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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-QSB
 mark one
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of Securities Exchange Act of 1934
 For the quarterly period ended March 31, 2007
 o
    
    Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to.
 Commission file number 0-11454
 VALENTEC SYSTEMS, INC.
 
  Delaware
    
    59-2332857(State or Other Jurisdiction of Incorporation 
or Organization)
    
    (I.R.S. Employer Identification No.)
 2629 York Avenue 
Minden, LA 71055
    
    71055(Address of principal executive offices)
    
    (Zip code)
 (318) 382-4574
 
  þ o
 o þ
  o þ




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Page NumberPart I Financial Information
    
    
    3Item 1. Financial Statements
    
    
    3Item 2: Managements Discussion And Analysis Or Plan Of Operation
    
    
    18Item 3: Controls and Procedures
    
    
    24Part II Other Information
    
    
    25Item 1: Legal Proceedings
    
    
    25Item 2: Unregistered Sales Of Equity Securities And Use Of Proceeds
    
    
    25Item 3: Defaults Upon Senior Securities
    
    
    25Item 4: Submission Of Matters To A Vote Of The Security Holders
    
    
    25Item 5: Other Information
    
    
    26Item 6: Exhibits And Reports On Form 8-K
    
    
    26Signatures
    
    
    27Certification of CEO Pursuant to Section 302Certification of CEO Pursuant to Section 906
  2




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PART I
 FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
  3




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VALENTEC SYSTEMS, INC. AND SUBSIDIARY
 CONTENTS
 PAGE
    
    
    5
    
    
    UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2007PAGE
    
    
    6
    
    
    UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006PAGE
    
    
    7
    
    
    UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006PAGE
    
    
    8
    
    
    UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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VALENTEC SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET  AS OF MARCH 31, 2007  (Unaudited)
 ASSETSCURRENT ASSETSCash
    
    
    60,836Accounts receivable and in-process billings, net
    
    
    15,479,124Inventories, net
    
    
    413,929Prepaid and other expenses
    
    
    104,968Total Current Assets
    
    
    16,058,857PROPERTY AND EQUIPMENT, NET
    
    
    2,783,800OTHER ASSETSDeferred income tax
    
    
    92,513Contract development cost, net
    
    
    5,783,050Insurance Receivable
    
    
    249,850Deposits
    
    
    31,936Total Other Assets
    
    
    6,157,349TOTAL ASSETS
    
    
    25,000,006LIABILITIES AND STOCKHOLDERS DEFICITCURRENT LIABILITIESAccounts payable and accrued expenses
    
    
    10,256,817Accrued salaries and payroll withholding
    
    
    140,610Accrued Contract Loss
    
    
    10,780Lines of credit
    
    
    12,435,851Deferred revenue
    
    
    1,546,133Notes Payable  stockholders
    
    
    2,483,039Due to related party
    
    
    1,589,481Capital lease
    
    
    24,735Customer Deposits
    
    
    167,045Deferred income taxes payable
    
    
    475,240Total Current Liabilities
    
    
    29,129,731LONG TERM LIABILITIESCapital lease  long term
    
    
    263,333Total Long Term Liabilities
    
    
    263,333TOTAL LIABILITIES
    
    
    29,393,064COMMITMENTS AND CONTINGENCIES
    
    
    STOCKHOLDERS DEFICITPreferred stock, $0.01 par value, 10,000,000 authorized, none issued and outstanding
    
    
    Common stock, $0.01 par value, 250,000,000 shares authorized, 15,538,165 shares
issued and outstanding
    
    
    155,382Additional paid in capital
    
    
    3,179,496Retained earnings
    
    
    (7,607,123
    )Less: Stockholder Advances
    
    
    (120,813
    )Total Stockholders Deficit
    
    
    (4,393,058
    )TOTAL LIABILITIES AND STOCKHOLDERS DEFICIT
    
    
    25,000,006
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VALENTEC SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 Three Months Ended March 31,2007
    
    
    2006REVENUESContract revenues
    
    $
    1,601,249
    
    
    $
    5,972,891COST OF GOODS SOLD
    
    
    1,613,194
    
    
    
    4,021,471GROSS PROFIT
    
    
    (11,945
    )
    
    
    1,951,420OPERATING EXPENSESFringe benefit expenses
    
    
    100,142
    
    
    
    149,241Overhead expenses
    
    
    869,069
    
    
    
    778,306General and administrative
    
    
    589,797
    
    
    
    754,877Total Operating Expenses
    
    
    1,551,008
    
    
    
