Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the Fiscal Year Ended December 31, 2011
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
VALLEY FORGE COMPOSITE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
|
Florida
|
20-3061892
|
|
|
(State or other jurisdiction of
|
(IRS Employer
|
|
|
incorporation or organization)
|
Identification No.)
|
|
|
50 East River Center Blvd., Suite 820, Covington, KY
|
41011
|
|
|
(Address of principal executive offices)
|
(Zip Code)
|
Issuer's telephone number: (859) 581-5111
Securities to be registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Common Stock, Par Value $.001 Per Share
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes x No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes x No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
1
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
|
Large accelerated filer o
|
Accelerated filer o
|
|
|
Non-accelerated filer o
|
Smaller reporting company x
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes x No
The aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 30, 2011 was $32,682,756, computed by reference to the price at which the common equity was sold as of such date.
The number of shares outstanding of the issuer’s common stock as of March 30, 2012 was 62,416,048 shares.
2
TABLE OF CONTENTS
|
PART I
|
|
|
Item 1. Business
|
4
|
|
Item 1A. Risk Factors
|
12
|
|
Item 1B Unresolved Staff Comments (Not Applicable)
|
25
|
|
Item 2. Properties
|
25
|
|
Item 3. Legal Proceedings
|
25
|
|
Item 4. Mine Safety Disclosures (Not Applicable)
|
29
|
|
PART II
|
|
|
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
|
29
|
|
Item 6. Selected Financial Data (Not Applicable)
|
34
|
|
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
34
|
|
Item 7A. Quantitative and Qualitative Disclosures About Market Risk`
|
46
|
|
Item 8. Financial Statements and Supplementary Data
|
47
|
|
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
|
75
|
|
Item 9A. Controls and Procedures
|
75
|
|
Item 9B. Other Information
|
77
|
|
PART III
|
|
|
Item 10. Directors, Executive Officers and Corporate Governance
|
77
|
|
Item 11. Executive Compensation
|
83
|
|
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|
87
|
|
Item 13. Certain Relationships and Related Transactions, and Director Independence
|
88
|
|
Item 14. Principal Accounting Fees and Services
|
90
|
|
PART IV
|
|
|
Item 15. Exhibits
|
91
|
|
SIGNATURES
|
92
|
3
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
Information included in this Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). This information may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Valley Forge Composite Technologies, Inc. (the “Company”, or VLYF), 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.
PART I
ITEM 1. BUSINESS.
General Lines of Business
Valley Forge Composite Technologies, Inc., a Florida corporation (the “Company”), has positioned itself to develop and acquire advanced technologies. Between 1996 and 2011, the Company won numerous contracts to produce various momentum wheels and other mechanical devices for special applications, some in aerospace. Historically, and in 2011, all of the Company’s sales have been derived from these momentum wheels and other mechanical devices. The Company purchases components from a variety of sources and engages in direct selling to its customers.
Since September 11, 2001 the Company has focused much of its energy on the development and commercialization of its counter-terrorism products. These products consist of an advanced detection capability for illicit narcotics, explosives, and bio-chemical weapons hidden in cargo containers, the THOR LVX photonuclear detection system (“THOR”), and a passenger weapons scanning device, ODIN. In late 2009, the Company and its partners completed the development of THOR in Russia, and the system has been demonstrated through testing conducted by P.N. Lebedev Physical Institute of the Russian Academy of Sciences (“LPI”), the premiere physics laboratory in the Russian Federation, to be operational and performing to the Company’s satisfaction.
Momentum wheels are used for energy storage to provide an uninterrupted power supply in various applications. They provide an alternative to battery energy storage and in some instances, as stabilization for satellites. Momentum wheels store energy as they rotate at increasing speeds. This rotating mass also provides stabilization much like a spinning top. As they spin down, the stored energy can be released to produce power.
THOR-LVX
Overview
Presently, and for the last nearly ten years, the Company has focused on the development and commercialization of the THOR Advanced Explosives Detection System and prepared for the manufacturing and distribution of THOR in the United States and other countries.
4
THOR components primarily consist of a high energy miniature particle accelerator generating 55 million electron volts, high sensitivity detectors, data collection systems and a database of photonuclear signatures from which substances can be identified. THOR operates by creating photo nuclear reactions in light elements, selectively screening out all but the operational isotopes found in modern day explosives and narcotics (which are carbon, nitrogen and oxygen), and identifying secondary gamma quanta that are unique to each such isotope. The photo nuclear reactions follow a precise pattern or unique signature that can be used to immediately identify the substance by automatically comparing the patterns or signatures to our database. THOR can also be enhanced with a fast neutron detector in order to detect fissile material. Because of its small size and effectiveness at detecting explosive, narcotic and bio weapon substances contained in attempted concealment barriers, the THOR technology can be applied in many security contexts including external scanning of entire cargo or truck containers, scanning airport bags and for protecting high value targets. The digital data, produced in milli-seconds, can be instantly transmitted to the appropriate threat mitigation, assessment and knowledge dissemination authorities.
THOR has over ten years of research and development behind its prototype. Each THOR unit is estimated to have an operational life of ten years. Thus, once THOR is introduced to the market and implemented in the field, the Company believes that THOR owners for several years are likely to be loyal repeat customers. In the meantime, the Company will take steps to improve THOR and to customize it for new applications.
Pursuant to a Cooperative Research and Development Agreement (“CRADA”), the Company’s partners in developing THOR are the Lawrence Livermore National Laboratory (“LLNL”), a national laboratory owned by the United States government and designated the “Center of Excellence” for new explosives detection systems technologies, and LPI. The THOR development efforts have been sponsored, in part, by the United States Department of Energy.
Recent Developments
On September 22, 2011, the Company announced that it signed a Limited Exclusive Patent License Agreement with Lawrence Livermore National Security, LLC (an affiliate of LLNL (“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 the CRADA. Pursuant to the license, the Company 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 costs will be amortized over 19 years and three months until the expiration of the patents, if granted, on December 5, 2030.
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 work order had a deliverable date of September 30, 2011 which required preliminary research steps and related deliverables; this deliverable date was extended to November 30, 2011. The Company is currently reviewing the results from the first work order.
5
License and other Rights in Thor
In April, 2002, the Company entered into an Exclusive Rights Agreement (“ERA”) with P.N. Lebedev Physical Institute, Russian Academy of Sciences (“LPI”), granting the Company sole and exclusive rights to distribute, promote, market and sell the projects/products known as PNDEN in the United States of America and all countries throughout the world with the exception of the Russian Federation and countries of the Commonwealth of Independent States. The ERA defines PNDEN as the “Photo- Nuclear Detector of Hidden Explosives and Narcotics,” which is the basic technology associated with THOR. In August 2004, the ERA was amended to extend the term to expire on April 12, 2014.
In April 2003, the Company entered into a Cooperative Research and Development Agreement (“CRADA”) with the Regents of the University of California, who operate the Department of Energy’s (“DOE”) Lawrence Livermore National Laboratory (“LLNL”), to implement a collaborative effort between the Company, LLNL, LPI, and other Russian institutions “to develop equipment and procedures for detecting explosive materials concealed in airline checked baggage and cargo.” The Company, LLNL and LPI implemented the CRADA from April 2003 through its expiration on March 30, 2010. The CRADA involves the development of an accelerator-detector complex which is the basis for the Company’s THOR LVX product. In July 2010, LLNL issued its final report (“Report”) pursuant to the CRADA. LLNL did not publically release the Report, but authorized the Company to issue a July 12, 2010 press release concerning the system’s performance, which states, in part:
Technical objectives of the project included the development and automation of the accelerator-detector complex for high efficiency detection of hidden explosives. Data acquisition and a photonuclear signature database were created. The system was operated and tested albeit on a limited sample size. A technique for the time analysis of signals from latent targets was developed and tested. This resulted in the positive identification of carbon and/or nitrogen. These techniques detected measurable decay from the radioisotopes formed upon irradiation.
A description of the Company’s license rights in THOR is set forth above in Recent Developments.
Research and Development
The Company was previously awarded a grant of over $1.8 million from the DOE for continued research, design, and production of the first THOR unit. The grant funds were allocated to the LLNL and have been reflected in the Company's financial statements in previous years as research and development costs. Historically, the Company has contributed research and development efforts, as required under the CRADA, and expenses to facilitate the commercialization of THOR. The Company anticipates incurring additional development costs associated with THOR under the CSA with Idaho State University, although no material commitments have been made. We do not have sufficient information at this time to provide an estimated R&D budget for 2012.
6
Raw Material Sources and Availability
THOR materials and parts can be manufactured to the Company’s specifications on an as needed basis from a variety of sources in the United States of America. The Company does not expect to encounter problems in acquiring the commercial quantities of components required to build THOR.
The THOR Market
Each year millions of cargo containers arrive in the United States by ship, truck, and rail with no effective explosive and other threat detection systems currently available to inspect them. Ensuring the security of the maritime trade system is essential, both in the United States and internationally, given that an estimated 90 percent of the world's cargo moves by container. The Company believes that there is currently demand, both in the United States and internationally, for products that are able to accurately inspect these containers and that the market for these products will continue to be affected by the threat of terrorist incidents and efforts by governments and private industry to prevent them.
The likely market for THOR includes:
|
|
·
|
Ports, cargo hubs, and rail yards, both domestically and internationally;
|
|
|
·
|
World-wide express cargo facilities;
|
|
|
·
|
United States postal facilities;
|
|
|
·
|
United States border crossings
|
|
|
·
|
United States military field applications; and
|
|
|
·
|
Technology licensing opportunities.
|
The Company believes that THOR’s capability to detect typical chemical, nuclear, and bio weapon threats is well suited to assist the U. S. Department of Homeland Security, the United States Military, and certain foreign governments with ramping up efforts to protect ports, rail, truck, and airline cargo, high value assets, and ships from terrorists. We believe, but cannot guarantee, that the Company’s license rights with respect to any subject inventions discovered under the CRADA would extend to using such subject inventions in the detection of all such threats.
Major Prospective Customer Dependency and Competition
The Company’s successful production and sales of THOR may initially depend to a great extent on interest in THOR from the United States Government and select foreign markets. Following completion of the demonstration unit, the Company will continue to seek buyers worldwide both to increase THOR’s eventual market share and to reduce its potential dependence on any one customer.
The security and inspection market in which THOR will compete is highly competitive. The marketplace already includes a number of established competitors, many of which have significantly greater financial, technical and marketing resources than we have. These competitors likely also have more well established customer relationships and greater name recognition than we do, and will have operated in the industry for longer than us. All of these factors may affect our ability to successfully compete in the market, and these and other competitive pressures may materially and adversely affect our business, financial conditions and results of operations.
We believe competition in this market is based on a number of factors, the most important of which include product performance and effectiveness, price, customer relationships, and service / support capabilities. We anticipate that the principal competitors against THOR will be products manufactured by the following companies: Smiths Detection; OSI Systems, Inc.; L-3 Communications—Security and Detection Systems; American Science and Engineering; GE Security; SAIC; CEIA; Nuctech; Morpho Detection Systems and others yet to be identified.
7
While the competition the Company and THOR will face will be intense and the challenges presented by this competition will be material, we believe that THOR will have a technological advantage over any known product in the industry available on the market today. The Company believes the THOR is more powerful than any known competitor’s products, can be made portable, and provides real time detection capability.
Traditional detection systems are based on X-rays of various low energy levels, including Nuclear Magnetic Resonance (NMR) and Quadropole Magnetic Resonance (QMR), or on low level gamma energies created by radioactive isotopes. It has been determined, however, that X-rays and lower level gamma energies lack sufficient strength to penetrate all barriers and are often absorbed or deflected before they can properly penetrate a container or identify its contents. THOR overcomes this problem by using a specialized particle accelerator to create high energy gamma rays that can penetrate virtually any cargo container and return a viable signal. The Company believes that THOR will have a competitive advantage over other products in the industry due to its specialized particle accelerator.
Typical research high energy particle accelerators are generally the size of a small warehouse and would not be suitable for use in the cargo inspection arena. But through decades of dedicated research, Russian scientists, many of whom have worked with the Company and LPI on the development of THOR, have developed a miniature particle accelerator approximately the size of a pool table. THOR utilizes this miniature particle accelerator to create the focused, high energy gamma rays that are necessary to accurately penetrate 8 feet through a cargo container and return a discernible signal. The detection energies generated by THOR are well in excess of the energies generated by typical EDS machines. As a comparison, typical EDS machines operate at 0.5 to 1.5 million electron volts (MeV). The Company’s THOR generates 55 MeV.
To the Company’s knowledge, only the THOR system can generate the necessary power levels and return signals to accurately determine the amount and exact chemical nature of explosives, drugs, or other illicit material in a sealed container in a commercially viable manner. According to multiple laboratory tests, the system effectively penetrates concealment media and performs to 99.6% accuracy.
THOR can be fully automated including the scanning and analysis of the nature and volume of explosive materials, devices or their components, meaning that no human operator is required for data interpretation, and it can be operated from a remote location. This reduces the operation costs of THOR compared to any other product. Also, THOR’s energy consumption is approximately 30 kilowatts vs. 50 kilowatts consumed by many other detection systems.
We have never built nor have we operated a THOR unit in the United States. While we believe that the materials, technology and labor needed to build a unit will be available at commercially reasonable costs, we do not know for certain just what the total cost will be. In addition, we do not know what the operating costs of a THOR unit will be. We anticipate that we will be able to get a better understanding of those items as work progresses by the Idaho Accelerator Center (under the Consulting and Services Agreement framework referenced above) to build and operate a unit. In addition, while we believe that the benefits offered by THOR will be both unique and of great value so customers will not be particularly price sensitive, we do not know whether we will be able to sell THOR units at a reasonable profit in excess of our costs.
Distribution of THOR
The Company intends to sell THOR through direct sales means in the United States, Canada, and Europe. The Company has yet to determine its distribution strategy for the rest of the world. Presently there are no distribution agreements in effect; all such agreements have expired.
8
Effect of Existing or Probable Government Regulations
Government regulations may impact the market for THOR. Since many of the potential end users for THOR may be government agencies, the terms and conditions of procurement regulations may have a material effect on potential purchases of THOR by such agencies. For example, such terms and conditions would likely have a positive effect on sales efforts if they required the target inspection devices to perform to standards that THOR can achieve but many competing products cannot reach. If, conversely, factors other than performance criteria in which THOR has an advantage are emphasized, such terms and conditions may make our sales efforts more challenging. The Company cannot anticipate the terms and conditions that will apply to any specific procurement regulations applicable to potential sales of THOR to government agencies.
The Company has not yet sought any government approvals or other approvals required to comply with applicable electrical or safety codes required to manufacture, sell or operate THOR.
The Company intends to market THOR to prospective customers outside of the United States, and will need to have United States Department of State approval to export THOR to any foreign purchaser in addition to complying with regulations of the country into which we are exporting THOR.
The Company otherwise believes that government regulations will not have a material impact on the Company’s production or sale of THOR units, and the Company does not anticipate any change to this in the near future.
ODIN
ODIN is a transmission X-ray system, producing medical type images of skeletons and organs that is similar to a technology used as the airport passenger weapons scanning system in several airports in Russia. The technology is not protected by patents outside of the Russian Federation. The Company has developed ODIN to improve and commercialize the technology for use in the United States and elsewhere outside of Russia.
The Company believes the ODIN technology, as compared against known system now in use in the United States, is more accurate (articles hidden inside or on the backside of a passenger are detected in a single scan with high resolution imaging), is fast , and is less inconvenient (passengers do not need to remove clothing or shoes). Between approximately April 2007 and February 2008, the Company developed a prototype of ODIN for employment at U.S. airports and passenger terminals. This prototype has similar functionality to the Russian technology, and is the product that the Company intends to market. In February 2008, ODIN passed independent radiation examination by the Radiation Safety Academy (“RSA”) and is certified by RSA as compliant under American National Standards Institute (“ANSI”) and the National Institute of Standards and Technology (“NIST”) standards for personnel security screening systems using x-ray or gamma radiation. Compliance with these ANSI / NIST standards means that ODIN is classified as “uncontrolled” and can be sold domestically and internationally. All X-ray exposure results for the operator, cabinet leakage, bystander exposure, and person being examined were well below U.S. government guidelines and standards.
Once the Company reviews 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 December 31, 2011 balance sheet as assets in the amount of $215,670, 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 possible that we may not 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.
9
Raw Material Sources and Availability
Most ODIN materials and parts are available on an as needed basis from a variety of sources in the United States of America and Western Europe. Accordingly, the Company does not expect to encounter problems in acquiring the commercial quantities of components required to produce or maintain ODIN.
The ODIN Market
Because ODIN has both anti-terrorism and anti-crime applications, the potential ODIN market extends to include potentially every civilian application where quick, accurate, full-body non-intrusive personnel scanning is necessary. Applications could include use at schools, government offices, prison facilities, sports complexes, passenger cruise liners, airports, rail and bus terminals, corporate offices, and any number of other circumstances where security screening is important. However, a single ODIN unit requires ample floor and ceiling space and can be utilized only in suitable locations. ODIN units are competitively priced but are not inexpensive and therefore are suitable primarily for institutional and large enterprise applications.
Major Prospective Customer Dependency and Competition
The Company believes that the ODIN is the best available personnel screening device and is more accurate and more efficient in detailing weapons and other contraband than other systems now in use in the United States. ODIN has been evaluated by several potential clients, but the Company has not made its first sale; so there is no way to estimate customer dependency at this time.
Like THOR, the domestic market in which ODIN will compete is highly competitive. The marketplace already includes a number of established competitors, many of which have significantly greater financial, technical and marketing resources than we have. These competitors likely also have more well established customer relationships and greater name recognition than we do, and will have operated in the industry for longer than us. In many instances, ODIN will be competing with many established systems for which the owners may not be willing or may be unable to justify incurring the significant per unit expense to replace their existing screening technology. We anticipate that the principal competitors against ODIN will be products manufactured by the following companies: Smiths Detection; OSI Systems, Inc.; L-3 Communications—Security and Detection Systems; American Science and Engineering; GE Security; SAIC; CEIA; and Nuctech.
Because of this significant domestic competition and concerns that the near medical quality image produced by ODIN that reveals the contours of the person being scanned may not mesh well with personal privacy cultural issues in the United States, we have historically focused significant marketing efforts abroad, and these marketing efforts will continue. The Company believes, however, that the domestic market is evolving in a manner that may be favorable to ODIN due to recent events, including the Christmas 2009 attempted terrorist attack by the “underwear bomber”. With the concerns presented by garment and implant bombs, the transmission X-ray generated by ODIN may be critical in safeguarding our airways. ODIN provides a near medical quality image that reveals the anatomy of the person being scanned. This is in sharp contrast with the nude like images generated by competitors.
