Attached files
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(AMENDMENT NO. 2)
(Mark one)
x 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 000-51420
VALLEY FORGE COMPOSITE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
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Florida
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20-3061892
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(State or other jurisdiction of
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(IRS Employer
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incorporation or organization)
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Identification No.)
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50 East River Center Blvd., Suite 820, Covington, KY
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41011
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(Address of principal executive offices)
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(Zip Code)
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Registrant’s telephone number: (859) 581-5111
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.001 Per Share
(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. o Yes x No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes x No
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. x Yes oNo
1
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) 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. x
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company x
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
The aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 30, 2010 was $47,223,207, computed by reference to the price at which the common equity was sold as of such date.
The number of shares outstanding of the issuer’s common stock as of April 8, 2011 was 61,320,774 shares.
EXPLANATORY NOTE
This Amendment No. 2 on Form 10-K/A amends the Annual Report on Form 10-K of Valley Forge Composite Technologies, Inc. (the “Company”) for the fiscal year ended December 31, 2010 as originally filed with the Securities and Exchange Commission (the “SEC”) on April 11, 2011 and amended on April 18, 2011 (collectively, the “Original Filing”). This Amendment No. 2 amends the Original Filing to (i) include a revised Report of Independent Registered Public Accounting Firm (R.R. Hawkins & Associates International) in Part II, Item 8 to clarify that the scope of the audit with respect to fiscal years ended December 31, 2009 and December 31, 2008 was not limited to the “schedule of accounts receivable” but encompassed the financial statements as a whole and (ii) revise Part II, Item 9A to conclude on the effectiveness of the Company’s disclosure controls and procedures, provide an evaluation date regarding changes in internal control over financial reporting and clarify that no changes have “materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.”
The report has been corrected herein and issued along with the Company’s financial statements from the Original Filing, which financial statements have not been amended in any manner.
In connection with this Amendment No. 2, the Company is also amending the Exhibit Index in Part IV, Item 15 to include financial statements and new certifications by the Company’s principal executive officer / principal financial officer as Exhibits 31.1, 31.2, 32.1 and 32.2.
Except as described above, no other amendments have been made to the Original Filing. This Amendment No. 2 continues to speak as of the date of the Original Filing, and the Company has not updated the disclosure contained herein to reflect events that have occurred since the date of the Original Filing. Accordingly, this Amendment should be read in conjunction with the Company’s other filings made with the SEC subsequent to the filing of the Original Filing, including any amendments to those filings.
2
Special Note Regarding Forward-Looking Statements
Information included in this Form 10-K/A contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act. This information may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” or “project” or the negative of these words or other variations on these words or comparable terminology. These forward-looking statements are based on assumptions that may be incorrect, and there can be no assurance that these projections included in these forward-looking statements will come to pass. Actual results of the Company could differ materially from those expressed or implied by the forward-looking statements as a result of various factors. Except as required by applicable laws, the Company has no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.
In this report references to “Valley Forge,” “the Company,” “we,” “us,” and “our” refer to Valley Forge Composite Technologies, Inc. and its subsidiaries.
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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PAGE
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Reports of Independent Registered Public Accounting Firms
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4 |
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Consolidated Balance Sheets as of December 31, 2010 and 2009
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6 |
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Consolidated Statements of Operations for the years ended December 31, 2010 and 2009
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7 |
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Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the years ended December 31, 2010 and 2009
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8 |
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Consolidated Statements of Cash Flows for the years ended December 31, 2010 and 2009
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9 |
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Notes to Consolidated Financial Statements
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10 |
3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Valley Forge Composite Technologies, Inc.
We have audited the accompanying consolidated balance sheet of Valley Forge Composite Technologies, Inc. and subsidiaries (the Company) as of December 31, 2010 and the related consolidated statements of operations, shareholders’ equity, and cash flows for the year then ended. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit 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. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Valley Forge Composite Technologies, Inc. and subsidiaries at December 31, 2010, and the results of their operations and their cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has incurred net losses since inception, which raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Mountjoy Chilton Medley LLP
Louisville, Kentucky
April 8, 2011
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R.R. Hawkins & Associates International, a Professional Service Corporation
DOMESTIC & INTERNATIONAL BUSINESS CONSULTING
A superior method to building big business…”
To the Board of Directors and Shareholders
Valley Forge Composite Technologies, Inc
Covington, Kentucky
Report of Independent Registered Public Accounting Firm
We have audited the consolidated balance sheet of Valley Forge Composite Technologies, Inc. as of December 31, 2009 and 2008 and the related consolidated statements of operations, stockholders’ equity and cash flows for the years ending December 31, 2009 and 2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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 audit provides reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Valley Forge Composite Technologies, Inc. as of December 31, 2009 and 2008, the results of operations, stockholders’ equity and its cash flows for the years ending December 31, 2009 and 2008 in conformity with generally accepted accounting principles in the United States of America.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has incurred net losses since inception, which raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustment that might result from the outcome of this uncertainty.
/s/ R.R. Hawkins & Associates International, PSC
April 13, 2010
Los Angeles, CA
Corporate Headquarters
5777 W. Century Blvd. , Suite No. 1500
Los Angeles, CA 90045
T: 310.553.5707 F: 310.553.5337
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VALLEY FORGE COMPOSITE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
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Dec 31, 2010
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Dec 31, 2009
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ASSETS
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Current assets:
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Cash
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$ | 585,549 | $ | 1,492,135 | ||||
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Marketable securities
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504,063 | -- | ||||||
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Accounts receivable
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1,991,902 | 99,120 | ||||||
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Inventories
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999,952 | 151,300 | ||||||
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Prepaid expenses and other
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47,852 | 104,285 | ||||||
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Deposits with vendors
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21,000 | 21,000 | ||||||
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Total current assets
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4,150,318 | 1,867,840 | ||||||
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Property and equipment, net
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274,405 | 211,821 | ||||||
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Non-current assets:
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Security deposits
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5,535 | 5,535 | ||||||
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Loan fees, net
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-- | 129,843 | ||||||
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Total non-current assets
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5,535 | 135,378 | ||||||
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Total Assets
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$ | 4,430,258 | $ | 2,215,039 | ||||
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LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
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Current liabilities:
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Accounts payable
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$ | 2,029,425 | $ | 1,164,030 | ||||
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Accrued expenses and other
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30,886 | 53,573 | ||||||
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Deferred revenue
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1,193,765 | 858,400 | ||||||
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Convertible debenture
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-- | 42,000 | ||||||
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Due to shareholder
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124,846 | 216,558 | ||||||
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Total current liabilities
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3,378,922 | 2,334,561 | ||||||
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Long-term debt, net
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-- | 458,107 | ||||||
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Shareholders' Equity (Deficit):
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Common stock, $.001 par value, 100,000,000
shares authorized; 61,320,774 and 54,688,920 issued and
outstanding December 31, 2010 and 2009
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61,321 | 54,689 | ||||||
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Additional paid-in capital
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10,777,265 | 7,673,903 | ||||||
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Accumulated deficit
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(9,782,871 | ) | (8,306,221 | ) | ||||
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Accumulated other comprehensive income (loss)
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(4,379 | ) | -- | |||||
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Total shareholders' equity (deficit)
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1,051,336 | (577,629 | ) | |||||
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Total Liabilities and Shareholders' Equity (Deficit)
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$ | 4,430,258 | $ | 2,215,039 | ||||
See accompanying notes.