    1,682,424INCOME/(LOSS) FROM OPERATIONS
    
    
    (1,570,953
    )
    
    
    268,996OTHER INCOME (EXPENSE)Interest income
    
    
    283
    
    
    
    675Miscellaneous income
    
    
    797
    
    
    
    2,381Interest expense
    
    
    (643,732
    )
    
    
    (391,961
    )Total Other Income (Expense)
    
    
    (642,652
    )
    
    
    (388,905
    )NET INCOME (LOSS) BEFORE INCOME TAXES
    
    
    (2,213,605
    )
    
    
    (119,909
    )Provision for Income Taxes
    
    
    
    
    
    
    NET INCOME (LOSS)
    
    $
    (2,213,605
    )
    
    $
    (119,909
    )Net income (loss) per share  basic and diluted
    
    $
    (.14
    )
    
    $
    (.01
    )Weighted Average Shares (Basic and Diluted)
    
    
    15,538,165
    
    
    
    6,997,351
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VALENTEC SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2007 AND 2006  (Unaudited)
 Three Months
    
    
    Three MonthsEnded
    
    
    EndedMarch 31, 2007
    
    
    March 31, 2006CASH FLOWS FROM OPERATING ACTIVITIES:Net income (Loss)
    
    $
    (2,213,605
    )
    
    $
    (119,909
    )Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:Depreciation and amortization
    
    
    172,973
    
    
    
    212,108In-kind contribution, interest
    
    
    8,814
    
    
    
    7,119Changes in operating assets and liabilities:(Increase) decrease in:Accounts receivable and in-process billings
    
    
    1,929,969
    
    
    
    (2,980,268
    )Inventory
    
    
    
    
    
    
    (48,047
    )Prepaid expense
    
    
    (14,585
    )
    
    
    (98,104
    )Increase (decrease) in:Accounts payable and Accrued Expenses
    
    
    1,769,372
    
    
    
    185,810Accrued Interest  Related Parties
    
    
    (26,294
    )
    
    
    Accrued Contract Loss
    
    
    10,780
    
    
    
    Due to related party
    
    
    120,798
    
    
    
    236,198Customer Deposits
    
    
    141,201
    
    
    
    Deferred revenue
    
    
    119,534
    
    
    
    (479,316
    )Net Cash Provided By (Used In) Operating Activities
    
    
    2,018,957
    
    
    
    (3,084,409
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (1,061,986
    )
    
    
    (6,374
    )Net Cash Used In Investing Activities
    
    
    (1,061,986
    )
    
    
    (6,374
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from / (Repayment to) line of credit
    
    
    (1,110,848
    )
    
    
    3,019,143Proceeds from Shareholder
    
    
    75,936
    
    
    
    Payments on capital leases
    
    
    (11,653
    )
    
    
    Net Cash Provided By (Used In) Financing Activities
    
    
    (1,046,565
    )
    
    
    3,019,143NET INCREASE (DECREASE) IN CASH
    
    
    (89,594
    )
    
    
    (71,640
    )CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    150,430
    
    
    
    81,878CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    60,836
    
    
    $
    10,238SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid for interest
    
    $
    643,732
    
    
    $
    364,675Cash paid for income taxes
    
    $
    
    
    
    $
    SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING:During the first quarter the Company acquired fixed assets under capital leases totaling
    
    $
    165,224
    
    
    $
    86,901
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VALENTEC SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2007  (Unaudited)
 NOTE 1
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
 (A) Organization
    B) Basis of Presentation
   B) Use of Estimates
  (C) Cash and Cash Equivalents
  8




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(D) Principles of Consolidation
  (E) Inventory
  (F) Property and Equipment
  (G) Contract Revenue
    (H) Fair Value of Financial Instruments
  (I) Earnings (Loss) Per Share
  (J) Product Information
  Three months ended March 31, 2007
 Systems
    
    
    Energetic
    
    
    Metal Parts
    
    
    TotalRevenues
    
    $
    769,904
    
    
    $
    821,167
    
    
    $
    10,178
    
    
    $
    1,601,249Gross Profit
    
    
    232,446
    
    
    
    349,399
    
    
    
    (593,790
    )
    
    
    (11,945
    )Order Backlog
    
    
    12,745,874
    
    
    
    8,669,059
    
    
    
    885,000
    
    
    
    22,299,933
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(K) Long-Lived Assets
  (L) Reclassification
  (M) Income Taxes
  (N) Stock Based Compensation Policy
    (O) Recent Accounting Pronouncements
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NOTE 2
    
