Attached files

file filename
EX-5.1 - EXHIBIT 5.1 - VALLEY FORGE COMPOSITE TECHNOLOGIES, INC.ex5_1.htm
EX-10.6 - EXHIBIT 10.6 - VALLEY FORGE COMPOSITE TECHNOLOGIES, INC.ex10_6.htm
EX-23.1 - EXHIBIT 23.1 - VALLEY FORGE COMPOSITE TECHNOLOGIES, INC.ex23_1.htm
EX-10.7 - EXHIBIT 10.7 - VALLEY FORGE COMPOSITE TECHNOLOGIES, INC.ex10_7.htm
EX-4.12 - EXHIBIT 4.12 - VALLEY FORGE COMPOSITE TECHNOLOGIES, INC.ex4_12.htm
EX-4.13 - EXHIBIT 4.13 - VALLEY FORGE COMPOSITE TECHNOLOGIES, INC.ex4_13.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
AMENDMENT NO. 1
TO
FORM S-1
 
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

VALLEY FORGE COMPOSITE TECHNOLOGIES, INC.
(Exact Name of Registrant As Specified in its Charter)

Florida
3812
20-3061892
(State or Other Jurisdiction of Incorporation or Organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer Identification No.)

River Center I
50 East River Center Boulevard, Suite 820
Covington, KY 41011
Telephone: (859) 581-5111

(Address and Telephone Number of Principal Executive Offices)

Louis J. Brothers
Chief Executive Officer
River Center I
50 East River Center Boulevard, Suite 820
Covington, KY 41011
Telephone: (859) 581-5111

(Name, Address and Telephone Number of Agent for Service)

Copies to:

John C. Rodney, Esq.
Rachel L. Smydo, Esq.
Thorp Reed & Armstrong, LLP
One Oxford Centre, 14th Floor
301 Grant Street
Pittsburgh, PA  15219
Telephone: (412) 394-7751
Facsimile: (412) 394-2555

Approximate Date of Proposed Sale to the Public:  From time to time after the effective date of this registration statement, as determined by the selling shareholder.
 
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  x
 
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 


 
 

 
 
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company x

CALCULATION OF REGISTRATION FEE
 
Title of Each Class of
Securities To Be
Registered
Amount to be
Registered(1)(3)
Proposed
Maximum Offering
Price per Share(2)
Proposed
Maximum
Aggregate Offering
Price(2)
Amount of
Registration Fee(4)
Common stock, $0.001 par value per share
6,514,154
$0.3075
$2,003,102
$230
 
(1)          Pursuant to Rule 416 under the Securities Act, the shares being registered hereunder include such indeterminate number of shares of common stock as may be issuable with respect to the shares being registered hereunder as a result of stock splits, stock dividends or similar transactions.

(2)          Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(c) under the Securities Act. The price per share and aggregate offering price are based on the average of the high and low sales prices of the registrant’s common stock on July 30, 2012, as reported on the OTCQB tier of the OTC Markets.
 
(3)           Pursuant to a purchase agreement, Lincoln Park Capital Fund, LLC, or Lincoln Park, has purchased 300,000 shares of the registrant’s common stock, for total consideration of $250,000 and, in consideration for entering into the purchase agreement, the registrant issued to Lincoln Park 314,154 shares of common stock (all included in this offering) as initial commitment shares. At a price of $0.34 per share (the closing price for a share of the registrant’s common stock on July 30, 2012), and ignoring any restrictions on the number of shares Lincoln Park can own at any time and on the registrant’s ability to sell shares to Lincoln Park, the registrant could sell to Lincoln Park 58,823,529 shares of common stock up to an additional $20,000,000 in available proceeds under the purchase agreement.  Lincoln Park would then be able to sell these shares at any time.  However, as described in the “Prospectus Summary” and in “The Lincoln Park Transaction” in this registration statement, the registrant’s ability to sell shares to Lincoln Park is subject to a number of restrictions.  Although the purchase agreement provides that we may sell up to $20,250,000 of our common stock to Lincoln Park, we are only registering 6,514,154 shares to be purchased thereunder, which may or may not cover all such shares purchased by Lincoln Park under the Purchase Agreement, depending on the purchase price per share.

(4)           A registration fee of $616 was previously paid by the registrant.

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall hereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, or until the registration statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine.
 
 
 

 

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission becomes effective. This prospectus is not an offer to sell these securities and it is not soliciting offers to buy these securities in any state where the offer or sale is not permitted.
 
PRELIMINARY PROSPECTUS
SUBJECT TO COMPLETION
AUGUST __, 2012
 
6,514,154 Shares
 
 
Common Stock
 
This prospectus relates to the sale of up to 6,514,154 shares of our common stock which may be offered by the selling shareholder, Lincoln Park Capital Fund, LLC, or Lincoln Park, from time to time. The shares of common stock being offered by the selling shareholder are issuable pursuant to the Lincoln Park Purchase Agreement, which we refer to in this prospectus as the Purchase Agreement. Please refer to the section of this prospectus entitled “The Lincoln Park Transaction” for a description of the Purchase Agreement and the section entitled “Selling Shareholder” for additional information. Such registration does not mean that Lincoln Park will actually offer or sell any of these shares. We will not receive any proceeds from the sales of shares of our common stock by the selling shareholder; however, we may receive proceeds of up to $20,250,000 under the Purchase Agreement.
 
Our common stock is currently quoted on the OTCQB tier of the OTC Markets under the symbol “VLYF”.  On July 30, 2012, the last reported sale price of our common stock was $0.34 per share.
 
Investing in our securities involves a high degree of risk.  See “Risk Factors” beginning on page 12 of this prospectus for a discussion of information that should be considered in connection with an investment in our securities.
 
The selling shareholder is an “underwriter” within the meaning of the Securities Act of 1933, as amended (the “Securities Act”). The selling shareholder is offering these shares of common stock and may sell all or a portion of these shares from time to time in market transactions, in negotiated transactions or otherwise, and at prices and on terms that will be determined by the then prevailing market price or at negotiated prices directly or through a broker or brokers, who may act as agent or as principal or by a combination of such methods of sale. For additional information on the methods of sale, you should refer to the section entitled “Plan of Distribution”.
 
Neither the Securities and Exchange Commission nor any state securities regulators have approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
The date of this prospectus is ________ ___, 2012.
 
 
2

 
 
TABLE OF CONTENTS
 
PROSPECTUS SUMMARY
6
   
SUMMARY FINANCIAL DATA
10
   
RISK FACTORS
12
   
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
22
   
USE OF PROCEEDS
23
   
CAPITALIZATION
24
   
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
25
   
DILUTION
27
   
SELECTED FINANCIAL DATA
28
   
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
30
   
BUSINESS
39
   
MANAGEMENT
49
   
EXECUTIVE COMPENSATION
53
   
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
57
   
PRINCIPAL SHAREHOLDERS
59
   
THE LINCOLN PARK TRANSACTION
61
   
SELLING SHAREHOLDER
64
   
DESCRIPTION OF SECURITIES
65
   
PLAN OF DISTRIBUTION
67
   
LEGAL MATTERS
68
   
EXPERTS
68
   
WHERE YOU CAN FIND ADDITIONAL INFORMATION
69
   
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITY
70
   
FINANCIAL STATEMENTS
F-1
   
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
F-2
  
 
3

 
 
   Consolidated Financial Statements:
 
   
BALANCE SHEETS – DECEMBER 31, 2011 AND 2010
F-3
   
STATEMENTS OF OPERATIONS – FOR THE FISCAL YEARS ENDED DECEMBER 31, 2011 AND 2010
F-4
   
STATEMENTS OF SHAREHOLDERS' EQUITY – FOR THE FISCAL YEARS ENDED DECEMBER 31, 2011 AND 2010
F-5
   
STATEMENTS OF CASH FLOWS - FOR THE FISCAL YEARS ENDED DECEMBER 31, 2011 AND 2010
F-6
   
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-7
   
   Interim Consolidated Unaudited Financial Statements:
 
   
BALANCE SHEETS – MARCH 31, 2012 (UNAUDITED) AND DECEMBER 31, 2011
F-29
   
STATEMENTS OF OPERATIONS – FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011 (UNAUDITED)
F-30
   
STATEMENTS OF CASH FLOWS – FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011 (UNAUDITED)
F-31
   
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
F-32
   
PROSPECTUS - ________________, 2012
 
   
INFORMATION NOT REQUIRED IN PROSPECTUS
II-1
   
SIGNATURES
II-8
 
 
 
 
 
4

 
 
You should rely only on the information contained in this prospectus. We have not, and the selling shareholder has not, authorized any person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. This prospectus is not an offer to sell, nor is the selling shareholder seeking an offer to buy, securities in any state where the offer or solicitation is not permitted. The information contained in this prospectus is complete and accurate as of the date on the front cover of this prospectus, but information may have changed since that date. We are responsible for updating this prospectus to ensure that all material information is included and will update this prospectus to the extent required by law.
 