6
VALLEY FORGE COMPOSITE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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Year ended Dec 31, 2010
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Year ended Dec 31, 2009
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Sales
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$ | 18,675,269 | $ | 3,202,815 | ||||
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Cost of sales
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16,077,631 | 2,943,065 | ||||||
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Gross Profit
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2,597,638 | 259,750 | ||||||
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Costs and expenses
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Selling and administrative expenses
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1,596,780 | 1,168,642 | ||||||
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Share-based payments
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1,864,279 | 32,550 | ||||||
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Warrant expense
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-- | 446,223 | ||||||
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Total expenses
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3,461,059 | 1,647,415 | ||||||
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Loss from operations
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(863,421 | ) | (1,387,665 | ) | ||||
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Other non-operating income (expense)
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Interest expense
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(684,365 | ) | (664,789 | ) | ||||
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Legal settlement
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62,441 | 13,750 | ||||||
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Investment income
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8,695 | 81 | ||||||
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Net loss
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(1,476,650 | ) | (2,038,623 | ) | ||||
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Other comprehensive loss
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Unrealized loss on marketable securities
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(4,379 | ) | -- | |||||
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Comprehensive Loss
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$ | (1,481,029 | ) | $ | (2,038,623 | ) | ||
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Net loss per common share - basic and diluted
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$ | (0.02 | ) | $ | (0.04 | ) | ||
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Weighted average common shares outstanding:
basic and diluted
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59,281,322 | 53,011,122 | ||||||
See accompanying notes.
7
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VALLEY FORGE COMPOSITE TECHNOLOGIES, INC.
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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
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YEARS ENDED DECEMBER 31, 2010 AND 2009
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Common
Stock |
Number of
Shares |
Additional Paid-in
Capital |
Accumulated
Deficit |
Accumu-
lated
Other
Compre-
hensive
Loss
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Total
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BALANCE AT JANUARY
1, 2009 |
$ | 51,415 | 51,415,349 | $ | 6,710,904 | $ | (6,267,598 | ) | $ | -- | $ | 494,721 | ||||||||||||
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Stock issued for note
conversions |
429 | 428,571 | 149,571 | -- | -- | 150,000 | ||||||||||||||||||
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Stock issued for services
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120 | 120,000 | 28,680 | -- | -- | 28,800 | ||||||||||||||||||
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Stock based
compensation |
25 | 25,000 | 3,725 | -- | -- | 3,750 | ||||||||||||||||||
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Proceeds from sale of
common stock |
2,700 | 2,700,000 | 334,800 | -- | -- | 337,500 | ||||||||||||||||||
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Warrant expense
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-- | -- | 446,223 | -- | -- | 446,223 | ||||||||||||||||||
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Net loss for 2009
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-- | -- | -- | (2,038,623 | ) | -- | (2,038,623 | ) | ||||||||||||||||
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BALANCE AT
DECEMBER 31, 2009 |
54,689 | 54,688,920 | 7,673,903 | (8,306,221 | ) | -- | (577,629 | ) | ||||||||||||||||
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Proceeds from exercise of
warrants |
1,229 | 1,228,571 | 244,486 | -- | -- | 245,715 | ||||||||||||||||||
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Stock issuance from
cashless exercise of warrants
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2,486 | 2,486,139 | (2,486 | ) | -- | -- | -- | |||||||||||||||||
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Stock issued for note
conversions |
2,857 | 2,857,144 | 997,143 | -- | -- | 1,000,000 | ||||||||||||||||||
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Stock issued for services
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60 | 60,000 | 118,140 | -- | -- | 118,200 | ||||||||||||||||||
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Option based
compensation |
-- | -- | 1,746,079 | -- | -- | 1,746,079 | ||||||||||||||||||
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Unrealized loss on
securities |
-- | -- | -- | -- | (4,379 | ) | (4,379 | ) | ||||||||||||||||
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Net loss for 2010
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-- | -- | -- | (1,476,650 | ) | -- | (1,476,650 | ) | ||||||||||||||||
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BALANCE AT
DECEMBER 31, 2010 |
$ | 61,321 | 61,320,774 | $ | 10,777,265 | $ | (9,782,871 | ) | $ | (4,379 | ) | $ | 1,051,336 | |||||||||||
See accompanying notes.
8
VALLEY FORGE COMPOSITE TECHNOLOGIES, INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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Year ended
Dec 31, 2010
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Year ended
Dec 31, 2009
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CASH FLOWS FROM OPERATING ACTIVITIES
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Net loss
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$ | (1,476,650 | ) | $ | (2,038,623 | ) | ||
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Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
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Depreciation and amortization expense
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198,373 | 140,907 | ||||||
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Amortization of debt discount
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541,893 | 469,660 | ||||||
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Fair value of warrants
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-- | 446,223 | ||||||
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Stock based compensation
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-- | 3,750 | ||||||
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Stock issued for services
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118,200 | 28,800 | ||||||
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Options issued for compensation
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1,746,079 | -- | ||||||
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Change in operating assets and liabilities
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(Increase) decrease in operating assets:
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Increase in accounts receivable
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(1,892,782 | ) | (89,628 | ) | ||||
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(Increase) decrease in inventories
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(848,652 | ) | 73,700 | |||||
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Decrease in prepaid expenses and other
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56,433 | 98,717 | ||||||
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Increase (decrease) in operating liabilities:
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Increase in accounts payables
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865,395 | 973,733 | ||||||
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Decrease in accrued expenses and other
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(22,687 | ) | (2,987 | ) | ||||
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Increase in deferred revenue
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335,365 | 858,400 | ||||||
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Net Cash Provided By (Used In) Operating Activities
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(379,033 | ) | 962,652 | |||||
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CASH FLOWS FROM INVESTING ACTIVITIES
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Purchase of marketable securities
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(508,442 | ) | -- | |||||
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Purchases of equipment
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(131,114 | ) | (3,196 | ) | ||||
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Net Cash Used In Investing Activities
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(639,556 | ) | (3,196 | ) | ||||
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CASH FLOWS FROM FINANCING ACTIVITIES
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Gross proceeds from exercise of warrants
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245,715 | -- | ||||||
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Proceeds from issuance of common stock
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-- | 337,500 | ||||||
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Repayment of convertible debenture
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(42,000 | ) | -- | |||||
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Repayments to shareholder
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(91,712 | ) | (110,000 | ) | ||||
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Net Cash Provided by Financing Activities
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112,003 | 227,500 | ||||||
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NET INCREASE (DECREASE) IN CASH
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(906,586 | ) | 1,186,956 | |||||
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CASH AT BEGINNING OF PERIOD
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1,492,135 | 305,179 | ||||||
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CASH AT END OF PERIOD
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$ | 585,549 | $ | 1,492,135 | ||||
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
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Cash paid during the period for:
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Income taxes paid
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$ | -- | $ | -- | ||||
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Interest paid
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$ | 64,808 | $ | 113,204 | ||||
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SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS
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Stock issued for note conversion
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$ | 1,000,000 | $ | 150,000 | ||||
See accompanying notes.
9
VALLEY FORGE COMPOSITE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010
NOTE 1 – NATURE OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of the Business
Valley Forge Composite Technologies, Inc., a Florida corporation, is headquartered in Covington, Kentucky and operates within the following wholly-owned subsidiaries (collectively, “The Company”) (all Florida corporations):
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Valley Forge Detection Systems, Inc. (“VFDS”) – Development of advanced detection systems, as further described below.
