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EXCEL - IDEA: XBRL DOCUMENT - VALLEY FORGE COMPOSITE TECHNOLOGIES, INC.Financial_Report.xls
EX-3.1 - EXHIBIT 3.1 - VALLEY FORGE COMPOSITE TECHNOLOGIES, INC.ex3_1.htm
EX-32.2 - EXHIBIT 32.2 - VALLEY FORGE COMPOSITE TECHNOLOGIES, INC.ex32_2.htm
EX-31.2 - EXHIBIT 31.2 - VALLEY FORGE COMPOSITE TECHNOLOGIES, INC.ex31_2.htm
EX-32.1 - EXHIBIT 32.1 - VALLEY FORGE COMPOSITE TECHNOLOGIES, INC.ex32_1.htm
EX-31.1 - EXHIBIT 31.1 - VALLEY FORGE COMPOSITE TECHNOLOGIES, INC.ex31_1.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 SEPTEMBER 30, 2011.
 
£  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

Commission file number 000-51420
 
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)

Registrant's telephone number, including area code: (859) 581-5111
 
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  R      No  £

Indicate by check mark 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, ($0.001 par value per share) as of November 21, 2011 was 62,066,928 shares.
 


 
1

 
 
VALLEY FORGE COMPOSITE TECHNOLOGIES, INC.
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2011
 
INDEX
  
Page
   
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
3
   
PART I. FINANCIAL INFORMATION
4
  
 
Item 1.
Financial Statements
4
  
Condensed Consolidated Balance Sheets as of September 30, 2011 (Unaudited) and December 31, 2010
4
  
Condensed Consolidated Statements of Operations (Unaudited) for the three and nine months ended September 30, 2011 and 2010
5
  
Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2011 and 2010
6
  
Notes to the Condensed Consolidated Financial Statements (Unaudited)
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
24
Item 3.
Qualitative and Quantitative Disclosures About Market Risk
31
Item 4.
Controls and Procedures
31
  
 
PART II. OTHER INFORMATION
32
  
 
Item 1.
Legal Proceedings
32
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
32
Item 3.
Defaults Upon Senior Securities
32
Item 4.
[REMOVED AND RESERVED]
32
Item 5.
Other information
32
Item 6.
Exhibits
34
  
 
SIGNATURES
35
 
EXPLANATORY NOTE - RESTATEMENT

As previously reported on Valley Forge Composite Technologies, Inc.’s (the “Company’s”) Current Report on Form 8-K, dated November 3, 2011, as amended by the Current Report on Form 8-K/A, Amendment No. 1, dated November 14, 2011, the consolidated financial statements in the Company’s Quarterly Report on Form 10-Q for the fiscal period ended September 30, 2010 (“2010 Third Quarter Form 10-Q”) contained an error in the timing of revenue recognition related to the shipment of certain products scheduled to be shipped in September 2010 but not actually shipped until October 2010, and did not include an expense for the September 2010 portion of option compensation for options that vested on January 1, 2011, and should no longer be relied upon.  The Company also reported that it would file an amended 2010 Third Quarter Form 10-Q.  Subsequently, the Company determined that it would be more useful to stockholders to include amended and restated consolidated financial statements for the fiscal period ended September 30, 2010 in this Quarterly Report on Form 10-Q for the fiscal period ended September 30, 2011 (“2011 Third Quarter Form 10-Q”) rather than filing an amended 2010 Third Quarter Form 10-Q.

As more fully described in the Notes to the Condensed Consolidated Financial Statements contained in this 2011 Third Quarter Form 10-Q, these changes resulted in an increase in the comprehensive net loss for the three and nine months ended September 30, 2010 of $265,202.  These corrections have no impact on our Annual Report on Form 10-K filed for the fiscal year ended December 31, 2010 or the Quarterly Reports on Form 10-Q filed for the fiscal periods ended March 31, 2011 and June 30, 2011.
 
 
2

 

Special Note Regarding Forward-Looking Statements
 
Information included in this Form 10-Q 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 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.
 
 
3

 
 
PART I FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
 
VALLEY FORGE COMPOSITE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 
   
SEP 30, 2011
   
DEC 31, 2010
 
   
(unaudited)
       
             
   
Current assets:
           
Cash and cash equivalents
  $ 201,082     $ 585,549  
Marketable securities
    509,304       504,063  
Accounts receivable
    4,506,676       1,991,902  
Inventories
    2,567,703       999,952  
Prepaid expenses and other
    32,050       47,852  
Deposits with vendors
    -       21,000  
Total current assets
    7,816,815       4,150,318  
Property and equipment, net
    260,844       274,405  
                 
Non-current assets:
               
Patent license
    40,000       -  
Security deposits
    5,535       5,535  
Total non-current assets
    45,535       5,535  
                 
Total Assets
  $ 8,123,194     $ 4,430,258  
                 
                 
   
Current liabilities:
               
Accounts payable
  $ 5,910,711     $ 2,029,425  
Accrued expenses and other
    300,000       30,886  
Deferred revenue
    331,351       1,193,765  
Due to shareholder
    -       124,846  
Total current liabilities
    6,542,062       3,378,922  
Shareholders' Equity:
               
Common stock, $.001 par value, 100,000,000
               
shares authorized; 61,320,774 issued and
               
outstanding at September 30, 2011 and December 31, 2010
    61,321       61,321  
Additional paid-in capital
    11,460,748       10,777,265  
Accumulated deficit
    (9,926,387 )     (9,782,871 )
Accumulated other comprehensive loss
    (14,550 )     (4,379 )
Total shareholders' equity
    1,581,132       1,051,336  
                 
Total Liabilities and Shareholders' Equity
  $ 8,123,194     $ 4,430,258  
 
See the accompanying notes to the condensed consolidated financial statements
 
 
4

 
 
VALLEY FORGE COMPOSITE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
 
    For the three months ended    
For the nine months ended
    SEP 30,      SEP 30,
    2011     2010     2011     2010  
          (as restated)           (as restated)  
                         
Sales
  $ 1,756,042     $ 4,726,687     $ 11,337,017     $ 12,882,461  
Cost of sales
    1,434,593       4,093,643       9,425,071       11,109,028  
                                 
Gross Profit
    321,449       633,044       1,911,946       1,773,433  
                                 
Costs and expenses
                               
Selling and administrative expenses
    327,427       381,975       1,085,606       1,281,215  
Share-based payments
    273,571       1,009,201       683,483       1,009,201  
      600,998       1,391,176       1,769,089       2,290,416  
                                 