ODIN also faces competition internationally from many sources, including the products serving the U.S. market and the similar system manufactured in Russia. However, potential international buyers have indicated to us that they prefer to buy an American product from an American company.
10
Distribution and Sales of ODIN
Initially, the Company intended to sell ODIN through direct sales means in North America, Eurasia, India, and to some extent, South America. However, the Company is re-evaluating this issue. No decisions or commitments on this issue have yet been made.
Effect of Existing or Probable Government Regulations
As with THOR, government regulations may impact the market for ODIN. To the extent end users are government agencies, the terms and conditions of procurement regulations may have a material effect on potential purchases of ODIN by such agencies. For example, such terms and conditions would likely have a positive effect on sales efforts if they required the target devices to perform to detection and resolution standards that ODIN can achieve but many competing products cannot reach. If, conversely, factors other than performance are emphasized, such terms and conditions may make our sales efforts more challenging. The Company cannot anticipate future terms and conditions that will apply to any specific procurement regulations applicable to potential sales of ODIN to government agencies. Current requirements, terms and conditions for purchasing Whole Body Imaging products were announced by the TSA in May, 2011. The Company is evaluating ODIN’s performance and other characteristics to determine whether ODIN satisfies the requirements.
The United States (U.S.) Food and Drug Administration’s (FDA) Center for Devices and Radiological Health (CDRH) is responsible for regulating radiation-emitting electronic products. The CDRH goal is to protect the public from hazardous and unnecessary exposure to radiation from electronic products. As required by law, the Company has submitted a product report concerning ODIN to the FDA and has received an acknowledgement letter that the report was received. An acknowledgement of receipt letter is not an approval of a product nor does it mean that a report is adequate. The FDA has established standards that manufacturers of radiation-emitting electronic products must meet. The Company believes that ODIN meets those standards and is required to self-certify that it does so. The FDA does not itself certify products. For a detailed explanation of the FDA’s requirements, see:
http://www.fda.gov/radiation-emittingproducts/electronicproductradiationcontrolprogram/gettingaproducttomarket/default.htm#3.
Aside from procurement specifications announced in 2011, the Company otherwise believes that government regulations will not have a material impact on the Company’s production or sale of ODIN, and the Company does not anticipate any change to this in the near future.
Additional Disclosure Regarding the Company’s Business
Research and Development Cost Estimate
The Company estimates that during each of 2011 and 2010, it incurred no material out of pocket research and development expenses with respect to THOR. The Company did provide in-kind research and development activities with respect to THOR, as required under the CRADA.
The Company estimates that during 2011 and 2010, it incurred $-0- and $382, respectively, on research and development activities with respect to ODIN.
Costs and Effects of Compliance with Environmental Laws
The Company has incurred no costs nor suffered any effects to maintain compliance with any environmental laws.
11
Environmental Impact
Food and other objects scanned with the THOR prototype have returned to below background radiation levels within approximately fifteen minutes. No long term effects were evidenced.
No environmental impact has been identified with respect to ODIN.
Employees
The Company has eight current employees, of which two are executive managers, four are administrative and two are engineers.
Former Shell Company
During fiscal year 2006, Quetzal Capital 1, Inc. (“Quetzal”), a shell company domiciled in Florida, executed a share exchange agreement with the shareholders of Valley Forge Composite Technologies, Inc., a Pennsylvania corporation, whereby the shareholders of the Pennsylvania corporation took control of Quetzal, and the Pennsylvania corporation became a wholly-owned subsidiary of Quetzal. The share exchange transaction occurred on July 6, 2006. Quetzal’s common stock was registered pursuant to section 12(g) of the Exchange Act, on or about August 1, 2005.
As a result of the share exchange, Quetzal’s status as a shell corporation ceased, and the consolidated company’s business was that of the Pennsylvania subsidiary. Simultaneously with the share exchange, the sole director of Quetzal resigned, and the Pennsylvania corporation’s management assumed control of Quetzal. Also on July 6, 2006, Quetzal changed its name to Valley Forge Composite Technologies, Inc., a Florida corporation. The Company has not materially reclassified, merged, consolidated, purchased or sold any significant amount of assets other than in the ordinary course of business, and the Company has not been the subject of any bankruptcy, receivership or similar proceedings.
ITEM 1A. RISK FACTORS.
Risks Relating to an Investment in the Company
Investment in our securities involves a high degree of risk. Investors should carefully consider the possibility that they may lose their entire investment. Given this possibility, we encourage investors to evaluate the following risk factors and all other information contained in this report and its attachments, in addition to other publicly available information in our reports filed with the Securities and Exchange Commission (“SEC”), before engaging in transactions in our securities. Any of the following risks, alone or together, could adversely affect our business, our financial condition, or the results of our operations, and therefore the value of your Company securities.
12
Because the Company had a net profit of $426,756 for the year ended December 31, 2011 but losses of $1,476,650, $2,038,623 and $1,848,755 for the years ended December 31, 2010, 2009 and 2008, respectively, we face a risk of insolvency.
Until 2009, the Company had never earned substantial operating revenue. We have been dependent on equity and debt financing to pay our operating costs and to cover operating losses
The auditors’ reports for our December 31, 2010, 2009, 2008, 2007 and 2006 financial statements include additional paragraphs that identify conditions which raise substantial doubt about our ability to continue as a going concern, which means that we may not be able to continue operations unless we obtain additional funding. The financial statements do not include any adjustments that might result from the outcome of this uncertainty
Risks Related to the Company’s Business
Our independent auditors included a going concern paragraph in their reports issued in connection with their audits of our December 31, 2010, 2009, 2008, 2007 and 2006 financial statements. The auditors noted in their reports that the Company has suffered recurring losses from operations. The Company had accumulated deficits of $9,356,115 and $9,782,871 as of December 31, 2011 and 2010, respectively. The Company experienced comprehensive income of $419,974 and a comprehensive loss of $1,481,029 for years ending December 31, 2011 and 2010 respectively.
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. Management believes its existing cash and investment balances, ongoing profitable sales and access to capital are adequate for the Company’s liquidity needs for 2012.
The sale of our ODIN personnel screening technology and THOR devices in foreign markets are dependent on the approvals of foreign governments, which are out of our control.
The Company’s ODIN personnel screening device and THOR units are being marketed for sale in foreign countries. Obtaining the permission of foreign governments has been challenging and slow. Certain countries in the Middle East prohibit non-Muslims from doing business directly with their governments, and we are required to negotiate with government-authorized middle men. This adds an additional layer of bureaucracy that we must penetrate in order to sell our products. Additionally, selling THOR outside the United States requires an export license from the Department of State. The Department of State may decline to issue such licenses, especially for sales to certain countries.
13
Personal privacy concerns may impact sales of ODIN in the United States.
Personal privacy issues may impact sales of ODIN in the United States and certain other countries. This is because the prototype ODIN provides a near medical quality image that reveals the contours of the person being scanned. In February 2011, the Transportation Security Administration announced that it was testing new software on its advanced imaging technology machines that enhances privacy by eliminating passenger-specific images and instead auto-detects potential threat items and indicates their location on a generic outline of a person. We have not yet developed software of that type for ODIN. Even though the transmission X-ray and near medical quality image generated by ODIN may be useful in safeguarding our airways against threats posed by garment and implant bombs, there is no guaranty that concerns over personal privacy issues will not cause potential customers to not consider purchasing and utilizing ODIN.
Delays in the introduction of THOR and ODIN may have significantly impacted our ability to compete for market share for these technologies.
Because we have not sold any THOR or ODIN units, other vendors of less sophisticated but competing screening technologies may be selling their products and limiting our potential market share. Due to budgetary concerns or other factors, such customers may not be interested in purchasing THOR or ODIN units when they become available until their existing units are retired. This may impact our ability to penetrate the screening technology market when we are ready to do so.
Because we do not have an exclusive license to develop or market or distribute “Express Inspection” using our private label “ODIN”, we compete against the manufacturer and possibly other competitors who may have units with similar functionality and may be redeveloping them for commercial use.
The manufacturer of the whole body scanner called “Express Inspection,” offers similar functionality to ODIN, is in Russia. To our knowledge, no other person or entity outside of Russia or China possesses an Express Inspection unit or possesses an exclusive license to develop or distribute this product in any geographic region other than the Russian Federation or China. Nevertheless, we do not have any exclusive rights with respect to Express Inspection, and it is possible that potential competitors could acquire and develop an Express Inspection unit and compete against us. We have encountered one instance where the Express Inspection manufacturer directly competed with us for an ODIN purchase and sale contract.
14
Because our sales of Aerospace Products are concentrated among a few customers, our sales levels could dramatically drop on short or no notice.
During the year ended December 31, 2011, two customers individually accounted for 90% and 10% of the Company’s total revenues. During the year ended December 31, 2010, two customers accounted for 78% and 22% of the Company’s total revenues. With sales limited to a few customers, one customer constituting the majority of sales, the Company’s sales volume is vulnerable to drastic shifts should one or more customers sever the business relationship.
We face aggressive competition in many areas of business. If we do not compete effectively, our business will be harmed.
We expect to face aggressive competition from numerous competitors with respect to both THOR and ODIN. In both cases, competition is likely to be based primarily on such factors as product performance, functionality and quality, cost, prior customer relationships, technological capabilities of the product, price, certification by government authorities, compliance with procurement specifications, local market presence and breadth of sales and service organization. We may not be able to compete effectively with all of our competitors. In addition to existing competitors, new competitors may emerge, and THOR and/or ODIN may be threatened by new technologies or market trends that reduce the value of these products.
Demand for our products may not materialize or continue.
The September 11, 2001 terrorist attacks, the war on terror, and the creation of the U.S. Department of Homeland Security have created increased interest in and demand for security and inspection systems and products. However, we are not certain whether the level of demand will continue to be as high as it is now. We do not know what solutions will continue to be adopted by the U.S. Department of Homeland Security, the U.S. Department of Defense, and similar agencies in other countries and whether our products will be a part of those solutions. Additionally, should our products be considered as a part of the future security solutions, it is unclear what the level may be and how quickly funding to purchase our products may be made available. These factors may adversely impact us and create unpredictability in revenues and operating results.
15
If operators of our security and inspection systems fail to detect weapons, explosives or other devices that are used to commit a terrorist act, we could be exposed to product liability and related claims for which we may not have adequate insurance coverage.
Our business exposes us to potential product liability risks from the development, manufacturing, and sale of THOR and ODIN. Our prospective customers will use our products to help them detect items that could be used in performing terrorist acts or other crimes. ODIN may require that an operator interpret an image of suspicious items within a bag, parcel, container or other vessel, and the training, reliability and competence of the operator will be crucial to the detection of suspicious items. We could be held liable if an operator using our equipment failed to detect a suspicious item that was used in a terrorist act or other crime.
Furthermore, both THOR and ODIN are advanced mechanical and electronic devices and therefore can malfunction. In addition, there are also many other factors beyond our control that could lead to liability claims should an act of terrorism occur. It is very difficult to obtain commercial insurance against the risk of such liability. It is very likely that, should we be found liable following a major act of terrorism, our insurance would not fully cover the claims for damages.
Our revenues are dependent on orders of security and inspection systems, which may have lengthy and unpredictable sales cycles.
Our sales of THOR and ODIN units may often depend upon the decision of governmental agencies to upgrade or expand existing airports, border crossing inspection sites, seaport inspection sites and other security installations. Any such sales may be subject to delays, lobbying pressures, political forces, procedural requirements, and other uncertainties and conditions that are inherent in the government procurement process.
We are dependent on key personnel, specifically Louis J. Brothers and Larry K. Wilhide, and have no employment agreements with them.
We are a Company with key employees and are dependent on the services of Louis J. Brothers, our president, chief executive officer and chief financial officer, and Larry K. Wilhide, our vice-president. Messrs. Brothers and Wilhide are equal shareholders and their combined voting rights are equal to 62.5% of our outstanding common stock. We do not have employment agreements with them, and losing either of their services would likely have an adverse effect on our ability to conduct business. Messrs. Brothers and Wilhide serve as officers and directors of the Company. Messrs. Brothers and Wilhide are our founders. Both men have contributed to the survival and growth of the Company for fifteen years. Mr. Brothers’ government and scientific contacts are essential to the Company’s ability to diversify its product line, including our ability to license, develop, and market future additional products unrelated to the THOR technology. Mr. Wilhide’s engineering and drafting capabilities are essential to our ability to manufacture the technology that we license or develop. Therefore, there is a risk that if either Mr. Brothers or Mr. Wilhide left the Company, the Company may not survive.
16
Our success depends on our ability to attract and retain key employees in order to support our existing business and future expansion.
We continue to actively recruit qualified candidates to fill key positions within the Company. There is substantial competition for experienced personnel. We will compete for experienced personnel with companies who have substantially greater financial resources than we do. If we fail to attract, motivate and retain qualified personnel, it could harm our business and limit our ability to be successful.
We cannot predict our future capital needs and may not be able to secure additional funding.
We may need to raise additional funds within the next twelve months in order to fund our installation of manufacturing facilities and distribution network. If we are unable to achieve sufficient free cash flow from sales of Aerospace Products, customer deposits or other sources, we will likely need to raise additional funds through the sale of equity securities, or debt convertible to equity securities, to public or private investors, which could result in a dilution of ownership interests by the holders of our common stock. Also, we cannot assure you that we will be able to obtain the funding we deem necessary to sustain our operations. Other than the Lincoln Park financing transaction, discussed below, we have no plans with respect to the possible acquisition of additional financing.
In October 2011, we entered into the Purchase Agreement with Lincoln Park, pursuant to which Lincoln Park has purchased 300,000 shares of our common stock, for total consideration of $250,000 and under which we may direct Lincoln Park to purchase up to an additional $20,000,000 worth of shares of our common stock over a 30-month period, once the S-1 registration statement has been declared effective by the SEC. If we make sales of our common stock under the Purchase Agreement, we would be able to fund our operations for a longer period of time. However, the extent to which we will rely on the Purchase Agreement with Lincoln Park as a source of funding will depend on a number of factors, including the prevailing market price of our common stock and volume of trading and the extent to which we are able to secure working capital from other sources. Specifically, Lincoln Park does not have the right or obligation to purchase any shares of our common stock on any business day that the price of our common stock is less than $0.50 per share.
17
The Costs to Produce and Operate THOR, and the Price at which We May Be Able to Sell it are Uncertain
We have never built nor have we operated a THOR unit in the United States. While we believe that the materials, technology and labor needed to build a unit will be available at commercially reasonable costs, we do not know for certain just what the total cost will be. In addition, we do not know just what the operating costs of a THOR unit will be. We anticipate that we will be able to get a better understanding of those items as the IAC (under the CSA framework referenced above) continues to build and ultimately operate a unit. In addition, while we believe that the benefits offered by THOR will be both unique and of great value so customers will not be particularly price sensitive, we do not know whether we will be able to sell THOR units at a reasonable profit in excess of our costs.
If we are not able to successfully protect our intellectual property, our ability to capitalize on the value of the THOR technology may be impaired.
We do not own the THOR technology, and our ability to use and capitalize on the value of the THOR technology depends on entirely on our rights to do so under the LLNL License, which conveys rights to patents resulting from two United States Provisional Patent Applications. There is no guarantee that any patents will be issued and the patents, if issued, may not provide the Company with sufficient protection to prevent competitors from engineering around them.
Even though we believe that there is no competitor currently close to being able to introduce a security technology with the capability and accuracy of the THOR technology, it is possible that imitators may appear who may create adaptive technologies that achieve similar results to THOR. It is also possible that LLNL, as the owner of the THOR technology under the CRADA, under certain circumstances may provide a third party with a license to utilize the THOR technology.
Moreover, the LLNL License provides that (i) the United States government and its agencies retain a nonexclusive, nontransferable, irrevocable paid-up license to practice or have practiced for or on behalf of the government the THOR technology throughout the world; and (ii) the US D.O.E. retains march-in rights with respect to the THOR technology. According to the US D.O.E., such march-in rights have never been exercised.
We have tried to minimize the deconstruction and adaptation of the THOR technology by potential competitors.
Our products and technologies may not qualify for protection under the SAFETY Act.
Under the “SAFETY Act” provisions of The Homeland Security Act of 2002, the federal government provides liability limitations and the “government contractor” defense applies if the Department of Homeland Security “designates” or “certifies” technologies or products as “qualified anti-terrorism technologies,” and if certain other conditions apply. We may seek to qualify some or all of our products and technologies under the SAFETY Act’s provisions in order to obtain such liability protections, but there is no guarantee that the U.S. Department of Homeland Security will designate or certify our products and technologies as a qualified anti-terrorism technology. To the extent we sell products not designated as qualified anti-terrorism technology, we will not be entitled to the benefit of the SAFETY Act’s cap on tort liability or U.S. government indemnification. Any indemnification that the U.S. government may provide may not cover certain potential claims.
18
Future climate change regulation could result in increased operating costs, affect the demand for our products or affect the ability of our critical suppliers to meet our needs.
The Company has followed the current debate over climate change and the related policy discussion and prospective legislation. The potential challenges for the Company that climate change policy and legislation may pose have been reviewed by the Company. Any such challenges are heavily dependent on the nature and degree of climate change legislation and the extent to which it applies to our industry. At this time, the Company cannot predict the ultimate impact of climate change and climate change legislation on the Company’s operations. Further, when or if these impacts may occur cannot be assessed until scientific analysis and legislative policy are more developed and specific legislative proposals begin to take shape. Any laws or regulations that may be adopted to restrict or reduce emissions of greenhouse gas could require us to incur increased operating costs, and could have an adverse effect on demand for our products. In addition, the price and availability of certain of the raw materials that we use could vary in the future as a result of environmental laws and regulations affecting our suppliers. An increase in the price of our raw materials or a decline in their availability could adversely affect our operating margins or result in reduced demand for our products.
We do Business Outside of the United States Which Subjects Us to Risks Associated with International Activities.
All sales of our aerospace products are to customers outside the United States. We also expect that there may be substantial markets outside the United States for sales of our ODIN and THOR products. Prospective customers for ODIN and THOR include foreign governments. The future success of our international operations may also be adversely affected by risks associated with international activities, including economic and labor conditions, political instability, risk of war, expropriation, termination, renegotiation or modification of existing contracts, tax laws (including host-country import-export, excise and income taxes and United States taxes on foreign subsidiaries). Changes in exchange rates may also adversely affect our future results of operations and financial condition.