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·
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Valley Forge Aerospace, Inc. (“VFA”) – Design and manufacture of attitude control instruments for small satellites, in particular, mini momentum reaction wheels based on VFA’s proprietary composite and bearing technology. This represents all of the Company’s revenues during 2010 and 2009.
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·
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Valley Forge Imaging, Inc. (“VFI”) – Market and sell personnel screening devices known as ODIN.
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Valley Forge Emerging Technologies, Inc. (“VFET”) – Evaluates other scientific technologies not matching the Company’s aerospace and anti-terrorism business segments for potential commercialization.
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During 2010 and 2009, the Company won numerous contracts to produce momentum wheels and various other mechanical devices for special projects. This represents all of the Company’s revenues during these periods. In recent years, the Company has focused much of its energy on the development and commercialization of its counter-terrorism products. Such products include an advanced detection capability for illicit narcotics, explosives, and bio-chemical weapons using photo-nuclear reactions to initiate secondary gamma quanta the result of which is a unique and distinguishable signal identifying each component of a substance. This product is known as the THOR LVX photonuclear detection system (“THOR”). The development and commercialization of THOR is the present focus of VFDS.
Former Shell Company
On July 6, 2006, Quetzal Capital 1, Inc., a Florida corporation and public company (“QC1”) entered into a share exchange agreement with the then shareholders of Valley Forge Composite Technologies, Inc. (“VF”). Under the share exchange agreement, the VF shareholders gained control of QC1. For financial accounting purposes, the exchange of stock was treated as a recapitalization of VF with the former shareholders of QC1 retaining approximately 11% of the public company. Prior to the merger, QC1 was a reporting shell corporation with no operations. The share exchange was approved by QC1 and its sole shareholder, Quetzal Capital Funding I, Inc. (“QCF1”), and by VF’s board of directors and a majority of its shareholders. QC1 changed its name to Valley Forge Composite Technologies, Inc., a Florida corporation.
Several related agreements were also made with parties associated or affiliated with QC1 in connection with the approval of the share exchange. These agreements involved the approval of a consulting agreement and a warrant agreement with Coast To Coast Equity Group, Inc. (“CTCEG”), a company owned by the same shareholders who owned QC1’s sole corporate shareholder, QCF1, and a registration rights agreement for QCF1, CTCEG and private placement unit holders.
10
Basis of Presentation
The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles in the United States of America (“GAAP”). The Accounting Standards Codification (“ASC”) as produced by the Financial Accounting Standards Board (“FASB”) is the sole source of authoritative GAAP. The consolidated financial statements of the Company include the Company and its subsidiaries. All material inter-company balances and transactions have been eliminated.
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The attainment of sustainable profitability and positive cash flow from operations is dependent on certain future events. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty (See Note 2).
Use of Estimates
In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported period. Actual results could differ from those estimates.
Comprehensive Income (Loss)
The Company follows the ASC for reporting comprehensive income (loss). Comprehensive income (loss) is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income. The Company’s item of other comprehensive loss is the unrealized loss on marketable securities.
Fair Value of Financial Instruments
The Company’s financial instruments consist of cash, marketable securities, accounts receivable, security deposits, due to shareholders, accounts payable, and convertible debt. Except as disclosed in Note 9, the carrying value of these financial instruments approximates their fair value due to their short term maturities.
Cash Equivalents
The Company considers all short-term securities purchased with a maturity of three months or less to be cash equivalents. At December 31, 2010 and 2009, the Company held no cash equivalent securities.
Marketable Securities
The Company’s marketable securities include a mutual fund investment which is classified as available for sale. Securities classified as available for sale are carried in the financial statements at fair value. Realized gains and losses, determined using the first-in, first-out (FIFO) method, are included in earnings; unrealized holding gains and losses are reported in other comprehensive income (loss).
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Accounts receivable
Receivables are based on contracted prices and are considered past due when the due date has expired. Typically, receivables are due with 14-45 days. The Company sells to customers using credit terms customary in its industry. Credit is based on the credit worthiness of the customer and collateral is generally not obtained. Receivables are reviewed for collectability when they become past due. Delinquent receivables are written off based on individual credit evaluation and specific circumstances of the customer. The Company provides estimated uncollectible accounts based on prior experience and review of existing receivables. There was no allowance for doubtful accounts at December 31, 2010 and 2009.
Inventories
The Company accounts for finished goods inventory by applying the lower of cost or market method, on a first-in, first-out (FIFO) basis. Inventories consist of the following:
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December 31
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December 31
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2010
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2009
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Raw materials
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$ | 609,900 | $ | -0- | ||||
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Work in process
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6,738 | -0- | ||||||
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Finished goods
|
383,314 | 151,300 | ||||||
| $ | 999,952 | $ | 151,300 | |||||
Property and Equipment
Property and equipment is stated at cost. Depreciation on property and equipment is calculated using the straight-line method over the estimated useful lives of the assets.
|
Computers and equipment
|
5 - 15 years
|
|
Furniture and fixtures
|
7 years
|
|
Demonstration units
|
5 years
|
Expenditures for major renewals and betterments that extend the useful lives of the assets are capitalized. Expenditures for maintenance and repairs of the assets are charged to expense as incurred.
Loan Fees
Loan fees are stated at cost. Amortization of loan fees is included in interest expense and calculated using the straight-line method over the term of the loans.
Revenue Recognition
The Company recognizes revenue when persuasive evidence of a customer or distributor arrangement exists, shipment of goods to the customer occurs, the price is fixed or determinable and collection is reasonably assured. See note 7 for discussion of deferred revenue.
For future sales of ODIN and THOR, it is expected customer acceptance, which may include testing, will also be required for revenue recognition.
12
Shipping and Handling Costs
Shipping and handling costs incurred by the Company are included in cost of sales, and shipping charges billed to the customer are included in net sales in the accompanying statements of operations.
Share Based Payments
Generally, all forms of share-based payments, including stock option grants, restricted stock grants and stock appreciation rights, are measured at their fair value on the awards’ grant date, and based on the estimated number of awards that are ultimately expected to vest. Share-based payment awards issued to non-employees for services rendered are recorded at either the fair value of the services rendered or the fair value of the share-based payment, whichever is more readily determinable.
Warranties
The Company warrants that Aerospace goods delivered under its customer arrangements will conform to applicable technical standards and specifications and will be free from material and manufacture defects. The warranty period is one year and extends to goods subject to normal use by the customer, as defined. Management does not believe any significant warranty exposure exists at December 31, 2010.
Research and Development Costs
Research and development costs, which relate primarily to the development, design and testing of products, are expensed as incurred, until such time as management determines the project will have a future use and at that time, such development costs are capitalized and amortized over their useful life. Research and development expense, is included in selling and administrative expenses, and was insignificant in 2010 and 2009.
Income Taxes
Income taxes are accounted for in accordance with ASC 740, Accounting for Income Taxes. ASC 740 requires the recognition of deferred tax assets and liabilities to reflect the future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and tax bases of the Company's assets and liabilities result in a deferred tax asset, ASC 740 requires an evaluation of the probability of being able to realize the future benefits indicated by such assets. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some, or all, of the deferred tax asset will not be realized.
The FASB has issued new standards, contained in the ASC, clarifying the accounting for uncertainty in income taxes recognized in annual financial statements for fiscal years beginning after December 15, 2008. These standards require recognition and measurement of uncertain tax positions using a “more-likely-than-not” approach. The Company adopted these standards at the beginning of 2009 with no material impact on its financial statements.
