s common stock is limited by
provisions of the New York Business Corporation Law which permits the payment of dividends only if
after the dividends are paid, a company’s net assets are at least equal to its stated capital.
Payment of dividends on the company’s common stock is also subordinated to the requirement that the
company pay all current and accumulated dividends on its Class A and Class B Preferred Shares prior
to the payment of any dividends on its common stock.
(D) Securities Authorized for Issuance under Equity Compensation Plans as of December 31,
2010
| Number of securities | ||||||||||||
| to be issued upon | Weighted average | |||||||||||
| exercise of | exercise price of | Number of securities | ||||||||||
| outstanding options, | outstanding options, | remaining available | ||||||||||
| warrants and rights | warrants and rights | for future issuance | ||||||||||
| Plan Category | (a) | (b) | (c) | |||||||||
Equity compensation plans approved by security holders |
641,848 | (1) | $ | 4.79 | None | |||||||
Equity compensation plans not approved by security holders |
7,727,500 | (2) | $ | 1.02 | None | |||||||
Total |
8,369,348 | (1,2) | $ | 1.31 | None | |||||||
| (1) | Represents the aggregate number of common stock options outstanding under the company’s
1998 Stock Option Plan. The 1998 Plan was terminated effective May 28, 2008 as to the grant of
future options thereunder. |
|
| (2) | Represents stock options granted to the company’s chief executive officer, chief financial
officer, and certain retired directors, as well as common stock warrants issued to executive
officers, nonmanagement directors and certain of our business, engineering, financial, governmental
affairs and technical consultants. See Note H to the company’s financial statements for details. |
On January 27, 2011, at the company’s annual shareholder meeting, our shareholders approved
the 2011 Stock Option Plan which provides for the grant of up to 3,000,000 common shares
thereunder. In addition, on January 27, 2011 at the company’s annual shareholder meeting, the
shareholders approved the grant of 1,350,000 stand-alone options to new directors and a special
advisor to the board exercisable at $.90 per common share. On January 28, 2011, 275,000 options
were granted under the 2011 Plan to a new director, exercisable at $.90 per share.
(E) Class A Preferred Stock
On August 30, 2000, the company amended its certificate of incorporation to permit the company
to issue up to 100,000,000 shares of $.01 par value preferred stock. Under the amendment, the board
of directors has the authority to allocate these shares into as many separate classes of preferred
as it deems appropriate and with respect to each class, designate the number of preferred shares
issuable and the relative rights, preferences, seniority with respect to other classes and to the
company’s common stock and any limitations and/or restrictions that may be applicable without
obtaining shareholder approval.
In March 2002, the company’s board designated the first series of preferred shares, namely
Class A Preferred. The relative rights, preferences and limitations of the Class A Preferred are as
follows:
| A. | Number of Shares |
The number of Class A Preferred initially authorized is 3,300,000 Class A Preferred. The
initial number authorized shall be increased as required to provide Class A Preferred for payment
of dividends as described in Section B, distribution to holders in accordance with Section C and as
described in Section F.
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| B. | Dividends |
| (i) | So long as any Class A Preferred is outstanding, the holders of the Class A Preferred will
be entitled to receive cumulative preferential dividends in the amount of $.40 per share of Class A
Preferred for each annual dividend period. The annual dividend period shall commence on the first
day of each March and shall end on the last day of the immediately succeeding February, which
February date is referred to as the “Dividend Accrual Date”. |
||
| (ii) | When and as declared by the board, dividends payable on the Class A Preferred will
be paid in cash out of any funds legally available for the payment of dividends or, in the
discretion of the board, will be paid in Class A Preferred at a rate of 1 share of Class A
Preferred for each $4.00 of dividends. No fractions of Class A Preferred shall issue. The Company
shall pay cash in lieu of paying fractions of Class A Preferred on a pro rata basis. |
||
| (iii) | Dividends shall be cumulative from the date of issuance of each share of Class A
Preferred, whether or not declared and whether or not, in any annual dividend period(s), there are
net profits or net assets of the Company legally available for the payment of dividends. |
||
| (iv) | Accumulated and unpaid dividends on the Class A Preferred will not bear interest. |
||
| (v) | So long as any Class A Preferred is outstanding, the Company may not declare or pay any
dividend, make any distribution, or fund, set aside or make monies available for a sinking fund for
the purchase or redemption of, any shares or stock of the Company ranking junior to the Class A
Preferred with respect to the payment of dividends, including the $.01 par value common stock of
the Company (“Junior Stock”), unless all dividends in respect of the Class A Preferred for all past
annual dividend periods have been paid and such dividends for the current annual dividend period
have been paid or declared and duly provided for. Subject to the foregoing, and not otherwise, the
dividends (payable in cash, stock or otherwise) as may be determined by the board, may be declared
and paid on any Junior Stock from time to time out of any funds legally available therefore, and
the Class A Preferred will be entitled to participate in any such dividends, whether payable in
cash, stock or otherwise on a pro rata basis. |
| C. | Liquidation Rights |
| (i) | In the event of any liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary, the holders of Class A Preferred then outstanding are entitled to be paid
out of the assets of the Company available for distribution to its shareholders, whether such
assets are capital, surplus or earnings, before any payment or declaration and setting apart for
payment of any amount in respect of any shares of any Junior Stock with respect to the payment of
dividends or distribution of assets on liquidation, dissolution or winding up of the Company, all
accumulated and unpaid dividends (including a prorated dividend from the last Dividend Accrual
Date) in respect of any liquidation, dissolution or winding up consummated except that,
notwithstanding the provisions of Section B(ii), all of such accumulated and unpaid dividends will
be paid in Class A Preferred at a rate of 1 share of Class A Preferred for each $4.00 of dividends.
No fractions of Class A Preferred shall issue. The Company shall pay cash in lieu of paying
fractions of Class A Preferred on a pro rata basis. |
||
| (ii) | The Class A Preferred will be entitled to participate on a pro rata basis in any
distribution of assets as may be made or paid on Junior Stock upon the liquidation, dissolution or
winding up of the Company. |
||
| (iii) | A consolidation or merger of the Company with or into any other corporation or
corporations or any other legal entity will not be deemed to constitute a liquidation, dissolution
or winding up of the Company as those terms are used in this Section C. |
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| D. | Redemption |
| (i) | The Company may, in the absolute discretion of its board, redeem at any time and from time
to time from any source of funds legally available any and all of the Class A Preferred at the
Redemption Price. |
||
| (ii) | For each redemption, the Redemption Price for each share of Class A Preferred shall
be equal to amount paid per share of Class A Preferred payable in cash, plus an amount payable (not
withstanding the provisions of Section B (ii)) in cash equal to the sum of all accumulated unpaid
dividends per share of Class A Preferred (including a prorated annual dividend from the last
Dividend Accrual Date) to the respective date for each redemption on which the Company shall redeem
any shares of Class A Preferred (the “Redemption Date”). |
||
| (iii) | In the event of redemption of only a portion of the then outstanding Class A
Preferred, the Company will affect the redemption pro rata according to the number shares held by
each holder of Class A Preferred. |
||
| (iv) | At least 20 days and not more than 60 days prior to the date fixed by the board for
any redemption of Class A Preferred, written notice (the “Redemption Notice”) will be mailed,
postage prepaid, to each holder of record of the Class A Preferred at his or her post office
address last shown on the records of the Company. The Redemption Notice will state: |
| • | Whether all or less than all of the outstanding Class A Preferred is to be redeemed and the
total number of shares of Class A Preferred being redeemed; |
||
| • | the number of shares of Class A Preferred held by the holder that the Company intends
to redeem; |
||
| • | the Redemption Date and Redemption Price; and |
||
| • | that the holder is to surrender to the Company, in the manner and at the place
designated in Section D(v), his or her certificate or certificates representing the number of
shares of Class A Preferred to be redeemed. |
| (v) | On or before the date fixed for redemption, each holder of Class A Preferred must
surrender the certificate or certificates representing the number of shares of Class A Preferred to
the Company, accompanied by instruments of transfer satisfactory to the Company and sufficient to
transfer the Class A Preferred being redeemed to the Company free and clear of any adverse
interest, at the place designated in the Redemption Notice. The Redemption Price for the number of
shares of Class A Preferred redeemed will be payable in cash on the Redemption Date to the person
whose name appears on the certificate(s) as the owner of such certificate(s) as of the date of the
Redemption Notice. In the event that less than all of the shares of Class A Preferred represented
by any certificate(s) are redeemed, a new certificate will issued by the Company representing the
unredeemed Class A Preferred to the same record owner. |
||
| (vi) | As promptly as practicable after surrender of the certificate(s) representing the
redeemed Class A Preferred, the Company will pay the Redemption Price to the record holder of the
redeemed Class A Preferred. |
||
| (vii) | Unless the Company defaults in the payment in full of the Redemption Price, the
obligation of the Company to pay dividends on the Class A Preferred redeemed shall cease on the
Redemption Date, and the holders of the Class A Preferred redeemed will cease to have any further
rights with respect to such redeemed Class A Preferred on the Redemption Date, other than to
receive the Redemption Price. |
||
| (viii) | The holders of the Class A Preferred have no right to seek or to compel redemption of
the Class A Preferred. |
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| E. | Voting Rights |
| (i) | The holders of Class A Preferred are not entitled to vote in any and all elections of
directors and with respect to any and all other matters as to which the vote or consent of
shareholders of the Company shall be required or taken. |
| F. | Conversion Privilege |
| (i) | The holders of the Class A Preferred have the right, at each holder’s option but subject
to board approval in each case, to convert each share of Class A Preferred into 1 fully paid and
nonassessable share of the $.01 par value common stock of the Company (“Common Share”) without
payment of any conversion price or other consideration. Such 1 for 1 rate of conversion is subject
to adjustment as set forth in Section F(x). |
||
| (ii) | The Conversion Privilege set forth in this Section F may not be exercised by the
holder of Class A Preferred until 1 year shall have elapsed from the issue date of the Class A
Preferred held by such holder and may not be exercised if the board shall not have approved the
actual exercise of such Conversion Privilege by such holder of Class A Preferred. Such approval
shall not be unreasonably withheld. Upon receipt of the Notice of Conversion described in Section
F(iii) below and the board’s approval of such conversion, the Company shall give a Notice of
Approval to the holder within 48 hours of the receipt of the Notice of Conversion that the exercise
of the Conversion Privilege by such holder is approved. |
||
| (iii) | In order to exercise the Conversion Privilege, the holder of Class A Preferred
must give written notice to the Company that the holder elects to covert the number of shares of
Class A Preferred as specified in the Notice of Conversion. The Notice of Conversion will also
state the name(s) and address (es) in which the certificate(s) for Common Shares issuable upon the
conversion are to be issued. Upon receipt of the Company’s Notice of Approval, the holder of the
Class A Preferred must surrender the certificate(s) representing the number of shares of Class A
Preferred being converted to the Company, accompanied by instruments of transfer satisfactory to
the Company and sufficient to transfer the Class A Preferred being converted to the Company free
and clear of any adverse interest at the office maintained for such purpose by the Company. As
promptly as practicable after the surrender of the certificate(s) representing the number of shares
of Class A Preferred converted, the Company will issue and deliver to the holder, or to such other
person designated by the holder’s written order, a certificate(s) for the number of full Common
Shares issuable upon the conversion of the Class A Preferred in accordance with the provisions of
this Section F(iii). |
||
| (iv) | The Conversion Privilege may be exercised in whole or in part and, if exercised in
part, a certificate(s) will be issued for the remaining number of Class A Preferred in any case in
which fewer than all of the Class A Preferred represented by a certificate(s) are converted to the
same record holder of Class A Preferred converted. |
||
| (v) | Each conversion will be deemed to have been effective immediately prior to the close
of business on the date on which the Class A Preferred will have been so surrendered as provided in
Section F(iii) (the “Conversion Date”) and the person(s) in whose name(s) any certificate(s) for
Common Shares will be issuable upon the conversion will be deemed to have become the holder(s) of
record of the Common Shares on the Conversion Date. Effective as of the Conversion Date, the
Company will have no obligation to pay dividends on the Class A Preferred converted provided that
effective as of the Conversion Date, the Company shall pay all accumulated and unpaid dividends
(including the prorated dividend from the last Dividend Accrual Date) on the Class A Preferred
converted, payable in the discretion of the Board, in cash out of any funds legally available for
payment of such dividends or in Class A Preferred. |
||
| (vi) | The Conversion Privilege shall terminate with respect to Class A Preferred called for
redemption by the mailing of a Redemption Notice described in Section D(iv) on the close of
business on the date immediately preceding the Redemption Date. |
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| (vii) | Notwithstanding the requirement for board approval and the 1 year limit set forth in
Section F(ii), in case of any consolidation or merger to which the Company is a party other than a
merger or consolidation in which the Company is the surviving corporation or in case of any sale or
conveyance to another
corporation of all or substantially all of the assets of the Company or in the case of any
statutory exchange of securities representing an excess of 50% of the total outstanding securities
of the Company with another corporation (including any exchange effected in connection with a
merger of a third corporation into the Company), the holders of Class A Preferred then outstanding
will have the right to convert the Class A Preferred into the kind and amount of securities, cash
or other property which the holder would have owned or have been entitled to receive immediately
after the consolidation, merger, statutory exchange, sale or conveyance, had the Class A Preferred
been converted immediately prior to the effective date of the consolidation, merger, statutory
exchange, sale or conveyance as the case may be. |
||
| (viii) | Notwithstanding the 1 year holding period set forth in Section F(ii), in the event the
highest bid price for the Company’s $.01 par value common stock quoted on any exchange, automated
quotation system or the OTC Bulletin Board on which such stock is actively traded is $20 or more on
5 consecutive trading days, the holders of Class A Preferred shall have the right to convert such
Class A Preferred upon Board approval. |
||
| (ix) | Common Shares delivered upon conversion of Class A Preferred will be, upon delivery,
validly issued, fully paid and nonassessable, free of all liens and charges and not subject to any
preemptive rights. |
||
| (x) | In case the Company |
| • | Declares a dividend, or makes a distribution, on shares of its $.01 par value common stock
in shares of its $.01 par value common stock; or |
||
| • | Subdivides its outstanding shares of its $.01 par value common stock into a greater
number of shares of its $.01 par value common stock; or |
||
| • | Combines its outstanding shares of its $.01 par value common stock into a smaller
number of shares of $.01 par value common stock, the number of Common Shares issuable upon the
conversion of the Class A Preferred shall be adjusted at the time of the record date for the
dividend or distribution or the effective date of the subdivision or a combination so that after
such record or effective date, the holder of Class A Preferred will be entitled to receive the same
percentage of ownership of the Company’s $.01 par value common stock as such holder would have been
entitled to receive immediately prior to such record or effective date. |
Since its designation in March 2002, the company has sold an aggregate 765,512 shares of Class
A Preferred for proceeds of approximately $3,062,000.
Since its designation in March 2002, Class A Preferred shareholders have converted an
aggregate 183,500 Class A Preferred into the company’s common stock (on a one to one basis) through
December 31, 2010, with 62,500 and 51,250 Class A Preferred converted in the years ending December
31, 2010 and 2009, respectively.
Upon conversion, converting Class A Preferred shareholders are entitled to receive, in
accordance with the terms of the Class A Preferred, dividends payable either in cash or in Class A
Preferred shares calculated at the rate of 10 percent per annum.
At times, the board of the company may elect to settle the dividends through the issuance of
common stock in lieu of cash. The amount of common stock shares issued is based on the market price
of the stock of the company at the time of the conversion.
Through December 31, 2010, an aggregate Class A Preferred dividend amounting to approximately
$230,000 was settled through the issuance of 16,760 Class A Preferred and of 92,453 common shares
of the company. For the year ended December 31, 2010, the company settled Class A Preferred
dividends amounting to $113,000 through the issuance of 22,883 shares of common stock and 5,421
shares of Class A Preferred stock.
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For the year ended December 31, 2009, the company settled Class A Preferred dividends
amounting to approximately $53,000 through the issuance of 65,965 shares of common stock.
At December 31, 2010, dividends payable upon conversion of 582,012 outstanding shares of Class
A Preferred amounted to approximately $1,339,000.
(F) Class B Preferred Stock
On October 19, 2004, the company incorporated Iso-Torque Corporation in order to commercialize
its Iso-Torque® differential technology.
In September 2004, the company created a new series of preferred stock—Class B Non-Voting,
Cumulative Convertible Preferred Stock (“Class B Preferred”) to fund the business operations of
Iso-Torque Corporation.
The designation, relative rights, preferences and limitations of the Class B Preferred, as
fixed by the board of directors, are as follows:
| A. | Three hundred thousand (300,000) authorized preferred shares of the par value of $.01 each
as fixed by the board of directors, shall be issued in and as a series to be designated Class B
Non-Voting Cumulative Convertible Preferred Shares, $.01 par value. Said series is hereinafter
called “Class B Preferred Shares”. The term preferred shares as used herein shall include all
100,000,000 of the preferred shares, $.01 par value authorized by the Certificate of Incorporation
of the Corporation of which Class B Preferred Shares is the second series. |
| B. | (1) | So long as any Class B Preferred are outstanding, the holders of the Class B Preferred
will be entitled to receive cumulative preferential dividends in the amount of $.50 per share of
Class B Preferred and no more for each annual dividend period. The annual dividend period shall
commence on the first day of each September and shall end on the last day of the immediately
succeeding August, which August date is referred to as the “Dividend Accrual Date”. |
| (2) | When and as declared by the board, dividends payable on the Class B Preferred will
be paid in cash out of any funds legally available for the payment of dividends or, in the
discretion of the board, will be paid in Class B Preferred at a rate of 1 share of Class B
Preferred for each $5.00 of dividends. No fractions of Class B Preferred shall be issued. The
Corporation shall pay cash in lieu of paying fractions of Class B Preferred on a pro rata basis. |
| (3) | Dividends shall be cumulative from the date of issuance of each share of Class B
Preferred, whether or not declared and whether or not, in any annual dividend period(s), there are
net profits or net assets of the Corporation legally available for the payment of dividends. |
| (4) | Accumulated and unpaid dividends on the Class B Preferred will not bear interest. |
| (5) | So long as any shares of Class B Preferred are outstanding, the Corporation may not
declare or pay any dividend, make any distribution, or fund, set aside or make monies available for
a sinking fund for the purchase or redemption of any shares or stock of the Corporation ranking
junior to the Class B Preferred with respect to the payment of dividends, including the $.01 par
value common stock of the company, for all past annual dividend periods have been paid and such
dividends for the current annual dividend period have been paid or declared and duly provided for.
Subject to the foregoing, and not otherwise, the dividends (payable in cash, stock or otherwise) as
may be determined by the Board, may be declared and paid on any Junior Stock from time to time out
of any funds legally available therefore, and the Class B Preferred will be entitled to participate
in any such dividends, whether payable in cash, stock or otherwise, on a pro rata basis. |
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| C. | The Class B Preferred shall rank junior and be classified as Junior Stock with respect to
the Corporation’s Class A Preferred Shares in all respects. |
| D. | (1) | In the event of any liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, the holders of Class B Preferred then outstanding are entitled to be paid
out of the assets of the Corporation available for distribution to its shareholders, whether such
assets are capital, surplus or earnings, before any payment or declaration and setting apart for
payment of any amount in respect of any shares of any Junior stock with respect to the payment of
dividends or distribution of assets on liquidation, dissolution or winding up of the Corporation,
all accumulated and unpaid dividends (including a prorated dividend from the last Dividend Accrual
Date) in respect of any liquidation, dissolution or winding up consummated except that,
notwithstanding the provisions of Section B(2), all of such accumulated and unpaid dividends will
be paid in shares of Class B Preferred at a rate of 1 share of Class B Preferred for each $5.00 of
dividends. No fractions of Class B Preferred shall be issued. The Corporation shall pay cash in
lieu of paying fractions of Class B Preferred on a pro rata basis. (2) The Class B Preferred will
be entitled to participate on a pro rata basis in any distribution of assets as may be made or paid
on Junior Stock upon the liquidation, dissolution or winding up of the Corporation. |
| E. | (1) | The Corporation may in the absolute discretion of its board, redeem at any time and
from time to time from any source of funds legally available any and all of the Class B Preferred
at the Redemption Price. |
| (2) | For each redemption, the Redemption Price for each share of Class B Preferred shall
be equal to the sum of $5.00 per share of Class B Preferred, payable in cash, plus an amount
payable (not withstanding the provisions of Section B(2)) in cash equal to the sum of all
accumulated unpaid dividends per share of Class B Preferred (including a prorated annual dividend
from the last Dividend Accrual Date) to the respective date for each redemption on which the
Corporation shall redeem any shares of Class B Preferred (the “Redemption Date”). |
||
| (3) | In the event of a redemption of only a portion of the then outstanding Class B
Preferred, the Corporation will affect the redemption pro rata according to the number shares held
by each holder of Class B Preferred. |
||
| (4) | Unless the Corporation defaults in the payment in full of the Redemption Price, the
obligation of the Corporation to pay dividends on the Class B Preferred redeemed shall cease on the
Redemption Date, and the holders of the Class B Preferred redeemed will cease to have any further
rights with respect to such redeemed Class B Preferred on the Redemption Date, other than to
receive the Redemption Price. |
||
| (5) | The holders of the Class B Preferred have no right to seek or to compel redemption
of the Class B Preferred. |
| F. | The holders of Class B Preferred are not entitled to vote in any and all elections of
directors and with respect to any and all other matters as to which the vote or consent of
shareholders of the Corporation shall be required or taken. |
| G. | (1) | The holders of the Class B Preferred have the right, at each holder’s option but
subject to board approval in each case, to (i) convert each share of Class B Preferred into 1 fully
paid and nonassessable share of the $.01 par value common stock of the Corporation (“Torvec
Common”) without payment of any conversion price or other consideration; or to (ii) convert each
share of Class B Preferred into 1 fully paid and nonassessable share of the $.01 par value common
stock of Iso-Torque Corporation (“Iso-Torque Common”) without payment of any conversion price or
other consideration upon the happening of any of the following events: |
| (a) | the effectiveness of a registration statement as filed with the Securities and Exchange
Commission pursuant to and under the Securities Act of 1933 with respect to an initial public
offering of Iso-Torque Common; or |
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| (b) | the effectiveness of a registration statement as filed with the Securities and
Exchange Commission pursuant to and under the Securities Exchange Act of 1934 with respect to an
initial trading of Iso-Torque Common on a national exchange, the NASDAQ or the OTCBB; or |
||
| (c) | notwithstanding the 1 year holding period set forth in Section G(2) the execution of
a definitive agreement for the sale, transfer and/or exchange of all of the issued and outstanding
Iso-Torque Common to a third party purchaser of such stock or by any of a business combination of
Iso-Torque Corporation with an unrelated entity, other than a merger or consolidation in which
Iso-Torque Corporation is the surviving corporation. |
| (2) | The Conversion Privilege set forth in this Section G may not be exercised by the holder of
Class B Preferred until 1 year shall have elapsed from the issue date of the Class B Preferred held
by such holder and may not be exercised if the board shall not have approved the actual exercise of
such Conversion Privilege by such holder of Class B Preferred. Such approval shall not be
unreasonably withheld. Upon receipt of the Notice of Conversion and the board’s approval of such
conversion, the Corporation shall give a Notice of Approval to the holder within 48 hours of the
receipt of the Notice of Conversion that the exercise of the Conversion Privilege by such holder is
approved. |
| (3) | The Conversion Privilege may be exercised in whole or in part and, if exercised in
part, a certificate(s) will be issued for the remaining Class B Preferred in any case in which
fewer than all of the Class B Preferred represented by a certificate(s) are converted to the same
record holder of Class B Preferred converted. |
| (4) | Each conversion will be deemed to have been effective immediately prior to the close
of business on the date on which the Class B Preferred will have been so surrendered (the
“Conversion Date”) and the person(s) in whose name(s) any certificate(s) for Torvec Common or
Iso-Torque Common will be issuable upon the conversion will be deemed to have become the holder(s)
of record of the Torvec Common or Iso-Torque Common on the Conversion Date. Effective as of the
Conversion Date, the Corporation will have no obligation to pay dividends on the Class B Preferred
converted provided that effective as of the Conversion Date, the Corporation shall pay all
accumulated and unpaid dividends (including the prorated dividend from the last Dividend Accrual
Date) on the Class B Preferred converted, payable in the discretion of the board, in cash out of
any funds legally available for payment of such dividends or in shares of Class B Preferred. |
| (5) | The Conversion Privilege shall terminate with respect to Class B Preferred called for
redemption by the mailing of a Redemption Notice on the close of business on the date immediately
preceding the Redemption Date. |
| (6) | Notwithstanding the requirement for board approval and the 1 year limit set forth in
Section G(2), in case of any consolidation or merger to which the Corporation is a party other than
a merger or consolidation in which the Corporation is the surviving corporation or in case of any
sale or conveyance to another corporation of all or substantially all of the assets of the
Corporation or in the case of any statutory exchange of securities representing an excess of 50% of
the total outstanding securities of the Corporation with another corporation (including any
exchange effected in connection with a merger of a third corporation into the Corporation), the
holders of Class B Preferred then outstanding will have the right to convert the Class B Preferred
into the kind and amount of securities, cash or other property which the holder would have owned or
have been entitled to receive immediately after the consolidation, merger, statutory exchange, sale
or conveyance, had the Class B Preferred been converted immediately prior to the effective date of
the consolidation, merger, statutory exchange, sale or conveyance as the case may be. |
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| (7) | Notwithstanding the 1 year holding period set forth in Section G(2), in the event
the highest bid price for the Corporation’s $.01 par value common stock quoted on any exchange,
automated quotation system or the OTC Bulletin Board on which such stock is actively traded is $20
or more on 5 consecutive trading days, the holders of Class B Preferred shall have the right to
convert such Class B Preferred upon board approval for such conversion period. |
||
| (8) | Torvec Common or Iso-Torque Common delivered upon conversion of Class B Preferred
will be, upon delivery, validly issued, fully paid and nonassessable, free of all liens and charges
and not subject to any preemptive rights. |
||
| (9) | In case the Corporation |
| (a) | declares a dividend, or makes a distribution, on shares of its $.01 par value common stock
in shares of its $.01 par value common stock; or |
||
| (b) | subdivides its outstanding shares of its $.01 par value common stock into a greater
number of shares of its $.01 par value common stock; or |
||
| (c) | combines its outstanding shares of its $.01 par value common stock into a smaller
number of shares of $.01 par value common stock, the number of Torvec Common issuable upon the
conversion of the Class B Preferred shall be adjusted at the time of the record date for the
dividend or distribution or the effective date of the subdivision or a combination so that after
such record or effective date, each holder of Class B Preferred will be entitled to receive the
same percentage of ownership of the Corporation’s $.01 par value common stock as such holder would
have been entitled to receive immediately prior to such record or effective date. |
Since its designation in September 2004, the company has sold an aggregate 97,500 Class B
Preferred in a number of private placements for proceeds of approximately $487,500. No Class B
Preferred was sold during the years ending December 31, 2010 and 2009.
Since its designation, Class B Preferred shareholders have converted an aggregate 20,000 Class
B Preferred into the company’s common stock (on a one to one basis) through December 31, 2010, with
no Class B Preferred converted in the year ending December 31, 2010.
Upon conversion, converting Class B Preferred shareholders are entitled to receive, in
accordance with the terms of the Class B Preferred, dividends payable, in the discretion of the
board of directors, either in cash or in Class B Preferred shares calculated at the rate of 10
percent per annum. Through December 31, 2010, no Class B Preferred shares have been issued to
converting Class B Preferred shareholders as a dividend.
Depending upon the company’s cash position, the company from time to time may request that a
converting preferred shareholder receiving dividends in cash consent to receive shares of
restricted common stock in lieu thereof. Through December 31, 2010, the company has issued 30,103
restricted common shares in payment of Class B dividends amounting to $24,082, based on the market
value of the Company’s stock at the time of conversion.
At December 31, 2010, dividends payable upon the conversion of 77,500 outstanding shares of
Class B Preferred amounted to approximately $204,000.
(G) Reports to Shareholders
The company furnishes its shareholders with an annual report containing audited financial
statements and such other periodic reports as the company may determine to be appropriate or as may
be required by law. The company complies with periodic reporting, proxy solicitation and certain
other requirements of the Securities Exchange Act of 1934.
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(H) Transfer Agent and Registrar
Continental Stock Transfer & Trust Company has been appointed as the company’s Transfer Agent
and Registrar for its common stock and for its preferred stock.
| Item 6. | SELECTED FINANCIAL DATA |
As a smaller reporting company, we are not required to include information otherwise required
by this item.
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| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
(A) Overall Business Strategy
Torvec, Inc. (the “company”) was incorporated as a New York State business corporation in
September 1996. The company, which has not had any significant revenue-producing operations and is
in the development stage, has developed technology for use in automotive and commercial
applications. In September 1996, the company acquired numerous patents, inventions and know-how
contributed by Vernon E. Gleasman, James Y. Gleasman and Keith E. Gleasman (the “Gleasmans”).
(B) Current Status of Business Plan and Ongoing Projects
The company’s plan of operation for the year ending December 31, 2011 is as follows:
1) to design, build and provide IsoTorque differentials to domestic and foreign original
equipment manufacturers, to engage with such manufacturers in the performance and durability
evaluation of the company’s IsoTorque in rear-wheel and front wheel drive applications and to
market the IsoTorque to such manufacturers for use in their future vehicle platforms, including
automotive and truck fleets;
2) to design and build prototype units of the company’s IsoTorque differential for integration
in the drive wheel assemblies of 21 SC mining shuttle cars under a contract with Eastern Mining &
Industrial Supply, Inc., Chapmanville, West Virginia, to jointly evaluate the performance and
durability of the prototype units and upon successful evaluation, to build and sell IsoTorque
differentials to Eastern for incorporation in 21 SC mining cars it remanufactures for the mining
industry;
3) to enhance the design of, build prototype units for, and evaluate the operating performance
and efficiencies of the company’s Rota-Torque Hydraulic Pump for commercial and industrial
applications and to market the Rota-Torque to industrial manufacturers of hydraulic pump and
associated manufacturers.
In addition to the activities to be undertaken by the company to implement its plan of
operation detailed immediately above, the company may expand its marketing activities depending
upon future circumstances and developments. Information regarding the company and all of its
automotive inventions, including regular updates on technological and business developments, can be
found on the company’s website, www.torvec.com.
(C) Company Revenue and Expenses
Revenue for the years ended December 31, 2010 and 2009 were $0 and $175,000, respectively. The
revenue generated in 2009 was primarily due to the sale of a prototype Full Terrain Vehicle, which
was a non-recurring event. The cost of goods sold was $90,000 in 2009, or 51% of revenue. Gross
profit for the twelve-month periods ended December 31, 2010 and 2009 were $0 and $85,000,
respectively.
Research and development expenses for the full year of 2010 amounted to $469,000 as compared
to $520,000 for the full year of 2009. The decrease of $51,000 is primarily due to lower personnel
costs related to the retirement of the company’s former CEO in the first quarter of 2010.
General and administrative expense for the year ended December 31, 2010 amounted to $4,471,000
compared to $2,877,000 for 2009. The increase of $1,594,000 is mainly related to non-cash stock
compensation expense in 2010 from issuances of stock options to directors, officers, and other key
personnel in the second half of 2010.
The loss from operations in 2010 was $4,940,000, compared with a loss from operations in 2009
of $3,312,000. Other income for 2010 included a gain of $1,900,000 from the settlement of the
company’s litigation for its Ice technology license to Ice Engineering, LLC in the first quarter of
2010. In addition, other income/(expense) was a net expense of $11,000, which included a $45,000
prepayment penalty on the company’s convertible note with Asher Enterprises that was paid in full
in the fourth quarter of 2010. There was $0 of other
income/(expense) in 2009. The income tax expense was $2,000 in 2010 compared with an income
tax benefit of $40,000 in 2009. The income tax benefit in 2009 resulted from New York State R&D
tax credits. Preferred stock dividends amounted to $273,000 and $229,000 in 2010 and 2009,
respectively.
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The net loss attributable to common stockholders for the year ended December 31, 2010 was
$3,326,000 as compared to a net loss for the same period in 2009 of $3,501,000. The weighted
average basic and diluted common shares outstanding amounted to 38,895,000 and 34,035,000 for 2010
and 2009, respectively. Basic and diluted net loss per share for 2010 and 2009 were $0.09 and
$0.10, respectively.
(D) Liquidity and Capital Resources
As of December 31, 2010, cash totaled $1,518,000, an increase of $1,477,000 from the beginning
of the year. During the twelve months ended December 31, 2010 and 2009, we used $1,807,000 and
$583,000, respectively, of cash in operating activities. The cash used in operating activities
during 2010 was mainly attributable to our net loss of $3,053,000 plus an addback of $1,900,000 for
a gain recorded from the settlement of litigation pertaining to a technology license with Ice
Engineering in the first quarter of 2010, offset in part by non-cash expenditures related to the
issuance of common stock, warrants and stock options to employees, directors and consultants and
vendors for services rendered. For 2009, the cash used in operating activities of $583,000 was
mainly attributable to a net loss of $3,272,000, offset in part by non-cash expenses related to
shareholder contribution of services as well as common stock issued to directors, outside
consultants and vendors as payment for their services
We generated $1,124,000 in cash from investing activities during 2010 compared with $0 in
2009. The cash generated in 2010 was mainly related to proceeds from the sale of a technology
license, as well as proceeds from sales of fixed assets.
During 2010, we generated $2,160,000 in funds from financing activities, compared to $320,000
in 2009. The financing activities in 2010 consisted mainly of proceeds from our private placement
of 6,834,002 restricted shares of common stock in October 2010 that generated $2,050,000 in cash.
During the year ended December 31, 2010 and 2009, the company issued 2,398,265 and 2,243,305
common shares, respectively, to business consultants under its business consultants stock plan in
exchange for ongoing corporate legal services, internal accounting services, business advisory
services as well as legal fees and associated expenses for ongoing patent work and litigation. As
of December 31, 2010 and 2009 there were 4,011,717 and 1,409,982 shares, respectively, available
for future issuances under the plan (the increase in shares available in 2010 from 2009 was the
result of board approval of an additional 5,000,000 business consultant shares on March 23, 2010
and effective registration of such additional shares on April 1, 2010).
Contribution of Shareholder Services:
Effective January 1, 2008, the board of directors instituted a compensation plan for James and
Keith Gleasman by which the company would compensate each of them for services performed and
inventions and know-how transferred to the company at the rate of $300,000 per year. Actual payment
of this compensation, or any portion thereof, was conditioned upon a board of director
determination that the company had the requisite cash, after the complete funding of all ongoing
company projects, to make payment.
The company did not have the requisite cash available to pay the Gleasmans’ compensation under
this arrangement from January 1, 2008 through August 17, 2009, the date on which each of the
Gleasmans waived all of his rights and interest in and to the board-created compensation plan,
including all of his rights and interest in and to the amount(s) under the plan accrued to such
date. As a result of such waiver, of the $942,000 accrued under the plan at June 30, 2009, $900,000
was reclassified to equity as a contribution of services and $42,000 accrued under the plan for
payroll taxes was recorded as a reduction to general and administrative expenses in the quarter
ended June 30, 2009.