In addition, to the extent we engage in operations and activities outside the United States, we are subject to the Foreign Corrupt Practices Act (“FCPA”), which generally prohibits U.S. companies and their intermediaries from making corrupt payments to foreign officials or their agents for the purpose of obtaining or keeping business or otherwise obtaining favorable treatment, and requires companies to maintain adequate record-keeping and internal accounting practices to accurately reflect the transactions of the company. The FCPA applies to companies, individual directors, officers, employees and agents. Under the FCPA, U.S. companies may be held liable for actions taken by strategic or local partners or representatives. Violation of the FCPA could result in substantial civil and/or criminal penalties.
19
While we do not believe that we have violated the FCPA, if the SEC and/or the Department of Justice (“DOJ”) conclude that we have, they could assert that there have been multiple violations of the FCPA, which could lead to multiple fines. The amount of any fines or monetary penalties would depend on, among other factors, the amount, timing, nature and scope of any improper payments, whether any such payments were authorized by or made with knowledge of the Company or its affiliates, the amount of gross pecuniary gain or loss involved, and the level of cooperation provided to the government authorities during the investigations. Negotiated dispositions of these types of violations also frequently result in an acknowledgement of wrongdoing by the entity and the appointment of a monitor on terms agreed upon with the SEC and DOJ to review and monitor current and future business practices, including the retention of agents, with the goal of assuring future FCPA compliance. Other potential consequences could be significant and include suspension or debarment of our ability to contract with governmental agencies of the United States and of foreign countries. Any determination that we have violated the FCPA could result in sanctions that could have a material adverse effect on our business, prospects, operations, financial condition and cash flow.
The Board Of Directors Has Received A “Demand for Action” Letter Demanding The Board Be Reorganized And Other Relief.
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 requested more information to enable the Board of Directors to investigate the factual allegations claimed in the letter. Such information has not been received. In subsequent correspondence, the attorney indicated that damages in excess of $10 million will be sought in litigation.
On June 30, 2011, the Company received a letter from the attorney stating that the Company’s in-house and outside counsel allegedly failed to transmit the April 24, 2011 demand letter to the Board of Directors and demanded 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.
20
Risks Related to Investment
We expect the price of our common stock to be volatile. As a result, investors could suffer greater market losses than they might experience with a more stable stock.
The stock markets generally, and the Over-The-Counter (“OTC”) Bulletin Board in particular, have experienced extreme price and volume fluctuations that are often unrelated and disproportionate to the operating performance of a particular company. For example, since the beginning of 2011 our stock went from a high price of about $1.60 per share to a low price of approximately $0.66 per share and closed on March 27, 2012 around $0.80 per share. Certain shareholders have expressed concern over the marked decline in the stock price. These market fluctuations, as well as general economic, political and market conditions such as recessions or interest rate or international currency fluctuations, may adversely affect the market for the common stock of the Company. Given the Company’s limited trading volume, the Company’s stock price is susceptible to wide fluctuations. In the past, class action litigation has often been brought against companies after periods of volatility in the market price of their securities. If such a class action suit is brought against the Company, it could result in substantial costs and a diversion of management’s attention and resources, which would hurt business operations.
Our stock value is dependent on our ability to generate net cash flows.
A large portion of any potential return on our common stock will be dependent on our ability to generate net cash flows. If we cannot operate our business at a net profit, there will be no return on shareholders’ equity, and this could result in a loss of share value. No assurance can be given that we will be able to operate at a net profit now or in the future.
Our common stock value may decline after the exercise of warrants or from the Company’s future capital raising events.
As of December 31, 2011, there are 1,428,574 Class D warrants, 1,300,000 Class F warrants and 410,000 Class H warrants for our common shares outstanding that remain unexercised. It is our belief that warrant holders may begin to exercise their warrants and sell their underlying shares at such time (if any): when the Company begins selling its ODIN units, when the Company receives its first contract to sell THOR units; or upon the occurrence of other factors triggering warrant exercises, provided that the price of our common stock exceeds the strike price on outstanding warrants. Regardless of the conditions or events that trigger the exercise of the warrants, if a large warrant exercise event occurs, there will certainly be an increase in supply of our common stock available and a corresponding downward pressure on our stock price. The sales may also make it more difficult for the Company or its investors to sell current securities in the future at a time and price that the Company or its current investors deem acceptable or even to sell such securities at all. The risk factors discussed in this “Risk Factors” section may significantly affect the market price of our stock. A low price of our stock may result in many brokerage firms declining to deal in our stock. Even if a buyer finds a broker willing to effect a transaction in our common stock, the combination of brokerage commissions, state transfer taxes, if any, and other selling costs may exceed the selling price. Further, many lending institutions will not permit the use of this stock as collateral for loans. Thus, investors may be unable to sell or otherwise realize the value of their investments in our securities.
21
In addition to the outstanding warrants discussed above, we also previously issued a total of 3,000,000 Class A Warrants at an exercise price per share to Coast to Coast Equity Group, Inc. (“CTCEG”) as follows: 1,000,000 shares at the exercise price of $1.00 per share, 1,000,000 shares at the exercise price of $1.50 per share and 1,000,000 shares at the exercise price of $2.00 per share. CTCEG assigned its right to purchase 200,000 shares at the exercise price of $1.00 per share to a third party, who purchased 200,000 shares, leaving 2,800,000 in Class A Warrants. Those warrants expired by their terms on May 14, 2009, but CTCEG has taken the position that, along with certain related agreements, they were extended until May 14, 2010 by the Company. The Company is currently in litigation with CTCEG which includes a claim by CTCEG that the warrants did not expire until May 14, 2010 and the Company cannot provide any assurance that CTCEG will not prevail and then exercise those warrants. However, the Company believes the class A warrants expired because the Warrant Agreement was never modified in writing to extend the warrants’ expiration date, as is required by the Warrant Agreement’s terms. The financial statements included in this 10-K were prepared as if such warrants were no longer outstanding.
Once the Registration Statement goes effective, and we elect to issue more than the 6,514,154 shares pursuant to the Lincoln Park Purchase Agreement, which we have the right but not the obligation to do, we must first register under the Securities Act any additional shares we may elect to sell to Lincoln Park before we can sell such additional shares, which could cause substantial dilution to our shareholders.
We may also enter the capital markets to raise money by selling securities. The number of shares that could be issued for our immediate capital requirements could lead to a large number of shares being placed on the market which could exert a downward trend on the price per share. If the supply created by these events exceeds the demand for purchase of the shares the market price for the shares of common stock will decline.
The number of shares to be made available in the registered offering could encourage short sales by third parties, which could contribute to a future decline in the price of our stock.
In our circumstances, the provision of a large number of common shares to be issued upon the exercise of warrants or sold outright by existing shareholders has the potential to cause a significant downward pressure on the price of common stock, such as ours. This would be especially true if the shares being placed into the market exceeds the market’s ability to take up the increased number of shares or if the Company has not performed in such a manner to encourage additional investment in the market place. Such events could place further downward pressure on the price of the common stock. As a result of the number of shares that could be made available on the market, an opportunity exists for short sellers and others to contribute to the future decline of our stock price. Persons engaged in short-sales first sell shares that they do not own and, thereafter, purchase shares to cover their previous sales. To the extent the stock price declines between the time the person sells the shares and subsequently purchases the shares, the person engaging in short-sales will profit from the transaction, and the greater the decline in the stock price the greater the profit to the person engaging in such short-sales. If there are significant short-sales of our stock, the price decline that would result from this activity will cause our share price to decline even further, which could cause any existing shareholders of our stock to sell their shares creating additional downward pressure on the price of the shares. It is not possible to predict how much the share price may decline should a short sale occur. In the case of some companies that have been subjected to short-sales the stock price has dropped to near zero. This could happen to our securities.
22
Our stock may be subject to significant restrictions on resale due to federal penny stock regulations.
Our common stock differs from many stocks because it has been a “penny stock.” The SEC has adopted a number of rules to regulate penny stocks. These rules require that a broker or dealer, prior to entering into a transaction with a customer, must furnish certain information related to the penny stock. The information that must be disclosed includes quotes on the bid and offer, any form of compensation to be received by the broker in connection with the transaction and information related to any cash compensation paid to any person associated with the broker or dealer.
These rules may affect your ability to sell our shares in any market that may develop for our stock. Should a market for our stock develop among dealers, it may be inactive. Investors in penny stocks are often unable to sell stock back to the dealer that sold it to them. The mark-ups or commissions charged by broker-dealers may be greater than any profit a seller can make. Because of large dealer spreads, investors may be unable to sell the stock immediately back to the dealer at the same price the dealer sold it to them. In some cases, the stock value may fall quickly. Investors may be unable to gain any profit from any sale of the stock, if they can sell it at all.
|
|
·
|
Potential investors should be aware that, according to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. These patterns include:
|
|
|
·
|
manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases
|
|
|
·
|
“boiler room” practices involving high pressure sales tactics and unrealistic price projections by inexperienced sales persons;
|
|
|
·
|
excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and
|
|
|
·
|
the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses.
|
23
Investors must contact a broker-dealer to trade Over-the-Counter Bulletin Board or Pink Sheet securities. As a result, investors may not be able to buy or sell our securities at the times they may wish.
Even though our common stock is presently quoted on the OTC Bulletin Board, our investors may not be able to sell securities when and in the manner that they wish. Because there are no automated systems for negotiating trades on the OTC Bulletin Board, they are often conducted via telephone. In times of heavy market volume, the limitations of this process may result in a significant increase in the time it takes to execute investor orders. When investors place market orders to buy or sell a specific number of shares at the current market price it is possible for the price of a stock to go up or down significantly during the lapse of time between placing a market order and its execution.
Our warrants may not develop a trading market before their time of expiration.
Only our common stock is traded in the over-the-counter market. We are not aware of any over-the-counter market for our warrants, although a private sale of our warrants has occurred. In the event a warrant is acquired by a new purchaser, that purchaser may not be able to resell the warrant, and, if the purchaser does not exercise the warrant before the expiration date then in effect, the purchaser will suffer a complete capital loss of his or her entire investment in the warrant.
If we fail to remain current on the reporting requirements that apply to us, we could be removed from the OTC Bulletin Board, which would limit the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities.
Companies with securities quoted on the OTC Bulletin Board must be reporting issuers under Section 12 of the Exchange Act, and must be current in their reports under Section 13 of the Exchange Act, in order to maintain price quotation privileges on the OTC Bulletin Board. If we fail to remain current on our reporting requirements, shares of our common stock could be removed from quotation on the OTC Bulletin Board. As a result of that removal, the market liquidity for our securities could be severely adversely affected by limiting the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market.
We may be exposed to potential risks relating to our internal controls over financial reporting and our ability to have our independent registered public accounting firm attest to these controls.
Our independent auditors have communicated to management their findings that material weaknesses exist in our internal controls over financial reporting as follows: 1) lack of segregation of duties; 2) lack of qualified accounting personnel working as direct employees. We are investigating how best to correct the material weaknesses identified. In the event we become a so-called “accelerated filer” for SEC reporting purposes, we would be required to obtain and file with the SEC an attestation report on our internal controls from auditors. See Item 9A. Controls and Procedures
24
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not Applicable.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company does not own or lease a manufacturing facility for production of THOR, but it intends to build, lease or otherwise acquire at least one assembly facility in the United States for that purpose. The Company has located several suitable sites and once a demonstration unit has been completed and is functioning in the United States, the Company intends to commence negotiations for a lease and / or facility construction.
The Company’s projection for the timing of production is dependent on receiving necessary government approvals to commence production, the Company’s ability to build or obtain at least one suitable production facility, and the ability to obtain additional capital if necessary to meet then current production goals. Initial market demand for THOR will determine the Company’s labor and physical plant requirements.
Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-K for additional information regarding property.
The Company’s headquarters office operates from leased space. The Company leases 2,985 square feet of office space located at 50 E. River Center Boulevard, Suite 820, Covington, Kentucky. The term of the lease is for five years beginning on the first day of September, 2006 and ending on the last day of August, 2011. The annual base rent increases every 12 months starting at approximately $40,484 and ending at approximately $53,730. Under the terms of the lease, additional rent for operating expenses of the building shall also be payable by the Company at a pro rata share deemed to be 0.928%. These expenses are anticipated to increase at a rate of 3% per year. Minimum annual lease payments are: $43,387 for 2007; $49,680 for 2008; $51,163 for 2009; $52,695 for 2010; and $35,820 for 2011. On September 1, 2011, the Company entered into a new for the 50 East River Center Boulevard, Suite 820 for a period of five years and six months until February 28, 2017. Base rent is $5,940 per month. At December 31, 2011, future minimum payments for operating leases related to our office and manufacturing facilities were $263,275.
On December 1, 2007, the Company entered into a lease of 2,700 square feet of rentable warehouse space located at 1895 Airport Exchange Blvd, Building A, Erlanger, Kentucky. The lease expired at the end of 2011 but was extended one year to the end of 2012.
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 period ended December 31, 2011 and 2010 was $54,830 and $97,407.
In the opinion of Management, the Company’s property and equipment are adequately insured under its existing insurance policy.
ITEM 3. LEGAL PROCEEDINGS.
William A. Rothstein vs.Valley Forge Composite Technologies, Inc., a Florida corporation, and Louis J. Brothers, Civil Action No. 09-0918071 Toomey (UT 3d Jud. Dist.)
25
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.
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. 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.
26
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 September 10, 2012.
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.
27
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.
On December 30, 2011, the Arbitrator issued a Final Award. Despite the Company, along with Mr. Wilhide and Mr. Brothers collectively prevailing on 30 of 32 claims, the arbitrator named ATD the prevailing party and awarded ATD $135,194 in attorney fees and $38,909 in expenses. ATD has received payment in full and the matter has concluded.
Valley Forge Composite Technologies, Inc., a Florida corporation, and Lou Brothers vs. Debra Elenson, Scott Heiken and Lori Heiken, Case No. 11-42629 (CA) 25 (Fla. 11 th Jud. Cir.)
On December 19, 2011, the Company filed a Complaint in the Circuit Court for the 11th Judicial District in and for Miami-Dade County, Florida against Debra Elenson, Scott Heiken and Lori Heiken (“Defendants”). The complaint seeks in excess of $15,000 in damages incurred by the Company by reason of the malicious prosecution of two earlier lawsuits the Defendants filed against the Company in 2009, those lawsuits concluded favorably for the Company when the Defendants each filed Notices of Dismissal with Prejudice in April 2010 resulting in Orders of Dismissal being signed by the Honorable Ronald Dresnick on April 20, 2010.
28
ITEM 4. MINE SAFETY DISCLOSURES (NOT APPLICABLE)
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Registration Statement and Use of Proceeds
On May 14, 2007, the SEC declared effective our registration statement on Form SB-2 (the “Registration Statement”) which registered for re-sale 1,296,500 units (comprised of one share of common stock and one Class B warrant), 1,296,500 shares of common stock underlying the warrants, 1,296,500 common shares and Class B warrants, respectively, contained in the units, all of which were owned by various investors; 5,000,000 shares of common stock owned by promoters; and 3,000,000 Class A warrants and 3,000,000 shares underlying the Class A warrants, owned by Coast To Coast Equity Group, Inc. (“CTCEG”), a Company consultant. Pertaining to the units registered in the Registration Statement, the unit offering investment agreements contained use of proceeds restrictions.
The Company received $1,296,500 in proceeds between August 2006 and November 2006 from the exempt offering of units. The unit offering agreements contained use of proceeds restrictions, with a minimum of 80% being mandated for working capital and up to 20% being allowable for salary expense. The Company used the proceeds during 2006 and 2007 as required by the limitations contained in the unit purchase agreements. As of the expiration of the Class B warrants on April 4, 2009, 338,000 Class B warrants have been exercised netting $507,000 in proceeds to the Company, which were applied with the same 80/20 working capital/salary expense limitation provided in the investor agreements. As of the expiration of the Class A warrants on May 14, 2009, 200,000 Class A warrants had been exercised, netting $200,000 in proceeds to the Company, which were applied with the same 80/20 working capital/salary expense limitation provided in the investor agreements.
On December 30, 2011, the Company filed a Form S-1 Registration Statement with the Securities and Exchange Commission in connection with the transaction with Lincoln Park Capital Fund, LLC described in Note 9. The Registration Statement has not yet been declared effective.
29
Common Stock
Our common stock is currently traded under the symbol “VLYF” on the OTC Bulletin Board.
The following table set forth below lists the range of high and low bids for our common stock for each fiscal quarter for the last three fiscal years. The prices in the table reflect inter-dealer prices, without retail markup, markdown or commission and may not represent actual transactions.
|
High
|
Low
|
||
|
Fiscal Year Ended December 31, 2009
|
|||
|
1st Quarter
|
$0.50
|
$0.08
|
|
|
2nd Quarter
|
$0.35
|
$0.10
|
|
|
3rd Quarter
|
$0.30
|
$0.12
|
|
|
4th Quarter
|
$0.91
|
$0.17
|
|
|
Fiscal Year Ended December 31, 2010
|
|||
|
1st Quarter
|
$2.86
|
$0.07
|
|
|
2nd Quarter
|
$2.76
|
$1.41
|
|
|
3rd Quarter
|
$2.07
|
$1.15
|
|
|
4th Quarter
|
$2.15
|
$1.27
|
|
|
Fiscal Year Ended December 31, 2011
|
|||
|
1st Quarter
|
$1.56
|
$1.09
|
|
|
2nd Quarter
|
$1.66
|
$1.10
|
|
|
3rd Quarter
|
$1.44
|
$0.85
|
|
|
4th Quarter
|
$1.05
|
$0.58
|
Holders of Common Equity
As of March 30, 2012, we have a total of 62,416,048 shares of common stock outstanding, held of record by 34 shareholders, and we believe we have an additional 1,733 beneficial shareholders who hold their shares in brokerage accounts.
30
Dividends
No cash dividends have been declared or paid on our common stock to date. No restrictions limit our ability to pay dividends on our common stock. The payment of cash dividends in the future, if any, will be contingent upon our Company's revenues and earnings, if any, capital requirements and general financial condition. The payment of any dividends is within the discretion of our board of directors. Our board of director's present intention is to retain all earnings, if any, for use in our business operations and, accordingly, the board of directors does not anticipate paying any cash dividends in the foreseeable future.