Income (loss) from operations
    (279,549 )     (758,132 )     142,857       (516,983 )
                                 
Other non-operating income (expense)
                               
Interest expense
    -       (3,519 )     (3,102 )     (552,037 )
Litigation income (expense)
    (150,000 )     13,941       (300,000 )     62,441  
Investment income
    5,783       212       16,729       246  
                                 
 Net loss
  $ (423,766 )   $ (747,498 )   $ (143,516 )   $ (1,006,333 )
                                 
Other comprehensive loss
                               
Unrealized gain (loss) on available
                               
for sale securities
    (10,144 )     2,440       (10,171 )     2,440  
                                 
Comprehensive loss
  $ (433,910 )   $ (745,058 )   $ (153,687 )   $ (1,003,893 )
                                 
Loss per common share
                               
Basic and Diluted
  $ (0.01 )   $ (0.01 )   $ (0.00 )   $ (0.02 )
                                 
Weighted Average Common Shares Outstanding
                         
Basic and Diluted
    61,320,774       61,104,490       61,320,774       58,601,068  
 
See the accompanying notes to the condensed consolidated financial statements
 
 
5

 
 
VALLEY FORGE COMPOSITE TECHNOLOGIES, INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
 
   
For the nine months ended
 
   
SEP 30,
 
   
2011
   
2010
 
         
(as restated)
 
             
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net loss
  $ (143,516 )   $ (1,006,333 )
Adjustments to reconcile net loss
               
to net cash provided by (used in)
               
operating activities:
               
Depreciation and amortization expense
    59,044       180,593  
Amortization of debt discount
    -       541,893  
Share-based payments
    683,483       1,009,201  
(Increase) decrease in operating assets:
               
(Increase) decrease in accounts receivable
    (2,514,774 )     (1,091,773 )
Increase in inventories
    (1,567,751 )     (634,906 )
Decrease in prepaid expenses and other
    15,802       56,306  
Decrease in vendor deposits
    21,000       -  
Increase (decrease) in operating liabilities:
               
Increase (decrease) in accounts payable
    3,881,286       (487,410 )
Increase in accrued expenses and other
    269,114       -  
Increase (decrease) in deferred revenue
    (862,414 )     1,058,439  
Net Cash Used In Operating Activities
    (158,726 )     (373,990 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Purchase of marketable securities
    (15,412 )     (500,000 )
Patent license
    (40,000 )     -  
Purchases of equipment
    (45,483 )     (121,280 )
Net Cash Used In Investing Activities
    (100,895 )     (621,280 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Gross proceeds from exercise of warrants
    -       245,714  
Repayments of convertible debt
            (42,000 )
Repayments to shareholder
    (124,846 )     (24,450 )
Net Cash Provided By (Used In) Financing Activities
    (124,846 )     179,264  
                 
NET DECREASE IN CASH AND CASH EQUIVALENTS
    (384,467 )     (816,006 )
                 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    585,549       1,492,135  
                 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 201,082     $ 676,129  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
               
Cash paid during the period for:
               
Income taxes
  $ -     $ -  
Interest
  $ 3,102     $ 57,684  
                 
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS
               
Stock issued for note conversion
  $ -     $ 1,000,000  
 
See the accompanying notes to the condensed consolidated financial statements.
 
 
6

 
 
VALLEY FORGE COMPOSITE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
SEPTEMBER 30, 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 (“VF”), 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 the first quarter of 2011, the Company had a high margin sale of a product containing a sensor that is no longer available, enabling the Company to charge a premium.  Sale of this product 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 of the THOR advanced explosives detection system was completed in Russia in 2009.  We are currently focused on being able to assemble a demonstration unit to further our efforts in marketing, manufacturing and distribution of THOR in the United States and other countries.

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 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.
 
 
7

 
 
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 September 30, 2011, the results of operations for the three and nine months ended September 30, 2011 and 2010, and cash flows for the nine months ended September 30, 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 on April 11, 2011 and amended on April 18, 2011.

The results of operations for the nine months ended September 30, 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 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.
 
 
8

 
 
Fair Value of Financial Instruments

The Company’s financial instruments consist of cash, marketable securities, accounts receivable, security deposits, amount due to shareholder 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.

Cash Equivalents

The Company considers all short-term securities purchased with a maturity of three months or less to be cash equivalents.

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 30 -180 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 September 30, 2011 and December 31, 2010.

Inventories

The Company accounts for inventories by applying the lower of cost or market method, on a first-in, first-out (FIFO) basis. Inventories consist of the following:
 
   
SEP 30
   
DEC 31
 
   
2011
   
2010
 
   
(unaudited)
       
             
Raw Materials
  $ 2,290,870     $ 609,900  
Work in process
    -       6,738  
Finished goods
    276,833       383,314  
    $ 2,567,703     $ 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 as follows:

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.

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.   
 
 
9

 
 
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 consolidated 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 September 30, 2011.

Research and Development Costs

Research and development costs, which relate primarily to the development, design and testing of products, are expensed as incurred.  Research and development expense is included in selling and administrative expenses, and was insignificant in 2011 and 2010.  However, the Company believes it will soon be able to review new Procurement Specifications of the Transportation Security Administration’s Advanced Imaging Technology program.  If the Company concludes a new version of ODIN should be developed in order to comply with the Procurement Specifications, the Company may incur research and development costs, the extent of which is presently unknown.  
 
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.
 
 
10

 
 
The Company’s policy for interest and penalties on material uncertain tax positions recognized in the financial statements is to classify them as interest expense and operating expense, respectively.  The Company assessed its uncertain 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 2008.

Advertising

Advertising costs are expensed as incurred.  For the three months ended September 30, 2011 and 2010, advertising expense was $1,207 and $20,494, respectively.