This prospectus includes statistical and other industry and market data that we obtained from industry publications and research, surveys and studies conducted by third parties. Industry publications and third-party research, surveys and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. While we believe that these industry publications and third-party research, surveys and studies are reliable, we have not independently verified such data and we do not make any representation as to the accuracy of the information.
 
 
 
 
 
 
 
 
5

 
 
PROSPECTUS SUMMARY
 
The items in the following summary are described in more detail later in this prospectus. This summary does not contain all of the information you should consider. Before investing in our securities, you should read the entire prospectus carefully, including the “Risk Factors” beginning on page 12 and the financial statements and related notes beginning on page F-1.
 
About Valley Forge Composite Technologies, Inc.
 
Valley Forge Composite Technologies, Inc., a Florida corporation (the “Company”), has positioned itself to develop and acquire advanced technologies.  Between 1996 and 2012, the Company won numerous contracts to produce various momentum wheels, momentum wheel components and other mechanical devices for special applications, some in aerospace.  Historically, and in 2012, all of the Company’s sales have been derived from these momentum wheels, momentum wheel components 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.  

The Company’s net income for the year ended December 31, 2011 was $426,756.  While the Company had net income for 2011, it has experienced net losses in prior years.  The Company also experienced a net loss of $259,007 for the fiscal period ended March 31, 2012.
 
THOR-LVX
 
Overview
 
Presently, and for the last nearly ten years, the Company has focused on the development and commercialization of the THOR-LVX Advanced Explosives Detection System and prepared for the manufacturing and distribution of THOR in the United States and other countries.
 
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.
 
 
6

 
 
Recent Developments
 
On May 30, 2012, the Company announced that it had reached an agreement in principle with Symmetry Group, LLC (“Symmetry”), a private U.S. based company that is negotiating an agreement with a Latin American government for the first commercial development, delivery and maintenance of a THOR LVX photonuclear detection system. Under the proposed terms of the agreement, the agreement would be for a five-year term, with the Company to receive an initial payment for the system and ongoing monthly revenue on a per-scan basis. The Company estimates that the total value of the agreement, including ongoing fees on a per-scan basis, would exceed $5 million, with revenue to be collected as phases of the project are completed. The agreement has not been finalized.  Management is in discussions with several potential partners to help finance the agreement.  No definitive agreements have been entered into and we can make no assurances that there will be definitive agreements in the future.  The Company has funded $300,000 for the posting of a bond, which is a step necessary to signing the agreement.  Symmetry executed an unsecured promissory note evidencing the $300,000 loan the Company made to Symmetry.  Under the terms of the note, which bears no interest, Symmetry must repay the loan in full on or before May 29, 2013.  

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 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.
 
On June 28, 2011, the Company announced that it has agreed to participate in the creation of a company in Troitsk, Russian Federation. The exclusive purpose of this company is to conduct research activities focused on the photonuclear detection system that is a major subcomponent of THOR.  Aspects of the research may include expanding the photonuclear 'fingerprint' database of explosive and narcotic compounds, and investigating additional possibilities to apply this technology. All work will be under the research category "Nuclear Technologies".  Initially, the Company announced it would own 50% of the new venture, with the remaining 50% owned by the Russian scientists and engineers who worked on the original CRADA project.  However, the Company has re-examined this structure in light of potentially significant transaction and other costs associated with 50% ownership of a Russian entity.  No decisions have been made concerning how the Company will participate in the Troitsk based entity.
 
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 has reviewed the results of the first work order and is analyzing whether to issue a second work order and if so, what will be contained therein.
 
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 any 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.
 
 
7

 
 
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 March 31, 2012 balance sheet as assets in the amount of $193,465, net of accumulated depreciation and inventory allowance. If we decide not to continue with the existing technology but to utilize a new system that we have developed, then it will be less likely that we will be able to sell our existing ODIN machines. In that case we may be required to write down the carrying value of those existing machines on our financial statements. In addition, in light of all this, the Board of Directors has discussed whether or not it makes sense to continue to pursue ODIN, particularly because the effort to continue ODIN may detract from our management's focus on THOR and our growing aerospace business. The Board of Directors has not yet made a decision on this issue.
  
Corporate Information
 
Our principal executive office is located at River Center I, 50 East River Center Boulevard, Suite 820, Covington, Kentucky 41011, and our telephone number is (859) 581-5111.  Our website address is www.vlyf.com.  Information contained in, or accessible through, our website does not constitute a part of, and is not incorporated into, this prospectus.  Also, this prospectus includes the names of various government agencies and the trade names of other companies.  Unless specifically stated otherwise, the use or display by us of such other parties’ names and trade names in this prospectus is not intended to and does not imply a relationship with, or endorsement or sponsorship of us by, any of these other parties.
 
The Offering
 
Common stock outstanding prior to the offering (1)
62,416,048 shares, including the 300,000 initial purchase shares and the 314,154 commitment shares already issued to Lincoln Park under the Purchase Agreement and included in this offering.
 
Common stock offered by the selling shareholder
6,514,154 shares, consisting of the 300,000 initial purchase shares and the 314,154 commitment shares already issued to Lincoln Park and the remaining shares to be purchased from time to time under the Purchase Agreement.
 
Common stock to be outstanding after giving effect to the issuance of 6,514,154 shares to Lincoln Park under the Purchase Agreement
 
68,316,048
Use of proceeds
We will not receive any proceeds from the sale of the shares of common stock by Lincoln Park. However, we may receive up to $20,250,000 from sales of shares under the Purchase Agreement. Any proceeds that we receive from sales to Lincoln Park under the Purchase Agreement will be used for working capital and general corporate purposes. See “Use of Proceeds”.
 
Over-the-Counter Bulletin Board symbol
VLYF
 
Risk factors
This investment involves a high degree of risk. See “Risk Factors” for a discussion of factors you should consider carefully before making an investment decision.
 
(1)        The number of shares of our common stock set forth above is based on 62,416,048 shares of common stock outstanding as of July 30, 2012, and excludes:
 
·        Options to purchase an aggregate of 4,050,000 shares of our common stock, of which 1,940,000 have vested as of March 31, 2012, at a weighted average exercise price of $1.38 per share;
 
·        Warrants to purchase an aggregate of 2,228,574 shares of our common stock, at a weighted average exercise price of $0.20 per share;
 
·        Warrants to purchase an aggregate of 410,000 shares of our common stock, at a weighted average exercise price of $1.09 per share, pursuant to an agreement with Wharton Capital Partners, Ltd. (“Wharton”), dated August 24, 2011; and
 
·        Warrants to purchase an aggregate of 100,000 shares of our common stock, at a weighted average exercise price of $0.60 per share, pursuant to an agreement with Hayden Investor Relations, dated February 16, 2012.
 
 
 
8

 
 
On October 5, 2011, we executed a Purchase Agreement and a Registration Rights Agreement with the selling shareholder, Lincoln Park Capital Fund, LLC, or Lincoln Park, pursuant to which Lincoln Park has purchased 300,000 shares of our common stock, for total consideration of $250,000.  Under the Purchase Agreement, we have the right to sell to Lincoln Park up to an additional $20,000,000 of our common stock at our option as described below.
 
Pursuant to the Registration Rights Agreement, we are filing this registration statement and prospectus with the SEC covering the shares that may be issued to Lincoln Park under the Purchase Agreement. We do not have the right to commence any sales of our shares to Lincoln Park until the SEC has declared effective the registration statement. Thereafter, until April 1, 2014, and subject to certain terms and conditions, we have the right to direct Lincoln Park to make periodic purchases of up to $500,000 of our common stock per sale depending on certain conditions as set forth in the Purchase Agreement as often as every three business days up to the aggregate commitment of $20,250,000. The purchase price of the shares will be based on the market prices of our shares immediately prior to the time of sale as computed under the Purchase Agreement without any fixed discount.  Under the Purchase Agreement, the purchase price will be equal to the lesser of (i) the lowest sale price of our common stock on the purchase date; or (ii) the arithmetic average of the three lowest closing sale prices for our common stock during the twelve consecutive trading days ending on the trading day immediately preceding the purchase date.  In no event, however, will Lincoln Park be obligated to purchase shares of our common stock under the Purchase Agreement at a price of less than $0.50 per share. We may, at any time, and in our sole discretion, terminate the Purchase Agreement without fee, penalty or cost upon notice to Lincoln Park. Lincoln Park may not assign or transfer its rights and obligations under the Purchase Agreement.  Upon signing the Purchase Agreement, we issued 314,154 shares of our common stock to Lincoln Park for no dollar consideration as a commitment fee for entering into the Purchase Agreement (which shares are included in this offering).
 
Although the Purchase Agreement provides that we may sell up to $20,250,000 of our common stock to Lincoln Park, we are only registering 6,514,154 shares to be purchased thereunder, which may or may not cover all such shares purchased by Lincoln Park under the Purchase Agreement, depending on the purchase price per share.
 