20
Table of Contents
For periods for which there is no compensation plan, the company is required to record the
estimated value of each of the Gleasman’s services rendered to the company (estimated at $300,000
each per annum) as a contribution
of services under generally accepted accounting principles applicable to the company and is
required under the same accounting principles to allocate the amount of such contribution between
research and development expenses on the one hand and general and administrative on the other hand.
For the years ended December 31, 2010 and 2009, the company recorded $125,000 and $200,000 to
research and development expense and $236,000 and $400,000 to general and administrative expense,
respectively, based upon management’s estimate of the Gleasmans’ time allocation.
Effective March 14, 2010, James Gleasman retired as the company’s chief executive officer,
interim chief financial officer and as a member of the board of directors.
Current Cash Outlook:
For the period from September 1996 (inception) through December 31, 2010, the company has
accumulated a deficit of $56,266,000 and at December 31, 2010 has working capital of $745,000 and
stockholders’ equity of $920,000. The company has been dependent upon equity financing and advances
from stockholders to meet its obligations and sustain operations. Management believes that based
upon its current cash position that resulted from the company’s success in raising $2,050,000 in
its private equity placement in October 2010 and its current outlook for its business operations,
the company will be able to continue operations through December 31, 2011. However, if its cash
flow projections are less than expected, the Company may need to downsize operations, issue shares
of common stock to pay for certain expenditures, incur debt or raise additional capital. There can
be no assurance, however, that the Company will be successful in raising additional capital or
incurring debt when needed on terms acceptable to the Company.
At December 31, 2010, the company had current liabilities that amounted to $821,000.
(E) Critical Accounting Policies
Revenue Recognition
The company’s terms provide that customers are obligated to pay for products sold to them
within a specified number of days from the date that title to the products is transferred to the
customer. The company’s standard terms are typically net 30 days. The company recognizes revenue
when transfer of title occurs and risk of ownership passes to a customer at the time of shipment or
delivery, depending on the terms of the agreement with a particular customer. The sale price of the
company’s products is substantially fixed or determinable at the date of the sale based upon
purchase orders generated by a customer and accepted by the company. To the extent that
collectability of the receivable is not assured, the company follows the cost recovery approach.
Accordingly, amounts collected will be accounted for as a reduction of costs.
Share-based Payments
The company accounts for the settlement of its commission arrangements to non-employee
consultants, directors, executives and certain administrative personnel with the issuance of its
business consulting shares under ASC 505 (Previously known as FASB Statement 123(R) “Share Based
Payment”), provided that there are sufficient shares available under the business consulting plan.
Under ASC 505, the company measures commission arrangements at the fair value of the equity
instruments issued. In the event that there are insufficient shares available to settle the
obligation, the company will follow the provisions of ASC 815-40 (previously known as: EITF 00-19
“Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock”). Under ASC 815-40, the company will record a liability instrument for the
resulting changes in fair value from the date incurred to the end of each reporting period until
such liability is satisfied.
Recently Issued Accounting Principles
In April 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards
Update (“ASU”) No. 2010-17, “Revenue Recognition — Milestone Method (Topic 605): Milestone Method
of Revenue Recognition — a consensus of the FASB EITF”. ASU No. 2010-17 is limited to research or
development
arrangements and requires that this ASU be met for an entity to apply the milestone method
(record the milestone payment in its entirety in the period received) of recognizing revenue.
However, the FASB clarified that, even if the requirements in this ASU are met, entities would not
be precluded from making an accounting policy election to apply another appropriate policy that
results in the deferral of some portion of the arrangement consideration. The guidance in this ASU
will apply to milestones in both single-deliverable and multiple-deliverable arrangements involving
research or development transactions. ASU No. 2010-17 will be effective prospectively for
milestones achieved in fiscal years, and interim periods within those years, beginning on or after
June 15, 2010. Early adoption is permitted. The company does not expect the adoption of this
pronouncement to have a significant impact on its financial statements.
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In October 2009, the FASB issued ASU No. 2009-13, “Revenue Recognition (Topic 605):
Multiple-Deliverable Revenue Arrangements — a consensus of the FASB EITF”. ASU No. 2009-13
eliminates the residual method of accounting for revenue on undelivered products and instead,
requires companies to allocate revenue to each of the deliverable products based on their relative
selling price. In addition, this ASU expands the disclosure requirements surrounding
multiple-deliverable arrangements. ASU No. 2009-13 will be effective for revenue arrangements
entered into for fiscal years beginning on or after June 15, 2010. The company does not expect the
adoption of this pronouncement to have a significant impact on its financial statements.
In May 2009, the FASB issued Accounting Standards Codification (“ASC”) No. 855 (SFAS No. 165),
“Subsequent Events” which establishes general standards for accounting for and disclosure of events
that occur after the balance sheet date but before financial statements are issued. In February
2010, FASB issued ASU 2010-09 Subsequent Event (Topic 855) Amendments to Certain Recognition and
Disclosure Requirements. ASU 2010-09 removes the requirement for an SEC filer to disclose a date in
both issued and revised financial statements.
(F) Impact of Inflation
Inflation has not had a significant impact on the company’s operations to date and management
is currently unable to determine the extent inflation may impact the company’s operations during
its fiscal year ending December 31, 2011.
(G) Quarterly Fluctuations
As of December 31, 2010 and 2009, the company had not engaged in substantial revenue producing
operations. Once the company actually commences significant revenue producing operations, the
company’s operating results may fluctuate significantly from period to period as a result of a
variety of factors, including purchasing patterns of consumers, the length of the company’s sales
cycle to key customers and distributors, the timing of the introduction of new products and product
enhancements by the company and its competitors, technological factors, variations in sales by
product and distribution channel, product returns, and competitive pricing. Consequently, once the
company actually commences significant revenue producing operations, the company’s product revenues
may vary significantly by quarter and the company’s operating results may experience significant
fluctuations.
| Item 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
As a smaller reporting company, we are not required to include information otherwise required
by this item.
22
Table of Contents
| Item 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
TORVEC, INC.
(a development stage company)
Contents
Financial Statements
(a development stage company)
Contents
Financial Statements
| 24 | ||||
| 25 | ||||
| 26 | ||||
| 27 | ||||
| 38 | ||||
| 40 |
23
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Torvec, Inc.
Torvec, Inc.
We have audited the accompanying consolidated balance sheets of Torvec, Inc. (a development stage
company) and its subsidiaries (the “Company”) as of December 31, 2010 and 2009, and the related consolidated
statements of operations and cash flows for each of the years in the two-year period ended December 31,
2010 and for the period from September 25, 1996 (inception) through December 31, 2010 and
changes in stockholders’ equity (capital deficit) for each of the periods from September 25, 1996
(inception) through December 31, 2010. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. We
were not engaged to perform an audit of the Company’s internal control over financial reporting.
Our audits include consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all material
respects, the consolidated financial position of Torvec, Inc. and subsidiaries as of December 31,
2010 and 2009, and the consolidated results of their operations and their consolidated cash flows
for each of the years in the two-year period ended December 31, 2010 and for the period from
September 25, 1996 (inception) through December 31, 2010, in conformity with accounting principles
generally accepted in the United States.
/s/ EisnerAmper LLP
New York, New York
March 28, 2011
New York, New York
March 28, 2011
24
Table of Contents
TORVEC, INC.
(a development stage company)
(a development stage company)
Consolidated Balance Sheets
| December 31, 2010 | December 31, 2009 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash |
$ | 1,518,000 | $ | 41,000 | ||||
Prepaid expenses and other current assets |
48,000 | 111,000 | ||||||
Total current assets |
1,566,000 | 152,000 | ||||||
Property and Equipment: |
||||||||
Office equipment |
68,000 | 68,000 | ||||||
Shop equipment |
118,000 | 139,000 | ||||||
Leasehold Improvements |
243,000 | 213,000 | ||||||
Transportation equipment |
37,000 | 106,000 | ||||||
| 466,000 | 526,000 | |||||||
Less accumulated depreciation and amortization |
246,000 | 299,000 | ||||||
Net property and equipment |
220,000 | 227,000 | ||||||
Total Assets |
$ | 1,786,000 | $ | 379,000 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY (CAPITAL DEFICIT) |
||||||||
Current Liabilities: |
||||||||
Notes payable, current portion |
$ | 15,000 | $ | 20,000 | ||||
Accounts payable |
167,000 | 255,000 | ||||||
Accrued liabilities |
618,000 | 451,000 | ||||||
Advance from related party |
— | 22,000 | ||||||
Deferred income |
21,000 | 828,000 | ||||||
Total current liabilities |
821,000 | 1,576,000 | ||||||
Deferred rent |
19,000 | 29,000 | ||||||
Notes payable, net of current portion |
26,000 | 9,000 | ||||||
Total Liabilities |
866,000 | 1,614,000 | ||||||
Commitments and other matters (Note I) |
||||||||
Stockholders’ Equity (Capital Deficit): |
||||||||
Preferred stock, $.01 par value, 100,000,000 shares authorized |
||||||||
a) 3,300,000 designated as Class A, Non-voting, convertible, cumulative dividend $.40 per share, per annum, December 31, 2010 and 2009: 598,772 and 655,851 shares issued and outstanding, respectively (liquidation preference $3,734,000 and $3,841,000, respectively) |
6,000 | 6,000 | ||||||
b) 300,000 designated as Class B, Non-voting, convertible, cumulative dividend $.50 per share, per annum, December 31, 2010 and 2009: 77,500 and 77,500 shares issued and outstanding, respectively (liquidation preference $592,000 and $553,000, respectively) |
1,000 | 1,000 | ||||||
Common stock, $.01 par value, 400,000,000 shares authorized, 45,685,678 and 35,811,192 issued and outstanding, at December 31, 2010 and 2009, respectively |
457,000 | 358,000 | ||||||
Additional paid-in capital |
56,722,000 | 51,613,000 | ||||||
Deficit accumulated during the development stage |
(56,266,000 | ) | (53,213,000 | ) | ||||
Total Stockholders’ Equity (Capital Deficit) |
920,000 | (1,235,000 | ) | |||||
Total Liabilities and Stockholders’ Equity (Capital Deficit) |
$ | 1,786,000 | $ | 379,000 | ||||
See notes to consolidated financial statements.
25
Table of Contents
TORVEC, INC.
(a development stage company)
(a development stage company)
Consolidated Statements of Operations
| September 25, | ||||||||||||
| Year ended | Year ended | 1996 (Inception) | ||||||||||
| December 31, | December 31, | through December | ||||||||||
| 2010 | 2009 | 31, 2010 | ||||||||||
Revenue |
$ | — | $ | 175,000 | $ | 422,000 | ||||||
Cost of Goods Sold |
— | 90,000 | 315,000 | |||||||||
Gross Profit |
— | 85,000 | 107,000 | |||||||||
Costs and expenses: |
||||||||||||
Research and development |
469,000 | 520,000 | 16,324,000 | |||||||||
General and administrative (including compensation expense
from options and warrants of $1,686,000, $0, and
$19,240,000, respectively) |
4,471,000 | 2,877,000 | 44,324,000 | |||||||||
Asset impairments |
— | — | 1,071,000 | |||||||||
Loss from operations |
(4,940,000 | ) | (3,312,000 | ) | (61,612,000 | ) | ||||||
Reversal of liability on cancellation of debt |
— | — | 1,541,000 | |||||||||
Gain on litigation settlement |
1,900,000 | — | 1,900,000 | |||||||||
Other income / (expense) |
(11,000 | ) | — | 249,000 | ||||||||
Loss Before Income Tax (Expense) / Benefits |
(3,051,000 | ) | (3,312,000 | ) | (57,922,000 | ) | ||||||
Income tax (expense) / benefits |
(2,000 | ) | 40,000 | 384,000 | ||||||||
Net Loss |
(3,053,000 | ) | (3,272,000 | ) | (57,538,000 | ) | ||||||
Net loss attributable to non-controlling interest in subsidiary |
— | — | 1,272,000 | |||||||||
Net Loss attributable to Torvec, Inc. |
(3,053,000 | ) | (3,272,000 | ) | (56,266,000 | ) | ||||||
Preferred stock beneficial conversion feature |
— | — | 763,000 | |||||||||
Preferred stock dividends |
273,000 | 229,000 | 1,678,000 | |||||||||
Net Loss attributable to Torvec, Inc. common stockholders |
$ | (3,326,000 | ) | $ | (3,501,000 | ) | $ | (58,707,000 | ) | |||
Net Loss per common share attributable to stockholders of Torvec, Inc., Basic and Diluted |
$ | (0.09 | ) | $ | (0.10 | ) | ||||||
Weighted average number of shares of common stock, Basic and Diluted |
38,895,000 | 34,035,000 | ||||||||||
See notes to consolidated financial statements.
26
Table of Contents
TORVEC, INC. AND SUBSIDIARIES
(a development stage company)
(a development stage company)
Consolidated Statements of Changes in Stockholders’ Equity
(Capital Deficit)
For the Period from September 25, 1996 (Inception) through December 31, 2010
| Deficit | ||||||||||||||||||||||||||||||||||||||||||||
| Unearned | Accumulated | |||||||||||||||||||||||||||||||||||||||||||
| Class A | Class B | Additional | Due | Compensatory | During the | Total | ||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Common Stock | Paid-in | From | Stock and | Development | Stockholders’ | |||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Stockholders | Options | Stage | Equity | ||||||||||||||||||||||||||||||||||
Issuance of shares to founders |
16,464,400 | $ | 165,000 | $ | (165,000 | ) | $ | 0 | ||||||||||||||||||||||||||||||||||||
Issuance of stock for services |
2,535,600 | 25,000 | 381,000 | 406,000 | ||||||||||||||||||||||||||||||||||||||||
Sale of common stock — November ($1.50 per share) |
64,600 | 1,000 | 96,000 | 97,000 | ||||||||||||||||||||||||||||||||||||||||
Sale of common stock — December ($1.50 per share) |
156,201 | 1,000 | 233,000 | 234,000 | ||||||||||||||||||||||||||||||||||||||||
Distribution to founders |
(27,000 | ) | (27,000 | ) | ||||||||||||||||||||||||||||||||||||||||
Net loss |
$ | (489,000 | ) | (489,000 | ) | |||||||||||||||||||||||||||||||||||||||
Balance — December 31, 1996 |
19,220,801 | 192,000 | 518,000 | (489,000 | ) | 221,000 | ||||||||||||||||||||||||||||||||||||||
Issuance of compensatory stock |
1,000,000 | 10,000 | 1,490,000 | $ | (1,500,000 | ) | 0 | |||||||||||||||||||||||||||||||||||||
Issuance of stock for services |
12,000 | 18,000 | 18,000 | |||||||||||||||||||||||||||||||||||||||||
Sale of common stock — January ($1.50 per share) |
58,266 | 1,000 | 86,000 | 87,000 | ||||||||||||||||||||||||||||||||||||||||
Sale of common stock — February ($1.50 per share) |
75,361 | 1,000 | 112,000 | 113,000 | ||||||||||||||||||||||||||||||||||||||||
Sale of common stock — May ($1.50 per share) |
30,000 | 45,000 | 45,000 | |||||||||||||||||||||||||||||||||||||||||
Issuance of stock for services |
2,000 | 6,000 | 6,000 | |||||||||||||||||||||||||||||||||||||||||
Sale of common stock — June ($3.00 per share) |
73,166 | 1,000 | 219,000 | 220,000 | ||||||||||||||||||||||||||||||||||||||||
Sale of common stock — July ($3.00 per share) |
13,335 | 40,000 | 40,000 | |||||||||||||||||||||||||||||||||||||||||
Sale of common stock — August ($3.00 per share) |
60,567 | 1,000 | 181,000 | 182,000 | ||||||||||||||||||||||||||||||||||||||||
Sale of common stock — September ($3.00 per share) |
10,000 | 30,000 | 30,000 | |||||||||||||||||||||||||||||||||||||||||
Sale of common stock — October ($3.00 per share) |
7,000 | 21,000 | 21,000 | |||||||||||||||||||||||||||||||||||||||||
Sale of common stock — November ($3.00 per share) |
10,000 | 30,000 | 30,000 | |||||||||||||||||||||||||||||||||||||||||
Sale of common stock — December ($3.00 per share) |
100,000 | 1,000 | 299,000 | 300,000 | ||||||||||||||||||||||||||||||||||||||||
Issuance of compensatory options to consultants |
234,000 | (234,000 | ) | 0 | ||||||||||||||||||||||||||||||||||||||||
Compensatory stock and options earned |
451,000 | 451,000 | ||||||||||||||||||||||||||||||||||||||||||
Distributions to founders |
(338,000 | ) | (338,000 | ) | ||||||||||||||||||||||||||||||||||||||||
Net loss |
(922,000 | ) | (922,000 | ) | ||||||||||||||||||||||||||||||||||||||||
27
Table of Contents
| Deficit | ||||||||||||||||||||||||||||||||||||||||||||
| Unearned | Accumulated | |||||||||||||||||||||||||||||||||||||||||||
| Class A | Class B | Additional | Due | Compensatory | During the | Total | ||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Common Stock | Paid-in | From | Stock and | Development | Stockholders’ | |||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Stockholders | Options | Stage | Equity | ||||||||||||||||||||||||||||||||||
Balance — December 31, 1997 |
20,672,496 | 207,000 | 2,991,000 | (1,283,000 | ) | (1,411,000 | ) | 504,000 | ||||||||||||||||||||||||||||||||||||
Issuance of stock for services |
1,000 | 3,000 | 3,000 | |||||||||||||||||||||||||||||||||||||||||
Sale of common stock — May 11 to September 20 ($5.00 per share) |
112,620 | 1,000 | 562,000 | 563,000 | ||||||||||||||||||||||||||||||||||||||||
Sale of common stock — September 21 to December 31 ($10.00 per share) |
25,500 | 255,000 | 255,000 | |||||||||||||||||||||||||||||||||||||||||
Costs of offering |
(60,000 | ) | (60,000 | ) | ||||||||||||||||||||||||||||||||||||||||
Compensatory stock and options earned |
578,000 | 578,000 | ||||||||||||||||||||||||||||||||||||||||||
Contribution of services |
15,000 | 15,000 | ||||||||||||||||||||||||||||||||||||||||||
Net loss |
(2,122,000 | ) | (2,122,000 | ) | ||||||||||||||||||||||||||||||||||||||||
Balance — December 31, 1998 |
20,811,616 | 208,000 | 3,766,000 | (705,000 | ) | (3,533,000 | ) | (264,000 | ) | |||||||||||||||||||||||||||||||||||
Issuance of stock for services |
45,351 | 327,000 | 327,000 | |||||||||||||||||||||||||||||||||||||||||
Sale of common stock — January 1 to August 9 ($10.00 per share) |
80,670 | 1,000 | 806,000 | 807,000 | ||||||||||||||||||||||||||||||||||||||||
Sale of common stock — August 10 to November 30 ($5.00 per share) |
84,500 | 1,000 | 422,000 | 423,000 | ||||||||||||||||||||||||||||||||||||||||
Issuance of compensatory options to consultants |
2,780,000 | (2,780,000 | ) | 0 | ||||||||||||||||||||||||||||||||||||||||
Common stock issued- exercise of options |
21,000 | 105,000 | 105,000 | |||||||||||||||||||||||||||||||||||||||||
Compensatory stock and options earned |
3,050,000 | 3,050,000 | ||||||||||||||||||||||||||||||||||||||||||
Contribution of services |
15,000 | 15,000 | ||||||||||||||||||||||||||||||||||||||||||
Net loss |
(4,788,000 | ) | (4,788,000 | ) | ||||||||||||||||||||||||||||||||||||||||
Balance — December 31, 1999 |
21,043,137 | $ | 210,000 | 8,221,000 | $ | (435,000 | ) | (8,321,000 | ) | (325,000 | ) | |||||||||||||||||||||||||||||||||
See notes to consolidated financial statements
28
Table of Contents
TORVEC, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Statements of Changes in Stockholders’ Equity (Capital Deficit)
For the Period from September 25, 1996 (Inception) through December 31, 2010
(continued)
(a development stage company)
Consolidated Statements of Changes in Stockholders’ Equity (Capital Deficit)
For the Period from September 25, 1996 (Inception) through December 31, 2010
(continued)
| Deficit | ||||||||||||||||||||||||||||||||||||||||||||
| Unearned | Accumulated | |||||||||||||||||||||||||||||||||||||||||||
| Class A | Class B | Additional | Due | Compensatory | During the | Total | ||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Common Stock | Paid-in | From | Stock and | Development | Stockholders’ | |||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Stockholders | Options | Stage | Equity | ||||||||||||||||||||||||||||||||||
Issuance of stock for services |
196,259 | $ | 2,000 | $ | 838,000 | $ | 840,000 | |||||||||||||||||||||||||||||||||||||
Sale of common stock — March 29 ($4.51 per share) |
44,321 | 200,000 | 200,000 | |||||||||||||||||||||||||||||||||||||||||
Sale of common stock — June 23 ($3.50 per share) |
100,000 | 1,000 | 349,000 | 350,000 | ||||||||||||||||||||||||||||||||||||||||
Acquisition of Ice Surface Development |
1,068,354 | 11,000 | 3,394,000 | 3,405,000 | ||||||||||||||||||||||||||||||||||||||||
Proceeds from exercise of put option |
36,735 | 1,000 | 108,000 | 109,000 | ||||||||||||||||||||||||||||||||||||||||
Compensatory stock and options earned |
$ | 435,000 | 435,000 | |||||||||||||||||||||||||||||||||||||||||
Contribution of services |
15,000 | 15,000 | ||||||||||||||||||||||||||||||||||||||||||
Net loss |
$ | (2,374,000 | ) | (2,374,000 | ) | |||||||||||||||||||||||||||||||||||||||
Balance — December 31, 2000 |
22,488,806 | 225,000 | 13,125,000 | 0 | (10,695,000 | ) | 2,655,000 | |||||||||||||||||||||||||||||||||||||
Issuance of stock for liabilities |
126,667 | 1,000 | 664,000 | 665,000 | ||||||||||||||||||||||||||||||||||||||||
Issuance of stock for services |
361,100 | 4,000 | 1,007,000 | 1,011,000 | ||||||||||||||||||||||||||||||||||||||||
Issuance of option to consultant for services |
398,000 | 398,000 | ||||||||||||||||||||||||||||||||||||||||||
Proceeds from exercise of put option |
101,910 | 1,000 | 323,000 | 324,000 | ||||||||||||||||||||||||||||||||||||||||
Contribution of services |
15,000 | 15,000 | ||||||||||||||||||||||||||||||||||||||||||
Net loss |
(3,871,000 | ) | (3,871,000 | ) | ||||||||||||||||||||||||||||||||||||||||
Balance — December 31, 2001 |
23,078,483 | 231,000 | 15,532,000 | 0 | (14,566,000 | ) | 1,197,000 | |||||||||||||||||||||||||||||||||||||
Exercise of warrants |
124,448 | 1,000 | 126,000 | 127,000 | ||||||||||||||||||||||||||||||||||||||||
Exercise of warrants |
250,000 | 3,000 | 72,000 | 75,000 | ||||||||||||||||||||||||||||||||||||||||
Loss on sale of minority interest |
(232,000 | ) | (232,000 | ) | ||||||||||||||||||||||||||||||||||||||||
Sale of preferred stock and warrant |
38,500 | 142,000 | 142,000 | |||||||||||||||||||||||||||||||||||||||||
Issuance of stock for services |
1,001,454 | 10,000 | 1,224,000 | 1,234,000 | ||||||||||||||||||||||||||||||||||||||||
Issuance of options in settlement of liabilities and consulting fees |
653,000 | 653,000 | ||||||||||||||||||||||||||||||||||||||||||
Issuance of warrants to chairman |
690,000 | 690,000 | ||||||||||||||||||||||||||||||||||||||||||
Proceeds from exercise of put option ($.90 per share) |
440,000 | 5,000 | 391,000 | 396,000 | ||||||||||||||||||||||||||||||||||||||||
Common stock issued in exchange for loan |
35,461 | 50,000 | 50,000 | |||||||||||||||||||||||||||||||||||||||||
Sale of common stock — July ($1.45 per share) |
46,897 | 68,000 | 68,000 | |||||||||||||||||||||||||||||||||||||||||
Sale of common stock — August ($1.42 per share) |
211,265 | 2,000 | 298,000 | 300,000 | ||||||||||||||||||||||||||||||||||||||||
Sale of common stock — September ($1.42 per share) |
140,845 | 1,000 | 199,000 | 200,000 | ||||||||||||||||||||||||||||||||||||||||
Sale of common stock — December ($.91 per share) |
109,890 | 1,000 | 99,000 | 100,000 | ||||||||||||||||||||||||||||||||||||||||
Contribution of services |
15,000 | 15,000 | ||||||||||||||||||||||||||||||||||||||||||
Issuance of warrant for financial services |
8,000 | 8,000 | ||||||||||||||||||||||||||||||||||||||||||
Warrant issued in lieu of compensation |
633,000 | 633,000 | ||||||||||||||||||||||||||||||||||||||||||
Issuance of shares in settlement of liabilities |
190,965 | 2,000 | 267,000 | 269,000 | ||||||||||||||||||||||||||||||||||||||||
Compensatory stock options |
32,000 | 32,000 | ||||||||||||||||||||||||||||||||||||||||||
Employees/Stockholders Contribution of services in subsidiary |
519,000 | 519,000 | ||||||||||||||||||||||||||||||||||||||||||
Net loss |
(4,577,000 | ) | (4,577,000 | ) | ||||||||||||||||||||||||||||||||||||||||
Balance — December 31, 2002 |
38,500 | 0 | 25,629,708 | $ | 256,000 | $ | 20,786,000 | $ | 0 | $ | (19,143,000 | ) | $ | 1,899,000 | ||||||||||||||||||||||||||||||
See notes to consolidated financial statements
29
Table of Contents
TORVEC, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Statements of Changes in Stockholders’ Equity (Capital Deficit)
For the Period from September 25, 1996 (Inception) through December 31, 2010
(continued)
(a development stage company)
Consolidated Statements of Changes in Stockholders’ Equity (Capital Deficit)
For the Period from September 25, 1996 (Inception) through December 31, 2010
(continued)
| Deficit | ||||||||||||||||||||||||||||||||||||||||||||
| Unearned | Accumulated | |||||||||||||||||||||||||||||||||||||||||||
| Class A | Class B | Additional | Due | Compensatory | During the | Total | ||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Common Stock | Paid-in | From | Stock and | Development | Stockholders’ | |||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Stockholders | Options | Stage | Equity | ||||||||||||||||||||||||||||||||||
Sale of Common Stock — March ($0.90 per share) |
111,112 | 1,000 | $ | 99,000 | $ | 100,000 | ||||||||||||||||||||||||||||||||||||||
Sale of Common Stock — June (0.80 per share) |
250,000 | 3,000 | 197,000 | 200,000 | ||||||||||||||||||||||||||||||||||||||||
Sale of Common Stock — September ($2.50 per share) |
8,000 | 20,000 | 20,000 | |||||||||||||||||||||||||||||||||||||||||
Advance settled with Common Stock — October ($2.50 per share) |
10,000 | 25,000 | 25,000 | |||||||||||||||||||||||||||||||||||||||||
Exercise of warrant for common stock — (December $0.50 per share) |
250,000 | 2,000 | 123,000 | 125,000 | ||||||||||||||||||||||||||||||||||||||||
Issuance of stock for services |
753,824 | 8,000 | 842,000 | 850,000 | ||||||||||||||||||||||||||||||||||||||||
Exercise of Warrants for $.01 per share |
130,000 | 1,000 | (1,000 | ) | — | |||||||||||||||||||||||||||||||||||||||
Exercise of Warrants for $.01 per share |
50,000 | 1,000 | (1,000 | ) | — | |||||||||||||||||||||||||||||||||||||||
Exercise of Warrants for $.01 per share |
8,680 | — | ||||||||||||||||||||||||||||||||||||||||||
Exercise of Warrants for $.01 per share |
2,500 | |||||||||||||||||||||||||||||||||||||||||||
Cashless exercise of put option |
654,432 | 7,000 | (7,000 | ) | — | |||||||||||||||||||||||||||||||||||||||
Sale of Class A Preferred Stock — September ($4.00 per share) |
5,575 | 22,000 | 22,000 | |||||||||||||||||||||||||||||||||||||||||
Sale of Class A Preferred Stock — December ($4.00 per share) |
10,112 | $ | 1,000 | 40,000 | 41,000 | |||||||||||||||||||||||||||||||||||||||
Issuance of option for services |
46,000 | 46,000 | ||||||||||||||||||||||||||||||||||||||||||
Issuance of options in settlement of liabilities and consulting fees |
265,000 | 265,000 | ||||||||||||||||||||||||||||||||||||||||||
Contribution of services in subsidiary |
173,000 | 173,000 | ||||||||||||||||||||||||||||||||||||||||||
Adjustment for equity issuances of subsidiary common stock |
79,000 | 79,000 | ||||||||||||||||||||||||||||||||||||||||||
Class A Preferred stock issued |
2,305 | 9,000 | 9,000 | |||||||||||||||||||||||||||||||||||||||||
NET LOSS |
(2,927,000 | ) | (2,927,000 | ) | ||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2003 |
56,492 | $ | 1,000 | 27,858,256 | $ | 279,000 | $ | 22,717,000 | $ | (22,070,000 | ) | $ | 927,000 | |||||||||||||||||||||||||||||||
See notes to consolidated financial statements
30
Table of Contents
TORVEC, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Statements of Changes in Stockholders’ Equity (Capital Deficit)
For the Period from September 25, 1996 (Inception) through December 31, 2010
(continued)
(a development stage company)
Consolidated Statements of Changes in Stockholders’ Equity (Capital Deficit)
For the Period from September 25, 1996 (Inception) through December 31, 2010
(continued)
| Deficit | ||||||||||||||||||||||||||||||||||||||||||||
| Unearned | Accumulated | |||||||||||||||||||||||||||||||||||||||||||
| Class A | Class B | Additional | Due | Compensatory | During the | Total | ||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Common Stock | Paid-in | From | Stock and | Development | Stockholders’ | |||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Stockholders | Options | Stage | Equity | ||||||||||||||||||||||||||||||||||
Sale of Common Stock — June 2004 |
60,000 | $ | 1,000 | $ | 300,000 | $ | 301,000 | |||||||||||||||||||||||||||||||||||||
Issuance of common stock for services |
469,883 | 4,000 | 2,348,000 | 2,352,000 | ||||||||||||||||||||||||||||||||||||||||
Sale of Class A Preferred Stock ($4.00 per share) — March |
203,117 | $ | 2,000 | 820,000 | 822,000 | |||||||||||||||||||||||||||||||||||||||
Sale of Class A Preferred Stock ($4.00 per share) — April |
32,653 | 121,000 | 121,000 | |||||||||||||||||||||||||||||||||||||||||
Conversion of Preferred Stock Class A |
(41,050 | ) | 41,050 | — | ||||||||||||||||||||||||||||||||||||||||
Preferred Dividend Class A attributable to converted shares |
8,031 | — | ||||||||||||||||||||||||||||||||||||||||||
Sale of Class B Preferred Stock ($5.00 per share) — September |
20,000 | 100,000 | 100,000 | |||||||||||||||||||||||||||||||||||||||||
Sale of Class B Preferred Stock ($5.00 per share) — October |
22,500 | 113,000 | 113,000 | |||||||||||||||||||||||||||||||||||||||||
Contribution of services |
450,000 | 450,000 | ||||||||||||||||||||||||||||||||||||||||||
Exercise of warrants |
268,865 | 3,000 | (2,000 | ) | 1,000 | |||||||||||||||||||||||||||||||||||||||
Exercise of consultants warrants |
345,600 | 3,000 | (3,000 | ) | — | |||||||||||||||||||||||||||||||||||||||
Issuance of warrants for consulting services |
5,794,000 | 5,794,000 | ||||||||||||||||||||||||||||||||||||||||||
Net Loss |
(9,805,000 | ) | (9,805,000 | ) | ||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2004 |
259,243 | $ | 3,000 | 42,500 | 29,043,654 | $ | 290,000 | $ | 32,761,000 | $ | (3,000 | ) | $ | (31,875,000 | ) | $ | 1,176,000 | |||||||||||||||||||||||||||
See notes to consolidated financial statements
31
Table of Contents
TORVEC, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Statements of Changes in Stockholders’ Equity (Capital Deficit)
For the Period from September 25, 1996 (Inception) through December 31, 2010
(continued)
(a development stage company)
Consolidated Statements of Changes in Stockholders’ Equity (Capital Deficit)
For the Period from September 25, 1996 (Inception) through December 31, 2010
(continued)
| Deficit | ||||||||||||||||||||||||||||||||||||||||||||
| Unearned | Accumulated | |||||||||||||||||||||||||||||||||||||||||||
| Class A | Class B | Additional | Due | Compensatory | During the | Total | ||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Common Stock | Paid-in | From | Stock and | Development | Stockholders’ | |||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Stockholders | Options | Stage | Equity | ||||||||||||||||||||||||||||||||||
Issuance of common stock for services |
786,309 | $ | 8,000 | $ | 1,771,000 | $ | 1,779,000 | |||||||||||||||||||||||||||||||||||||
Sale of Class A Preferred Stock ($4.00 per share) — March |
47,500 | $ | 1,000 | 189,000 | 190,000 | |||||||||||||||||||||||||||||||||||||||
Sale of Class A Preferred Stock ($4.00 per share) — April/May |
30,000 | 120,000 | 120,000 | |||||||||||||||||||||||||||||||||||||||||
Sale of Class A Preferred Stock ($4.00 per share) |
92,500 | $ | 1,000 | 369,000 | 370,000 | |||||||||||||||||||||||||||||||||||||||
Sale of Class A Preferred Stock ($4.00 per share) — October/November |
30,000 | 120,000 | 120,000 | |||||||||||||||||||||||||||||||||||||||||
Contribution of services |
300,000 | 300,000 | ||||||||||||||||||||||||||||||||||||||||||
Issuance of options for consulting services |
247,000 | 247,000 | ||||||||||||||||||||||||||||||||||||||||||
Exercise of consultants warrants |
161,000 | 2,000 | 2,000 | |||||||||||||||||||||||||||||||||||||||||
Issuance of warrants for consulting services |
1,261,000 | 1,261,000 | ||||||||||||||||||||||||||||||||||||||||||
Issuance of shares for debt repayment |
11,667 | 28,000 | 28,000 | |||||||||||||||||||||||||||||||||||||||||
Shares issued for future consulting services |
50,000 | 103,000 | (103,000 | ) | ||||||||||||||||||||||||||||||||||||||||
Receipt for common stock par stock value for amounts paid in |
(2,000 | ) | 2,000 | |||||||||||||||||||||||||||||||||||||||||
Reclass of due from Stockholder to other receivable |
1,000 | 1,000 | ||||||||||||||||||||||||||||||||||||||||||
Net Loss |
(5,445,000 | ) | (5,445,000 | ) | ||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2005 |
459,243 | $ | 5,000 | 42,500 | 30,052,630 | $ | 300,000 | $ | 37,267,000 | $ | — | $ | (103,000 | ) | $ | (37,320,000 | ) | $ | 149,000 | |||||||||||||||||||||||||
See notes to consolidated financial statements
32
Table of Contents
TORVEC, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Statements of Changes in Stockholders’ Equity (Capital Deficit)
For the Period from September 25, 1996 (Inception) through December 31, 2010
(continued)
(a development stage company)
Consolidated Statements of Changes in Stockholders’ Equity (Capital Deficit)
For the Period from September 25, 1996 (Inception) through December 31, 2010
(continued)
| Deficit | ||||||||||||||||||||||||||||||||||||||||||||
| Unearned | Accumulated | |||||||||||||||||||||||||||||||||||||||||||
| Class A | Class B | Additional | Due | Compensatory | During the | Total | ||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Common Stock | Paid-in | From | Stock and | Development | Stockholders’ | |||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Stockholders | Options | Stage | Equity | ||||||||||||||||||||||||||||||||||
Issuance of common stock for services |
375,230 | $ | 5,000 | $ | 799,000 | $ | 804,000 | |||||||||||||||||||||||||||||||||||||
Sale of Class A Preferred Stock ($4.00 per share) — January and March 2006 |
58,250 | $ | 1,000 | 232,000 | 233,000 | |||||||||||||||||||||||||||||||||||||||
Sale of Class A Preferred Stock ($4.00 per share) — May 2006 |
25,000 | 100,000 | 100,000 | |||||||||||||||||||||||||||||||||||||||||
Sale of Class A Preferred Stock ($4.00 per share) — July and August 2006 |
78,750 | $ | 1,000 | 314,000 | 315,000 | |||||||||||||||||||||||||||||||||||||||
Sale of Class A Preferred Stock ($4.00 per share) — October and November 2006 |
111,250 | $ | 1,000 | 444,000 | 445,000 | |||||||||||||||||||||||||||||||||||||||
Sale of Class B Preferred Stock ($5.00 per share) |
55,000 | $ | 1,000 | 274,000 | 275,000 | |||||||||||||||||||||||||||||||||||||||
