**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-K**

(Mark one)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the Fiscal Year Ended **December 31, 2010**

OR

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

 

**VALLEY FORGE COMPOSITE TECHNOLOGIES, INC****.**

(Exact name of registrant as specified in its charter)
|  

 

 

**Florida**

 

**20-3061892**

(State or other jurisdiction of

 

(IRS Employer

incorporation or organization)

 

Identification No.)

 

 

 

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

 

**41011**

(Address of principal executive offices)

 

(Zip Code)

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

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

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

**Common Stock, Par Value $.001 Per Share**

(Title of class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.          [  ] Yes    [X] No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    [  ] Yes    [X] No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.         [X] Yes    [  ] No

1

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  [  ]   No  [  ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    [X]

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

 

 

 

 

 

 

Large accelerated filer [  ]

 

Accelerated filer [  ]

Non-accelerated filer [  ]

 

Smaller reporting company [X]

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

Yes  [  ]   No  [X]

The aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 30, 2010 was $47,223,207, computed by reference to the price at which the common equity was sold as of such date.

The number of shares outstanding of the issuer’s common stock as of April 8, 2011 was 61,320,774 shares.

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**TABLE OF CONTENTS**

PART I

 

 

 

Item 1. Business

4

Item 1A. Risk Factors

12

Item 1B Unresolved Staff Comments (Not Applicable)

20

Item 2. Properties

21

Item 3. Legal Proceedings

21

Item 4. (Removed and Reserved)

23

 

 

PART II

 

 

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

23

Item 6. Selected Financial Data (Not Applicable)

26

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

Item 7A. Quantitative and Qualitative Disclosures About Market Risk`

31

Item 8. Financial Statements and Supplementary Data

31

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial  Disclosure

54

Item 9A. Controls and Procedures

54

Item 9B. Other Information

55

 

 

PART III

 

 

 

Item 10. Directors, Executive Officers and Corporate Governance

55

Item 11. Executive Compensation

58

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

60

Item 13. Certain Relationships and Related Transactions, and Director Independence

61

Item 14. Principal Accounting Fees and Services

63

 

 

PART  IV

 

 

 

Item 15.  Exhibits

64

 

 

SIGNATURES

65

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**Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995**

Information included in this Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”).  This information may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Valley Forge Composite Technologies, Inc. (the “Company”, or VLYF), to be materially different from future results, performance or achievements expressed or implied by any forward-looking statements.  Forward-looking statements, which involve assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” or “project” or the negative of these words or other variations on these words or comparable terminology.  These forward-looking statements are based on assumptions that may be incorrect, and there can be no assurance that these projections included in these forward-looking statements will come to pass.  Actual results of the Company could differ materially from those expressed or implied by the forward-looking statements as a result of various factors.  Except as required by applicable laws, the Company has no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

**PART I**

**ITEM 1.** ** BUSINESS.**

**General Lines of Business**

Since its inception in November 1996, VLYF has positioned itself to develop and acquire advanced technologies.  Between 1996 and 2010, the Company won numerous contracts to produce various momentum wheels and other mechanical devices for special applications, some in aerospace (“Aerospace Products”).  Historically, and in 2010, all of the Company’s sales have been derived from these momentum wheels and other mechanical devices and this continues to be true through the filing date of this Form 10-K.  The Company generated Aerospace Products revenues of $3,202,815 in 2009, increasing revenues to $18,675,269 in 2010.  The Aerospace Products were sold to two customers in 2010, both of which are multinational corporations.  One customer was responsible for approximately $14,000,000 in sales, with the other customer purchasing approximately $4,000,000 of products.  The Company assembles momentum wheels from components produced by subcontractors.  The selling price typically ranges for $25,000 to $75,000 per unit.  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”) to be operational and performing to the Company’s satisfaction.  

***THOR-LVX***

***Overview***

Presently, and for the last nearly eight years, the Company has focused on the development of the THOR-LVX (“THOR”) Advanced Explosives Detection System and preparing for the manufacturing and distribution of THOR in the United States and other countries.

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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.

The Company believes that THOR is unique and advanced relative to competitive technologies.  To the best of the Company’s knowledge, there is no existing device that can screen containers for explosives, drugs, micro organisms and nuclear materials, such as plutonium and weapons grade uranium, in a commercially viable manner, with the accuracy and effectiveness of THOR.  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.

 

The Company is unaware of any other system capable of performing at the level Thor does.  While others may have similar concepts, the Company believes it is the first to reduce it to practice.  Accordingly, the Company estimates it has a significant time advantage over any competitor who may attempt to build and bring to market a system of similar size and function.   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 be taking 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 the P. N. Lebedev Physical Institute of the Russian Academy of Sciences (“LPI”), the premiere physics laboratory in the Russian Federation.  The THOR development efforts have been sponsored, in part, by the United States Department of Energy (the “US D.O.E.”).

***Recent Developments***

In 2009, the Company and its partners completed the development of THOR in Russia, and the system has been demonstrated through testing conducted by LPI to be operational and performing to the Company’s satisfaction. In July 2010, LLNL released to the Company a Final Project Report under the CRADA, confirming that the technical objectives of the CRADA have been met. The Company is developing plans to assemble a THOR demonstration unit in the United States to facilitate its first commercial sale of THOR.   The Company is currently engaged in marketing activity for THOR units.  Thereafter, the Company will establish limited scale production, and then plan and implement full scale production.  

The Company has 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 demonstration unit in Pocatello, Idaho.  In order to begin that project, the CSA requires the Company to propose a series of work orders setting forth work tasks, deliverables, due dates, IAC’s compensation and other commercial terms.  To date, no work orders have been issued or accepted.  

5

***License and other Rights in Thor***

In April, 2002, the Company entered into an Exclusive Rights Agreement (“ERA”) with P.N. Lebedev Physical Institute, Russian Academy of Sciences (“LPI”), granting the Company sole and exclusive rights to distribute, promote, market and sell the projects/products known as PNDEN in the United States of America and all countries throughout the world with the exception of the Russian Federation and countries of the Commonwealth of Independent States.  The ERA defines PNDEN as the “Photo- Nuclear Detector of Hidden Explosives and Narcotics,” which is the basic technology associated with THOR.  In August 2004, the ERA was amended to extend the term to expire on April 12, 2014.  

In April 2003, the Company entered into a Cooperative Research and Development Agreement (“CRADA”) with the Regents of the University of California, who operate the Department of Energy’s (“DOE”) Lawrence Livermore National Laboratory (“LLNL”), to implement a collaborative effort between the Company, LLNL, LPI, and other Russian institutions “to develop equipment and procedures for detecting explosive materials concealed in airline checked baggage and cargo.”  The Company, LLNL and LPI implemented the CRADA from April 2003 through its expiration on March 30, 2010.  The CRADA involves the development of an accelerator-detector complex which is the basis for the Company’s THOR LVX product.  In July 2010, LLNL issued its final report (“Report”) pursuant to the CRADA.  LLNL did not publically release the Report, but authorized the Company to issue a July 12, 2010 press release concerning the system’s performance, which states, in part:

Technical objectives of the project included the development and automation of the accelerator-detector complex for high efficiency detection of hidden explosives. Data acquisition and a photonuclear signature database were created. The system was operated and tested albeit on a limited sample size. A technique for the time analysis of signals from latent targets was developed and tested. This resulted in the positive identification of carbon and/or nitrogen. These techniques detected measurable decay from the radioisotopes formed upon irradiation.

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.  The Company will have a non-exclusive, non-transferable, royalty-free license to use any such subject inventions for its own use in the field of “detection of hidden explosives.”  The Company also had an exclusive first option for six months following the expiration of the CRADA to negotiate for greater rights in any such inventions, such as a royalty-bearing exclusive, transferrable, domestic and foreign license, and LLNL is obligated to negotiate that license in good faith with the Company.  Although the six-month period has expired, due to delays in translating and prosecuting Russian patents, LLNL personnel have advised the Company that they intend to negotiate an exclusive license with the Company.  The Company continues to communicate with LLNL and believes it will ultimately finalize a license agreement with LLNL.   Any license granted to the Company will be subject to US D.O.E.’s so-called “march-in-rights” to cause the invention to be commercialized and to a non-exclusive, nontransferable, irrevocable, paid-up license to practice the invention subject to the license or have the invention practiced throughout the world by or on behalf of the U.S. Government.   Russian Patent Applications have been completed.  The company hopes to complete an exclusive license with LLNL in the coming months.