The Company’s policy for interest and penalties on material uncertain tax positions recognized in the financial statements is to classify as interest expense and operating expense, respectively. The Company assessed its tax positions for all open tax years and concluded that they have no material liabilities to be recognized at this time. The Company is no longer subject to federal, state, and local examination by tax authorities for tax years before 2007.
13
Advertising
Advertising costs are expensed as incurred. For the years ended December 31, 2010 and 2009 advertising expense was $61,814 and $143,815, respectively.
Loss per common share
Basic earnings per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net loss by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. For the periods below, the Company excludes potentially dilutive securities such as convertible warrants and the convertible debenture from the loss per share calculations as their effect would have been anti-dilutive.
The following sets forth the computation of earnings per share.
|
For the Year Ended
December 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Net loss
|
$ | (1,476,650 | ) | $ | (2,038,623 | ) | ||
|
Weighted average shares outstanding
|
59,281,322 | 53,011,122 | ||||||
|
Loss per share - basic and diluted
|
$ | ( .02 | ) | $ | ( .04 | ) | ||
The Company’s common stock equivalents include the following:
|
December 31,
|
December 31,
|
|||||||
|
2010
|
2009
|
|||||||
|
Class C Warrants
|
- | 2,146,667 | ||||||
|
Class D Warrants
|
1,428,574 | 1,857,146 | ||||||
|
Class F Warrants
|
1,300,000 | 1,900,000 | ||||||
|
Class G Warrants
|
- | 800,000 | ||||||
|
Options
|
4,050,000 | - | ||||||
|
Total common stock equivalents
|
6,778,574 | 6,703,813 | ||||||
On January 29, 2010 individual investors exercised 600,000 Class F Warrants and received 534,624 shares of common stock.
On February 16, 2010 individual investors exercised 428,572 Class D Warrants and received 428,572 shares of common stock.
On March 29, 2010 individual investors exercised 800,000 Class G Warrants and received 800,000 shares of common stock.
|
On June 30, 2010, the Company issued 1,951,515 shares of common stock following the cashless exercise of 2,146,667 MKM Class C Warrants.
|
|
On September 3, 2010 the Company issued 4,050,000 stock options. See Note 12 for further details.
|
14
|
Recent accounting pronouncements
|
Effective July 1, 2009, the Company adopted ASC 105-10, “Generally Accepted Accounting Principles – Overall." ASC 105-10 establishes the ASC as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. All guidance contained in the ASC carries an equal level of authority. The ASC superseded all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the ASC is non-authoritative. The FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates (“ASUs”). The FASB will not consider ASUs as authoritative in their own right. ASUs will serve only to update the ASC, provide background information about the guidance and provide the bases for conclusions on the change(s) in the Codification. References made to FASB guidance throughout this document have been updated for the ASC.
Effective June 30, 2009, the Company adopted three ASU’s which were intended to provide additional application guidance and enhanced disclosures regarding fair value measurements and impairments of securities. They also provide additional guidelines for estimating fair value in accordance with fair value accounting. The first update, as codified in ASC 820-10-65, provides additional guidelines for estimating fair value in accordance with fair value accounting. The second accounting update, as codified in ASC 320-10-65, changes accounting requirements for other-than-temporary-impairment (OTTI) for debt securities by replacing the current requirement that a holder have the positive intent and ability to hold an impaired security to recovery in order to conclude an impairment was temporary with a requirement that an entity conclude it does not intend to sell an impaired security and it will not be required to sell the security before the recovery of its amortized cost basis. The third accounting update, as codified in ASC 825-10-65, increases the frequency of fair value disclosures. These updates were effective for fiscal years and interim periods ended after June 15, 2009. The adoption of these accounting updates did not have a material impact on the Company’s financial statements.
Effective June 30, 2009, the Company adopted a new accounting standard for subsequent events, as codified in ASC 855-10. The update modifies the names of the two types of subsequent events either as recognized subsequent events (previously referred to in practice as Type I subsequent events) or non-recognized subsequent events (previously referred to in practice as Type II subsequent events). In addition, the standard modifies the definition of subsequent events to refer to events or transactions that occur after the balance sheet date, but before the financial statements are issued (for public entities) or available to be issued (for nonpublic entities). It also requires the disclosure of the date through which subsequent events have been evaluated. The update did not result in significant changes in the practice of subsequent event disclosures, and therefore the adoption did not have a material impact on the Company’s financial statements.
Effective July 1, 2009, the Company adopted FASB ASU No. 2009-05, Fair Value Measurements and Disclosures (Topic 820) (“ASU 2009-05”). ASU 2009-05 provided amendments to ASC 820-10, Fair Value Measurements and Disclosures – Overall, for the fair value measurement of liabilities. ASU 2009-05 provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using certain techniques. ASU 2009-05 also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of a liability. ASU 2009-05 also clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. Adoption of ASU 2009-05 did not have a material impact on the Company’s financial statements.
Reclassifications
Certain amounts in the 2009 financial statements have been reclassified to conform with 2010 presentation. The reclassifications have no impact on net loss or retained deficit.
15
NOTE 2 - GOING CONCERN
As reflected in the accompanying consolidated financial statements, the Company has an accumulated deficit of $9,782,871 at December 31, 2010, net losses in the year ended December 31, 2010 of $1,476,650 and cash used in operations during the year ended December 31, 2010 of $379,033. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.
The attainment of sustainable profitability and positive cash flow from operations is dependent on certain future events. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Management may attempt to raise additional funds by way of a public or private offering of its securities. While the Company believes in the viability of its strategy to improve sales volume and its ability to raise additional funds, there can be no assurances to that effect.
Since its inception in 1996, the Company was involved in the development and sales of advanced scientific technologies. Sales of primarily momentum wheels through the years were sporadic but have been strong in 2010. The Company’s limited financial resources have prevented the Company from aggressively advertising its products and services to achieve consumer recognition. The ability of the Company to continue as a going concern is dependent on the Company’s ability to further implement its business plan to generate increased revenues and to raise additional funds.
The Company also seeks the acquisition, development, and commercialization of other advanced technologies. The ultimate success of the Company in attaining sustainable profitability and positive cash flow from operations is dependent upon the successful development and commercialization of these advanced technologies including the THOR and ODIN systems together with obtaining sufficient capital or financing to support management plans. Management believes that the actions presently being taken to further implement its business plan and generate additional revenues are adequate to meet its needs.
NOTE 3 – MARKETABLE SECURITIES
The cost and fair value of marketable securities are as follows:
|
December 31, 2010
|
Amortized Cost
|
Unrealized Loss
|
Fair Value
|
|||||||||
|
Available for sale equity securities
|
$ | 508,442 | $ | 4,379 | $ | 504,063 | ||||||
Available for sale securities are carried in the financial statements at fair value. Net unrealized holding losses on available-for-sale securities in the amount of $4,379 for the year ended December 31, 2010 have been included in other comprehensive loss.
The ASC defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and establishes a framework for measuring fair value. GAAP establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2- inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.
16
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
At December 31, 2010, marketable securities consisted of an exchange traded bond fund that was measured using the Level 1 valuation hierarchy.
NOTE 4 – PROPERTY AND EQUIPMENT
The major classifications of equipment are summarized below:
|
December 31,
|
December 31,
|
|||||||
|
2010
|
2009
|
|||||||
|
Computers and equipment
|
$ | 135,065 | $ | 55,871 | ||||
|
Furniture and fixtures
|
49,564 | 49,564 | ||||||
|
Demonstration units
|
296,010 | 244,090 | ||||||
| 480,639 | 349,525 | |||||||
|
Less accumulated depreciation
|
(206,234 | ) | (137,704 | ) | ||||
| $ | 274,405 | $ | 211,821 | |||||
Depreciation expense for the years ending December 31, 2010 and 2009 was $68,530 and $62,679.