31
Securities Authorized for Issuance Under Equity Compensation Plan
Equity Compensation Plans as of December 31, 2011
|
Equity Compensation Plan Information
|
|||
|
Plan category
|
Number of securities to
be issued upon exercise of outstanding options, warrants and rights (a)
|
Weighted-average
exercise price of outstanding options, warrants and rights (b)
|
Number of securities
remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
|
|
Equity compensation
plans approved by security holders |
4,050,000(1)
|
$1.38
|
5,950,000
|
|
Equity compensation
plans not approved by security holders |
-
|
||
|
Total
|
4,050,000
|
$1.38
|
5,950,000
|
|
(1) On September 13, 2010, the Board of Directors issued 4,050,000 stock options to key employees and consultants pursuant to the 2008 Equity Incentive Plan previously approved by the stockholders.
|
Recent Sales of Unregistered Securities
During 2009 and 2008, we sold securities in various private, unregistered transactions. Neither the Company nor any person acting on its behalf offered or sold securities by any form of general solicitation or general advertising. The purchasers were known to management or were known to business associates of management. No underwriting discounts or commissions were paid to any party by the Company.
On May 27, 2009 the Company issued 1,900,000 shares of common stock to MKM Master Opportunity Fund and individual investors for $237,500 in cash. On May 27, 2009, the Company also granted to MKM and individual investors seven-year Class F Warrants to purchase 1,900,000 shares of common stock at a price of $0.20. These sales were conducted in a private transaction exempt from registration pursuant to pursuant to Section 4(2) of the Securities Act and Regulation D Rule 506.
On August 10, 2009 the Company issued 800,000 shares of common stock to individual investors for $100,000 in cash ($92,000 net of expenses). On August 10, 2009, the Company also granted to such investors seven-year Class G Warrants to purchase 800,000 shares of common stock at a price of $0.20. These sales were conducted in a private transaction exempt from registration pursuant to pursuant to Section 4(2) of the Securities Act and Regulation D Rule 506.
32
Warrants
As previously disclosed, between 2006 and 2009, the Company has issued Class A, B, C, D, E, F, and G warrants. The Company on occasion has previously referred to Class C, Class D, Class F, and Class G warrants as Series C, Series D, Series F and Series G warrants, respectively. These warrants were issued in a private transaction exempt from registration pursuant to pursuant to Section 4(2) of the Securities Act and Regulation D Rule 506.
33
Our Class A warrants expired on May 14, 2009. Language in prior filings inadvertently and mistakenly implied that these warrants had been extended until May 13, 2010, but no such extension was ever effected in writing, as is required by the Warrant Agreement dated July 6, 2006. CTCEG, the holder of those warrants, believes that the expiration date of those warrants was extended and has attempted to exercise those Warrants. The Company rejected that attempt and the matter is currently in litigation.
Our Class B warrants expired on April 4, 2009.
The sole person to whom we issued Class E warrants, Mr. Daniel Katz, agreed to forego his right to receive such warrants, pursuant to a settlement agreement described in our current report on Form 8-K filed on March 13, 2009.
None of the remaining outstanding warrants has a market at the present time. The Class C, D, F and G warrants are restricted securities and are assignable by the buyers in transactions compliant with exemptions from registration under the Securities Act and the rules promulgated thereunder.
Class H Warrants
On October 4, 2011, the Company issued a Warrant to Wharton Capital Partners, Ltd. for the purchase of 410,000 shares of common stock at $1.09 per share. The Warrant expires on October 3rd, 2016 and contains a cashless exercise provision.
The Company may offer additional securities as our capital requirements dictate or as suitable funding opportunities present themselves.
Repurchases of Securities by the Company
None
ITEM 6. SELECTED FINANCIAL DATA.
Not Applicable.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
You should read the following discussion and analysis of our financial condition and results of our operations together with our financial statements and the related notes to those statements included later in this Form 10-K. In addition to historical financial information, this discussion contains forward-looking statements reflecting our current plans, estimates, beliefs and expectations that involve risks and uncertainties. As a result of many important factors, particularly those set forth under “Special Note Regarding Forward-Looking Statements” and “Risk Factors”. Our actual results and the timing of events may differ materially from those anticipated in these forward-looking statements.
Overview
The Company has positioned itself to develop and commercialize advanced technologies. Between 1996 and 2011, the Company won numerous contracts to produce various momentum wheels and other mechanical devices for special applications, some in aerospace. Historically, and in 2011, all of the Company’s sales have been derived from these momentum wheels and other mechanical devices. The Company purchases components from a variety of sources and engages in direct selling to its customers.
Since September 11, 2001 the Company has focused much of its energy on the development and commercialization of its counter-terrorism products. These products consist of an advanced detection capability for illicit narcotics, explosives, and bio-chemical weapons hidden in cargo containers, the THOR LVX photonuclear detection system, and a passenger weapons scanning device, ODIN. 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.
34
Liquidity and Capital Resources
Between January 1, 2011 and December 31, 2011, our capital requirements have largely been met through sales of products other than THOR or ODIN. We recorded sales of $14,992,867 from the sale of various aerospace products and other mechanical devices from January 1, 2011 and December 31, 2011. We anticipate that income from sales of such products will be sufficient to finance our ongoing operating requirements in 2012. To the extent we make sales of ODIN or THOR systems during the next several months, 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 during the third quarter of 2011 resulted from a delayed payment by one of our customers due to the earthquake in Japan during the first quarter of 2011 as well as other supplier problems encountered causing shipment delays. 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 with Lincoln Park, upon completion of the related registration statement.
Lincoln Park initially purchased 300,000 shares of our common stock for $250,000 under the Purchase Agreement. We also entered into a registration rights agreement with Lincoln Park whereby we agreed to file a registration statement related to the transaction with the SEC covering the shares that may be issued to Lincoln Park 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 Lincoln Park 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 share price Lincoln Park 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 Lincoln Park. Lincoln Park 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.
35
The following liquidity events describe the amounts and sources of our capital resources and describe how we have paid our expenses. For the year ended December 31, 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 $1,600,919 that was due to a longer than anticipated collection from our customers, an increase in inventories of $3,508,734, 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 January 1, 2011 through December 31, 2011, the Company has collected $1,991,902 of the outstanding accounts receivable balance of $1,991,902 at December 31, 2010. The accounts receivables balance 180 days past due at December 31, 2011 was $-0-. From January 1, 2012 through March 30, 2012, the Company has paid $3,190,844 of the outstanding accounts payable balance of $5,934,187 and collected $3,050,980 of the outstanding receivables balance of $3,592,821 at December 31, 2011. Further, we believe our cash and investment reserves are satisfactory to fund any potential operating shortfalls.
We have incurred losses for the fiscal years ended December 31, 2010 and 2009 but had comprehensive income of $419,974 for the year ended December 31, 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 year ended December 31, 2011, we received cash proceeds of $10,497,332 from sales of various products, $1,991,902 from accounts receivable outstanding at December 31, 2011 and $250,000 paid for 300,000 shares of our common stock. Our cash outflows for the year consisted of net inventory purchases of $3,508,734, marketable securities purchases of $21,295, investment in patent license of $40,000, equipment purchases of $1,577, and repayment to shareholder of $124,846. For the year ended December 31, 2010, we received cash proceeds of $16,675,269 from sales of various products, $335,365 from customer deposits, and $245,714 from amounts paid to exercise warrants resulting in the issuance of common stock. Our cash outflows for the year consisted of net increase of accounts receivable of $1,892,782, net inventory purchases of $848,652, marketable securities purchases of $508,442, equipment purchases of $131,114, repayment of convertible debenture of $42,000 and repayment to shareholder of $91,712.
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.
Between January 1, 2011 and December 31, 2011, our capital requirements were largely met through sales of products other than THOR or ODIN. We recorded sales of $14,992,867 from the sale of various products in 2011. We anticipated that income from sales of such products will be sufficient to finance our ongoing operating capital requirements in 2012.
36
For the year ended December 31, 2011 we issued 746,154 shares of our common stock from the sale of 300,000 shares of our common stock for $250,000 in cash, issuance of 314,154 shares of our common stock in exchange for the financing commitment for Lincoln Park Capital and 132,000 shares to the Board of Directors and officers for their services in 2011. For the year ended December 31, 2010 we issued 6,631,854 shares of our common stock primarily as the result of the exercise of previously issued warrants and note conversions.
Commitments and Contingent Liabilities
The Company leases office and warehouse spaces in Covington, KY and Erlanger, KY under five-year , six month and 12 month non-cancelable operating leases, expiring February 2017 and December 2011, respectively. The aggregate base rent is $5,940 per month. At December 31, 2011, future minimum payments for operating leases related to our office and manufacturing facilities were $263,275 through February 2017.
Our total current liabilities increased to $6,634,602 at December 31, 2011 compared to $3,378,922 at December 31, 2010. Our total current liabilities at December 31, 2011 included accounts payable of $5,934,187, accrued expenses of $409,364, and deferred revenue of $291,051 compared to our total current liabilities at December 31, 2010 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 audited condensed consolidated financial statements of Valley Forge Composite Technologies and its subsidiaries. These charts and discussions summarize our financial statements for the years ended December 31, 2011 and 2010, and should be read in conjunction with the financial statements, and notes thereto, included with the Company’s Form 10-K for the fiscal year ended December 31, 2011.
37
SUMMARY COMPARISON OPERATING RESULTS
|
SUMMARY COMPARISON OPERATING RESULTS
|
||||||||
|
YEAR ENDED
DEC 31, 2011 |
YEAR ENDED
DEC 31, 2010 |
|||||||
|
Gross profit
|
$ | 3,313,755 | $ | 2,597,638 | ||||
|
Total operating expenses
|
2,569,625 | 3,461,059 | ||||||
|
Income (loss) from operations
|
744,130 | (863,421 | ) | |||||
|
Total other income (expense)
|
(297,374 | ) | (613,229 | ) | ||||
|
Net income (loss) before taxes
|
446,756 | (1,476,650 | ) | |||||
|
Income taxes
|
20,000 | - | ||||||
|
Net income (loss)
|
426,756 | (1,476,650 | ) | |||||
|
Other comprehensive income (loss)
|
(6,782 | ) | (4,379 | ) | ||||
|
Comprehensive income (loss)
|
$ | 419,974 | $ | (1,481,029 | ) | |||
|
Net income (loss) per share:
|
||||||||
|
Basic
|
$ | 0.01 | $ | (0.02 | ) | |||
|
Diluted
|
$ | 0.01 | $ | - | ||||
For the year ended December 31, 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. Revenues, primarily for momentum wheels, were $14,992,867 and $18,675,269 for the year ended December 31, 2011 and 2010. All of these revenues were concentrated among a few customers. The Company’s supplier problems improved in the fourth quarter of 2011.
38
To date, no revenues have been attributable to sales from ODIN or THOR. All sales for the years ended December 31, 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. The Company periodically receives a high profit margin order that exceeds the normal profit percentage of approximately 15%. For the year ended December 31, 2011, the Company had two such orders that realized a gross profit of approximately $2,000,000.
Our gross profit margins have increased for the year ended December 31, 2011, compared with the year ended December 31, 2010. We have seen an increase of our gross margin to 22% from 14% for the year ended December 31, 2011 and 2010, respectively. The increase in profit margin for the year ended December 31, 2011 was due to a few high margin sales that the Company cannot predict will occur with regularity in the future. The Company’s goal is to increase gross profit margin on future sales of momentum wheels.
Our operating expenses generally decreased for the year ended December 31, 2011, compared with the year ended December 31, 2010. The major components of our operating expenses consisted of selling and administrative expenses and share-based payments. For the years ended December 31, 2011 and 2010, our selling and administrative expenses were $1,624,006 and $1,596,780 and our share-based payment expenses were $945,619 and $1,864,279. Share-based payments were greater in 2010 primarily due to stock options granted in September 2010, some of which immediately vested requiring compensation expense to be recorded.
Operating expenses The following table shows our operating expenses:
|
For the year ended DEC 31,
|
||||||||||||
|
2011
|
2010
|
Percent
Change |
||||||||||
|
Selling and administrative expenses
|
$ | 1,624,006 | $ | 1,596,780 | 2 | % | ||||||
|
Share-based payments
|
945,619 | 1,864,279 | (49 | ) % | ||||||||
|
Total operating expenses
|
$ | 2,569,625 | $ | 3,461,059 | (26 | ) % | ||||||
Selling and administrative expenses increased $27,226 for the year ended December 31, 2011 compared to the same period of 2010 which is primarily attributable to a net increase in professional fees. Total selling and administrative expenses were 10.8% and 8.6% of sales for the year ended December 31, 2011 and 2010, respectively.
Share-based payments decreased $918,660 for the year ended December 31, 2011 compared to the same period of 2010 due to fewer options vesting in 2011 compared to 2010.
Total operating expenses were 17.1% and 18.5% of sales for the year ended December 31, 2011 and 2010.
39
Income (loss) from operations Income from operations totaled $744,130 (or 5.0% of sales) in the year ended December 31, 2011 compared to the loss from operations of $863,421 (or 4.6% of sales) for the year ended December 31, 2010. The loss from operations decreased primarily due to an increase in gross profit and a decrease in share-based payments.
Net income (loss) before taxes Net income before income tax expense for the year ended December 31, 2011 increased $1,923,406, compared to 2010. The increase in net profit is due to an increase in gross profit and a decrease in share-based payments.
Net income (loss) Net income for the year ended December 31, 2011 increased $1,903,406, compared to 2010. The increase in net profit is due to an increase in gross profit and a decrease in share-based payments. Income tax expense for 2011 relates to the Alternative Minimum Tax due which is recorded as an expense due to an increase in the deferred tax asset valuation allowance.
Interest expense, net Overall interest expense, net, decreased due to the full amortization of the debt discount in 2010 and the repayment of a loan to a shareholder.
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 for the years ended December 31, 2011 and 2010.
|
YEAR ENDED DEC 31,
2011 |
YEAR ENDED DEC 31,
2010 |
|||||||
|
Valley Forge Detection Systems, Inc.
|
$ | - | $ | - | ||||
|
Valley Forge Aerospace, Inc.
|
14,992,867 | 18,675,269 | ||||||
|
Valley Forge Imaging, Inc.
|
- | - | ||||||
|
Valley Forge Emerging Technologies, Inc.
|
- | - | ||||||
|
Totals Per Financial Statements
|
$ | 14,992,867 | $ | 18,675,269 | ||||
Our total operating expense was $2,569,625 and $3,461,059, respectively, for the years ended December 31, 2011 and 2010.
Our average monthly cost of operations from January 2011 through December 2011 was approximately $214,000. Excluding aggregate non-cash charges of $112,571 for depreciation and amortization, and $945,619 for share-based payments, our average monthly cost of operations from January 2011 through December 2011 was approximately $126,000.
As of December 31, 2011, we had $372,435 in cash remaining as well as $518,576 of marketable securities.
40
At this rate, and barring any material changes to our capital requirements and assuming no additional revenue with margin, we anticipate being able to sustain our operations for seven months, at which time we will have to obtain additional funding in the absence of obtaining additional cash from operations or other sources. Our ability to sustain ourselves on our current cash position depends almost entirely on: (1) continued sales of our aerospace products and conversion of working capital to cash (2) how long the government and/or customer approval process may take and how high the initial market demand is for the THOR system, and (3) how long it takes to realize revenue from any sales of ODIN units; and (4) whether additional cash infusions are obtained via the issuance of equity securities or from other sources, including from Lincoln Park. It is uncertain whether we will receive significant cash payments for THOR or ODIN sales during the remainder of 2012. While the receipt of purchase orders for THOR units will dictate our major production needs, the timing of the government approval process, where relevant, 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 and marketable securities to fund operations through July 31, 2012, we have no immediate plans to raise additional capital, notwithstanding the Lincoln Park Capital arrangement, because we believe profits from sales of momentum wheels and other products will be sufficient to cover operating expenses through the end of 2012. 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.
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 accommodate customer needs, ongoing improvements or to facilitate obtaining necessary approvals before we can commence production of the THOR system or to facilitate the execution of new contracts.
The Company has received information regarding new government specifications for passenger screening, but has not yet reviewed it. Once the company reviews it, 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 $215,670, net of accumulated depreciation and inventory allowance, as of December 31, 2011. If we decide not to continue with the existing technology but to utilize a new system that we have developed, then it will be possible that we may not 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.
41
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. The work order is the first request for services under the CSA. The work order had a deliverable date of September 30, 2011 which required preliminary research steps and related deliverables; this deliverable date was extended to November 30, 2011. The Company is currently reviewing results from the first work order and will prepare a proposed second work order after further consultation with ISU.
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 CSA. 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.
Subsequent Events
The Company Has Received a Settlement Offer Concerning “Demand for Action” Letter Demanding The Board Be Reorganized And Other Relief
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 requested more information to enable the Board of Directors to investigate the factual allegations claimed in the letter. Such information has not been received. In subsequent correspondence, the attorney indicated that damages in excess of $10 million will be sought in litigation.
42
On June 30, 2011, the Company received a letter from the attorney stating that the Company’s in-house and outside counsel allegedly failed to transmit the April 24, 2011 demand letter to the Board of Directors and demanded 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.
On March 8, 2012 the attorney representing the “class of shareholders” transmitted by email a Settlement Agreement and Mutual General Release (“Settlement Agreement”). The Settlement Agreement identifies the “class of shareholders” to be Evan Levine and Victoria Levine, Evan and Victoria Levine on behalf of minors Alexander Levine, Nathaniel Levine and Elinor Levine and Mark Capital LLC. The Settlement Agreement lists Evan Levine as a signatory for Mark Capital; the Company believes Mr. Levine is the Managing Member. Accordingly, the “class of shareholders” appears to be limited to Mr. Levine, his wife and children and his investment fund.
Because of the narrowly limited “class of shareholders” and the fact that almost a year has lapsed with no action being brought, the Company is assessing whether the threats contained in the April 24, 2011 letter are credible. Management will brief the Board of Directors in April 2012, to enable the Board to make a final determination of whether to accept or reject the terms of the Settlement Agreement.
Valley Forge Composite Technologies, Inc., a Florida corporation, and Lou Brothers vs. Debra Elenson, Scott Heiken and Lori Heiken, Case No. 11-42629 (CA) 25 (Fla. 11 th Jud. Cir.)
On December 19, 2011, the Company filed a Complaint in the Circuit Court for the 11th Judicial District in and for Miami-Dade County, Florida against Debra Elenson, Scott Heiken and Lori Heiken (“Defendants”). The complaint seeks in excess of $15,000 in damages incurred by the Company by reason of the malicious prosecution of two earlier lawsuits the Defendants filed against the Company in 2009, those lawsuits concluded favorably for the Company when the Defendants each filed Notices of Dismissal with Prejudice in April 2010 resulting in Orders of Dismissal being signed by the Honorable Ronald Dresnick on April 20, 2010.