Advertising costs are expensed as incurred.  For the nine months ended September 30, 2011 and 2010, advertising expense was $2,407 and $60,944, 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 Nine Months Ended
 
   
SEP 30,
 
   
2011
   
2010
 
   
(unaudited)
   
(unaudited)
 
         
(as restated)
 
Net loss
  $ (143,516 )   $ (1,006,333 )
Weighted average shares outstanding
    61,320,774       58,601,068  
Loss per share - basic and diluted
  $ (0.00 )   $ (0.02 )

The Company’s common stock equivalents include the following: 
 
   
SEPT 30,
   
SEPT 30,
 
   
2011
   
2010
 
   
(unaudited)
   
(unaudited)
 
         
(as restated)
 
Class D Warrants
    1,428,574       1,428,574  
Class F Warrants
    1,300,000       1,300,000  
Options
    4,050,000       4,050,000  
      6,778,574       6,778,574  
 
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 13, 2010, the Company issued 4,050,000 stock options of which 660,000 were vested at December 31, 2010.  See Note 11 for further details.

On January 1, 2011, an additional 660,000 options vested.  As of September 30, 2011, 1,320,000 options were vested.  See Note 11 for further details.
 
 
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NOTE 2 - GOING CONCERN

As reflected in the accompanying consolidated financial statements, the Company has an accumulated deficit of $9,926,387 at September 30, 2011, net losses of $143,516 and cash used in operations of $158,726 for the nine months ended September 30, 2011.  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 borrowings or a public or private offering of its securities, which includes selling stock to Lincoln Park Capital LLC under terms disclosed in Note 17 “Subsequent Events” below.  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 customer 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:
 
   
SEP 30,
   
DEC 31,
 
   
2011
   
2010
 
   
(unaudited)
       
Available for sale equity securities:
           
Amortized Cost
  $ 523,854     $ 508,442  
Unrealized Loss
    (14,550 )     (4,379 )
Fair Value
  $ 509,304     $ 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 $14,550 and $4,379 have been included in accumulated other comprehensive loss at September 30, 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:

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 September 30, 2011 and December 31, 2010, marketable securities consisted of an exchange traded bond fund that was measured using the Level 1 valuation hierarchy.
 
 
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NOTE 4 – PROPERTY AND EQUIPMENT

The major classifications of property and equipment are summarized below:
 
   
SEP 30,
   
DEC 31,
 
   
2011
   
2010
 
   
(unaudited)
       
Computers and equipment
  $ 136,643     $ 135,065  
Furniture and fixtures
    49,564       49,564  
Demonstration units
    339,915       296,010  
      526,122       480,639  
Less:  accumulated depreciation
    (265,278 )     (206,234 )
    $ 260,844     $ 274,405  
  
Depreciation expense for the nine months ending September 30, 2011 and 2010 was $59,044 and $62,955.

The Company has incurred $95,824 and $51,919 of capitalized THOR costs, recorded in demonstration units, still under construction and not amortized as of September 30, 2011 and December 31, 2010.  Demonstration units also includes an ODIN unit available for testing by customers.

NOTE 5 – PATENT LICENSE

On September 22, 2011, the Company announced that it signed a definitive agreement for an exclusive license with Lawrence Livermore National Security, LLC (an affiliate of Lawrence Livermore National Laboratory (“LLNS”)) for certain patents covering an advanced accelerator-detector complex for high efficiency detection of hidden explosives.  The patents are those that may ultimately issue from two provisional patent applications filed by LLNS and related to inventions resulting from work done under a Cooperative Research and Development Agreement.  Pursuant to the license, Valley Forge paid LLNS license issue fees of $40,000 in the third quarter of 2011 and will make royalty payments equal to 6% of net sales, subject to a minimum annual royalty of $30,000 beginning in 2014, $50,000 in 2015 and $60,000 in 2016 and thereafter during the term of the agreement, expiring December 5, 2030.

The patent license will be amortized over 19 years and three months until the expiration of the patents, if granted, on December 5, 2030.

NOTE 6 – ACCOUNTS PAYABLE

The Company’s 2011 accounts payable include $6,248 borrowed on revolving credit lines utilizing corporate credit cards which bear interest at an average rate of 9.65% per annum and call for total minimum monthly installment payments of $70 as of September 30, 2011. However, since amounts may be due on demand and it is the Company’s intent to pay such balances in their entirety within 12 months; such amounts have been classified as current.  

The remaining 2011 accounts payable consist of ordinary inventory purchases and administrative expenses which were incurred in the operations of the Company and include $5,904,463 of trade accounts.

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, 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 2010 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.

NOTE 7 – DEFERRED REVENUE

The Company has received $331,351 and $1,193,765, at September 30, 2011 and December 31, 2010, respectively, in cash for orders it intends to ship in the following twelve months.  Per the Company’s revenue recognition policy (see Note 1), generally 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.
 
 
13

 
 
NOTE 8 – 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 which was 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. The Company reduced the warrant exercise price to $0.20 per share as part of the terms of an additional round of financing from its Class C and Class D warrant holder.  The difference between the warrants’ fair value immediately before and after the modification of the exercise price was insignificant and, therefore, no related expense was recorded.  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 nine months ended September 30, 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.  The Company reduced the warrant exercise price to $0.20 per share as part of the terms of an additional round of financing from its Class C and Class D warrant holder.  The difference between the warrants’ fair value immediately before and after the modification of the exercise price was insignificant and, therefore, no related expense was recorded.  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 nine months ended September 30, 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 were no notes outstanding at September 30, 2011 and December 31, 2010.

NOTE 9 – 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.
 
 
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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 8).  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.  The Company reduced the warrant exercise price to $0.20 per share as part of the terms of an additional round of financing from its Class C and Class D warrant holder.  The Company believed that accepting this term was necessary in order to close the financing (the sale of stock and warrants on May 27, 2009) and to keep the Company operating.  No accounting entries were recorded in connection with reducing the exercise price.  The difference between the warrants’ fair value immediately before and after the modification of the exercise price was insignificant and, therefore, no accounting entry was made.

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.  The Company reduced the warrant exercise price to $0.20 per share as part of the terms of an additional round of financing from its Class C and Class D warrant holder.  The Company believed that accepting this term was necessary in order to close the financing (the sale of stock and warrants on May 27, 2009) and to keep the Company operating.  No accounting entries were recorded in connection with reducing the exercise price.  The difference between the warrants’ fair value immediately before and after the modification of the exercise price was insignificant and, therefore, no accounting entry was made.

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 relating 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 relating 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%.
 