Contribution of services |
300,000 | 300,000 | ||||||||||||||||||||||||||||||||||||||||||
Exercise of consultants warrants |
680,932 | $ | 7,000 | 3,000 | 10,000 | |||||||||||||||||||||||||||||||||||||||
Issuance of warrants for consulting services |
3,614,000 | 3,614,000 | ||||||||||||||||||||||||||||||||||||||||||
Shares issued for consulting services |
160,000 | $ | 1,000 | 420,000 | 103,000 | 524,000 | ||||||||||||||||||||||||||||||||||||||
Issuance of Common Stock to Placement agent for finders fee |
39,000 | |||||||||||||||||||||||||||||||||||||||||||
Net Loss |
(7,727,000 | ) | (7,727,000 | ) | ||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2006 |
732,493 | $ | 8,000 | 97,500 | $ | 1,000 | 31,307,792 | $ | 313,000 | $ | 43,767,000 | $ | 0 | $ | 0 | $ | (45,047,000 | ) | $ | (958,000 | ) | |||||||||||||||||||||||
See notes to consolidated financial statements
33
Table of Contents
TORVEC, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Statements of Changes in Stockholders’ Equity (Capital Deficit)
For the Period from September 25, 1996 (Inception) through December 31, 2010
(continued)
(a development stage company)
Consolidated Statements of Changes in Stockholders’ Equity (Capital Deficit)
For the Period from September 25, 1996 (Inception) through December 31, 2010
(continued)
| Deficit | ||||||||||||||||||||||||||||||||||||||||||||
| Unearned | Accumulated | Total | ||||||||||||||||||||||||||||||||||||||||||
| Class A | Class B | Additional | Due | Compensatory | During the | Stockholders’ | ||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Common Stock | Paid-in | From | Stock and | Development | Equity | |||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Stockholders | Options | Stage | (Capital Deficit) | ||||||||||||||||||||||||||||||||||
Contribution of services |
300,000 | 300,000 | ||||||||||||||||||||||||||||||||||||||||||
Exercise of Warrants |
25,250 | 1,000 | 1,000 | |||||||||||||||||||||||||||||||||||||||||
Shares Issued for Services |
302,003 | 2,000 | 1,190,000 | 1,192,000 | ||||||||||||||||||||||||||||||||||||||||
Warrants Issued for Services |
650,000 | 650,000 | ||||||||||||||||||||||||||||||||||||||||||
Stock Issued for Purchase
of Variable Gear, LLC |
5,000 | 19,000 | 19,000 | |||||||||||||||||||||||||||||||||||||||||
Net Loss |
(3,211,000 | ) | (3,211,000 | ) | ||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2007 |
732,493 | $ | 8,000 | 97,500 | $ | 1,000 | 31,640,045 | $ | 316,000 | $ | 45,926,000 | $ | 0 | $ | 0 | $ | (48,258,000 | ) | $ | (2,007,000 | ) | |||||||||||||||||||||||
See notes to consolidated financial statements
34
Table of Contents
TORVEC, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Statements of Changes in Stockholders’ Equity (Capital Deficit)
For the Period from September 25, 1996 (Inception) through December 31, 2010
(continued)
(a development stage company)
Consolidated Statements of Changes in Stockholders’ Equity (Capital Deficit)
For the Period from September 25, 1996 (Inception) through December 31, 2010
(continued)
| Deficit | ||||||||||||||||||||||||||||||||||||||||||||
| Unearned | Accumulated | Total | ||||||||||||||||||||||||||||||||||||||||||
| Class A | Class B | Additional | Due | Compensatory | During the | Stockholders’ | ||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Common Stock | Paid-in | From | Stock and | Development | Equity | |||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Stockholders | Options | Stage | (Capital Deficit) | ||||||||||||||||||||||||||||||||||
Conversion |
(32,305 | ) | (1,000 | ) | 32,305 | 1,000 | ||||||||||||||||||||||||||||||||||||||
Shares Issued for Services |
875,390 | 7,000 | 1,730,000 | 1,737,000 | ||||||||||||||||||||||||||||||||||||||||
Shares Issued as Compensation |
147,757 | 3,000 | 331,000 | 334,000 | ||||||||||||||||||||||||||||||||||||||||
Dividend |
6,913 | |||||||||||||||||||||||||||||||||||||||||||
Issuance of Common Stock — June ($2.75 per share) |
36,364 | 1,000 | 99,000 | 100,000 | ||||||||||||||||||||||||||||||||||||||||
Issuance of Common Stock — September ($1.50 per share) |
20,000 | 30,000 | 30,000 | |||||||||||||||||||||||||||||||||||||||||
Issuance of Common Stock — October ($1.50 per share) |
45,000 | 68,000 | 68,000 | |||||||||||||||||||||||||||||||||||||||||
Warrants Exercised |
2,500 | |||||||||||||||||||||||||||||||||||||||||||
Warrants Issued for Services |
249,000 | 249,000 | ||||||||||||||||||||||||||||||||||||||||||
Shares Issued for Commercializing Event |
12,061 | 36,000 | 36,000 | |||||||||||||||||||||||||||||||||||||||||
Contributed Capital — Ford Truck |
16,000 | 16,000 | ||||||||||||||||||||||||||||||||||||||||||
Net Loss |
(1,683,000 | ) | (1,683,000 | ) | ||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2008 |
707,101 | $ | 7,000 | 97,500 | $ | 1,000 | 32,811,422 | $ | 328,000 | $ | 48,485,000 | $ | 0 | $ | 0 | $ | (49,941,000 | ) | $ | (1,120,000 | ) | |||||||||||||||||||||||
See notes to consolidated financial statements
35
Table of Contents
TORVEC, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Statements of Changes in Stockholders’ Equity (Capital Deficit)
For the Period from September 25, 1996 (Inception) through December 31, 2010
(continued)
(a development stage company)
Consolidated Statements of Changes in Stockholders’ Equity (Capital Deficit)
For the Period from September 25, 1996 (Inception) through December 31, 2010
(continued)
| Deficit | ||||||||||||||||||||||||||||||||||||||||||||||||
| Unearned | Accumulated | Total | ||||||||||||||||||||||||||||||||||||||||||||||
| Class A | Class B | Additional | Due | Compensatory | During the | Non- | Stockholders’ | |||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Common Stock | Paid-in | From | Stock and | Development | controlling | Equity | ||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Stockholders | Options | Stage | Interest | (Capital Deficit) | |||||||||||||||||||||||||||||||||||||
Conversion Preferred A |
(51,250 | ) | (1,000 | ) | — | 51,250 | 1,000 | — | ||||||||||||||||||||||||||||||||||||||||
Payment of Preferred A Dividend in Common Stock |
65,965 | 1,000 | (1,000 | ) | — | |||||||||||||||||||||||||||||||||||||||||||
Conversion Preferred B |
(20,000 | ) | 20,000 | — | ||||||||||||||||||||||||||||||||||||||||||||
Payment of Preferred B Dividend in Common Stock |
30,103 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Shares Issued for Services |
1,861,475 | 18,000 | 1,281,000 | 1,299,000 | ||||||||||||||||||||||||||||||||||||||||||||
Shares Issued as Compensation |
377,152 | 4,000 | 286,000 | 290,000 | ||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock April ($0.78 per share |
64,103 | 1,000 | 49,000 | 50,000 | ||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock June ($0.67 per share) |
30,000 | 20,000 | 20,000 | |||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock July ($0.60 per share) |
86,665 | 1,000 | 51,000 | 52,000 | ||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock July ($0.51 per share) |
39,216 | 1,000 | 19,000 | 20,000 | ||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock July ($0.76 per share) |
13,200 | 10,000 | 10,000 | |||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock August ($0.60 per share) |
25,000 | 15,000 | 15,000 | |||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock August ($0.72 per share) |
38,961 | 1,000 | 29,000 | 30,000 | ||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock September ($0.70 per share |
17,142 | 12,000 | 12,000 | |||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock September ($0.77 per share) |
7,944 | 6,000 | 6,000 | |||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock October ($0.52 per share) |
192,308 | 2,000 | 98,000 | 100,000 | ||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock October ($0.63 per share) |
20,000 | 13,000 | 13,000 | |||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock December ($0.40 per share) |
16,944 | 7,000 | 7,000 | |||||||||||||||||||||||||||||||||||||||||||||
Warrants Exercised |
12,500 | — | — | |||||||||||||||||||||||||||||||||||||||||||||
Issuance of restricted share for services |
25,173 | 19,000 | 19,000 | |||||||||||||||||||||||||||||||||||||||||||||
Shares Issued for Commercializing Event |
4,669 | 14,000 | 14,000 | |||||||||||||||||||||||||||||||||||||||||||||
Contributed Services |
1,200,000 | 1,200,000 | ||||||||||||||||||||||||||||||||||||||||||||||
Net Loss |
(3,272,000 | ) | (3,272,000 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2009 |
655,851 | $ | 6,000 | 77,500 | $ | 1,000 | 35,811,192 | $ | 358,000 | $ | 51,613,000 | $ | 0 | $ | 0 | $ | (53,213,000 | ) | $ | 0 | $ | (1,235,000 | ) | |||||||||||||||||||||||||
See notes to consolidated financial statements
36
Table of Contents
TORVEC, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Statements of Changes in Stockholders’ Equity (Capital Deficit)
For the Period from September 25, 1996 (Inception) through December 31, 2010
(continued)
(a development stage company)
Consolidated Statements of Changes in Stockholders’ Equity (Capital Deficit)
For the Period from September 25, 1996 (Inception) through December 31, 2010
(continued)
| Deficit | ||||||||||||||||||||||||||||||||||||||||||||||||
| Unearned | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||
| Class A | Class B | Additional | Due | Compensatory | During the | Non- | ||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Common Stock | Paid-In | From | Stock and | Development | Controlling | |||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Stockholders | Options | Stage | Interest | Total Equity | |||||||||||||||||||||||||||||||||||||
Conversion Preferred A |
(62,500 | ) | 62,500 | — | ||||||||||||||||||||||||||||||||||||||||||||
Payment of Preferred A dividend in Preferred Stock |
5,421 | — | ||||||||||||||||||||||||||||||||||||||||||||||
Payment of Preferred A dividend in Common Stock |
22,883 | — | ||||||||||||||||||||||||||||||||||||||||||||||
Shares Issued for Services |
1,476,992 | 15,000 | 561,000 | 576,000 | ||||||||||||||||||||||||||||||||||||||||||||
Shares Issued for Compensation |
889,195 | 9,000 | 330,000 | 339,000 | ||||||||||||||||||||||||||||||||||||||||||||
Issuance of Common Stock — January ($0.50 per share) |
10,000 | — | 5,000 | 5,000 | ||||||||||||||||||||||||||||||||||||||||||||
Issuance of Common Stock — May ($0.30 per share) |
350,167 | 4,000 | 102,000 | 106,000 | ||||||||||||||||||||||||||||||||||||||||||||
Issuance of Common Stock — July ($0.39 per share) |
68,571 | 1,000 | 26,000 | 27,000 | ||||||||||||||||||||||||||||||||||||||||||||
Issuance of Common Stock — August ($0.35 per share) |
4,000 | — | 1,000 | 1,000 | ||||||||||||||||||||||||||||||||||||||||||||
Issuance of Common Stock from October Private
Placement ($0.30 per share) |
6,834,002 | 69,000 | 1,981,000 | 2,050,000 | ||||||||||||||||||||||||||||||||||||||||||||
Warrants Exercised |
6,000 | — | ||||||||||||||||||||||||||||||||||||||||||||||
Issuance of Common Stock Warrants for Services |
45,000 | 45,000 | ||||||||||||||||||||||||||||||||||||||||||||||
Issuance of Restricted Shares for Services |
118,099 | 1,000 | 43,000 | 44,000 | ||||||||||||||||||||||||||||||||||||||||||||
Shares issued for Commercializing Event |
32,077 | 13,000 | 13,000 | |||||||||||||||||||||||||||||||||||||||||||||
Stock-Based Compensation Related to Stock Options |
1,573,000 | 1,573,000 | ||||||||||||||||||||||||||||||||||||||||||||||
Warrant Modification |
68,000 | 68,000 | ||||||||||||||||||||||||||||||||||||||||||||||
Contributed Services |
361,000 | 361,000 | ||||||||||||||||||||||||||||||||||||||||||||||
Net Loss |
(3,053,000 | ) | (3,053,000 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2010 |
598,772 | $ | 6,000 | 77,500 | $ | 1,000 | 45,685,678 | $ | 457,000 | $ | 56,722,000 | $ | — | $ | — | $ | (56,266,000 | ) | $ | — | $ | 920,000 | ||||||||||||||||||||||||||
See notes to consolidated financial statements.
37
Table of Contents
TORVEC, INC.
(a development stage company)
(a development stage company)
Consolidated Statement of Cash Flows
| September 25, | ||||||||||||
| 1996 | ||||||||||||
| (Inception) | ||||||||||||
| Year Ended | Through | |||||||||||
| December 31, | December 31, | |||||||||||
| 2010 | 2009 | 2010 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net loss |
$ | (3,053,000 | ) | $ | (3,272,000 | ) | $ | (57,538,000 | ) | |||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||||||
Depreciation and amortization |
51,000 | 62,000 | 2,563,000 | |||||||||
Loss on impairment of license |
— | — | 1,071,000 | |||||||||
Impairment of goodwill |
— | — | 19,000 | |||||||||
Gain on sale of fixed assets |
(27,000 | ) | — | (37,000 | ) | |||||||
Compensation expense attributable to common stock in subsidiary |
— | — | 619,000 | |||||||||
Common stock issued for services |
620,000 | 1,318,000 | 15,132,000 | |||||||||
Stock-based compensation related to stock options |
1,573,000 | — | 1,573,000 | |||||||||
Warrant modification |
68,000 | — | 68,000 | |||||||||
Warrants issued for services |
45,000 | — | 294,000 | |||||||||
Shares issued for future consulting services |
— | — | 103,000 | |||||||||
Stockholder contribution of services |
361,000 | 1,200,000 | 3,970,000 | |||||||||
Contribution to capital, Ford Truck |
— | — | 16,000 | |||||||||
Common Stock issued in connection with commercializing event plan |
13,000 | 14,000 | 63,000 | |||||||||
Reversal of liability |
— | — | (1,541,000 | ) | ||||||||
Gain on sale of Ice Engineering license |
(1,900,000 | ) | — | (1,900,000 | ) | |||||||
Compensatory common stock, options and warrants |
339,000 | 290,000 | 18,215,000 | |||||||||
Changes in: |
||||||||||||
Prepaid expenses and other current assets |
63,000 | (9,000 | ) | 113,000 | ||||||||
Deferred revenue |
(7,000 | ) | 28,000 | (70,000 | ) | |||||||
Deferred rent |
(10,000 | ) | (10,000 | ) | 19,000 | |||||||
Change in accrued payroll taxes |
169,000 | 68,000 | 346,000 | |||||||||
Accounts payable and other accrued expenses |
(87,000 | ) | 306,000 | 4,157,000 | ||||||||
Deferred compensation and other |
— | (600,000 | ) | — | ||||||||
Due to a related party |
(22,000 | ) | 22,000 | — | ||||||||
Net cash used in operating activities |
(1,804,000 | ) | (583,000 | ) | (12,745,000 | ) | ||||||
Cash flows from investing activities: |
||||||||||||
Purchase of property and equipment |
(3,000 | ) | — | (363,000 | ) | |||||||
Cost of acquisition |
— | — | (16,000 | ) | ||||||||
Proceeds from sale of license |
1,100,000 | — | 1,900,000 | |||||||||
Proceeds from sale of fixed assets |
27,000 | — | 37,000 | |||||||||
Net cash provided by investing activities |
1,124,000 | — | 1,558,000 | |||||||||
Cash flows from financing activities: |
||||||||||||
Net proceeds from sales of common stock and upon exercise of options and warrants |
2,189,000 | 335,000 | 9,223,000 | |||||||||
Net proceeds from sales of preferred stock |
— | — | 3,537,000 | |||||||||
Net proceeds from sale of subsidiary stock |
— | — | 234,000 | |||||||||
Net proceeds from issuance of notes payable |
57,000 | — | 57,000 | |||||||||
Payments of notes payable |
(60,000 | ) | — | (60,000 | ) | |||||||
Proceeds from loans |
— | — | 335,000 | |||||||||
Repayments of loans |
(29,000 | ) | (15,000 | ) | (109,000 | ) | ||||||
Repayment of officer & stockholder loans and advances |
— | — | (147,000 | ) | ||||||||
Distributions |
— | — | (365,000 | ) | ||||||||
Net cash provided by financing activities |
2,157,000 | 320,000 | 12,705,000 | |||||||||
Net increase (decrease) in cash |
1,477,000 | (263,000 | ) | 1,518,000 | ||||||||
Cash at beginning of period |
41,000 | 304,000 | — | |||||||||
Cash at end of period |
$ | 1,518,000 | $ | 41,000 | $ | 1,518,000 | ||||||
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Table of Contents
TORVEC, INC.
(a development stage company)
Consolidated Statement of Cash Flows
(continued)
(a development stage company)
Consolidated Statement of Cash Flows
(continued)
| September 25, | ||||||||||||
| 1996 | ||||||||||||
| (Inception) | ||||||||||||
| Year Ended | Through | |||||||||||
| December 31, | December 31, | |||||||||||
| 2010 | 2009 | 2010 | ||||||||||
Noncash investing and financing activities: |
||||||||||||
Preferred stock issued in payment of dividend |
$ | 22,000 | $ | — | $ | 61,000 | ||||||
Issuance of common stock for license |
— | — | 3,405,000 | |||||||||
Issuance of common stock, warrant and options in settlement of liabilities, except notes payable |
— | — | 2,907,000 | |||||||||
Notes payable exchanged for common stock |
— | — | 50,000 | |||||||||
Advance settled with common stock |
— | — | 25,000 | |||||||||
Loss on exchange of noncontrolling interest |
— | — | 232,000 | |||||||||
Shares issued for future consulting services |
— | — | 103,000 | |||||||||
Issuance of common stock for a finder’s fee |
— | — | 225,000 | |||||||||
Advance from stockholder |
— | — | 250,000 | |||||||||
Contribution of FTV Ford Truck |
— | — | 16,000 | |||||||||
Ice Engineering LLC payable netted against receivable |
— | — | 91,000 | |||||||||
Common stock issued in settlement of director fee payable |
— | 63,000 | 121,000 | |||||||||
Common stock issued in settlement of patent expense |
— | — | 117,000 | |||||||||
Issuance of common stock as payment for Preferred A and B dividends |
91,000 | 77,000 | 168,000 | |||||||||
Purchases of fixed assets with debt |
41,000 | — | 41,000 | |||||||||
Supplemental Disclosures: |
||||||||||||
Interest paid |
$ | 47,000 | $ | 3,000 | $ | 74,000 | ||||||
Income tax paid |
— | — | 1,000 | |||||||||
See notes to consolidated financial statements.
39
Table of Contents
TORVEC, INC.
(a development stage company)
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 2010
NOTE A — THE COMPANY AND BASIS OF PRESENTATION
Torvec, Inc. (the “company”) was incorporated as a New York business corporation on September 25,
1996. Upon its incorporation, the company acquired numerous patents, inventions and know-how
created by Vernon E. Gleasman and his sons, James and Keith Gleasman, a family with more than fifty
years of experience in the automotive industry. Since its inception, the company has endeavored to
design, develop, build and commercialize its automotive technology portfolio. The company
currently is focusing its commercialization strategies on the following technologies: the
IsoTorque® differential, the Rota-Torque hydraulic pump, and the Torsteer Vehicle Steer-Drive.
For the period from September 1996 (inception) through December 31, 2010, the company has
accumulated a deficit of $56,266,000 and at December 31, 2010 has working capital of $745,000 and
stockholders’ equity of $920,000. The company has been dependent upon equity financing and advances
from stockholders to meet its obligations and sustain operations. Management believes that based
upon its current cash position that resulted from the company’s success in raising $2,050,000 in
its private equity placement in October 2010 and its current outlook for its business operations,
the company will be able to continue operations through December 31, 2011. However, if its cash
flow projections are less than expected, the company may need to downsize operations, issue shares
of common stock to pay for certain expenditures, incur debt or raise additional capital. There can
be no assurance, however, that the company will be successful in raising additional capital or
incurring debt when needed on terms acceptable to the company.
The company’s ability to continue as a going concern is ultimately dependent upon achieving
profitable operations and generating sufficient cash flows from operations to continue to meet its
future obligations.
NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[1] Consolidation
The financial statements include the accounts of the company, its wholly-owned subsidiaries
Iso-Torque Corporation, IVT Diesel Corp. and Variable Gear LLC, its majority-owned subsidiary, Ice
Surface Development, Inc. (56% owned at December 31, 2010 and 2009), and its majority-owned joint
venture, Torvec China, LLC, (60% ownership interest at December 31, 2010). All material
intercompany transactions and account balances have been eliminated in consolidation.
[2] Cash and Cash Equivalents
Cash and cash equivalents may include time deposits, certificates of deposit, and highly liquid
debt instruments with original maturities of three months or less. The company maintains cash and
cash equivalents at financial institutions which periodically may exceed federally insured amounts.
[3] Property and Equipment
Equipment is stated at cost less accumulated depreciation. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets which range from three to seven
years. Leasehold improvements are being amortized over shorter of lease term or useful life.
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Table of Contents
[4] Research and Development and Patents
Research and development costs and patent expenses are charged to operations as incurred. Research
and development includes amortization of the Ice technology, purchase of parts, depreciation and
consulting services. Depreciation expense in each of the years ended December 31, 2010 and 2009
that was charged to research and development was $16,000 and $19,000 respectively.
Patent costs for the year ended December 31, 2010 and 2009 amounted to $211,000 and $300,000,
respectively, and are included in General and Administrative expenses.
[5] Intangible Assets
The company follows ASC 350-30, “General Intangibles Other Than Goodwill.” Whenever events or
circumstances indicate, the company’s long-lived assets, including any intangible assets with
finite useful lives, are tested for impairment by using the estimated future cash flows directly
associated with, and that are expected to arise as a direct result of, the use of the assets. If
the carrying amount exceeds the estimated undiscounted cash flows, an impairment may be indicated.
The carrying amount is then compared to the estimated discounted cash flows, and if there is an
excess, such amount is recorded as an impairment.
[6] Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses during the reporting period.
Such estimates are used in valuing the useful lives of any intangible assets and the future
realizable value of such assets. These estimates are subject to a high degree of judgment and
potential change. Actual results could differ from those estimates.
[7] Loss per Common Share
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 260-10 (
Previously known as: FASB Statement 128, “Earnings Per Share”) requires the presentation of basic
earnings per share, which is based on common stock outstanding, and dilutive earnings per share,
which gives effect to options, warrants and convertible securities in periods when they are
dilutive. At December 31, 2010 and 2009, the company excluded 8,444,870 and 2,503,949 potential
common shares, respectively, relating to convertible preferred stock outstanding, options and
warrants from its diluted net loss per common share calculation because they are anti-dilutive. The
company also excluded 625,000 warrants at December 31, 2010 and 2009 as the conditions for their
vesting were not yet satisfied.
[8] Fair Value of Financial Instruments
The carrying amount of cash, accounts payable, and accrued expenses approximates their fair value
due to the short maturity of those instruments. The carrying amount of notes payable approximates
fair value since most of the outstanding balance was borrowed in November 2010 at then current
interest rates.
[9] Stock-based Compensation
ASC 718-10 requires all share-based payments to employees, including grants of employee stock
options, to be recognized as compensation expense over the service period (generally the vesting
period) in the consolidated financial statements based on their fair values on the grant date.
Under the modified prospective method adopted by the company, awards that were granted, modified,
or settled on or after January 1, 2006 are measured and accounted for in accordance with ASC
718-10. Unvested equity-classified awards that were granted prior to January 1, 2006 will continue
to be accounted for in accordance with ASC 718-10, except that the grant date fair value of all
awards are recognized in the results of operations over the remaining vesting periods. The impact
of forfeitures that may
occur prior to vesting is also estimated and considered in the amount recognized. In addition, the
realization of tax benefits in excess of amounts recognized for financial reporting purposes will
be recognized as a financing activity in accordance with ASC 718-10.
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No tax benefits were attributed to the stock-based compensation expense because a valuation
allowance was maintained for substantially all net deferred tax assets. We elected to adopt the
alternative method of calculating the historical pool of windfall tax benefits as permitted by ASC
718-10-65 (Previously known as: FASB Staff Position (FSP) No. SFAS 123(R)-c, “Transition Election
Related to Accounting for the Tax Effects of Share-Based Payment Awards.”) This is a simplified
method to determine the pool of windfall tax benefits that is used in determining the tax effects
of stock compensation in the results of operations and cash flow reporting for awards that were
outstanding as of the adoption of ASC 718-10.
[10] Revenue Recognition
The company’s terms provide that customers are obligated to pay for products sold to them within a
specified number of days from the date that title to the products is transferred to the customers.
The company’s standard terms are typically net 30 days. The company recognizes revenue when
transfer of title occurs, risk of ownership passes to a customer at the time of shipment or
delivery depending on the terms of the agreement with a particular customer and collection is
reasonably assured. The sale price of the company’s products is substantially fixed and
determinable at the date of the sale based upon purchase orders generated by a customer and
accepted by the company.
[11] Recent Accounting Pronouncements
In April 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) No. 2010-17, “Revenue Recognition — Milestone Method (Topic 605): Milestone Method of
Revenue Recognition — a consensus of the FASB EITF”. ASU No. 2010-17 is limited to research or
development arrangements and requires that this ASU be met for an entity to apply the milestone
method (record the milestone payment in its entirety in the period received) of recognizing
revenue. However, the FASB clarified that, even if the requirements in this ASU are met, entities
would not be precluded from making an accounting policy election to apply another appropriate
policy that results in the deferral of some portion of the arrangement consideration. The guidance
in this ASU will apply to milestones in both single-deliverable and multiple-deliverable
arrangements involving research or development transactions. ASU No. 2010-17 will be effective
prospectively for milestones achieved in fiscal years, and interim periods within those years,
beginning on or after June 15, 2010. Early adoption is permitted. The company does not expect the
adoption of this pronouncement to have a significant impact on its financial statements.
In October 2009, the FASB issued ASU No. 2009-13, “Revenue Recognition (Topic 605):
Multiple-Deliverable Revenue Arrangements — a consensus of the FASB EITF”. ASU No. 2009-13
eliminates the residual method of accounting for revenue on undelivered products and instead,
requires companies to allocate revenue to each of the deliverable products based on their relative
selling price. In addition, this ASU expands the disclosure requirements surrounding
multiple-deliverable arrangements. ASU No. 2009-13 will be effective for revenue arrangements
entered into for fiscal years beginning on or after June 15, 2010. The company does not expect the
adoption of this pronouncement to have a significant impact on its financial statements.
In May 2009, the FASB issued ASC 855 (SFAS No. 165), “Subsequent Events” which establishes general
standards for accounting for and disclosure of events that occur after the balance sheet date but
before financial statements are issued. In February 2010, FASB issued ASU 2010-09 Subsequent Event
(Topic 855) Amendments to Certain Recognition and Disclosure Requirements. ASU 2010-09 removes the
requirement for an SEC filer to disclose a date in both issued and revised financial statements.
[12] Reclassifications
Certain reclassifications have been made to prior year balances to conform to the current year’s
presentation.
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Table of Contents
NOTE C — LICENSE FROM THE TRUSTEES OF DARTMOUTH COLLEGE
On November 28, 2000, the company’s majority-owned subsidiary, Ice Surface Development LLC entered
into a 20-year exclusive license with the Trustees of Dartmouth College for land-based applications
to a novel ice adhesion modification system developed by Dr. Victor Petrenko at Dartmouth’s Thayer
School of Engineering. Under the license agreement the company made a single payment of $140,000 in
2000 for sponsored research. The license agreement provided for a royalty of 3.5% based on the
value of net sales of licensed product with minimum annual payments of $10,000 for the first two
years, $15,000 for the third year and $25,000 per year through 2021. In addition, the agreement
provided for the payment of 50% of sub-license fee income.
Effective June 15, 2007, Ice Surface assigned the license to an unrelated company, Ice Engineering,
LLC in exchange for Ice Engineering’s agreement to pay the shareholders of Ice Surface an annual
royalty equal to 5% of the annual gross revenues generated by the license and its agreement to
assume the obligations to Dartmouth under the license.
Separately, Ice Engineering, LLC agreed to reimburse approximately $3,500,000 of acquisition and
maintenance costs expended by the company in connection with the ice technology. Pursuant to the
reimbursement agreement, the company received $500,000 on June 15, 2007. Under the license
assignment agreement, the $3,000,000 balance was to be paid at the rate of $300,000 per quarter
commencing March 1, 2008, less approximately $91,000 in fees payable to Dartmouth College accrued
through June 14, 2007 to be deducted from the first quarterly reimbursement amount. The company
received the first installment of $209,000 due March 1, 2008 on April 3, 2008 and did not receive
the balance of the installments.
On October 31, 2008, the company commenced an action in New York Supreme Court, County of New York,
Commercial Division against Ice Engineering, LLC seeking the total balance owed by Ice Engineering
to the company pursuant to the assignment agreement.
On January 27, 2010, the company and Ice Engineering settled this litigation. Under the settlement
agreement, the company’s assignment of the ice technology license is made permanent; the company
elected to forego its right to royalties and the company agreed to accept $1,100,000 in full
payment of Ice Engineering’s reimbursement obligation. The company was paid the settlement amount,
$1,100,000, in the first quarter of 2010. (See Note J.)
NOTE D — RELATED PARTY TRANSACTIONS
[1] Effective January 1, 2008, the board of directors instituted a compensation plan for James and
Keith Gleasman by which the company would compensate each of them for services performed and
inventions and know-how transferred to the company at the rate of $300,000 per year. Actual payment
of this compensation, or any portion thereof, was conditioned upon a board of director
determination that the company had the requisite cash, after the complete funding of all ongoing
company projects, to make payment.
The company did not have the requisite cash available to pay the Gleasmans’ compensation under this
arrangement from January 1, 2008 through August 17, 2009, the date on which each of the Gleasmans
waived all of his rights and interest in and to the board-created compensation plan, including all
of his rights and interest in and to the amount(s) under the plan accrued to such date. As a result
of such waiver, of the $942,000 accrued under the plan at June 30, 2009, $900,000 was reclassified
to equity as a contribution of services and $42,000 accrued under the plan for payroll taxes was
recorded as a reduction to general and administrative expenses in the quarter ended June 30, 2009.
For periods for which there is no compensation plan, the company is required to record the
estimated value of each of the Gleasman’s services rendered to the company (estimated at $300,000
each per annum) as a contribution of services under generally accepted accounting principles
applicable to the company and is required under the same accounting principles to allocate the
amount of such contribution between research and development expenses and general and
administrative expenses. For the years ended December 31, 2010 and 2009, the company recorded
$125,000 and $200,000 to research and development expense and $236,000 and $400,000 to general and
administrative expense, respectively, based upon management’s estimate of the Gleasmans time
allocation.
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Effective March 14, 2010, James Gleasman retired as the company’s chief executive officer, interim
chief financial officer and as a member of the board of directors.
During the year ended December 31, 2009, James Gleasman loaned the company $22,000 for compensation
to the engineers. As of December 31, 2010, the company has repaid the full amount of this loan.
[2] During the years ended December 31, 2010 and 2009, the company paid a total value of
approximately $117,900 and $94,700, respectively, in a combination of business consultant common
shares and cash to a member of the Gleasman family for administrative, technological and
engineering consulting services. The $117,900 paid in 2010 was comprised of approximately $114,900
in cash and 7,006 common shares with a value of approximately $3,000. The $94,700 paid in 2009 was
comprised of approximately $90,500 in cash and 5,589 common shares with a value of approximately
$4,200.
[3] During the years ended December 31, 2010 and 2009, the company paid a total value of $97,500
and $87,700 to a family member of its general counsel for engineering services rendered to the
company. The $97,500 paid in 2010 was comprised of approximately $94,900 in cash and 5,982 common
shares with a value of approximately $2,600. The $87,700 paid in 2009 was comprised of
approximately $87,500 in cash and 292 common shares with a value of approximately $200.
[4] On September 14, 2007, the company moved its executive offices from Pittsford, New York to
Rochester, New York, which includes both a manufacturing and executive office facility. The
Rochester facility is owned by a partnership, with which Asher J. Flaum, a company director, is
associated. On April 28, 2008, the company’s board of directors approved the terms of a lease and
such lease was executed on April 29, 2008. (See Notes G and I[2].)
[5] On June 29, 2000, the company granted an exclusive world-wide license of all its automotive
technologies to Variable Gear, LLC for the aeronautical and marine markets for $150,000 cash. The
company recorded the receipt of the $150,000 as deferred revenue to be recognized when all
conditions for earning such fees are complete. At the time of its formation and through June 6,
2007 when his interest was purchased, Robert C. Horton, a company shareholder, owned 51% of
Variable Gear, LLC. On June 6, 2007, the company purchased Mr. Horton’s entire interest in Variable
Gear for 5,000 shares of common stock valued at $19,250. In fiscal 2007, the company recognized the
deferred revenue of $150,000 as other income and recorded an impairment of the goodwill of $19,250,
since there were no operations of the entity since inception.