On January 31, 2012, Defendants filed a motion to dismiss the Company’s complaint. Following a hearing, the Honorable Jorge Cueto denied Defendant’s motion to dismiss on February 16, 2012, and ordered them to file an answer within 30 days. Defendants filed an answer to the complaint on March 6, 2012. Discovery has not yet commenced.
On January 18, 2012, Mark Capital LLC exercised Series F warrants issued in May, 2009. Pursuant to the terms of the warrant, 349,120 shares were issued in a cashless exercise.
On February 16, 2012, the Company entered into an Investor Relations Consulting Agreement (“IR Agreement”) with Hayden Investor Relations. The IR Agreement requires Hayden to perform consulting services, including disseminating information to the investing public. The term of the IR Agreement is 12 months, unless terminated earlier; compensation thereunder is a monthly cash payment of $6,500 and 100,000 three year, cashless exercise warrants with a strike price of $0.60 cents per share; 50,000 warrants vested on February 16, 2012 with the remaining warrants vesting after the first six months.
43
Description of Critical Accounting Policies and Estimates, Going Concern, and Fair Value of Financial Instruments
This section of our Form 10-K 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 of the “Notes to Consolidated Financial Statements” for the year ended December 31, 2011.
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.
Liquidity
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. While the Company has net income for 2011, it has experienced net losses in prior years. Management believes its existing cash and investment balances, ongoing profitable sales and access to capital are adequate for the Company’s liquidity needs for 2012.
44
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 of the “Notes to Consolidated Financial Statements” for the year ended December 31, 2011 and 2010 in this form 10-K, 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 of the “Notes to Consolidated Financial Statements” for the year ended December 31, 2011 and 2010 in this form 10-K 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.
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.
45
Recent Accounting Pronouncements
In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income (“FASB ASU No. 2011-05”), which will require a company to present components of net income and other comprehensive income in one continuous statement or in two separate, but consecutive statements. There are no changes to the components that are recognized in net income or other comprehensive income under current GAAP. In addition, in December 2011, the FASB issued an amendment which defers the requirement to present components of reclassifications of other comprehensive income on the face of the income statement. This guidance is effective for fiscal years ending after December 15, 2012, with early adoption permitted. The Company currently presents components of net income and other comprehensive income in one continuous statement.
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 7A. 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.
46
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
PAGE
|
|
Report of Independent Registered Public Accounting Firm
|
48
|
|
Consolidated Balance Sheets as of December 31, 2011 and 2010
|
49
|
|
Consolidated Statements of Operations for the years ended December 31, 2011 and 2010
|
50
|
|
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2011 and 2010
|
51
|
|
Consolidated Statements of Cash Flows for the years ended December 31, 2011 and 2010
|
52
|
|
Notes to Consolidated Financial Statements
|
53
|
47
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Valley Forge Composite Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Valley Forge Composite Technologies, Inc. and subsidiaries (the Company) as of December 31, 2011 and 2010, and the related consolidated statements of operations, shareholder’s equity, and cash flows for each of the years in the two-year period ended December 31, 2011. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Valley Forge Composite Technologies, Inc. and subsidiaries as of December 31, 2011 and 2010, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America.
/s/ Mountjoy Chilton Medley LLP
Louisville, Kentucky
March 30, 2012
48
|
VALLEY FORGE COMPOSITE TECHNOLOGIES, INC.
|
||||||||
|
CONSOLIDATED BALANCE SHEETS
|
||||||||
|
Dec 31, 2011
|
Dec 31, 2010
|
|||||||
|
ASSETS
|
||||||||
|
Current assets:
|
||||||||
|
Cash
|
$ | 372,435 | $ | 585,549 | ||||
|
Marketable securities
|
518,576 | 504,063 | ||||||
|
Accounts receivable
|
3,592,821 | 1,991,902 | ||||||
|
Inventories
|
4,508,686 | 999,952 | ||||||
|
Prepaid expenses and other
|
66,183 | 47,852 | ||||||
|
Deposits with vendors
|
- | 21,000 | ||||||
|
Total current assets
|
9,058,701 | 4,150,318 | ||||||
|
Property and equipment, net
|
112,062 | 274,405 | ||||||
|
Non-current assets:
|
||||||||
|
Patent license, net
|
39,430 | - | ||||||
|
Deferred equity offering costs, net
|
658,262 | - | ||||||
|
Security deposits
|
5,535 | 5,535 | ||||||
|
Total non-current assets
|
703,227 | 5,535 | ||||||
|
Total Assets
|
$ | 9,873,990 | $ | 4,430,258 | ||||
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
||||||||
|
Current liabilities:
|
||||||||
|
Accounts payable
|
$ | 5,934,187 | $ | 2,029,425 | ||||
|
Accrued expenses and other
|
409,364 | 30,886 | ||||||
|
Deferred revenue
|
291,051 | 1,193,765 | ||||||
|
Due to shareholder
|
- | 124,846 | ||||||
|
Total current liabilities
|
6,634,602 | 3,378,922 | ||||||
|
Shareholders' Equity:
|
||||||||
|
Common stock, $.001 par value, 100,000,000 shares authorized;
|
||||||||
|
62,066,928 and 61,320,774 shares issued and
|
||||||||
|
outstanding at December 31, 2011 and 2010
|
62,067 | 61,321 | ||||||
|
Additional paid-in capital
|
12,544,597 | 10,777,265 | ||||||
|
Accumulated deficit
|
(9,356,115 | ) | (9,782,871 | ) | ||||
|
Accumulated other comprehensive loss
|
(11,161 | ) | (4,379 | ) | ||||
|
Total shareholders' equity
|
3,239,388 | 1,051,336 | ||||||
|
Total Liabilities and Shareholders' Equity
|
$ | 9,873,990 | $ | 4,430,258 | ||||
See accompanying notes.
49
|
VALLEY FORGE COMPOSITE TECHNOLOGIES, INC.
|
||||||||
|
CONSOLIDATED STATEMENTS OF OPERATIONS
|
||||||||
|
For the years ended
|
||||||||
| December 31, | ||||||||
|
2011
|
2010
|
|||||||
|
Sales
|
$ | 14,992,867 | $ | 18,675,269 | ||||
|
Cost of sales
|
11,679,112 | 16,077,631 | ||||||
|
Gross Profit
|
3,313,755 | 2,597,638 | ||||||
|
Costs and expenses
|
||||||||
|
Selling and administrative expenses
|
1,624,006 | 1,596,780 | ||||||
|
Share-based payments
|
945,619 | 1,864,279 | ||||||
|
Total expenses
|
2,569,625 | 3,461,059 | ||||||
|
Income (loss) from operations
|
744,130 | (863,421 | ) | |||||
|
Other non-operating income (expense)
|
||||||||
|
Interest expense
|
(3,102 | ) | (684,365 | ) | ||||
|
Legal settlement
|
(316,896 | ) | 62,441 | |||||
|
Investment income
|
22,624 | 8,695 | ||||||
|
Net income (loss) before taxes
|
446,756 | (1,476,650 | ) | |||||
|
Income Taxes
|
20,000 | - | ||||||
|
Net income (loss)
|
426,756 | (1,476,650 | ) | |||||
|
Other comprehensive loss
|
||||||||
|
Unrealized loss on marketable securities
|
(6,782 | ) | (4,379 | ) | ||||
|
Comprehensive income (loss)
|
$ | 419,974 | $ | (1,481,029 | ) | |||
|
Income (loss) per common share:
|
||||||||
|
Basic
|
$ | 0.01 | $ | (0.02 | ) | |||
|
Diluted
|
$ | 0.01 | ||||||
|
Weighted Average Common Shares Outstanding:
|
||||||||
|
Basic
|
61,500,794 | 59,281,322 | ||||||
|
Diluted
|
63,778,097 | |||||||
See accompanying notes.
50
|
VALLEY FORGE COMPOSITE TECHNOLOGIES, INC.
|
||||||||||||||||||||||||
|
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
|
||||||||||||||||||||||||
|
YEARS ENDED DECEMBER 31, 2011 AND 2010
|
||||||||||||||||||||||||
|
Common
Stock |
Number of
Shares |
Additional Paid-
in Capital |
Accumulated
Deficit |
Accumulated
Other Comprehensive Loss |
Total
|
|||||||||||||||||||
|
BALANCE AT JANUARY 1, 2010
|
$ | 54,689 | 54,688,920 | $ | 7,673,903 | $ | (8,306,221 | ) | $ | - | $ | (577,629 | ) | |||||||||||
|
Proceeds from exercise of warrants
|
1,229 | 1,228,571 | 244,486 | 245,715 | ||||||||||||||||||||
|
Stock issuance from cashless exercise of warrants
|
2,486 | 2,486,139 | (2,486 | ) | - | |||||||||||||||||||
|
Stock issued for note conversions
|
2,857 | 2,857,144 | 997,143 | 1,000,000 | ||||||||||||||||||||
|
Stock issued for services
|
60 | 60,000 | 118,140 | 118,200 | ||||||||||||||||||||
|
Option based compensation
|
1,746,079 | 1,746,079 | ||||||||||||||||||||||
|
Unrealized loss on securities
|
(4,379 | ) | (4,379 | ) | ||||||||||||||||||||
|
Net loss for 2010
|
(1,476,650 | ) | (1,476,650 | ) | ||||||||||||||||||||
|
BALANCE AT DECEMBER 31, 2010
|
61,321 | 61,320,774 | 10,777,265 | (9,782,871 | ) | (4,379 | ) | 1,051,336 | ||||||||||||||||
|
Proceeds from sale of common stock
|
300 | 300,000 | 249,700 | 250,000 | ||||||||||||||||||||
|
Stock issued for services
|
132 | 132,000 | 125,664 | 125,796 | ||||||||||||||||||||
|
Option based compensation
|
819,823 | 819,823 | ||||||||||||||||||||||
|
Stock issued for commitment fee
|
314 | 314,154 | 282,425 | 282,739 | ||||||||||||||||||||
|
Issuance of warrants
|
356,145 | 356,145 | ||||||||||||||||||||||
|
Equity offering costs
|
(66,425 | ) | (66,425 | ) | ||||||||||||||||||||
|
Unrealized loss on securities
|
(6,782 | ) | (6,782 | ) | ||||||||||||||||||||
|
Net income for 2011
|
426,756 | 426,756 | ||||||||||||||||||||||
|
BALANCE AT DECEMBER 31, 2011
|
$ | 62,067 | 62,066,928 | $ | 12,544,597 | $ | (9,356,115 | ) | $ | (11,161 | ) | $ | 3,239,388 | |||||||||||
See accompanying notes.
51
|
VALLEY FORGE COMPOSITE TECHNOLOGIES, INC.
|
||||||||
|
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
||||||||
|
For the year ended
|
||||||||
|
December 31,
|
||||||||
|
2011
|
2010
|
|||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
||||||||
|
Net income (loss)
|
$ | 426,756 | $ | (1,476,650 | ) | |||
|
Adjustments to reconcile net income (loss) to net cash
|
||||||||
|
used in operating activities:
|
||||||||
|
Depreciation and amortization expense
|
112,571 | 198,373 | ||||||
|
Loss on disposal of equipment
|
51,919 | - | ||||||
|
Amortization of debt discount
|
- | 541,893 | ||||||
|
Share-based payments
|
945,619 | 1,864,279 | ||||||
|
Change in operating assets and liabilities
|
||||||||
|
(Increase) decrease in operating assets:
|
||||||||
|
Increase in accounts receivable
|
(1,600,919 | ) | (1,892,782 | ) | ||||
|
(Increase) decrease in inventories
|
(3,508,734 | ) | (848,652 | ) | ||||
|
(Increase) decrease in prepaid expenses and other
|
(18,331 | ) | 56,433 | |||||
|
Decrease in vendor deposits
|
21,000 | - | ||||||
|
Increase (decrease) in operating liabilities:
|
||||||||
|
Increase in accounts payable
|
3,840,059 | 865,395 | ||||||
|
Increase (decrease) in accrued expenses and other
|
357,378 | (22,687 | ) | |||||
|
Increase (decrease) in deferred revenue
|
(902,714 | ) | 335,365 | |||||
|
Net Cash Used In Operating Activities
|
(275,396 | ) | (379,033 | ) | ||||
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
||||||||
|
Purchase of marketable securities
|
(21,295 | ) | (508,442 | ) | ||||
|
Purchase of patent license
|
(40,000 | ) | - | |||||
|
Purchases of equipment
|
(1,577 | ) | (131,114 | ) | ||||
|
Net Cash Used In Investing Activities
|
(62,872 | ) | (639,556 | ) | ||||
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
||||||||
|
Gross proceeds from exercise of warrants
|
- | 245,715 | ||||||
|
Proceeds from issuance of common stock
|
250,000 | - | ||||||
|
Repayment of convertible debenture
|
- | (42,000 | ) | |||||
|
Repayments to shareholder
|
(124,846 | ) | (91,712 | ) | ||||
|
Net cash provided from financing activities
|
125,154 | 112,003 | ||||||
|
NET DECREASE IN CASH
|
(213,114 | ) | (906,586 | ) | ||||
|
CASH AT BEGINNING OF YEAR
|
585,549 | 1,492,135 | ||||||
|
CASH AT END OF YEAR
|
$ | 372,435 | $ | 585,549 | ||||
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|
||||||||
|
Cash paid during the period for:
|
||||||||
|
Income taxes
|
$ | - | $ | - | ||||
|
Interest
|
$ | 3,102 | $ | 64,808 | ||||
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING
|
||||||||
|
ACTIVITIES
|
||||||||
|
Stock issued for note conversion
|
$ | - | $ | 1,000,000 | ||||
|
Stock issued for commitment fee
|
$ | 356,145 | $ | - | ||||
|
Equity offering costs
|
$ | (66,425 | ) | $ | - | |||
|
Issuance of warrants
|
$ | 282,739 | $ | - | ||||
|
Deferred equity offering costs in payables and accruals
|
$ | 85,803 | $ | - | ||||
See accompanying notes.
52
VALLEY FORGE COMPOSITE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011
NOTE 1 – NATURE OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of the Business
Valley Forge Composite Technologies, Inc., a Florida corporation (“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. Periodically, the Company has a high margin sale outside of the expected gross profit of approximately 15%. Sales of this type are not expected to continue on a consistent basis. 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 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.
53
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.
Basis of Presentation
The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles in the United States of America (“GAAP”). The Accounting Standards Codification (“ASC”) as produced by the Financial Accounting Standards Board (“FASB”) is the sole source of authoritative GAAP. The consolidated financial statements of the Company include the Company and its subsidiaries. All material inter-company balances and transactions have been eliminated.
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.
54
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 (loss). The Company’s item of other comprehensive loss is the unrealized loss on marketable securities.
Fair Value of Financial Instruments
The Company’s financial instruments consist of cash, marketable securities, accounts receivable, security deposits, 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. The Company held no cash equivalents at December 31, 2011 and 2010.
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 for estimated uncollectible accounts based on prior experience and review of existing receivables. There was no allowance for doubtful accounts at December 31, 2011 and 2010.
55
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:
|
December 31
|
December 31
|
|||||||
|
2011
|
2010
|
|||||||
|
Raw Materials
|
$ | 4,035,468 | $ | 609,900 | ||||
|
Work in process
|
- | 6,738 | ||||||
|
Finished goods
|
473,218 | 383,314 | ||||||
| $ | 4,508,686 | $ | 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
|
Depreciation expense for the years ended December 31, 2011 and 2010 was $112,001 and $68,530, respectively.
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.
Deferred Equity Offering Costs
In connection with the Lincoln Park Capital (“LPC”) arrangement (Note 9), the Company incurred the following costs: (1) warrants issued to Wharton Capital Partners (Note 9), fair value of $356,145, (2) shares issued to LPC as a commitment fee, fair value of $282,739, and (3) Professional fees related to the registration statement to register the LPC shares of $85,803. These costs will be charged to additional paid-in-capital (“APIC”) as shares are sold to LPC. During 2011, $66,425 have been charged to APIC related to the sale of shares to LPC in 2011.
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.
56
For future sales of ODIN and THOR, it is expected customer acceptance, which may include testing, will also be required for revenue recognition.
Shipping and Handling Costs
Shipping and handling costs incurred by the Company are included in cost of sales, and shipping charges billed to the customer are included in net sales in the accompanying 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 December 31, 2011.
Research and Development Costs
Research and development (“R&D”) costs, which relate primarily to the development, design and testing of products, are expensed as incurred. R&D expense is included in selling and administrative expenses, and was insignificant in 2011 and 2010. However, R&D expenses may be necessary to accommodate customer needs, ongoing improvements or changing government regulations, the extent of which is presently unknown.
57
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.
The Company’s policy for interest and penalties on material uncertain income 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. 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 years ended December 31, 2011 and 2010, advertising expense was $3,552 and $61,814, respectively.
Legal costs
Legal costs are expensed as incurred.
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.
58
The following sets forth the computation of earnings per share:
|
For the Year Ended
|
||||||||
|
December 31,
|
||||||||
|
2011
|
2010
|
|||||||
|
Net income (loss) (A)
|
$ | 426,756 | $ | (1,476,650 | ) | |||
|
Weighted average shares outstanding (B)
|
61,500,794 | 59,281,322 | ||||||
|
Dilutive effect of stock based awards
|
2,277,303 | - | ||||||
|
Common stock and common stock equivalents (C)
|
63,778,097 | 59,281,322 | ||||||
|
Income (loss) per share - basic (A/B)
|
$ | 0.01 | $ | (0.02 | ) | |||
|
Income (loss) per share - diluted (A/C)
|
$ | 0.01 | ||||||
The Company’s common stock equivalents include the following:
|
December 31,
|
December 31,
|
|||||||
|
2011
|
2010
|
|||||||
|
Class D Warrants
|
1,428,574 | 1,428,574 | ||||||
|
Class F Warrants
|
1,300,000 | 1,300,000 | ||||||
|
Class H Warrants
|
410,000 | - | ||||||
|
Options
|
4,050,000 | 4,050,000 | ||||||
|
Total common stock equivalents
|
7,188,574 | 6,778,574 | ||||||
On September 13, 2010, the Company issued 4,050,000 stock options of which 1,320,000 and 660,000 were vested at December 31, 2011 and 2010, respectively. See Note 11 for further details. See Note 9 for further details regarding warrants.