***Research and Development***

The Company was previously awarded a grant of over $1.8 million from the DOE for continued research, design, and production of the first THOR unit.  The grant funds were allocated to the LLNL and have been reflected in the Company's financial statements in previous years as research and development costs.  Historically, the Company has contributed research and development efforts, as required under the CRADA, and expenses to facilitate the commercialization of THOR.  The Company anticipates incurring additional development costs associated with THOR under the CSA with Idaho State University, although no commitments have been made.

6

***Raw Material Sources and Availability***

THOR materials and parts can be manufactured to the Company’s specifications on an as needed basis from a variety of sources in the United States of America.   The Company does not expect to encounter problems in acquiring the commercial quantities of components required to build THOR.

***The THOR Market***

Each year millions of cargo containers arrive in the United States by ship, truck, and rail with no effective explosive and other threat detection systems currently available to inspect them. Ensuring the security of the maritime trade system is essential, both in the United States and internationally, given that an estimated 90 percent of the world's cargo moves by container.  The Company believes that there is currently demand, both in the United States and internationally, for products that are able to accurately inspect these containers and that the market for these products will continue to be affected by the threat of terrorist incidents and efforts by governments and private industry to prevent them.  

 

The likely market for THOR includes:

·

 Ports, cargo hubs, and rail yards, both domestically and internationally;

·

World-wide express cargo facilities;

·

United States postal facilities;

·

United States border crossings

·

United States military field applications; and

·

Technology licensing opportunities.

The Company believes that THOR’s capability to detect 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 Company’s license rights with respect to any subject inventions discovered under the CRADA would extend to using such subject inventions in the detection of all such threats.

***Major Prospective Customer Dependency and Competition***

The Company’s successful production and sales of THOR may initially depend to a great extent on interest in THOR from the United States Government and select foreign markets.  Following completion of the demonstration unit, the Company will continue to seek buyers worldwide both to increase THOR’s eventual market share and to reduce its potential dependence on any one customer.

The security and inspection market in which THOR will compete is highly competitive.  The marketplace already includes a number of established competitors, many of which have significantly greater financial, technical and marketing resources than we have.  These competitors likely also have more well established customer relationships and greater name recognition than we do, and will have operated in the industry for longer than us.  All of these factors may affect our ability to successfully compete in the market, and these and other competitive pressures may materially and adversely affect our business, financial conditions and results of operations.  

We believe competition in this market is based on a number of factors, the most important of which include product performance and effectiveness, price, customer relationships, and service / support capabilities.  We anticipate that the principal competitors against THOR will be products manufactured by the following companies:  Smiths Detection; OSI Systems, Inc.; L-3 Communications—Security and Detection Systems; 
7

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 the THOR is more powerful than any known competitor’s products, can be made portable, and provides real time detection capability.

Traditional detection systems are based on X-rays of various low energy levels, including Nuclear Magnetic Resonance (NMR) and Quadropole Magnetic Resonance (QMR), or on low level gamma energies created by radioactive isotopes.  It has been determined, however, that X-rays and lower level gamma energies lack sufficient strength to penetrate all barriers and are often absorbed or deflected before they can properly penetrate a container or identify its contents.  THOR overcomes this problem by using a specialized particle accelerator to create high energy gamma rays that can penetrate virtually any cargo container and return a viable signal.    The Company believes that THOR will have a competitive advantage over other products in the industry due to its specialized particle accelerator.  

Typical research high energy particle accelerators are generally the size of a small warehouse and would not be suitable for use in the cargo inspection arena. But through decades of dedicated research, Russian scientists, many of whom have worked with the Company and LPI on the development of THOR, have developed a miniature particle accelerator approximately the size of a pool table.  THOR utilizes this miniature particle accelerator** **to create the focused, high energy gamma rays that are necessary to accurately penetrate 8 feet through a cargo container and return a 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 million electron volts (MeV). The Company’s THOR generates 55 MeV.

To the Company’s knowledge, only the THOR system can generate the necessary power levels and return signals to accurately determine the amount and exact chemical nature of explosives, drugs, or other illicit material in a sealed container in a commercially viable manner.  According to multiple laboratory tests, the system effectively penetrates concealment media and performs to 99.6% accuracy.

 

THOR can be fully automated including the scanning and analysis of the nature and volume of explosive materials, devices or their components, meaning that no human operator is required for data interpretation, and it can be operated from a remote location.  This reduces the operation costs of THOR compared to any other product.  Also, THOR’s energy consumption is approximately 30 kilowatts vs. 50 kilowatts consumed by many other detection systems.

We have never built nor have we operated a THOR unit in the United States.  While we believe that the materials, technology and labor needed to build a unit will be available at commercially reasonable costs, we do not know for certain just what the total cost will be.  In addition, we do not know just what the operating costs of a THOR unit will be.  We anticipate that we will be able to get a better understanding of those items if we are able to reach agreement with the Idaho Accelerator Center (under the Consulting and Services Agreement framework referenced above) to build and operate a unit.  In addition, while we believe that the benefits offered by THOR will be both unique and of great value so customers will not be particularly price sensitive, we do not know whether we will be able to sell THOR units at a reasonable profit in excess of our costs.

***Distribution of THOR***

The Company intends to sell THOR through direct sales means in the United States, Canada, and Europe.  The Company has yet to determine its distribution strategy for the rest of the world.  Presently there are no distribution agreements in effect; all such agreements have expired.

8

***Effect of Existing or Probable Government Regulations***

Government regulations may impact the market for THOR.  Since many of the potential end users for THOR may be government agencies, the terms and conditions of procurement regulations may have a material effect on potential purchases of THOR by such agencies.  For example, such terms and conditions would likely have a positive effect on sales efforts if they required the target inspection devices to perform to standards that THOR can achieve but many competing products cannot reach.  If, conversely, factors other than performance criteria in which THOR has an advantage are emphasized, such terms and conditions may make our sales efforts more challenging.  The Company cannot anticipate the terms and conditions that will apply to any specific procurement regulations applicable to potential sales of THOR to government agencies.

The Company has not yet sought any government approvals or other approvals required to comply with applicable electrical or safety codes required to manufacture, sell or operate THOR.

The Company intends to market THOR to prospective customers outside of the United States, and will need to have United States Department of State approval to export THOR to any foreign purchaser in addition to complying with regulations of the country into which we are exporting THOR. 

The Company otherwise believes that  government regulations will not have a material impact on the Company’s production or sale of THOR units, and the Company does not anticipate any change to this in the future.

 

***ODIN***

ODIN is a transmission X-ray system, producing medical type images of skeletons and organs that is similar to a technology used as the airport passenger weapons scanning system in several airports in Russia.   The technology is not protected by patents outside of the Russian Federation; the Company has developed ODIN to improve and commercialize the technology for use in the United States and elsewhere outside of Russia.

The Company believes the ODIN technology, as compared against 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 is currently considering whether to manufacture ODIN directly, while licensing certain software or other non-owned technology, or entering into a joint venture to handle all manufacturing and marketing of ODIN.  No decisions or commitments on this issue have yet been made.

***Raw Material Sources and Availability***

Most ODIN materials and parts are available on an as needed basis from a variety of sources in the United States of America and Western Europe.  Accordingly, the Company does not expect to encounter problems in acquiring the commercial quantities of components required to produce or maintain ODIN.

9

***The ODIN Market***

Because ODIN has both anti-terrorism and anti-crime applications, the potential ODIN market extends to include potentially every civilian application where quick, accurate, full-body non-intrusive personnel scanning is necessary.  Applications could include use at schools, government offices, prison facilities, sports complexes, passenger cruise liners, airports, rail and bus terminals, corporate offices, and any number of other circumstances where security screening is important.  However, a single ODIN unit requires ample floor and ceiling space and can be utilized only in suitable locations.  ODIN units are competitively priced but are not inexpensive and therefore are suitable primarily for institutional and large enterprise applications.

***Major Prospective Customer Dependency and Competition***

The Company believes that the ODIN is the best available personnel screening device and is more accurate and more efficient in detailing weapons and other contraband than 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.

