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EXCEL - IDEA: XBRL DOCUMENT - VALLEY FORGE COMPOSITE TECHNOLOGIES, INC.Financial_Report.xls
EX-31.2 - CERTIFICATION - VALLEY FORGE COMPOSITE TECHNOLOGIES, INC.exhibit312.htm
EX-31.1 - CERTIFICATION - VALLEY FORGE COMPOSITE TECHNOLOGIES, INC.exhibit311.htm
EX-32.2 - CERTIFICATION - VALLEY FORGE COMPOSITE TECHNOLOGIES, INC.exhibit322.htm
EX-32.1 - CERTIFICATION - VALLEY FORGE COMPOSITE TECHNOLOGIES, INC.exhibit321.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

(Mark one)

R  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011.



£  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.


Commission file number 0-51420

 

VALLEY FORGE COMPOSITE TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)


Florida

 

20-3061892

(State or other jurisdiction of

 

(IRS Employer

incorporation or organization)

 

Identification No.)

 

 

 

50 East River Center Blvd., Suite 820, Covington, KY

 

41011

(Address of principal executive offices)

 

(Zip Code)


Issuer's telephone number: (859) 581-5111


Securities to be registered under Section 12(b) of the Act:   None


Securities to be registered under Section 12(g) of the Act:


Common Stock, Par Value $.001 Per Share

(Title of class)

 

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  R     No  £


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  £      No  £


Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.


Large accelerated filer  £

 

 Accelerated filer                  £

Non-accelerated filer    £

 

Smaller reporting company  R


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act

Yes  £      No  R


The number of shares outstanding of the issuer’s common stock as of May 16, 2011 was 61,320,774 shares.



1




VALLEY FORGE COMPOSITE TECHNOLOGIES, INC.

FORM 10-Q

FOR THE PERIOD ENDED MARCH 31, 2011

 

INDEX 

  

Page

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

2

 

 

PART I. FINANCIAL INFORMATION

3

  

 

Item 1.

Financial Statements

3

  

Condensed Consolidated Balance Sheets as of March 31, 2011 (Unaudited) and December 31, 2010

3

  

Condensed Consolidated Statements of Operations (Unaudited) for the three months ended March 31, 2011 and 2010

4

  

Condensed Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2011 and 2010

5

  

Notes to the Condensed Consolidated Financial Statements

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

Item 3.

Qualitative and Quantitative Disclosures About Market Risk

24

Item 4.

Controls and Procedures

24

  

 

PART II. OTHER INFORMATION

25

  

 

Item 1.

Legal Proceedings

25

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

26

Item 3.

Defaults Upon Senior Securities

27

Item 4.

[REMOVED AND RESERVED]

27

Item 5.

Other information

27

Item 6.

Exhibits

27

  

 

SIGNATURES

28


Special Note Regarding Forward-Looking Statements

 

Information included in this Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). This information may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Valley Forge Composite Technologies, Inc. (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.



2




PART I FINANCIAL INFORMATION


Item 1. Financial Statements



VALLEY FORGE COMPOSITE TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

 

 

 

 

 

 

 

 

  

 

Mar 31, 2011

 

Dec 31, 2010

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

     Cash

$

849,842

$

585,549

 

 

     Marketable securities

 

509,509

 

504,063

 

 

     Accounts receivable

 

5,137,984

 

1,991,902

 

 

     Inventories

 

374,654

 

999,952

 

 

     Prepaid expenses and other

 

52,761

 

47,852

 

 

     Deposits with vendors

 

21,000

 

21,000

 

 

          Total current assets

 

6,945,750

 

4,150,318

 

 

Property and equipment, net

 

255,164

 

274,405

 

 

Non-current assets:

 

 

 

 

 

 

     Security deposits

 

5,535

 

5,535

 

 

           Total non-current assets 

 

5,535

 

5,535

 

 

  

 

 

 

 

 

 

     Total Assets

$

7,206,449

$

4,430,258

 

 

  

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

Current liabilities: 

 

 

 

 

 

 

     Accounts payable

$

4,495,926

$

2,029,425

 

 

     Accrued expenses and other

 

87,895

 

30,886

 

 

     Deferred revenue 

 

577,286

 

1,193,765

 

 

     Due to shareholder

 

101,118

 

124,846

 

 

           Total current liabilities

 

5,262,225

 

3,378,922

 

 

Shareholders' Equity: 

 

 

 

 

 

 

     Common stock, $.001 par value, 100,000,000

        shares authorized; 61,320,774 issued and

        outstanding on March 31, 2011 and December 31, 2010

 

61,321

 

61,321

 

 

     Additional paid-in capital

 

10,982,221

 

10,777,265

 

 

     Accumulated deficit 

 

(9,094,931)

 

(9,782,871)

 

 

     Accumulated other comprehensive loss

 

(4,387)

 

(4,379)

 

 

           Total shareholders' equity

 

1,944,224

 

1,051,336

 

 

 

 

 

 

 

 

 

     Total Liabilities and Shareholders' Equity

$

7,206,449

$

4,430,258

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


See the accompanying notes to the condensed consolidated financial statements




3





VALLEY FORGE COMPOSITE TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)


 

 

 

 

 

 

 

 

  

 