Of the 6,514,154 shares offered under this prospectus:
 
 
·
300,000 shares were already issued to Lincoln Park for $250,000 upon execution of the Purchase Agreement; and
 
 
·
314,154 shares were already issued to Lincoln Park as a commitment fee for entering into the Purchase Agreement; and
 
 
·
The remainder represents shares we may sell to Lincoln Park under the Purchase Agreement.
 
Except as otherwise indicated herein, all information in this prospectus, including the number of shares that will be outstanding after this offering, assumes or gives effect to no exercise of options or warrants outstanding on the date of this prospectus or in the future, except as specifically set forth herein.
 
As of July 30, 2012, there were 62,416,048 shares outstanding, of which 23,608,048 shares were held by non-affiliates. If all of the 6,514,154 shares offered by Lincoln Park were issued and outstanding as of the date hereof, such shares would represent 9.54% of the total common stock outstanding, or 22.08% of the non-affiliates’ shares outstanding. The number of shares ultimately offered for sale by Lincoln Park is dependent upon the number of shares that we sell to Lincoln Park under the Purchase Agreement. If we elect to issue more than the 6,514,154 shares offered under this prospectus, which we have the right but not the obligation to do, we must first register under the Securities Act the resale by Lincoln Park of any additional shares we may elect to sell to Lincoln Park before we can sell such additional shares.
 
 
9

 
 
SUMMARY FINANCIAL DATA
 
The following tables summarize our financial data.  We have derived the following summary of our statement of operations data for the years ended December 31, 2011 and 2010 from our audited financial statements appearing later in this prospectus. We have derived the following summary of our statement of operations data for the three months ended March 31, 2012 and 2011 and balance sheet data as of March 31, 2012 from our unaudited financial statements appearing later in this prospectus.  Our historical results are not necessarily indicative of the results that may be expected in the future. You should read the summary of our financial data set forth below together with our financial statements and the related notes to those statements, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing later in this prospectus.

   
Years Ended
   
Three Months Ended
 
   
December 31,
   
March 31,
 
   
2011
   
2010
   
2012
   
2011
 
               
(unaudited)
   
(unaudited)
 
                         
Statement of Operations Data:
                       
                         
NET SALES
 
$
14,992,867
   
$
18,675,269
   
$
4,351,127
   
$
6,417,936
 
                                 
COST OF SALES
   
11,679,112
     
16,077,631
     
3,893,434
     
5,103,379
 
                                 
GROSS PROFIT
   
3,313,755
     
2,597,638
     
457,693
     
1,314,557
 
                                 
COSTS AND EXPENSES
                               
  Selling and administrative
   
1,624,006
     
1,596,780
     
484,339
     
425,530
 
  Share based payments
   
945,619
     
1,864,279
     
238,201
     
204,956
 
                                 
INCOME (LOSS) FROM OPERATIONS
   
744,130
     
(863,421
)
   
(264,847)
     
684,071
 
                                 
OTHER (EXPENSE) INCOME
   
(297,374
)
   
(613,229
)
   
5,840
     
3,869
 
                                 
NET INCOME (LOSS) BEFORE TAXES
   
446,756
     
(1,476,650
)
   
(259,007
)
   
687,940
 
                                 
INCOME TAXES
   
20,000
     
-
     
-
     
-
 
                                 
NET INCOME (LOSS)
   
426,756
     
(1,476,650
)
   
(259,007
)
   
687,940
 
                                 
OTHER COMPREHENSIVE (LOSS) GAIN
   
(6,782
)
   
(4,379
   
6,879
     
(8
                                 
COMPREHENSIVE INCOME (LOSS)
 
$
419,974
   
$
(1,481,029
)
 
$
(252,128
)
 
$
687,932
 
                                 
Income (loss) per share
                 
$
           
  Basic
 
0.01
   
$
(0.02) 
   
(0.00
 
$
0.01
 
  Diluted
 
$
0.01
                   
$
0.01
 
                                 
Weighted Average Common Shares Outstanding:
                               
    Basic
   
61,500,794
     
59,281,322
     
62,346,991
     
61,320,774
 
    Diluted
   
63,778,097
                     
63,629,568
 

 
10

 
 
   
As of
 
Balance Sheet Data:
 
March 31,
 
   
2012
 
   
(unaudited)
 
Current Assets
 
$
7,289,349
 
Property and equipment - net
   
93,850
 
Other assets
   
5,535
 
Deferred equity offering costs, net     658,262  
Intangible assets - net    
38,910
 
         
TOTAL ASSETS
 
$
8,085,906
 
         
TOTAL LIABILITIES
 
$
4,860,446
 
         
TOTAL STOCKHOLDERS' EQUITY
   
3,225,460
 
         
TOTAL LIABILITIES AND STOCKHOLDERS'
       
EQUITY
 
$
8,085,906
 
 
 
 
 
 
 
 
 
11

 
 
RISK FACTORS
 
Before you make a decision to invest in our securities, you should consider carefully the risks described below, together with other information in this prospectus.  If any of the following events actually occur, our business, operating results, prospects or financial condition could be materially and adversely affected.  This could cause the trading price of our common stock to decline and you may lose all or part of your investment.  The risks described below are not the only ones that we face.  Additional risks not presently known to us or that we currently deem immaterial may also significantly impair our business operations and could result in a complete loss of your investment.
 
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.

· Although the Company had comprehensive income of $419,974 for the year ended December 31, 2011, it had a net loss of $1,476,650 and $2,038,623 for the years ended December 31, 2010 and 2009, respectively.  The Company also had a net loss of $259,007 for the fiscal period ended March 31, 2012.  The attainment of sustainable profitability and positive cash flow from operations is dependent on certain future events.  The accompanying financial statements assume the Company will continue as a going concern.  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.

· Until 2009, the Company had never earned substantial operating revenue. We have been dependent on equity and debt financing to pay operating costs and to cover operating losses.

· The auditors’ reports for our December 31, 2010, 2009, 2008 and 2007 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
 
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.

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.
 
 
12

 
 
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,” which 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.
 
Because our sales of Aerospace Products are concentrated among a few customers, our sales levels could dramatically drop on short or no notice.

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.

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.
 
 
13

 
 
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.
  
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, 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 until April 1, 2014, once the registration statement of which this prospectus forms a part 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 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.

We are registering the resale of 6,514,154 shares by Lincoln Park pursuant to this prospectus. In the event we elect to issue more than the 6,514,154 shares offered hereby, we would be required to file a new registration statement and have it declared effective by the SEC. If obtaining sufficient funding from Lincoln Park does not occur or is prohibitively dilutive, we will need to secure another source of funding in order to satisfy our working capital needs. Should the financing we require to sustain our working capital needs be unavailable or prohibitively expensive when we require it, the consequences could be a material adverse effect on our business, operating results, financial condition and prospects.
 
 
14

 
 
Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed elsewhere in this prospectus. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect.

Additional financing may not be available to us, due to, among other things, our Company not having a sufficient credit history, income stream, profit level, asset base eligible to be collateralized, or market for its securities. If we raise additional funds by issuing equity or convertible debt securities, the percentage ownership of our existing shareholders may be reduced, and these securities may have rights superior to those of our common stock. If adequate funds are not available to satisfy either short-term or long-term capital requirements, or if planned revenues are not generated, we may be required to substantially limit our operations.         
 
We may not be able to access the full amounts available under the Purchase Agreement, which could prevent us from accessing the capital we need to continue our operations which could have an adverse affect on our business.
 
Under the Purchase Agreement, we may direct Lincoln Park to purchase up to $20,250,000 worth of shares of our common stock until April 1, 2014.  On any trading day selected by us, we may sell to Lincoln Park up to $150,000 of common stock by delivering a purchase notice to Lincoln Park. The Purchase Price of such shares is equal to the lesser of: (i) the lowest sale price of our common stock on the purchase date; or (ii) the arithmetic average of the three lowest closing sale prices for our common stock during the twelve consecutive trading days ending on the trading day immediately preceding the purchase date.  Lincoln Park does not have the right or the obligation to purchase any shares of our common stock on any business day that the market price of our common stock is less than $0.50. To the extent that the market price of our common stock is below $0.50 per share on a trading day, we would not receive any proceeds under the Purchase Agreement for that day.

If the market price of our common stock is not below $4.00 per share, our sales will be limited to up to $500,000 of our common stock on each purchase date. If the market price of our common stock is not below $2.25 per share, our sales will be limited to up to $300,000 of our common stock on each purchase date.  If the market price of our common stock is not below $1.90 per share, our sales will be limited to up to $250,000 of our common stock on each purchase date.  If the market price of our common stock is not below $1.50 per share, our sales will be limited to up to $200,000 of our common stock on each purchase date.  