 
15

 
 
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 nine months ended September 30, 2011 is summarized as follows:
 
   
Number of
shares
   
Weighted
average
exercise
price
 
Outstanding at January 1, 2011
    2,728,574     $ 0.20  
Granted
    -       -  
Forfeited
    -       -  
Exercised
    -       -  
Outstanding at September 30, 2011
    2,728,574     $ 0.20  
 
The following table summarizes the Company's Class D and Class F stock warrants outstanding at September 30, 2011:
 
Warrant
Class
   
Range of
Exercise
Price
   
Number
   
Weighted
Average
Remaining
Life
   
Weighted
Average
Exercise
Price
 
D     $ 0.20       1,428,574       4     $ 0.20  
F     $ 0.20       1,300,000       3.75     $ 0.20  
 
NOTE 10 – 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.
 
On September 29, 2011, the Board of Directors of the Company authorized the issuance of 96,000 shares of common stock, for 2011 services, distributed to the five Board members and three executive officers of the Company. The Company has record 75% of the annual cost of this compensation at September 30, 2011.  The recipients are required to remain in service through December 31, 2011.
 
 
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NOTE 11 – 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 nine months ended September 30, 2011 and 2010  the Company recognized compensation cost and an increase in additional paid-in capital of $614,867 and $1,009,201 and an income tax benefit has not been reflected due to an increase in the deferred tax asset valuation allowance. As of September 30, 2011, there was $2,997,302 of total unrecognized compensation cost relating to unvested 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, September 30, 2011
    4,050,000     $ 1.38  
                 
Options exercisable, September 30, 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, September 30, 2011
    2,730,000     $ 1.32  
 
At September 30, 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 3.8 years and expire on September 13, 2015 while 1,050,640 options have a remaining life of 8.8 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.

2011 Amendment

On August 8, 2011, the Board of Directors approved an amendment to the Incentive Stock Option Master Agreement and the Non Qualified Stock Option Master Agreement previously adopted as part of the Company’s 2008 Equity Incentive Plan (a) to provide for a different vesting schedule, (b) to permit the vesting of unvested options upon Change of Control as defined in the Plan and (c) to permit, in the Board’s discretion, alternative means of payments to exercise options.  No change was made to the vesting schedule for options previously granted.  No accounting adjustments were recorded as a result of this amendment.

NOTE 12 – INCOME TAXES

There was no income tax expense or benefit for the periods ended September 30, 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.
 
 
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NOTE 13 - 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 was for five years ending in August, 2011.  The Company has extended the lease an additional five years and six months commencing on September 1, 2011 and expiring February 28, 2017.

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 $41,044 for the initial twelve months.  These expenses are anticipated to increase at a 3% rate annually for the remaining term of the agreement.

The Company has entered into a lease of 2,700 square feet of warehouse space located at 1895 Airport Exchange Blvd, Building A, Erlanger, Kentucky, expiring 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 September 30, 2011 and 2010 was $50,060 and $48,670, respectively.

The following is a schedule of future minimum lease payments required under the leases as of September 30, 2011:
 
Period Ending SEP 30
 
Amount
2012
 
 $      49,257
2013
 
         46,004
2014
 
         47,141
2015
 
         48,307
2016
 
         49,503
Thereafter
 
         21,094
   
 $     261,306
 
NOTE 14 - RELATED PARTY TRANSACTIONS

The Company made a $25,000 payment to Mr. Brothers on January 24, 2011 related to the due to shareholder balance.  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.  On September 30, 2011, the Company made a $103,728 payment to Mr. Brothers.  Of that payment, $2,610 was applied to accrued interest and the remaining $101,118 was applied to retire 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 September 30, 2011 and 2010, the Company incurred expenses for accounting services of $50,307 and $33,325, 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.  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.

As of September 30, 2011, the Company owed $50,000 to L & M Consulting (“L&M”) which is owned by Louis Brothers, Jr., the son of Louis Brothers, Sr., the Company’s president and chief executive officer.  The Company retained L&M to provide information technology consulting services.  Louis Brothers, Sr., has no interest in the amounts paid to his son.  This amount does not bear interest and is expected to be paid during 2011.
 
 
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NOTE 15 – CONCENTRATION AND CREDIT RISK

During the period ended September 30, 2011, two customers individually accounted for 90% and 10% of the Company’s total revenues.  During the period ended September 30, 2010, two customers accounted for 82% and 18% 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 September 30, 2011 accounts receivable balance of $4,506,676 is from one customer.  The accounts receivable balance of $1,991,902 is from one customer as of December 31, 2010.  The customer is a multinational corporation.  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 $5,765,349 and $1,912,577 as of September 30, 2011 and December 31, 2010, respectively.

NOTE 16 – COMMITMENTS AND CONTINGENCIES

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.  On July 15, 2011, the first accepted work order was transmitted to the Company by ISU.  The completion date for this work order, originally September 30, 2011, has been extended to November 30, 2011.

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 $84,620 as of September 30, 2011.

The Company is involved in litigation and disputes 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.

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 the shareholder, and breached a settlement agreement and seeks unspecified compensatory and punitive damages and attorney’s fees.  The complaint alleged 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 the Plaintiff 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.

On November 1, 2011, the Court granted the Plaintiff’s motion to file an amended complaint, which abandons the claims in the original complaint except for breach of contract based upon a claimed breach of an alleged agreement to settle the stock fraud claims alleged in the original Complaint.  The Amended Complaint includes 11 additional plaintiffs, two of whom previously filed lawsuits against the Company in Florida, which were later voluntarily dismissed.  In the first Amended Complaint claim for breach of contract, Plaintiffs seek the fair market value of stock and warrants under an alleged settlement agreement.  The second claim, promissory estoppel, seeks the fair market value of the stock and warrants promised to Plaintiffs.  The third claim is for a declaratory judgment that the Defendants are in material breach of a settlement agreement, specific performance for the issuance of promised stock and warrants or, alternatively, damages and other relief the court deems proper.
 
 
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The Company and Mr. Brothers have filed an Answer to First Amended Complaint denying all claims and asserting affirmative defenses.  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, 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 January 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 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 Securities and Exchange Commission (“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.  The matter is scheduled for trial during the trial period beginning March 12, 2012.
 
 
20

 
 
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 parties agreed to the appointment of Phillip D. O’Neil, Jr. as the Sole Arbitrator and the arbitration proceeding was heard from April 27 through April 29, 2011.  On July 31, the Arbitrator issued an Interim Award, finding that the Company breached the Scanner Agreement by failing to pay ATD $228,194.  Because ATD never actually delivered a second unit, the Arbitrator has ordered the parties to brief the issue of damages, interest, costs and attorney fees before a Final Award will be issued.  The Arbitrator also found that the Company breached the Space Supply Contract and a balance of $42,376 is owed, plus interest.
 