[6] On August 18, 2006, the company granted 400,000 nonqualified common stock warrants valued at
approximately $1,237,000 for consulting services to an enterprise, one of whose members was a
director. The warrants were immediately exercisable at $3.27 per common share for a period of ten
years. These warrants were modified by mutual agreement of the parties effective October 15, 2010.
These modified warrants are immediately exercisable at $.44 per common share for a period of ten
years from the modification date. This modification was valued at $68,000 and the company
recognized this expense in the fourth quarter of 2010.
[7] On June 19, 2006, the company awarded an aggregate 360,000 nonqualified common stock warrants
with no expiration date, valued at approximately $629,000, to a director for additional services
rendered by such director as chairman of the board’s executive committee during 2006.
[8] On April 28, 2008, the board of directors approved a one-time payment to its chairman of the
governance and compensation committee of $46,000 for special services rendered in connection with
required compliance under the Sarbanes-Oxley Act. This amount was paid by the issuance of 19,167
common shares valued as of the closing price on April 28, 2008. The company charged $46,000 to
operations in connection with such services.
[9] On August 17, 2005, the company repaid $28,000 indebtedness to a stockholder by issuing 11,667
restricted common shares, such number of shares based upon the closing price of the company’s
common stock on August 16, 2005.
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[10] On October 26, 2010, the company issued 164,187 common shares valued at approximately $62,400
to each of its chairman of the board and general counsel for services rendered in connection with
the engagement of the company’s new chief executive officer.
[11] On December 13, 2010, the company executed a consultant agreement with a director to provide
consulting services to the company at a rate of $200 per hour. Pursuant to the agreement, the
company also agreed to pay the consultant an incentive fee equal to $10,000 or proportionate part
thereof for each $1,000,000 of revenue or proportionate part thereof actually received by the
company for a period of five years, provided the definitive agreement with the third party results
from the material efforts of the consultant.
NOTE E — INCOME TAXES
The company accounts for income taxes using the asset and liability method, the objective of which
is to establish deferred tax assets and liabilities for the temporary differences between the
financial reporting and the tax bases of the company’s assets and liabilities at enacted tax rates
expected to be in effect when such amounts are realized or settled. A valuation allowance related
to deferred tax assets is recorded when it is more likely than not that some portion or all of the
deferred tax assets will not be realized.
The provision (benefit) for income taxes for the years ended December 31, 2010 and 2009 is
summarized below:
| December 31, | December 31, | |||||||
| Income Tax Provision | 2010 | 2009 | ||||||
Current tax expense (benefit) |
||||||||
State |
$ | 2,000 | $ | (40,000 | ) | |||
Federal |
— | — | ||||||
Deferred tax expense (benefit) |
||||||||
State |
29,000 | (104,000 | ) | |||||
Federal |
182,000 | (664,000 | ) | |||||
Increase (decrease) in valuation allowance |
(211,000 | ) | 768,000 | |||||
Provision for income tax |
$ | 2,000 | $ | (40,000 | ) | |||
The difference between income taxes at the statutory federal income tax rate and income taxes
reported in the statements of operations is attributable to the following:
| December 31, | December 31, | |||||||
| 2010 | 2009 | |||||||
Income tax benefit at the federal statutory rate |
$ | (1,038,000 | ) | $ | (1,087,000 | ) | ||
State income tax benefit, net of effect of federal taxes |
(161,000 | ) | (103,000 | ) | ||||
Travel and entertainment |
1,000 | 1,000 | ||||||
New York State tax credit |
— | 13,000 | ||||||
Refundable tax credits |
— | (40,000 | ) | |||||
Contribution of capital — shareholder’s services |
123,000 | 408,000 | ||||||
Expiration of net operating loss carryforward |
1,288,000 | — | ||||||
Increase (decrease) in valuation allowance |
(211,000 | ) | 768,000 | |||||
Provision (benefit) for income tax |
$ | 2,000 | $ | (40,000 | ) | |||
At December 31, 2010, we have approximately $24,672,000 of net operating loss carryforwards to
offset future taxable income, expiring 2011 through 2028, and $18,392,000 of certain operating
expenses which have been
deferred as startup costs under Section 195 of the Internal Revenue Code for federal income tax
purposes, subject to limitations for alternative minimum tax. Start-up costs are amortized over 15
years.
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The deferred tax asset at December 31, 2010 and 2009 consists of the following:
| 2010 | 2009 | |||||||
Net operating loss carryforward |
$ | 9,811,000 | $ | 10,145,000 | ||||
Deferred startup costs |
7,224,000 | 7,829,000 | ||||||
Stock-based compensation |
1,003,000 | 342,000 | ||||||
Other |
193,000 | 126,000 | ||||||
| 18,231,000 | 18,442,000 | |||||||
Less: Valuation allowance |
(18,231,000 | ) | (18,442,000 | ) | ||||
Net deferred tax asset |
$ | — | $ | — | ||||
The decrease in the valuation allowance from December 31, 2009 to December 31, 2010 amounted to
approximately $211,000. The increase in the valuation allowance from December 31, 2008 to December
31, 2009 amounted to approximately $767,000. The company has provided a full valuation allowance
on the net deferred tax assets due to uncertainty of realization through future earnings.
Based upon the change in ownership rules under section 382 of the Internal Revenue Code of 1986, if
in the future the company issues common stock or additional equity instruments convertible in
common shares which result in an ownership change exceeding the 50% limitation threshold imposed by
that section, all of the Company’s net operating loss carry forwards may be significantly limited
as to the amount of use in any particular year.
The company recognizes interest and penalties related to uncertain tax positions in general and
administrative expense. As of December 31, 2010, the company has no unrecognized tax benefit,
including interest and penalties.
NOTE F — ACCRUED LIABILITIES
At December 31, 2010 and 2009, accrued liabilities consist of the following:
| 2010 | 2009 | |||||||
Accrued Compensation |
$ | 32,000 | $ | — | ||||
Accrued Payroll Taxes Payable |
484,000 | 315,000 | ||||||
Accrued Legal |
47,000 | 124,000 | ||||||
Other |
55,000 | 12,000 | ||||||
| $ | 618,000 | $ | 451,000 | |||||
NOTE G — NOTES PAYABLE
During the year ended December 31, 2005, the company financed a vehicle to be used with its
prototype technology and pledged the vehicle as collateral for this loan. The loan in the amount of
$24,000 is paid in monthly installments of $479 consisting of principal and interest at 6.59% per
annum through December 2010.
During the year ended December 31, 2006, the company refinanced two vehicles and pledged the
vehicles as collateral for the loan. The loan in the amount of $56,174 is paid in monthly
installments of $1,201 consisting of principal and interest at 10.3% per annum scheduled through
August 2011. In April 2010, the company paid off the outstanding balance of approximately $18,200
on this loan in full.
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On July 19, 2010, the company received a net amount of $57,000, after payment of $3,000 in legal
expenses, in connection with a Securities Purchase Agreement for the issuance of a Convertible Note
in the principal amount of $60,000 due and payable on April 2, 2011, with interest payable at the
rate of 8% per annum. The outstanding Note principal can be converted, in whole or in part, into
the company’s common stock at the election of the Holder from time to time beginning 180 days after
the July 2, 2010 issue date. The conversion price is equal to 58% of the average of the three
lowest closing bid prices of the company’s common stock during a 10 day trading period immediately
prior to the date the Holder’s conversion notice is sent to the company. The company may prepay
the principal amount of the Note and all accrued interest at any time beginning on the July 2, 2010
issue date and expiring 180 days thereafter. In the event the company elects to prepay within the
first 90 days, the repayment amount is 150% of the $60,000 principal amount and outstanding accrued
interest and if between the 91st and the 180th day, the repayment amount is
175% of the $60,000 principal amount and outstanding accrued interest. In the event of default,
the amount of principal and interest not paid when due bears interest at the rate of 22% per annum
and the Note becomes immediately due and payable. The Note agreement contains covenants requiring
the Holder’s written consent for certain activities not in existence or not committed to by the
company on the date of issuance as follows: common stock dividend distributions in cash or shares,
stock repurchases, borrowings, sale of significantly all assets, certain advances and loans in
excess of $100,000 and certain guarantees with respect to third-party liabilities. In order to
prevent conversion of the Note into our common stock at a discount of 42%, on November 22, 2010,
the company elected to exercise its prepayment right by tendering approximately $106,700 to the
Holder, which amount represented the principal of $60,000 and the entire amount of the Optional
Prepayment Amount under the Note of $45,000, in addition to accrued interest of approximately
$1,700. As a result of such prepayment, the Note was paid in full and the Securities Purchase
Agreement is of no further legal effect. Both the prepayment penalty and the interest are recorded
as other income / (expense) in the Consolidated Statements of Operations for the year ended
December 31, 2010.
In November 2010, the company completed a construction project for some additional office space at
its leased corporate office facility. The cost of the leasehold improvement was $32,500 and the
landlord agreed to finance this cost over the remaining initial term of the lease which expires in
May 2013. The monthly payments are approximately $1,100 per month. (See Note D[4].)
In November 2010, the company entered into a capital lease for a copy machine over a 5 year term,
with a fair market value buyout. The capitalized value of the lease was approximately $8,900, and
the monthly payment is approximately $170.
The following represents the required minimum payments for the outstanding loans as of December 31,
2010:
| Period Ending | ||||
| December 31, | ||||
2011 |
$ | 15,000 | ||
2012 |
15,000 | |||
2013 |
8,000 | |||
2014 |
2,000 | |||
2015 |
2,000 | |||
Total Minimum payments |
42,000 | |||
Less-amount representing interest |
1,000 | |||
| 41,000 | ||||
Less-Current Maturities |
15,000 | |||
Long Term Portion |
$ | 26,000 | ||
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NOTE H — STOCKHOLDERS’ EQUITY
(CAPITAL DEFICIT)
[1] Private Placements of Common Stock
The company received net proceeds of $550,000, $1,230,000 (of which $507,000 was received from the
Gleasman family), $758,000, $1,068,000 and $331,000 from private placements of its common stock for
the years ended December 31, 2000, 1999, 1998 and 1997 and for the period ended December 31, 1996,
respectively.
During 2002, the company sold 508,897 common shares for net proceeds of approximately $668,000.
In 2003, an existing stockholder purchased 361,112 common shares for $300,000 and was paid 70,000
common shares at market value on the date of issuance (valued at $158,000) for consulting services
and rent for the company’s use of a facility and technicians. The company also sold an additional
8,000 common shares to an unrelated party for $20,000.
In 2004, the same existing stockholder purchased 60,000 common shares for $301,000 and was paid
35,000 common shares at market value on the date of issuance(valued at $194,000) as rent for use by
the company of a facility and technicians.
In 2005, this stockholder was paid 90,000 common shares at market value on the date of issuance
(valued at $259,000) for consulting services rendered to the company.
In 2008, the company sold 101,364 shares of common stock to accredited investors for proceeds of
approximately $198,000.
In 2009, the company sold 551,483 shares of common stock to accredited investors for proceeds of
approximately $335,000.
During 2010, the company sold an aggregate of 432,738 restricted common shares in a series of
non-brokered private placements for proceeds of approximately $139,000 at an average of
approximately $.32 per common share. In addition, in October 2010, the company sold 6,834,002
restricted common shares for approximately $2,050,000 of proceeds in a non-brokered private
placement of its common stock at $.30 per common share.
[2] Initial Public Offering Consultant
In February 1997, the company entered into a three-year agreement with an IPO consulting firm (“IPO
Consultant”) to arrange for an initial public offering of the company’s common stock and to provide
financial advisory services. In consideration, the company issued an aggregate 1,000,000 restricted
common shares to five principals of the IPO Consultant for an aggregate $50. In addition, the
company granted an aggregate 500,000 warrants to the same principals. Such warrants were only
exercisable in the event the company conducted an initial public offering for its common stock. In
such event, the warrants were exercisable for a term of five years after the IPO and were
exercisable at the per share public offering exercise price (unless during the warrant term after
the IPO, at least 50% of the company’s assets were acquired by a third party in which case the
exercise price was $1.50 per share).
In February 1999, the company entered into a one-year consulting agreement directly with two of the
former principals of the IPO Consultant to provide financial advisory services. In connection with
this agreement, the company and the two former principals agreed to convert the 375,000 warrants
they owned into 375,000 common stock purchase options exercisable immediately through February 2004
at $5.00 per common share. The company valued these options at $2,780,000 using the Black-Scholes
option-pricing model with the following weighted average assumptions for the year ended December
31, 1999: risk free interest rate of 5%, dividend yield of 0%, volatility of 40% and expected life
of the options granted of 5 years. These options were charged to operations over the term of the
consulting agreement. In February 1999, 21,000 of these options were exercised for proceeds of
$105,000. The term of the remaining 354,000 options expired in February 2004. As of December 31,
2010, none of the warrants are exercisable.
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[3] Equity Funding Commitment
On September 5, 2000, the company entered into an agreement with Swartz Private Equity, LLC
(“Swartz”) pursuant to which Swartz granted the company a $50,000,000, three-year equity funding
commitment. The agreement provided that, from time to time, at the company’s request, Swartz would
purchase from the company that number of common shares equal to 15% of the number of shares traded
in the market in the 20 business days occurring after the date of the requested purchase. The
purchase price was the lesser of 91% of the average market price during that 20 day period or the
average market price less $.20. As a commitment fee, the company granted Swartz a commitment
warrant to purchase, in the aggregate, 960,101 common shares at a price which equaled the lowest
closing price of the company common stock during the five trading days ending on each six-month
anniversary of the warrant issue date.
During 2002, 76,456 commitment warrants were exercised for proceeds of approximately $60,000.
During 2003, Swartz exercised the remaining 883,645 commitment warrants in a cashless exercise
transaction, and received 647,270 common shares.
Swartz was also issued a warrant to purchase one share of the company’s common stock for every ten
shares it purchased from the company under the agreement. During 2002, 47,992 of such warrants were
exercised for proceeds of approximately $67,000. In 2003, Swartz exercised the balance of its
purchase warrants (9,875) in a cashless exercise transaction and received 7,162 common shares.
The agreement with Swartz terminated on September 5, 2003.
[4] Common Stock Subject to Resale Guarantee
During 2002, the company issued 190,695 common shares to former officers and certain minority
shareholders of Ice Surface Development, Inc. in exchange for approximately $269,000 owed to them.
If, on the sale of the shares, the amount realized is less than $269,000, additional shares are
required to be issued and if the amount is greater than $269,000, the excess is to be paid to the
company. During 2002, all of such shares were sold for proceeds of approximately $269,000. The
company has no further liability with respect to this transaction.
[5] Class A Preferred Stock
In January 2002, the company authorized the sale of up to 2,000,000 shares of its Class A
Non-Voting Cumulative Convertible Preferred Stock (“Class A Preferred”). Each share of Class A
Preferred is convertible into one share of voting common stock and entitles the holder to
dividends, at $.40 per share per annum. The holder has the right to convert after one year subject
to board approval into one share of common stock of the Company. The Company may, in the absolute
discretion of its board, redeem at any time and from time to time from any source of funds legally
available any and all of the Class A Preferred at the Redemption Price.
In the event of any liquidation, dissolution or winding up of the company, whether voluntary or
involuntary, the holders of Class A Preferred Shares then outstanding are entitled to be paid out
of the assets of the company available for distribution to its stockholders, whether such assets
are capital, surplus or earnings, before any payment or declaration and setting apart for payment
of any amount in respect of any shares of any junior stock. All of such accumulated and unpaid
dividends will be paid in Class A Preferred Shares at a rate of 1 Class A Preferred Share for each
$4.00 of dividends. No fractions of Class A Preferred Shares shall issue. The company shall pay
cash in lieu of paying fractions of Class A Preferred Shares on a pro rata basis.
The Class A Preferred Shares will be entitled to participate on a pro rata basis in any
distribution of assets as may be made or paid on Junior Stock upon the liquidation, dissolution or
winding up of the company. A consolidation or merger of the company with or into any other
corporation or corporations or any other legal entity will not be deemed to constitute a
liquidation, dissolution or winding up of the company.
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In connection with the 2002 offering of Class A Preferred, the company granted the placement agent
5,000 Class A Warrants, exercisable for five years at an exercise price of $1.52 per share into
common stock. Such warrants were treated as a cost of the offering. Also, the placement agent was
granted 10,000 warrants for providing certain financial analysis for the company. The warrants are
immediately exercisable at $.30 per share for five years. The warrant contains a cashless exercise
feature. The company valued the warrant at $8,000 using the Black-Scholes option-pricing model and
charged operations.
The company also granted to these investors 2,500 Class A Warrants, exercisable for five years at
an exercise price of $0.01 per share. On July 8, August 14, September 11, 2003 and August 4, 2006,
the company issued 2,500, 7,480, 1,200 and 2,500 common shares, respectively, to the placement
agent upon the exercise of warrants issued in connection with this offering.
Since its designation in March 2002, the company has sold an aggregate 765,512 shares of Class A
Preferred for proceeds of $3,062,048.
Since its designation in March 2002, Class A Preferred shareholders have converted an aggregate
183,500 Class A Preferred into the company’s common stock (on a one to one basis) through December
31, 2010, with 62,500 and 51,250 Class A Preferred converted in the years ending December 31, 2010
and 2009, respectively.
Upon conversion, converting Class A Preferred shareholders are entitled to receive, in accordance
with the terms of the Class A Preferred, dividends payable either in cash or in Class A Preferred
shares calculated at the rate of 10 percent per annum.
At times, the board of the company may elect to settle the dividends through the issuance of common
stock in lieu of cash. The number of shares of common stock issued is based on the market price of
the stock of the company at the time of the conversion.
Through December 31, 2010, an aggregate Class A Preferred dividend amounting to approximately
$230,000 was settled through the issuance of 16,760 Class A Preferred and of 92,453 common shares of
the company. For the year ended December 31, 2010, the company settled Class A Preferred dividends
amounting to approximately $113,000 through the issuance of 22,883 shares of common stock and 5,421
shares of Class A Preferred stock.
For the year ended December 31, 2009, the company settled Class A Preferred dividends amounting to
approximately $53,000 through the issuance of 65,965 shares of common stock.
At December 31, 2010, dividends payable upon conversion of 582,012 outstanding shares of Class A
Preferred amounted to approximately $1,339,000.
[6] Class B Preferred Stock
On October 21, 2004, the company authorized the sale of up to 300,000 shares of its Class B
Non-Voting Cumulative Convertible Preferred Stock (“Class B Preferred”). Each share of Class B
Preferred pays cumulative dividends at $.50 per share per annum and is convertible into either one
share of the company’s common stock or one share of the common stock of the company’s subsidiary,
IsoTorque Corporation. The holder has the right to convert after one year, subject to board
approval. The Company may, in the absolute discretion of its board, redeem at any time at the
redemption price equal to the amount paid per share in cash plus any accumulated unpaid dividends.
In the event of any liquidation, dissolution or winding up of the company, whether voluntary or
involuntary, the holders of Class B Preferred Shares then outstanding are entitled to be paid out
of the assets of the company available for distribution to its shareholders, whether such assets
are capital, surplus or earnings, before any payment or declaration and setting apart for payment
of any amount in respect of any shares of any junior stock. All of such accumulated and unpaid
dividends will be paid in Class B Preferred Shares at a rate of 1 Class B Preferred Share for each
$5.00 of dividends. No fractions of Class B Preferred Shares shall be issued. The company shall pay
cash in
lieu of paying fractions of Class B Preferred Shares on a pro rata basis. Class B Preferred shares
rank junior and is classified as junior stock with respect to the Company’s Class A Preferred
shares.
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The Class B Preferred Shares will be entitled to participate on a pro rata basis in any
distribution of assets as may be made or paid on junior stock upon the liquidation, dissolution or
winding up of the company.
Since its designation in September 2004, the company has sold an aggregate 97,500 Class B Preferred
in a number of private placements for proceeds of approximately $487,500.
Since its designation, Class B Preferred shareholders have converted an aggregate 20,000 Class B
Preferred into the company’s common stock (on a one to one basis) through December 31, 2010, with
no Class B Preferred converted in the year ending December 31, 2010.
Upon conversion, converting Class B Preferred shareholders are entitled to receive, in accordance
with the terms of the Class B Preferred, dividends payable, in the discretion of the board of
directors, either in cash or in Class B Preferred shares calculated at the rate of 10 percent per
annum. Through December 31, 2010, no Class B Preferred shares have been issued to converting Class
B Preferred shareholders as a dividend.
Depending upon the company’s cash position, the company from time to time may request that a
converting preferred shareholder receiving dividends in cash consent to receive shares of
restricted common stock in lieu thereof. Through December 31, 2010, the company has issued 30,103
restricted common shares in payment of Class B dividends amounting to $24,082, based on the market
value of the Company’s stock at the time of conversion.
At December 31, 2010, dividends payable upon the conversion of 77,500 outstanding shares of Class B
Preferred amounted to approximately $204,000.
[7] Business Consultants Stock Plan
In June, 1999, the company adopted the Business Consultants Stock Plan (the “Stock Plan”). The
Plan, as amended through the year ended December 31, 2010, provides for the issuance of up to
15,000,000 common shares to be awarded from time to time to officers, directors, employees and
consultants in exchange for business, financial, legal, accounting, engineering, research and
development, technical, governmental relations and other similar services.
| Common Shares Issued to Business | ||||||||||||
| For the year ended | Consultants and Other Third Parties | Amount Charged to | ||||||||||
| December 31, | in Exchange for Services | Operations | Note | |||||||||
2010 |
2,398,264 | $ | 928,000 | |||||||||
2009 |
2,243,296 | $ | 1,603,000 | |||||||||
2008 |
1,000,348 | $ | 2,040,000 | |||||||||
2007 |
359,432 | $ | 1,245,000 | |||||||||
2006 |
983,230 | $ | 1,861,000 | A | ||||||||
2005 |
836,309 | $ | 1,874,000 | |||||||||
2004 |
469,883 | $ | 2,352,000 | |||||||||
2003 |
738,184 | $ | 832,000 | |||||||||
2002 |
1,057,455 | $ | 1,036,000 | B | ||||||||
2001 |
361,100 | $ | 1,011,000 | |||||||||
2000 |
196,259 | $ | 840,000 | |||||||||
1999 |
45,351 | $ | 327,000 | |||||||||
| A- | Includes 448,000 business consulting shares issued upon exercise of warrants for which a
compensation charge of approximately $629,000 had been previously recognized. |
|
| B- | Includes 190,965 shares issued in settlement of amounts owed of approximately $269,000 (see
Note H[15]). |
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[8] Nonmanagement Directors Plan
On October 1, 2004, the board of directors approved a Nonmanagement Directors Plan pursuant to
which each nonmanagement director is entitled to receive, if certain conditions are met, on an
annual basis for services rendered as a director, warrants to purchase 12,000 shares of the
company’s common stock at $.01 per share. In addition, the chairman of the audit committee is
entitled to receive, on an annual basis for services rendered as chairman, additional warrants for
5,000 shares of the company’s common stock at $.01 per share.
For the years ended December 31, 2004, 2005 and 2006, the Company issued an aggregate 123,500
warrants immediately exercisable for a ten year term at $.01 per common share to its nonmanagement
directors for services rendered to the board under its Nonmanagement Directors Stock Plan. For the
years ended December 31, 2004, 2005 and 2006, the Company recognized compensation expense related
to these warrants of approximately $297,000, $110,000 and $48,000, respectively. During fiscal
2005 and 2006, 21,000 and 42,000 of these warrants were exercised.
Due to changes made to the Nonmanagement Directors Plan described below, the company did not issue
any warrants under the plan for the years ended December 31, 2008 and 2007. No previously issued
warrants were exercised during the year ended December 31, 2008 and 6,000 warrants were exercised
during the year ended December 31, 2007.
On October 10, 2007, the Nonmanagement Directors Plan was modified, effective July 1, 2007, to
increase the fees payable to the company’s nonmanagement directors. As adjusted, each nonmanagement
director (a total of 4 persons) would receive $26,460 for board and committee service per annum.
The chairman of the audit committee would receive an additional $12,600 per annum and the chairman
of the nominating committee would receive an additional $5,355 per annum.
The Nonmanagement Directors Plan was also modified to provide that the chairman of the board,
chairman of the executive committee and chairman of the governance and compensation committee, one
person, will be paid an aggregate $110,000 per annum for all services rendered by him as a director
and in such capacities. The effective date for these adjustments to the plan was July 1, 2007.
On April 28, 2008, the plan was again modified to increase the compensation of the person serving
as chairman of the board, chairman of the executive committee, chairman of the governance and
compensation committee (one person) to $125,000 per annum.
On April 28, 2008, the board of directors approved a one-time payment to its chairman of the
governance and compensation committee of $46,000 for special services rendered in connection with
required compliance under the Sarbanes-Oxley Act. This amount was paid by the issuance of 19,167
common shares under the Business Consultants Plan valued at the closing price on April 28, 2008.
The company charged $46,000 to operations in connection with such services.
During the years ended December 31, 2010 and 2009, the company issued 889,195 and 377,152 common
shares under the Business Consultants Plan to satisfy payables for services rendered by the
company’s nonmanagement directors in their capacity as directors and valued these shares at
$339,000 and $290,000 for such years. Of the total shares issued in 2010 and 2009, shares valued
at $21,000 and $63,000 were for services provided and accrued for in 2009 and 2008, respectively.
[9] Shares Issued for Consulting Services
On September 17, 2005, certain consultants created a trust to enable them to sell business
consultants shares issued to them by the company under their consultant agreements. The company
issues business consultant common shares to the trust from time to time, contingent on the
performance of services by the consultants under such consulting agreements. The company fair
values the shares issued to the trust using the closing market price on the date immediately prior
to the date of issuance. Shares issued in excess of the consulting invoices are classified as
shares issued for consulting services.
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During the year ended December 31, 2009, the company issued to the trust an aggregate 899,271
business consultant common shares with an aggregate value when issued of $610,000 to satisfy the
payment of invoices submitted by the consultants for services rendered. During the year ended
December 31, 2009, the trustee sold 770,720 business consultants common shares for aggregate
proceeds of approximately $536,100 and distributed the proceeds from the trust to the consultants
in payment of invoices submitted by the consultants.
During the year ended December 31, 2010, the company issued to the trust an aggregate 104,167
business consultant common shares with an aggregate value when issued of approximately $50,000 to
satisfy the payment of invoices submitted by the consultants for services rendered. During 2010,
the trustee sold 177,495 business consultants common shares for aggregate proceeds of approximately
$83,600 and distributed the proceeds from the trust to the consultants in payment of invoices
submitted by the consultants. During March 2010, the trust was effectively terminated and the
company’s common shares were no longer used to the trust to pay for the consultants. In May 2010,
the trust returned 88,857 of undistributed common shares to the company. The company credited the
fair value of the shares returned to general and administrative expenses for approximately $45,000.
The company’s payment obligations with respect to the consultant agreements were met once it has
issued shares to the trust in accordance with directives received from the consultants and the
consultants, not the company, bear the risk of loss in the event the proceeds of stock sales by the
trustee are less than the value of the stock contributed to the trust by the company on the date of
contribution.
[10] Commercializing Event Plan
On October 13, 2006, the board of directors adopted a Commercializing Event Plan (“2006 Event
Plan”) designed to reward the company’s directors, executives and certain administrative personnel
for the successful completion of one or more commercializing events. No payments were made under
the 2006 Event Plan.
On October 31, 2007, the board of directors terminated the 2006 Event Plan and approved a new 2007
Commercializing Event Plan (the “2007 Event Plan”), effective October 10, 2007. The 2007 Event Plan
provided that upon the happening of any commercializing event, each of the directors and officers
of Torvec as well as certain management personnel shall be entitled to share equally in 6% of the
gross amounts derived or to be derived from the transaction and/or transactions constituting a
commercializing event. Upon the happening of any commercializing event, each of the company’s
engineering and security consultants shall be entitled to share equally in 2% of the gross amounts
derived and/or to be derived from the transaction and/or transactions constituting a
commercializing event. In order to actually receive payment under the 2007 Event Plan, each
participant must be both a) employed by, a consultant to or associated with the company and b)
judged to be “in good standing” with the company at the time of any and all such payments, all as
determined by the board of directors as of the date of the board’s authorization of payments to be
made.
The 2007 Event Plant specifically provides that the participants in the commercializing event plan
shall be entitled to receive payments as described in the plan regardless of the number of
commercializing events, in the aggregate or with respect to any given technology.
The company issued an aggregate 4,669 common shares with a value upon issuance of $14,000 to
participants under the 2007 Event Plan for the year ended December 31, 2009. For the year ended
December 31, 2010, the company issued an aggregate 32,077 common shares with a value upon issuance
of $13,000 to participants under the 2007 Event Plan.
The company accounts for the settlement of its commission arrangements to non-employee consultants,
directors, executives and certain administrative personnel with the issuance of its business
consulting shares under ASC 505 (Previously known as: FASB Statement 123®
“Share Based Payment”), provided that there are sufficient shares available under the business
consulting plan. Under ASC 505, the company measures commission arrangements at the fair value of
the equity instruments issued. In the event that there are insufficient shares available to settle
the obligation, the company will follow the provisions of ASC 815 (Previously known as: EITF 00-19
“Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock”). Under ASC 815,
the company will record a liability instrument for the resulting changes in fair value from the
date due to the end of each reporting period until such liability is satisfied.
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In 2007, certain engineering consultants agreed to cancel 445,000 warrants issued in 2005 and 2006
in exchange for their participation in the 2007 Event Plan. The exchange of the warrants for the
participation rights in a commercializing event did not result in an accounting charge. The
warrants at the date of the exchange were considered to have no value because the underlying
condition for vesting the warrants was not satisfied. The company determined that the fair value of
the rights to be de minimis at the date of the exchange.
Effective November 3, 2010, the company’s board of directors terminated the 2007 Event Plan. In
connection with such termination, the board of directors, on December 2, 2010, granted 360,000
common stock options to certain engineer participants in the 2007 Event Plan, exercisable for 6
years at an exercise price of $5.00 per common share. The transaction was considered a
modification of a stock-based award and the company recorded a charge of approximately $508,000.
The fair value the 360,000 options granted was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
Expected Term |
5.00 years | |||
Risk-free rate |
1.68 | % | ||
Volatility |
124.61 | % | ||
Dividend yield |
0.0 | % | ||
[11] Restricted Shares Issued for Services and Rent
From fiscal 1998 to fiscal 2008, the Company granted an aggregate 335,465 restricted shares of
common stock, valued at approximately $748,500, as payment for services and rent.
For the years ended December 31, 2010 and 2009, the company issued 118,099 and 25,173 restricted
shares of common stock, respectively, for internal accounting and financial consulting services
valued at approximately $44,000 and $19,000.
[12] 1998 Stock-Option Plan
In December 1997, the company’s board approved a Stock Option Plan (the “1998 Plan”) which provided
for the granting of up to 2,000,000 shares of common stock, pursuant to which officers, directors,
key employees and key consultants/advisors are eligible to receive incentive, nonqualified or
reload stock options which plan was ratified by the shareholders on May 28, 1998. Options granted
under the 1998 Plan are exercisable for a period of up to 10 years from date of grant at an
exercise price which is not less than the fair value on date of grant, except that the exercise
period of options granted to a stockholder owning more than 10% of the outstanding capital stock
may not exceed five years and their exercise price may not be less than 110% of the fair value of
the common stock at date of grant. Options may vest over five years.
In 1997, in connection with certain consulting agreements, the company granted an aggregate 75,000
nonqualified options at an exercise price of $5.00 per common share. The options vested at a rate
of 20% per annum and were exercisable through November 30, 2007. The company valued these options
using the Black-Scholes option-pricing method. The fair value of these options was expensed over
the term of the consulting agreements. The options expired on November 30, 2007 and were not
replaced.
In 1998, the company granted three directors an aggregate 380,000 options under the 1998 Plan, all
exercisable immediately at $5.00 per common share. These options expired on January 1, 2007. In
2001, the company granted 100,000 options to an officer in his capacity as a consultant under the
1998 Plan exercisable immediately at $5.00 per common share and with a ten years term. In
connection with this grant, the company recorded a stock compensation charge of $398,000.
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In 2002, in connection with the consulting agreements, the company granted an aggregate 727,047
options under the 1998 Plan, all exercisable immediately at $5.00 per common share. The options
were granted in payment of an aggregate $653,000 owed under the consulting agreements. These
options expired on September 30, 2007 and were not replaced.
In 2003, in connection with the same consulting agreements, the company granted 166,848 options
under the 1998 Plan, all exercisable immediately at $5.00 per common share. The options were
granted in payment of an aggregate $265,000 owed under the consulting agreements. These options
expire on December 22, 2013.
In 2003, the company granted an aggregate 225,000 options under the 1998 Plan to three directors,
all immediately exercisable at $5.00 per common share. These options expire on October 15, 2013.
In 2003, the company granted 50,000 options to a consultant under the 1998 Plan, immediately
exercisable at $2.26 per common share. In connection with this grant, the company recorded a stock
compensation charge of $46,000. These options expire on May 20, 2013.
In 2005, the company granted 100,000 options to a consultant under the 1998 Plan, immediately
exercisable at $5.00 per common share. In connection with this grant, the company recorded a stock
compensation charge of $247,000 allocated to research and development. These options expire on June
30, 2015.
By its terms, the company’s 1998 Plan terminated as to the grant of future options on May 27, 2008.
Consequently, no additional stock options will be granted under the 1998 Plan, although outstanding
options remain available for exercise in accordance with their terms. No options were granted,
expired, or exercised during the years ended December 31, 2010 and 2009.
The following table represents information relating to stock options outstanding under the 1998
Plan at December 31, 2010:
Options Outstanding and Exercisable
| Weighted | Weighted | |||||||||||
| Average | Average | Aggregate | ||||||||||
| Exercise | Remaining Life | Intrinsic | ||||||||||
| Shares | Price | in Years | Value | |||||||||
641,848 |
4.79 | 2.75 | $ | 0 | ||||||||
As of December 31, 2010, the company did not have any unrecognized stock compensation related to
unvested awards under the 1998 Plan.
[13] 2011 Stock Option Plan and Other Option Grants
On November 3, 2010 the board adopted and on January 27, 2011 the shareholders approved the 2011
Stock Option Plan (“2011 Plan”) which provides for the grant of up to 3,000,000 common stock
options to provide equity incentives to directors, officers, employees and consultants. Two types
of options may be granted under the 2011 Plan: non-qualified options and incentive options.
Non-qualified options may be granted to the company’s officers, directors, employees and outside
consultants. Incentive options may be granted only to the company’s employees, including officers
and directors who are also employees. In the case of non-qualified options, the exercise price may
be less than the fair market value of the company’s stock on the date of grant. In the case of
incentive options, the exercise price may not be less than such fair market value and in the case
of an employee who owns more than 10% of our common stock, the exercise price may not be less than
110% of such market price. Options generally are exercisable for ten years from the date of grant,
except that the exercise period for an incentive option granted to an employee who owns more than
10% of the company’s stock may not be greater than five years.