The Company has incurred $51,920 of capitalized THOR costs, recorded in demonstration units, still under construction and not amortized as of December 31, 2010. Demonstration units also includes an ODIN unit available for testing by customers.
NOTE 5 – LOAN FEES
Loan fees are summarized below:
|
December 31,
|
December 31,
|
|||||||
|
2010
|
2009
|
|||||||
|
Loan fees
|
$ | 234,685 | $ | 234,685 | ||||
|
Less accumulated amortization
|
(234,685 | ) | (104,842 | ) | ||||
|
|
$ | -- | $ | 129,843 | ||||
Amortization expense for the years ending December 31, 2010 and 2009 was $129,843 and $78,228.
Loan fees are being amortized over the terms of the loans which are 36 months. When a convertible note is converted to shares, any unamortized loan fees are expensed.
NOTE 6 – ACCOUNTS PAYABLE
The Company’s current accounts payable include $10,863 borrowed on revolving credit lines utilizing corporate credit cards which bear interest at an average rate of 11.39% per annum and call for total minimum monthly installment payments of $106 as of December 31, 2010. However, since amounts may be due on demand, it is the Company’s intent to pay such balances in their entirety during 2011; such amounts have been classified as current.
The remaining accounts payable consist of ordinary inventory purchases and administrative expenses which were incurred in the operations of the Company and include $2,017,212 of trade accounts and other of $1,350.
17
The Company’s 2009 accounts payable include $5,393 borrowed on revolving credit lines utilizing corporate credit cards which bear interest at an average rate of 16.78% per annum and call for total minimum monthly installment payments of $80 as of December 31, 2009. Since amounts may be due on demand, the Company paid the balances in their entirety during 2010; the amounts were classified as current.
The remaining accounts payable consist of ordinary inventory purchases and administrative expenses which were incurred in the operations of the Company and include $1,158,637.
NOTE 7 – DEFERRED REVENUE
The Company has received $1,193,765 and $858,400, at December 31, 2010 and 2009, respectively, in cash for orders it intends to ship in the following six months. Per the Company’s revenue recognition policy (see note 1), the revenue will be recognized when goods have been shipped to the customer. Beginning in December 2010, the Company ceased the requirement of an advance payment on customer orders.
NOTE 8 - CONVERTIBLE DEBENTURE
On August 11, 2006, the Company issued a convertible debenture to CTCEG (Note 1), in the amount of $42,000 in exchange for cash received. The stated interest rate is 4% per annum and the original maturity was extended to August 11, 2010.
During the third quarter of 2010, the Company made a payment of $49,134 against the amounts owed to CTCEG. Of that payment $7,134 was applied to accrued but unpaid interest, and the remaining $42,000 was applied to reduce the principal amount owed to CTCEG.
NOTE 9 – NOTES PAYABLE
On July 3, 2008, the Company secured a financing arrangement with MKM Opportunity Master Fund, LLC ("MKM"). The financing consists of a $500,000 Convertible Note, with a conversion price of $0.50 per share, bearing interest at the rate of 8% per year, payable on a quarterly basis and has a term of three years due on July 3, 2011. On September 29, 2008, the Company reduced the conversion price to $0.35 per share. In connection with the financing, MKM was also issued Class C Warrants to purchase up to 1,000,000 shares of the Company's common stock. The warrants contained an exercise price of $1.61 per share, but on May 27, 2009 the Company reduced the Class C Warrant exercise price to $0.20 per share. In connection with this financing arrangement, the Class C warrants were valued and recorded at $500,000. Accordingly, the Company recorded an initial debt discount of $500,000 to be amortized over the term of the note and charged $250,685 and $166,667 to interest expense during the years ended December 31, 2010 and 2009, respectively.
On March 22, 2010, MKM converted the entire amount of the $500,000 note into 1,428,572 shares of common stock at a conversion price of $0.35 per share.
On September 29, 2008, the Company secured a financing arrangement with MKM and other parties. The financing consists of a $650,000 Convertible Note, with a conversion price of $0.35 per share, bearing interest at the rate of 8% per year, payable on a quarterly basis and has a term of three years due on September 29, 2011. In connection with the financing, MKM and other unrelated individuals were also issued Class D Warrants to purchase up to 1,857,146 shares of the Company's common stock. The warrants contained an exercise price of $0.75 per share, but on May 27, 2009 the Company reduced the Class D Warrant exercise price to $0.20 per share. In connection with this financing arrangement, the Class D warrants were valued and recorded at $650,000. Accordingly, the Company recorded an initial debt discount of $650,000 to be amortized over the term of the note and charged $291,209 and $302,992 to interest expense during the years ended December 31, 2010 and 2009, respectively.
18
On September 29, 2009, the unrelated individual investors converted their $150,000 note into 428,571 shares of common stock at a conversion price of $0.35 per share.
On March 22, 2010, MKM converted the remaining $500,000 note into 1,428,572 shares of common stock at a conversion price of $0.35 per share.
The promissory notes are as follows:
|
December 31,
|
December 31,
|
|||||||
|
2010
|
2009
|
|||||||
|
Notes payable
|
$ | 1,000,000 | $ | 1,150,000 | ||||
|
Less: principal conversions
|
1,000,000 | 150,000 | ||||||
|
Notes payable outstanding at December 31, 2010 and 2009
|
-- | 1,000,000 | ||||||
|
Less: unamortized discount on notes payable
|
-- | (541,893 | ) | |||||
|
Notes payable, net
|
-- | 458,107 | ||||||
|
Less current portion
|
-- | -- | ||||||
|
Notes payable, net of discount of $-0- and $541,893,
less current portion
|
$ | -- | $ | 458,107 | ||||
NOTE 10 – SHAREHOLDERS’ EQUITY
On July 6, 2006 the Company granted 3,000,000 Class A warrants in connection with a two-year consulting agreement beginning July 6, 2006 to CTCEG (Note 1). These warrants granted in connection with the consulting agreement include the following provisions: 1,000,000 warrants to purchase 1,000,000 shares at an exercise price of $1.00 per share when the per share market value closes at or above $1.00 for up to two years from the effective date of the registration statement registering the underlying shares; 1,000,000 warrants to purchase 1,000,000 shares at an exercise price of $1.50 per share when the per share market value closes at or above $1.50 for up to two years from the effective date of the registration statement registering the underlying shares; and, 1,000,000 warrants to purchase 1,000,000 shares at an exercise price of $2.00 per share when the per share market value closes at or above $2.00 for up to two years from the effective date of the registration statement registering the underlying shares. The Company believes all of the Class A warrants expired on May 14, 2009. CTCEG is disputing whether these Class A warrants have expired.
During the period August 2006 through November 2006, the Company sold in private placement transactions 1,296,500 units at $1.00 per unit which consist of 1 share of common stock and 1 Class B warrant which can be exercised at $1.50 per share within 6 months from the effective date of a registration statement registering the units and the underlying shares reserved for the exercise of the warrants. A registration statement was required to be filed within 30 days from the date that the Company attains a shareholder base of 35 shareholders. This filing occurred on November 14, 2006 and was declared effective on May 14, 2007. The Class B warrants’ contractual expiration date of November 13, 2007 has been extended several times by the board of directors, with the most recent extension occurring on December 23, 2008. The Class B warrants expired on April 4, 2009.