Recent accounting pronouncements
In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income (“FASB ASU No. 2011-05”), which will require a company to present components of net income and other comprehensive income in one continuous statement or in two separate, but consecutive statements. There are no changes to the components that are recognized in net income or other comprehensive income under current GAAP. In addition, in December 2011, the FASB issued an amendment which defers the requirement to present components of reclassifications of other comprehensive income on the face of the income statement. This guidance is effective for fiscal years ending after December 15, 2012, with early adoption permitted. The Company currently presents components of net income and other comprehensive income in one continuous statement.
59
NOTE 2 - LIQUIDITY
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. Management believes its existing cash and investment balances, ongoing profitable sales and access to capital are adequate for the Company’s liquidity needs for 2012.
NOTE 3 – MARKETABLE SECURITIES
The cost and fair value of marketable securities are as follows:
|
December 31,
|
December 31,
|
|||||||
|
2011
|
2010
|
|||||||
|
Available for sale equity securities:
|
||||||||
|
Amortized Cost
|
$ | 529,737 | $ | 508,442 | ||||
|
Unrealized Loss
|
(11,161 | ) | (4,379 | ) | ||||
|
Fair Value
|
$ | 518,576 | $ | 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 $11,161 and $4,379 have been included in accumulated other comprehensive loss at December 31, 2011 and 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.
60
At December 31, 2011 and 2010, marketable securities consisted of an exchange traded bond fund that was measured using the Level 1 valuation hierarchy.
NOTE 4 – PROPERTY AND EQUIPMENT
The major classifications of property and equipment are summarized below:
|
December 31,
|
December 31,
|
|||||||
|
2011
|
2010
|
|||||||
|
Computers and equipment
|
$ | 89,643 | $ | 135,065 | ||||
|
Furniture and fixtures
|
49,564 | 49,564 | ||||||
|
Demonstration units
|
244,090 | 296,010 | ||||||
| 383,297 | 480,639 | |||||||
|
Less: accumulated depreciation
|
(271,235 | ) | (206,234 | ) | ||||
| $ | 112,062 | $ | 274,405 | |||||
Demonstration units 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, The Company paid LLNS license issue fees of $40,000 in 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.
|
December 31,
|
||||
|
2011
|
||||
|
Patent License
|
$ | 40,000 | ||
|
Less: accumulated amortization
|
(570 | ) | ||
| $ | 39,430 | |||
Amortization expense for the year ended December 31, 2011 was $570.
Amortization for each of the next five years will be $2,076 per year.
61
NOTE 6 – ACCOUNTS PAYABLE
The Company’s 2011 accounts payable include $8,351 borrowed on revolving credit lines utilizing corporate credit cards which bear interest at an average rate of 13.04% per annum and call for total minimum monthly installment payments of $145 as of December 31, 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 $5,925,836 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 $291,051 and $1,193,765, at December 31, 2011 and 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.
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 years ended December 31, 2011 and 2010, respectively.
62
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 years ended December 31, 2011 and 2010, respectively.
On September 29, 2009, the unrelated individual investors converted their $150,000 note into 428,571 shares of common stock at a conversion price of $0.35 per share.
On March 22, 2010, MKM converted the remaining $500,000 note into 1,428,572 shares of common stock at a conversion price of $0.35 per share.
There were no notes outstanding at December 31, 2011 and 2010.
63
NOTE 9 – SHAREHOLDERS’ EQUITY
On October 5, 2011, the Company signed a $20.25 million purchase agreement (the “Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“LPC”). Upon signing the Purchase Agreement, LPC agreed to initially purchase 300,000 shares of our common stock for $250,000. The Company also entered into a registration rights agreement with LPC whereby it 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, the Company has the right, in its sole discretion, over a 30-month period to sell up to an additional $20 million of its 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 share price LPC may pay to purchase 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 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 common stock is below the floor price as set forth in the Purchase Agreement.
In consideration for entering into the $20.25 million agreement, the Company issued to LPC 314,154 shares of common stock as a commitment fee. The fair value of these commitment fee shares have been recorded as deferred equity offering costs (Note 1). The Purchase Agreement may be terminated by the Company at anytime.
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.
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.
64
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. 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. 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. 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. 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.
65
On May 27, 2009, the Company issued 1,900,000 shares of common stock to MKM Capital Advisors and individual investors for 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.
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 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.
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.
Wharton Capital Partners, Ltd. assisted the Company in arranging for the equity offering arrangement with Lincoln Park Capital. As compensation for its services, the Company issued Class H Warrants 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 cashless exercise provision contained in the warrant. A fair value of $356,145 was calculated relating to these warrants using the Black-Scholes pricing model with the following assumptions: share price of $0.94; Strike price of $1.09 per share; Time to expiration (days) of 1,826; Expected volatility of 158%; no dividends; and an annual interest rate based on 3-month U.S. Treasury Bill of 0.19%. The fair value has been recorded to deferred equity offering costs in the accompanying December 31, 2011 consolidated balance sheet.
Stock warrant activity for the year ended December 31, 2011 is summarized as follows:
|
Number of
shares |
Weighted
average exercise price |
|||||||
|
Outstanding at January 1, 2011
|
2,728,574 | $ | 0.20 | |||||
|
Granted
|
410,000 | 1.09 | ||||||
|
Forfeited
|
- | - | ||||||
|
Exercised
|
- | - | ||||||
|
Outstanding at December 31, 2011
|
3,138,574 | $ | 0.32 | |||||
The following table summarizes the Company's Class D, Class F and Class H stock warrants outstanding at December 31, 2011:
|
Warrant Class
|
Range of
Exercise Price |
Number
|
Weighted
Average Remaining Life |
Weighted
Average Exercise Price |
||||||||||||
|
D
|
$ | 0.20 | 1,428,574 | 3.75 | $ | 0.20 | ||||||||||
|
F
|
$ | 0.20 | 1,300,000 | 2.50 | $ | 0.20 | ||||||||||
|
H
|
$ | 1.09 | 410,000 | 4.75 | $ | 1.09 | ||||||||||
66
NOTE 10 – STOCK GRANT
On or about November 1, 2010, each director (other than Lou Brothers and Larry Wilhide) received 12,000 shares of restricted stock totaling 60,000 shares in one lump sum for payment of service for 2010.
On September 29, 2011, the Board of Directors of the Company authorized the issuance of 60,000 shares of common stock for 2011 services, distributed equally to the five Board members. The $57,180 value of the services was recorded based on the previous five day average share price at the date of authorization. The recipients are required to remain in service through December 31, 2011.
On September 29, 2011, the Board of Directors of the Company authorized the issuance of 72,000 shares of common stock for 2011 services, distributed equally to the three executive officers. The $68,616 value of the services was recorded based on the previous five day average share price at the date of authorization. The recipients are required to remain in service through December 31, 2011.
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 five to 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 years ended December 31, 2011 and 2010 the Company recognized compensation cost and an increase in additional paid-in capital of $819,823 and $1,746,079 and an income tax benefit has not been reflected due to an increase in the deferred tax asset valuation allowance. As of December 31, 2011, there was $2,792,077 of total unrecognized compensation cost relating to unvested stock options. That cost is expected to be recognized in the years ending December 31, 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.
67
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, December 31, 2011
|
4,050,000 | 1.38 | ||||||
|
Options exercisable, December 31, 2011
|
1,320,000 | $ | 1.38 | |||||
|
Nonvested
Options |
Average
Fair Value |
|||||||
|
Nonvested options
|
||||||||
|
Nonvested options, January 1, 2011
|
3,390,000 | $ | 1.32 | |||||
|
Granted
|
- | - | ||||||
|
Vested
|
(660,000 | ) | 1.32 | |||||
|
Forfeited
|
- | - | ||||||
|
Nonvested options, December 31, 2011
|
2,730,000 | $ | 1.32 | |||||
At December 31, 2011, vested exercisable options were outstanding for 1,320,000 shares at an exercise price between $1.35 and $1.49. The weighted average value of the options is $1.32. Of the vested options, 269,360 options have a remaining life of 3.7 years and expire on September 13, 2015 while 1,050,640 options have a remaining life of 8.7 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
Income tax expense for the year ended December 31, 2011 reflects the current amount due for the Alternative Minimum Tax (“AMT”). The Company owed this tax due to a limitation on the use of its net operating loss carryforward for AMT purposes. This amount is recorded as an expense due to an increase in the deferred tax asset valuation allowance. There was no income tax expense or benefit for the year ended December 31, 2010 due to the Company’s net losses and increases in its deferred tax asset valuation allowance.
68
Deferred income taxes reflect the income tax effect of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and amounts used for income taxes. The Company’s deferred income tax assets and liabilities consist of the following at December 31, 2011 and 2010:
|
2011
|
2010
|
|||||||
|
Deferred Tax Assets:
|
||||||||
|
Stock options
|
$ | 659,209 | $ | 456,724 | ||||
|
AMT credit carryforward
|
20,000 | - | ||||||
|
Net operating loss carryforwards
|
1,336,361 | 1,916,138 | ||||||
| 2,015,570 | 2,372,862 | |||||||
|
Valuation allowance
|
(2,005,260 | ) | (2,330,896 | ) | ||||
| $ | 10,310 | $ | 41,966 | |||||
| 2011 | 2010 | |||||||
|
Deferred Tax Liabilities
|
||||||||
|
Depreciation
|
$ | 10,310 | $ | 41,996 | ||||
The table below summarizes the differences between the Company’s effective tax rate and the statutory federal rate for fiscal years 2011 and 2010:
|
2011
|
2010
|
|||||||
|
Federal "expected" tax expense (benefit)
|
34 | % | (33 | ) % | ||||
|
State taxes, net of "expected" tax expense (benefit)
|
6 | % | (6 | ) % | ||||
|
Permanent differences
|
38 | % | 14 | % | ||||
|
Change in valuation allowance
|
(73 | ) % | 25 | % | ||||
|
Effective tax rate
|
5 | % | -0- | % | ||||
Net operating loss carryforwards totaled approximately $3,400,000 at December 31, 2011. The net operating loss carryforwards will begin to expire in the year 2028 if not utilized. After consideration of all the evidence, both positive and negative, management has recorded a full valuation allowance at December 31, 2011 and 2010 due to the uncertainty of realizing the net deferred tax assets under the more likely than not approach. The valuation allowance decreased by approximately $326,000 for the year ended December 2011. Utilization of the Company’s net operating loss carryforwards may be limited based on changes in ownership as defined in Internal Revenue Code Section 382.
NOTE 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. The Company has extended the lease an additional year commencing on January 1, 2012 and expiring on December 31, 2012.
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 December 31, 2011 and 2010 was $76,173 and $97,407, respectively.
69
The following is a schedule of future minimum lease payments required under the leases as of December 31, 2011:
|
Period Ending
December 31,
|
Amount
|
|||
|
2012
|
$ | 62,703 | ||
|
2013
|
46,287 | |||
|
2014
|
47,432 | |||
|
2015
|
48,606 | |||
|
2016
|
49,810 | |||
|
Thereafter
|
8,437 | |||
| $ | 263,275 | |||
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 December 31, 2011 and 2010, the Company incurred expenses for accounting services of $100,110 and $58,125, 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.
The Company paid $50,000 in 2011 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. The Company also paid Louis Brothers, Jr $26,000 and $24,000 for consulting services in 2011 and 2010, respectively.
For the periods ended December 31, 2011 and 2010, the Company incurred expenses for translating services of $6,489 and $3,192, respectively, to a member of the board of directors.
NOTE 15 – CONCENTRATION AND CREDIT RISK
During the year ended December 31, 2011, two customers individually accounted for 90% and 10% of the Company’s total revenues. During the year ended December 31, 2010, two customers accounted for 78% and 22% 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.
70
The Company’s entire December 31, 2011 accounts receivable balance of $3,592,821 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 and all of the Company's sales are exported. 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 December 31, 2011 and 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 as well as provide consulting services. 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. Costs related to the first work order have been expensed.
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
On October 30, 2009, the Company and its president and director, Louis J. Brothers, were both named as defendants in a civil complaint filed in Utah by shareholder William A. Rothstein. The complaint alleges that the defendants committed fraud, violated the Utah Uniform Securities Act, 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. 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.
71
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.
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 in 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 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, 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.
The First Amended Complaint ("Complaint") alleges failure to pay a $42,000 promissory note payable to CTCEG. CTCEG was allowed to file an amended complaint. 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.
72
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 September 10, 2012.
George Frudakis vs. Valley Forge Composite Technologies, Inc., a Florida corporation, and Lou Brothers.
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 2010, the Company, Louis J. Brothers and Larry K. Wilhide received 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 arbitration proceeding was heard from April 27 through April 29, 2011. On July 31, 2011 and November 2, 2011, the Arbitrator issued Interim Awards.
On December 30, 2011, the Arbitrator issued a Final Award in a total amount aggregating to $316,896. This amount is included in accrued expenses at December 31, 2011. In 2012, ATD has received payment in full and the matter has concluded.
The Company is also a plaintiff in certain legal actions which could result in a gain. The ultimate outcome is not determinable and no amounts have been recognized.
73
NOTE 17 – SUBSEQUENT EVENTS
We have evaluated the period from December 31, 2011 through the date the financial statements herein were issued for subsequent events requiring recognition or disclosure in the financial statements and we have identified the following events:
The Company Has Received a Settlement Offer Concerning “Demand for Action” Letter Demanding The Board Be Reorganized And Other Relief
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 requested more information to enable the Board of Directors to investigate the factual allegations claimed in the letter. Such information has not been received. In subsequent correspondence, the attorney indicated that damages in excess of $10 million will be sought in litigation.
The Company’s request for additional information regarding these claims 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.
On March 8, 2012 the attorney representing the “class of shareholders” transmitted by email a Settlement Agreement and Mutual General Release (“Settlement Agreement”). The “class of shareholders” appears to be limited to Mr. Evan Levine, his wife and children and his investment fund. Because of the narrowly limited “class of shareholders” and the fact that almost a year has lapsed with no action being brought, the Company is assessing whether the threats contained in the April 24, 2011 letter are credible. The Company cannot provide any assurances regarding the outcome of this matter.
On January 18, 2012, Mark Capital LLC exercised Series F warrants issued in May, 2009. Pursuant to the terms of the warrant, 349,120 shares were issued in a cashless exercise.
On February 16, 2012, the Company entered into an Investor Relations Consulting Agreement (“IR Agreement”) with Hayden Investor Relations. The IR Agreement requires Hayden to perform consulting services, including disseminating information to the investing public. The term of the IR Agreement is 12 months, unless terminated earlier; compensation thereunder is a monthly cash payment of $6,500 and 100,000 three year, cashless exercise warrants with a strike price of $0.60 per share; 50,000 warrants vested on February 16, 2012 with the remaining warrants vesting after the first six months.
74
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.
ITEM 9A. 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 December 31, 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 one of our previously filed financial statements requires an adjustment. Accordingly, the principal executive officer/principal financial officer concluded that the disclosure controls and procedures were not effective 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 was (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) accumulated and communicated to management, including our principal executive officer/principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Our management, including our chief executive officer 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.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate control over financial reporting (as defined in Rule 13a-15(f) promulgated under the Exchange Act). Valley Forge Composite Technologies, Inc.’s internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting of the Company includes those policies and procedures that:
(1) pertain to the maintenance of records that in reasonable detail accurately and fairy reflect the transactions of the company.
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorization of management and directors of the Company; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company’s financial statements.
75
All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error or circumvention through collusion of improper overriding of controls. Therefore, even those internal control systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2011. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control-Integrated Framework. Our management has concluded that our internal control over financial reporting is not effective based on these criteria in light of the following material weaknesses:
Lack of Segregation of Duties and Qualified Internal Employees – Because of our limited staff, a limited number of people perform all financial duties. Much of our financial accounting is performed by outside accountants not affiliated with our auditors. The Company has retained, LGI CFO to advise on financial matters and to address methods of correcting this material weakness.
76
Changes in Internal Control over Financial Reporting
Our management has also evaluated our internal control over financial reporting, and there have been no significant changes in our internal controls or in other factors that could significantly affect those controls subsequent to the date of our last evaluation. As noted, management intends to improve the Company’s internal controls going forward.
The Company is not required by current SEC rules to include, and does not include, an auditor's attestation report. The Company's registered public accounting firm has not attested to Management's reports on the Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
Not Applicable.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Directors and Executive Officers
The following table sets forth as of the date of this Form 10-K the name, age and position of each person who serves as an executive officer, director and significant employee of our Company as of December 31, 2011.
|
Name
|
|
Age
|
|
Position
|
|
Louis J. Brothers
|
|
59
|
|
Chairman, Chief Executive Officer and Chief Financial Officer
|
|
Larry K. Wilhide
|
|
63
|
|
Director, Vice-President (Engineering)
|
|
Andrew T. Gilinsky
|
|
51
|
|
Director
|
|
Richard S. Relac
|
|
70
|
|
Director
|
|
Eugene Breyer
|
|
63
|
|
Director
|
|
Raul A. Fernandez
|
|
61
|
|
Director
|
|
Dr. Victor A. Alessi
|
|
72
|
|
Director
|
|
Keith L. McClellan
|
55
|
Vice President, General Counsel and Secretary
|
Background of Executive Officers, Directors and Significant Employees
Louis J. Brothers
Mr. Brothers is a founding shareholder of the Company. He served as President of Valley Forge Composite Technologies, Inc., a Pennsylvania corporation, (“VLYF”) and as Chairman of VLYF’s Board of Directors from 1997 to 2006. He became Chairman of the Board of Directors of the Company upon execution of the July 6, 2006 Share Exchange Agreement among Quetzal Capital 1, Inc., a Florida corporation, and the shareholders of VLYF (the “Share Exchange Agreement”). Mr. Brothers has been President, Chief Executive Officer and Chief Financial Officer since the execution of the Share Exchange Agreement.
77
Mr. Brothers has more than 20 years of experience in marketing, marketing support, product management and logistics in industrial products. He also has extensive international business experience, having worked in Europe, Russia, China and Japan. In China, he was part of the management team that supervised the construction of three large industrial plants. His experience on the management team provides the Board with a management and leadership insight. Mr. Brothers was responsible for increasing his products’ market share in the bearing industry from 2% to 95%, in the process making valuable contacts, building business relationships with private manufacturers and the research communities and gaining important knowledge in the manufacturing and technology market segments. His knowledge of marketing and logistics, understanding of the company’s products and extensive international business experience provide the Board with a unique perspective on ways to collaborate with the international markets in order to accomplish the Company’s goals.