    ACCOUNTS RECEIVABLE AND IN-PROCESS BILLINGS
  Billed
    
    $
    2,111,353Unbilled
    
    
    13,367,771Total
    
    $
    15,479,124
      NOTE 3
    
    INSURANCE PROCEEDS RECEIVABLE ARISING FROM INVOLUNTARY
LOSS CONVERSION DUE TO FIRE
  NOTE 4
    
    INVENTORY
  Finished goods
    
    $
    413,929
  NOTE 5
    
    PROPERTY AND EQUIPMENT
  12




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Furniture and fixtures
    
    $
    106,352Machinery and equipment
    
    
    2,488,561Leasehold improvements
    
    
    1,684,3154,279,228Less accumulated depreciation
    
    
    (1,495,428
    )$
    2,783,800
  NOTE 6
    
    DEVELOPMENT COSTS
  Keshet  Systems Integration
    
    $
    3,026,140Ammunition Mortar Rounds (60,81,120 mm)
    
    
    854,10840mm
    
    
    2,894,6926,774,940Less development cost amortization
    
    
    (991,890
    )$
    5,783,050
  NOTE 7
    
    NOTE PAYABLE  LINE OF CREDIT
    NOTE 8
    
    NOTE PAYABLE  STOCKHOLDERS
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NOTE 9
    
    EQUITY
     For the threemonths endedMarch 31, 2007Expected term (in years)
    
    
    
    
    4
    %Expected volatility
    
    
    
    
    240
    %Expected dividend yield
    
    
    
    
    0
    %Risk-free interest rate
    
    
    
    
    4.5
    %
  Weighted Average Fixed Options
    
    Shares
    
    
    Exercise PriceOutstanding at beginning of year
    
    
    1,000,000
    
    
    $
    0.154Issued
    
    
    1,000,000
    
    
    
    0.180Cancelled
    
    
    
    
    
    
    Outstanding at March 31, 2007
    
    
    2,000,000
    
    
    $
    0.165Exercisable at March 31, 2007
    
    
    1,000,000Weighted average exercise price of options granted at March 31, 2007
    
    $
    0.165
 WeightedNumber
    
    Average
    
    Weighted
    
    Number
    
    WeightedOutstanding
    
    Remaining
    
    Average
    
    Exercisable at
    
    AverageExercise Price
    
    at March 31, 2007
    
    Contractual Life
    
    Exercise Price
    
    March 31, 2007
    
    Exercise Price$0.25
    
    600,000
    
    7.5
    
    $0.25
    
    1,000,000
    
    $
    0.25$0.01
    
    400,000
    
    7.5
    
    $0.01
    
    400,000
    
    $
    0.01$0.18
    
    1,000,000
    
    4.0
    
    $0.18
    
    -0-
    
    $
    0.18
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NOTE 10
    
    WARRANTS AND OPTIONS
      NOTE 11
    
    PROFIT SHARING PLAN
  NOTE 12
    
    RELATED PARTY
  March 31, 2007
    
    
    March 31, 2006Sales to affiliates
    
    $
    761,445
    
    
    $
    3,773,426Due from affiliates (included in advances 
stockholders in accompanying balance sheet)
    
    $
    120,813
    
    
    $
    196,749Due to related party
    
    $
    1,589,481
    
    
    $
    1,228,436Notes Payable to Stockholders
    
    $
    2,483,039
    
    
    $
    933,455Advance payment on a contract  related party
    
    $
    1,490,174
    
    
    $
    2,837,619
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NOTE 13
    
    CONTRACT STATUS
  Backlog 
 March 31, 2007
    
    
    March 31, 2006Total contract price of
initial contract awards including
exercised options and approved
change orders (modifications)
    
    $
    54,981,418
    
    
    $
    31,958,973Completed to date
    
    
    32,681,485
    
    
    
    5,972,891Authorized backlog
    
    $
    22,299,933
    *
    
    $
    25,986,082
    *
 
 *
    
    Included in this amount is $12,745,874 and $23,791,745 for 2007 and 2006, respectively, in
authorized backlog from a related party (Soltam Systems). NOTE 14
    
    COMMITMENTS AND CONTINGENT LIABILITIES
 (A) Litigation
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(B) Employment Agreement
  (C) Capital Lease
  NOTE 15
    
    CONCENTRATIONS
 (A) Revenue and Receivables
  (B) Suppliers
  17




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(C) Materials
  (D) Foreign Operations
  NOTE 16
    