The Company established a price protection provision relating to the selling unit holders of the private placement securities named in the registration statement. The provision states that parties to the agreement are entitled to receive additional stock or warrants if the Company sells shares of stock or warrants for less than $1.00 per share of common stock and $1.50 per warrant prior to the time limitations specified which are one year from the effective date of the Registration Statement for common stock issued and six months from the effective date of the Registration Statement for warrants issued. The Company did not offer any additional securities that would have caused this provision to become effective prior to the applicable time limitations of the provisions, which expired in May 2008. Accordingly, the Company believes that the price protection provision had no accounting impact.
19
CTCEG, and Charles J. Scimeca, George Frudakis, and Tony N. Frudakis (formerly the shareholders of Quetzal Capital Funding 1, Inc.), were previously protected from dilution of their percentage ownership of the Company. Non-dilution rights, as defined by the registration rights agreement, mean that these parties shall continue to have the same percentage of ownership and the same percentage of voting rights of the class of the Company’s common stock regardless of whether the Company or its successors or its assigns may thereafter increase or decrease the authorized number of shares of the Company’s common stock or increase or decrease the number of shares issued and outstanding. The non-dilution rights, by the terms of the registration rights agreement, expired on May 14, 2009. Language in prior filings inadvertently and mistakenly implied that these non-dilution rights had been extended until May 13, 2010, but no such extension was ever affected. CTCEG is disputing whether these non-dilution rights have expired.
Common Stock Warrants
On July 3, 2008, the Company secured a financing arrangement with MKM (Note 9). In connection with the financing, MKM was also issued Class C Warrants to purchase up to 1,000,000 shares of the Company's common stock. The warrants contain an exercise price of $1.61 per share. In connection with this financing arrangement, the Company valued and recorded the Class C warrants at $500,000. On September 29, 2008 the Company issued an additional 1,146,667 warrants at $0.75 pursuant to section 2(c) of the Class C warrant agreement. Subsequently, on May 27, 2009, the Company reduced the exercise price of the MKM Class C warrants to $0.20 per share.
On June 30, 2010, the Company issued 1,951,515 shares of common stock following the cashless exercise of 2,146,667 MKM Class C Warrants.
On September 29, 2008, the Company secured a financing arrangement with MKM and other unrelated parties in connection with the financing, MKM and other unrelated parties were also issued Class D Warrants to purchase up to 1,857,146 shares of the Company's common stock. The warrants contain an exercise price of $0.75 per share. In connection with this financing arrangement, the Company recorded the Class D warrants at $650,000. Subsequently, on May 27, 2009, the Company reduced the exercise price of the MKM Class D warrants to $0.20 per share from $0.75 per share.
On February 16, 2010, the Company issued 271,429 shares of common stock following the exercise of 271,429 Class D Warrants and received $54,286 in cash.
On August 23, 2010, the Company issued 157,143 shares of common stock following the exercise of 157,143 Class D Warrants and received $31,429 in cash.
On May 27, 2009 the Company issued 1,900,000 shares of common stock to MKM Capital Advisors and individual investors for $237,500 in cash. In connection with the common stock purchase, MKM Capital Advisors and the individual investors were issued Class F Warrants to purchase up to 1,900,000 shares of the Company’s common stock at an exercise price of $0.20 per share. A total of $302,600 was expensed to these warrants using the Black-Scholes pricing model with the following assumptions: share price of $0.16; Strike price of $0.20 per share; Time to expiration (days) of 1,826; Expected volatility of 254.69%; no dividends; and an annual interest rate based on 3-month U.S. Treasury Bill of 2.72.
On January 29, 2010, the Company issued 534,624 shares of common stock following the cashless exercise of 600,000 Class F Warrants.
On August 10, 2009 the Company issued 800,000 shares of common stock to individual investors for $100,000 in cash. In connection with the common stock purchase, the individual investors were issued Class G Warrants to purchase up to 800,000 shares of the Company’s common stock at an exercise price of $0.20 per share. A total of $143,623 was expensed to these warrants using the Black-Scholes pricing model with the following assumptions: share price of $0.18; Strike price of $0.20 per share; Time to expiration (days) of 1,826; Expected volatility of 270.54%; no dividends; and an annual interest rate based on 3-month U.S. Treasury Bill of 0.19%.
20
On March 29, 2010, the Company issued 800,000 shares of common stock following the exercise of 800,000 Class G Warrants and received $160,000 in cash.
Stock warrant activity for the year ended December 31, 2010 is summarized as follows:
|
Weighted
|
||||||||
|
average
|
||||||||
|
Number
|
exercise
|
|||||||
|
of shares
|
price
|
|||||||
|
Outstanding at January 1, 2010
|
6,703,813 | $ | 0.20 | |||||
|
Granted
|
-- | -- | ||||||
|
Forfeited
|
-- | -- | ||||||
|
Exercised
|
(3,975,239 | ) | 0.20 | |||||
|
Outstanding at December 31, 2010
|
2,728,574 | $ | 0.20 | |||||
The following table summarizes the Company's Class D and Class F stock warrants outstanding at December 31, 2010:
|
Weighted
|
Weighted
|
|||||||||||||
|
Range of
|
Average
|
Average
|
||||||||||||
|
Warrant
|
Exercise
|
Remaining
|
Exercise
|
|||||||||||
|
Class
|
Price
|
Number
|
Life
|
Price
|
||||||||||
|
D
|
$ | 0.20 | 1,428,574 | 4.75 | $ | 0.20 | ||||||||
|
F
|
$ | 0.20 | 1,300,000 | 3.50 | $ | 0.20 | ||||||||
NOTE 11 – STOCK GRANT
On August 1, 2009, the Board of Directors of the Company issued 25,000 shares of restricted common stock to an employee of the Company. The Company recorded $3,750 in compensation expense based on the closing price of the stock on August 1, 2009.
In 2009, the Board of Directors voted to compensate themselves in the form of restricted stock, based on 2,000 shares of restricted stock per month. Compensation commenced with respect to January 2009, but none was retroactive to 2008. On or about October 7, 2009, each director (other than Lou Brothers and Larry Wilhide) received his entire stock award of 24,000 shares of restricted stock in one lump sum for payment of the entire year’s service, along with a $3,000 tax gross-up cash payment. Neither Mr. Brothers nor Mr. Wilhide received any stock or cash compensation for his 2009 service as a director.
On or about November 1, 2010, each director (other than Lou Brothers and Larry Wilhide) received 12,000 shares of restricted stock in one lump sum for payment of the entire year’s service, along with a $12,000 tax gross-up cash payment. Neither Mr. Brothers nor Mr. Wilhide received any stock or cash compensation for his 2010 service as a director.
21
NOTE 12 – STOCK OPTIONS
On September 13, 2010, the Company granted certain employees and others the option to purchase 4,050,000 shares of the Company’s common stock at prices ranging from $1.35 - $1.49 per share. The fair value of stock at the option grant date was determined to be $1.32 per share. The options vest 660,000 on September 13, 2010, 660,000 on January 1, 2011, 620,000 on January 1, 2012, 620,000 on January 1, 2013, 620,000 on January 1, 2014, 620,000 on January 2, 2015, and 250,000 options will vest upon the completion of certain sales goals for ODIN and THOR, and are exercisable from vesting date through a period of ten years from the grant date. Management anticipates the average term of the options will be 5-7 years.