Depending on the prevailing market price of our common stock, we may not be able to sell shares to Lincoln Park for the maximum $20,250,000 over the term of the Purchase Agreement.  In addition, we are only registering 6,514,154 shares of our common stock under this prospectus. Assuming a purchase price of $0.34 per share, the closing sale price of our common stock on July 30, 2012, and the issuance to Lincoln Park of 6,514,154 purchase shares, which would be comprised of 5,900,000 shares purchased at the assumed price of $0.34 per share, the 300,000 initial purchase shares for consideration of $250,000 and 314,154 shares issued as commitment shares for no additional consideration, the proceeds to us would only be $2,256,000.  In the event we elect to issue more than 6,514,154 shares, we would be required to file a new registration statement and have it declared effective by the SEC.

The sale of shares of our common stock to Lincoln Park under the Purchase Agreement may cause substantial dilution to our existing stockholders and could cause the price of our common stock to decline.

Under the Purchase Agreement, we may sell to Lincoln Park, from time to time and under certain circumstances, up to $20,250,000 of our common stock. Lincoln Park has purchased 300,000 shares of our common stock for total consideration of $250,000. We do not have the right to commence any additional sales of our shares to Lincoln Park under the Purchase Agreement until the SEC has declared effective the resale registration statement of which this prospectus forms a part. After the SEC has declared effective the resale registration statement, until April 1, 2014, generally, we have the right, but no obligation, to direct Lincoln Park to periodically purchase up to an additional $20,000,000 of our common stock in specific amounts under certain conditions, which periodic purchase amounts can be increased under specified circumstances.  We also issued to Lincoln Park 314,154 shares of common stock as a fee for Lincoln Park’s commitment to purchase our shares.

Depending upon market liquidity at the time, sales of shares of our common stock to Lincoln Park may cause the trading price of our common stock to decline. Lincoln Park may ultimately purchase all or some of the $20,250,000 of common stock, and after it has acquired shares, Lincoln Park may sell all, some or none of those shares. Therefore, sales to Lincoln Park by us could result in substantial dilution to the interests of other holders of our common stock. The sale of a substantial number of shares of our common stock to Lincoln Park, or the anticipation of such sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and at a price that we might otherwise wish to effect sales. However, we have the right to control the timing and amount of any sales of our shares to Lincoln Park, and the Purchase Agreement may be terminated by us at any time at our discretion without any cost to us.
 
 
15

 
 
The exercise of options and warrants and other issuances of shares of common stock or securities convertible into common stock will dilute your interest.

As of the date of this prospectus, there are outstanding options to purchase an aggregate of 4,050,000 shares of our common stock at exercise prices ranging from $1.35 per share to $1.49 per share and outstanding warrants to purchase 2,228,574 shares of our common stock at a weighted average exercise price of $0.20 per share, 410,000 shares of our common stock at a weighted average exercise price of $1.09 per share and 100,000 shares of our common stock at a weighted average exercise price of $0.60 per share.  The exercise of options and warrants at prices below the market price of our common stock could adversely affect the price of shares of our common stock. Additional dilution may result from the issuance of shares of our capital stock in connection with any collaborations (although none are contemplated at this time) or in connection with other financing efforts, including pursuant to the Purchase Agreement with Lincoln Park.  
 
            Any issuance of our common stock that is not made solely to then-existing stockholders proportionate to their interests, such as in the case of a stock dividend or stock split, will result in dilution to each stockholder by reducing his, her or its percentage ownership of the total outstanding shares. Moreover, if we issue options or warrants to purchase our common stock in the future and those options or warrants are exercised or we issue restricted stock, stockholders may experience further dilution. Holders of shares of our common stock have no preemptive rights that entitle them to purchase their pro rata share of any offering of shares of any class or series.

You will experience immediate dilution in the book value per share of the common stock you purchase.

Because the price per share of our common stock being offered is likely to be substantially higher than the book value per share of our common stock, you will suffer substantial dilution in the net tangible book value of the common stock you purchase in this offering. Based on the assumed minimum allowed offering price of $0.50 per share in this offering and a pro forma net tangible book value per share of our common stock of $0.08 as of March 31, 2012, if you purchase securities in this offering, you will suffer immediate and substantial dilution of $0.42 per share in the net tangible book value of the common stock purchased. See “Dilution” on page 27 for a more detailed discussion of the dilution you will incur in connection with this offering.

Management will have broad discretion as to the use of the proceeds from sales under the Purchase Agreement, and we may not use the proceeds effectively which could have a materially adverse affect on our business.

We have not designated any portion of the proceeds from sales to Lincoln Park under the Purchase Agreement to be used for any particular purpose. Accordingly, our management will have broad discretion as to the application of the proceeds from any such sales and could spend the proceeds in ways that do not necessarily improve our operating results or enhance the value of our common stock.

The costs to produce and operate THOR, and the price at which we may be able to sell it are uncertain.
 
  To the Company's  knowledge, the THOR demonstration in Russia has never been used for commercial applications and may not be suitable in its current configuration for such a purpose.  The Company can make no assurances that the Company will in fact be successful in commercializing THOR.  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.  Further, 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 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.
 
 
16

 
 
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.
 
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. 
   
 
17

 
 
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.  

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.
 
On May 3, 2012, the Company received a “Final Settlement Overture” from the attorney who sent the original demand letter.  The letter alleges unlawful conduct committed by Company officers and states damages in excess of $1 million will be sought against the Company and its management.  The letter requests the Company contact the attorney no later than May 11, 2012 to discuss an out of court resolution.  The Company responded, agreeing to mediation with the class of shareholders.  The Company cannot provide any assurances regarding the outcome of this matter.

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 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 December 30, 2011 at $0.75 per share.  Since the beginning of 2012, our stock went from a high price of about $0.89 per share to a low of approximately $0.31 per share and closed on July 30, 2012 at $.34 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.  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.
  
 
18

 
 
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 July 30, 2012, there are 1,428,574 Class D warrants, 800,000 Class F warrants and an additional 510,000 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 LVX 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.

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 Form S-1 were prepared as if such warrants were no longer outstanding.

If we elect to issue more than the 6,514,154 shares offered under this prospectus, 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.
 
 
19

 
 
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:

· control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;

· 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.

Investors must contact a broker-dealer to trade Over-the-Counter 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 OTCQB tier of the OTC Markets, 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 OTCQB tier of the OTC Markets, 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.
 
 
20

 
 
If we fail to remain current on the reporting requirements that apply to us, we could be removed from the OTCQB tier of the OTC Markets, 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 OTCQB tier of the OTC Markets 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 OTCQB tier of the OTC Markets.  If we fail to remain current on our reporting requirements, shares of our common stock could be removed from quotation on the OTCQB tier of the OTC Markets.  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 and 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.
 
 
 
 
 
 
 
21

 
 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This prospectus contains forward-looking statements that involve substantial risks and uncertainties. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary”, “Risk Factors”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” but are also contained elsewhere in this prospectus. In some cases, you can identify forward-looking statements by the words “may”, “might”, “will”, “could”, “would”, “should”, “expect”, “intend”, “plan”, “objective”, “anticipate”, “believe”, “estimate”, “predict”, “project”, “potential”, “continue” and “ongoing,” or the negative of these terms, or other comparable terminology intended to identify statements about the future. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this prospectus, we caution you that these statements are based on a combination of facts and factors currently known by us and our expectations of the future, about which we cannot be certain. Forward-looking statements include, but are not limited to, statements about:
 
 
·
Our business;
 
 
·
Our business strategy;
 
 
·
Our future operating results;
 
 
·
Our ability to obtain external financing;
 
 
·
Our understanding of our competition;
 
 
·
Industry and market trends;
 
 
·
Future capital expenditures; and
 
 
·
The impact of technology on our products, operations and business.
 
In addition, you should refer to the “Risk Factors” section of this prospectus for a discussion of other important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this prospectus will prove to be accurate or that we will achieve the plans, intentions or expectations expressed or implied in our forward-looking statements. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. Any forward-looking statements we make in this prospectus speak only as of its date, and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
 
You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.
 
 
22

 
 
USE OF PROCEEDS
 
This prospectus relates to shares of our common stock that may be offered and sold from time to time by Lincoln Park. We will not receive any proceeds upon the sale of shares by Lincoln Park. However, we have already received $250,000 and may receive additional proceeds of up to $20,000,000 under the Purchase Agreement with Lincoln Park, subject to the terms and conditions of the Purchase Agreement.  Any proceeds that we receive from sales to Lincoln Park under the Purchase Agreement will be used for working capital and general corporate purposes.
 