    GOING CONCERN
  NOTE 17
    
    SUBSEQUENT EVENTS
  
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
 FORWARD-LOOKING STATEMENTS
 Information included or incorporated by reference in this filing may contain forward-looking
statements. This information may involve known and unknown risks, uncertainties and other factors
which may cause our actual results, performance or achievements of the Company to be materially
different from the future results, performance or achievements expressed or implied by any
forward-looking statements. Forward-looking statements, which involve assumptions and describe our
future plans, strategies and expectations, are generally identifiable by use of the words may,
should, expect, anticipate, estimate, believe, intend, or project, or the negative of
these words or other variations on these words or comparable terminology.
 This filing contains forward-looking statements, including statements regarding, among other
things, (a) our projected sales and profitability, (b) our growth strategies, (c) anticipated
trends in our industry, (d) our future financing plans and (e) our anticipated needs for working
capital. These statements may be found under Managements Discussion and Analysis or Plan of
Operations and Business, as well as in this filing generally. Actual events or results may
differ materially from those discussed in forward-looking statements as a result of various
factors, including, without limitation, the risks outlined under Risk Factors and matters
described in this filing generally. In light of these risks and uncertainties, there can be no
assurance that the forward-looking statements contained in this filing will in fact occur.
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OVERVIEW
  
    
    Systems Management/Integration segment consists of 120mm Mortar Weapon System
with Electronic Fire Control and mortar ammunition consisting of 120mm, 81mm and 60mm. The
Company will pursue contracts from foreign governments for vehicle integration and mortar
ammunition.
    
    Energetic Manufacturing segment consists of 40mm flares and simulators.
Valentec is a producer of various flares and simulators with multiple end uses, such as
illumination, signaling and training purposes to simulate a battlefield environment. The
Company will pursue contracts from the US Army.
    
    Metal Parts Manufacturing segment consists of 105mm Spiral Wrapped Cartridge
Cases which are used by the U.S. Armed forces in battlefield. The Company is currently
marketing this product with foreign governments and is also actively fulfilling a contract
with U S Army. The Company will pursue additional contracts with U S government.
     40MM Production Facility
     System Contract
  19




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SWCC
   Cost Reduction Plan
  RESULTS OF OPERATION
     20




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LIQUIDITY AND CAPITAL RESOURCES
       21




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RECENT ACCOUNTING PRONOUNCEMENTS
 Accounting for Certain Hybrid Financial
Instruments-an amendment of FASB Statements No. 133 and 140 Accounting for
Derivative Instruments and Hedging Activities Accounting for the Impairment or Disposal of Long-Lived Assets
 Accounting for Servicing of Financial Assets, an
amendment of FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
 Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statements No. 109"
 Fair Value Measurements
 Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans  an amendment of FASB Statements No. 87, 88, 106, and
132(R)
 Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements
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The
Fair Value Option for Financial Assets and Financial Liabilities  Including an Amendment of FASB
Statement No. 115 Accounting for Certain Investments in Debt and Equity Securities Fair Value Measurements.
 OFF-BALANCE SHEET ARRANGEMENTS
  CRITICAL ACCOUNTING POLICIES
   
    
    Revenue recognition via the percentage of completion method
 Revenue Recognition via the Percentage of Completion Method.
   23




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ITEM 3. CONTROLS AND PROCEDURES
 (a) Evaluation of Disclosure Controls and Procedures:
  (b) Changes In Internal Controls Over Financial Reporting
  (c) Inherent Limitations on Effectiveness of Controls
  24




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PART II
 
 ITEM 1. LEGAL PROCEEDINGS
     
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 None.
 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 None.
 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS




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ITEM 5. OTHER INFORMATION
 None.
 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 10-QSB
 (a)
    
    The following exhibits are filed as part of this filing:
 Exhibit No
    
    Description
    
    Location31.1
    
    Certification by Chief Executive
Officer and Principal Accounting
Officer pursuant to 15 U.S.C.
Section 7241, as adopted pursuant
to Section 302 of the
Sarbanes-Oxley Act of 2002
    
    Provided herewith32.1
    
    Certification by Chief Executive
Officer and Principal Accounting
Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant
to Section 906 of the
Sarbanes-Oxley Act of 2002
    
    Provided herewith
 (b)
    
    Reports of Form 8-K
        26




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SIGNATURES
  VALENTEC SYSTEMS, INC.June 18, 2007
    By:
    /s/ Robert A. ZummoRobert A. ZummoChief Executive Officer and
Principal Accounting Officer 27