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.   While we are discussing a future business arrangement with the Russian manufacturer, there is no restriction from that manufacturer putting its units into competition with the Company in attempted sales of ODIN.  However, potential international buyers have indicated to us that they prefer to buy from an American product from an American company. 

***Distribution and Sales of ODIN***

Initially, the Company intended to sell ODIN through direct sales means in North America, Eurasia, India, and to some extent, South America.  However, in light of the joint venture mentioned above, the Company is reevaluating its distribution and sales strategy for ODIN.    In the event the Company enters into a joint venture, sales will be made through that entity.  No decisions or commitments on this issue have yet been made.

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The Company is currently considering whether to manufacture ODIN directly, while licensing certain software or other non-owned technology, or entering into a possible joint venture to handle all manufacturing and marketing of ODIN.  No decisions or commitments on this issue have yet been made.

***Effect of Existing or Probable Government Regulations***

As with THOR, government regulations may impact the market for ODIN.  To the extent end users are government agencies, the terms and conditions of procurement regulations may have a material effect on potential purchases of ODIN by such agencies.  For example, such terms and conditions would likely have a positive effect on sales efforts if they required the target devices to perform to detection and resolution standards that ODIN can achieve but many competing products cannot reach.  If, conversely, factors other than performance are emphasized, such terms and conditions may make our sales efforts more challenging.  The Company cannot anticipate future terms and conditions that will apply to any specific procurement regulations applicable to potential sales of ODIN to government agencies.  Current terms and conditions for purchasing Whole Body Imaging products were announced by the TSA in 2008.

The Company is familiar with those terms and conditions and believes ODIN sales are possible in light of the specifications and other terms and conditions established by the TSA.  Efforts are underway for ODIN’s placement on the TSA’s applicable Qualified Products List (“QPL”), but we do not know when or if ODIN will be placed on the QPL.

The United States (U.S.) Food and Drug Administration’s (FDA) Center for Devices and Radiological Health (CDRH) is responsible for regulating radiation-emitting electronic products.  The CDRH goal is to protect the public from hazardous and unnecessary exposure to radiation from electronic products.  As required by law, the Company has submitted a product report concerning ODIN to the FDA and has received an acknowledgement letter that the report was received.  An acknowledgement of receipt letter is not an approval of a product nor does it mean that a report is adequate.  The FDA has established standards that manufacturers of radiation-emitting electronic products must meet.  The Company believes that ODIN meets those standards and is required to self-certify that it does so.  The FDA does not itself certify products.  For a detailed explanation of the FDA’s requirements, see:

http://www.fda.gov/radiation-emittingproducts/electronicproductradiationcontrolprogram/gettingaproducttomarket/default.htm#3.

The Company otherwise believes that government regulations will not have a material impact on the Company’s production or sale of ODIN, and the Company does not anticipate any change to this in the future.

**Additional Disclosure Regarding the Company’s Business**

***Research and Development Cost Estimate***

The Company estimates that during each of 2010 and 2009, it incurred no out of pocket research and development expenses with respect to THOR.  The Company did provide in-kind research and development activities with respect to THOR, as required under the CRADA.

The Company estimates that during 2010 and 2009, it incurred $382 and $30, 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.

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***Environmental Impact***

Food and other objects scanned with the THOR prototype have returned to below background radiation levels within approximately fifteen minutes.  No long term effects were evidenced.  

No environmental impact has been identified with respect to ODIN.

**Employees**

The Company has six current employees, of which two are executive managers, two 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.  (Hereafter, in this Form 10-K, the consolidated operations of the parent and subsidiary will be referred to as the “Company” or “VLYF”).  The Company has not materially reclassified, merged, consolidated, purchased or sold any significant amount of assets other than in the ordinary course of business, and the Company has not been the subject of any bankruptcy, receivership or similar proceedings.

**ITEM 1A.   RISK FACTORS.**

**Risks Relating to an Investment in the Company**

Investment in our securities involves a high degree of risk.  Investors should carefully consider the possibility that they may lose their entire investment.  Given this possibility, we encourage investors to evaluate the following risk factors and all other information contained in this report and its attachments, in addition to other publicly available information in our reports filed with the Securities and Exchange Commission (SEC), before engaging in transactions in our securities. Any of the following risks, alone or together, could adversely affect our business, our financial condition, or the results of our operations, and therefore the value of your Company securities.

·

 Because the Company had a net loss of $1,476,650, $2,038,623 and $1,848,755 for the years ended December 31, 2010, 2009 and 2008, respectively, we face a risk of insolvency

·

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

·

The auditors’ reports for our December 31, 2010, 2009, 2008, 2007 and 2006 financial statements include additional paragraphs that identify conditions which raise substantial doubt about our ability to continue as a going concern, which means that we may not be able to continue operations unless we obtain additional funding. The financial statements do not include any adjustments that might result from the outcome of this uncertainty

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**Risks Related to the Company’s Business**

***There is substantial doubt about the Company’s ability to continue as a going concern due to insufficient revenues to cover our operating costs.***

 

Our independent auditors included a going concern paragraph in their reports issued in connection with their audits of our December 31, 2010, 2009, 2008, 2007 and 2006 financial statements.  The auditors noted in their reports that the Company has suffered recurring losses from operations.  The Company had accumulated deficits of $9,782,871 and $8,306,221 as of December 31, 2010 and 2009, respectively.  The Company experienced comprehensive losses from operations of $1,481,029 and $2,038,623 for periods ending December 31, 2010 and 2009 respectively.  These factors raise substantial doubt about our ability to continue as a going concern. 

We incurred a net loss for the year end results for each of December 31, 2010 and 2009, respectively.  To the extent that we do not generate revenue from the sale of THOR or ODIN units, or from other sources, then the Company may not have the ability to continue as a going concern.  The financial statements which accompany this report do not include any adjustments that might result from the outcome of this uncertainty.

***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.

***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.  

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***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.

***Our Ability to Market Body Scanning Technology Products May Depend on Execution of Third Party Agreements or Additional Development***

As noted earlier, the Company is currently considering whether to manufacture ODIN directly or entering into a joint venture to handle all manufacturing and marketing of ODIN.  In the event that the Company is unsuccessful in completing a joint venture, the Company will need to develop other software or utilize a fundamentally different alternative technology that it is considering.  The Company is currently negotiating a joint venture agreement and the other parties have recently insisted that it be signed promptly.  While we anticipate that we would be able to reach agreement on the joint venture agreement, we are unable to predict whether that will happen as quickly as the other parties have requested or whether the other parties will, in fact, decline to continue to pursue the joint venture if it is not signed promptly.  If we are unable to enter into a joint venture our ability to continue to market ODIN or other body scanning technology will be impaired or, at a minimum, delayed.

***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, 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, 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.

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***If operators of our security and inspection systems fail to detect weapons, explosives or other devices that are used to commit a terrorist act, we could be exposed to product liability and related claims for which we may not have adequate insurance coverage.***

Our business exposes us to potential product liability risks from the development, manufacturing, and sale of THOR and ODIN.  Our prospective customers will use our products to help them detect items that could be used in performing terrorist acts or other crimes.  ODIN may require that an operator interpret an image of suspicious items within a bag, parcel, container or other vessel, and the training, reliability and competence of the operator will be crucial to the detection of suspicious items.  We could be held liable if an operator using our equipment failed to detect a suspicious item that was used in a terrorist act or other crime.  

Furthermore, both THOR and ODIN are advanced mechanical and electronic devices and therefore can malfunction.  In addition, there are also many other factors beyond our control that could lead to liability claims should an act of terrorism occur.  It is very difficult to obtain commercial insurance against the risk of such liability.  It is very likely that, should we be found liable following a major act of terrorism, our insurance would not fully cover the claims for damages.

***Our revenues are dependent on orders of security and inspection systems, which may have lengthy and unpredictable sales cycles.***

 

Our sales of THOR and ODIN units may often depend upon the decision of governmental agencies to upgrade or expand existing airports, border crossing inspection sites, seaport inspection sites and other security installations.  Any such sales may be subject to delays, lobbying pressures, political forces, procedural requirements, and other uncertainties and conditions that are inherent in the government procurement process.  

***We are dependent on key personnel, specifically Louis J. Brothers and Larry K. Wilhide, and have no employment agreements with them*.**

We are a company with key employees and are dependent on the services of Louis J. Brothers, our president, and Larry K. Wilhide, our vice-president.  Messrs. Brothers and Wilhide are equal shareholders and their combined voting rights are equal to 62.4% 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, there is no guarantee that we could survive.