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No options were granted under the 2011 Plan during and for the year ended December 31, 2010. See
Note L for information about stock option grants under the 2011 Plan subsequent to December 31,
2010.
In 2010, the company granted stock options (outside the 2011 Plan) to acquire 5,910,000 shares of
the company’s common stock to certain of the company’s officers, directors, and engineering
consultants, at exercise prices ranging from $.36 to $5.00 per share with various vesting criteria
and expiration dates. As of December 31, 2010, 3,572,500 options were vested. For the year ended
December 31, 2010, the company recorded compensation expense of approximately $1,573,000 related to
the aforementioned options.
On September 30, 2010, the company granted a stock option for 5,150,000 common shares (included in
the aforementioned 5,910,000 options) exercisable for ten years at an exercise price of $0.36 per
common share to its newly appointed chief executive officer. The option vests and is exercisable as
follows: 1,000,000 options vest and are exercisable immediately upon grant; a second 1,000,000
options vest and are exercisable upon the trading price of the company’s common stock closing at a
minimum of $1.00 per share; a third 1,000,000 options vest and are exercisable upon the trading
price of the company’s common stock closing at a minimum of $2.00 per share; a fourth 1,000,000
options vest and are exercisable upon the trading price of the company’s common stock closing at a
minimum of $3.00 per share and the balance of the options, namely 1,150,000 options, vest and are
exercisable upon the trading price of the company’s common stock closing at a minimum of $4.00 per
share. The company valued the option using a variation of a Black-Scholes model, with the following
assumptions: (a) an average expected term of 8 years; (b) an expected forfeiture rate of 0%; (c) a
risk-free interest rate of 2.1%; (d) an average volatility of 96%; and (f) a dividend yield of 0%.
The weighted average value of a single option was determined to be $0.29. Immediate vesting was
utilized for the initial tranche and the shorter of the expected vesting period or the 51/4 years
expected service period will be utilized to amortize the expense related to each of the other
tranches, but amortization will be accelerated if the market price milestone is achieved prior to
the end of the amortization period. The company charged $873,000 to general and administrative
expense during the year ended December 31, 2010, including $841,000 for the vesting of the first
three tranches.
The weighted average grant-date fair value of all stock options granted during the year ended
December 31, 2010 was $0.40. The total grant date fair value of all stock options vested during the
year ended year ended December 31, 2010 was approximately $1,525,000.
The fair value of each option granted, excluding the 5,150,000 options granted to the Company’s CEO
that are described above, was estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions:
Expected Term |
6.74 years | |||
Expected forfeiture rate |
-0- | % | ||
Risk-free rate |
1.92 | % | ||
Volatility |
124.61 | % | ||
Dividend yield |
0.0 | % | ||
The average risk-free interest rate is based on the U.S. treasury security rate in effect as of the
grant date. The Company determined expected volatility using its historical closing stock price.
The expected life was determined using the simplified method as the Company does not believe it has
sufficient historical stock option exercise experience on which to base the expected term.
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The following tables represent information relating to non-plan stock options outstanding at
December 31, 2010:
| Options Outstanding and Expected to Vest | ||||||||||||||||
| Weighted- | Weighted- | |||||||||||||||
| Average | Average | Aggregate | ||||||||||||||
| Range | Number | Remaining | Exercise Price | Intrinsic | ||||||||||||
| Exercise Prices | Outstanding | Contractual Life | Per Share | Value | ||||||||||||
$0.36 |
5,150,000 | 9.9 | $ | 0.36 | $ | 4,790,000 | ||||||||||
$0.85-$1.07 |
400,000 | 9.9 | $ | 0.88 | $ | 165,000 | ||||||||||
$5.00 |
360,000 | 6.0 | $ | 5.00 | $ | — | ||||||||||
| 5,910,000 | 9.7 | $ | 0.68 | $ | 4,955,000 | |||||||||||
| Options Exercisable | ||||||||||||||||
| Weighted- | Weighted- | |||||||||||||||
| Average | Average | Aggregate | ||||||||||||||
| Range | Number | Remaining | Exercise Price | Intrinsic | ||||||||||||
| Exercise Prices | Outstanding | Contractual Life | Per Share | Value | ||||||||||||
$0.36 |
3,000,000 | 9.9 | $ | 0.36 | $ | 2,790,000 | ||||||||||
$0.85-$1.07 |
212,500 | 9.9 | $ | 0.90 | $ | 83,000 | ||||||||||
$5.00 |
360,000 | 6.0 | $ | 5.00 | $ | — | ||||||||||
| 3,572,500 | 9.5 | $ | 0.86 | $ | 2,873,000 | |||||||||||
As of December 31, 2010, there was approximately $779,000 of unrecognized stock compensation
expense related to unvested non-plan options expected to be recognized over the next four years.
[14] Warrants
As of December 31, 2010, outstanding warrants to acquire shares of the company’s common stock are
as follows:
| Number of | Number of | ||||||||||||
| Exercise | Warrants | Warrants | |||||||||||
| Price | Expiration | Outstanding | Exercisable | ||||||||||
| (a) | (a) | 125,000 | (a) | — | |||||||||
| $ | .75 |
None | 500,000 | (b) | — | ||||||||
| $ | .01 |
2015-2016 | 54,500 | (c) | 54,500 | ||||||||
| $ | .01 |
None | 3,000 | (d) | 3,000 | ||||||||
| $ | 5.00 |
None | 95,000 | (e) | 95,000 | ||||||||
| $ | 5.00 |
2016 | 100,000 | (e) | 100,000 | ||||||||
| $ | .01 |
None | 60,000 | (f) | 60,000 | ||||||||
| $ | .01 |
2016 | 3,750 | (g) | 3,750 | ||||||||
| $ | 1.00 |
None | 20,500 | (h) | 20,500 | ||||||||
| $ | .44 |
2020 | 400,000 | (i) | 400,000 | ||||||||
| $ | 3.75 |
2016 | 200,000 | (j) | 200,000 | ||||||||
| $ | 5.00 |
2016 | 30,000 | (k) | 30,000 | ||||||||
| $ | 5.00 |
2017 | 50,000 | (l) | 50,000 | ||||||||
| $ | 5.00 |
2017 | 100,000 | (m) | 100,000 | ||||||||
| $ | 2.50 |
2020 | 100,000 | (n) | 100,000 | ||||||||
| 1,841,750 | 1,216,750 | ||||||||||||
| (a) | Exercisable only if the company has an IPO and exercisable at the IPO price five years
from IPO. Through the year ended December 31, 2010, the company has not conducted an IPO. |
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| (b) | On April 15, 2002, the company issued 1,000,000 warrants at prices ranging from $.30 to
$.75 to its then chairman of the board of directors and chief executive officer. Of the total
warrants, 250,000 were exercisable at $.30, and 250,000 were exercisable at $.50 on the date the
then board elected the executive to the board and named
him chief executive officer. During the year ended December 31, 2002, 250,000 warrants were
exercised for $.30 per share, resulting in proceeds of $75,000. During the year ended December 31,
2003, 250,000 warrants were exercised for $.50 per share, resulting in proceeds of $125,000. The
remaining 500,000 warrants are exercisable upon the execution by the company of a binding agreement
for the sale, transfer, license or assignment for value of any and/or all of its automotive
technology at $.75 per share. The company will record a charge representing the fair value of the
warrants when the warrants become exercisable. |
|
| (c) | The company has issued an aggregate 123,500 warrants at an exercise price of $0.01 with a
ten year term to its nonmanagement directors for services rendered to the board under its
Nonmanagement Directors Stock Plan prior to its amendment on October 13, 2006. No further warrants
are issuable under the Plan as modified by the board of directors on October 13, 2006 (See Note H
[8]). An aggregate 69,000 warrants have been exercised for proceeds of $690. |
|
| (d) | In 2005, the company issued 12,500 warrants to consultants, immediately exercisable at
$0.01 per common share. During 2005 and 2006, 3,500 of these warrants were exercised. During the
year ended December 31, 2010, an additional 6,000 of these warrants were exercised. The 3,000
remaining outstanding warrants have no expiration date. |
|
| (e) | In 2005, the company issued 95,000 warrants to two engineering and administrative
consultants, exercisable immediately at $5.00 per common share. During 2006, the company issued an
additional 100,000 warrants to these same consultants exercisable over a ten year term at $5.00 per
common share, but only exercisable if there is a commercializing event as determined by the board
of directors. During 2008, these warrants were cancelled and new warrants were issued to the same
consultants for an aggregate 195,000 shares exercisable until 2016 at $5.00 per common share and
conditioned upon the happening of a commercializing event as determined by the board. The company
recorded a charge of $249,000 in 2008 to general and administrative expense. In 2010, 95,000 of the
total number of 195,000 warrants issued to these consultants were modified to eliminate both the
term and the commercializing event condition for exercise. The charge related to the modification
was insignificant. |
|
| (f) | During 2005, the company issued 60,000 warrants to an engineering consultant exercisable
immediately at $5.00 per common share and with no expiration date. |
|
| (g) | During 2005, the company issued 62,500 warrants to investors in connection with their
purchase of 62,500 Class A Preferred, immediately exercisable at $.01 per common share and with a
ten year term. During 2006, the company issued 135,849 warrants to investors along with their
purchase 162,000 Class A Preferred and 20,000 Class B Preferred, all immediately exercisable at
$.01 per common share and with a ten year term. At December 31, 2010 an aggregate 194,599 of these
warrants have been exercised for proceeds of approximately $1,258. No additional warrants were
exercised in the years ended December 31, 2010 and 2009. |
|
| (h) | During 2006, one investor purchased 20,500 warrants with no expiration date at $1.00 per
common share for a purchase price of $2,000. |
|
| (i) | During 2006, the company issued 400,000 warrants immediately exercisable for ten years at
an exercise price of $3.27 per common share to a business consultant. Effective October 15, 2010,
these warrants were modified and reissued upon the mutual agreement of the parties. Effective
October 15, 2010, the company issued 400,000 warrants immediately exercisable at $.44 per common
share for a period of ten years from the modification date. The company recorded a charge of
$68,000 to general and administrative expenses using the Black-Scholes inputs shown below to
calculate the value of the warrants. |
Expected Term |
10.00 years | |||
Risk-free rate |
2.59 | % | ||
Volatility |
124.61 | % | ||
Dividend yield |
0.0 | % | ||
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| (j) | During 2006, the company issued 200,000 warrants immediately exercisable for ten years at an
exercise price of $3.75 per common share to a former governmental affairs consultant. |
|
| (k) | In 2006, the company issued 30,000 warrants to consultants exercisable immediately for a
ten year term at $5.00 per common share. |
|
| (l) | During 2007, the company issued 50,000 warrants exercisable for ten years at $5.00 per common
share upon the happening of a commercializing event. The warrants were issued to a consultant who
assisted the company to potentially place its products in various state school bus programs. The
company recorded a charge of $249,000 to general and administrative expenses. |
|
| (m) | During 2007, the company issued 100,000 warrants immediately exercisable for ten years at
an exercise price of $5.00 per common share to two engineering consultants in connection with the
company’s engagement to furnish constant velocity joints to a military contractor. The company
recorded a charge of $401,000 to general and administrative expenses. |
|
| (n) | On February 17, 2010, the company issued 100,000 common stock warrants exercisable for ten
years at an exercise price of $2.50 per common share to an adviser. The company recorded a charge
of $45,000 to general and administrative expenses using the Black-Scholes inputs shown below to
calculate the value of the warrants. |
Term |
10.00 years | |||
Risk-free rate |
3.74 | % | ||
Volatility |
122.25 | % | ||
Dividend yield |
0.0 | % | ||
The following summarizes the activity of the company’s outstanding warrants for the years ended
December 31, 2010:
| Weighted | ||||||||||||||||
| Weighted | Average | |||||||||||||||
| Average | Remaining | Aggregate | ||||||||||||||
| Exercise | Contractual | Intrinsic | ||||||||||||||
| Shares | Price | Term | Value | |||||||||||||
Outstanding at January 1, 2010 |
1,753,750 | $ | 2.84 | 6.65 years | ||||||||||||
Granted |
500,000 | 0.85 | 9.80 years | |||||||||||||
Exercised |
(6,000 | ) | 0.01 | — | ||||||||||||
Canceled or expired |
(406,000 | ) | 3.27 | — | ||||||||||||
Outstanding at December 31, 2010 |
1,841,750 | $ | 2.18 | (A) | 7.79 years | (B) | $ | 694,000 | ||||||||
Exercisable at December 31, 2010 |
1,216,750 | $ | 2.77 | 7.79 years | (C) | $ | 424,000 | |||||||||
| A) | The weighted average exercise price for warrants outstanding as of December 31, 2010
excludes 125,000 warrants with no determined exercise price. |
|
| B) | The weighted average remaining contractual term for warrants outstanding as of
December 31, 2010 excludes 803,500 warrants with no expiration date. |
|
| C) | The weighted average remaining contractual term for warrants exercisable as of
December 31, 2010 excludes 178,500 warrants with no expiration date. |
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[15] Warrants Issued to Business, Financial and Engineering Consultants
In 2005, the Company issued 12,500 warrants to certain consultants, with an exercise price of $0.01
and valued at approximately $43,000. 3,500 of these warrants were exercised in 2005 and 2006. 6,000
of these warrants were exercised during the year ended December 31, 2010.
During the year ended December 31, 2005, the company issued 210,000 warrants valued at
approximately $377,000 to certain engineering consultants, immediately exercisable over a ten year
term at an exercise price of $5.00 per common share. The engineering consultants holding 150,000 of
these warrants agreed to cancel them in the fourth quarter of 2007 in exchange for their
participation in the company’s 2007 Commercializing Event Plan. (See Note H [16].)
In connection with its business and financial operations for the year ended December 31, 2006, the
company issued 91,583 warrants valued at approximately $167,000 to a number of business and
financial consultants. Such warrants are immediately exercisable at $.01 per common share, each
with a ten year term. During the year ended December 31, 2006, 91,083 of these warrants were
exercised for proceeds of $910 and the remaining 500 warrants were exercised during the year ended
December 31, 2007 for proceeds of $5.00.
In 2006, the company issued 30,000 warrants valued at approximately $168,000 immediately
exercisable over a ten year term at $5.00 per common share to certain design engineers.
The company issued 400,000 warrants valued at approximately $1,237,000 to a business consultant on
August 18, 2006, immediately exercisable over a ten year term at an exercise price of $3.27 per
common share. These warrants were modified and reissued upon mutual agreement of the parties
effective October 15, 2010 (see Note H[14]).
On November 21, 2006, the company issued 200,000 warrants valued at approximately $948,000 in
connection with the engagement of a governmental affairs consultant, immediately exercisable over a
ten year term at an exercise price of $3.75 per common share.
During the year ended December 31, 2006, the company issued 295,000 warrants to certain engineering
consultants, exercisable over a ten year term at an exercise price of $5.00 per common share but
only if the company were to consummate a commercializing event involving a transaction or series of
transactions which results in the sale, license or other technology transfer of one or more of its
technologies to a third party for value. These warrants are contingent upon an event occurring in
the future and the company will fair value these warrants when the contingency is resolved. The
engineering consultants holding 295,000 of these warrants agreed to cancel them in the fourth
quarter of 2007 in exchange for their participation in the company’s 2007 Commercializing Event
Plan. (See Note H [15].)
In 2007, the company issued 50,000 warrants, valued at approximately $249,000, immediately
exercisable for ten years at an exercise price of $5.00 per common share upon the happening of a
commercializing event. The warrants were issued to a consultant who assisted the company to
potentially place its products in various state school bus programs.
In 2007, the company issued 100,000 warrants, valued at approximately $401,000, immediately
exercisable for ten years at an exercise price of $5.00 per common share to engineering
consultants.
In 2008, the company issued 195,000 warrants, valued at approximately $249,000, immediately
exercisable for ten years at an exercise price of $5.00 per common share to engineering
consultants. In 2010, 95,000 of the total 195,000 warrants issued to these consultants were
modified to eliminate the ten-year term and the commercializing event condition for exercise. The
charge related to the modification was insignificant. (See Note (H [14e].)
In 2010, the company issued a warrant for 100,000 common shares exercisable for 10 years at $2.50
per common share to business consultants.
In 2010 and 2009, 6,000 and 12,500 common stock warrants were exercised for proceeds of $60 and
$125, respectively. (See Note (H [14].)
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[16] Issuance of Stock and Warrants by Subsidiary
In 2003, the company’s majority-owned subsidiary, Ice Surface Development, Inc. issued 308,041
shares of its common stock at a price of $.76 per share and realized aggregate proceeds of $234,000
in a private placement. These issuances reduced the company’s interest in Ice from 72% to
approximately 69.26%. Based upon the company’s accounting policy, the change in the company’s
proportionate share of Ice’s equity resulting from the additional equity raised by the subsidiary
was accounted for as a capital transaction.
In connection with the private placement, Ice issued 53,948 warrants to the placement agent
immediately exercisable at $.76 per common share through June 9, 2007. In addition, 50,000 warrants
were issued by Ice to a consultant immediately exercisable at $.76 per common share through June 9,
2007. In connection with the issuance of these warrants, a compensation charge of $36,000 was
recognized.
These warrants were cancelled effective June 7, 2007 upon the adoption by Ice’s shareholders of a
Plan for the Complete Liquidation and Dissolution of Ice.
NOTE I — COMMITMENTS AND OTHER MATTERS
[1] Variable Gear, LLC
Under the operating agreement of Variable Gear, LLC, the company was required to purchase the 51%
membership interest it did not own in such entity by January 1, 2007 at the then fair market value
as defined. Since inception, Variable Gear generated no revenues, incurred no expenses and had no
operations. On June 3, 2007, the company and the 51% owner agreed that his entire membership
interest would be purchased in exchange for 5,000 common shares of the company, valued at the close
of trading on such date ($19,250 based upon a $3.85 per common share close). The transaction was
finalized on June 6, 2007.
The company has recorded the purchase of the membership interest as additional goodwill. The
company also recorded the deferred revenue of $150,000 as other income at June 30, 2007 because all
of the company’s obligations regarding this payment have been met. Since there are no operations of
the Variable Gear entity since inception, the company has concluded that there is no future benefit
to the purchased interest and has impaired the goodwill and recorded a charge of $19,000 at June
30, 2007.
[2] Leases
The company leases a facility located at 1999 Mount Read Blvd., Rochester, New York. On April 29,
2008, the company executed a five-year lease for the premises (with a December 1, 2007 lease
commencement date) providing for rent to be paid at a rate of $5,687 per month ($68,244 per annum)
and in addition, for the payment of the company’s proportionate share of yearly real estate taxes
and yearly common area operating costs. (See Note D[4].)
Under the lease, monthly rental payments commenced June 1, 2008. The lease contains three 5-year
renewal options and grants an option to the company to lease additional adjacent manufacturing and
assembly space.
Rental payments and certain other payments due to the landlord are to be paid in cash or common
shares of the company, based upon the closing price per share on the 15th day
of the calendar month immediately prior to the date any installment payment of monthly rent or
other payment is due landlord.
Rent expense for the years ended December 31, 2010 and 2009 was approximately $90,500 and $58,500,
respectively.
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[3] Employment Agreements
Effective October 4, 2010, the company appointed a new chief executive officer and executed a five
year employment agreement pursuant to which the company will pay base compensation of $50,000 per
annum, which compensation increases to $200,000 per annum on the first day of the calendar year
immediately following the calendar year in which the company has adjusted EBITDA of at least
$300,000 (earnings before interest, taxes, depreciation and amortization, but excluding all
non-cash expenses associated with stock options). Under the agreement, the executive is entitled to
a performance bonus based upon financial targets established each year in good faith by the
Governance and Compensation Committee and the achievement of individual management objectives
established annually by such committee. The executive is entitled to participate in all employee
benefit plans as are provided from time to time for senior executives. If the company terminates
the executive, removes him
as CEO, or a change in control of the company occurs, the executive is entitled to three years’
severance pay, consisting of base pay and any incentive compensation.
On September 30, 2010, the company granted a non-plan stock option for 5,150,000 common shares
exercisable for ten years at an exercise price of $0.36 per common share to its newly appointed
chief executive officer. The option vests and is exercisable as follows: 1,000,000 options vest and
are exercisable immediately upon grant; a second 1,000,000 options vest and are exercisable upon
the trading price of the company’s common stock closing at a minimum of $1.00 per share; a third
1,000,000 options vest and are exercisable upon the trading price of the company’s common stock
closing at a minimum of $2.00 per share; a fourth 1,000,000 options vest and are exercisable upon
the trading price of the company’s common stock closing at a minimum of $3.00 per share and the
balance of the options, namely 1,150,000 options, vest and are exercisable upon the trading price
of the company’s common stock closing at a minimum of $4.00 per share.
Effective October 18, 2010, the company engaged a new chief financial officer under a letter
agreement dated October 18, 2010 pursuant to which the company will pay annual compensation equal
to $125,000, with increases of $25,000 per annum effective April 1, 2011, October 1, 2011 and
January 1, 2012. The executive also was granted a non-plan stock option exercisable for 10 years to
acquire 250,000 shares of the company’s common stock at $0.85 per share. The option vests and is
exercisable as follows: 62,500 options vest and are immediately exercisable upon grant; 62,500
options vest and become exercisable on each of October 18, 2011, 2012 and 2013. If the company
terminates the executive, removes him as CFO, or a change in control of the company occurs, the
executive is entitled to 12 months’ severance pay.
[4] Consulting Agreements
Effective July 1, 2010, the company engaged the services of a consulting firm to provide expertise
in local, state and federal governmental relations, to advise the company with respect to media
relations, business development and in negotiating with industry representatives. The company has
agreed to pay the consultant an annual retainer of $48,000 to be paid in quarterly installments of
$12,000 beginning July 1, 2010. The agreement is for a one year term.
Effective July 1, 2010, the company engaged a consultant to provide the company with assistance in
the development of strategic plans, financial modeling, licensing agreements, partnership
agreements and general funding opportunities. The company has agreed to pay the consultant an
annual retainer equal to $34,500 to be paid in quarterly installments of $8,625 beginning July 1,
2010. The company also agreed to pay the consultant a commission equal to 4% of the value received
by the company from third parties introduced by or through the auspices of the consultant. The
agreement is for a two year term.
NOTE J — LITIGATION
On October 31, 2008, the company commenced an action in New York Supreme Court, County of New York,
Commercial Division against Ice Engineering, LLC seeking the total balance owed by Ice Engineering
to the company pursuant to an assignment agreement entered into by the parties, effective June 15,
2007, whereby the company assigned all of its rights and interest in an ice technology license
granted by Dartmouth College to Ice Engineering in exchange for a 2.8% royalty interest and a cash
reimbursement of $3,500,000. The suit was commenced after the company had been paid approximately
$800,000 in reimbursement monies.
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On January 27, 2010, the company and Ice Engineering settled this litigation. Under the settlement
agreement, the company’s assignment of the ice technology license is made permanent; the company
elected to forego its right to royalties and agreed to receive $1,100,000, with $300,000 paid to
the company by Ice Engineering on January 27, 2010 and $800,000 paid to the company by Ice
Engineering by February 26, 2010. The company received the entire $1,100,000 due under the
settlement agreement by the due dates specified in the settlement agreement.
The recovery of $1,100,000 received during January and February 2010 was recorded as other income
during the quarter ended March 31, 2010. The $800,000 received in 2007 and 2008 was previously
recorded as deferred
income and, upon settlement of this litigation, was reflected as other income during the quarter
ended March 31, 2010. (See Note C).
NOTE K — ROYALTY AGREEMENT
On December 12, 2007, the company granted High Density Poweretrain, Inc. of Waterford, Michigan
(“HDP”) an exclusive, worldwide license to incorporate the company’s constant velocity joint
technology in HDP’s family of highly-powered, multifueled, fuel efficient, light weight, cost
effective internal combustion engines. In consideration for the grant of the license, the company
will receive annual royalties equal to 5% of annual gross revenues generated by the sale of HDP’s
multifuel engines, including all sublicense of such technology. There are no minimum royalty
payments and the grant does not affect the company’s ability to commercialize its constant velocity
joint technology in any other field and/or application. For the years ended December 31, 2010 and
2009, the company did not receive any royalties under this agreement.
NOTE L — SUBSEQUENT EVENTS
On January 27, 2011, the company’s shareholders approved the issuance of stock options to 5
directors each for 250,000 common shares exercisable at $.90 per common share. Each option is
conditioned upon the optionee serving as a director and vests in four tranches of 62,500 shares on
each of the four anniversary dates of January 27, 2011. The optionee must exercise each 62,500
tranche within two and one-half months following the calendar year in which the tranche vests or
lose the tranche.
Also, on January 27, 2011, the company’s shareholders approved the issuance of stock options for
100,000 common shares to a consultant acting in the capacity as a special adviser to the board. The
options are exercisable at $.90 per common share. Each option is conditioned upon the optionee
continuing to serve as a consultant and vests in four tranches of 25,000 shares on each of the four
anniversary dates of January 27, 2011. The optionee must exercise each 25,000 tranche within two
and one-half months following the calendar year in which the tranche vests or lose the tranche.
Effective January 28, 2011, the company’s board of directors appointed Wesley K. Clark as a member
of the board of directors. The company’s board voted to grant Gen. Clark a stock option for 250,000
common shares effective January 28, 2011 exercisable at $.90 per share. The option is conditioned
upon Gen. Clark serving as a director and vests in four tranches of 62,500 shares on each of the
four anniversary dates of January 28, 2011. The optionee must exercise each 62,500 tranche within
two and one-half months following the calendar year in which the tranche vests or lose the tranche.
The company’s board also voted to grant Gen. Clark a stock option for 25,000 common shares
effective January 28, 2011 exercisable at $.90 per share. This 25,000 share option vests
immediately and is exercisable for 10 years.
On January 28, 2011, the company announced that it has entered into a contract with a West Virginia
remanufacturer of components for the mining and associated industrial equipment industry to
develop, evaluate, manufacture and sell Torvec’s IsoTorque® differential technology in mining
shuttle cars. The contract calls for Torvec to design and build a prototype IsoTorque® unit for
installation in a 21 SC model mining shuttle car. The remanufacturer will pay Torvec $120,000 for
the initial development. Upon successful completion of the prototype phase, the parties have agreed
that Torvec will sell 100% of the differential requirements for all 21 SC model mining shuttle cars
remanufactured by the remanufacturer on an exclusive basis. Minimum purchase requirements will be
established after the first anniversary of the agreement.
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| Item 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE |
None.
| Item 9A | CONTROLS and PROCEDURES |
Richard A. Kaplan and Robert W. Fishback, as of December 31, 2010, the company’s chief executive
officer and chief financial officer, respectively, have informed the board of directors that, based
upon each of their evaluations of the company’s disclosure controls and procedures as of the end of
the period covered by this annual report (Form 10-K), such disclosure controls and procedures were
effective to ensure that information required to be disclosed by the company in the reports it
submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to
management (including the chief executive officer and interim chief financial officer) as
appropriate to allow timely decisions regarding required disclosure.
REPORT ON MANAGEMENT’S ASSESSMENT OF INTERNAL CONTROL OVER
FINANCIAL REPORTING
FINANCIAL REPORTING
Management of the company is responsible for establishing and maintaining an adequate system of
internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f)
promulgated under the Securities Exchange Act of 1934, as amended. The company’s internal control
over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of the company’s consolidated financial
statements. Our internal control over financial reporting is supported by a program of appropriate
reviews by management, written policies and guidelines, careful selection and training of qualified
personnel, and a written code of conduct adopted by our company’s board of directors, applicable to
all company directors and all officers, consultants and employees of our company.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements and even when determined to be effective, can only provide reasonable
assurance with respect to financial statement preparation and presentation. Also, projections or
any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate. The audit committee of our company’s board of directors meets with the
company’s independent registered public accounting firm and management periodically to discuss
internal control over financial reporting, auditing and financial reporting matters. The audit
committee reviews with the company’s independent registered public accountants the scope and the
results of the audit effort. The audit committee also meets periodically with such accountants and
the company’s chief internal accountant without management present to ensure that the independent
registered public accountants and the company’s chief internal accountant have free access to the
audit committee. The audit committee’s report can be found in the definitive proxy statement issued
in connection with the company’s 2010 annual meeting of shareholders.
Management assessed the effectiveness of the company’s internal control over financial reporting as
of December 31, 2010. In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission in “Internal Control—Integrated
Framework.” Based upon our assessment, management concluded that as of December 31, 2010 internal
control over financial reporting was effective.
As of December 31, 2009, our Audit Committee was advised by EisnerAmper LLP (formerly Eisner LLP),
our independent registered public accounting firm, that during their performance of audit
procedures for 2009, EisnerAmper LLP (formerly Eisner LLP) identified material weaknesses as
defined in Public Company Accounting Oversight Board Standard No. 5 in our internal control over
financial reporting. Based on our evaluation as of December 31, 2009, our management concluded that
there were material weaknesses in our internal control over
financial reporting. The material weaknesses identified did not result in the restatement of any
previously reported financial statements nor did management believe that it had any effect on the
accuracy of the Company’s financial statements for the current reporting period. A material
weakness is a deficiency, or a combination of control deficiencies, in internal control over
financial reporting such that there is a reasonable possibility that a material misstatement of the
Company’s annual or interim financial statements will not be prevented or detected on a timely
basis.
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The material weaknesses as of December 31, 2009 related to the a) preparation of the income tax
disclosures including the related components of our deferred tax assets, b) accounting for equity
transactions, resulting in the Company providing price protection to consultants which is
inconsistent with its disclosed policy and c) preparation of financial statements and related
footnotes and financial data provided to the Company’s independent registered public accounting
firm in connection with the annual audit. While we engage outside consultants to assist us in
preparing our tax provision, our financial statements and related disclosures; we did not have
proper review controls to monitor such processes
During 2010, our management took appropriate and reasonable steps to make the necessary
improvements to remediate the material weaknesses identified as of December 31, 2009. Along with
improving the controls around each of the specific material weaknesses described previously, we
have substantially improved our focus on our control environment with the addition of a new Chief
Financial Officer in October 2010.
This annual report does not include an attestation report of the company’s independent registered
public accounting firm regarding internal control over financial reporting. Management’s report was
not subject to attestation by the company’s independent registered public accounting firm pursuant
to rules of the Securities and Exchange Commission that permit the company to provide only
management’s report in this annual report.
This report shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange
Act of 1934, or otherwise subject to the liabilities of that section, and is not incorporated by
reference into any filing of the Company, whether made before or after the date hereof, regardless
of any general incorporation language in such filing.
| Item 9B. | OTHER INFORMATION |
None.
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PART III
| Item 10. | DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT |
(a) Identification of Directors, Executive Officers And Consultants
The following table sets forth certain information about the current directors and executive
officers of the company as of December 31, 2010 (with respect to Wesley K. Clark, January 28, 2011)
| Date of Election or | ||||||||
| Director | Principal Occupation | Age | Designation** | |||||
| Gary A. Siconolfi
325 VanVoorhis Avenue Rochester, NY 14617 (1) |
Chairman of the Board
|
59 | 10/31/02 | |||||
| Richard A. Kaplan
112 Heatherstone Lane Rochester, New York 14618 (2) |
Chief Executive Officer
|
65 | 9/30/10 | |||||
| Keith E. Gleasman
11 McCoordwoods Drive Fairport, NY 14450 (3) |
President, Vice-President of
Marketing
|
63 | 09/26/96 | |||||
| Thomas F. Bonadio
1 Country Club Drive Rochester, New York 14618 (4) |
Chief Executive Officer, Managing Partner of Accounting Firm |
61 | 11/22/10 | |||||
| Wesley K. Clark
116 Ottenheimer Plaza Little Rock, Arkansas 72201 (5) |
Author, Commentator, Investment Banker |
66 | 1/28/11 | |||||
| William W. Destler, Ph.D.
One Lomb Memorial Drive Rochester, New York 14623 (6) |
College President
|
64 | 9/15/09 | |||||
| Asher J. Flaum
49 Sunrise Park Pittsford, New York 14534 (7) |
Real Estate Developer
|
30 | 10/10/08 | |||||
| John W. Heinricy
8850 Tipsico Lake Road Holly, Michigan 48442 (8) |
President, International Automotive Consulting Firm |
63 | 11/3/10 | |||||
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| Date of Election or | ||||||||
| Director | Principal Occupation | Age | Designation** | |||||
| Charles N. Mills
121 Sandringham Road Rochester, New York 14610 (9) |
Real Estate Developer
|
72 | 11/3/10 | |||||
| E. Philip Saunders
10709 Sugar Creek Road Rochester, New York 14437 (10) |
Board Chairman of Regional
Bank
|
73 | 11/3/10 | |||||
| ** | Changes in Control — To the best knowledge of the company’s management, there are no
present arrangements or pledges of the company’s common stock which may result in a change of
control of the company. Under the company’s bylaws, the members of the board of directors serve
until the next annual meeting of shareholders and until their successors have been elected or
appointed and shall have qualified, or until their prior resignation or termination. All directors
were reelected to the board at the annual meeting of shareholders held on January 27, 2011. |
(b) Business Experience
| (1) | Mr. Siconolfi was the owner and general manager of Panorama Dodge, Inc., Penfield, New York
from 1984-1995 and of Panorama Collision, Inc., East Rochester, New York from 1989-1995. He
started and managed a highly successful auto/truck dealership and collision business, building
the business to annual sales of $20 million, with 5 departments and 65 employees. |
Prior to opening the dealership and collision business, Mr. Siconolfi acquired an excellent
foundation in the automotive business, working in sales, sales management and general management
at Vanderstyne Ford, Schrieber Buick, Judge Motor Corporation and Meisenzahl Auto Parts, all in
the Rochester area. He has completed 100+ programs sponsored by Chrysler Corporation, Ford Motor
Company and General Motors in fields such as management, sales management, sales, customer
relations, human resources and service training. He earned numerous awards given by these
companies. |
A very active participant in his community, Mr. Siconolfi is currently involved in commercial
real estate. |
| (2) | Richard Kaplan is the former president of Richland Industries, Inc., a retail floor covering
chain; chairman and co-founder of Resnick Media Associates, Inc., an advertising and marketing
agency; chairman and co-founder of Blanton Communications, Inc., a computer software company;
president of RAK Realty Corporation, a real estate development company; chairman and founder
of WorkSmart International, Inc., a human resource development,publishing and training company
for multi-market, multinational corporations and organizations. He was also chairman and
founder of Maxim Group Inc., a publicly held company previously listed on the New York Stock
Exchange. |
Mr. Kaplan is on the boards of two startup companies: Cerebral Assessment Systems and Vnomics
Corp. |
Mr. Kaplan serves as vice-president of the Rochester Angel Investment Network, is former
chairman of the Rochester Broadway Theatre League, vice-chairman of the Better Business Bureau
and is, or has been, active in community organizations such as Sojourner House, Rochester’s
Child, the Martial Arts Center of Rochester, the Center for Governmental Research, Camp Good
Days and Special Times and was former chairman of the Monroe County division of The American
Cancer Society. |
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Mr. Kaplan is a member of the Board of Trustees of Rochester Institute of Technology and
Nazareth College. He is also chairman of the board of advisors at RIT’s Chester F. Carlson
Center for Imaging Science as well as serving as a member of the University of Rochester’s
Economic Development Board. |
Mr. Kaplan’s business success and contributions within the community have been recognized by
multiple awards, including the prestigious Herbert W. Vanden Brul Entrepreneurial Award
presented by RIT’s E. Philip Saunders College of Business in April 2007. Other recipients
include B. Thomas Golisano, Robert Wegman, Arunas Chesonis, E. Philip Saunders, Wayne LeChase
and James Hammer. Mr. Kaplan was also designated the“Business Man of the Year” in 2007. |
Mr. Kaplan is the author of a book entitled “A Time for CARING” which delineates the causes
of many of the problems confronting American society in the 21st century and provides concrete
solutions for the remediation of such problems. |
Mr. Kaplan has an extensive background in economics, accounting, management and executive
leadership. He is regularly sought out by startups, universities and other organizations for
which he has done private consulting and guest lecturing on marketing, economics and
organizational development. |
| (3) | Keith E. Gleasman is co-inventor with Vernon E. Gleasman on all Torvec patents. Mr.