Larry K. Wilhide
Larry K. Wilhide is a founder of the Company, and since its inception in 1997 has been a director and the vice-president of engineering. On July 6, 2006, Mr. Wilhide became a director of the Company upon the execution of the Share Exchange Agreement. Mr. Wilhide is a part-time employee of VLYF and since 2000 continues to work for SKF Bearing, Inc. in Hanover, Pennsylvania, as a sub-contractor where he performs general engineering and design services.
Mr. Wilhide has worked as a design engineer on projects for aerospace bearings for over 25 years including cage, retainer design and spherical bearing refurbishing. He has supported general machining and grinding operations. He was team leader for computer aided design and computer numerical control programming. Additionally, Mr. Wilhide served in the U.S. Army in Korea where he held primary responsibility for arming nuclear warheads. Mr. Wilhide holds a Bachelors Degree in Mechanical Engineering. Combined with his design knowledge, his experience as a team leader enables him to provide the Board with leadership skills and perspective regarding the design of the Company’s products.
Andrew T. Gilinsky, CPA, PFS, MBA, CFP
Andrew T. Gilinsky is a certified public accountant and has been employed since 1987 by Clairmont Paciello & Co., P.C., located in King of Prussia, Pennsylvania. Clairmont Paciello & Co., P.C. serves as the Company’s outsourced accounting staff. Mr. Gilinsky has served as a director of the Company since April 15, 2008.
Mr. Gilinsky has been employed as a certified public accountant for over 20 years. He brings to the Board not only a particularized knowledge of financial statements, but also the broad knowledge and experience regarding financial reporting and accounting of public companies he has gained from working with numerous clients throughout the years.
Eugene Breyer
Eugene Breyer has served as a director of the Company since March 25, 2008. From December 1999 through the present, Mr. Breyer has been employed as the director of human resources for Cincinnati State Technical and Community College.
Mr. Breyer’s experience as the director of human resources for Cincinnati State Technical and Community College provides the Board with unique problem solving skills and an established perspective on overseeing the management of employees and diverse issues.
78
Dr. Victor E. Alessi
Dr. Victor E. Alessi has served as a director of the Company since April 15, 2008. From 1999 until October 2007, Dr. Alessi was the Chief Executive Officer of the United States Industry Coalition, an Arlington, Virginia, based non-profit organization comprised of American businesses, organizations, and research institutions dedicated to non-proliferation through the commercialization of technology emanating from the New Independent States of the former Soviet Union. Since October 2007 Dr. Alessi has been retired.
Dr. Alessi’s experience as Chief Executive Officer of the United States Industry Coalition and his overall knowledge of the industry make him well-suited to provide broad leadership guidance and business acumen to the Board of a technology company operating in international markets.
Raul A. Fernandez
Raul A. Fernandez has served as a director of the Company since April 15, 2008. Mr. Fernandez is an information technology consultant. He has been employed by KForce Technology Staffing in Tampa, Florida, since March 2007. Previously, between January 2000 and November 2006, he was the director of information technology services at Iron Mountain Information Management in Collegeville, Pennsylvania.
Mr. Fernandez’s background as the director of information technology services provides knowledge to the Board and the Company regarding information technology issues and cybersecurity risks. He also brings broad problem-solving skills and management experience to the Board.
Richard S. Relac
Richard S. Relac has served as a director of the Company since April 15, 2008. Mr. Relac is a professional linguist and since January 2006 has been self-employed in this capacity. From 1967 to 1974, and from 1983 to 2002, Mr. Relac served elements of the U.S. Department of Defense as a translator, intelligence analyst, customer relations officer, and senior editor. In January 2002 he retired from federal service. Mr. Relac remained in retired status until January 2006 when he was elected as a council member for Bonneauville Borough, Pennsylvania. He ceased being a council member upon moving out of the borough in March 2009. Also in January 2006, Mr. Relac commenced his free-lance translating service with the Company as his primary customer. Mr. Relac currently operates his translating service.
Mr. Relac’s unique background as an intelligence analyst and customer relations officer brings insight to the Board regarding management of international operations and negotiating agreements with companies in various countries. His linguist skills assist the Board in establishing relationships with customer and suppliers in foreign countries.
Each director of the Company holds such position until the next annual meeting of shareholders, or written consent in lieu thereof, and until his successor is duly elected and qualified, or until his earlier death, removal or resignation.
79
Keith L. McClellan, Esq., MBA
Keith L. McClellan was appointed by the Board of Directors as the Company’s Vice President, General Counsel and Secretary, effective July 1, 2010. Since 1991, he has worked on business and legal issues associated with technology commercialization. From 2006 until his appointment with the Company, he was self employed as a consultant to domestic and international companies in the areas of technology commercialization and business development. He is admitted to the Bar in Nevada and Kentucky.
Code of Ethics
In August 2006, the Company adopted a Code of Ethics. The Code of Ethics applies to the Company’s officers, director level employees and certain other designated employees and independent contractors. A copy of the Code of Ethics, our Code of Conduct, and our Insider Trading Policy are available on our website at www.VLYF.com under the “About Valley Forge” tab in the Corporate Governance section.
Audit Committee
The Company does not have a separately designated standing audit committee or audit committee charter in place; the Company’s entire Board of Directors served, and currently serves, in the capacity of audit committee. This is due to the small size of business operations, the small number of executive officers involved with the Company, and the fact that the Company operates with few employees. Our Board of Directors will continue to evaluate, from time to time, whether a separately designated standing audit committee should be put in place.
Compensation Committee
Our Board of Directors currently has no compensation committee charter, standing compensation committee or committee performing similar functions. This is due to the Company’s small size of business operations, the small number of executive officers involved with the Company, and the fact that the Company operates with few employees. The Company’s entire Board of Directors currently participates in the consideration of executive officer and director compensation. Our Board of Directors will continue to evaluate, from time to time, whether it should appoint a standing compensation committee.
Executive officers who are also directors participate in determining or recommending the amount or form of executive and director compensation, but the ultimate determination of executive compensation is determined by the independent directors. Neither the board nor management utilizes compensation consultants in determining or recommending the amount or form of executive and director compensation.
80
Nominating Committee
Our Board of Directors does not have a nominating committee or a nominating committee charter. Instead of having such a committee, our Board of Directors historically has searched for and evaluated qualified individuals to become nominees for membership on our Board of Directors. The directors recommend candidates for nomination for election or reelection by written action of the majority shareholders and, as necessary, to fill vacancies and newly created directorships.
Board Leadership Structure
The Company’s leadership structure combines the roles of the chairman and chief executive officer. The Board believes that this leadership structure is currently appropriate for the Company due to Mr. Brother’s knowledge of the Company and the next-generation detection systems and instruments industry, and his extensive marketing, products management and logistics experience with respect to logistical products. In this regard, having a combined chairman and chief executive officer provides an efficient and effective leadership model. The board believes that this structure promotes unambiguous accountability, effective decision-making, and alignment on corporate strategy. In addition, because our Board works closely with our executive officers and members of senior management, there is a natural synergy in the combined role that facilitates our Board's oversight and guidance of management.
The Board of Directors does not have a lead independent director, however, the entire Board, including our independent directors, works with Mr. Brothers to perform a variety of functions related to our corporate governance, including coordinating board activities, setting relevant items on the agenda and ensuring adequate communication between the Board of Directors and management.
Risk Oversight
The Board of Directors is actively involved in the oversight of risks, including strategic, operational and other risks, which could affect our business. The Board of Directors administers this oversight function directly through the Board of Directors as a whole, which oversees risks relevant to its and management’s functions. The Board of Directors considers strategic risks and opportunities and administers its respective risk oversight function by evaluating management’s monitoring, assessment and management of risks, including steps taken to limit our exposure to known risks, through regular interaction with our senior management.
The Board provides oversight and guidance to members of management who are responsible for the timely identification, mitigation and management of those risks that could have a material impact on the Company. The Board considers the risk that our compensation policies and practices may have in attracting, retaining, and motivating valued employees and endeavors to assure that it is not reasonably likely that our compensation plans and policies would have a material adverse effect on our Company. In addition, the Board oversees governance related risks, such as board independence and conflicts of interest. The interaction with management occurs not only at formal board meetings but also through periodic written and oral communications. The Board has overall responsibility for executive officer succession planning and reviews succession planning as needed.
81
Independent Directors
Our independent directors are Messrs. Fernandez, Breyer, Relac and Dr. Alessi. Our definition of “independent director” is that of NASDAQ Listing Rule 5605(a)(2). However, the Company’s securities are not listed on the NASDAQ Stock Market.
Meetings of the Board
The Board of Directors held seven meetings during 2011. Meetings of the board were conducted by telephone, except for a meeting held in person in November 2011. Each of the directors attended 75% or more of such meetings. The Board of Directors also acted at times by unanimous written consent, as authorized by our bylaws and the Florida Statutes.
82
ITEM 11.EXECUTIVE COMPENSATION.
The principal elements of our executive compensation program are base salary, annual cash incentives, and long-term equity incentives in the form of restricted stock, stock options, performance units and performance shares. A brief summary of our stock incentive plan follows.
2008 Stock Incentive Plan
The Company’s 2008 Stock Incentive Plan, as amended (the “2008 Plan”), is intended to attract, motivate, and retain employees of the Company, consultants who provide significant services to the Company, and members of the Board of Directors of the Company who are not employees of the Company. The 2008 Plan is also designed to further the growth and financial success of the Company by aligning the interests of the Participants (as defined in the 2008 Plan), through the ownership of shares of the Company’s stock and through other incentives, with the interests of the Company’s stockholders. The Board of Directors authorized the adoption of, and the Company’s majority stockholders approved, the 2008 Plan on September 10, 2008.
Certain terms and provisions of the 2008 Plan are summarized below. As a summary, the description below is not a complete description of all of the terms of the 2008 Plan; the full text can be found in the Company’s schedule 14 C filed June 1, 2009. Furthermore, capitalized terms used in the summary below shall have the meanings given to them in the 2008 Plan unless otherwise defined in such summary.
Administration. The 2008 Plan provides that it will be administered by the Board of Directors; provided, however, that if the Board of Directors chooses, it may delegate some or all of its authority (except for the administration of the Non-Discretionary Grant Program) to a Committee or Committees. The Committee may consist solely of two or more “outside directors” as described in Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), or solely of two or more Non-Employee Directors, in accordance with Rule 16b-3.
Available Shares. Ten million (10,000,000) shares of the Company’s common stock are available for award under the 2008 Plan. Such amount is subject to adjustment upon, among other things, changes in capitalization, dissolution or liquidation, or a merger or change in control, in each case as set forth in the 2008 Plan.
Types of Awards. Under the 2008 Plan, the Board of Directors may grant any one or a combination of Incentive Stock Options (within meaning of the Code), Non-Qualified Stock Options, and Restricted Stock, as well as Performance Units and Performance Shares (collectively, “Awards”). Subject to certain limitations in the 2008 Plan, the Board of Directors shall establish the terms and conditions of Awards granted under the 2008 Plan.
Eligible Participants. Except for Incentive Stock Options, which may only be granted to Employees of the Company or a parent corporation or a subsidiary corporation (as such terms are defined in Code Sections 424(e) and (f)), and subject to certain restrictions set forth in the 2008 Plan, Awards under the 2008 Plan may be granted to Employees, Directors, and Consultants of the Company who are designated by the Board of Directors.
83
Term. The 2008 Plan became effective upon its adoption by the Board of Directors, and continues in effect for a term of ten (10) years from the date adopted by the Board unless earlier terminated.
Amendment. The Board of Directors may amend, suspend or terminate the 2008 Plan at any time. The Company will obtain stockholder approval of any amendment to the 2008 Plan to the extent necessary to comply with applicable laws. An amendment to, or the termination, alteration or suspension of the 2008 Plan may not impair the rights of any Participant, unless mutually agreed to otherwise in writing and signed by the Participant and the Company.
Amendment To The 2008 Plan Forms Of Stock Option Agreements
On August 8, 2011, the Board of Directors approved an amendment to the forms of Incentive Stock Option Agreement and Non Qualified Stock Option Agreement previously adopted as part of the 2008 Plan to (a) provide for a different Option (as defined in the 2008 Plan) vesting schedule, (b) permit the vesting of unvested Options upon a Change of Control (as defined in the 2008 Plan), and (c) 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 under the 2008 Plan.
Payments to Management
In the future, Mr. Brothers and all other employees may receive commissions from their individual efforts resulting in customer purchase orders for THOR and ODIN units although no commission agreements have been entered into to date.
Summary Compensation Table
This table shows the compensation for the Company’s Chief Executive Officer / Chief Financial Officer and the two other most highly paid executive officers, other than the Chief Executive Officer / Chief Financial Officer, at December 31, 2011 and December 31, 2010.
84
|
Name and Principal Position
|
Year
|
Salary
|
Stock Awards
|
Option Awards
|
Total
|
||||||||||||
|
($)
|
($)
|
($)(1)
|
($)(2)
|
($)
|
|||||||||||||
|
Louis J. Brothers
|
|||||||||||||||||
|
President, CEO and CFO
|
2011
|
$ | 140,250 | $ | 22,872 | $ | 330,008 | $ | 493,130 | ||||||||
|
2010
|
$ | 134,500 | $ | - | $ | 660,012 | $ | 794,512 | |||||||||
|
Larry K. Wilhide
|
|||||||||||||||||
|
Vice President and Director
|
2011
|
$ | 113,565 | $ | 22,872 | $ | 330,008 | $ | 466,445 | ||||||||
|
2010
|
$ | 100,850 | $ | - | $ | 660,012 | $ | 760,862 | |||||||||
|
Keith L. McClellan
|
|||||||||||||||||
|
Vice President, Secretary
|
|||||||||||||||||
|
and General Counsel
|
2011
|
$ | 54,250 | $ | 22,872 | $ | 133,000 | $ | 210,122 | ||||||||
|
2010
|
$ | 45,000 | $ | - | $ | 266,000 | $ | 311,000 | |||||||||
|
(1)
|
Reflects the fair value dollar amount based on the previous five day average share
|
|
price at the date of authorization.
|
|
|
(2)
|
Reflects the aggregate grant date fair value dollar amount computed in accordance with
|
|
ASC Topic 718 related to the named executive officers that had stock options granted
|
|
|
during the year. For the assumptions used in the calculation of this amount under ASC 718,
|
|
|
see Note 12 of the Notes to the Consolidated Financial Statements for the year ended
|
|
|
December 31, 2011.
|
Outstanding Equity Awards at Fiscal Year End
This table provides information concerning unexercised options outstanding as of December 31, 2011 for the Company’s Chief Executive Officer / Chief Financial Officer and the two most highly paid executive officers, other than the Chief Executive Officer / Chief Financial Officer.
|
Name
|
Number of Securities
Underlying Unexercised Options Exercisable |
Number of Securities
Underlying Unexercised Options Unexercisable |
Option
Exercise Price |
Option Expiration
Date |
||||||||||
|
Lou Brothers
|
||||||||||||||
| 134,680 | 269,360 | (1) | $ | 1.49 |
September 13, 2015
|
|||||||||
| 365,320 | 730,640 | (2) | 1.35 |
September 13, 2020
|
||||||||||
|
Larry Wilhide
|
||||||||||||||
| 134,680 | 269,360 | (1) | 1.49 |
September 13, 2015
|
||||||||||
| 365,320 | 730,640 | (2) | 1.35 |
September 13, 2020
|
||||||||||
|
Keith McClellan
|
||||||||||||||
| 148,148 | 296,296 | (3) | 1.35 |
September 13, 2020
|
||||||||||
| 51,852 | 103,704 | (4) | 1.35 |
September 13, 2020
|
||||||||||
|
(1)
|
These options vest at a rate of 67,340 shares on each of January 1, 2011, 2012, 2013, 2014 and
|
|
January 2, 2015. This represents the number of options that were granted in 2010 under the
|
|
|
2008 Equity Incentive Plan and that remain unvested as of December 31, 2011.
|
|
|
(2)
|
These options vest at a rate of 182,660 shares on each of January 1, 2011, 2012, 2013, 2014 and
|
|
January 2, 2015. This represents the number of options that were granted in 2010 under the
|
|
|
2008 Equity Incentive Plan and that remain unvested as of December 31, 2011.
|
|
|
(3)
|
These options vest at a rate of 74,074 shares on each of January 1, 2011, 2012, 2013, 2014 and
|
|
January 2, 2015. This represents the number of options that were granted in 2010 under the
|
|
|
2008 Equity Incentive Plan and that remain unvested as of December 31, 2011.
|
|
|
(4)
|
These options vest at a rate of 25,926 shares on each of January 1, 2011, 2012, 2013, 2014 and
|
|
January 2, 2015. This represents the number of options that were granted in 2010 under the
|
|
|
2008 Equity Incentive Plan and that remain unvested as of December 31, 2011.
|
85
Director Compensation
The following table provides information concerning the compensation of our directors for the period January 1, 2011 through December 31, 2011:
|
Name
|
Fees Earned or
Paid in Cash |
Stock Awards
(1)(2) |
Total
|
|||||||||
|
Louis J. Brothers
|
$ | - | $ | - | ||||||||
|
Larry K. Wilhide
|
$ | - | $ | - | $ | - | ||||||
|
Andrew T. Gilinsky
|
$ | 3,049 | $ | 11,436 | $ | 14,485 | ||||||
|
Eugene Breyer
|
$ | 3,049 | $ | 11,436 | $ | 14,485 | ||||||
|
Dr. Victor E. Alessi
|
$ | 3,049 | $ | 11,436 | $ | 14,485 | ||||||
|
Raul A. Fernandez
|
$ | 3,049 | $ | 11,436 | $ | 14,485 | ||||||
|
Richard S. Relac
|
$ | 3,049 | $ | 11,436 | $ | 14,485 | ||||||
|
(1)
|
Reflects the aggregate grant date fair value dollar amount calculated in accordance with ASC 718 related to
|
|
the awards of stock to the directors for their service to the Board. For assumptions used in the
|
|
|
calculation of the amount under ASC 718, see Note 11 of the Notes to Consolidated Financial Statements
|
|
|
for the year ended December 31, 2011 in this registration statement.
|
|
|
(2)
|
The annual award of 12,000 shares of restricted stock was made to each non-employee director on
|
|
September 29, 2011. The shares had a grant date fair value of $0.97 per share. Each award was valued at
|
|
|
$11,436.
|
Each non-employee director receives an annual cash retainer of $3,049 for his services as a director. In addition, each director receives an annual grant of 12,000 shares of restricted stock for his services as a director. The annual stock retainer is restricted for 6 months from the date of issue and will vest on March 29, 2012. All directors are reimbursed for their out-of-pocket expenses incurred in connection with attendance at meetings and other activities relating to the Board.