 
 
 
 
 
 
23

 

CAPITALIZATION
 
The following table sets forth our cash and cash equivalents and our capitalization as of March 31, 2012:
 
Cash and cash equivalents
 
$
943,529
 
Shareholders' equity:
   
3,225,460
 
Common stock, 100,000,000 shares authorized,
       
62,416,048 shares issued and outstanding
   
62,416
 
Additional paid-in capital
   
12,782,448
 
Accumulated deficit
   
(9,615,122
)
Accumulated other comprehensive loss
   
(4,282
)
Total shareholders' equity
   
3,225,460
 
Total capitalization
 
$
3,225,460
 

The number of shares of common stock outstanding in the table above excludes, as of March 31, 2012:
 
 
·
Options to purchase an aggregate of 4,050,000 shares of our common stock, of which 1,940,000 have vested as of March 31, 2012, at a weighted average exercise price of $1.38 per share;
 
 
·
Warrants to purchase an aggregate of 2,228,574 shares of our common stock, at a weighted average exercise price of $0.20 per share;
 
 
·
Warrants to purchase an aggregate of 410,000 shares of our common stock, at a weighted average exercise price of $1.09 per share, pursuant to an agreement with Wharton, dated August 24, 2011; and
     
 
·
Warrants to purchase an aggregate of 100,000 shares of our common stock, at a weighted average exercise price of $0.60 per share, pursuant to an agreement with Hayden Investor Relations, dated February 16, 2012.
 
 
 
 
 
24

 
 
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
 
Market For Common Equity
 
Our common stock is currently traded under the symbol “VLYF” on the OTCQB tier of the OTC Markets.
 
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 two fiscal years and the first fiscal quarter of 2012. 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, 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
       
Fiscal Year Ended December 31, 2012
     
1st Quarter
$0.89
 
$0.51

 Holders of Common Equity
 
As of July 30, 2012, we have a total of 62,416,048 shares of common stock outstanding, held of record by 33 shareholders, and we believe we have an additional 1,733 beneficial shareholders who hold their shares in brokerage accounts.
 
Dividends
 
No cash dividends have been declared or paid on our common stock to date. No restrictions, other than restrictions imposed by applicable law, 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.
 
 
25

 
 
Securities Authorized for Issuance under Equity Compensation Plans
 
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.   
 
 
 
 
 
26

 
 
DILUTION
 
Investors who purchase our common stock will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering. Net tangible book value per share is determined by dividing our total tangible assets less total liabilities by the number of outstanding shares of our common stock. As of March 31, 2012, we had a net tangible book value of $3,186,550, or approximately $0.05 per share of common stock.

Dilution in net tangible book value per share represents the difference between the amount per share paid by purchasers of common stock in this offering, assuming a purchase price of $0.50 per share for additional shares, which is the minimum purchase price at which shares can be sold under the Purchase Agreement, and the pro forma as adjusted net tangible book value per share of common stock immediately after the completion of this offering.  After giving effect to our assumed receipt of $2,389,500 in estimated net proceeds from the sale of 6,200,000 purchase shares of common stock issuable under the Purchase Agreement and registered in this offering (assuming a purchase price of $0.50 per share for additional shares, offering expenses of $171,616, other share-based offering costs of $638,884, and assuming all such sales and issuances were made on March 31, 2012), our pro forma as adjusted net tangible book value as of March 31, 2012 would have been approximately $5,392,475, or $0.08 per share. This would represent an immediate increase in the net tangible book value of $0.03 per share to existing shareholders attributable to this offering. The following table illustrates this per share dilution:
 
Assumed public offering price per share of common stock (minimum price allowed)
       
$
0.50
 
As adjusted net tangible book value per share as of March 31, 2012
 
$
0.05
         
Increase in as adjusted net tangible book value per share attributable to this offering
 
$
0.03
         
Pro forma net tangible book value per share after this offering
         
$
0.08
 
Dilution per share to new investors
         
$
0.42
 

To the extent that we sell more or less than $2,389,500 worth of shares under the Purchase Agreement, or to the extent that some or all sales are made at prices in excess of the minimum allowable purchase price of $0.50 per share, then the dilution reflected in the table above will differ. The above table is based on 62,416,048 shares of our common stock outstanding as of March 31, 2012, adjusted for the assumed sale of 5,900,000 additional shares to Lincoln Park under the Purchase Agreement at the assumed minimum purchase price described above. In addition, the calculations in the foregoing table do not take into account, as of March 31, 2012:

·
Options to purchase an aggregate of 4,050,000 shares of our common stock, of which 1,940,000 have vested as of March 31, 2012, at a weighted average exercise price of $1.38 per share;
 
·
Warrants to purchase an aggregate of 2,228,574 shares of our common stock, at a weighted average exercise price of $0.20 per share;
 
·
Warrants to purchase an aggregate of 410,000 shares of our common stock, at a weighted average exercise price of $1.09 per share, pursuant to an agreement with Wharton, dated August 24, 2011; and
   
·
Warrants to purchase an aggregate of 100,000 shares of our common stock, at a weighted average exercise price of $0.60 per share, pursuant to an agreement with Hayden Investor Relations, dated February 16, 2012.
 
To the extent that options or warrants are exercised, new options are issued under our equity benefit plans, or we issue additional shares of common stock in the future, there may be further dilution to investors participating in this offering. In addition, we may choose to raise additional capital because of market conditions or strategic considerations, even if we believe that we have sufficient funds for our current or future operating plans. If we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our shareholders.  
 
 
27

 
 
SELECTED FINANCIAL DATA
 
You should read the following selected financial data together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and accompanying notes included later in this prospectus. The selected financial data in this section is not intended to replace our financial statements and the accompanying notes.
 
We have derived the selected balance sheet data as of December 31, 2011 and 2010 and the selected statement of operations data for the years ended December 31, 2011 and 2010 from our audited financial statements that are included in this prospectus. We have derived the selected balance sheet data as of December 31, 2009, 2008 and 2007 and the selected statement of operations data for the years ended December 31, 2009, 2008 and 2007 from our audited financial statements that are not included in this prospectus. We have derived the selected statement of operations data for the three months ended March 31, 2012 and 2011 and the selected balance sheet data as of March 31, 2012 from our unaudited financial statements that are included in this prospectus.

Our historical results are not necessarily indicative of the results to be expected in any future period.

         
Three Months Ended
 
   
Year ended December 31,
         
March 31,
 
   
2011
   
2010
   
2009
   
2008
   
2007
   
2012
   
2011
 
                                 
(unaudited)
   
(unaudited)
 
                                           
Statement of Operations Data:
                                         
                                           
NET SALES
 
$
14,992,867
   
$
18,675,269
   
 $
3,202,815
   
132,000
     
-
   
$
4,351,127
   
$
6,417,936
 
                                                         
COST OF SALES
   
11,679,112
     
16,077,631
     
2,943,065
     
72,068
     
-
     
3,893,434
     
5,103,379
 
                                                         
GROSS PROFIT
   
3,313,755
     
2,597,638
     
259,750
     
59,932
     
-
     
457,693
     
1,314,557
 
                                                         
COSTS AND EXPENSES
                                                       
  Loss on shipped inventory
   
-
     
-
     
-
     
-
     
483,268
     
-
     
-
 
  Selling and administrative
   
1,624,006
     
1,596,780
     
1,168,642
     
1,560,984
     
1,230,244
     
484,339
     
425,530
 
  Share based payments
   
945,619
     
1,864,279
     
32,550
     
142,450
     
284,900
     
238,201
     
204,956
 
  Warrant expense
   
-
     
-
     
446,223
     
-
     
-
     
-
     
-
 
                                                         
INCOME (LOSS) FROM OPERATIONS
   
744,130
     
(863,421
)
   
(1,387,665
)
   
(1,643,502
)
   
(1,998,412
)
   
(264,847
)
   
684,071
 
                                                         
OTHER INCOME (EXPENSE)
   
(297,374
)
   
(613,229
)
   
(650,958
)
   
(205,253
)
   
(12,708
)
   
5,840
     
3,869
 
                                                         
NET INCOME (LOSS) BEFORE TAXES
   
446,756
     
(1,476,650
)
   
(2,038,623
)
   
(1,848,755
)
   
(2,011,120
)
   
(259,007
)
   
687,940
 
                                                         
INCOME TAXES
   
20,000
     
-
     
-
     
-
     
-
     
-
     
-
 
                                                         
NET INCOME (LOSS)
   
426,756
     
(1,476,650
)
   
(2,038,623
)
   
(1,848,755
)
   
(2,011,120
)
   
(259,007
)
   
687,940
 
                                                         
OTHER COMPREHENSIVE GAIN (LOSS)
   
(6,782
)
   
(4,379
)
   
-
     
-
     
-
     
6,879
     
(8)
 
                                                         
COMPREHENSIVE (INCOME) LOSS
 
$
419,974
   
$
(1,481,029
)
 
$
(2,038,623
)
 
$
(1,848,755
)
 
$
(2,011,120
)
 
$
(252,128
)
 
$
687,932
 
                                                         
Income (loss) per share:
                                                       
Basic
 
$
0.01
   
$
(0.02
)
 
$
(0.04
)
 
$
(0.04
)
 
$
(0.04
)
 