***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.

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***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.

***The Costs to Produce and Operate THOR, and the Price at which We May Be Able to Sell it are Uncertain***

We have never built nor have we operated a THOR unit in the United States.  While we believe that the materials, technology and labor needed to build a unit will be available at commercially reasonable costs, we do not know for certain just what the total cost will be.  In addition, we do not know just what the operating costs of a THOR unit will be.  We anticipate that we will be able to get a better understanding of those items if we are able to reach agreement with the Idaho Accelerator Center (under the Consulting and Services Agreement framework referenced above) to build and operate a unit.  In addition, while we believe that the benefits offered by THOR will be both unique and of great value so customers will not be particularly price sensitive, we do not know whether we will be able to sell THOR units at a reasonable profit in excess of our costs.

***If we are not able to successfully protect our intellectual property, our ability to capitalize on the value of the THOR technology may be impaired****.*

We do not own the THOR technology, and our ability to use and capitalize on the value of the THOR technology depends on entirely on our rights to do so under the CRADA and the ERA.  The CRADA does not guarantee that we will have any permanent or exclusive right to utilize the THOR technology. We are actively pursuing and attempting to maximize our rights under the CRADA, but there is no guarantee that we will be able to secure rights that provide the desired level of intellectual property protection.

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, regardless of any rights we secure under the CRADA, the CRADA 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 Department of Energy 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.  We are currently engaged in discussions with LLNL regarding potential inventions resulting from the CRADA, and expect that patent protection will be pursued.

***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-

16

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.

***We do Business Outside of the United States Which Subjects Us to Risks Associated with International Activities.***

A portion of the 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. 

  

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. 

***A shareholder has threatened to send a letter to the Board demanding the removal of certain officers of the Company and other relief***

A shareholder claiming to represent a group of shareholders has threatened to send a letter to the Board of Directors (and file the letter with the SEC as part of a Schedule 13D), demanding that certain officers of the Company be removed and further demanding additional information regarding compensation, the appointment of an interim CEO approved by the shareholder group and “an analysis of any possible criminal activity”, the basis for which is unspecified.  The shareholder, who claims to not yet be represented by counsel, further demands that unless he receives a response from an independent committee of the Board, he will file a class action lawsuit.  The Company is unable to predict what actions, if any, this shareholder and others associated with him might take.

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**Risks Related to Investment**

***We expect the price of our common stock to be volatile. As a result, investors could suffer greater market losses than they might experience with a more stable stock.***

The stock markets generally, and the Over-The-Counter (“OTC”) Bulletin Board in particular, have experienced extreme price and volume fluctuations that are often unrelated and disproportionate to the operating performance of a particular company.  For example, since the beginning of 2009 our stock went from a low price of about 8 cents per share to a high price of approximately $2.86 per share and closed on March 25, 2011 around $1.22 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.

***Our stock value is dependent on our ability to generate net cash flows.***

A large portion of any potential return on our common stock will be dependent on our ability to generate net cash flows.  If we cannot operate our business at a net profit, there will be no return on shareholders’ equity, and this could result in a loss of share value.  No assurance can be given that we will be able to operate at a net profit now or in the future.

***Our common stock value may decline after the exercise of warrants or from the Company’s future capital raising events.***

As of December 31, 2010, there are 1,428,574 Class D warrants and 1,300,000 Class F warrants 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 

18

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 10-K were prepared as if such warrants were no longer outstanding.

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.

***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 the 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;

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·

“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 Bulletin Board or Pink Sheet securities.  As a result, investors may not be able to buy or sell our securities at the times they may wish.***

Even though our common stock is presently quoted on the OTC Bulletin Board, our investors may not be able to sell securities when and in the manner that they wish.  Because there are no automated systems for negotiating trades on the OTC Bulletin Board, they are often conducted via telephone.  In times of heavy market volume, the limitations of this process may result in a significant increase in the time it takes to execute investor orders. When investors place market orders to buy or sell a specific number of shares at the current market price it is possible for the price of a stock to go up or down significantly during the lapse of time between placing a market order and its execution.

***Our warrants may not develop a trading market before their time of expiration.***

Only our common stock is traded in the over-the-counter market.  We are not aware of any over-the-counter market for our warrants, although a private sale of our warrants has occurred.  In the event a warrant is acquired by a new purchaser, that purchaser may not be able to resell the warrant, and, if the purchaser does not exercise the warrant before the expiration date then in effect, the purchaser will suffer a complete capital loss of his or her entire investment in the warrant.

***If we fail to remain current on the reporting requirements that apply to us, we could be removed from the OTC Bulletin Board, which would limit the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities.***

Companies with securities quoted on the OTC Bulletin Board must be reporting issuers under Section 12 of the Exchange Act, and must be current in their reports under Section 13 of the Exchange Act, in order to maintain price quotation privileges on the OTC Bulletin Board.  If we fail to remain current on our reporting requirements, shares of our common stock could be removed from quotation on the OTC Bulletin Board.  As a result of that removal, the market liquidity for our securities could be severely adversely affected by limiting the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market.

***We may be exposed to potential risks relating to our internal controls over financial reporting and our ability to have our independent registered public accounting firm attest to these controls.***

Our independent auditors have communicated to management their findings that material weaknesses exist in our internal controls over financial reporting as follows: 1) lack of segregation of duties; 2) lack of qualified accounting personnel working as direct employees.  We are investigating how best to correct the material weaknesses identified.  In the event we become a so-called “accelerated filer” for SEC reporting purposes, we would be required to obtain and file with the SEC an attestation report on our internal controls from auditors.  To obtain such a report, we would need to correct the material weaknesses currently identified in our internal controls.

**ITEM 1B.  UNRESOLVED STAFF COMMENTS.**

Not Applicable.

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**ITEM 2.** ** DESCRIPTION OF PROPERTY.**

The Company does not own or lease a manufacturing facility for production of THOR, but it intends to build, lease or otherwise acquire at least one assembly facility in the United States for that purpose.  The Company has located several suitable sites and once a demonstration unit has been completed and is functioning in the United States, the Company intends to commence negotiations for a lease and / or facility construction.

 

The Company’s projection for the timing of production is dependent on receiving necessary government approvals to commence production, the Company’s ability to build or obtain at least one suitable production facility, and the ability to obtain additional capital if necessary to meet then current production goals.    Initial market demand for THOR will determine the Company’s labor and physical plant requirements.

The Company’s headquarters office operates from leased space.   The Company leases 2,985 square feet of office space located at 50 E. River Center Boulevard, Suite 820, Covington, Kentucky.   The term of the lease is for five years beginning on the first day of September, 2006 and ending on the last day of August, 2011.  The annual base rent increases every 12 months starting at approximately $40,484 and ending at approximately $53,730.  Under the terms of the lease, additional rent for operating expenses of the building shall also be payable by the Company at a pro rata share deemed to be 0.928%.  These expenses are anticipated to increase at a rate of 3% per year.  Minimum annual lease payments are: $43,387 for 2007; $49,680 for 2008; $51,163 for 2009; $52,695 for 2010; and $35,820 for 2011.  Therefore, the Company’s minimum cumulative lease obligation is $232,745 for the full five year lease period.  The Company has not decided whether it will vacate the premises upon expiration of the lease or seek to renew the lease terms.  

On December 1, 2007, the Company entered into a lease of 2,700 square feet of rentable space located at 1895 Airport Exchange Blvd, Building A, Erlanger, Kentucky. The lease expired at the end of 2010 but was extended one year to the end of 2011.

Under the terms of the lease, the Company shall pay additional rent to cover operating expenses of the property of approximately $349 per month.  Rent expense for the period ended December 31, 2010 and 2009 was $97,407 and $101,814. 

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

**ITEM 3.** ** LEGAL PROCEEDINGS.  **

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

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

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

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

 

A Motion to Dismiss was filed in response to the Complaint.  A Consent Order was entered on Jan. 14, 2010, allowing CTCEG to file an Amended Complaint.  A Motion to Dismiss was filed in response to the Amended Complaint.  On May 20, 2010, the Court granted CTCEG leave to file a third amended complaint, which abandons the claims in the original complaint except for breach of contract based on allegations of failure to pay expenses under the above referenced consulting agreement.  The First Amended Complaint ("Complaint") alleges failure to pay a $42,000 promissory note payable to CTCEG.  (This claim has been resolved and will be dismissed with prejudice.) 