Three months ended Mar 31, 2011

 

Three months ended Mar 31, 2010

 

 

Sales

$

6,417,936

$

4,511,570

 

 

Cost of sales

 

5,103,379

 

3,924,376

 

 

 

 

 

 

 

 

 

Gross Profit 

 

1,314,557

 

587,194

 

 

 

 

 

 

 

 

 

Costs and expenses 

 

 

 

 

 

 

     Selling and administrative expenses

 

425,530

 

535,597

 

 

     Share-based payments

 

204,956

 

--

 

 

          Total expenses  

 

630,486

 

535,597

 

 

 

 

 

 

 

 

 

Income from operations 

 

684,071

 

51,597

 

 

 

 

 

 

 

 

 

Other non-operating income (expense) 

 

 

 

 

 

 

    Interest expense

 

(1,590)

 

(544,972)

 

 

    Investment income

 

5,459

 

16

 

 

  

 

 

 

 

 

 

Net income (loss) 

 

687,940

 

(493,359)

 

 

 

 

 

 

 

 

 

Other comprehensive loss

 

 

 

 

 

 

     Unrealized loss on marketable securities

 

(8)

 

--

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

$

687,932

$

(493,359)

 

 

  

 

 

 

 

 

 

Net income (loss) per common share:

 

 

 

 

 

 

    Basic

$

0.01

$

(0.01)

 

 

    Diluted

$

0.01

$

(0.01)

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

    Basic

 

61,320,774

 

55,419,371

 

 

    Diluted

 

63,629,568

 

55,419,371

 






See the accompanying notes to the condensed consolidated financial statements





4






VALLEY FORGE COMPOSITE TECHNOLOGIES, INC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

 

 

 

 

 

 

 

 

  

 

Three months ended Mar 31, 2011

 

Three months ended Mar 31, 2010

 

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

     Net income (loss)

$

687,940

$

(493,359)

 

 

     Adjustments to reconcile net income (loss) to net cash

     provided by (used in) operating activities: 

 

 

 

 

 

 

         Depreciation and amortization expense

 

19,240

 

145,843 

 

 

         Amortization of debt discount

 

--

 

541,893 

 

 

         Options issued for compensation

 

204,956

 

--

 

 

     Change in operating assets and liabilities

 

 

 

 

 

 

     (Increase) decrease in operating assets:

 

 

 

 

 

 

         (Increase) decrease in accounts receivable

 

(3,146,082)

 

10,077 

 

 

         (Increase) decrease in inventories

 

625,298

 

(6,947)

 

 

         (Increase) decrease in prepaid expenses  and other

 

(4,909)

 

16,457 

 

 

         Increase in vendor deposits

 

--

 

(180,880)

 

 

     Increase (decrease) in operating liabilities:

 

 

 

 

 

 

         Increase (decrease) in accounts payables

 

2,466,501

 

(589,042)

 

 

         Increase in accrued expenses and other

 

57,009

 

--

 

 

         Decrease in deferred revenue 

 

(616,479)

 

(207,017)

 

 

         Net Cash Provided By (Used In) Operating Activities

 

293,474

 

(762,975)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

     Purchase of marketable securities

 

(5,453)

 

--

 

 

     Purchases of equipment 

 

--

 

(10,202)

 

 

          Net Cash Used In Investing Activities

 

(5,453)

 

(10,202)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

     Gross proceeds from exercise of warrants

 

--

 

214,286

 

 

     Repayments to shareholder

 

(23,728)

 

--

 

 

          Net Cash Provided By (Used In) Financing Activities

 

(23,728)

 

214,286 

 

 

 

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH

 

264,293

 

(558,891)

 

 

CASH AT BEGINNING OF PERIOD 

 

585,549

 

1,492,135 

 

 

CASH AT END OF PERIOD

$

849,842

$

933,244 

 

 

  

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 

 

 

 

 

 

Cash paid during the period for: 

 

 

 

 

 

 

     Income taxes paid

$

--

$

--

 

 

     Interest  paid

$

1,272

$

--

 

 

 

 

 

 

 

 



See the accompanying notes to the condensed consolidated financial statements.


5




VALLEY FORGE COMPOSITE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

MARCH 31, 2011


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):

·

Valley Forge Detection Systems, Inc. (“VFDS”) – Development of advanced detection systems, as further described below.  

·

Valley Forge Aerospace, Inc. (“VFA”) – Primarily, the 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 2011 and 2010.

·

Valley Forge Imaging, Inc. (“VFI”) – Market and sell personnel screening devices known as ODIN.

·

Valley Forge Emerging Technologies, Inc. (“VFET”) – Evaluates other scientific technologies not matching the Company’s aerospace and anti-terrorism business segments for potential commercialization.


During 2011 and 2010, 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 2011 the Company had a high margin sale that is not expected to reoccur.  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.



6




Basis of Presentation


The accompanying interim condensed consolidated financial statements are unaudited, but in the opinion of management of the Company, contain all adjustments, which include normal recurring adjustments, necessary to present fairly the financial position at March 31, 2011, the results of operations for the three months ended March 31, 2011 and 2010, and cash flows for the three months ended March 31, 2011 and 2010.  The balance sheet as of December 31, 2010 is derived from the Company’s audited financial statements.