$
(0.00
 
$
0.01
 
Diluted
 
$
0.01
                                           
$
0.01
 
                                                         
Weighted Average Common Shares Outstanding
                                                       
    Basic
   
61,500,794
     
59,281,322
     
53,011,122
     
49,362,903
     
46,482,853
     
62,346,991
     
61,320,774
 
    Diluted
   
63,778,097
                                             
63,629,568
 
 
 
28

 
 
         
As of
 
Balance Sheet Data:
 
As of December 31,
   
March 31,
 
   
2011
   
2010
   
2009
   
2008
   
2007
   
2012
 
                                 
(unaudited)
 
Current Assets
   
9,058,701
     
4,150,318
   
$
1,867,840
   
$
763,673
     
814,164
   
$
7,289,349
 
Property and equipment - net
   
112,062
     
274,405
     
211,821
     
51,623
     
59,747
     
93,850
 
Other assets
   
663,797
     
5,535
     
135,378
     
433,287
     
5,535
     
663,797
 
Intangible assets - net
   
39,430
     
-
     
-
     
-
     
-
     
38,910
 
                                                 
TOTAL ASSETS
 
$
9,873,990
   
$
4,430,258
   
$
2,215,039
   
$
1,248,583
   
$
879,446
   
$
8,085,906
 
                                                 
TOTAL LIABILITIES
   
6,634,602
     
3,378,922
     
2,792,668
     
753,862
     
612,939
   
$
4,860,446
 
                                                 
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)
   
3,239,388
     
1,051,336
     
(577,629
)
   
494,721
     
266,507
     
3,225,460
 
                                                 
TOTAL LIABILITIES AND STOCKHOLDERS'
                                               
EQUITY (DEFICIT)
 
$
9,873,990
   
$
4,430,258
   
$
2,215,039
   
$
1,248,583
   
$
879,446
   
$
8,085,906
 
 
 
 
 
 
29

 
 
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 prospectus. 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 2012, the Company won numerous contracts to produce various momentum wheels and other mechanical devices for special applications, some in aerospace.  Historically, and in 2012, 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 the marketing, manufacturing and distribution of THOR throughout the world.
 
Liquidity and Capital Resources

Between January 1, 2012 and March 31, 2012, our capital requirements have largely been met through sales of products other than THOR or ODIN. We recorded sales of $4,351,127 from the sale of various aerospace products and other mechanical devices in the first quarter of 2012.  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.  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.
 
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, until April 1, 2014 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.
 
 The following liquidity events describe the amounts and sources of our capital resources and describe how we have paid our expenses. For the three months ended March 31, 2012, we had positive cash flows from operations due primarily to changes in accounts receivable, inventories, accounts payable, accrued expenses and deferred revenue. We had an increase in accounts receivable of $1,211,715 that was due to a large number of shipments near the end of the quarter, a decrease in accounts payable of $1,281,560, a decrease in accrued expenses of $404,164 and a reduction in advance payments received from customers of $88,432 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 April 1, 2012 through May 9, 2012, the Company has collected $1,000,000 of the outstanding accounts receivable balance of $4,804,356 at March 31, 2012. The accounts receivables balance 180 days past due at March 31, 2012 was $-0-. From April 1, 2012 through June 25, 2012, the Company has paid $1,502,817 of the outstanding accounts payable balance of $4,652,627.  Further, we believe our cash and investment reserves are satisfactory to fund any potential operating shortfalls.
 
 
30

 
 
We have incurred losses for the three months ended March 31, 2012 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 three months ended March 31, 2012, we received cash proceeds of $-0- from sales of various products and $3,050,980 from accounts receivable outstanding at December 31, 2011.  Our cash outflows for the period consisted of net increase in accounts receivable of $1,211,715, marketable securities purchases of $5,831, decrease in accounts payable of $1,281,560, decrease of accrued expenses of $404,164, and a net decrease in advance payments received from customers of $88,432.  For the three months ended March 31, 2011, we received cash proceeds of $1,332,930 from sales of various products and $1,322,445 from accounts receivable outstanding at December 31, 2010.  Our cash outflows for the three months consisted of net increase of accounts receivable of $3,146,082, marketable securities purchases of $5,453, and repayment to shareholder of $23,728 and a net decrease in advance payments received from customers of $616,479.
 
While our customer base is limited, so is the number of competing suppliers worldwide.  We have developed a reputation with our customers of delivering high quality products on time and at competitive prices.  While we cannot be certain they will remain customers, we believe that our current relationship with our customers will continue.  We also believe the market for our specific products will grow in the future based on customer feedback regarding future expectations.

For the year ended December 31, 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 $1,964,902 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 June 25, 2012, the Company has paid $2,784,237 of the outstanding accounts payable balance of $5,934,187 and collected $3,592,821 of the outstanding receivables balance of $3,592,821 at December 31, 2011.

For the year ended December 31, 2010, we had negative cash flows from operations due primarily to changes in accounts receivable and inventories. We had an increase in accounts receivable of $1,892,782 that was due to a longer than anticipated collection from our customers and an increase in inventories of $848,652 which had negative impacts on our cash flows while an increase in accounts payables of $865,395 and an increase in advance payments received from customers which had negative impacts on our cash flows.  As of June 25, 2012, the Company has collected $1,964,182 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, 2010 was $-0- The remainder is due from a longstanding customer with a history of complete payment. The cumulative sales for the year ended December 31, 2010 to the customer with the outstanding receivable balance were $14,534,359. The Company had paid $2,009,425 of the outstanding accounts payable balance of $2,029,425 at December 31, 2010.

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 requirements in 2012.

Between January 1, 2010 and December 31, 2010, our capital requirements were largely met through sales of securities and sales of products other than THOR or ODIN. We recorded sales of $18,675,269 from the sale of various products in 2010.  

We had a comprehensive loss of $1,481,029 for the year ended December 31, 2010.

 
31

 

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 $245,715 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.

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 space in Covington, Kentucky, and Erlanger, Kentucky, under five-year, six month and 12 month non-cancelable operating leases, expiring February 2017 and December 2012, respectively.  The aggregate base rent is $5,940 per month. At March 31, 2012, future minimum payments for operating leases related to our office and manufacturing facilities were $263,275 through February 2017.
 
Our total current liabilities decreased to $4,860,446 at March 31, 2012 compared to $6,634,602 at December 31, 2011. Our total current liabilities at March 31, 2012 included accounts payable of $4,652,627, accrued expenses of $5,200, and deferred revenue of $202,619 compared to our total current liabilities at December 31, 2011 which included accounts payable of $5,934,187, accrued expenses of $409,364 and deferred revenue of $291,051.

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 for the years ended December 31, 2011 and 2010 and the unaudited condensed consolidated financial statements for the three months ended March 31, 2012 and 2011 of Valley Forge Composite Technologies and its subsidiaries. These charts and discussions summarize our financial statements for such periods, and should be read in conjunction with the financial statements, and notes thereto.

SUMMARY COMPARISON OPERATING RESULTS
 
             
   
THREE
MONTHS
ENDED MARCH
31, 2012
   
THREE
MONTHS
ENDED MARCH
31, 2011
 
             
Gross profit
 
$
457,693
   
$
1,314,557
 
Total operating expenses
   
722,540
     
630,486
 
Income (loss) from operations
   
(264,847
)
   
684,071
 
Total other income (expense)
   
5,840
     
3,869
 
Net loss
   
(259,007
)
   
687,940
 
Other comprehensive income (loss)
   
6,879
     
(8
Comprehensive income (loss)
 
$
(252,128
)
 
$
687,932
 
Net loss per share:
               
Basic
 
$
(0.00
)
 
$
0.01
 
Diluted
         
$
0.01
 
 
 
32

 
 
For the three months ended March 31, 2012, the Company’s decrease in revenues is related to a decrease in aerospace sales due to the timing of customer orders and shipments.  In addition, the Company had a significant “non-recurring” order for the period ended March 31, 2011.  Revenues, primarily for momentum wheels and associated components, were $4,351,127 and $6,417,936 for the three months ended March 31, 2012 and 2011.  All of these revenues were concentrated among a few customers.  

To date, no revenues have been attributable to sales from ODIN or THOR.  All sales for the three months ended March 31, 2012 and 2011 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%.

Our gross profit margins have decreased for the three months ended March 31, 2012, compared with the three months ended March 31, 2011.  We have seen a decrease of our gross margin to 11% from 20% for the three months ended March 31, 2012 and 2011, respectively.  The decrease in profit margin for the three months ended March 31, 2012 was due to a few high margin sales at March 31, 2011, 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 and other aerospace products.

Our operating expenses generally increased for the three months ended March 31, 2012, compared with the three months ended March 31, 2011.  The major components of our operating expenses consisted of selling and administrative expenses and share-based payments.  For the three months ended March 31, 2012 and 2011, our selling and administrative expenses were $484,339 and $425,530 and our share-based payment expenses were $238,201 and $204,956.  Share-based payments were greater in 2012 primarily due to warrants granted in February 2012, some of which immediately vested requiring operating expense to be recorded.
 