Using the Black-Scholes-Merton option pricing model, management has determined that the options have a value ranging from $1.29 to $1.33. For the year ended December 31, 2010 the Company recognized compensation cost of $1,746,079 and an income tax benefit has not been reflected due to an increase in the deferred tax asset valuation allowance. As of December 31, 2010, there was $3,610,968 of total unrecognized compensation cost relating to nonvested stock options. That cost is expected to be recognized in the years ending December 31, 2011, 2012, 2013, and 2014 in the amounts of $819,617, $819,617, $819,617 and $819,617, respectively, while $332,500 will be recognized upon the completion of certain sales goals for ODIN and THOR.
The assumptions used and the calculated fair value of the options are as follows:
|
Expected dividend yield
|
-0-
|
||
|
Risk-free interest rate
|
3.78% – 4.99%
|
||
|
Expected life in years
|
5-7
|
||
|
Expected volatility
|
180.00%
|
||
|
Weighted average of fair value of options granted
|
$1.32
|
The following is an analysis of options to purchase shares of the Company’s stock issued and outstanding:
|
Total
Options
|
Weighted
Average
Exercise Price
|
|||||||
|
Total Options outstanding, January 1, 2010
|
-- | - | ||||||
|
Granted
|
4,050,000 | $ | 1.38 | |||||
|
Exercised
|
-- | -- | ||||||
|
Expired/cancelled
|
-- | -- | ||||||
|
Total options outstanding, December 31, 2010
|
4,050,000 | 1.38 | ||||||
|
Options exercisable, December 31, 2010
|
660,000 | $ | 1.38 | |||||
|
Nonvested
Options
|
Average
Fair Value
|
|||||||
|
Nonvested options
|
||||||||
|
Nonvested options, January 1, 2010
|
-- | $ | -- | |||||
|
Granted
|
4,050,000 | 1.32 | ||||||
|
Vested
|
(660,000 | ) | 1.32 | |||||
|
Forfeited
|
-- | |||||||
|
Nonvested options, December 31, 2010
|
3,390,000 | $ | 1.32 | |||||
22
At December 31, 2010, vested exercisable options were outstanding for 660,000 shares at an exercise price between $1.35 and $1.49. The weighted average value of the options is $1.32. 134,680 options have a remaining life of 4.7 years and expire on September 13, 2015 while 525,320 options have a remaining life of 9.7 years and expire on September 13, 2020. The 3,390,000 nonvested options will vest over the next five years excluding 250,000 which will vest upon completion of certain sales goals for ODIN and THOR.
NOTE 13 – INCOME TAXES
There was no income tax expense or benefit for the years ended December 31, 2010 and 2009 due to the Company’s net losses and increases in its deferred tax asset valuation allowance.
Deferred income taxes reflect the income tax effect of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and amounts used for income taxes. The Company’s deferred income tax assets and liabilities consist of the following at December 31, 2010 and 2009:
|
2010
|
2009
|
|||||||
|
Deferred Tax Assets:
|
||||||||
|
Stock options
|
$ | 456,724 | $ | -- | ||||
|
Accruals
|
-- | 18,418 | ||||||
|
Net operating loss carryforwards
|
1,916,138 | 2,005,653 | ||||||
| 2,372,862 | 2,024,071 | |||||||
|
Valuation allowance
|
(2,330,896 | ) | (1,966,366 | ) | ||||
| $ | 41,996 | $ | 57,705 | |||||
| 2010 | 2009 | |||||||
|
Deferred Tax Liabilities
|
||||||||
|
Depreciation
|
$ | 41,996 | $ | 57,705 | ||||
The table below summarizes the differences between the Company’s effective tax rate and the statutory federal rate for fiscal years 2010 and 2009:
|
2010
|
2009
|
|||||||
|
Computed “expected” tax benefit
|
(33 | ) % | (33 | ) | ||||
|
State taxes net of “expected” tax benefit
|
(6 | ) % | (6 | ) | ||||
|
Permanent differences
|
14 | % | -- | |||||
|
Change in valuation allowance
|
25 | % | 39 | |||||
|
Effective tax rate
|
0 | % | 0 | |||||
Net operating loss carryforwards totaled approximately $4,900,000 at December 31, 2010. The net operating loss carryforwards will begin to expire in the year 2028 if not utilized. After consideration of all the evidence, both positive and negative, management has recorded a full valuation allowance at December 31, 2010 and 2009 due to the uncertainty of realizing the net deferred tax assets. The valuation allowance increased by approximately $365,000 for the year ended December 2010. Utilization of the Company’s net operating loss carryforwards may be limited based on changes in ownership as defined in Internal Revenue Code Section 382.
Income taxes are accounted for in accordance with ASC 740, Accounting for Income Taxes. ASC 740 requires an evaluation of the probability of being able to realize the future tax benefits of deferred taxes. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some, or all, of the deferred tax asset will not be realized. Due to ongoing losses and the establishment of a valuation allowance to offset net deferred tax assets, the Company did not record a tax benefit for the years ended December 31, 2010 and 2009.
23
NOTE 14 - DESCRIPTION OF LEASING ARRANGEMENTS
On September 1, 2006, the Company entered into a lease of 2,985 square feet of office space located at 50 E. River Center Boulevard, Suite 820, Covington, Kentucky. The term of the lease is for five years ending in August, 2011. The Company has not decided whether it will vacate the premises upon expiration of the lease or seek to renew the lease terms.
Under the terms of the lease, the Company shall pay additional rent to cover operating expenses of the property at a pro rata share deemed to be 0.928%, which will total approximately $19,402 for the initial twelve months. These expenses are anticipated to increase at a 3% rate annually for the remaining term of the agreement.
On December 1, 2007, the Company entered into a lease of 2,700 square feet of warehouse space located at 1895 Airport Exchange Blvd, Building A, Erlanger, Kentucky. The term of the lease is for 37 months ending in December, 2010. In December 2010, the Company renewed the lease for 12 months ending in December, 2011.
Under the terms of the lease, the Company shall pay additional rent to cover operating expenses of the property of approximately $349 per month. Rent expense for the year ended December 31, 2010 and 2009 was $97,407 and $101,814, respectively.
The following is a schedule of future minimum lease payments required under the lease as of December 31, 2010:
|
Period Ending
|
||||
|
December 31
|
Amount
|
|||
|
2011
|
$
|
53,370
|
||
|
|
$
|
53,370
|
||
NOTE 15 - RELATED PARTY TRANSACTIONS
At December 31, 2010 the Company owed Louis J. Brothers, the Company’s president and major shareholder, $124,846 for advances made to the Company. Such amount, which is included in the due to shareholder balance on the balance sheet at December 31, 2010 earns 6% annual interest quarterly, is unsecured and is due on demand. As of December 31, 2009, the Company owed Mr. Brothers the principal amount of $216,558 for advances made to the Company, plus accrued interest. During 2010, the Company made payments of $150,000 against the amounts owed to Mr. Brothers. Of that payment $58,288 was applied to accrued but unpaid interest, and the remaining $91,712 was applied to reduce the principal amount owed to Mr. Brothers. The Company made a $25,000 payment to Mr. Brothers on January 24, 2011.
For the years ended December 31, 2010 and 2009, the Company incurred expenses for accounting services of $58,125 and 62,810, respectively, to a firm related to a member of the board of directors.