Certain information and footnote disclosures normally included in financial statements that have been prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, although management of the Company believes that the disclosures contained in these financial statements are adequate to make the information presented therein not misleading. For further information, refer to the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010, as filed with the Securities and Exchange Commission.


The results of operations for the three months ended March 31, 2011 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2011.


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 and accounts payable.  Except as disclosed in Note 3, the carrying value of these financial instruments approximates their fair value due to their short term maturities.



7




Cash Equivalents


The Company considers all short-term securities purchased with a maturity of three months or less to be cash equivalents. At March 31, 2011 and December 31, 2010, 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).


Accounts receivable


Receivables are based on contracted prices and are considered past due when the due date has expired.  Typically, receivables are due within 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 March 31, 2011 and December 31, 2010.


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:

 

 

 

March 31

 

December 31

 

 

2011

 

2010

 

 

 

 

 

Raw materials   

$

-0- 

$

609,900 

Work in process 

 

9,866 

 

6,738 

Finished goods 

 

364,788 

 

383,314 

 

$

374,654 

$

999,952 

 

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.



8





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 6 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.   


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 and restricted stock grants, 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 and other mechanical devices 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 March 31, 2011.


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 2011 and 2010.


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 standards, contained in the ASC, clarifying the accounting for uncertainty in income taxes.  These standards require recognition and measurement of uncertain tax positions using a “more-likely-than-not” approach.  These standards have had no material impact on the financial statements.




9




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 income 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.


Advertising


Advertising costs are expensed as incurred.  For the three months ended March 31, 2011 and 2010, advertising expense was $-0- and $20,256, respectively.


Income (loss) per common share


Basic earnings per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. For the 2010 period below, the Company excludes potentially dilutive securities such as convertible warrants and stock options 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 Period Ended

 March 31,

 

 

2011

 

 

2010

Net income (loss) (A)

$

687,940

 

$

(493,359)

Weighted average shares outstanding (B)

 

61,320,774 

 

 

55,419,371 

Dilutive effect on stock based awards

 

2,308,794

 

 

--

Common stock and common stock equivalents (C)

 

63,629,568

 

 

55,419,371

Income (loss) per share - basic (A/B)

 

0.01

 

 

(0.01)

Income (loss) per share – diluted (A/C)

$

0.01

 

$

(0.01)


The Company’s common stock equivalents include the following: 


 

 

March 31,

 

March 31,

 

 

2011

 

2010

Class C Warrants

 

-  

 

2,146,667 

Class D Warrants 

 

1,428,574 

 

1,585,717 

Class F Warrants 

 

1,300,000 

 

1,300,000 

Options

 

4,050,000 

 

Total common stock equivalents          

 

6,778,574 

 

5,032,384 


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.




10




On September 13, 2010 the Company issued 4,050,000 stock options of which 660,000 were vested at December 31, 2010.  See Note 10 for further details.


On January 1, 2011, 660,000 options vested.  As of March 31, 2011, 1,320,000 options were vested.  See Note 10 for further details.


NOTE 2 - GOING CONCERN


As reflected in the accompanying consolidated financial statements, the Company has an accumulated deficit of $9,094,931 at March 31, 2011.  While the Company had a net profit in the period ended March 31, 2011 of $687,940 it has had a history of losses.  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 2011 and 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 seeks the acquisition, development, and commercialization of 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:


 

 

 

 

 

 

 

March 31,

 2011

 

December 31,

2010

Available for sale equity securities:

 

 

 

 

     Amortized Cost

$

513,896

$

508,442

     Unrealized Loss

 

4,387

 

4,379

     Fair Value

$

509,509

$

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 $4,387 and $4,379 have been included in accumulated other comprehensive loss at March 31, 2011 and December 31, 2010, respectively.


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:



11




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.


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 March 31, 2011 and 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:

 

 

 

March 31,

 

December 31,

 

 

2011

 

2010

       Computers and equipment 

$

135,065 

$

135,065 

       Furniture and fixtures 

 

49,564 

 

49,564 

       Demonstration units

 

296,010 

 

296,010 

 

 

480,639 

 

480,639 

     Less accumulated depreciation

 

(225,475)

 

(206,234)

 

$

255,164 

$

274,405 

 

Depreciation expense for the periods ending March 31, 2011 and 2010 was $19,240 and $3,796.


The Company has incurred $51,920 of capitalized THOR costs, recorded in demonstration units, still under construction and not amortized as of March 31, 2011.  Demonstration units also includes an ODIN unit available for testing by customers.


NOTE 5 – ACCOUNTS PAYABLE


The Company’s 2011 accounts payable include $34,754 borrowed on revolving credit lines utilizing corporate credit cards which bear interest at an average rate of 9.80% per annum and call for total minimum monthly installment payments of $581 as of March 31, 2011. However, since amounts may be due on demand and 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 $4,459,822 of trade accounts and other of $1,350.


The Company’s 2010 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.



12




NOTE 6 – DEFERRED REVENUE


The Company has received $577,286 and $1,193,765, at March 31, 2011 and December 31, 2010, 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 7 – 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 $-0- and $250,685 to interest expense during the three months ended March 31, 2011 and 2010, 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 $-0- and $291,209 to interest expense during the three months ended March 31, 2011 and 2010, respectively.