On November 2, 2011, the Arbitrator issued a Second Interim Award, awarding ATD $90,000 in lost profits resulting from the breach of the Scanner Agreement, plus interest since November 10, 2007.  He additionally awarded 2% interest as part of the damage award for the Space Supply Contract breach.  The Arbitrator found ATD to be the prevailing party for the purposes of shifting attorneys fees, but confined the award to those fees incurred in pursuing the breach of contract claims.  A final award will be issued when the Arbitrator determines the appropriate award of attorney’s fees.  Although the exact amount of the award has not been announced, the Company has accrued a loss contingency of $300,000.   The Company estimates the loss range to be between $151,778 and $355,400, but the loss could be higher.

NOTE 17 – SUBSEQUENT EVENTS

We have evaluated the period from September 30, 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 events:

On October 5, 2011, the Company signed a $20.25 million purchase agreement (the “Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“LPC”), an Illinois limited liability company.  Upon signing the Purchase Agreement, LPC agreed to initially purchase 300,000 shares of our common stock for $250,000.  We also entered into a registration rights agreement with LPC whereby we agreed to file a registration statement related to the transaction with the SEC covering the shares that may be issued to LPC under the Purchase Agreement.  After the SEC has declared effective the registration statement related to the transaction, we have the right, in our sole discretion, over a 30-month period to sell up to an additional $20 million of our common stock to LPC in amounts up to $500,000 per sale, depending on certain conditions as set forth in the Purchase Agreement.
 
 
21

 
 
There are no upper limits to the price LPC may pay to purchase our common stock and the purchase price of the shares related to the $20 million of additional future funding will be based on the prevailing market prices of the Company’s shares immediately preceding the time of sales without any fixed discount, with the Company controlling the timing and amount of any future sales, if any, of shares to LPC.  LPC shall not have the right or the obligation to purchase any shares of our common stock on any business day that the price of our common stock is below the floor price as set forth in the Purchase Agreement.
 
The Purchase Agreement contains customary representations, warranties, covenants, closing conditions and indemnification and termination provisions by, among and for the benefit of the parties. LPC has covenanted not to cause or engage in any manner whatsoever any direct or indirect short selling or hedging of the Company’s shares of common stock.  In consideration for entering into the $20.25 million agreement, we issued to LPC 314,154 shares of our common stock as a commitment fee. The Purchase Agreement may be terminated by us at any time at our discretion without any cost to us.  The proceeds received by the Company under the purchase agreement are expected to be used for working capital and general corporate purposes in carrying out our business plan.
 
The 96,000 shares of common stock authorized on September 29, 2011 for issuance to Board members and three officers, as described in Note 10 of the “Notes to Condensed Consolidated Financial Statements,” were issued on October 19, 2011 and delivered to the Board members on November 1, 2011.
 
Wharton Capital Partners, Ltd. assisted the Company in arranging for the equity line of credit with Lincoln Park Capital.  As compensation for its services, the Company issued a warrant to Wharton Capital Partners, Ltd, dated October 4, 2011, to acquire 410,000 shares of the Company's common stock at a price of $1.09 per share.  The warrant expires on October 3, 2016 and may be exercised, in whole or in part, at any time prior to expiration either for cash or pursuant to a customary cashless exercise provision contained in the warrant.
 
Refer to Note 16 of the “Notes to Condensed Consolidated Financial Statements” in this Quarterly Report on Form 10-Q for additional information regarding subsequent events.

NOTE 18 – RESTATEMENT OF FINANCIAL STATEMENTS

We have restated our previously issued condensed consolidated financial statements as of and for the period ended September 30, 2010 to account for the impact of a misstatement in sales and accounts receivable due to the timing of a shipment which was scheduled to be shipped in September 2010, but was not actually shipped until October 2010.  We also recognized an additional expense related to the issuance of options on September 13, 2010 that vested on January 1, 2011.  We have reflected the effects of the changes in the condensed consolidated financial statements for the periods presented herein.
 
 
22

 
 
The effect of this change on the condensed consolidated financial statements previously filed in the Quarterly Report on Form 10-Q for the fiscal period ended September 30, 2010, is as follows:
 
   
As Previously
Reported
   
Adjustment
   
As Restated
 
Selected balance sheet data at September 30, 2010:
                 
                   
 Accounts receivable
  $ 1,337,893     $ (147,000 )   $ 1,190,893  
 Additional paid-in capital
    9,804,045       118,202       9,922,247  
 Accumulated deficit
  $ (9,047,352 )   $ (265,202 )   $ (9,312,554 )
                         
                         
Selected statements of operations data for the three months ending September 30, 2010:
                 
                         
 Sales
  $ 4,873,687     $ (147,000 )   $ 4,726,687  
 Gross Profit
    780,044       (147,000 )     633,044  
 Share-based payments
    890,999       118,202       1,009,201  
 Loss from operations
    (492,930 )     (265,202 )     (758,132 )
 Net loss
    (482,296 )     (265,202 )     (747,498 )
 Comprehensive loss
  $ (479,856 )   $ (265,202 )   $ (745,058 )
 Loss per common share
                       
 Basic and Diluted
  $ (0.01 )   $ -     $ (0.01 )
                         
Selected statements of operations data for the nine months ending September 30, 2010:
                 
                         
 Sales
  $ 13,029,461     $ (147,000 )   $ 12,882,461  
 Gross Profit
    1,920,433       (147,000 )     1,773,433  
 Share-based payments
    890,999       118,202       1,009,201  
 Loss from operations
    (251,781 )     (265,202 )     (516,983 )
 Net loss
    (741,131 )     (265,202 )     (1,006,333 )
 Comprehensive loss
  $ (738,691 )   $ (265,202 )   $ (1,003,893 )
                         
 Loss per common share
                       
 Basic and Diluted
  $ (0.01 )   $ (0.01 )   $ (0.02 )
                         
Selected statements of cash flows for the nine months ending September 30, 2010:
                 
 Net loss
  $ (741,131 )   $ (265,202 )   $ (1,006,333 )
 Options issued for compensation
    890,999       118,202       1,009,201  
 Accounts receivable
  $ (1,238,773 )   $ 147,000     $ (1,091,773 )
 
 
23

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

This Management's Discussion and Analysis or of Financial Condition and Results 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 such words as 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 immaterial.