Gleasman’s strengths include his extensive marketing and sales executive experience, in
addition to his design and development knowledge. His particular expertise has been in the
area of defining and demonstrating the products to persons within all levels of the automotive
industry, race crew members, educators and students. |
As former Vice President of Sales for the unrelated Gleason Corporation (Power Systems
Division), designed and conducted seminars on vehicle driveline systems for engineers at the
U.S. army tank automotive command. |
Mr. Gleasman’s accomplishments include: a) Designing a complete nationwide after-market program
for the Torsen differential, which included trade show participation for the largest
after-market shows in the U.S., SCORE and SEMA; b) Developing extensive after-market experience
including pricing, distribution, sales catalogs, promotions, trade show booths designs and
vehicle sponsorships; c) publishing over 300 articles in trade magazines highlighting the Torsen
differential (e.g., Popular Science, Auto Week, Motor Trend, Off-Road, and Four Wheeler); d)
designing the FTV vehicle (from concept to assembly); and e) assisting in the development and
manufacturing procedures for the Torsen differential and for all of the Torvec products. Mr.
Gleasman has also instructed race teams on use of the Torsen differential (Indy cars, Formula 1,
SCCA Trans-Am, IMSA, GTO, GTU, GT-1, NASCAR, truck pullers and off-road racers), and has been
trained for up-to-date manufacturing techniques such as NWH, statistical process control and MRP
II. |
Mr. Gleasman has extensive technical and practical experience, covering all aspect of the
company’s products such as, promotion, engineering and manufacturing. |
| (4) | Thomas F. Bonadio is Managing Partner of The Bonadio Group which he founded in 1978 with one
partner and one part-time employee (his mother). With 325 people in six offices, The Bonadio
Group has grown to be the largest independent provider of accounting, business advisory and
financial services in upstate New York. As founder and managing partner, Mr. Bonadio has been
the driver behind the firm’s growth and diversification, growing from a firm offering only
public accounting and auditing services to a multi-dimensional accounting, business advisory
and financial services organization. |
Mr. Bonadio has a B.B.A. degree in accounting from St. John Fisher College and was certified
as a CPA in 1973. He is a member of the American Institute of Certified Public Accountants, the
New York State Society of Certified Public Accountants and the National Association of Certified
Valuation Analysts. He was named a “CPA ALLSTAR” by CPA Magazine, an “Outstanding Alumni” by St.
John Fisher and received The Point of Light Foundation Award, sponsored by President George W.
Bush. Mr. Bonadio was named the 2009 “Business Person of the Year” by the Small Business Council
and inducted into the Rochester Business Hall of Fame in 2010. |
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Mr. Bonadio has served as chairman of the Board of Trustees of St. John Fisher College and
chairman of the College’s Accounting Advisory Board. He is chairman of the Audit Committee of
Conceptus, a NASDAQ-listed company and a board member of Eagle Productivity Solutions, CLIX
Photo, Moore Stephens North America and Windsor Technology. |
Mr. Bonadio has been active for many years in various charitable, cultural and professional
organizations, including Junior Achievement, United Way, Small Business Council’s CEO
Roundtable, the City of Rochester City Budget Review Committee and the Athena Awards. |
| (5) | During 34 years of service in the United States Army, Wesley K. Clark rose to the rank of
four-star general as NATO’s Supreme Allied Commander, Europe. After his retirement in 2000, he
became an investment banker, author, commentator and businessman. In September 2003 he entered
politics as a Democratic candidate for president of the United States. His campaign won the
state of Oklahoma before he returned to the private sector in February 2004. |
In his final military command, Clark commanded Operation Allied Force, NATO’s first major combat
action, which saved 1.5 million Albanians from ethnic cleansing in Kosovo. He was also
responsible for the peacekeeping operation in Bosnia. |
Clark’s awards and honors include the Presidential Medal of Freedom, the State Department
Distinguished Service Award, the U.S. Department of Defense Distinguished Service Medal (five
awards), the U.S. Army Distinguished Service Medal(two awards), the Silver Star, the Bronze
Star, the Purple Heart, and Honorary Knighthoods from the British and Dutch governments. |
He is the author of two books and is seen as a guest commentator on many national news programs. |
Clark graduated from the U.S. Military Academy in 1966 as valedictorian of his class, and
completed two degrees at Oxford University as a Rhodes Scholar. He is also a graduate of the
Ranger and Airborne schools. |
Today, Clark is an investment banker and is active in the finance, technology and energy fields.
He currently serves in leadership roles with a number of for profit and non-profit
organizations, including Chairman of New York investment bank Rodman and Renshaw, Chairman of
Wesley K. Clark and Associates, a strategic consulting firm, Trustee of the International
Crisis Group, and Chairman of City Year Little Rock, as well as a member of other private and
public boards. |
| (6) | Dr. William W. Destler became president of Rochester Institute of Technology on July 1, 2007.
He is the ninth president in the university’s 178-year history. He was formerly senior vice
president for academic affairs and provost of the University of Maryland at College Park. |
At RIT, Dr. Destler is responsible for one of the nation’s leading career-oriented universities
with 16,450-students from all 50 states and more than 100 foreign countries, 2,800 faculty and
staff, an annual operating budget of more than $492 million, and an endowment of more than $600
million. The university has one of the oldest and largest cooperative education programs in the
country. |
Dr. Destler serves on the American Council on Education’s Commission on Effective Leadership and
is a board member for the National Institute of Aerospace Foundation. He is a member of the
board of directors for New York’s Commission on Independent Colleges and Universities. He also
serves on community boards in Rochester: Rochester General Health System, Greater Rochester
Enterprise, Rochester Business Alliance, Golisano Family Foundation and High Tech of Rochester,
and Torvec Inc. |
Prior to RIT, Dr. Destler spent more than 30 years at the University of Maryland, rising from
the ranks of research associate and assistant professor of electrical engineering to senior vice
president and provost. At Maryland, he also served as electrical engineering department chair,
dean of the A. James Clark School of Engineering, interim vice president for university
advancement, vice president for research, and dean of the graduate school. |
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As engineering school dean, Dr. Destler created the Gemstone Program, a multidisciplinary
four-year research program for undergraduate honors students of all majors in which teams of
students design, direct and conduct research exploring the interdependence of science and
technology with society. During his term as graduate school dean, student applications increased
by more than 20 percent and research funding rose by more than 30 percent. While interim vice
president for advancement, Dr. Destler was credited with securing a $25 million gift from
Comcast Corp. for naming rights supporting the construction of the Comcast Center sports arena.
As senior vice president for academic affairs, retention increased and the graduation rate rose
from 62 percent to 80 percent over five years. Other achievements at Maryland include leading a
faculty team in the creation of a cross-disciplinary master’s degree program in
telecommunications; originating the Hinman CEOs Program, a living-learning entrepreneurship
initiative for undergraduate students; and involvement in the President’s Promise, an
outside-the-classroom experiential program for freshmen. |
Dr. Destler is an international authority on high-power microwave sources and advanced
accelerator concepts. He is best known for his pioneering work in the collective acceleration of
heavy ions, achieving the highest energies to date by this method, and for his development of
large orbit microwave devices, including large orbit gyrotrons and rotating beam free electron
lasers. He has consulted for government agencies and private firms, received more than $40
million in grants and contracts, published more than 200 journal articles and book chapters, and
presented many papers. Dr. Destler has also directed 18 master’s and doctoral student theses and
earned awards for his teaching. |
Dr. Destler earned a bachelor’s degree from Stevens Institute of Technology and a Ph.D. from
Cornell University. Both degrees were in the field of applied physics. |
| (7) | Asher J. Flaum is President of Flaum Management Co., Inc., a full service real estate company
that owns and manages a portfolio of several million square feet of commercial real estate
including retail, office, industrial, development projects as well as provides complete real
estate brokerage services through its real estate brokerage division. Through his active
involvement with Flaum Management, Mr. Flaum focuses on real property management, development,
acquisitions and finance, leasing and brokerage services. He has participated in multiple real
estate transactions involving Fortune 500, national and regional companies. A licensed real
estate broker, Mr. Flaum is a member of the International Council of Shopping Centers (ICSC)
and a member of the New York State Commercial Association of Realtors (NYSCAR). Mr. Flaum, who
has a B.S. degree from Syracuse University, serves on the board of directors and finance
committee of the Jewish Community Federation and on the board of directors of Constellation
Brands Marvin Sands Performing Arts Center (CMAC). |
| (8) | As Director of High-Performance Vehicle Operations, General Motors Performance Division until
2008, Mr. Heinricy was responsible for the planning, development, testing and execution of all
the performance versions of GM vehicles, from the Cobalt SS to the Cadillac CTS-V to the
Corvette Z-06. John is also a legendary race-car driver, capturing 11 SCCA national titles.
This past summer, he won six out of six SCCA races, driving a C-5 Corvette equipped with
Torvec’s IsoTorque® differential. |
Mr. Heinricy began his career at General Motors in 1970. During his first tour of the
engineering rotation in Chevrolet Racing R&D, he was assigned to the Milford Proving Grounds
where he became immersed in the development and testing of GM’s LS6 and LS7 Corvettes and
Chevrolet Chevelle L88s. Mr. Heinricy became Vehicle Development Manager for the Corvette
platform in 1989 and in 1995, he became head of Vehicle Integration Engineering for the
Corvette. In 1997, he became Chief Engineer for the Camaro and Firebird and was appointed the
Director of Vehicle Dynamics for all of GM’s cars and trucks in 2001. Later that same year, he
became the Director of High-Performance Vehicle Operations in GM’s Performance Division,
retiring from GM in 2008. |
Mr. Heinricy has raced Corvettes, Camaros, and Pontiac Firebirds professionally since 1984,
driving in over 240 professional races, including thirty-five 24-hour races, has won 4
Professional Driver Championships, 11 SCCA National Championships, has set 3 FIA world speed
records and was a 2001 President’s Cup recipient. |
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Through his company, Heinrocket Inc., Mr. Heinricy today is an international automotive
consultant, specializing in vehicle testing and development, high performance driver training,
race car development and motivational speaking. |
| (9) | Charles Mills founded the law firm of Mills, Schwartz and White in 1967 which later merged to
become Bernstein, Mills, Schwartz, White and Bernstein. Mr. Mills substantially concentrated
on real estate syndication, venture capital and securities law. Wanting to branch out from his
legal career, Mr. Mills ventured into his own real estate development company. As CEO of
Crosskeys Corporation, he led the company into many successful ventures, including office
parks, high-end office buildings and a commercial mall/plaza. In 2001, Mr. Mills sold most of
his real estate empire but still manages quite a few prime properties. |
Mr. Mills holds a BS degree in Business Administration from Syracuse University and a law degree
from Cornell Law School. He is also active in several charitable organizations in his community. |
| (10) | Known for both his business acumen and his philanthropic efforts, E. Philip Saunders’
ventures are far-reaching and diverse. He was instrumental in reshaping the truck stop
industry, taking it from poorly stocked, overgrown gas stations to modern travel plazas with
stores, restaurants, and lodging facilities. Saunders began in 1958 with his father’s gas
station, and built it into the Truckstops of America chain. Saunders later founded Travel
Ports of America, Inc. which merged with Ryder’s TravelCenters of America in 1999. Today,
TravelCenters is the nation’s largest chain of truck stops. |
Mr. Saunders ventured into liquid-fuels distribution and convenience stores. In 1979, he
purchased W.W. Griffith Oil Corp. and began the Sugar Creek Corp. chain of retail gas and
convenience stores. In 1998, Saunders sold Griffith Oil Inc to Rochester Gas and Electric
Corp.’s Energetix subsidiary. Two years later he sold the 105-store Sugar Creek chain to Tops
Markets Inc. |
Mr. Saunders has successfully diversified his interests to auto and truck rental, recreation and
tourism, packaged foods, property management, and banking. His previous business history
includes owner of Econocar International, owner of Richardson Foods, chief executive officer of
American Rock Salt, and Sr. Vice President of Ryder Systems. Currently, Mr. Saunders is the
owner of Swain Ski Center in Swain, NY and Bristol Harbour Resort in Canandaigua, NY. He is also
owner of Essex Property Management, which maintains over 100 commercial properties. Saunders
has a major interest in Western New York Energy, Youngblood and Genesee Regional Bank where he
serves as Board Chairman. In 1997, Mr. Saunders and a Rochester attorney bought Lyndon
Guaranty Bank of New York from ITT Corp., renaming it Genesee Regional Bank. |
Mr. Saunders currently serves on the board of directors for Paul Smiths College, American Rock
Salt, Western New York Energy, Lewis Tree and the Rochester Institute of Technology. His past
services have incorporated membership on the board of directors of several organizations,
including Rochester General Hospital, Excellus Blue Cross/Blue Shield, Security-Norstar Ryder
Systems, and the Boy Scouts of America-Steuben Area Council. He has received numerous awards for
his contributions to the community, including the Herbert W. Vanden Brul Entrepreneurial Award
from the Rochester Institute of Technology’s College of Business (now known as the E. Philip
Saunders College of Business), a Doctorate of Commercial Science from Paul Smiths College, the
Teddi Award from Camp Good Days and Special Times and the Livingston County Citizen of the Year.
He was elected to the Rochester Business Hall of Fame in 2004. |
(c) Relationships; Agreements
There are no family relationships among any of the directors or executive officers of the company.
There are no agreements or arrangements for the nomination or the appointment of any persons to the
board of directors.
(d) Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our directors, our executive officers
and persons who own more than 10% of our common stock to file initial reports of ownership (Form 3)
and reports of changes in
ownership of our common stock (Forms 4 and 5) with the Securities and Exchange Commission. These
persons are required by SEC regulations to furnish us with copies of all section 16(a) reports they
file.
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To the best of the company’s knowledge, based upon its review of all of the copies of Forms 3, 4
and 5 received by it, the company believes that to the extent such forms were required to be filed,
such forms were timely filed by the current directors and executive officers pursuant to section 16
of the Securities Exchange Act of 1934, and that no current director or executive officer required
to file such forms failed to either file them or file them in timely fashion.
(e) Corporate Governance, Code of Ethics, Director Independence
Role of the Board of Directors
All corporate authority resides in the board of directors as the representative of the
shareholders. The board has delegated authority to management to implement Torvec’s mission of
maximizing long-term shareholder value, while adhering to the laws of the jurisdictions where we
operate and at all times observing the highest ethical standards. With respect to its relationship
to management, the board’s role is not to manage but to provide independent oversight of
management’s decisions.
Management’s responsibilities include the development and implementation of the company’s strategic
plans, utilization of company resources, authorization of spending limits and the authority to hire
consultants and employees and terminate their services. The board retains responsibility to
recommend candidates to the shareholders for election to the board of directors. The board retains
responsibility for selection and evaluation of the chief executive officer, determination of senior
management compensation, approval of the annual budget, assurance of adequate financial and
accounting systems, procedures and controls. The board also provides advice and counsel to senior
management on a regular basis.
All major decisions are considered by the board as a whole; however, the board has chosen to
exercise certain of its responsibilities through committees of the board. The board has established
three standing committees — an Audit Committee, a Nominating Committee, and a Governance and
Compensation Committee.
Consistent with the company’s view of our board of directors’ and management’s distinct but
mutually supportive roles described above, the company has chosen to separate the positions of
board chairman and chief executive officer. The role of the board chairman is to set board agendas,
priorities and procedures to facilitate the board in its review and oversight function. The role of
the chief executive officer is to establish and implement the company’s strategic direction,
subject to board oversight.
Risk Oversight
The board oversees the company’s risk management process through regular discussions of the
company’s credit, liquidity, operational, compliance and similar risks with senior management both
during and outside of regularly scheduled board meetings. In addition, the Audit Committee assists
the board by administering such oversight function with respect to risks relating to the company’s
accounting and financial controls.
Annual Meeting Attendance
It is the company’s policy that all directors attend the annual shareholders meeting. All persons
who were directors on the date of last year’s annual shareholders meeting attended such meeting.
Operation of the Board of Directors
The board of directors of the company met and/or took official action 9 times during the year ended
December 31, 2010. During this period, each incumbent director attended, either in person or by
telephonic conference as permitted by the company’s Bylaws, approximately 100% of the total number
of meetings held during the period for
which he was a director and approximately 100% of the total number of meetings of the committees of
the board on which he served during the period for which he was a member of such committee(s).
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Director Independence
The company’s common stock is traded on the over-the-counter bulletin board, an electronic
inter-dealer quotation system that displays real-time quotes, last-sale prices and volume
information. While the bulletin board is owned by the National Association of Securities Dealers,
Inc., the company’s common stock is not “listed” for trading on the NASDAQ system or any stock
exchange.
Despite the company’s common stock not being so listed, the board has voluntarily adopted and
implemented the NASD’s “listed company rules” regulating the composition and operation of the board
and its committees as in effect from time to time since the company’s common stock began trading in
January 1999.
Under NASD’s rules applicable to listed companies, a majority of the board must be independent.
This requirement means that a majority of the company’s board must be composed of persons who are
not executive officers or employees of the company or who have a relationship with the company
which, in the board’s opinion, would interfere with the exercise of independent judgment in
carrying out his responsibilities as a director. In addition, a director can not be considered
independent if he is compensated by the company for any reason other than for service rendered as a
member of the board and/or its committees.
Based upon these independence standards and all of the relevant facts and circumstances, the board
has affirmatively determined that Thomas F. Bonadio, Wesley K. Clark, William W. Destler, Asher J.
Flaum, John W. Heinricy, Charles Mills, E. Philip Saunders and Gary A. Siconolfi (constituting 8
members of a 10 person board) are independent. In making this determination, the board noted that
none of these directors is an executive officer or employee of the company and that each will be
compensated by the company solely for his service on the board and its committees.
In making its determination with respect to Mr. Heinricy, the board considered that while the
company has a consulting agreement with a company owned by Mr. Heinricy, the agreement does not
impair Mr. Heinricy’s independence since the amount paid under the agreement in any one year since
its inception (and since a prior agreement’s inception) did not exceed $200,000 or 5% of such
company’s gross revenues during such period.
In making its determination with respect to Mr. Flaum, the board considered that while Mr. Flaum is
an affiliate of the company’s landlord, such relationship does not impair his independence since
the amount of fees paid by the company in any one year since the inception of the lease did not
exceed the greater of $200,000 or 5% of such landlord’s gross revenues during such period.
Code of Ethics/Committee Charters
The board has adopted, implemented and published on the company’s website (www.torvec.com)
the company’s code of business conduct which applies to all members of the Board, all executive and
financial officers and all employees and consultants of the company, its divisions and its
subsidiaries. The code mandates that all company personnel observe the highest standards of
business and personal conduct in the performance of their duties and responsibilities, especially
in dealing with other company personnel, our shareholders, the general public, the business
community, customers, suppliers, and governmental authorities. It addresses conflicts of interest,
corporate opportunities, confidentiality, fair dealing, protection and proper use of corporate
assets, compliance with laws, rules and regulations and requires the reporting of any illegal or
unethical behavior.
We require our employees, our officers and directors to talk to supervisors, managers or other
appropriate personnel to report and discuss any known or suspected unethical, illegal or criminal
activity involving the company and/or its employees. We have established a process which allows
employees, officers and directors to anonymously report any known or suspected violation of
policies and rules set forth in the code of business conduct.
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Waivers or amendments of the code’s provisions are generally not permitted, may be granted only by
the board of directors, and if granted, will be disclosed promptly by the company by posting the
waiver or amendment on the company’s website and by filing a current report (Form 8-K) with the
Securities and Exchange Commission. There were no waivers of the code during the year ended
December 31, 2010.
The board has also adopted, implemented and posted on the company’s website the company’s financial
integrity and compliance program. The program mandates that the company’s results of operations and
financial position must be recorded in accordance with the requirements of law and generally
accepted accounting principles and that all books, records and accounts must be maintained in
reasonable detail so that they accurately and fairly reflect the business transactions and
disposition of assets of the company. The written policy requires all personnel responsible for the
preparation of financial information to ensure that the company’s financial policies and internal
control procedures are followed and holds each person involved in creating, processing and
recording financial information accountable for the integrity of the financial reporting process.
The program establishes a network for the receipt, retention, and treatment of complaints received
by the company regarding accounting, internal accounting controls or auditing matters and provides
for the submission (including the confidential anonymous submission) by company personnel of any
concerns they might have regarding questionable accounting or auditing practices.
On November 9, 2004, the board adopted a statement of corporate governance principles which
establishes policies governing the role of the board of directors, its relationship to management,
qualifications of directors, independence of directors, the size of the board and selection
process, board committees, independence of committee members, meetings of independent directors,
shareholder communications, board and committee agendas, ethics and conflicts of interest,
reporting and access to advisers. The statement can be found on the company’s website at
www.torvec.com.
The board adopted an Audit Committee charter delineating the composition and the responsibilities
of the Audit Committee which became effective on April 17, 2000. The charter was revised by the
board on January 15, 2003 to further delineate the Committee’s responsibilities and authority in
accordance with provisions of the Sarbanes-Oxley Act of 2002. The charter is on the company’s
website.
On November 9, 2004, the board adopted a Nominating Committee charter delineating the composition
and responsibilities of the Nominating Committee. The Nominating Committee charter is on the
company’s website.
Policy/Procedure for Review/ Approval of Related Party Transactions
Business transactions between Torvec and its officers or directors, including companies in which a
director or officer (or an immediate family member) has a substantial ownership interest or a
company where such director or officer (or an immediate family member) serves as an executive
officer (“related party transactions”) are not prohibited. In fact, certain related party
transactions can be beneficial to the company and to its shareholders.
It is important, however, to ensure that any related party transactions are beneficial to the
company. Accordingly, any related party transaction, regardless of amount, is submitted to the
Governance and Compensation Committee in advance for review and approval. All existing related
party transactions are reviewed at least annually by the Governance and Compensation Committee. All
related party transactions are reviewed by the company’s general counsel to determine the
appropriateness of each related party transaction. The Committee may, at its discretion, consult
with outside legal counsel.
No related party transaction may be approved by the Committee if such transaction, regardless of
its benefit to the company, would violate the company’s written code of business conduct, its
written financial integrity and compliance program and/or its statement of corporate governance
principles.
Any director or officer with an interest in a related party transaction is expected to recluse
himself from considering the matter and voting upon it. In all cases, a director or officer with an
interest in a related party transaction may not attempt to influence company personnel in making
any decision with respect to the transaction.
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Executive Sessions of Independent Directors
The company’s independent directors meet in executive session without management or non-independent
directors present. Currently, Gary A. Siconolfi presides at all executive sessions of the
independent directors.
Committees of the Board
The Audit Committee
Number of Members: 3
Members:
Members:
Thomas F. Bonadio, chairman
E. Philip Saunders
Asher J. Flaum
E. Philip Saunders
Asher J. Flaum
Number of Meetings in 2010: 4
Functions:
The primary function of the Audit Committee as stated in its charter is to assist the board of
directors in fulfilling its oversight responsibilities relating to monitoring the quality,
reliability and integrity of the company’s external financial reporting process, the adequacy of
the company’s internal controls particularly with respect to the company’s compliance with legal
and regulatory requirements and corporate policy, and the independence and performance of the
company’s registered public accounting firm who is ultimately accountable and must report directly
to the Audit Committee. More specifically, the Audit Committee is directly responsible for:
| • | the appointment, compensation, retention and oversight of the work of the independent,
registered public accounting firm engaged (including the resolution of disagreements
between management and the auditor regarding financial reporting) for the purpose of
preparing or issuing an audit report or related work or performing other audit, review or
attest services; |
| • | the pre-approval of all auditing and legally permissible non-auditing services to be
performed by the company’s independent, registered public accounting firm; |
| • | the disclosure by the company of all pre-approved non-audit services in periodic
reports filed by the company with the Securities and Exchange Commission; |
| • | the disclosure by the company of the number and name(s) of each Audit Committee member
who is an “audit committee financial expert” as defined by the charter in accordance with
rules promulgated by the Securities and Exchange Commission; |
| • | the establishment of internal procedures for complaints concerning the company’s
accounting, internal accounting controls or auditing matters; |
| • | the review of internal controls, accounting practices, and financial reporting,
including the results of the annual audit and the review of the interim financial
statements with management and the independent, registered public accounting firm; |
| • | the engagement of independent counsel and advisors as it determines necessary to carry
out its duties and the funding thereof. |
All members of the Audit Committee are “independent” as independence is defined in Rule 4200(a)(15)
of the National Association of Securities Dealers, Inc. listing standards and as defined by Rule
10A-3(b)(1)(ii) promulgated by the Securities and Exchange Commission. Thomas F. Bonadio has been
appointed the Audit Committee’s “financial expert” as defined by the Audit Committee’s charter in
accordance with rules promulgated by the Securities and Exchange Commission.
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The Nominating Committee
Number of Members: 3
Members:
Members:
Gary Siconolfi, chairman
Wesley K. Clark
Asher J. Flaum
Wesley K. Clark
Asher J. Flaum
Number of Meetings in 2010: 2
Functions:
As specified in its charter, the purpose of the Nominating Committee is to identify, consider and
recommend qualified individuals to the Board for election as directors, including the slate of
directors that the board proposes for election by shareholders at the annual meeting. The charter
sets forth the following policy and procedures with respect to the consideration of any director
candidates recommended by security holders:
Shareholders wishing to directly nominate candidates for election to the board of directors at an
annual meeting must do so by giving notice in writing to the chairman of the Nominating Committee,
Torvec, Inc., Mount Read Industrial Facility, 1999 Mount Read Blvd., Rochester, New York 14615. The
notice with respect to any annual meeting must be delivered to the chairman not less than 120 days
prior to the first anniversary of the preceding year’s annual meeting. The notice shall set forth
(a) the name and address of the shareholder who intends to make the nomination; (b) the name, age,
business address and residence address of each nominee; (c) the principal occupation or employment
of each nominee; (d) the class and number of shares of Torvec securities which are beneficially
owned by each nominee and by the nominating shareholder; (e) any other information concerning the
nominee that must be disclosed in nominee and proxy solicitations pursuant to Regulation 14A of the
Securities Exchange Act of 1934; and (f) the executed consent of each nominee to serve as a
director of Torvec if elected.
Nominations submitted in accordance with the foregoing procedure will be considered and voted upon
by the Nominating Committee. Any shareholder nominee recommended by the Committee and proposed by
the board for election at the next annual meeting of shareholders shall be included in the
company’s proxy statement for such annual meeting.
The Nominating Committee charter also sets forth the qualifications and a specific description of
skills that members of the board of the company should possess, regardless of by whom nominated:
In recommending candidates, the Committee shall consider the candidates’ mix of skills, experience
with businesses and other organizations of comparable size, reputation, background and time
availability (in light of anticipated needs), the interplay of the candidate’s experience with the
experience of other board members, the extent to which the candidate would be a desirable addition
to the board and any committees of the board and any other factors the Committee deems appropriate.
At a minimum, the Committee shall address the following skill sets in evaluating director
candidates: accounting or finance, business or management experience, industry knowledge, customer
base experience or perspective, international marketing and business experience, strategic planning
and leadership experience.
Directors should possess the highest personal and professional ethics, integrity and values, and be
committed to representing the long-term interest of the shareholders. They must also have an
inquisitive and objective perspective, practical wisdom and mature judgment. The board should
represent diverse experience at policy making levels in business, government, education and
technology, and in areas that are relevant to the company’s worldwide activities.
Directors must be willing to devote sufficient time to carrying out their duties and
responsibilities effectively, and should be committed to serve on the board for an extended period
of time. Directors should consider offering their resignation in the event that significant change
in their personal circumstances, including their health, family
responsibilities, or a change in their principal job responsibilities, would preclude them from
devoting sufficient time to carrying out their responsibilities effectively.
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The board does not believe that arbitrary term limits on director service are appropriate, nor does
it believe that directors should expect to be renominated automatically. The contribution of each
member as a member of a committee or the board shall be evaluated each year by the Committee before
his renomination is recommended to the board.
Each of member of the Nominating Committee is an independent director as defined by Rule
10A-3(b)(1)(ii) promulgated by the Securities and Exchange Commission and as defined by Rule
4200(a)(15) of the National Association of Securities Dealers, Inc.
The Governance and Compensation Committee
Number of Members: 3
Members:
Members:
William W. Destler, chairman
Charles N. Mills
John W. Heinricy
Charles N. Mills
John W. Heinricy
Number of Meetings in 2010: 2
Functions:
The purpose of the Governance and Compensation Committee is to regularly monitor the effectiveness
of management’s policies and decisions including the execution of the company’s strategies in order
to insure that the company represents the shareholders’ interests, including optimizing long term
as well as short term financial returns. The Committee develops and recommends to the board
corporate governance principles and guidelines and reviews the charter and composition of each
committee of the board and makes recommendations to the board for the adoption of or revisions to
committee charters, the creation of additional committees or the elimination of committees.
The Committee also:
(1) establishes and reviews the overall executive compensation philosophy and strategy of
the company and oversees the company’s various compensation programs and plans.
(2) reviews and makes recommendations to the board of directors on employment and business
consultants compensation policies, forms and levels of annual compensation, including
specifically, the performance and level of annual compensation of the executive officers and
top management personnel of the company;
(3) specifically reviews the annual compensation of the chief executive officer in the light
of established goals and objectives and based upon such evaluation, makes specific
recommendations to the board regarding such compensation;
(4) reviews and makes recommendations to the board on the operation, performance and
administration of the company’s employee benefit plans, including the company’s Business
Consultants Stock Plan, the Nonmanagement Directors Plan and Commercializing Event Plan.
All members of the Committee are independent within the meaning of Rule 10A-3(b) (1)(ii) and Rule
4200(a)(15) promulgated by the Securities and Exchange Commission and the National Association of
Securities Dealers, Inc. respectively.
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Compensation Committee Interlocks and Insider Participation
The Governance and Compensation Committee is composed of William W. Destler, Charles N. Mills and
John W. Heinricy None of these persons is a current or former employee of the company. John W.
Heinricy serves as the president of an automotive consulting firm that provides services to the
company.
Shareholder Communications
We encourage all shareholders to communicate with management and with our directors, including our
independent directors. Any shareholder wishing to communicate directly with management should
e-mail or address regular mail to:
| Officer | Mailing Address | |||
| Richard A. Kaplan, Chief Executive Officer |
Torvec, Inc. Mt. Read Industrial Facility 1999 Mt. Read Blvd. Rochester, New York 14615 |
dickk@torvec.com | ||
| Keith E. Gleasman, President, Vice President of Marketing |
Torvec, Inc. Mt. Read Industrial Facility 1999 Mt. Read Blvd. Rochester, New York 14615 |
kgleasman@torvec.com | ||
| Robert W. Fishback, Chief Financial Officer & Secretary |
Torvec, Inc. Mt. Read Industrial Facility 1999 Mt. Read Blvd. Rochester, New York 14615 |
bfishback@torvec.com |
Any shareholder wishing to communicate directly with any of our independent directors should e-mail
him as follows:
Thomas F. Bonadio
|
tbonadio@bonadio.com | |
Wesley K. Clark
|
wclark@wesleykclark.com | |
William W. Destler
|
wwdpro@rit.edu | |
Asher J. Flaum
|
aflaum@flaummgt.com | |
John W. Heinricy
|
heinrocket@gmail.com | |
Charles N. Mills
|
charlesnmills@gmail.com | |
E. Philip Saunders
|
PhilS@saundersmgt.com | |
Gary A. Siconolfi
|
gsiconolfi@torvec.com | |
Regular mail may be addressed to:
|
Torvec Independent Directors c/o Torvec, Inc. Mt. Read Industrial Facility 1999 Mt. Read Blvd. Rochester, New York 14615 Attention: Robert W. Fishback |
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Sarbanes-Oxley Compliance
The Sarbanes-Oxley Act of 2002 was enacted on July 30, 2002. The statute addresses, among other
issues, corporate governance, auditing and accounting, executive compensation and enhanced and
timely disclosure of corporate information. On November 4, 2003, the National Association of
Securities Dealers, Inc. adopted final NASD Rules addressing corporate governance, director
independence and corporate accountability. The NASD has amended these Rules from time to time.
The company’s board of directors has acted to strengthen and improve its already strong corporate
governance policies and practices as a result of the Act and Rules. A summary of formal policies
the board has adopted to comply with Sarbanes-Oxley, the NASD Rules and to enhance shareholder
confidence in the company and its management is found under the caption “Corporate Governance, Code
of Ethics, Director Independence.”
A majority of the members of the company’s board of directors and of its executive committee are
independent within the meaning of Rule 10A-3(b)(1)(ii) promulgated by the Securities and Exchange
Commission and Rule 4200 (a) (15) promulgated by the National Association of Securities Dealers,
Inc.
| Item 11. | EXECUTIVE COMPENSATION |
A. Compensation Discussion and Analysis
The company is a development stage company which means that the company has not generated
significant revenues on an ongoing basis. Since its inception in September 1996, the company’s
principal business activity has consisted of research, development and patenting its automotive
technologies worldwide. Since inception through December 31, 2010, the company has relied primarily
on monies generated by the sale of its common and Preferred equity to sustain its business. During
2009 and 2010, the company generated limited revenues from the sale of certain of its products. The
board of directors has adopted and has consistently followed a policy to expend the proceeds of
equity sales and any revenues generated by the sale of its products directly on the costs and
expenses associated with the actual development and manufacture of its products (including the
development of prototypes, pre-production and production-ready models, and the leasing of research
and testing facilities).