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 and related product sales primarily due to a supplier having production problems, preventing the Company from completing certain orders. Revenues, primarily for momentum wheels and related products, 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.
 
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 and related products.
 
 
33

 
 
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.

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.

Operating expenses The following table shows our operating expenses: 

   
For the three months ended MAR 31,
 
   
2012
   
2011
   
Percent
Change
 
Selling and administrative expenses
 
$
484,339
   
$
425,530
     
14
%
Share-based payments
   
238,201
     
204,956
     
16
%
Total operating expenses
 
$
722,540
   
$
630,486
     
15
%

Selling and administrative expenses increased $58,809 for the three months ended March 31, 2012 compared to the same period of 2011 which is primarily attributable to an increase in salaries and R&D expense.  Total selling and administrative expenses were 11.1% and 6.6% of sales for the three months ended March 31, 2012 and 2011, respectively.

Share-based payments increased $33,245 for the three months ended March 31, 2012 compared to the same period of 2011 due to the granting of 100,000 warrants in February of 2012.

Total operating expenses were 16.6% and 9.8% of sales for the three months ended March 31, 2012 and 2011.
 
Income (loss) from operations Loss from operations totaled $264,847 (or 6.1% of sales) in the three months ended March 31, 2012 compared to the income from operations of $684,071 (or 10.7% of sales) for the three months ended March 31, 2011. The loss from operations increased due to a decrease in sales and a decrease in gross profit.

Net income (loss) Net loss for the three months ended March 31, 2012 increased $946,947, compared to 2011. The increase in net loss is due to a decrease in sales and a decrease in gross profit.

Interest expense, net Overall interest expense, net, decreased due to the full repayment of outstanding long-term debt in 2011. 
 
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 years 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.
 
 
34

 
 
Total operating expenses were 17.1% and 18.5% of sales for the year ended December 31, 2011 and 2010. 
 
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 following chart provides a breakdown of our sales for the three months ended March 31, 2012 and 2011. 

   
THREE MONTHS
ENDED MAR 31, 2012
   
THREE MONTHS
ENDED MAR 31, 2011
 
Valley Forge Detection Systems, Inc.
 
$
-
   
$
-
 
Valley Forge Aerospace, Inc.
   
4,351,127
     
6,417,936
 
Valley Forge Imaging, Inc.
   
-
     
-
 
Valley Forge Emerging Technologies, Inc.
   
-
     
-
 
Totals Per Financial Statements
 
$
4,351,127
   
$
6,417,936
 

Our total operating expense was $722,540 and $630,486, respectively, for the three months ended March 31, 2012 and 2011.

Our average monthly cost of operations from January 2012 through March 2012 was approximately $241,000. Excluding aggregate non-cash charges of $18,732 for depreciation and amortization, and $238,201 for share-based payments, our average monthly cost of operations from January 2012 through March 2012 was approximately $155,000.

As of March 31, 2012, we had $943,529 in cash remaining as well as $531,285 of marketable securities.

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; (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 December 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 associated 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. 
 
 
35

 
 
             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 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 $193,465, net of accumulated depreciation and inventory allowance, as of March 31, 2012.  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.

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 has reviewed the results of the first work order and is analyzing whether to issue a second work order and if so, what will be contained therein.

If the Company and ISU do negotiate and execute additional work orders, then, pursuant to the CSA, ISU will assemble and demonstrate an accelerator and detector 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.

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.

 
36

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

This section of our registration statement 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 Notes 1 and 2 of the “Notes to Consolidated Financial Statements” for the year ended December 31, 2011 in this registration statement and Notes 1 and 2 of the “Notes to Condensed Consolidated Financial Statements” for the quarterly period ended March 31, 2012 in this registration statement.

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.  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.

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 in this registration statement and Note 3 of the “Notes to Condensed Consolidated Financial Statements” for the quarterly period ended March 31, 2012 in this registration statement, 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 in this registration statement and Note 1 of the “Notes to Condensed Consolidated Financial Statements” for the quarterly period ended March 31, 2012 in this registration statement 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.

 
37

 
 
Share-based Payments

Generally, all forms of shared-based payments, including stock option grants and restricted stock grants, are measured at their fair value on the awards’ grant date, based on the estimated number of awards that are ultimately expected to vest.  Share-based payment awards issued to non-employees for services rendered are recorded at either the fair value of the services rendered or the fair value of the share-based payment, whichever is more readily determinable.

Recent Accounting Pronouncements
 
The Company does not believe that recent accounting pronouncements will have a material effect on the content or presentation of its financial statements.
 
The Company does not believe that any other recently issued, but not yet effective accounting standards, will have a material effect on the Company’s consolidated financial position, results of operations or cash flows.
 
Off-Balance Sheet Arrangements
 
The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a significant current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Contractual Obligations

As a “smaller reporting company,” as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.
 
 
 
 
 
38

 
 
BUSINESS
 
General
 
The Company has positioned itself to develop and acquire advanced technologies.  Between 1996 and 2012, the Company won numerous contracts to produce various momentum wheels, which are attitude control instruments for small satellites, and other mechanical devices for special applications, some in aerospace. Historically, and in 2012, 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. 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.  
 
THOR-LVX
 
Overview
 
Presently, and for the last nearly ten years, the Company has focused on the development and commercialization of the THOR-LVX Advanced Explosives Detection System and prepared for the manufacturing and distribution of THOR in the United States and other countries.
 
THOR components primarily consist of a high energy miniature particle accelerator generating 55 million electron volts (“MeV”), 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 (“EDS”) technologies, and LPI.  The THOR development efforts have been sponsored, in part, by the United States Department of Energy (the “US D.O.E.”).
  
Recent Developments
 
On May 30, 2012, the Company announced that it had reached an agreement in principle with Symmetry, a private U.S. based company that is negotiating an agreement with a Latin American government for the first commercial development, delivery and maintenance of a THOR LVX photonuclear detection system.  The Company has funded $300,000 for the posting of a bond, which is a step necessary to signing the agreement.  Symmetry executed an unsecured promissory note evidencing the $300,000 loan the Company made to Symmetry.  Under the terms of the note, which bears no interest, Symmetry must repay the loan in full on or before May 29, 2013. Under the proposed terms of the agreement, the agreement would be for a five-year term, with the Company to receive an initial payment for the system and ongoing monthly revenue on a per-scan basis. The Company estimates that the total value of the agreement, including ongoing fees on a per-scan basis, would exceed $5 million, with revenue to be collected as phases of the project are completed. Management is in discussions with several potential partners to help finance the agreement.  There is no assurance that the agreement will be finalized.   
 
 
39

 
 
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 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.
 
On June 28, 2011, the Company announced that it has agreed to participate in the creation of a company in Troitsk, Russian Federation. The exclusive purpose of this company is to conduct research activities focused on the photonuclear detection system that is a major subcomponent of THOR.  Aspects of the research may include expanding the photonuclear 'fingerprint' database of explosive and narcotic compounds, and investigating additional possibilities to apply this technology. All work will be under the research category "Nuclear Technologies".  Initially, the Company announced it would own 50% of the new venture, with the remaining 50% owned by the Russian scientists and engineers who worked on the original CRADA project.  However, the Company has re-examined this structure in light of potentially significant transaction and other costs associated with 50% ownership of a Russian entity.  No decisions have been made concerning how the Company will participate in the Troitsk based entity.
 
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  has reviewed the results of the first work order and is analyzing whether to issue a second work order and if so, what will be contained therein.

License and other Rights in Thor
 
In April, 2002, the Company entered into an Exclusive Rights Agreement (“ERA”) with 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 April 12, 2014.  
 
In April 2003, the Company entered into the CRADA with the Regents of the University of California, who operate the U.S. D.O.E’s 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 involved 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.
 
In accordance with the CRADA, LLNL and the Company have disclosed to each other the subject inventions which have been developed through the collaborative effort.  
 
On September 22, 2011, the Company announced that it signed the LLNL License as described above.
 
 
40

 
 
Research and Development
 
The Company is not engaged in any significant research and development activities concerning THOR at this time.  No research and development is being performed under the CSA.  Additional research and development expenses, if any, will be determined in the future as work continues pursuant to the CSA.
 
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 as well as outside the United States.   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 all 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 rights from the Company’s LLNL License 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.  
 
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 every known product in the industry available on the market today.  The Company believes that THOR is more powerful than any known competitor’s products, can be made portable, and provides real time detection capability.
 
 
41

 
 
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 shows 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 discernable 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 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 just what the operating costs of a THOR unit will be.  Further, 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 light 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.
 
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 future.

 
42

 
 
 
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 any 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.
 
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 $193,465, net of accumulated depreciation and inventory allowance, as of March 31, 2012.  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.
 
Raw Material Sources and Availability
 
Most materials and parts needed for ODIN as currently configured are available 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.  Exactly how a new ODIN design might impact availability of materials and parts is unknown, although the Company believes parts and materials will be readily available, based upon preliminary design discussions.
 