Liquidity and Capital Resources

Between January 1, 2011 and September 30, 2011, our capital requirements have largely been met through sales of products other than THOR or ODIN. We recorded sales of $11,337,017 from the sale of various aerospace products and other mechanical devices in the three quarters of 2011.  We are currently evaluating whether additional capital requirements are needed for 2011.  We anticipate that income from sales of such products will be sufficient to finance our ongoing operating 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. However, there are no assurances this will occur.  The increase in accounts payable and accrued expenses resulted from a delayed payment by one of our customers due to the earthquake in Japan during the first quarter of 2011.  The delayed customer payment required the Company to seek extended payment terms from vendors, which were granted.  With respect to the Company no longer requiring advanced payment from customers, the effect on liquidity is offset by vendors granting the Company extended payment terms.  In addition, to the extent we may need additional working capital, we may decide to exercise our rights under our $20.25 million purchase agreement (“Purchase Agreement”), dated October 5, 2011 with Lincoln Park Capital, LLC (“LPC”).
 
Upon signing the Purchase Agreement, LPC agreed to initially purchase 300,000 shares of our common stock for $250,000.  We also entered into a registration rights agreement with LPC whereby we agreed to file a registration statement related to the transaction with the SEC covering the shares that may be issued to LPC under the Purchase Agreement.  After the SEC has declared effective the registration statement related to the transaction, we have the right, in our sole discretion, over a 30-month period to sell up to an additional $20 million of our common stock to LPC in amounts up to $500,000 per sale, depending on certain conditions as set forth in the Purchase Agreement.
 
There are no upper limits to the price LPC may pay to purchase our common stock and the purchase price of the shares related to the $20 million of additional future funding will be based on the prevailing market prices of the Company’s shares immediately preceding the time of sales without any fixed discount, with the Company controlling the timing and amount of any future sales, if any, of shares to LPC.  LPC shall not have the right or the obligation to purchase any shares of our common stock on any business day that the price of our common stock is below the floor price as set forth in the Purchase Agreement.
 
 
24

 
 
The following liquidity events describe the amounts and sources of our capital resources and describe how we have paid our expenses. For the nine months ended September 30, 2011, we had negative cash flows from operations due primarily to changes in accounts receivable and inventories. We had an increase in accounts receivable of $2,514,774 that was due to a longer than anticipated collection from our customers, an increase in inventories of $1,567,751, and a reduction in advance payments received from customers which had negative impacts on our cash flows. We expect cash flows from operations to improve in 2012 as cash receipts from customers and cash payments to vendors will be more correlated due to the extended payment terms we have received from vendors.  From October 1, 2011 through November 18, 2011, the Company has collected $3,279,405 of the outstanding accounts receivable balance of $4,506,676 at September 30, 2011. The accounts receivables balance 180 days past due at September 30, 2011 was $428,145 and $389,475 has been collected as of November 18, 2011.  Of the $38,670 due, $10,500 is for a product that the customer  is going to return for a refund.  The remainder is due from a longstanding customer with a history of complete payment. The cumulative sales for the nine month period ended September 30, 2011 to the customer with the outstanding receivable balance were $10,207,077. From October 1, 2011 through November 18, 2011, the Company has paid $2,964.082 of the outstanding accounts payable balance of $5,910,711 at September 30, 2011.  Further, we believe our cash and investment reserves are satisfactory to fund any potential operating shortfalls.

We have incurred losses for the past two fiscal years and had comprehensive loss of $153,687 for the nine months ended September 30, 2011.
 
Historically, we have relied on gross profit from revenues, debt financing and sales of our common stock to satisfy our cash requirements. For the nine months ended September 30, 2011, we received cash proceeds of $5,995,647 from sales of various products and $1,964,182 from accounts receivable outstanding at December 31, 2010.  Our cash outflows for the nine months consisted of net inventory purchases of $1,577,959, marketable securities purchases of $15,412, investment in patent license of $40,000, equipment purchases of $45,483, and repayment to shareholder of $124,846. For the nine months ended September 30, 2010, we received cash proceeds of $11,790,688 from sales of various products, $1,058,439 from customer deposits, and $245,714 from amounts paid to exercise warrants resulting in the issuance of common stock.  Our cash outflows for the nine months consisted of net inventory purchases of $634,906, marketable securities purchases of $500,000, equipment purchases of $121,280, repayment of convertible debenture of $42,000 and repayment to shareholder of $24,450.

While our customer base is limited, so is the number of competing suppliers worldwide.  We have developed a reputation with our customers of delivering high quality products on time and at competitive prices.  While we cannot be certain they will remain customers, we believe that our current relationship with our customers will continue.  We also believe the market for our specific products will grow in the future based on customer feedback regarding future expectations.

For the year ended December 31, 2010, we issued 6,631,854 shares of our common stock.  Management anticipates that we may continue to issue shares for expansion of our business in the short term.
 
Commitments and Contingent Liabilities
 
The Company leases office and warehouse spaces in Covington, KY and Erlanger, KY under a five-year and 12 month non-cancelable operating leases, expiring August 2011 and December 2011, respectively.  The office lease was extended for an additional five years and six months until February 28, 2017.  Base rent is $5,940 per month. At September 30, 2011, future minimum payments for operating leases related to our office and manufacturing facilities were $261,306 through February 2017.
 
Our total current liabilities increased to $6,542,062 at September 30, 2011 compared to $3,378,922 at December 31, 2010. Our total current liabilities at September 30, 2011 included accounts payable of $5,910,711, accrued expenses of $300,000, and deferred revenue of $331,351 compared to our total current liabilities at December 31, 2011 included accounts payable of $2,029,425, accrued expenses of $30,886, deferred revenue of $1,193,765 and due to shareholder of $124,846.

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 and nine months ended September 30, 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 fiscal quarter ended September 30, 2011.
 