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.


There are no notes outstanding at March 31, 2010 or thereafter.


NOTE 8 – 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



13




Company believes all of the Class A warrants expired on May 14, 2009. CTCEG is disputing whether these Class A warrants have expired.


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 7).  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


14




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%.


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 period ended March 31, 2011 is summarized as follows:


 

 

 

 

Weighted

 

 

 

 

average

 

 

Number

 

exercise

 

 

of shares

 

 price

    Outstanding at January 1, 2011

 

2,728,574 

$

0.20

        Granted 

 

--

 

--

        Forfeited        

 

--

 

--

        Exercised    

 

--

 

--

    Outstanding at March 31, 2011

 

2,728,574 

$

0.20


The following table summarizes the Company's Class D and Class F stock warrants outstanding at March 31, 2011:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

Weighted

 

 

Range of

 

 

 

 

 

Average

 

 

Average

Warrant

 

Exercise

 

 

 

 

 

Remaining

 

 

Exercise

Class

 

Price

 

 

Number

 

 

Life

 

 

Price

D

$

0.20

 

 

1,428,574

 

 

4.50

 

$

0.20

F

$

0.20

 

 

1,300,000

 

 

3.25

 

$

0.20


NOTE 9 – STOCK GRANT


In 2009, the Board of Directors voted to compensate themselves in the form of restricted stock.

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.


NOTE 10 – 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.


15





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 three months ended March 31, 2011 and 2010  the Company recognized compensation cost of $204,956 and $-0- and an income tax benefit has not been reflected due to an increase in the deferred tax asset valuation allowance. As of March 31, 2011, there was $3,406,012 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 $819,823 per year, 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, 2011

4,050,000

     $

1.38

    Granted

--

 

--

    Exercised

--

 

--

    Expired/cancelled

--

 

--

Total options outstanding, March 31, 2011

   4,050,000

 

1.38

 

 

 

 

Options exercisable, March 31, 2011

1,320,000

$

1.38


 

  Nonvested   

Options

 

    Average     

 Fair Value  

Nonvested options

 

 

 

Nonvested options, January 1, 2011

3,390,000

$

1.32

Granted

--

 

--

Vested

(660,000)

 

1.32

Forfeited

--

 

--

Nonvested options, March 31, 2011

2,730,000

$

1.32


At March 31, 2011, vested exercisable options were outstanding for 1,320,000 shares at an exercise price between $1.35 and $1.49.  The weighted average value of the options is $1.32.  Of the vested options, 269,360 options have a remaining life of 4.4 years and expire on September 13, 2015 while 1,050,640 options have a remaining life of 9.4 years and expire on September 13, 2020.  The 2,730,000 nonvested options will vest over the next five to ten years excluding 250,000 which will vest upon completion of certain sales goals for ODIN and THOR.




16




NOTE 11 – INCOME TAXES


There was no income tax expense or benefit for the periods ended March 31, 2011 and 2010 due to the Company’s historical net losses and changes in its deferred tax asset valuation allowance.


The Company has net operating loss carryforwards for tax purposes that begin to expire in 2028 if not utilized.  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.


NOTE 12 - 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 periods ended March 31, 2011 and 2010 was $24,576 and $23,950, respectively.


The following is a schedule of future minimum lease payments required under the lease as of March 31, 2011:

Period Ending March 31

 

 Amount

 

2011

 

 $

  35,550 

 

  

 

$

35,550 

 


NOTE 13 - RELATED PARTY TRANSACTIONS


At March 31, 2011 the Company owed Louis J. Brothers, the Company’s president and major shareholder, $101,118 for advances made to the Company.  Such amount, which is included in the due to shareholder balance on the balance sheet at March 31, 2011 earns 6% annual interest quarterly, is unsecured and is due on demand.  The Company made a $25,000 payment to Mr. Brothers on January 24, 2011.  Of that payment, $1,272 was applied to accrued but unpaid interest, and the remaining $23,728 was applied to reduce the principal amount owed to Mr. Brothers.  As of December 31, 2010, the Company owed Mr. Brothers the principal amount of $124,846 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.


For the periods ended March 31, 2011 and 2010, the Company incurred expenses for accounting services of $28,775 and $15,000, respectively, to a firm related to a member of the board of directors.


On August 11, 2006, CTCEG loaned the Company $42,000.  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.  


17




 Of that payment $7,134 was applied to accrued but unpaid interest, and the remaining $42,000 was applied to retire the principal amount owed to Coast to Coast Equity Group, Inc.  


NOTE 14 – CONCENTRATION AND CREDIT RISK


During the period ended March 31, 2011, two customers individually accounted for 82% and 18% of the Company’s total revenues.  During the period ended March 31, 2010, two customers accounted for 95% and 5% of 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 March 31, 2011 accounts receivable balance of $5,137,984 is from two customers. The customers accounted for 22% and 78% of the receivable balance as of March 31, 2011.  The accounts receivable balance of $1,991,902 is from one customer as of December 31, 2010.  The customers are multinational corporations.  The Company has not experienced any bad debts from these customers.