1) Current Executive Compensation
Effective October 4, 2010, the company appointed a new chief executive officer and executed a five
year employment agreement pursuant to which the company will pay base compensation of $50,000 per
annum, which compensation increases to $200,000 per annum on the first day of the calendar year
immediately following the calendar year in which the company has adjusted EBITDA of at least
$300,000 (earnings before interest, taxes, depreciation and amortization, but excluding all
non-cash expenses associated with stock options). Under the agreement, the executive is entitled to
a performance bonus based upon financial targets established each year in good faith by the
Governance and Compensation Committee and the achievement of individual management objectives
established annually by such committee. The executive is entitled to participate in all employee
benefit plans as are provided from time to time for senior executives. If the company terminates
the executive, removes him as CEO, or a change in control of the company occurs, the executive is
entitled to three years’ severance pay, consisting of base pay and any incentive compensation.
On September 30, 2010, the company granted a non-plan stock option for 5,150,000 common shares
exercisable for ten years at an exercise price of $0.36 per common share to its newly appointed
chief executive officer. The option vests and is exercisable as follows: 1,000,000 options vest and
are exercisable immediately upon grant; a second 1,000,000 options vest and are exercisable upon
the trading price of the company’s common stock closing at a minimum of $1.00 per share; a third
1,000,000 options vest and are exercisable upon the trading price of the company’s common stock
closing at a minimum of $2.00 per share; a fourth 1,000,000 options vest and are exercisable upon
the trading price of the company’s common stock closing at a minimum of $3.00 per share and the
balance of the options, namely 1,150,000 options, vest and are exercisable upon the trading price
of the company’s common stock closing at a minimum of $4.00 per share.
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Effective October 18, 2010, the company engaged a new chief financial officer under a letter
agreement dated October 18, 2010 pursuant to which the company will pay annual compensation equal
to $125,000, with increases of $25,000 per annum effective April 1, 2011, October 1, 2011 and
January 1, 2012. The executive also was granted a non-plan stock option exercisable for 10 years to
acquire 250,000 shares of the company’s common stock at $0.85 per share. The option vests and is
exercisable as follows: 62,500 options vest and are immediately exercisable upon grant; 62,500
options vest and become exercisable on each of October 18, 2011, 2012 and 2013. If the company
terminates the executive, removes him as CFO, or a change in control of the company occurs, the
executive is entitled to 12 months’ severance pay.
Effective January 1, 2004, Keith E. Gleasman and the company reached an understanding pursuant to
which Mr. Gleasman agreed to serve the company as its president without payment of compensation.
From time to time, the company’s board of directors and Mr. Gleasman revisited this arrangement.
Effective January 1, 2008, the board of directors agreed to pay Mr. Gleasman $300,000 per annum
based upon the company’s ability to pay such compensation in cash. The company did not have the
cash to pay Mr. Gleasman from January 1, 2008 through August 17, 2009, the date when Mr. Gleasman
waived all of his right to such compensation, including specifically all compensation which had
accrued to the date of waiver. For the year ended December 31, 2010, Mr. Gleasman continued to
serve the company as its president and Chief Marketing Officer without compensation.
2) Shareholder Advice on Executive Compensation
The company’s board of directors values and encourages constructive dialogue on executive
compensation and other important governance topics with our shareholders, to whom it is ultimately
accountable. In connection with the annual meeting of shareholders held on January 27, 2011, the
board of directors requested shareholders to provide their input on executive compensation in order
to enhance shareholder communication and provide another avenue to obtain information on investor
sentiment about the company’s executive compensation philosophy, policies, and procedures. In
addition, the board requested shareholder opinion on the frequency (whether one year, two year or
three year) during which it should seek shareholder input on the company’s executive compensation.
In this regard, the board indicated its preference for seeking shareholder input on executive
compensation each year since executive compensation is evaluated, adjusted and approved on an
annual basis and the board’s believes that investor sentiment should be a factor taken into
consideration in setting annual executive compensation.
In response to these requests, the company’s shareholders supported the company’s executive
compensation policies by a large majority of the votes cast and by a similar majority, agreed with
the board that shareholder advice on executive compensation should be obtained every year.
3) Long-Term Compensation Philosophy
The core of the board’s long-term compensation philosophy is based upon its realization that the
company’s shareholders will be rewarded only by a business transaction involving the
commercialization of one or more of the company’s automotive technologies. This means that the
company sells, licenses, enters into supply contracts, receives purchase orders and/or enters into
any other arrangement for any of the company’s technologies in a manner designed to generate
revenue for the company. This can also mean that the company itself is acquired in a business
combination such that the company’s shareholders will receive cash, the buyer’s stock or a
combination of cash and purchaser stock.
To accomplish this goal, the board adopted a commercializing event plan designed to reward the
company’s directors, executive officers and specified management and engineering personnel for the
successful completion of one or more commercializing events. Under the plan, business consultants’
shares will be issued to participants in the plan if and only if a revenue-producing business
transaction is consummated.
Consequently, from time to time, the company adopted various incentive plans used to grant equity
awards to members of the board of directors, senior management, engineering and business
consultants designed to optimize the profitability and growth of the company through annual and
long-term incentives that are consistent with the company’s goals and that link the personal
interests of the participants to those of the company’s shareholders.
Specifically, on December 1, 1997, the board adopted the 1998 Stock Option Plan; on October 19,
2004, the board adopted the Nonmanagement Directors’ Plan; and on October 13, 2006, the board
adopted the Commercializing Event Plan.
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The 1998 Stock Option Plan terminated by its own terms as to the grant of future stock options
under the Plan on May 27, 2008. The board terminated both the Nonmanagement Directors’ Plan and the
Commercializing Event Plan on November 3, 2010. In terminating these plans, the board reaffirmed
its belief that it order for the company to continue to attract and retain outstanding individuals,
it must continue to provide equity incentives through the granting of stock options to directors,
senior management, employees and consultants. Consequently, on November 3, 2010, the board adopted
the 2011 Stock Option Plan (“2011 Plan”) as an important part of the board’s strategy for
recruiting and retaining outstanding individuals in the service of the company and for aligning
their interests with the interests of the company’s shareholders.
4) The 2011 Stock Option Plan
The following description sets forth the material terms and conditions of the 2011 Plan:
a) Types of Options
A stock option is the right to purchase one or more shares of the company’s common stock at a
specified price, commonly called the “exercise price”, as determined by the Governance and
Compensation Committee. Under the 2011 Plan, there are two types of options which may be granted:
“non-qualified” options and “incentive” stock options.
Non-qualified options may be granted to the company’s officers, directors, employees and outside
consultants. Incentive options may be granted only to the company’s employees, including officers
and directors who are also employees. In the case of non-qualified options, the exercise price may
be less than the fair market value of the company’s stock on the date of grant. In the case of
incentive options, the exercise price may not be less than such fair market value and in the case
of an employee who owns more than 10% of our common stock, the exercise price may not be less than
110% of such market price. Options generally are exercisable for ten years from the date of grant,
except that the exercise period for an incentive option granted to an employee who owns more than
10% of the company’s stock may not be greater than five years.
b) Corporate Governance Provisions
The 2011 Plan contains provisions intended to make sure that grants under the 2011 Plan comply with
established principles of corporate governance. These provisions include:
| i) | No | Stock Option Repricings. — Stock options may not be repriced absent shareholder
approval. This provision applies to both direct repricings—lowering the exercise price of
an outstanding stock option—and indirect repricings, that is, canceling an outstanding
stock option and granting a replacement stock option with a lower exercise price; |
| ii) | No | Evergreen Provision. — The 2011 Plan does not contain an “evergreen
provision”—there is no automatic provision to replenish the aggregate number of shares of
common stock authorized for issuance under the 2011 Plan; |
| iii) | No | Unlimited Recycling.—The 2011 Plan permits recycling (i.e. adding back shares to
the number of shares available for future grants) only with respect to shares underlying
options that have expired or terminated without issuance. Specifically, recycling is not
permitted with respect to common stock transferred as consideration for the purchase of
shares underlying an option, common stock retained to satisfy tax withholding obligations,
or common stock repurchased by the company in open market transactions |
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c) Administration
The 2011 Plan will be administered by the Governance and Compensation Committee which is composed
entirely of independent directors. Subject to the terms of the 2011 Plan, the Committee is
responsible for making recommendations to the board of directors as to option grant recipients;
number of options granted; exercise price of options; duration; vesting; as well as all other terms
and conditions of all such option grants. The Committee has full authority to interpret the 2011
Plan and to adopt rules, forms, instruments, option agreements and guidelines for administering the
2011 Plan.
d) Eligibility
Options under the 2011 Plan may be granted to members of the board of directors, including retired
members of the board, senior executives, employees and business advisers and consultants to the
company. In the case of incentive options, options may only be granted to persons who are employees
of the company at the time of grant. The Governance and Compensation Committee will initially
recommend to the board who should receive options and the terms and conditions pertaining to each
option grant. The final determination will be made by the board of directors.
e) Authorized Number of Shares Reserved Under the 2011 Plan
As of the date of this Proxy Statement, the board has not granted any options under the 2011 Plan.
In adopting the 2011 Plan on November 3, 2010, the board reserved 3,000,000 shares of common stock
to be issued upon the exercise of options granted under the 2011 Plan after its approval by the
shareholders.
f) Adjustments
In the event of a change in the number of outstanding shares of common stock of the company due to
a stock-split, stock dividend, recapitalization, merger, consolidation, spin-off, or
reorganization, the Governance and Compensation Committee shall take certain actions to prevent the
dilution or enlargement of benefits under the 2011 Plan, including adjusting the number of shares
of common stock that may be issued under the 2011 Plan and adjusting the number of shares or
exercise price of shares subject to outstanding options.
g) Change in Control
In the event of a change in control of the company, as defined in the 2011 Plan, unless otherwise
specified in the stock option agreement, all outstanding options will become immediately
exercisable in full during their remaining term.
h) Transferability of Options
Except as otherwise provided in the stock option agreement, options may not be sold, assigned,
transferred, pledged or otherwise encumbered by the person to whom they are granted, either
voluntarily or by operation of law, except by will or the laws of descent and distribution. Except
as otherwise provided in the stock option agreement, during the life of the optionee, options are
exercisable only by the optionee or the optionee’s legal representative.
i) Amendment and Termination
The Governance and Compensation Committee may recommend to the board amendments to the 2011 Plan or
that the 2011 Plan be terminated at any time, except that no amendment or 2011 Plan termination may
adversely affect in any material way the rights of an optionee with respect to an outstanding
option grant without the optionee’s written consent.
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j) Federal Income Tax Consequences
The following summary is based on existing U.S. federal income tax laws as of December 31, 2010 and
is not intended as, and should not be relied upon, as tax guidance for optionees under the 2011
Plan. Changes to such tax laws could alter the income tax consequences described below.
Non-Qualified Options
The grant of a non-qualified stock option at fair market value on the grant date will not be a
taxable event for the optionee or for the company. Upon exercising a non-qualified option, an
optionee will recognize ordinary income in an amount equal to the difference between the exercise
price and the fair market value of the common stock on the date of exercise. Upon a subsequent sale
or exchange of shares acquired pursuant to the exercise of a non-qualified stock option, the
optionee will have taxable gain or loss, measured by the difference between the amount realized on
the disposition and the tax basis of the shares (generally, the amount paid by the optionee for the
shares plus the amount treated as ordinary income at the time the option was exercised). Subject to
the restrictions of section 162(m) of the Internal Revenue Code, the company will be entitled to a
business expense deduction in the same amount and generally at the same time as the optionee
recognizes ordinary income.
The 2011 Plan permits non-qualified options to be granted at exercise prices which are less than
the fair market value of the company’s common stock on the date of grant. Pursuant to the
provisions of section 409A of the Internal Revenue Code, if the exercise price of a stock option is
less than the fair market value of the company’s common stock on the date of grant (‘discounted
option”), then upon the vesting of the option, the optionee will recognize ordinary income in an
amount equal to the difference between the exercise price of the discounted option and the fair
market value of the company’s common stock on the date of grant. In addition, the optionee is
subject to an excise tax equal to 20% of the amount of ordinary income recognized. Section 409A
contains a number of “safe-harbor” provisions which eliminate the section’s adverse tax
consequences.
Incentive Options
An incentive stock option must set forth an exercise price at least equal to the underlying common
stock’s fair market value on the date of grant. The grant of an incentive stock option will not be
a taxable event for the optionee or for the company. An optionee will not recognize taxable income
upon exercise of an incentive stock option (except that the alternative minimum tax may apply), and
any gain realized upon a disposition of common stock acquired pursuant to the exercise of an
incentive stock option will be taxed as long-term capital gain if the optionee holds the shares of
common stock for at least two years from the date of grant and one year from the date of
exercise(“the holding period requirement”). The company will not be entitled to any business
expense deduction with respect to the exercise of an incentive stock option, except as discussed
below. For the exercise of an incentive option to qualify for this favorable income tax treatment,
the optionee must exercise the option while the optionee is an employee of the company, or if the
optionee has terminated employment, no later than three months after the participant terminated
employment.
If the holding period requirement is not met, the optionee will recognize ordinary income upon the
disposition of the common stock in an amount generally equal to the excess of the fair market value
of the common stock on the date of exercise over the exercise price (but not in excess of the gain
realized on the sale). The balance of the realized gain, if any, will be capital gain, long or
short term depending upon the holding period of the stock. In these circumstances, the company will
be allowed a business expense deduction when and to the extent the optionee recognizes ordinary
income, subject to the restrictions of section 162(m) of the Internal Revenue Code.
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5) Stand-Alone Director Options
On November 3, 2010, the board granted options for 250,000 shares of the company’s common stock to
each of 4 non-officer individuals who had been appointed to the board of directors on that date or,
in one case, within a year prior to November 3rd. The board also granted options for
250,000 common shares each in the case of an individual who had been invited to join the board but
who, as of November 3rd, had not reached a decision to accept the invitation. Each of
these options are conditioned upon and become effective only upon the individual being elected
as a director at the annual meeting of shareholders on January 27, 2011. Each of these options vest
and become exercisable at an exercise price of $.90 per share on each of the four anniversaries of
the effective date (i.e. January 27, 2011) at the rate of 62,500 options each year. The option
agreements also provide that the vested portion of each option must be exercised by the optionee
within two and one-half months after the calendar year such portion vests or such portion is
forfeited. The exercise price of $.90 per share represents the closing price of the company’s
common stock on the date(s) the invitation to join the board was first issued to the new directors.
At the same meeting, the board granted options for 50,000 shares of the company’s common stock to
each of three retiring directors. These options are exercisable for a one year period at, in the
case of two grants, an exercise price of $.85 per share and the other grant at an exercise price of
$1.07 per share. The exercise price per share represents the closing price of the company’s common
stock on the date each director retired from the board.
Effective January 28, 2011, the board granted an option to a new director for 250,000 common shares
at the exercise price of $.90 per share with vesting terms identical with the vesting terms
incorporated in the board’s November 3, 2010 new director grants. In addition, the board granted
the same individual a ten year option for 25,000 common shares exercisable at $.90 per common
share.
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SUMMARY COMPENSATION TABLE FOR YEARS
ENDED DECEMBER 31, 2008, 2009 and 2010
ENDED DECEMBER 31, 2008, 2009 and 2010
| Change in | ||||||||||||||||||||||||||||||||||||
| Pension Value | ||||||||||||||||||||||||||||||||||||
| and | ||||||||||||||||||||||||||||||||||||
| Non- | Nonqualified | |||||||||||||||||||||||||||||||||||
| Equity | Deferred | All | ||||||||||||||||||||||||||||||||||
| Name and | Stock | Option | Incentive Plan | Compensation | Other | |||||||||||||||||||||||||||||||
| Principal | Salary | Bonus | Awards | Awards | Compensation | Earnings | Compensation | Total | ||||||||||||||||||||||||||||
| Position | Year | ($) | ($) | ($) | ($) | ($) | ($) | ($) | ($) | |||||||||||||||||||||||||||
| (a) | (b) | (c) | (d) | (e) | (f) | (g) | (h) | (i) | (j) | |||||||||||||||||||||||||||
Richard A. Kaplan, |
2008 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||
Chief Executive Officer (1) |
2009 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||
| 2010 | $ | 10,577 | $ | — | $ | — | $ | 1,517,000 | $ | — | $ | — | $ | — | $ | 1,527,577 | ||||||||||||||||||||
James Y. Gleasman, |
2008 | $ | — | $ | — | $ | 3,014 | (6) | $ | — | $ | — | $ | — | $ | — | $ | 3,014 | ||||||||||||||||||
Former Chief Executive Officer, |
2009 | $ | — | $ | — | $ | 1,167 | (6) | $ | — | $ | — | $ | — | $ | — | $ | 1,167 | ||||||||||||||||||
Interim Chief Financial Officer (2) |
2010 | $ | — | $ | — | $ | 1,363 | (6) | $ | — | $ | — | $ | — | $ | — | $ | 1,363 | ||||||||||||||||||
Keith E. Gleasman, |
2008 | $ | — | $ | — | $ | 3,014 | (6) | $ | — | $ | — | $ | — | $ | — | $ | 3,014 | ||||||||||||||||||
President (3) |
2009 | $ | — | $ | — | $ | 1,167 | (6) | $ | — | $ | — | $ | — | $ | — | $ | 1,167 | ||||||||||||||||||
| 2010 | $ | — | $ | — | $ | 1,363 | (6) | $ | — | $ | — | $ | — | $ | — | $ | 1,363 | |||||||||||||||||||
Robert W. Fishback, |
2008 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||
Chief Financial Officer (4) |
2009 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||
| 2010 | $ | 19,231 | $ | — | $ | — | $ | 198,125 | $ | — | $ | — | $ | 48,544 | $ | 265,900 | ||||||||||||||||||||
Richard B. Sullivan, |
2008 | $ | — | $ | — | $ | 3,014 | (6) | $ | — | $ | — | $ | — | $ | 144,000 | $ | 147,014 | ||||||||||||||||||
General Counsel (5) |
2009 | $ | — | $ | — | $ | 1,167 | (6) | $ | — | $ | — | $ | — | $ | 160,417 | $ | 161,584 | ||||||||||||||||||
| 2010 | $ | — | $ | — | $ | 1,363 | (6) | $ | — | $ | — | $ | — | $ | 295,740 | $ | 297,103 | |||||||||||||||||||
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| 1) | Richard A. Kaplan became chief executive officer effective October 4. 2010. Under his
employment agreement, he is paid base compensation equal to $50,000 per annum ( adjusted
to $200,000 per annum on the first day of the calendar following the calendar year the
company has adjusted EBITDA of at least $300,000. In addition to his base compensation,
Mr. Kaplan is entitled to receive an expense allowance of not less than $25,000 per
annum, participate in all company benefit plans and participate in performance bonuses
granted to the company’s executives. On September 30, 2010, Mr. Kaplan was granted an
option to acquire 5,150,000 shares of the company’s $.01 par value common stock
exercisable for a period of ten years at $.36 per common share. The option vests as
follows: 1,000,000 shares immediately; 1,000,000 shares upon the closing price of the
company’s common stock reaching $1.00 per share; another 1,000,000 upon the closing price
reaching $2.00 per share; another 1,000,000 upon the closing price reaching $3.00 per
share and the balance of 1,150,000 upon the closing price reaching $4.00 per share.
3,000,000 options have vested under the option agreement. |
|
| 2) | Mr. James Y. Gleasman served as chief executive officer and interim chief financial
officer for the years ended December 31, 2008, 2009 and in 2010, until his resignation
effective March 14, 2010. Mr. Gleasman was paid 1,005 business consultants shares in
2008, 389 business consultants shares in 2009 and 2,673 business consultants shares in
2010, all under the company’s commercializing event plan. At issuance, such shares had a
value of $3,014, $1,167, and $1,363, respectively. |
|
Under a compensation plan established for Mr. Gleasman by the board of directors, effective
January 1, 2008, Mr. Gleasman’s annual compensation is $300,000, payable only if the
company has sufficient cash to pay all or any portion of such amount. The company did not
have cash to pay such compensation for the years ended December 31, 2009, and 2008. On
August 17, 2009, Mr. Gleasman waived all of his rights and interest in and to the
board-created compensation plan, including all of his rights and interest in and to the
amount(s) under the plan accrued to such date. |
||
| 3) | Mr. Keith E. Gleasman served as president for the years ended December 31, 2008,
2009 and 2010. Mr. Gleasman was paid 1,005 business consultants shares in 2008, 389
business consultants shares in 2009 and 2,673 business consultants shares in 2010, all
under the company’s commercializing event plan. At issuance, such shares had a value of
$3,014, $1,167 and $1,363, respectively. |
|
Under compensation plan established for Mr. Gleasman by the board of directors, effective
January 1, 2008, Mr. Gleasman’s annual compensation is $300,000, payable only if the
company has sufficient cash to pay all or any portion of such amount. The company did not
have cash to pay such compensation for the years ended December 31, 2009 and 2008. On
August 17, 2009, Mr. Gleasman waived all of his rights and interest in and to the
board-created compensation plan, including all of his rights and interest in and to the
amount(s) under the plan accrued to such date. |
||
| 4) | Robert W. Fishback became chief financial officer effective October 18, 2010. Under
his agreement with the company, he is paid an annual salary of $125,000, increasing to
$150,000 per annum beginning on April 1, 2011, increasing to $175,000 per annum beginning
on October 1, 2011 and increasing to $200,000 per annum beginning on January 1, 2012. He
is entitled to fully paid health care and dental benefits. Effective October 18, 2010,
Mr. Fishback was granted an option to acquire 250,000 shares of the company’s $.01 par
value common stock exercisable for a period of ten years at an exercise price of $.85 per
common share. The option vests as follows: 62,500 shares immediately; 62,500 shares on
October 18, 2011; an additional 62,500 shares on October 18, 2012 and 62,500 shares of
October 18, 2013. |
|
| 5) | Mr. Sullivan served as the company’s general counsel for the years ended December
31, 2008, 2009 and 2010. He was paid a consulting fee monthly in business consultants
stock based upon the closing price of the company’s common stock as of the last day of
the previous month. The amount of Mr. Sullivan’s consulting fee was determined by the
board of directors from time to time. As a participant in the company’s commercializing
event plan, Mr. Sullivan was paid 1,005 business consultants shares in 2008, 389 business
consultants shares in 2009 and 2,673 business consultants shares in 2010, all under the
company’s commercializing event plan. At issuance, such shares had a value of $3,014,
$1,167, and $1,363, respectively. |
|
| 6) | Represents payments made in accordance with company’s commercializing event plan
during years ended December 31, 2008, 2009 and 2010. |
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OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2010
| Option Awards | Stock Awards | |||||||||||||||||||||||||||||||||||
| Equity | ||||||||||||||||||||||||||||||||||||
| Incentive | ||||||||||||||||||||||||||||||||||||
| Plan | ||||||||||||||||||||||||||||||||||||
| Awards: | ||||||||||||||||||||||||||||||||||||
| Number | ||||||||||||||||||||||||||||||||||||
| Equity | Market | of | ||||||||||||||||||||||||||||||||||
| Incentive Plan | Value of | Unearned | ||||||||||||||||||||||||||||||||||
| Awards: | Number | Shares | Shares, | Equity Incentive | ||||||||||||||||||||||||||||||||
| Number of | Number of | Number | of Shares | or Units | Units or | Plan Awards: | ||||||||||||||||||||||||||||||
| Securities | Securities | of Securities | or Units of | of Stock | Other | Market or Payout | ||||||||||||||||||||||||||||||
| Underlying | Underlying | Underlying | Stock | That | Rights | Value of Unearned | ||||||||||||||||||||||||||||||
| Unexercised | Unexercised | Unexercised | Option | That Have | Have | That Have | Shares, Units or | |||||||||||||||||||||||||||||
| Options | Options | Unearned | Exercise | Option | Not | Not | Not | Other Rights That | ||||||||||||||||||||||||||||
| (#) | (#) | Options | Price | Expiration | Vested | Vested | Vested | have Not Vested | ||||||||||||||||||||||||||||
| Name | Exercisable | Unexercisable | (#) | ($) | Date | (#) | ($) | (#) | ($) | |||||||||||||||||||||||||||
| (a) | (b) | (c) | (d) | (e) | (f) | (g) | (h) | (i) | (j) | |||||||||||||||||||||||||||
Estate of James Y. Gleasman |
39,575 | — | — | $ | 5.00 | 2013 | (1) | — | $ | — | — | $ | — | |||||||||||||||||||||||
Richard A. Kaplan |
3,000,000 | 2,150,000 | — | $ | 0.36 | 2020 | (2) | — | $ | — | — | $ | — | |||||||||||||||||||||||
Robert W. Fishback |
62,500 | 187,500 | — | $ | 0.85 | 2020 | (3) | — | $ | — | — | $ | — | |||||||||||||||||||||||
Keith E. Gleasman |
31,818 | — | — | $ | 5.00 | 2013 | (4) | — | $ | — | — | $ | — | |||||||||||||||||||||||
| 1) | 39,575 common stock purchase options exercisable at $5.00 per common share expiring on
December 21, 2013. |
|
| 2) | On September 30, 2010, Mr. Kaplan was granted an option to acquire 5,150,000 shares of
the company’s $.01 par value common stock exercisable for a period of ten years at $.36 per
common share. The option vests as follows: 1,000,000 shares immediately; 1,000,000 shares
upon the closing price of the company’s common stock reaching $1.00 per share; another
1,000,000 upon the closing price reaching $2.00 per share; another 1,000,000 upon the
closing price reaching $3.00 per share and the balance of 1,150,000 upon the closing price
reaching $4.00 per share. 3,000,000 options have vested under the option agreement. |
|
| 3) | Effective October 18, 2010, Mr. Fishback was granted an option to acquire 250,000 shares
of the company’s $.01 par value common stock exercisable for a period of ten years at an
exercise price of $.85 per common share. The option vests as follows: 62,500 shares
immediately; 62,500 shares on October 18, 2011; an additional 62,500 shares on October 18,
2012 and 62,500 shares of October 18, 2013. |
|
| 4) | 31,818 common stock purchase options exercisable at $5.00 per common share expiring on
December 21, 2013. |
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DIRECTOR COMPENSATION FOR THE YEAR ENDED DECEMBER 31, 2010
| Change in Pension | ||||||||||||||||||||||||||||
| Fees | Value and | |||||||||||||||||||||||||||
| Earned or | Non-Equity | Nonqualified | ||||||||||||||||||||||||||
| Paid in | Stock | Option | Incentive Plan | Deferred | All Other | |||||||||||||||||||||||
| Cash | Awards | Awards | Compensation | Compensation | Compensation | Total | ||||||||||||||||||||||
| Name | ($) | ($) | ($) | ($) | Earnings ($) | ($) | ($) | |||||||||||||||||||||
| (a) | (b) | (c) | (d) | (e) | (f) | (g) | (h) | |||||||||||||||||||||
Daniel R. Bickel (1) |
$ | — | $ | 33,636 | $ | — | $ | — | $ | — | $ | — | $ | 33,636 | ||||||||||||||
Herbert H. Dobbs (2) |
$ | — | $ | 7,711 | $ | — | $ | — | $ | — | $ | — | $ | 7,711 | ||||||||||||||
Joseph B. Rizzo (3) |
$ | — | $ | 26,520 | $ | — | $ | — | $ | — | $ | — | $ | 26,520 | ||||||||||||||
Gary A. Siconolfi (4) |
$ | — | $ | 239,472 | $ | — | $ | — | $ | — | $ | — | $ | 239,472 | ||||||||||||||
Asher J. Flaum(5) |
$ | — | $ | 23,146 | $ | — | $ | — | $ | — | $ | — | $ | 23,146 | ||||||||||||||
William W. Destler (6) |
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
Thomas F. Bonadio (6) |
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
John W. Heinricy (6) |
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
Charles N. Mills (6) |
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
E. Philip Saunders (6) |
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
Wesley K. Clark (6) |
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
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| 1) | Daniel R. Bickel was paid $19,673 in business consultants shares for services rendered
during 2010 as a director and $12,600 in business consultants shares for services rendered
in 2010 as chairman of the company’s audit committee. In 2010, he was paid 2,673 common
shares with a value at issuance of $1.363 under the company’s commercializing event plan.
Mr. Bickel retired as a director and member of the Audit Committee effective October 15,
2010. |
|
| 2) | Herbert H. Dobbs was paid $6,348 in business consultants shares for services rendered
during 2010 as a director. In 2010, he was paid 2,673 common shares with a value at issuance
of $1,363 under the company’s commercializing event plan. Dr. Dobbs retired as a director
effective October 19, 2010. |
|
| 3) | Joseph B. Rizzo was paid $19,802 in business consultants shares for services rendered
during 2010 as a director and $5,355 in business consultants shares for services rendered in
2010 as chairman of the company’s nominating committee. In 2010, he was paid 2,673 common
shares with a value at issuance of $1,363 under the company’s commercializing event plan.
Mr. Rizzo retired as a director effective October 15, 2010. |
|
| 4) | Gary A. Siconolfi was paid $238,109 in business consultants shares for services rendered
during 2010 as a director, chairman of the board, chairman of the company’s executive
committee, chairman of the company governance and compensation committee and special
services rendered in connection with the engagement of the company’s new chief executive
officer. In 2010, he was paid 2,673 common shares with a value at issuance of $1,363 under
the company’s commercializing event plan. |
|
| 5) | Asher J. Flaum was paid $21, 783 in business consultants shares for services rendered in
2010 as a director. In 2010, he was paid 2,673 common shares with a value at issuance of
$1,363 under the company’s commercializing event plan. |
|
| 6) | William W. Destler, Thomas F. Bonadio, John W. Heinricy, Charles N. Mills, E. Philip
Saunders were not compensated as directors for the year ended December 31, 2010. Wesley K.
Clark was elected to the board effective January 28, 2011. |
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Discussion of Director Compensation
1) Participation in the Nonmanagement Directors’ Plan
On October 31, 2007, the Board of Directors approved a Nonmanagement Directors’ Plan by which,
effective for the quarter commencing July 1, 2007 and for all subsequent quarters commencing
thereafter, all individuals who were directors of the company but who were not officers, employees
or consultants, were paid $26,460 per annum for board and committee service. In addition, the
chairman of the audit committee would receive an additional $13,125 per annum and the chairman of
the nominating committee would receive an additional $5,355 per annum.
In recognition of the circumstance that the chairman of the board, chairman of the governance and
compensation committee and the chairman of then-existing executive committee is the same
individual, the value of such service performed by such individual and the fact that the time
expended by such individual in service to the company in each of these positions had expanded
greatly as the result of the Sarbanes-Oxley Act, the Board approved an increase in the fee payable
to such person to $125,000 per annum. Effective for the year commencing January 1, 2010, this fee
for the chairman of the board was increased to $175,000 per annum.
Daniel R. Bickel, Herbert H. Dobbs, Asher J. Flaum, Joseph B. Rizzo and Gary A. Siconolfi were each
eligible to participate in the Nonmanagement Directors’ Plan during 2010. Keith E. Gleasman and
James Y. Gleasman were not eligible to participate since they were executive officers of the
company. Dr. William W. Destler elected not to participate in the Nonmanagement Directors’ Plan and
effective March 29, 2010 Dr. Dobbs elected to withdraw from participation.
On November 3, 2010, the board of directors terminated the Nonmanagement Directors’ Plan.
2) Participation in Commercializing Event Plan
On October 31, 2007, the board of directors the “2007 Commercializing Event” Plan (“2007 Event
Plan”). The 2007 Event Plan provided that upon the happening of any “commercializing event”, each
of the directors and executive officers of the company as well as certain other management
personnel shared equally in 6% of the gross dollars generated by the commercializing event. On
February 3, 2010, each director received 2,673 common shares valued at $8,019 as a result of a
commercializing event pursuant to the 2007 Event Plan.
On November 3, 2010, the board of directors terminated the 2007 Event Plan.
3) Participation in 1998 Stock Option Plan
On December 1, 1997, the company’s board of directors adopted the company’s 1998 Stock Option Plan
pursuant to which officers, directors, key employees and/or consultants of the company may be
granted incentive stock options and/or non-qualified stock options to purchase up to an aggregate
of 2,000,000 shares of the company’s common stock. On May 27, 1998, the company’s shareholders
approved the 1998 Stock Option Plan. On December 17, 1998, the company registered the shares
reserved for issuance under the 1998 Stock Option Plan under the Securities Act of 1933.
With respect to incentive stock options, the Stock Option Plan provided that the exercise price of
each such option must be at least equal to 100% of the fair market value of the common stock on the
date that such option is granted (110% of fair market value in the case of shareholders who, at the
time the option is granted, own more than 10% of the total outstanding common stock), and required
that all such options have an expiration date not later than the date which is one day before the
tenth anniversary of the date of the grant of such options (or the fifth anniversary of the date of
grant in the case of 10% shareholders). However, in the event that the option holder ceases to be
an employee of the company, such option holder’s incentive options immediately terminate. Pursuant
to the provisions of the Stock Option Plan, the aggregate fair market value, determined as of the
date(s) of grant, for which incentive stock options are first exercisable by an option holder
during any one calendar year cannot exceed $100,000.
With respect to non-qualified stock options, the Stock Option Plan permitted the exercise price to
be less than the fair market value of the common stock on the date the option is granted and
permitted Board discretion with respect to the establishment of the terms of such options. Unless
the Board otherwise determined, in the event that the option holder ceases to be an employee of the
company, such option holder’s non-qualified options immediately terminate.
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As of December 31, 2010, current and former officers and directors held 391,848 common stock
options, exercisable until 2013 at $5.00 per share.
The Stock Option Plan terminated on May 27, 2008. Consequently, no new options will be granted
under the Stock Option Plan although outstanding options remain exercisable in accordance with
their terms.
4) Participation in 2011 Stock Option Plan
All directors are eligible to participate in the company’s 2011 Stock Option Plan which was adopted
by the board of directors on November 3, 2010 and approved by the company’s shareholders at the
annual meeting held on January 27, 2011.
Effective January 28, 2011, the board granted an option under the 2011 Stock Option Plan for
250,000 common shares to a new director. The option is exercisable in quarterly installments of
62,500 shares on each of the four anniversary dates of the grant at $.90 per common share. Each
installment must be exercised within two and one-half months after the taxable year in which the
installment vests. The board also granted this same director a separate option under the 2011 Stock
Option Plan for 25,000 common shares exercisable for ten years at $.90 per common share.
| Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED SHAREHOLDER MATTERS |
Security Ownership — Common Stock
The following table presents information concerning the beneficial ownership of the shares of our
common stock as of December 31, 2010 (with respect to Wesley K. Clark, January 28, 2011) by:
| • | each person who is known by us to beneficially own more than 5% of our common stock; |
||
| • | each of our directors; |
||
| • | each of our named executive officers; and |
||
| • | all of our directors and executive officers as a group. |
The number and percentage of shares beneficially owned are based on 45,685,678 shares of common
stock outstanding as of December 31, 2010. Beneficial ownership is determined under rules
promulgated by the Securities and Exchange Commission. Shares of common stock subject to options
that are exercisable on December 31, 2010 or exercisable within 60 days thereafter are deemed to be
outstanding and beneficially owned by the person holding the options for the purpose of calculating
the number of shares beneficially owned and the percentage ownership of that person, but are not
deemed to be outstanding for the purpose of calculating the percentage ownership of any other
person. Except as indicated in the footnotes to this table, these persons have sole voting and
investment power with respect to all shares of our common stock shown as beneficially owned by
them.