 
25

 
 
SUMMARY COMPARISON OPERATING RESULTS
 
   
THREE
MONTHS
ENDED SEP
30, 2011
   
THREE
MONTHS
ENDED SEP
30, 2010
   
NINE
MONTHS
ENDED SEP
30, 2011
   
NINE
MONTHS
ENDED SEP
30, 2010
 
         
(as restated)
         
(as restated)
 
Gross profit
  $ 321,449     $ 633,044     $ 1,911,946     $ 1,773,433  
Total operating expenses
    600,998       1,391,176       1,769,089       2,290,416  
Income (loss) from operations
    (279,549 )     (758,132 )     142,857       (516,983 )
Total other income (expense)
    (144,217 )     10,634       (286,373 )     (489,350 )
Net loss
    (423,766 )     (747,498 )     (143,516 )     (1,006,333 )
Other comprehensive income (loss)
    (10,144 )     2,440       (10,171 )     2,440  
Comprehensive loss
  $ (433,910 )   $ (745,058 )   $ (153,687 )   $ (1,003,893 )
Net loss per share:
                               
Basic and diluted
  $ (0.01 )   $ (0.01 )   $ (0.00 )   $ (0.02 )
 
For the three months ended September 30, 2011, the Company’s decrease in revenues is related to a decrease in momentum wheel sales primarily due to a supplier having production problems, preventing the Company from completing certain orders.    This also negatively impacted our sales for the nine months ended September 30, 2011.    Sales, primarily for momentum wheels, were $11,337,017 and $12,882,461 for the nine months ended September 30, 2011 and 2010.  All of these sales were concentrated among a few customers.  The Company expects the supplier problems to improve in the fourth quarter of 2011.

To date, no revenues have been attributable to sales from ODIN or THOR.  All sales for the first nine months of 2011 and 2010 have been for Aerospace Products and other mechanical devices. We have experienced an increase in revenues (from 2009) due to enhanced relationships with existing momentum wheel customers.  Gross profit for the nine months ended September 30, 2011 includes approximately $1,950,000 from an order that is not expected to continue. The Company had some legacy momentum wheel product in inventory that was not available from other vendors.  A customer desired to purchase this inventory at a high price and high profit margin to the Company.  This particular product can no longer be manufactured because the components and parts are no longer available.

Our gross profit margins have increased for the three months ended September 30, 2011, compared with the nine months ended September 30, 2011.  We have seen an increase of our gross margin to 18% from 13% for the three months ended September 30, 2011 and 2010, respectively.  The increase in profit margin for the three months September 30, 2011 was due to a reduction in cost of sales due to increased buying power for the components used to make the momentum wheels.  The Company’s goal is to achieve a gross profit margin of 15-20% on future sales of momentum wheels.

Our gross profit margins have increased for the nine months ended September 30, 2011, compared with the nine months ended September 30, 2010.  We have seen an increase of our gross margin to 17% from 14% for the nine months ended September 30, 2011 and 2010, respectively.  The increase in profit margin for the nine months September 30, 2011 was due to the high profit order noted above.  The Company’s goal is to achieve a gross profit margin of 15-20% on future sales of momentum wheels.

 
26

 
 
   
For the three months ended SEP 30,
   
For the nine months ended SEP 30,
 
   
2011
   
2010
   
Percent
   
2011
   
2010
   
Percent
 
         
(as restated)
    Change          
(as restated)
    Change  
Selling and administrative expenses
  $ 327,427     $ 381,975       (14 )  %   $ 1,085,606     $ 1,281,215       (15 )  %
Share-based payments
    273,571       1,009,201       100 %     683,483       1,009,201       100 %
Total operating expenses
  $ 600,998     $ 1,391,176       (57 )  %   $ 1,769,089     $ 2,290,416       (23 )  %
 
Selling and administrative expenses decreased $54,548 for the three months ended September 30, 2011 compared to the same period of 2010 which is attributable to the following: 1) advertising and 2) decrease in travel. Costs related to engineering for specific customer contracts are included in cost of sales. Total selling and administrative expenses were 18.6% and 8.1% of sales for the three months ended September 30, 2011 and 2010, respectively.

Share-based payments decreased $735,630 for the three months ended September 30, 2011 compared to the same period of 2010 due to the Company granting certain employees on September 13, 2010 the option to purchase 4,050,000 shares of common stock with 660,000 immediately vesting.

Total operating expenses were 34.2% and 29.4% of sales for the three months ended September 30, 2011 and 2010.
 
Loss from operations Loss from operations totaled $279,549 (or 15.9% of sales) in the three months ended September 30, 2011 compared to $758,132 (or 16.0% of sales) for the three months ended September 30, 2010. The loss from operations decreased primarily due to lower share-based payment expenses.
 
Net loss Net loss for the three months ended September 30, 2011 decreased $323,732, compared to 2010. The decrease in net loss is due to a decrease in share-based payments.

Selling and administrative expenses decreased $195,609 in the nine months ended September 30, 2011 compared to 2010 which is attributable to the following: 1) the decrease in amortization of loan fees 2) advertising and 3) decrease in payroll following the departure of one employee. Costs related to engineering for specific customer contracts are included in cost of sales. Total selling and administrative expenses were 9.6% and 9.9% of sales for the nine months ended September 30, 2011 and 2010, respectively.

Share-based payments decreased $325,718 for the nine months ended September 30, 2011 compared to the same period of 2010 due to the Company granting certain employees on September 13, 2010 the option to purchase 4,050,000 shares of common stock with 660,000 shares immediately vesting.

Total operating expenses were 15.6% and 17.8% of sales for the nine months ended September 30, 2011 and 2010.
 
 
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Income (loss) from operations Income from operations totaled $142,857 (or 1.3% of sales) in the nine months ended September 30, 2011 compared to a loss of $516,983 (or 4.0% of sales) for the nine months ended September 30, 2010. The increase in income from operations increased due to lower share-based payment expenses.
 
Interest expense, net Overall interest expense, net, decreased. Interest expense is lower due to the full amortization of debt discount in 2010 and the repayment of a loan to a shareholder.
 
Net loss Net loss for the nine months ended September 30, 2011 decreased $862,817, compared to the nine months ended September 30, 2010. The decrease in net loss is due to higher gross profit margins, a decrease in selling and operating expenses, share-based payments and interest expense.

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 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
SEP 30, 2011
   
THREE
MONTHS
ENDED
SEP 30, 2010
   
NINE
MONTHS
ENDED
SEP 30, 2011
   
NINE
MONTHS
ENDED
SEP 30, 2010
 
         
(as restated)
         
(as restated)
 
Valley Forge Detection Systems, Inc.
  $ -     $ -     $ -     $ -  
Valley Forge Aerospace, Inc.
    1,756,042       4,726,687       11,337,017       12,882,461  
Valley Forge Imaging, Inc.
    -       -       -       -  
Valley Forge Emerging Technologies, Inc.
    -       -       -       -  
Totals Per Financial Statements
  $ 1,756,042     $ 4,726,687     $ 11,337,017     $ 12,882,461  

Our total operating expense was $600,998 and $1,391,176 for the three months ended September 30, 2011 and 2010.  Our total operating expense was $1,769,089 and $2,290,416 for the nine months ended September 30, 2011 and 2010.