The Company receives its inventory from approximately eight suppliers.  The Company has an accounts payable balance to these suppliers of $4,459,822 and $1,912,577 as of March 31, 2011 and December 31, 2010, respectively.


NOTE 15 – 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 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 March 31, 2011.



18




NOTE 16 – SUBSEQUENT EVENTS


We have evaluated the period from March 31, 2011 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 event:


Demand for Action Letter


On April 24, 2011, the Company and its Board of Directors received a letter entitled “Demand for Action” wherein an attorney representing a class of shareholders alleges facts to support the following claims:  “Fraudulent Misrepresentation and Concealments in Violation of §10(b) of the Securities Exchange Act of 1934 and S.E.C. rule 10b-5,” “Selective Disclosure of, and Failure to Disclose, Material Information, In Violation of Regulation FD”; and Breaches of Fiduciary Duty.  The letter does not make any claims for monetary damages, but rather seeks a reduction in the number of Board of Directors seats from seven to six, the appointment of three” Independent Directors” and requirement that the Board must approve all “material decisions in the Company.”  The letter further demands the Company hire “an investor / public relations firm,” a CFO experienced in “Wall Street investor relations” and other personnel, along with rescission of options granted to Messrs. Brothers and Wilhide.  The Company has responded to the letter and the Board of Directors is examining how best to investigate the factual allegations claimed in the letter. In subsequent correspondence, the attorney indicated that damages in excess of $10 million will be sought in litigation.


19





Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.


This Management's Discussion and Analysis or Plan of Operation (MD&A) contains forward-looking statements that involve known and unknown risks, significant uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed, or implied, by those forward-looking statements.  You can identify forward-looking statements by the use of the words may, will, should, could, expects, plans, anticipates, believes, estimates, predicts, intends, potential, proposed, or continue or the negative of those terms.  These statements are only predictions. In evaluating these statements, you should specifically consider various factors, including the risk factors outlined below.  These factors may cause our actual results to differ materially from any forward-looking statements.  Although we believe that the exceptions reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.  Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements.  We undertake no obligation to revise or update publicly any forward-looking statements for any reason.


We believe that the impact of inflation and changing prices on our net sales and revenues and on income from continuing operations has been inconsequential.


Liquidity and Capital Resources


Between January 1, 2011 and March 31, 2011, our capital requirements have largely been met through sales of products other than THOR or ODIN. We recorded sales of $6,417,936 from the sale of various products in the first quarter of 2011.  We anticipate that income from sales of such products will be sufficient to finance our ongoing capital requirements in 2011. To the extent we make sales of ODIN or THOR systems in 2011, we expect to negotiate customer deposits sufficient to provide us with the working capital needed to build the related systems. The following liquidity events describe the amounts and sources of our capital resources and describe how we have paid our expenses.


We have incurred losses for the past two fiscal years but had comprehensive income of $687,932 for the three months ended March 31, 2011.

 

Historically, we have relied on revenues, debt financing and sales of our common stock to satisfy our cash requirements. For the three months ended March 31, 2011, we received cash proceeds of $1,332,930 from sales of various products and $1,322,445 from accounts receivable outstanding at December 31, 2010.  For the year ended December 31, 2010, we received cash proceeds of $16,782,487 from sales of various products, $335,365 from customer deposits, and $245,714 from amounts paid to exercise warrants resulting in the issuance of common stock


For the year ended December 31, 2010 we issued 6,631,854 shares of our common stock.  For the year ended December 31, 2009 we issued 3,273,571 shares of our common stock.  For the year ended December 31, 2008 we issued 4,459,516 shares of our common stock. For the year ended December 31, 2007 we issued 659,333 shares of our common stock as payment for services. Management anticipates that we may continue to issue shares for expansion of our business in the short term.


Management intends to finance our 2011 operations primarily with the revenue from product sales.   Any cash shortfalls will be addressed through equity, debt financing or commercial loans, if available. Management expects revenues will be realized to support operations in 2011. We may need to continue to raise additional capital, both internally and externally, to cover cash shortfalls and to compete in our markets. These operating costs include cost of sales, general and administrative expenses, salaries and benefits and professional fees. We believe we have sufficient contracts in place to meet our expected cash requirements for 2011. We anticipate that any capital raised in 2011 will be primarily for the purpose of expanding operations.

 



20




Commitments and Contingent Liabilities

 

The Company leases office and warehouse spaces in Covington, KY and Erlanger, KY under a five-year and 37 month non-cancelable operating leases, expiring August 2011 and December 2011, respectively. Base rent is $5,807 per month with an annual rent escalator of 3%. At March 31, 2011, future minimum payments for operating leases related to our office and manufacturing facilities were $35,550 through December 2011.

 

Our total current liabilities increased to $5,262,225 at March 31, 2011 compared to $3,378,922 at December 31, 2010. Our total current liabilities at March 31, 2011 included accounts payable of $4,495,926, accrued expenses of $87,895, deferred revenue of $577,286, and a loan from shareholder of $101,118.


Results of Operations


The following discussions are based on the unaudited condensed consolidated financial statements of Valley Forge Composite Technologies and its subsidiaries. These charts and discussions summarize our financial statements for the three months ended March 31, 2011 and 2010, and should be read in conjunction with the financial statements, and notes thereto, included with the Company’s Form 10-Q for the three months ended March 31, 2011.