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

 

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

 

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

 

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

22

*Arbitration Claim filed by Advanced Technology Development, Inc.*

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

The parties agreed to the appointment of Phillip D. O’Neil, Jr. as the Sole Arbitrator and are presently conducting limited discovery in accordance with arbitration rules.  The arbitration hearing is scheduled for April 27, 2011.

**ITEM 4. ** **[RESERVED]  **

**PART II**

**ITEM 5.** ** MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.**

**Registration Statement and Use of Proceeds**

On May 14, 2007, the SEC declared effective our registration statement on Form SB-2 (the “Registration Statement”) which registered for re-sale 1,296,500 units (comprised of one share of common stock and one Class B warrant), 1,296,500 shares of common stock underlying the warrants, 1,296,500 common shares and Class B warrants, respectively, contained in the units, all of which were owned by various investors; 5,000,000 shares of common stock owned by promoters; and 3,000,000 Class A warrants and 3,000,000 shares underlying the Class A warrants, owned by Coast To Coast Equity Group, Inc. (“CTCEG”), a Company consultant.  Pertaining to the units registered in the Registration Statement, the unit offering investment agreements contained use of proceeds restrictions.

The Company received $1,296,500 in proceeds between August 2006 and November 2006 from the exempt offering of units.  The unit offering agreements contained use of proceeds restrictions, with a minimum of 80% being mandated for working capital and up to 20% being allowable for salary expense.  The Company used the proceeds during 2006 and 2007 as required by the limitations contained in the unit purchase agreements.  As of the expiration of the Class B warrants on April 4, 2009, 338,000 Class B warrants have been exercised netting $507,000 in proceeds to the Company, which were applied with the same 80/20 working capital/salary expense limitation provided in the investor agreements.  As of the expiration of the Class A warrants on May 14, 2009, 200,000 Class A warrants had been exercised, netting $200,000 in proceeds to the Company, which were applied with the same 80/20 working capital/salary expense limitation provided in the investor agreements.

23

**Common Stock**

The Company's common stock trades on the OTC Bulletin Board under the symbol "VLYF".

As of March 31, 2011, we had approximately 1,400 shareholders of record.  ** **The Company has one class of common stock, $0.001 par value per share, and has 100,000,000 authorized shares.   The common stock holds voting rights of one vote per share, is entitled to dividends when and if declared out of funds legally available therefore, but has no preemptive rights.  In each of the two most recent fiscal years we did not issue or declare any dividends; in 2010, we issued stock options pursuant to the Company’s 2008 Equity Incentive Plan.  

During 2010 and 2009, in each quarterly period the high and low price per share transacted on the OTC Bulletin Board of our common stock was:

 

 

 

 

**FOURTH QUARTER 2010**

 

 

 

**Date**

**BID**

 

**HIGH/LOW **†

11/08/10

$2.15

 

HIGH BID

11/26/10

  1.27

 

LOW BID

**THIRD QUARTER 2010**

 

 

 

**Date**

**BID**

 

**HIGH/LOW **†

07/12/10

$2.07

 

HIGH BID

08/17/10

  1.15

 

LOW BID

**SECOND QUARTER 2010**

 

 

 

**Date**

**BID**

 

**HIGH/LOW **†

05/11/10

$2.76

 

HIGH BID

06/25/10

  1.41

 

LOW BID

**FIRST QUARTER 2010**

 

 

 

**Date**

**BID**

 

**HIGH/LOW **†

03/15/10

$2.86

 

HIGH BID

01/06/10

  0.07

 

LOW BID

**FOURTH QUARTER 2009**

 

 

 

**Date**

**BID**

 

**HIGH/LOW **†

12/31/09

$0.91

 

HIGH BID

11/01/09

  0.17

 

LOW BID

**THIRD QUARTER 2009**

 

 

 

**Date**

**BID**

 

**HIGH/LOW **†

8/6/09

$0.30

 

HIGH BID

7/30/09

  0.12

 

LOW BID

**SECOND QUARTER 2009**

 

 

 

**Date**

**BID**

 

**HIGH/LOW **†

06/22/09

$0.35

 

HIGH BID

05/12/09

  0.10

 

LOW BID

**FIRST QUARTER 2009**

 

 

 

**Date**

**BID**

 

**HIGH/LOW **†

03/11/09

$0.50

 

HIGH BID

02/25/09

  0.08

 

LOW BID

Quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commissions and may not represent actual transactions.

†Source: www.finance.yahoo.com

 

24

**Securities Authorized for Issuance Under Equity Compensation Plan**

**Equity Compensation Plan Information**

 

 

 

 

**Plan Category**

**Number of securities to be issued upon exercise of outstanding options, warrants and rights**

**Weighted-average exercise price of outstanding options, warrants and rights**

**Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))**

Equity compensation plans approved by security holders

4,050,000

--

5,950,000(1)

Equity compensation plans not approved by security holders

--

--

--

Total

4,050,000

--

5,950,000(1)

  (1) On September 13, 2010, the Board of Directors issued 4,050,000 stock options to key employees and consultants pursuant to the 2008 Equity Incentive Plan previously approved by the stockholders.

**Recent Sales of Unregistered Securities**

During 2009 and 2008, we sold securities in various private, unregistered transactions. Neither the Company nor any person acting on its behalf offered or sold securities by any form of general solicitation or general advertising. The purchasers were known to management or were known to business associates of management. No underwriting discounts or commissions were paid to any party by the Company.

On May 27, 2009 the Company issued 1,900,000 shares of common stock to MKM Master Opportunity Fund and individual investors for $237,500 in cash.  On May 27, 2009, the Company also granted to MKM and individual investors** **seven-year Class F Warrants to purchase 1,900,000 shares of common stock at a price of $0.20.  These sales were conducted in a private transaction exempt from registration pursuant to pursuant to Section 4(2) of the Securities Act and Regulation D Rule 506.  

On August 10, 2009 the Company issued 800,000 shares of common stock to individual investors for $100,000 in cash ($92,000 net of expenses).   On August 10, 2009, the Company also granted to such investors seven-year Class G Warrants to purchase 800,000 shares of common stock at a price of $0.20.  These sales were conducted in a private transaction exempt from registration pursuant to pursuant to Section 4(2) of the Securities Act and Regulation D Rule 506.  

**Warrants**

As previously disclosed, between 2006 and 2009, the Company has issued Class A, B, C, D, E, F, and G warrants.  The Company on occasion has previously referred to Class C, Class D, Class F, and Class G warrants as Series C, Series D, Series F and Series G warrants, respectively.  These warrants were issued in a private transaction exempt from registration pursuant to pursuant to Section 4(2) of the Securities Act and Regulation D Rule 506.

25

Our Class A warrants expired on May 14, 2009.  Language in prior filings inadvertently and mistakenly implied that these warrants had been extended until May 13, 2010, but no such extension was ever effected in writing, as is required by the Warrant Agreement dated July 6, 2006.  CTCEG, the holder of those warrants, believes that the expiration date of those warrants was extended and has attempted to exercise those Warrants.  The Company rejected that attempt and the matter is currently in litigation.

Our Class B warrants expired on April 4, 2009.  

The sole person to whom we issued Class E warrants, Mr. Daniel Katz, agreed to forego his right to receive such warrants, pursuant to a settlement agreement described in our current report on Form 8-K filed on March 13, 2009.   

None of the remaining outstanding warrants has a market at the present time.   The Class C, D, F and G warrants are restricted securities and are assignable by the buyers in transactions compliant with exemptions from registration under the Securities Act and the rules promulgated thereunder.

The Company may offer additional securities as our capital requirements dictate or as suitable funding opportunities present themselves.

**Repurchases of Securities by the Company**

None

 

**ITEM 6.  SELECTED FINANCIAL DATA.**

Not Applicable.

**ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.**

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

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

26

***Liquidity and Capital Resources***

Between January 1, 2010 and December 31, 2010, our capital requirements have largely been met through sales of products other than THOR or ODIN. We recorded sales of $18,675,269 from the sale of various products in 2010.  We anticipate that income from sales of such products will be sufficient to finance our ongoing capital requirements in 2011. To the extent we make sales of ODIN or THOR systems in 2011, we expect to negotiate customer deposits sufficient to provide us with the working capital needed to build the related systems.  However, it is uncertain whether customers will agree to such terms in purchasing either product. The following liquidity events describe the amounts and sources of our capital resources and describe how we have paid our expenses.

We have incurred losses for the past two fiscal years and had a comprehensive loss of $1,481,029 for the year ended December 31, 2010.

Historically, we have relied on revenues, debt financing and sales of our common stock to satisfy our cash requirements. For the year ended December 31, 2010, we received cash proceeds of $16,782,487 from sales of various products, $335,365 from customer deposits, and $245,714 from amounts paid to exercise warrants resulting in the issuance of common stock.  For the year ended December 31, 2009 we received cash proceeds of $3,103,615 from revenues, $858,400 from deferred revenues and $337,500 from sales of our common stock.

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.  For the year ended December 31, 2009 we issued 3,273,571 shares of our common stock.

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

 

***Commitments and Contingent Liabilities***

 

The Company leases office and warehouse spaces in Covington, KY and Erlanger, KY under a five-year and a 12 month non-cancelable operating lease, expiring August 2011 and December 2011, respectively. Base rent is $5,807 per month with an annual rent escalator of 3%. At December 31, 2010, future minimum payments for operating leases related to our office and manufacturing facilities were $53,370 through December, 2011.

 

Our total current liabilities increased to $3,378,922 at December 31, 2010 compared to $2,334,561 at December 31, 2009. 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 a loan from shareholder of $124,846.

***Results of Operations***

The following discussions are based on the audited condensed consolidated financial statements of Valley Forge Composite Technologies and its subsidiaries. These charts and discussions summarize our financial statements for the year ended December 31, 2010, and 2009, and should be read in conjunction with the financial statements, and notes thereto, included with the Company’s Form 10-K for the year ended December 31, 2010.

27

**SUMMARY COMPARISON OPERATING RESULTS**

 

 

 

**Year ended**

**December 31,**

** **

** **

**2010**

** **

**2009**

Gross Profit

$

2,597,638 

$

259,750 

Total operating expenses

 

3,461,059 

 

1,647,415 

Income (loss) from operations

 

  (863,421)

 

(1,387,665)

Total other income (expense)

 

(613,229)

 

(650,958)

Net loss

 

(1,476,650)

 

(2,038,623)

Other comprehensive loss

 

 (4,379)

 

- 

Comprehensive loss

$

(1,481,029)

$

(2,038,623)

Net loss per share

$

(0.02)

$

(0.04)

To date, no revenues have been attributable to sales from ODIN or THOR.  All sales for 2010 and 2009 have been for Aerospace Products.  We have experienced a significant increase in revenues in 2010 due to an increase in efforts in this area.

Our operating expenses have generally increased for the year ended December 31, 2010, compared with the year ended December 31, 2009.  The major components of our operating expenses consisted of selling and administrative expenses, share-based payments and warrant expense.  For the years ended December 31, 2010 and 2009, our selling and administrative expenses were $1,596,780 and $1,168,642; our share-based payment expenses were $1,864,279 and $32,550; and the warrant expense was $-0- and $446,223.  Share-based payments increased primarily due to stock options granted in September 2010.

The Company recognizes revenue when persuasive evidence of a customer or distributor arrangement exists, shipment of goods to the customer occurs, the price is fixed or determinable and collection is reasonably assured.

For future sales of ODIN and THOR, it is expected customer acceptance, which may include testing, will also be required for revenue recognition.  In May 2010, the Company issued a press release indicating sales through Valley Forge Imaging Systems.  The products sold were for aerospace imaging applications and were not an ODIN device.  Accordingly, the Company later determined to account for these revenues as aerospace sales.

 

The following chart provides a breakdown of our sales in 2010 and 2009. 

 

 

**December 31,**

 

 

**December 31,**

 

 

**2010**

 

 

**2009**

Valley Forge Detection Systems, Inc.

$

-

 

$

-

Valley Forge Aerospace, Inc.

 

18,675,269

 

 

3,202,815

Valley Forge Imaging, Inc.

 

-

 

 

-

Valley Forge Emerging Technologies, Inc.

 

-

 

 

-

Totals per financial statements:

$

18,675,269

 

$

3,202,815

 

Our total operating expense was $3,461,059 and $1,647,415 for the year ended December 31, 2010 and 2009.

Our average monthly cost of operations from January 2010 through December 2010 was approximately $288,000. Excluding aggregate non-cash charges of $68,530 for depreciation, and $1,864,279 for share-based payments, our average monthly cost of operations from January 2010 through December 2010 was approximately $127,000.

 

28

As of December 31, 2010, we had $585,549 in cash remaining as well as $504,063 of marketable securities.

 

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

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

 

In the coming months, the Company will refine its estimates of its capital requirements based on any quantities of THOR and ODIN units ordered and the terms of any license the Company is able to negotiate with Lawrence Livermore National Laboratories.  See the discussion in Item 5, *Other Information*.  

***Subsequent Events***

The Company made a $25,000 payment to Mr. Brothers on January 24, 2011 as partial repayment of a promissory note evidencing a loan Mr. Brothers made to the Company.

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

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

**Critical Accounting Policies and Estimates** 

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

Our financial statements have been prepared according to accounting principles generally accepted in the United States of America.  In preparing these financial statements, we are required to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities.  We evaluate these estimates on an on-going basis.  We base these estimates on historical experiences and on various other assumptions that we believe are reasonable under the circumstances, the results 

29

of which form the basis for making judgments about the carrying values of assets and liabilities.  Actual results may differ from these estimates under different assumptions or conditions.  At this point in our operations, subjective judgments do not have a material impact on our financial statements except as discussed in the next paragraph.

  

**Going Concern** 

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  The attainment of sustainable profitability and positive cash flow from operations is dependent on certain future events.  

**Use of Estimates** 

 

In preparing financial statements in conformity with generally accepted accounting principles, Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported period.  Actual results could differ from those estimates.

 

**Fair Value of Financial Instruments** 

 

The Company’s financial instruments consist of cash, marketable securities, security deposits, accounts receivable, amount due to shareholders, accounts payable, and  convertible debt.  Except as discussed in Note 9, the carrying values of these financial instruments approximate the fair value due to their short term maturities.

 

**Revenue Recognition** 

 

The Company recognizes revenue when persuasive evidence of a customer or distributor arrangement exists, shipment of goods to the customer occurs, the price is fixed or determinable and collection is reasonably assured. See Note 7 to the financial statements for discussion of deferred revenue.

 

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

**Share Based Payments**

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

**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.

 

 

 

30

**Off-Balance Sheet Arrangements** 

 

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

**Contractual Obligations**

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

**Item 7A. Quantitative And Qualitative Disclosures About Market Risk**

 

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

**ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.**

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 

 

 

       

**PAGE**

 

 

Reports of Independent Registered Public Accounting Firms

32-33

Consolidated Balance Sheets as of December 31, 2010 and 2009

34

Consolidated Statements of Operations for the years ended December 31, 2010 and 2009

35

Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the years ended December 31, 2010 and 2009

36

Consolidated Statements of Cash Flows for the years ended December 31, 2010 and 2009

37

Notes to Consolidated Financial Statements

38-53

 

 

 

 

31

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

The Board of Directors and Shareholders

Valley Forge Composite Technologies, Inc.

We have audited the accompanying consolidated balance sheet of Valley Forge Composite Technologies, Inc. and subsidiaries (the Company) as of December 31, 2010 and the related consolidated statements of operations, shareholders’ equity, and cash flows for the year then ended.  The Company’s management is responsible for these consolidated financial statements.  Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of  Valley Forge Composite Technologies, Inc. and subsidiaries at December 31, 2010, and the results of their operations and their cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 2 to the financial statements, the Company has incurred net losses since inception, which raise substantial doubt about its ability to continue as a going concern.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Mountjoy Chilton Medley LLP

Louisville, Kentucky

April 8, 2011
32

**                              R.R. Hawkins & Associates International, a Professional Service Corporation**

                                                   *DOMESTIC & INTERNATIONAL BUSINESS CONSULTING*

**A superior method to building big business...”**

To the Board of Directors and Shareholders

Valley Forge Composite Technologies, Inc

Covington, Kentucky

**Report of Independent Registered Public Accounting Firm**

We have audited the consolidated balance sheet of Valley Forge Composite Technologies, Inc. as of December 31, 2009 and 2008 and the related consolidated statements of operations, stockholders’ equity and cash flows for the years ending December 31, 2009 and 2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board in the United States of America.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the schedule of accounts receivable is free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the schedule of accounts receivable.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Valley Forge Composite Technologies, Inc. as of December 31, 2009 and 2008, the results of operations, stockholders’ equity and its cash flows for the years ending December 31, 2009 and 2008 in conformity with generally accepted accounting principles in the United States of America.