On August 11, 2006, CTCEG loaned the Company $42,000 as described in Note 8.During the third quarter of 2010, the Company made a payment of $49,134 against the amounts owed to Coast to Coast Equity Group, Inc. Of that payment $7,134 was applied to accrued but unpaid interest, and the remaining $42,000 was applied to reduce the principal amount owed to Coast to Coast Equity Group, Inc.
24
NOTE 16 – CONCENTRATION AND CREDIT RISK
During the year ended December 31, 2010, two customers accounted for 78% and 22% of the Company’s total revenues. During the year ended December 31, 2009, one customer accounted for 100% the Company’s total revenues. A reduction in sales from or loss of these customers could have a material adverse effect on the Company’s results of operations and financial condition.
Certain financial instruments potentially subject the Company to concentrations of credit risk. These financial instruments consist primarily of cash and accounts receivable. The Company maintains its cash investments in high credit quality financial institutions. At various times, the Company has deposits in excess of the Federal Deposit Insurance Corporation limit. The Company has not experienced any losses on these accounts.
The Company’s entire accounts receivable balance of $1,991,902 is from one customer. The customer is located in Asia. The Company has not experienced any bad debts from this customer.
The Company receives its inventory from approximately eight suppliers. The Company has an accounts payable balance to these suppliers of $1,912,577 and $1,107,305 for the years ended December 31, 2010 and 2009, respectively.
NOTE 17 – COMMITMENTS AND CONTINGENCIES
The Company is involved in litigation arising in the ordinary course of business. While the ultimate outcome of these matters is not presently determinable, it is the opinion of management that the resolution of outstanding claims will not have a material adverse effect on the financial position or results of operations of the Company.
The Company settled several lawsuits in 2010 resulting in legal settlement income of $62,441.
The Company entered into a Consulting and Services Agreement (“CSA”) with Idaho State University (“ISU”). The CSA establishes a framework under which ISU, through the Idaho Accelerator Center (“IAC”), could assemble a THOR demonstration unit in Pocatello, Idaho. In order to begin that project, the CSA requires the Company to propose a series of work orders setting forth work tasks, deliverables, due dates, IAC’s compensation and other commercial terms. To date, no work orders have been issued or accepted.
The Company has entered into an agreement with a manufacturer to build a component for THOR. The contract amount was $99,200 and the Company has incurred costs of $44,600 as of December 31, 2010.
NOTE 18 – SUBSEQUENT EVENTS
We have evaluated the period from December 31, 2010 through the date the financial statements herein were issued for subsequent events requiring recognition or disclosure in the financial statements and we have identified the following events:
The Company made a $25,000 payment to Mr. Brothers on January 24, 2011 as partial repayment of a promissory note evidencing a loan Mr. Brothers made to the Company.
On March 11, 2011, Japan suffered an earthquake, tsunami, and a subsequent nuclear power reactor failure. While current indications are that these events will not have a material impact on the Company’s sales in Japan or elsewhere, the ultimate impact remains uncertain.
25
ITEM 9A. CONTROLS AND PROCEDURES.
Under the supervision and with the participation of our principal executive officer/principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (“Exchange Act”), as of December 31, 2010. During this evaluation, we identified a material weakness in our internal control over financial reporting. We have a limited staff so a limited number of people perform all financial duties. Much of our financial accounting is performed by outside accountants not affiliated with our independent registered public accounting firm. Accordingly, the principal executive officer/principal financial officer concluded that the disclosure controls and procedures are not effective, and were not effective with respect to the fiscal year ended December 31, 2010, to provide reasonable assurance that information relating to the Company, including our consolidated subsidiaries, required to be disclosed in our SEC reports or submitted by the Company under the Exchange Act is or was (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) accumulated and communicated to management, including our principal executive officer/principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Our management, including our chief executive officer / chief financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate control over financial reporting (as defined in Rule 13a-15(f) promulgated under the Exchange Act). The Company’s internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting of the Company includes those policies and procedures that:
(1) pertain to the maintenance of records that in reasonable detail accurately and fairy reflect the transactions of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorization of management and directors of the Company; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company’s financial statements.
All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error or circumvention through collusion of improper overriding of controls. Therefore, even those internal control systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.
26
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2010. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control-Integrated Framework. Our management has concluded that our internal control over financial reporting is not effective based on these criteria in light of the following material weaknesses:
Lack of Segregation of Duties and Qualified Internal Employees – Because of our limited staff, a limited number of people perform all financial duties. Much of our financial accounting is performed by outside accountants not affiliated with our auditors. We are considering hiring a full time controller to oversee our accounting functions.
Changes in Internal Control over Financial Reporting
There have been no significant changes in our internal controls over financial reporting or in other factors that could significantly affect those controls during the quarter ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
The Company is not required by current SEC rules to include, and does not include, an auditor's attestation report. The Company's registered public accounting firm has not attested to management's reports on the Company's internal control over financial reporting.
PART IV
ITEM 15 EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
The following exhibit index lists Exhibits filed, or in the case of Exhibits 32.1 and 32.2 furnished, with this Amendment No. 2 to the Original Filing on Form 10-K/A:
Exhibit Index
(a)(1) Financial Statements
|
|
PAGE
|
|
Reports of Independent Registered Public Accounting Firms
|
4 |
|
Consolidated Balance Sheets as of December 31, 2010 and 2009
|
6 |
|
Consolidated Statements of Operations for the years ended December 31, 2010 and 2009
|
7 |
|
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the years ended December 31, 2010 and 2009
|
8 |
|
Consolidated Statements of Cash Flows for the years ended December 31, 2010 and 2009
|
9 |
|
Notes to Consolidated Financial Statements
|
10 |
(a)(2) Financial Statement Schedules
No financial statement schedules are provided because the information called for is not required or is shown either in the financial statements or the notes thereto.
(b) Exhibits
|
Exhibit No.
|
Description
|
|
|
31.1
|
13a-14(a)-15d-14(a) Certification - Louis J Brothers
|
|
|
31.2
|
13a-14(a)-15d-14(a) Certification - Louis J Brothers
|
|
|
32.1
|
18 U.S.C. § 1350 Certification - Louis J Brothers
|
|
|
32.2
|
18 U.S.C. § 1350 Certification - Louis J Brothers
|
|
27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
VALLEY FORGE COMPOSITE TECHNOLOGIES, INC.
|
||
|
By:
|
/s/Louis J. Brothers
|
|
|
Date: April 16, 2012
|
Louis J. Brothers
President, Chief Executive Officer
and Chief Financial Officer |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
|
|
/s/Louis J. Brothers
|
||||
|
Louis J. Brothers
|
President, Chief Executive Officer, Chief
Financial Officer and Chairman of the Board (Principal Executive Officer and Principal Financial Officer ) |
April 16, 2012
|
||
|
/s/Larry K. Wilhide
|
||||
|
Larry K. Wilhide
|
Vice President and Director
|
April 16, 2012
|
||
|
/s/Dr. Victor A. Alessi
|
||||
|
Dr. Victor A. Alessi
|
Director
|
April 16, 2012
|
||
|
/s/Eugene Breyer
|
||||
|
Eugene Breyer
|
Director
|
April 16, 2012
|
||
|
/s/Raul A. Fernandez
|
||||
|
Raul A. Fernandez
|
Director
|
April 16, 2012
|
||
|
/s/Andrew T. Gilinsky
|
||||
|
Andrew T. Gilinsky
|
Director
|
April 16, 2012
|
||
|
/s/Richard S. Relac
|
||||
|
Richard S. Relac
|
Director
|
April 16, 2012
|
28