SUMMARY COMPARISON OPERATING RESULTS


 

 

THREE MONTHS ENDED MAR 31, 2011

 

THREE MONTHS ENDED MAR 31, 2010

Gross Profit

$

1,314,557

$

587,194

Total operating expenses

 

630,486

 

535,597

Income from operations

 

684,071

 

51,597

Total other income (expense)

 

3,869

 

(544,956)

Net income (loss)

 

687,940

 

(493,359)

Other comprehensive loss

 

(8)

 

--

Comprehensive income (loss)

$

687,932

$

(493,359)

Net income (loss) per share

$

0.01

$

(0.01)


To date, no revenues have been attributable to sales from ODIN or THOR.  All sales for the first three months of 2011 and 2010 have been for Aerospace Products and other mechanical devices.  We have experienced a significant increase in revenues due to an increase in efforts in this area.  Gross profit in 2011 includes approximately $1,000,000 from an order that is not expected to continue.  As of May 13, 2011 the Company has not received payment on this transaction.


Our operating expenses have generally increased for the three months ended March 31, 2011, compared with the three months ended March 31, 2010.  The major component of our operating expenses consisted of selling and administrative expenses and share-based payments.  For the three months ended March 31, 2011 and 2010, our selling and administrative expenses were $630,486 and $535,597, which included stock option compensation expense of $204,956 and $-0-.


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.


For future sales of ODIN and THOR, it is expected customer acceptance, which may include testing, will also be required for revenue recognition.  In May 2010, the Company issued a press release indicating sales through Valley Forge Imaging Systems.  The products sold were for aerospace imaging applications



21




and were not an ODIN device.  Accordingly, the Company later determined to account for these revenues as aerospace sales.

 

 

The following chart provides a breakdown of our sales in 2011 and 2010. 


 

 

THREE MONTHS ENDED MAR 31, 2011

 

THREE MONTHS ENDED MAR 31, 2010

Valley Forge Detection Systems, Inc.

$

 

$

 

Valley Forge Aerospace, Inc.

 

6,417,936

 

4,511,570

Valley Forge Imaging, Inc.

 

 

 

 

Valley Forge Emerging Technologies, Inc.

 

 

 

 

Totals per financial statements:

$

6,417,936

$

4,511,570

 

Our total operating expense was $630,486 and $535,597 for the three months ended March 31, 2011 and 2010.


Our average monthly cost of operations from January 2011 through March 2011 was $210,162. Excluding aggregate non-cash charges of $19,240 for depreciation and $204,956 for option compensation, our average monthly cost of operations from January 2011 through March 2011 was $135,430.

 

As of March 31, 2011, we had $849,842 in cash remaining as well as $509,509 of marketable securities.

 

At this rate, and barring any material changes to our capital requirements, we anticipate being able to sustain our operations for ten months, at which time we will have to obtain additional capital funding in the absence of obtaining additional cash from other sources. Our ability to sustain ourselves on our current cash position depends almost entirely on: (1) how long the government and/or customer approval process may take and how high the initial market demand is for the THOR system, and (2) how long it takes to realize revenue from any sales of ODIN units; and (3) whether additional cash infusions are obtained via the exercise of outstanding warrants or from other sources or (4) continued sales of our standard products. While the receipt of purchase orders for THOR units will dictate our major production needs, the timing of the government approval process is largely out of our control. Likewise, in the fourth quarter of 2009, we placed a unit with ODIN components in a foreign country for the purpose of demonstration and sales. That demonstration unit has been returned and no sale occurred. Although the unit performed according to specifications, we do not have a forecast of how long it may take to realize revenues from any sales of such units.


Other than for general operational and payroll expenses, which may also include the payment of additional research and development and marketing expenses, the Company’s day-to-day operations are not expected to change materially until such time as we commence production and then the delivery of the first commercial THOR devices or sales orders for any ODIN units. We do not anticipate having significant additional research and development expenses during the next twelve months, but such expenses may be necessary to facilitate the obtaining of U.S. Government approvals before we can commence production of the THOR system or to facilitate the execution of new contracts.


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.  If we do issue work orders we may have additional R & D expense.

 



22




In the coming months, the Company will refine its estimates of its capital requirements based on any quantities of THOR and ODIN units ordered and the terms of any license the Company is able to negotiate with Lawrence Livermore National Laboratories.


Description of Critical Accounting Policies and Estimates, Going Concern, and Fair Value of Financial Instruments


This section of our Form 10-Q contains a description of our critical accounting policies as they pertain to: the Company’s business as a going concern, our use of estimates, our fair valuation of financial instruments, our revenue recognition policy, and to the effect on our financial statements of recent accounting pronouncements.  A more comprehensive discussion of our critical accounting policies, and certain additional accounting policies, can be found in Note 1 to the financial statements.


Critical Accounting Policies and Estimates 

 

The accompanying consolidated financial statements have been prepared by the Company. The Company’s financial statements are consolidated with the results of its subsidiaries.  All material inter-company balances and transactions have been eliminated. 