The accompanying financial statements have been prepared assuming the Company will continue as a going concern.  As discussed in Note 2 to the financial statements, the Company has incurred net losses since inception, which raise substantial doubt about its ability to continue as a going concern.  The financial statements do not include any adjustment that might result from the outcome of this uncertainty.

*/s/ R.R. Hawkins & Associates International, PSC*

April 13, 2010

Los Angeles, CA

***Corporate Headquarters***

***5777 W. Century Blvd.  , Suite No. 1500***

***Los Angeles, CA 90045***

***T: 310.553.5707  F: 310.553.5337***

33

**VALLEY FORGE COMPOSITE TECHNOLOGIES, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEET**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

**Dec 31, 2010**

 

**Dec 31, 2009**

 

 

 

 

 

 

 

 

**ASSETS**

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

     Cash

$

585,549

$

1,492,135

 

 

     Marketable securities

 

504,063

 

--

 

 

     Accounts receivable

 

1,991,902

 

99,120

 

 

     Inventories

 

999,952

 

151,300

 

 

     Prepaid expenses and other

 

47,852

 

104,285

 

 

     Deposits with vendors

 

21,000

 

21,000

 

 

          Total current assets

 

4,150,318

 

1,867,840

 

 

Property and equipment, net

 

274,405

 

211,821

 

 

Non-current assets:

 

 

 

 

 

 

     Security deposits

 

5,535

 

5,535

 

 

     Loan fees, net

 

--

 

129,843

 

 

           Total non-current assets 

 

5,535

 

135,378

 

 

  

 

 

 

 

 

 

     Total Assets

$

4,430,258

$

2,215,039

 

 

  

 

 

 

 

 

 

**LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)**

 

 

 

 

 

 

Current liabilities: 

 

 

 

 

 

 

     Accounts payable

$

2,029,425

$

1,164,030

 

 

     Accrued expenses and other

 

30,886

 

53,573

 

 

     Deferred revenue 

 

1,193,765

 

858,400

 

 

     Convertible debenture 

 

--

 

42,000

 

 

     Due to shareholder

 

124,846

 

216,558

 

 

           Total current liabilities

 

3,378,922

 

2,334,561

 

 

Long-term debt, net

 

--

 

458,107

 

 

Shareholders' Equity (Deficit): 

 

 

 

 

 

 

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

        shares authorized; 61,320,774 and 54,688,920 issued and 

        outstanding December 31, 2010 and 2009  

 

61,321

 

54,689

 

 

     Additional paid-in capital

 

10,777,265

 

7,673,903

 

 

     Accumulated deficit 

 

(9,782,871)

 

(8,306,221)

 

 

     Accumulated other comprehensive income (loss)

 

(4,379)

 

--

 

 

           Total shareholders' equity (deficit)

 

1,051,336

 

(577,629)

 

 

 

 

 

 

 

 

 

     Total Liabilities and Shareholders' Equity (Deficit)

$

4,430,258

$

2,215,039

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

34

**VALLEY FORGE COMPOSITE TECHNOLOGIES, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

 

 

 

 

 

 

 

 

  

 

**Year ended Dec 31, 2010**

 

**Year ended Dec 31, 2009**

 

 

Sales

$

18,675,269

$

3,202,815

 

 

Cost of sales

 

16,077,631

 

2,943,065

 

 

 

 

 

 

 

 

 

Gross Profit 

 

2,597,638

 

259,750

 

 

 

 

 

 

 

 

 

Costs and expenses 

 

 

 

 

 

 

     Selling and administrative expenses

 

1,596,780

 

1,168,642

 

 

     Share-based payments

 

1,864,279

 

32,550

 

 

     Warrant expense 

 

--

 

446,223

 

 

          Total expenses  

 

3,461,059

 

1,647,415

 

 

 

 

 

 

 

 

 

Loss from operations 

 

(863,421)

 

(1,387,665)

 

 

 

 

 

 

 

 

 

Other non-operating income (expense) 

 

 

 

 

 

 

    Interest expense

 

(684,365)

 

(664,789)

 

 

    Legal settlement

 

62,441

 

13,750

 

 

    Investment income

 

8,695

 

81

 

 

  

 

 

 

 

 

 

Net loss 

 

(1,476,650)

 

(2,038,623)

 

 

 

 

 

 

 

 

 

Other comprehensive loss 

 

 

 

 

 

 

     Unrealized loss on marketable securities

 

(4,379)

 

--

 

 

 

 

 

 

 

 

 

Comprehensive Loss 

$

(1,481,029)

$

(2,038,623)

 

 

  

 

 

 

 

 

 

Net loss per common share - basic and diluted

$

(0.02)

$

(0.04)

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

    basic and diluted

 

59,281,322

 

53,011,122

 

See accompanying notes.

35

**VALLEY FORGE COMPOSITE TECHNOLOGIES, INC.**

**CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY**

**YEARS ENDED DECEMBER 31, 2010 AND 2009**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Number of Shares

 

Additional Paid-in Capital

 

Accumulated Deficit

 

Accumu-

lated

Other

Compre-

hensive

Loss

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT JANUARY 1, 2009

 

$  51,415

 

51,415,349

 

$ 6,710,904

 

$(6,267,598)

 

$         --

 

$  494,721

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock issued for note conversions

 

      429

 

     428,571

 

149,571

 

--

 

--

 

    150,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock issued for services

 

     120

 

     120,000

 

28,680

 

--

 

--

 

     28,800

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock based compensation

 

       25

 

     25,000

 

3,725

 

--

 

--

 

      3,750

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from sale of common stock

 

   2,700

 

 2,700,000

 

 334,800

 

--

 

--

 

  337,500

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrant expense

 

--

 

--

 

  446,223

 

--

 

--

 

   446,223

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for 2009

 

 --

 

--

 

--

 

 (2,038,623)

 

--

 

(2,038,623)

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT DECEMBER 31, 2009

 

  54,689

 

54,688,920

 

 7,673,903

 

  (8,306,221)

 

          --

 

  (577,629)

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from exercise of warrants

 

   1,229

 

 1,228,571

 

 244,486

 

--

 

--

 

  245,715 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock issuance from cashless

   exercise of warrants

 

    2,486

 

 2,486,139

 

 (2,486)

 

--

 

--

 

         --

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock issued for note conversions

 

    2,857

 

 2,857,144

 

  997,143

 

--

 

--

 

1,000,000 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock issued for services

 

        60

 

     60,000

 

 118,140

 

--

 

--

 

   118,200

 

 

 

 

 

 

 

 

 

 

 

 

 

Option based compensation

 

--

 

--

 

   1,746,079

 

--

 

--

 

   1,746,079

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss on securities

 

--

 

--

 

--

 

--

 

  (4,379)

 

    (4,379)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for 2010

 

 --

 

 --

 

--

 

   (1,476,650)

 

--

 

  (1,476,650)

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT DECEMBER 31, 2010

 

$  61,321

 

61,320,774

 

$ 10,777,265

 

$(9,782,871)

 

$   (4,379)

 

$1,051,336

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

36

**VALLEY FORGE COMPOSITE TECHNOLOGIES, INC**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

 

 

 

 

 

 

 

 

  

 

**Year ended**

**Dec 31, 2010**

 

**Year ended**

**Dec 31, 2009**

 

 

 

 

 

 

 

 

**CASH FLOWS FROM OPERATING ACTIVITIES**

 

 

 

 

 

 

     Net loss

$

(1,476,650)

$

(2,038,623)

 

 

     Adjustments to reconcile net loss to net cash 

     provided by (used in) operating activities: 

 

 

 

 

 

 

         Depreciation and amortization expense

 

198,373

 