Our average monthly cost of operations from January 2011 through September 2011 was $196,565. Excluding aggregate non-cash charges of $59,044 for depreciation and $683,483 for share-based compensation, our average monthly cost of operations from January 2011 through September 2011 was $114,062.

As of September 30, 2011, we had $201,082 in cash remaining as well as $509,304 of marketable securities.
 
At this rate, and barring any material changes to our capital requirements, we anticipate being able to sustain our operations for six 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 issuance of equity securities or from other sources or (4) continued sales of our standard products. We do not expect to receive significant cash payments for THOR or ODIN sales during the remainder of 2011.  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.  Although we presently have enough cash to fund operations for six months, we have no immediate plans to raise additional capital because we believe profits from sales of momentum wheels and other products will be sufficient to cover operating expenses for at least an additional six months.  However, we are refining our cash flow forecast and if warranted, we will seek to raise additional capital through commercial loans and other financing sources, if available, or, if the registration statement has been declared effective by the SEC, through exercising our rights under the Purchase Agreement.
 
 
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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 necessary approvals before we can commence production of the THOR system or to facilitate the execution of new contracts.

Once the Company receives sufficient information regarding new government specifications, the Company will reevaluate whether or not to continue to use the existing technology associated with ODIN.  Currently we have two ODIN machines, which are included on the balance sheet as assets in the amount of $237,874, net of accumulated depreciation and inventory allowance.  If we decide not to continue with the existing technology but to utilize a new system that we have developed, then it will be less likely that we will be able to sell our existing ODIN machines.  In that case we may be required to write down the carrying value of those existing machines on our financial statements.  In addition, in light of all this, the Board of Directors has discussed whether or not it makes sense to continue to pursue ODIN, particularly because the effort to continue ODIN may detract from our management's focus on THOR and our growing aerospace business.  The Board of Directors has not made a decision on this issue yet.

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.  On July 15, 2011, the first accepted work order (“Work Order”) was transmitted to the Company. The Work Order is the first request for services under the Agreement.  The Work Order had a deliverable date of September 30, 2011 which required preliminary research steps and related deliverables; this deliverable date has been extended to November 30, 2011.

If the Company and ISU negotiate and execute additional work orders, then, pursuant to the CSA, ISU will assist the Company in reviewing the THOR design, using Company-supplied components to assemble an accelerator and demonstrating that accelerator to the Company’s customers.  The Company will compensate ISU for hourly labor and for materials and sub-contracting costs.  The Company and ISU will jointly hold all right, title and interest in any invention the parties jointly make resulting from services performed under the Agreement.  To the extent ISU holds an interest in an Encumbered Invention, as such term is defined in the Agreement, the Company has the option to negotiate an exclusive (for a time to be determined), worldwide, royalty-bearing license to make, use or sell under any Encumbered Invention.  If we do issue additional work orders we may have additional research and development expense.
 
In the coming months, the Company will refine its estimates of its capital requirements based on any quantities of THOR and ODIN units ordered.
 
 
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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 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 shareholder, and accounts payable.  Except as discussed in Note 3 to the financial statements, the carrying values of these financial instruments approximates their 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 7 to the financial statements for discussion of deferred revenue.
 
 
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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 or 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/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 September 30, 2011.  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.  In addition, we determined that our previously filed financial statements for the fiscal period ended September 30, 2010 requires an adjustment.  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 period ended September 30, 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.
 
 
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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 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
 
There were no changes in our “internal control over financial reporting” (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2011, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

Except as described in Note 16 of the “Notes to Condensed Consolidated Financial Statements,” there have been no material changes regarding the Company’s commitments and contingencies as described in Part II, Item 3 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, filed on April 11, 2011 and amended on April 18, 2011.

Item 2. Unregistered Sales Of Equity Securities And Use Of Proceeds
 
None

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 request 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 a 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.
 
 
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On June 30, 2011, the attorney representing a class of shareholders, accused the Company’s in-house and outside counsel of failing to transmit the April 24, 2011 demand letter to the Board of Directors and demanding that outside counsel recuse himself.  The email further states that outside counsel and the Company “have until Tuesday, July 5, 2011 to explain yourselves to me, and for VLYF to advise whether and how VLYF is addressing the matters at issue.”  The Company through outside counsel responded on July 5, 2011 indicating that the Board of Directors had in fact been informed of the demand letter and that the Board of Directors has not been able to reach any decisions because the Company’s request for additional information has been ignored.  To date, no lawsuit has been filed, although the Company can offer no assurances that no lawsuit will be filed in the future.
 
 
 
 
 
 

 
 
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Item 6. Exhibits
 
The following exhibit index lists Exhibits filed, or in the case of Exhibits 32.1 and 32.2 furnished, with this Quarterly Report on Form 10-Q:
 
Exhibit Index
 
 Exhibit No.
  Description
3.1
Amended and Restated Articles of Incorporation of the Company dated October 28, 2009.
10.1
Limited Exclusive Patent License Agreement, dated September 16, 2011, by and between the Company and Lawrence Livermore National Security, LLC (an affiliate of Lawrence Livermore National Laboratory).
10.2 Purchase Agreement, dated as of October 5, 2011, by and between the Company and Lincoln Park Capital Fund, LLC, filed as Exhibit 10.1 to Form 8-K filed on October 7, 2011, and incorporated herein by reference.
10.3
Registration Rights Agreement, dated as of October 5, 2011, by and between the Company and Lincoln Park Capital Fund, LLC, filed as Exhibit 10.2 to Form 8-K filed on October 7, 2011, and incorporated herein by reference.
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

Users of the XBRL data referenced above are advised pursuant to Rule 406T of Regulation S-T that these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, are deemed not filed purposes of Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under those sections.
 
 
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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:  November 21, 2011
By:
/s/ Louis J. Brothers
 
   
Louis J. Brothers
 
   
President, Chief Executive Officer and Chief Financial Officer,
and Chairman of the Board
(Principal Executive Officer, Principal Financial Officer
and Duly Authorized Officer)
 
 
 
 
 
 
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