Our financial statements have been prepared according to accounting principles generally accepted in the United States of America.  In preparing these financial statements, we are required to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities.  We evaluate these estimates on an on-going basis.  We base these estimates on historical experiences and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities.  Actual results may differ from these estimates under different assumptions or conditions.  At this point in our operations, subjective judgments do not have a material impact on our financial statements except as discussed in the next paragraph.

  

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.  


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.

 

Fair Value of Financial Instruments 

 

The Company’s financial instruments consist of cash, marketable securities, security deposits, accounts receivable, amount due to shareholders, and accounts payables.  Except as discussed in Note 3, the carrying values of these financial instruments approximate the fair value due to their short term maturities.

 

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 6 to the financial statements for discussion of deferred revenue.




23




For future sales of ODIN and THOR, it is expected customer acceptance, which may include testing, will also be required for revenue recognition.


Share-based Payments


Generally, all forms of shared-based payments, including stock option grants and restricted stock grants, are measured at their fair value on the awards’ grant date, 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 of the fair value of the share-based payment, whichever is more readily determinable.


Recent Accounting Pronouncements 

 

The Company does not believe that recent accounting pronouncements will have a material effect on the content or presentation of its financial statements.

 

The Company does not believe that any other recently issued, but not yet effective accounting standards will have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

 

Off-Balance Sheet Arrangements 

 

The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a significant current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.


Contractual Obligations


As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.


Item 3. Quantitative And Qualitative Disclosures About Market Risk

 

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.

 

Item 4. Controls And Procedures

 

Disclosure Controls and Procedures

 

Under the supervision and with the participation of our principal executive officer and 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 Exchange Act, as of December 31, 2010 (the "Evaluation Date"). Our disclosure controls and procedures are designed so that information relating to the Company, including our consolidated subsidiaries, required to be disclosed in our SEC reports is  (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) is 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 and 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



24




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.

 

Changes in Internal Control over Financial Reporting

 

Our management has also evaluated our internal control over financial reporting, and there have been no significant changes in our internal controls or in other factors that could significantly affect those controls subsequent to the date of our last evaluation.

 

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 II – OTHER INFORMATION


Item 1. Legal Proceedings


William A. Rothstein vs. Valley Forge Composite Technologies, Inc., a Florida corporation, and Louis J. Brothers, Civil Action No. 09-0918071 Toomey (UT 3d Jud. Dist.)


On October 30, 2009, the Company and its president and director Louis J. Brothers were both named as defendants in a civil complaint filed on that date in the Third Judicial District Court in and for Salt Lake County, Utah by shareholder William A. Rothstein. The complaint has been served on Mr. Brothers and the Company. The five-count complaint alleges that the defendants committed fraud, violated the Utah Uniform Securities Act (Ut. Code Ann. §61-1-1, et seq.), made negligent misrepresentations, breached a fiduciary duty to shareholders, and breached a settlement agreement and seeks unspecified compensatory and punitive damages and attorney’s fees.  The complaint alleges that Mr. Brothers misrepresented the timetable in which the Company’s THOR LVX technology would receive government approvals and the number of Department of Energy employees working on the THOR project and thereby induced plaintiffs to invest in the Company’s securities in 2006.  The Company and Mr. Brothers filed a motion to dismiss the complaint based upon the Utah court’s lack of personal jurisdiction over the Company and Brothers.  The Honorable Judge Kate Toomey denied the motion to dismiss on December 13, 2010; Mr. Brothers and the Company filed an answer to the complaint denying all claims.  The Company cannot provide any assurances on the outcome of the matter.


Coast To Coast Equity Group, Inc. vs. Valley Forge Composite Technologies, Inc., a Florida corporation, and Lou Brothers, Civil Action No. 090A-11229 (Fla. 12 th Jud. Cir.)

On November 11, 2009, the Company and its president and director Louis J. Brothers were served with a civil complaint naming both of them as defendants. The complaint was filed on or about October 28, 2009 in circuit court in Manatee County, Florida by shareholder and creditor Coast To Coast Equity Group, Inc.  ("CTCEG") The complaint alleges that the defendants breached a consulting services agreement by not reimbursing plaintiff for $44,495.18 in expenses, committed fraud, pleaded for the rescission of a standby equity agreement in the amount of $500,000, violated the Florida Securities and Investor Protection Act (Fla. Stat. §517.301), made negligent misrepresentations, and breached a fiduciary duty to shareholders and seeks damages in excess of $15,000 and attorney's fees.  As it pertains to non-contract claims, the complaint alleges that Mr. Brothers misrepresented the distribution rights that the Company had to its ODIN product and misused plaintiff's proceeds which were to be allocated towards the purchase of an ODIN unit   

 

A Motion to Dismiss was filed in response to the Complaint.  A Consent Order was entered on Jan. 14, 2010, allowing CTCEG to file an Amended Complaint.  A Motion to Dismiss was filed in response to the Amended Complaint.  On May 20, 2010, the Court granted CTCEG leave to file a third amended complaint, which abandons the claims in the original complaint except for breach of contract based on allegations of failure to pay expenses under the above referenced consulting agreement.  The First



25




Amended Complaint ("Complaint") alleges failure to pay a $42,000 promissory note payable to CTCEG.  The claim has been resolved and the Company paid in full amounts owing under the promissory note.