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 currently configured 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 ODIN is the best available personnel screening device and is more accurate and more efficient in detailing weapons and other contraband than any known competitor’s product.  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.
 
 
43

 
 
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.
 
Distribution and Sales of ODIN
 
We currently have two ODIN units for sale.  One unit is held in inventory and the other unit is a demonstration unit that is classified as a fixed asset.  However, since the whole body imaging procurement specifications were updated in May 2011, we do not know whether these units satisfy the new procurement requirements.  We have received, but not yet reviewed, the new requirements which are not publically available.  Once the Company reviews the information regarding new whole body imaging procurement specifications, the Company will reevaluate whether or not to continue to use the existing technology associated with ODIN.  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.
 
            If the Company decides to remain in the whole body imaging market, it will initially sell ODIN through direct sales in North America, Eurasia, India, and to some extent, South America. 
 
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.  The first set of terms and conditions for purchasing Whole Body Imaging products was announced by the TSA in 2008.   In May 2010, the TSA announced new procurement specifications which are not available to the public because they are Security Sensitive Information.  The Company applied for approval to receive Security Sensitive Information and received the approval, but has not yet reviewed the information.  Once the Company reviews the information regarding new government specifications, the Company will reevaluate whether or not to continue to use the existing technology associated with ODIN or design a new version of ODIN.  In addition, the Board of Directors has discussed whether or not it makes sense to continue to pursue ODIN, particularly because the effort to continue ODIN may detract from our management's focus on THOR and our growing aerospace business. The Board of Directors has not made a decision on this issue yet.
 
The United States 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.

 
44

 
 
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 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.
 
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.
 
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.

The Company leases office and warehouse space in Covington, Kentucky, and Erlanger, Kentucky, under five-year, six month and 12 month non-cancelable operating leases, expiring February 2017 and December 2012, respectively.  The aggregate base rent is $5,940 per month. At March 31, 2012, future minimum payments for operating leases related to our office and manufacturing facilities were $263,275 through February 2017.

In the opinion of management, the Company’s property and equipment are adequately insured under its existing insurance policy.

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.
 
 
45

 
 
Legal Proceedings

The Company is involved in litigation and disputes arising in the ordinary course of business.  While the ultimate outcome of these matters is not presently determinable, it is the opinion of management that the resolution of outstanding claims will not have a material adverse effect on the financial position or results of operations of the Company.   
 
William A. Rothstein vs.Valley Forge Composite Technologies, Inc., a Florida corporation, and Louis J. Brothers, Civil Action No. 09-0918071 Toomey (UT 3d Jud. Dist.)

On October 30, 2009, the Company and its president and director, Louis J. Brothers, were both named as defendants in a civil complaint filed on that date in the Third Judicial District Court in and for Salt Lake County, Utah by shareholder William A. Rothstein. The complaint has been served on Mr. Brothers and the Company. The five-count complaint alleges that the defendants committed fraud, violated the Utah Uniform Securities Act (Ut. Code Ann. §61-1-1, et seq.), made negligent misrepresentations, breached a fiduciary duty to the shareholder, and breached a settlement agreement and seeks unspecified compensatory and punitive damages and attorney’s fees.  The complaint alleged that Mr. Brothers misrepresented the timetable in which the Company’s THOR LVX technology would receive government approvals and the number of Department of Energy employees working on the THOR project and thereby induced the Plaintiff to invest in the Company’s securities in 2006.  The Company and Mr. Brothers filed a motion to dismiss the complaint based upon the Utah court’s lack of personal jurisdiction over the Company and Brothers.  The Honorable Judge Kate Toomey denied the motion to dismiss on December 13, 2010; Mr. Brothers and the Company filed an answer to the complaint denying all claims.

On November 1, 2011, the Court granted the Plaintiff’s motion to file an amended complaint, which abandons the claims in the original complaint except for breach of contract based upon a claimed breach of an alleged agreement to settle the stock fraud claims alleged in the original Complaint.  The Amended Complaint includes 11 additional plaintiffs, two of whom previously filed lawsuits against the Company in Florida, which were later voluntarily dismissed.  In the first Amended Complaint claim for breach of contract, Plaintiffs seek the fair market value of stock and warrants under an alleged settlement agreement.  The second claim, promissory estoppel, seeks the fair market value of the stock and warrants promised to Plaintiffs.  The third claim is for a declaratory judgment that the Defendants are in material breach of a settlement agreement, specific performance for the issuance of promised stock and warrants or, alternatively, damages and other relief the court deems proper.

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. 12th 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.  
 
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.
 
 
46

 
 
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. 12th Jud. Cir.)
 
On or about May 7, 2010, George Frudakis commenced the above titled action against the Company and Lou Brothers.  The Complaint sets forth the exact same causes of action as in the Coast to Coast Equity Group, Inc. vs. Valley Forge Composite Technologies, Inc. and Lou Brothers, described above, with the exception that the Frudakis matter does not include a claim for breach of contract based upon the Consulting Agreement.  The Company and Brothers deny all allegations and have filed a motion to dismiss the complaint and a motion to consolidate the Frudakis and Coast to Coast cases into a single proceeding.  The Court has granted a motion to consolidate the cases for discovery purposes and has reserved as to consolidation for trial.   The Company and Lou Brothers intend to file appropriate Affirmative Defenses and Counterclaims, and possible third-party claims, in the event the Court denies the Motion to Dismiss.  However, the Company cannot provide assurances as to the outcome of the matter.

Arbitration Claim filed by Advanced Technology Development, Inc.

During the period between July 9th and 13th, 2010, the Company, Louis J. Brothers and Larry K. Wilhide were served by mail courier with a Statement of Claim (“Statement”) filed with the American Arbitration Association by Advanced Technology Development, Inc. (“ATD”).  Summarizing in general terms, ATD’s arbitration claims one through four are based upon allegations the Company failed to perform or pay ATD for goods pursuant to two separate supply contracts. Claims five through eight are based upon the Company’s activities in the promotion and sale of the ODIN imaging device.  Claims nine through thirteen are based upon the Company’s alleged misuse of ATDs’ “ULDRIS” mark.  The final claim seeks injunctive relief.
 
            The parties agreed to the appointment of Phillip D. O’Neil, Jr. as the Sole Arbitrator and the arbitration proceeding was heard from April 27 through April 29, 2011.  On July 31, the Arbitrator issued an Interim Award, finding that the Company breached the Scanner Agreement by failing to pay ATD $228,194.  Because ATD never actually delivered a second unit, the Arbitrator has ordered the parties to brief the issue of damages, interest, costs and attorney fees before a Final Award will be issued.  The Arbitrator also found that the Company breached the Space Supply Contract and a balance of $42,376 is owed, plus interest.

On November 2, 2011, the Arbitrator issued a Second Interim Award, awarding ATD $90,000 in lost profits resulting from the breach of the Scanner Agreement, plus interest since November 10, 2007.  He additionally awarded 2% interest as part of the damage award for the Space Supply Contract breach.   The Arbitrator found ATD to be the prevailing party for the purposes of shifting attorneys fees, but confined the award to those fees incurred in pursuing the breach of contract claims.

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. 11th 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. 
 
 
47

 
 
Corporate Information
 
Our principal executive office is located at River Center I, 50 East River Center Boulevard, Suite 820, Covington, Kentucky 41011, and our telephone number is (859) 581-5111.  Our website address is www.vlyf.com.  Information contained in, or accessible through, our website does not constitute a part of, and is not incorporated into, this prospectus.  Also, this prospectus includes the names of various government agencies and the trade names of other companies.  Unless specifically stated otherwise, the use or display by us of such other parties’ names and trade names in this prospectus is not intended to and does not imply a relationship with, or endorsement or sponsorship of us by, any of these other parties.
 
 
 
 
 
 
 
 
48

 
 
MANAGEMENT
 
Executive Officers and Directors

The following table sets forth as of the date of this prospectus the name, age and position of each person who serves as an executive officer, director and significant employee of our Company.

Name
  
Age
  
Position
Louis J. Brothers
  
60
  
Chairman, Chief Executive Officer and Chief Financial Officer
Larry K. Wilhide
  
64
  
Director, Vice-President (Engineering)
Andrew T. Gilinsky
  
51
  
Director
Richard S. Relac
  
71
  
Director
Eugene Breyer
  
65
  
Director
Raul A. Fernandez
  
62
  
Director
Dr. Victor E. Alessi
  
72
  
Director
Keith L. McClellan
 
56
 
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.
 
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.
 
 
49

 
  
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.
 
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.  Since December 2011, Mr. Fernandez has been retired.
 
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.
 
 
50

 
 
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.

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.

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.
 
 
51

 

 
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 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.

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.
 
 
 
 
 
52

 
 
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 and is qualified in its entirety by reference to the full text of the 2008 Plan. 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.

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.    

 
53

 
  
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.

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
  &#