Indemnification of Directors and Officers
Our bylaws contain the broadest form of indemnification for our officers and directors permitted under Florida law. Our bylaws generally provide as follows:
The Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by, or in the right of the Company) by reason of the fact that he or she is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of any other corporation, partnership, joint venture, trust or other enterprise against expenses (including attorney's fees), judgments, fines, amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding, including any appeal thereof, if he or she acted in good faith in a manner he reasonably believed to be in, or not opposed to the best interests of the Company, and with respect to any criminal action or proceeding, had no reasonable cause to believe that his or her conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of no contenders or its equivalent shall not create, of itself, a presumption that the person did not act in good faith or in a manner which he or she reasonably believed to be in, or not opposed to, the best interests of the Company or, with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful.
To the extent that a director, officer, employee or agent of the Company has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to above, or in any defense of any claim, issue or matter therein, he or she shall be indemnified against expenses, including attorneys fees, actually and reasonably incurred by him in connection therewith.
Any indemnification shall be made only if a determination is made that indemnification of the director, officer, employee or agent is proper in the circumstances because such person has met the applicable standard of conduct set forth above. Such determination shall be made either (1) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (2) by the shareholders who were not parties to such action, suit or proceeding. If neither of the above determinations can occur because the Board of Directors consists of a sole director or the Company is owned by a sole shareholder, which is controlled by the sole officer and director, then the sole officer and director or sole shareholder shall be allowed to make such determination.
Expenses incurred in defending any action, suit or proceeding may be paid in advance of the final disposition of such action, suit or proceeding as authorized in the manner provided above upon receipt of any undertaking by or on behalf of the director, officer, employee or agent to repay such amount if it shall is ultimately determined that such person is not entitled to be indemnified by the Company.
The indemnification provided shall be in addition to the indemnification rights provided pursuant to Chapter 607 of the Florida Statutes, and shall not be deemed exclusive of any other rights to which any person seeking indemnification may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in such person's official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent of the Company and shall inure to the benefit of the heirs, executors and administrators of such a person.
The description of the indemnification rights herein is subject to, and qualified by, the actual indemnification provisions set forth in the Company’s bylaws.
86
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Director and Executive Officer Stock Ownership; Owners of More Than 5%
Under the rules of the SEC, a person beneficially owns the Company’s common stock if the person has the power to vote or dispose of the shares, or if such power may be acquired, by exercising options, warrants or otherwise, within 60 days. The table below shows how much Company common stock is beneficially owned as of December 31, 2011 by our directors, Chief Executive Officer / Chief Financial Officer, and the two other most highly paid executive officers at December 31, 2011, other than the Chief Executive Officer / Chief Financial Officer, and the directors and executive officers as a group. Each person has sole voting power and sole dispositive power with respect to the shares listed unless indicated otherwise. No shares have been pledged as security by the named executive officers, directors, or the directors and executive officers as a group. The following table also shows shareholders who are known to the Company to be a beneficial owner of more than 5% of the Company’s common shares as of December 31, 2011.
|
Name
|
Common Shares Beneficially
Owned |
Common Shares
Issuable Upon Exercise Of Warrants |
Total
|
% of currently
outstanding shares (5) |
% of outstanding
shares fully diluted (6) |
||||||||
|
Directors:
|
|||||||||||||
|
Louis J. Brothers
|
19,404,000
|
(1) (2) (3)
|
19,404,000
|
31.26%
|
29.46%
|
||||||||
|
Larry K. Wilhide
|
19,404,000
|
(1) (2) (4)
|
19,404,000
|
31.26%
|
29.46%
|
||||||||
|
Dr. Victor E. Alessi
|
48,000
|
(1)
|
48,000
|
*
|
*
|
||||||||
|
Raul A. Fernandez
|
48,000
|
(1)
|
48,000
|
*
|
*
|
||||||||
|
Richard S. Relac
|
53,000
|
(1)
|
53,000
|
*
|
*
|
||||||||
|
Andrew T. Gilinsky
|
68,000
|
(1)
|
68,000
|
*
|
*
|
||||||||
|
Eugene Breyer
|
48,000
|
(1)
|
48,000
|
*
|
*
|
||||||||
|
Executive Officers:
|
|||||||||||||
|
Keith McClellan
|
224,000
|
(1) (2)
|
224,000
|
*
|
*
|
||||||||
|
All Directors and Executive Officers as a Group (8 persons)
|
39,297,000
|
(1) (2)
|
39,297,000
|
63.31%
|
59.66%
|
||||||||
|
Security Ownership of
Certain Beneficial Owners: |
|||||||||||||
|
MKM Opportunity
Master Fund, Ltd. (7) |
3,351,060
|
(8)
|
2,728,574
|
(9)
|
6,079,634
|
5.40%
|
9.23%
|
||||||
|
*
|
Denotes beneficial ownership less than 1% of the Company's Common Stock
|
|
|
(1)
|
Includes restricted shares as follows: Mr. Brothers 24,000, Mr. Wilhide 24,000; Mr. Alessi 12,000;
|
|
|
Mr. Fernandez 12,000; Mr. Relac 12,000; Mr. Gilinsky 12,000; Mr. Breyer 12,000;
|
||
|
Mr. McClellan 12,000; and all directors and executive officers as a group 120,000. Unless
|
||
|
otherwise indicated in the other footnotes below, the restricted stockholders have sole voting
|
||
|
power with respect to the restricted shares but do not have sole or shared dispositive power
|
||
|
until the restrictive shares vest.
|
||
|
(2)
|
Includes options that are exercisable on or within 60 days of December 21, 2011 as follows:
|
|
|
Mr. Brothers 250,000; Mr. Wilhide 250,000; Mr. McClellan 100,000; and all directors and
|
||
|
executive officers as a group 600,000.
|
||
|
(3)
|
Mr. Brothers and his wife own all shares as tenants in the entirety. Mr. Brothers and his wife
|
|
|
share voting power and dispositive power with respect to all shares other than restricted
|
||
|
shares for which they share voting power but do not have shared dispositive power until
|
||
|
the restricted shares vest.
|
||
|
(4)
|
Mr. Wilhide and his wife own all shares as tenants in the entirety. Mr. Wilhide and his wife
|
|
|
share voting power and dispositive power with respect to all shares other than restricted
|
||
|
shares for which they share voting power but do not have shared dispositive power until
|
||
|
the restricted shares vest.
|
||
|
(5)
|
Calculated with respect to each beneficial owner in accordance with Exchange Act Rule 13d-3.
|
|
|
(6)
|
Calculated assuming the exercise of all warrants and options held by all beneficial owners.
|
|
|
(7)
|
The address of MKM Opportunity Master Fund, Ltd.'s ("MKM") address is c/o MKM Capital Advisors, LLC,
|
|
|
420 Lexington Avenue, Suite 1718, New York, New York 10170.
|
||
|
(8)
|
According to the Schedule 13D filed October 25, 2010, MKM Capital Advisors, LLC (“MKM Capital”)
|
|
|
serves as investment manager to MKM Opportunity. David Skriloff is the managing member of
|
||
|
MKM Capital and the portfolio manager of MKM Opportunity (together, MKM Opportunity, MKM
|
||
|
Capital and David Skriloff are “MKM”).
|
||
|
(9)
|
MKM Opportunity holds certain warrants for the Company’s shares. According to the Schedule 13D
|
|
|
filed October 25, 2010, MKM Opportunity holds 3,351,060 shares and warrants for an additional
|
||
|
2,082,571 shares issuable upon exercise of the warrants on an as converted basis; and MKM
|
||
|
Opportunity, MKM Capital and David Skriloff share voting power and dispositive power with respect
|
||
|
to 5,379,631 shares. Our records indicate, however, that MKM holds warrants for 2,728,574 shares,
|
||
|
rather than the 2,082,571 disclosed in the Schedule 13D, which we have reflected in the above table.
|
||
|
All warrants held by MKM Opportunity include a limitation on exercise, which provides that at no
|
||
|
time will MKM Opportunity be entitled to exercise any number of warrants that would result in the
|
||
|
beneficial ownership by MKM Opportunity of more than 9.99% of the outstanding shares of the
|
||
|
Company's common stock.
|
87
Change in Control Arrangements
We are not aware of any arrangements that could result in a change of control.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Director Independence
Our independent directors are Messrs. Fernandez and Relac and Dr. Alessi. Our definition of “independent” is that of NASDAQ Marketplace Rule 5605(a)(2). However, the Company’s securities are not listed on any platform in the NASDAQ Stock Market.
Transactions with Related Persons
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 December 31, 2011 and 2010, the Company incurred expenses for accounting services of $100,110 and $58,125, respectively, to Clairmont, Paciello, & Co. P.C., 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.
The Company paid $50,000 in 2011, 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, Jr., the son of Louis Brothers, Sr., the Company’s president and chief executive officer, was paid $26,000 and $24,000 for consulting services in 2011 and 2010, respectively.
Mr. Richard Relac, a director of the Company, in the past has been compensated by the Company for translating services unrelated to his position as a director. In 2011 and 2010, the Company paid Mr. Relac $6,489 and $3,192, respectively, for such translating services. Mr. Eugene Breyer, a director of the Company, has provided consulting services to the Company on human resource matters but has not been and does not expect to be compensated for such services.
In 2011 and 2010, the Company paid Rosemary A. Brothers, the wife of director Louis J. Brothers, $48,125 and $42,275, respectively, for administrative services. Rosemary A. Brothers is, as of the filing date of this report, one of four of the Company’s administrative employee.
88
Transactions with Promoters
On July 6, 2006, Quetzal Capital 1, Inc., a Florida corporation (“QC1”) entered into a share exchange agreement with VFDS’ predecessor Pennsylvania corporation. Under the share exchange agreement, QC1 issued 40,000,000 shares of its common stock to VFDS shareholders for the acquisition of all of the outstanding capital stock of VFDS. For financial accounting purposes, the exchange of stock was treated as a recapitalization of VFDS with the former shareholders of QC1 retaining 5,000,000 shares (or 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 VFDS’ board of directors and a majority of its shareholders. QC1 changed its name to Valley Forge Composite Technologies, Inc., a Florida corporation, and is referred to throughout this report as the “Company.” The three shareholders of QC1 were the same shareholders of Coast To Coast Equity Group, Inc., which entered into a consulting agreement with the newly merged Company.
The Company had a consulting contract with Coast To Coast Equity Group, Inc. The contract is for a two-year period. The full text of the contract is attached to the Company’s Form 8-K filed on July 11, 2006 and is incorporated herein by reference. The terms of the contract generally provide that Coast To Coast Equity Group, Inc. will not be paid cash but will be paid three million warrants to purchase up to three million shares of Company common stock. Those warrants have now expired.
Coast To Coast Equity Group, Inc., Charles, J. Scimeca, Tony N. Frudakis, and George Frudakis were previously protected from dilution of their percentage ownership of the Company by certain non-dilution rights. The non-dilution rights, by the terms of the registration rights agreement (attached hereto as Exhibit 4.1), 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 effected.
On August 11, 2006, the Company issued a convertible debenture to CTCEG in the amount of $42,000 in exchange for cash received. The interest rate is 4% per annum and runs from August 11, 2006. The sale was conducted in a private transaction exempt from registration pursuant to pursuant to Sections 4(2) or 4(6) of the Securities Act.
On August 22, 2007, the Company entered into an agreement with CTCEG to sell 333,333 shares of common stock at $1.50 per share on demand of the Company. The Company established a price protection provision relating to the selling price of common stock per the agreement. The provision states that parties to the agreement are entitled to receive additional stock if the Company sells shares of stock for less than $1.50 per share of common stock to an investor prior to the time limitations specified which is one (1) year from the effective date of the agreement. As of December 31, 2007, the Company had sold 271,333 shares for $407,000. The Company has the right to sell an additional 62,000 shares with a value of $93,000 to CTCEG by August 21, 2008.
For a transaction on February 15, 2008, the Company on August 8, 2008 issued CTCEG 200,000 shares of restricted common stock to reimburse it for its assignment of 200,000 registered Class A warrants to Debra Elenson without compensation from Ms. Elenson. On or about February 15, 2008, Ms. Elenson exercised the warrants. The issue was conducted in a private transaction exempt from registration pursuant to pursuant to Sections 4(2) or 4(6) of the Securities Act.
For a May 8, 2008 transaction, the Company on August 8, 2008 issued 1,200,000 shares of restricted common stock to reimburse CTCEG’s principals Charles Scimeca and Tony Frudakis for their sale of 1,200,000 shares of registered Company stock to Daniel Katz at a discount to market to induce Mr. Katz to enter an investment banking agreement. The Company issued an additional 360,000 shares to CTCEG to compensate it for its federal tax liability. The issue was conducted in a private transaction exempt from registration pursuant to pursuant to Sections 4(2) or 4(6) of the Securities Act.
89
ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES.
Audit Fees
We paid Mountjoy Chilton Medley, LLP (“MCM”) $62,000 and $52,000 for auditing our financial statements and review of our 10-K for the years ended December 31, 2011 and 2010, respectively.
In 2011, we paid MCM $49,500 for the review of our three quarterly financial statements, reviews of our forms 10-Q, including services related to restatement of prior year balances in our Form 10-Q for the period ended September 30, 2011, and services that are normally provided by the accountant in connection with non year end statutory and regulatory filings in 2011.
In 2010 we paid R.R. Hawkins & Associates International, P.C. (“Hawkins”) $16,300 for the review of two of our quarterly financial statements, review of our Forms 10-Q and services that are normally provided by the accountant in connection with non year end statutory and regulatory filings on engagements in 2010.
In 2010 we paid MCM $6,500 for the review of our September 30, 2010 quarterly financial statements, review of our Form 10-Q and services that are normally provided by the accountant in connection with non year end statutory and regulatory filings on engagements in 2010.
Audit Related Fees
In 2011, we paid MCM $32,100 for audit related services associated with the Company’s response to an SEC comment letter; services associated with review and issuance of consent related to our Form S-1 Registration Statement.
In 2011, we paid Hawkins $3,000 for audit related services related to issuance of consent for our Form S-1 Registration Statement.
In 2010, we paid Hawkins $1,750 for audit related services related to issuance of consent for our 2010 Form 10-K.
Tax Fees
No fees were paid to Hawkins or MCM for taxes.
All Other Fees
No fees were paid to Hawkins or MCM for other services.
90
PART IV
ITEM 15 EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
|
INDEX OF EXHIBITS
|
||
|
Exhibit
No. |
Description
|
|
|
2.1
|
Share Exchange Agreement Between Quetzal Capital 1, Inc. and the Shareholders of Valley Forge Composite Technologies, Inc., dated July 6, 2006, incorporated by reference to Exhibit 2.1 to the Company’s current report on Form 8-K filed on July 11, 2006.
|
|
|
3.1
|
Articles of Amendment by Quetzal Capital 1, Inc., incorporated by reference to Exhibit 3 to the Company’s current report on Form 8-K filed on July 11, 2006.
|
|
|
3.2
|
Bylaws of Valley Forge Composite Technologies, Inc. incorporated by reference to Exhibit 3.2 to the Company’s annual report on Form 10-K for December 31, 2009 filed on April 14, 2010
|
|
|
4.1
|
Registration Rights Agreement, dated July 6, 2006, incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed on July 11, 2006.
|
|
|
4.2
|
Securities Purchase Agreement dated as of July 3, 2008 between Valley Forge Composite Technologies, Inc. and various buyers, incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed on July 8, 2008
|
|
|
4.3
|
Form of Senior Convertible Note, incorporated by reference to Exhibit 10.2 to the Company’s current report on Form 8-K filed on July 8, 2008
|
|
|
4.4
|
Form of Warrant, incorporated by reference to Exhibit 10.3 to the Company’s current report on Form 8-K filed on July 8, 2008.
|
|
|
4.5
|
Securities Purchase Agreement dated as of September 29, 2008, between Valley Forge Composite Technologies, Inc. and various buyers, incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed on September 30, 2008.
|
|
|
4.6
|
Form of Senior Convertible Note, incorporated by reference to Exhibit 10.2 to the Company’s current report on Form 8-K filed on September 30, 2008.
|
|
|
4.7
|
Form of Warrant, incorporated by reference to Exhibit 10.3 to the Company’s current report on Form 8-K filed on September 30, 2008.
|
|
|
4.8
|
Securities Purchase Agreement dated as of May 27, 2009, between Valley Forge Composite Technologies, Inc. and various buyers, incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed on June 4, 2009.
|
|
|
4.9
|
Form of Warrant, incorporated by reference to Exhibit 10.2 to the Company’s current report on Form 8-K filed on June 4, 2009.
|
|
|
4.10
|
Securities Purchase Agreement dated as of August 10, 2009 between Valley Forge Composite Technologies, Inc. and various buyers, incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed on August 17, 2009.
|
|
|
4.11
|
Form of Warrant, incorporated by referenced to Exhibit 10.2 to the Company’s current report on Form 8-K filed on August 17, 2009.
|
|
|
10.1
|
Cooperative Research and Development Agreement between the Regents of the University of California and Valley Forge Composite Technologies, Inc., dated April 17, 2003. incorporated by reference to Exhibit 10.1 to the Company’s annual report on Form 10-K for December 31, 2009 filed on April 14, 2010
|
|
|
21.1
|
List of Subsidiaries, incorporated by reference to Exhibit 21.1 to the Company’s Annual Report on Form 10-K filed on April 15, 2009
|
|
|
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
|
|
** FILED HEREWITH
91
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, 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: March, 30, 2012
|
By:
|
/s/ Louis J. Brothers
|
|
|
Louis J. Brothers
|
|||
|
President, Chief Executive Officer,
Chief Financial Officer, and Chairman of the Board
(Principal Executive Officer, Principal Financial and
Accounting Officer)
|
|||
92
|
INDEX OF EXHIBITS
|
|
|
Exhibit
No.
|
Description
|
|
31.1**
|
13a-14(a)-15d-14(a) Certification - Louis J Brothers
|
|
31.2**
|
13a-14(a)-15d-14(a) Certification - Louis J Brothers
|
|
32.1**
|
18 U.S.C. § 1350 Certification - Louis J Brothers
|
|
32.2**
|
18 U.S.C. § 1350 Certification - Louis J Brothers
|
**
Filed herewith.