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| Number of | Percent | |||||||||
| Name of | Shares | of Shares | ||||||||
| Beneficial Owner | Position | Owned | Owned | |||||||
Estate of James Y. Gleasman |
N/A | 3,802,919 | (1) | 8.3 | % | |||||
Gary A. Siconolfi |
Chairman of Board | 596,667 | (2) | 1.3 | % | |||||
Richard A. Kaplan |
Chief Executive Officer, Torvec, Inc.; Director | 3,000,000 | (3) | 6.2 | % | |||||
Keith E. Gleasman |
President, Torvec, Inc.; Director | 9,383,096 | (4) | 20.6 | % | |||||
Robert W. Fishback |
Chief Financial Officer and Secretary | 87,302 | (5) | Less than 1 | % | |||||
Thomas Bonadio |
Director | — | — | |||||||
Wesley K. Clark |
Director | 25,000 | (6) | Less than 1 | % | |||||
William W. Destler |
Director | 186,667 | Less than 1 | % | ||||||
Asher J. Flaum |
Director | 560,006 | (7) | 1.2 | % | |||||
John Heinricy |
Director | — | — | |||||||
Charles N. Mills |
Director | — | — | |||||||
E. Philip Saunders |
Director | — | — | |||||||
All 5% Owners, Directors
and Named Executive
Officers as a Group |
17,641,657 | (8) | 35.8 | % | ||||||
| (1) | Includes 39,575 shares which may be purchased through the exercise of ten year options
granted on December 22, 2003, exercisable at $5.00 per share. |
|
| (2) | Includes 100,000 shares which may be purchased through the exercise of a ten year option
granted on October 15, 2003, exercisable at $5.00 per share. |
|
| (3) | Represents 3,000,000 common shares which may be acquired upon the exercise of a ten year
non-qualified stock option granted on September 30, 2010 at an exercise price of $.36 per
share. The balance of the option, namely 2,150,000 common shares will vest when the company’s
stock price reaches certain targets as set forth in the stock option agreement. |
|
| (4) | Includes 31,818 shares which may be purchased through the exercise of ten year options
granted on December 22, 2003, exercisable at $5.00 per share. Includes 30,000 shares owned by
Mr. Gleasman’s son. Includes 1,400,000 shares held by the Vernon E. Gleasman Grandchildren’s
Trust and 1,400,000 shares held by the Margaret F. Gleasman’s Grandchildren’s Trust of which
Mr. Gleasman is co-trustee. Includes 1,666,666 shares held by the James Y. Gleasman Children’s
Trust of which Mr. Gleasman is co-trustee. |
|
| (5) | Includes 24,802 shares of common stock owned directly by Mr. Fishback, and 62,500 common
shares which may be acquired upon the exercise of a ten year non-qualified stock option
granted on October 18, 2010 at an exercise price of $.85 per share. |
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| (6) | Includes 25,000 shares which may be purchased through the exercise of a ten year option
granted effective January 28, 2011, exercisable at $.90 per common share. |
|
| (7) | Includes 120,006 shares of common stock and 400,000 common stock warrants owned directly by a
limited liability company, of which Mr. Flaum is a member. |
|
| (8) | Includes an aggregate 171,393 shares which may be purchased through the exercise of options
exercisable at $5.00 per share, 3,000,000 shares which may be purchased through the exercise
of options exercisable at $.36 per share, 62,500 shares which may be purchased through
exercising options exercisable at $.85 per share,
25,000 shares which may be purchased through the exercise of options exercisable at $.90 per
share, and 400,000 shares which may be purchased through the exercise of warrants at $.44 per
share. Includes 1,400,000 shares held by the Vernon E. Gleasman Grandchildren’s Trust, 1,400,000
shares held by the Margaret F. Gleasman Grandchildren’s Trust and 1,666,666 held by the James Y.
Gleasman Children’s Trust by virtue of Keith E. Gleasman serving as the co-trustee of such
trusts. |
Security Ownership — Preferred Stock
No director, executive officer and/or 5% shareholder owns any of our Class A Preferred or Class B
Preferred.
| Item 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE |
Certain Transactions
| (1) | During the ten plus years prior to the incorporation of the company, Vernon E., Keith E. and
James Y. Gleasman invented and patented numerous technologies as disclosed in domestically and
internationally filed patents. Upon the company’s incorporation, the Gleasmans assigned all of
their right, title and interest to and in such inventions and patents to the company in exchange
for the issuance of 16,464,400 shares of the company’s common stock and the agreement of the
company to pay the Gleasmans the sum of $365,000 for expenditures in the development of these
inventions and products, the Gleasmans having agreed to waive and release the company from payment
of any other expenses that they had incurred in the development of these inventions and products.
The board of directors of the company concluded that the value of the inventions, patents and
patent applications assigned to the company, as well as the value of the services rendered, had a
value in excess of the par value of the number of shares transferred to the assignors and service
providers, respectively. Shares issued are fully paid and nonassessable. |
|
| (2) | On December 1, 1997, the company entered into three-year consulting agreements with
Vernon, Keith and James Gleasman (major stockholders, directors and officers) whereby each was
obligated to provide services to the company in exchange for compensation of $12,500 each per
month. In 1997 the company granted each Vernon, Keith and James Gleasman 25,000 nonqualified common
stock options, exercisable immediately at $5.00 per common share for ten years. These options
expired in 2007 and were not extended or replaced. |
|
During 2001, the company issued 126,667 common shares under these agreements for
approximately $665,000 of accrued consulting fees. |
||
On September 30, 2002, the company granted 727,047 nonqualified common stock options,
all exercisable immediately at $5.00 per common share, in settlement of approximately $653,000 of
accrued consulting fees under these agreements. These options expired September 30, 2007 and were
not extended or replaced. |
||
On December 23, 2003, the company granted 166,848 nonqualified common stock options
exercisable immediately at $5.00 per common share, in settlement under the agreements for accrued
consulting fees of approximately $265,000. These options are exercisable for ten years. |
||
The company’s consulting agreements with Vernon, Keith and James Gleasman expired on
December 1, 2003 and were not renewed. |
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| (3) | Effective January 1, 2008, the board of directors instituted a compensation plan for James and
Keith Gleasman by which the company would compensate each of them for services performed and
inventions and know-how transferred to the company at the rate of $300,000 per year. Actual payment
of this compensation, or any portion thereof, was conditioned upon a board of director
determination that the company had the requisite cash, after the complete funding of all ongoing
company projects, to make payment. |
|
The company did not have the requisite cash available to pay the Gleasmans’ compensation
under this arrangement from January 1, 2008 through August 17, 2009, the date on which each of the
Gleasmans waived all of his rights and interest in and to the board-created compensation plan,
including all of his rights and interest in and to the amount(s) under the plan accrued to such
date. As a result of such waiver, of the $942,000 amount accrued under the plan at June 30, 2009,
$900,000 was reclassified to equity as a contribution of services and $42,000 accrued under the
plan for payroll taxes was recorded as a reduction to general and administrative expenses in the
quarter ended June 30, 2009. |
||
For periods for which there is no compensation plan, the company is required to record
the estimated value of each of the Gleasman’s services rendered to the company (estimated at
$300,000 each per annum) as a contribution of services under generally accepted accounting
principles applicable to the company and is required under the same accounting principles to
allocate the amount of such contribution between research and development expenses and general and
administrative expenses. For the year ended December 31, 2010, the company recorded $125,000 to
research and development expense and $236,000 to general and administrative expense, based upon
management’s estimate of the Gleasmans’ time allocation. |
||
Mr. James Y. Gleasman retired as the company’s chief executive officer, interim chief
financial officer and member of the board of directors effective March 14, 2010. |
||
| (4) | During the years ended December 31, 2010 and 2009, the company paid in business consultant
common shares or cash $94,494 and $94,700 respectively, to a member of the Gleasman family for
administrative, technological and engineering consulting services. Management believes this
compensation is reasonable. |
|
| (5) | During the years ended December 31, 2010 and 2009, the company paid in business consultant
common shares or cash $76,002 and $87,700 to a family member of its general counsel for engineering
services rendered to the company. Management believes this compensation is reasonable. |
|
| (6) | On September 14, 2007, the company moved its executive offices from Pittsford, New York to
Rochester, New York, which includes both a manufacturing and executive office facility. The
Rochester facility is owned by a partnership, with which Asher J. Flaum, a company director, is
associated. On April 28, 2008, the company’s board of directors approved the terms of a lease and
such lease was executed on April 29, 2008. |
|
| (7) | On June 29, 2000, the company granted an exclusive world-wide license of all its
automotive technologies to Variable Gear, LLC for the aeronautical and marine markets for $150,000
cash. The company recorded the receipt of the $150,000 as deferred revenue to be recognized when
all conditions for earning such fees are complete. At the time of its formation and through June 6,
2007 when his interest was purchased, Robert C. Horton, a company shareholder, owned 51% of
Variable Gear, LLC. On June 6, 2007, the company purchased Mr. Horton’s entire interest in Variable
Gear for 5,000 shares of common stock for $19,250. In fiscal 2007, the company recognized the
deferred revenue of $150,000 as other income and recorded an impairment of the goodwill of $19,250,
since there were no operations of the entity since inception. |
|
| (8) | On August 18, 2006, the company granted 400,000 nonqualified common stock warrants valued
at approximately $1,237,000 to a company one member of which is a director. The warrants are
immediately exercisable at $3.27 per common share for a period of ten years. These warrants were
modified and reissued upon mutual agreement of the parties effective October 15, 2010. These
modified warrants are immediately exercisable at $.44 per common share for a period of ten years
from the modification date. This modification was valued at $68,000 and the company recognized
this expense in the fourth quarter of 2010. |
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| (9) | On June 19, 2006, the company awarded an aggregate 360,000 nonqualified common stock
warrants valued at approximately $629,000 to a director for additional services rendered by such
director as chairman of the board’s executive committee during 2006. |
|
| (10) | On August 17, 2005, the company repaid $28,000 indebtedness to a stockholder by issuing
11,667 restricted common shares, such number of shares based upon the closing price of the
company’s common stock on August 16, 2005. |
|
| (11) | On April 28, 2008, the board of directors approved a one-time payment to its chairman of the
governance and compensation committee of $46,000 for special services rendered in connection with
required compliance under the Sarbanes-Oxley Act. This amount was paid by the issuance of 19,167
common shares valued as of the closing price on April 28, 2008. The company charged $46,000 to
operations in connection with such services. |
|
| (12) | On October 26, 2010, the company issued 164,187 common shares valued at approximately $62,400 to
each of its chairman of the board and general counsel for services rendered in connection with the
engagement of the company’s new chief executive officer. |
|
| (13) | On December 13, 2010, the company executed a consultant agreement with a director to provide
consulting services to the company at a rate of $200 per hour. Pursuant to the agreement, the
company agreed to pay the consultant an incentive fee equal to $10,000 or proportionate part
thereof for each $1,000,000 of revenue or proportionate part thereof actually paid and received by
the company for a period of five years provided the definitive agreement with the third party payer
results from the material efforts of the consultant. |
Other than as described herein, there have been no material transactions, series of similar
transactions or currently proposed transactions to which the company was or is a party, in which
the amount involved exceeds $120,000 and in which any director or executive officer, or any
security holder who is known to the company to own of record or beneficially more than five percent
of the company’s common stock, or any member of the immediate family of any of the foregoing
persons, had a material interest.
Director Independence
See Item 10 of this annual report for a discussion regarding the independence of our directors
under standards set forth by the Securities and Exchange Commission and by the National Association
of Securities Dealers, Inc.
| Item 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Principal Accountant Fees and Services
Audit Fees
EisnerAmper LLP (formerly Eisner LLP) served as the company’s independent registered public
accounting firm for the years ended December 31, 2010 and 2009. The aggregate expense incurred by
the company for professional services rendered by EisnerAmper LLP (formerly Eisner LLP) for the
audit of the company’s annual consolidated financial statements included in the company’s annual
report on Form 10-K, for the review of the company’s consolidated financial statements included in
the company’s quarterly reports on Form 10-Q, and for services normally provided in connection with
statutory and regulatory filings or engagements was approximately $130,000 for the year ended
December 31, 2010 and approximately $134,000 for the year ended December 31, 2009.
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Audit-Related Fees
The company incurred a total of $3,000 in other fees with EisnerAmper LLP (formerly Eisner LLP) for
the year ended December 31, 2010, compared with $0 in 2009. The $3,000 expense incurred in 2010
was related to fees for a Form S-8 registration filing.
Tax Fees
The company did not engage EisnerAmper LLP (formerly Eisner LLP) for any tax services for the years
ended December 31, 2010 and 2009.
All Other Fees
The Company did not engage EisnerAmper LLP (formerly Eisner LLP) for any other services for the
years ended December 31, 2010 and 2009.
Total Fees
The company incurred total fees of approximately $133,000 for the year ended December 31, 2010 with
its principal accountant, EisnerAmper LLP (formerly Eisner LLP), compared to approximately $134,000
in 2009. The shareholders approved the Audit Committee’s appointment of EisnerAmper LLP as the
company’s independent registered public accounting firm for the year ended December 31, 2010 at the
annual meeting of shareholders held on January 27, 2011.
Pre-Approval of Policies and Procedures
Article II of our Audit Committee Charter, as amended, specifically provides that the Audit
Committee must pre-approve all auditing and legally permissible non-auditing services to be
performed by the company’s registered public accounting firm. In accordance with such mandate, at a
meeting held on January 15, 2003, the Audit Committee established a set of procedures governing the
pre-approval process. Under the procedure, for each fiscal year, the Committee first shall
determine the general nature and scope of the audit, audit-related, tax and other legally
permissible non-audit services to be performed by the company’s registered accounting firm. Prior
to the performance of any services, the Committee shall require such firm to submit to the
Committee one or more engagement letter(s) delineating specific audit, audit-related, tax and other
legally permissible non-audit services to be rendered (together with a schedule of fees with
respect to each of such services). Upon receipt of such engagement letter(s), the Committee shall
review and approve such engagement letter(s) in advance of the performance of any such services,
including the specific advance approval of fees in connection with each of such services. Upon
approval and execution of each of such engagement letter(s) by the Committee, the registered public
accounting firm shall perform such pre-approved services in accordance with the terms and
conditions of each engagement letter and shall not engage in any other services unless each of said
services, if any, shall have been specifically approved (including the specific approval of all
fees associated therewith) by the Audit Committee in advance of the rendering any such service.
Audit Committee Approval
The Audit Committee pre-approved 100% of the services rendered by EisnerAmper LLP in accordance
with such Committee’s Pre-Approval Policies and Procedures.
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| Item 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
| (a) | Exhibits |
The following Exhibits, as applicable, are attached to this Annual Report (Form 10-K). The Exhibit
Index is found on the page immediately succeeding the signature page and the Exhibits follow on the
pages immediately succeeding the Exhibit Index.
| (2) | Plan of acquisition, reorganization, arrangement, liquidation, or succession |
| 2.1 | Agreement and Plan of Merger, dated November 29, 2000 by and among Torvec Subsidiary
Corporation, Torvec, Inc., UTEK Corporation and ICE Surface Development, Inc. incorporated by
reference to Form 8-K filed November 30, 2000 and Form 8K/A filed February 12, 2001. |
| (3) | Articles of Incorporation, By-laws |
| 3.1 | Certificate of Incorporation, incorporated by reference to Form 10-SB/A, Registration
Statement, registering Company’s $.01 par value common stock under section 12(g) of the Securities
Exchange Act of 1934; |
||
| 3.2 | Certificate of Amendment to the Certificate of Incorporation dated August 30, 2000,
incorporated by reference to Form SB-2 filed October 19, 2000; |
||
| 3.3 | Certificate of Correction dated March 22, 2002, incorporated by reference to Form 10-KSB filed
for fiscal year ended December 31, 2002; |
||
| 3.4 | By-laws, as amended by shareholders on January 24, 2002, incorporated by reference to Form
10-KSB filed for fiscal year ended December 31, 2002; |
||
| 3.5 | Certificate of Amendment to the Certificate of Incorporation dated October 21, 2004 setting
forth terms and conditions of Class B Preferred, incorporated by reference to Form 10-QSB filed for
fiscal quarter ended September 30, 2004. |
||
| 3.6 | Certificate of Amendment to the Certificate of Incorporation dated January 26, 2007 increasing
authorized common shares from 40,000,000 to 400,000,000. |
| (4) | Instruments defining the rights of holders including indentures |
|
None. |
||
| (9) | Voting Trust Agreement |
|
None. |
97
Table of Contents
| (10) | Material Contracts |
| 10.2 | The Company’s 1998 Stock Option Plan and related Stock Options Agreements, incorporated by
reference to Form S-8, Registration Statement, registering 2,000,000 shares of the Company’s $.01
par value common stock reserved for issuance thereunder, effective December 17, 1998; |
|||
| 10.3 | The Company’s Business Consultants Stock Plan, incorporated by reference to Form S-8,
Registration Statement, registering 200,000 shares of the Company’s $.01 par value common stock
reserved for issuance thereunder, effective June 11, 1999, as amended by reference to Form S-8
Registration Statements registering an additional 200,000, 200,000, 100,000, 800,000, 250,000,
250,000, 350,000, 250,000, and 2,500,000 shares of the Company’s $.01 par value common stock
reserved for issuance thereunder, effective October 5, 2000, November 7,
2001, December 21, 2001, February 1, 2002, November 12, 2002, January 22, 2003, May 23, 2003,
November 26, 2003, and April 20, 2004 respectively; |
|||
| 10.4 | Termination of Neri Service and Space Agreement dated August 31, 1999, incorporated by
reference to Form 10-QSB filed for the quarter ended September 30, 1999; |
|||
| 10.5 | Operating Agreement of Variable Gear, LLC dated June 28, 2000, incorporated by reference to
Form 10-QSB filed for the quarter ended June 30, 2000; |
|||
| 10.6 | License Agreement between Torvec, Inc. and Variable Gear, LLC dated June 28, 2000,
incorporated by reference to Form SB-2 filed October 19, 2000; |
|||
| 10.7 | Investment Agreement with Swartz Private Equity, LLC dated September 5, 2000, together with
attachments thereto, incorporated by reference to Form 8-K filed October 2, 2000; |
|||
| 10.8 | Extension of and Amendment to Consulting Agreement with James A. Gleasman, incorporated by
reference to Form 10-KSB filed for the fiscal year ended December 31, 2000; |
|||
| 10.9 | Extension of and Amendment to Consulting Agreement with Keith E. Gleasman, incorporated by
reference to Form 10-KSB filed for the fiscal year ended December 31, 2000; |
|||
| 10.10 | Extension of and Amendment to Consulting Agreement with Vernon E. Gleasman, incorporated by
reference to Form 10-KSB filed for the fiscal year ended December 31, 2000; |
|||
| 10.11 | Option and Consulting Agreement with Marquis Capital, LLC dated February 10, 1999,
incorporated by reference to Form 10-QSB filed for quarter ended March 31, 2001; |
|||
| 10.12 | Option and Consulting Agreement with PMC Direct Corp., dated February 10, 1999, incorporated
by reference to Form 10-QSB filed for quarter ended March 31, 2001; |
|||
| 10.13 | Investment Banking Services Agreement with Swartz Institutional Finance (Dunwoody Brokerage
Services, Inc.) dated December 8, 2000, incorporated by reference to Form 10-QSB filed for quarter
ended March 31, 2001; |
|||
| 10.14 | Employment Agreement with Michael Martindale, Chief Executive Officer, dated August 1, 2001,
incorporated by reference to Form 10-QSB filed for fiscal quarter ended September 30, 2001; |
|||
| 10.15 | Employment Agreement with Jacob H. Brooks, Chief Operating Officer, dated August 1, 2001,
incorporated by reference to Form 10-QSB filed for fiscal quarter ended September 30, 2001; |
|||
| 10.16 | Employment Agreement with David K. Marshall, Vice-President of Manufacturing, dated September
1, 2001, incorporated by reference to Form 10-QSB filed for fiscal quarter ended September 30,
2001; |
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Table of Contents
| 10.17 | Investment Banking Services Agreement with Swartz Institutional Finance (Dunwoody Brokerage
Services, Inc.), as amended, dated October 23, 2001, incorporated by reference to Form 10-QSB filed
for fiscal quarter ended September 30, 2001; |
|||
| 10.18 | Stock Option Agreement with Samuel Bronsky, Chief Financial and Accounting Officer, dated
August 28, 2001, incorporated by reference to Form 10-QSB filed for fiscal quarter ended September
30, 2001; |
|||
| 10.19 | Pittsford Capital Group, LLC Agreement dated January 30, 2002, incorporated by reference to
Form 10-KSB filed for fiscal year ended December 31, 2001; |
|||
| 10.20 | Gleasman-Steenburgh Indemnification Agreement dated April 9, 2002, incorporated by reference
to Form 10-KSB filed for fiscal year ended December 31, 2001; |
|||
| 10.21 | Series B Warrant dated April 10, 2002, incorporated by reference to Form 10-KSB filed for
fiscal year ended December 31, 2001; |
|||
| 10.22 | Billow Butler & Company, LLC investment banking engagement letter dated October 1, 2003,
incorporated by reference to Form 10-QSB filed for fiscal quarter ended September 30, 2003; |
|||
| 10.23 | Letter of Acknowledgement and Agreement with U.S. Environmental Protection Agency dated
February 4, 2004, incorporated by reference to Form 10-KSB filed for fiscal year ended December 31,
2003; |
|||
| 10.24 | Letter Agreement with CXO on the GO, L.L.C. dated February 20, 2004, incorporated by
reference to Form 10-KSB filed for fiscal year ended December 31, 2003; |
|||
| 10.25 | Letter Amendment with CXO on the GO, L.L.C. dated February 23, 2004, incorporated by
reference to Form 10-KSB filed for fiscal year ended December 31, 2003; |
|||
| 10.26 | Lease Agreement for premises at Powder Mills Office Park, 1169 Pittsford-Victor Road, Suite
125, Pittsford, New York 14534, dated July 16, 2004; incorporated by reference to Form 10-QSB filed
for fiscal quarter ended June 30, 2004; |
|||
| 10.27 | Lease Agreement for testing facility and Mustang dynamometer, dated July 21, 2004;
incorporated by reference to Form 10-QSB filed for fiscal quarter ended June 30, 2004; |
|||
| 10.28 | Advisory Agreement with PNB Consulting, LLC, 970 Peachtree Industrial Blvd., Suite 303,
Suwanee, Georgia 30024; incorporated by reference to Form 10-QSB filed for fiscal quarter ended
June 30, 2004; |
|||
| 10.29 | Agreement between Torvec and ZT Technologies, Inc. dated July 21, 2004, incorporated by
reference to Form 10-QSB filed for fiscal quarter ended September 30, 2004; |
|||
| 10.30 | Assignment and Assumption of Lease between William J. Green and Ronald J. Green and Torvec,
Inc. effective as of December 31, 2004, incorporated by reference to Form 10-KSB filed for fiscal
year ended December 31,2004; |
|||
| 10.31 | Bill of Sale between Dynamx, Inc. and Torvec, Inc. for equipment and machinery, incorporated
by reference to Form 10-KSB filed for fiscal year ended December 31, 2004; |
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Table of Contents
| 10.32 | Lease and Services Agreement between Robert C. Horton as Landlord and Torvec, Inc. as Tenant
dated March 18, 2005, incorporated by reference to Form 10-KSB filed for fiscal year ended December
31, 2004; |
|||
| 10.33 | Settlement Agreement and Mutual Release between Torvec, Inc. and ZT Technologies, Inc. dated
March 29, 2005, incorporated by reference to Form 10-QSB filed for fiscal quarter ended March 31,
2005; |
|||
| 10.34 | Advisory Agreement between Robert C. Horton and Torvec, Inc. dated February 15, 2005,
incorporated by reference to Form 10-QSB filed for fiscal quarter ended March 31, 2005; |
|||
| 10.35 | Lease and Services Agreement between Dennis J. Trask as Landlord and Torvec, Inc. as Tenant
dated April 18, 2005, incorporated by reference to Form 10-QSB filed for fiscal quarter ended March
31, 2005; |
|||
| 10.36 | Consulting Agreement with Matthew R. Wrona, dated June 30, 2005, incorporated by reference to
Form 10-QSB filed for fiscal quarter ended June 30, 2005; |
|||
| 10.37 | Option Agreement between Matthew R. Wrona and Torvec, Inc. dated June 30, 2005, incorporated
by reference to Form 10-QSB filed for fiscal quarter ended June 30, 2005; |
|||
| 10.38 | Trust Agreement between Matthew R. Wrona, Donald Gabel, Lawrence Clark, Steven Urbanik, Floyd
G. Cady,Jr., and Michael Pomponi as Grantors and Richard B. Sullivan as Trustee, dated September
22, 2005, incorporated by reference to Form 10-QSB filed for fiscal quarter ended September 30,
2005; |
|||
| 10.39 | Consultant Agreement with Floyd G. Cady, Jr., dated October 1, 2005, incorporated by
reference to Form 10-QSB filed for fiscal quarter ended September 30, 2005; |
|||
| 10.40 | Consultant Agreement with Lawrence W. Clark, dated October 1, 2005, incorporated by reference
to Form 10-QSB filed for fiscal quarter ended September 30, 2005; |
|||
| 10.41 | Consultant Agreement with Donald W. Gabel, dated October 1, 2005, incorporated by reference
to Form 10-QSB filed for fiscal quarter ended September 30, 2005; |
|||
| 10.42 | Consultant Agreement with Michael A. Pomponi, dated October 1, 2005, incorporated by
reference to Form 10-QSB filed for fiscal quarter ended September 30, 2005; |
|||
| 10.43 | Consultant Agreement with Steven Urbanik, dated October 1, 2005, incorporated by reference to
Form 10-QSB filed for fiscal quarter ended September 30, 2005; |
|||
| 10.44 | Consultant Agreement with Kiwee Johnson, dated September 30, 2005, incorporated by reference
to Form 10-QSB filed for fiscal quarter ended September 30, 2005; |
|||
| 10.45 | Confidentiality Agreement with Joseph B. Rizzo, dated October 24, 2005, incorporated by
reference to Form 10-QSB filed for fiscal quarter ended September 30, 2005; |
|||
| 10.46 | Minutes of meeting Board of Directors Torvec, Inc., held October 19, 2004 Incorporated by
reference to annual report (Form 10-KSB) filed for the year ended December 31, 2005; |
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Table of Contents
| 10.47 | Minutes of meeting of Board of Directors dated October 13, 2006 creating the Commercializing
Event Plan, modifying the Nonmanagement Directors Plan. increasing the number of authorized shares
to be issued under Business Consultants Plan and recommending shareholder approval of increase in
number of authorized common shares from 40,000,000 to 400,000,000; |
|||
| 10.48 | Order of Supreme Court of the State of New York with respect to litigation between the
company and a management consulting firm incorporated by reference to Current Report (Form 8-K)
filed on June 20, 2006; |
|||
| 10.49 | Agreement with American Continental Group, LLC dated October 27, 2006 incorporated by
reference to Current Report (Form 8-K) filed October 30, 2006; |
|||
| 10.50 | New York State School Bus Proposal incorporated by reference to Form 10-Q filed for quarter
ended March 31, 2006; |
|||
| 10.51 | Order of Supreme Court of the State of New York directing the Monroe County, New York Clerk
to release back to the company 40,000 common shares and 245,000 common stock warrants issued to a
management consulting firm with which the company is in litigation and held in escrow by such Clerk
by virtue of a previous court order and which order directed the return to the company of a
$250,000 (less administrative fee) undertaking deposited with the Monroe County, New York Treasurer
in connection with the same litigation, incorporated by reference to quarterly report (Form 10-Q)
filed for the quarter ended March 31, 2007; |
|||
| 10.52 | License Assignment and Transfer Agreement by and between Ice Engineering, LLC and Torvec, LLC
made effective June 15, 2007 assigning license granted by Dartmouth College with respect to ice
technology from Torvec to Ice Engineering, incorporated by reference to current report (Form 8-K)
filed July 18, 2007; |
|||
| 10.53 | License Agreement by and between High Density Powertrain and Torvec, Inc. dated December 12,
2007, incorporated by reference to current report (Form 8-K) filed December 14, 2007; |
|||
| 10.54 | Consulting Agreement by and between Clifford Carlson and Torvec, Inc. dated December 12,
2007, incorporated by reference to current report (Form 8-K) filed December 14, 2007; |
|||
| 10.55 | Minutes of meeting of Governance and Compensation Committee dated February 19, 2007
establishing compensation for the company’s president and chief executive officer and amending the
company’s commercializing event plan; |
|||
| 10.56 | Consulting Agreement by and between Capital Campaigns, Inc. and Torvec, dated February 6,
2009; |
|||
| 10.57 | Settlement and Release Agreement by and between CXO on the GO of Delaware LLC, et. al. and
Torvec, Inc. et.al. dated March 6, 2009; |
|||
| 10.58 | Memorandum of Understanding between Rochester Institute of Technology and Torvec, inc. dated
as of July 31,2010, incorporated by reference to current report (Form 8-K) filed August 6, 2009; |
|||
| 10.59 | Prototype Agreement between Eastern Mining & Industrial Supply and Torvec, Inc. dated as of
November 11, 2009, incorporated by reference to current report (Form 8-K) filed November 18, 2009; |
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Table of Contents
| 10.60 | Agreement between Rochester Institute of Technology’s Center for Integrated Manufacturing
Studies and Torvec, Inc. dated as of October 6, 2009, incorporated by reference to current report
(Form 8-K) filed November 18, 2009; |
|||
| 10.61 | Resignation letter of James Y. Gleasman as chief executive officer, interim chief financial
officer and director dated March 5, 2010, incorporated by reference to current report (Form 8-K)
filed March 5, 2010; |
|||
| 10.62 | Corporate Sponsorship Agreement between Phoenix Performance, Inc. and Torvec, Inc. dated as
of May 18, 2010, incorporated by reference to current report (Form 8-K) filed May 26, 2010; |
|||
| 10.63 | Operating Agreement of Torvec-China, LLC dated as of September 11, 2010, incorporated by
reference to current report (Form 8-K) filed September 16, 2010; |
|||
| 10.64 | Exclusive Marketing Agreement between Torvec, Inc. and Torvec-China, LLC dated as of
September 11, 2010, incorporated by reference to current report (Form 8-K) filed September 16, 2010; |
|||
| 10.65 | Sales and Marketing Agreement between Torvec-China, LLC and Across-China (USA), Inc. dated as
of September 11, 2010, incorporated by reference to current report (Form 8-K) filed September 16,
2010; |
|||
| 10.66 | Convertible Promissory Note issued by Torvec, Inc. to Asher Enterprises, Inc. dated as of
July 2, 2010, incorporated by reference to current report (Form 8-K) filed July 20, 2010; |
|||
| 10.67 | Securities Purchase Agreement between Asher Enterprises, Inc. and Torvec, Inc. dated as of
July 2, 2010, incorporated by reference to current report (Form 8-K) filed July 20, 2010; |
|||
| 10.68 | Stock Option Agreement dated September 30, 2010 between the company and Richard A. Kaplan,
incorporated by reference to current report (Form 8-K) filed October 6, 2010; |
|||
| 10.69 | Employment Agreement dated October 4, 2010 between the company and Richard A. Kaplan,
incorporated by reference to current report (Form 8-K) filed October 6, 2010; |
|||
| 10.70 | Letter Agreement dated October 18, 2010 between the company and Robert W. Fishback,
incorporated by reference to current report (Form 8-K) filed October 22, 2010; |
|||
| 10.71 | Stock Option Agreement dated October 18, 2010 between the company and Robert W. Fishback,
incorporated by reference to current report (Form 8-K) filed October 22, 2010; |
|||
| 10.72 | 2011 Stock Option Plan and template agreements to be used to grant options thereunder; |
|||
| 10.73 | Agreement dated December 13, 2010 between Heinrocket Inc. as Consultant and Torvec, Inc. |
| (11) | Statement re computation of per share earnings (loss) |
|
Not applicable. |
||
| (14) | Code of Ethics |
102
Table of Contents
| (16) | Letter on change in certifying accountant |
|
None. |
||
| (18) | Letter re change in accounting principles |
|
None. |
||
| (20) | Other documents or statements to security holders |
|
None. |
||
| (21) | Subsidiaries of the registrant |
|
Ice Surface Development, Inc. (New York) Iso-Torque Corporation (New York) IVT Diesel Corp. (New York) Variable Gear, LLC (New York) Torvec China, LLC (New York) |
||
| (22) | Published report regarding matters submitted to vote of security holders |
|
None. |
||
| (23) | Consents of experts and counsel |
|
| (23.1) | EisnerAmper LLP Consent |
|
| (24) | Power of attorney |
|
None. |
||
| (31.1) | Rule 13(a)-14(a)/15(d)-14(a) Certifications — CEO |
|
| (31.2) | Rule 13(a)-14(a)/15(d)-14(a) Certifications — CFO |
|
| (32) | Section 1350 Certifications |
|
| (99) | Additional exhibits |
|
None. |
103
Table of Contents
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
| TORVEC, INC. | ||||||
Date: March 29, 2011
|
By: | /s/ Richard A. Kaplan
|
||||
| Chief Executive Officer | ||||||
In accordance with the Exchange Act, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
Dated: March 29, 2011
|
By: | /s/ Richard A. Kaplan
|
||||
| Chief Executive Officer and Director | ||||||
Dated: March 29, 2011
|
By: | /s/ Robert W. Fishback
|
||||
| Chief Financial Officer and Secretary | ||||||
Dated: March 29, 2011
|
By: | /s/ Keith E. Gleasman
|
||||
| President and Director | ||||||
Dated: March 29, 2011
|
By: | /s/ Thomas F. Bonadio
|
||||
| Director | ||||||
Dated: March 29, 2011
|
By: | /s/ Wesley K. Clark
|
||||
| Director | ||||||
Dated: March 29, 2011
|
By: | /s/ William W. Destler
|
||||
| Director | ||||||
Dated: March 29, 2011
|
By: | /s/ Asher J. Flaum
|
||||
| Director | ||||||
Dated: March 29, 2011
|
By: | /s/ John W. Heinricy
|
||||
| Director | ||||||
Dated: March 29, 2011
|
By: | /s/ Charles N. Mills
|
||||
| Director | ||||||
Dated: March 29, 2011
|
By: | /s/ E. Philip Saunders
|
||||
| Director | ||||||
Dated: March 29, 2011
|
By: | /s/ Gary A. Siconolfi
|
||||
| Director |
104
Table of Contents
EXHIBIT INDEX
| Exhibit | Description | |||
| 10.72 | 2011 Stock Option Plan and template agreements to be used to grant options thereunder |
|||
| 10.73 | Agreement dated December 13, 2010 between Heinrocket Inc. as Consultant and Torvec, Inc. |
|||
| 23.1 | EisnerAmper LLP Consent |
|||
| 31.1 | Rule 13(a)-14(a)/15(d)-14(a) Certifications — CEO |
|||
| 31.2 | Rule 13(a)-14(a)/15(d)-14(a) Certifications — CFO |
|||
| 32 | Section 1350 Certifications |
|||
105