The Complaint also contains a claim for breach of the 2006 Warrant Agreement in that the Company failed to issue stock for warrants which the Company contends expired in May, 2009.  The Complaint contains a claim for promissory estoppel, alleging that Mr. Brothers orally, and in SEC filings, agreed to extend the Warrant Agreement and is estopped to deny such promises.  A claim for non-dilution damages is also included, based on allegations that the 2006 Registration Rights Agreement was also extended to May 2010 and CTCEG is therefore entitled to have additional shares issued because the Company sold additional stock in 2008 and 2009.  The Complaint contains a claim for promissory estoppel, alleging that Mr. Brothers orally, and in SEC filings, agreed to extend the Registration Rights Agreement and is estopped to deny such promises.  The last claim is for tortious interference with a contractual relationship, alleging Mr. Brothers, presumably in his individual capacity, interfered with CTCEG's contractual rights under the Warrant Agreement, Registration Rights Agreement and Consulting Agreement. 

 

The Company and Mr. Brothers deny all allegations and have filed an Answer and Affirmative Defenses; raising numerous defenses to the claims.   They also intend to file applicable counterclaims and possible third party claims, but they cannot provide assurances as to the outcome of the matter.

 

George Frudakis vs. Valley Forge Composite Technologies, Inc., a Florida corporation, and Lou Brothers, Civil Action No. 2010 CA-04230  (Fla. 12 th Jud. Cir.)

 

On or about May 7, 2010, George Frudakis commenced the above titled action against the Company and Lou Brothers.  The Complaint sets forth the exact same causes of action as in the Coast to Coast Equity Group, Inc. vs. Valley Forge Composite Technologies, Inc. and Lou Brothers, described above, with the exception that the Frudakis matter does not include a claim for breach of contract based upon the Consulting Agreement.  The Company and Brothers deny all allegations and have filed a motion to dismiss the complaint and a motion to consolidate the Frudakis and Coast to Coast cases into a single proceeding.  The Court has granted a motion to consolidate the cases for discovery purposes and has reserved as to consolidation for trial.   The Company and Lou Brothers intend to file appropriate Affirmative Defenses and Counterclaims, and possible third-party claims, in the event the Court denies the Motion to Dismiss.  However, the Company cannot provide assurances as to the outcome of the matter.


Arbitration Claim filed by Advanced Technology Development, Inc.


During the period between July 9th and 13th, 2010, the Company, Louis J. Brothers and Larry K. Wilhide were served by mail courier with a Statement of Claim (“Statement”) filed with the American Arbitration Association by Advanced Technology Development, Inc. (“ATD”).  Summarizing in general terms, ATD’s arbitration claims one through four are based upon allegations the Company failed to perform or pay ATD for goods pursuant to two separate supply contracts. Claims five through eight are based upon the Company’s activities in the promotion and sale of the ODIN imaging device.  Claims nine through thirteen are based upon the Company’s alleged misuse of ATDs’ “ULDRIS” mark.  The final claim seeks injunctive relief.  The nature of the claims is discussed in greater detail in the Subsequent Events discussion of the Company’s Form 10-Q filed for the second quarter of 2010.


The parties agreed to the appointment of Phillip D. O’Neil, Jr. as the Sole Arbitrator and are presently conducting limited discovery in accordance with arbitration rules.  The arbitration proceeding was heard from April 27 through April 29, 2011.  The parties must submit briefs in June, 2011 before the arbitrator can issue a ruling.


Item 2. Unregistered Sales Of Equity Securities And Use Of Proceeds

 

None



26




Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. [REMOVED AND RESERVED]

 

Item 5. Other Information

 

Demand for Action Letter


On April 24, 2011, the Company and its Board of Directors received a letter entitled “Demand for Action” wherein an attorney representing a class of shareholders alleges facts to support the following claims:  “Fraudulent Misrepresentation and Concealments in Violation of §10(b) of the Securities Exchange Act of 1934 and S.E.C. rule 10b-5,” “Selective Disclosure of, and Failure to Disclose, Material Information, In Violation of Regulation FD”; and Breaches of Fiduciary Duty.  The letter does not make any monetary damages, but rather seeks a reduction in the number of Board of Directors seats from seven to six, the appointment of three” Independent Directors” and requirement that the Board must approve all “material decisions in the Company.”  The letter further demands the Company hire “an investor / public relations firm,” a CFO experienced in “Wall Street investor relations” and other personnel, along with rescission of options granted to Messrs. Brothers and Wilhide.  The Company’s counsel has responded to the letter and the Board of Directors is examining how best to investigate the factual allegations claimed in the letter. In subsequent correspondence, the attorney indicated that damages in excess of $10 million will be sought in litigation.


Item 6. Exhibits

 

The following exhibits are filed herewith:

 

(a) 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

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document.

101.CAL

XBRL Taxonomy Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Label Linkbase Document

101.PRE

XBRL Taxonomy Presentation Linkbase Document



27





SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

 

VALLEY FORGE COMPOSITE TECHNOLOGIES, INC.

 

 

 

 

 

Date:  May 16, 2011

By:

/s/ Louis J. Brothers

 

 

 

Louis J. Brothers

 

 

 

President, Secretary and Treasurer

(Principal Accounting Officer and Authorized Officer

 









28