140,907

 

 

         Amortization of debt discount

 

541,893

 

469,660

 

 

         Fair value of warrants

 

--

 

446,223

 

 

         Stock based compensation

 

--

 

3,750

 

 

         Stock issued for services

 

118,200

 

28,800

 

 

         Options issued for compensation

 

1,746,079

 

--

 

 

     Change in operating assets and liabilities

 

 

 

 

 

 

     (Increase) decrease in operating assets:

 

 

 

 

 

 

         Increase in accounts receivable

 

(1,892,782)

 

(89,628)

 

 

         (Increase) decrease in inventories

 

(848,652)

 

73,700

 

 

         Decrease in prepaid expenses  and other

 

56,433

 

98,717

 

 

     Increase (decrease) in operating liabilities:

 

 

 

 

 

 

         Increase in accounts payables

 

865,395

 

973,733

 

 

         Decrease in accrued expenses and other

 

(22,687)

 

(2,987)

 

 

         Increase in deferred revenue 

 

335,365

 

858,400

 

 

         Net Cash Provided By (Used In) Operating Activities

 

(379,033)

 

962,652

 

 

 

 

 

 

 

 

 

**CASH FLOWS FROM INVESTING ACTIVITIES**

 

 

 

 

 

 

     Purchase of marketable securities

 

(508,442)

 

--

 

 

     Purchases of equipment 

 

(131,114)

 

(3,196)

 

 

          Net Cash Used In Investing Activities

 

(639,556)

 

(3,196)

 

 

 

 

 

 

 

 

 

**CASH FLOWS FROM FINANCING ACTIVITIES**

 

 

 

 

 

 

     Gross proceeds from exercise of warrants

 

245,715

 

--

 

 

     Proceeds from issuance of common stock

 

--

 

337,500

 

 

     Repayment of convertible debenture

 

(42,000)

 

--

 

 

     Repayments to shareholder

 

(91,712)

 

(110,000)

 

 

          Net Cash Provided by Financing Activities

 

112,003

 

227,500

 

 

 

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH

 

(906,586)

 

1,186,956

 

 

CASH AT BEGINNING OF PERIOD 

 

1,492,135

 

305,179

 

 

CASH AT END OF PERIOD

$

585,549

$

1,492,135

 

 

  

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 

 

 

 

 

 

Cash paid during the period for: 

 

 

 

 

 

 

     Income taxes paid

$

--

$

--

 

 

     Interest  paid

$

64,808

$

113,204

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS

 

 

 

 

 

 

     Stock issued for note conversion

$

1,000,000

$

150,000

 

See accompanying notes 

37

**VALLEY FORGE COMPOSITE TECHNOLOGIES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2010**

NOTE 1 – NATURE OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of the Business

Valley Forge Composite Technologies, Inc., a Florida corporation, is headquartered in Covington, Kentucky and operates within the following wholly-owned subsidiaries (collectively, “The Company”) (all Florida corporations): 

·

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

·

Valley Forge Aerospace, Inc. (“VFA”) – Design and manufacture of attitude control instruments for small satellites, in particular, mini momentum reaction wheels based on VFA’s proprietary composite and bearing technology.  This represents all of the Company’s revenues during 2010 and 2009.

·

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

·

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

During 2010 and 2009, the Company won numerous contracts to produce momentum wheels and various other mechanical devices for special projects.  This represents all of the Company’s revenues during these periods.  In recent years, the Company has focused much of its energy on the development and commercialization of its counter-terrorism products.  Such products include an advanced detection capability for illicit narcotics, explosives, and bio-chemical weapons using photo-nuclear reactions to initiate secondary gamma quanta the result of which is a unique and distinguishable signal identifying each component of a substance. This product is known as the THOR LVX photonuclear detection system (“THOR”).  The development and commercialization of THOR is the present focus of VFDS.

Former Shell Company

On July 6, 2006, Quetzal Capital 1, Inc., a Florida corporation and public company (“QC1”) entered into a share exchange agreement with the then shareholders of Valley Forge Composite Technologies, Inc. (“VF”). Under the share exchange agreement, the VF shareholders gained control of QC1.  For financial accounting purposes, the exchange of stock was treated as a recapitalization of VF with the former shareholders of QC1 retaining approximately 11% of the public company.  Prior to the merger, QC1 was a reporting shell corporation with no operations. The share exchange was approved by QC1 and its sole shareholder, Quetzal Capital Funding I, Inc. (“QCF1”), and by VF’s board of directors and a majority of its shareholders.   QC1 changed its name to Valley Forge Composite Technologies, Inc., a Florida corporation.

Several related agreements were also made with parties associated or affiliated with QC1 in connection with the approval of the share exchange. These agreements involved the approval of a consulting agreement and a warrant agreement with Coast To Coast Equity Group, Inc. (“CTCEG”), a company owned by the same shareholders who owned QC1’s sole corporate shareholder, QCF1, and a registration rights agreement for QCF1, CTCEG and private placement unit holders. 

38

Basis of Presentation

The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles in the United States of America (“GAAP”). The Accounting Standards Codification (“ASC”) as produced by the Financial Accounting Standards Board (“FASB”) is the sole source of authoritative GAAP.  The consolidated financial statements of the Company include the Company and its subsidiaries. All material inter-company balances and transactions have been eliminated.

Going Concern

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The attainment of sustainable profitability and positive cash flow from operations is dependent on certain future events. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty (See Note 2).

Use of Estimates

In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported period. Actual results could differ from those estimates.

Comprehensive Income (Loss)

The Company follows the ASC for reporting comprehensive income (loss).  Comprehensive income (loss) is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income. The Company’s item of other comprehensive loss is the unrealized loss on marketable securities.

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash, marketable securities, accounts receivable, security deposits, due to shareholders, accounts payable, and convertible debt.  Except as disclosed in Note 9, the carrying value of these financial instruments approximates their fair value due to their short term maturities.

Cash Equivalents

The Company considers all short-term securities purchased with a maturity of three months or less to be cash equivalents. At December 31, 2010 and 2009, the Company held no cash equivalent securities.

Marketable Securities

The Company’s marketable securities include a mutual fund investment which is classified as available for sale.  Securities classified as available for sale are carried in the financial statements at fair value.  Realized gains and losses, determined using the first-in, first-out (FIFO) method, are included in earnings; unrealized holding gains and losses are reported in other comprehensive income (loss).

39

Accounts receivable

Receivables are based on contracted prices and are considered past due when the due date has expired.  Typically, receivables are due with 14-45 days.  The Company sells to customers using credit terms customary in its industry.  Credit is based on the credit worthiness of the customer and collateral is generally not obtained.  Receivables are reviewed for collectability when they become past due.  Delinquent receivables are written off based on individual credit evaluation and specific circumstances of the customer.  The Company provides estimated uncollectible accounts based on prior experience and review of existing receivables.  There was no allowance for doubtful accounts at December 31, 2010 and 2009.

Inventories

The Company accounts for finished goods inventory by applying the lower of cost or market method, on a first-in, first-out (FIFO) basis. Inventories consist of the following:

 

 

 

**December 31**

 

**December 31**

 

 

**2010**

 

**2009**

 

 

 

 

 

Raw materials   

$

609,900 

$

-0- 

Work in process 

 

6,738 

 

-0- 

Finished goods 

 

383,314 

 

151,300 

 

$

999,952 

$

151,300 

 

Property and Equipment

Property and equipment is stated at cost. Depreciation on property and equipment is calculated using the straight-line method over the estimated useful lives of the assets.

Computers and equipment        5 - 15 years

Furniture and fixtures                       7 years

Demonstration units

    5 years

Expenditures for major renewals and betterments that extend the useful lives of the assets are capitalized. Expenditures for maintenance and repairs of the assets are charged to expense as incurred.

Loan Fees

Loan fees are stated at cost.  Amortization of loan fees is included in interest expense and calculated using the straight-line method over the term of the loans.

Revenue Recognition

The Company recognizes revenue when persuasive evidence of a customer or distributor arrangement exists, shipment of goods to the customer occurs, the price is fixed or determinable and collection is reasonably assured.  See note 7 for discussion of deferred revenue.

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

40

Shipping and Handling Costs

Shipping and handling costs incurred by the Company are included in cost of sales, and shipping charges billed to the customer are included in net sales in the accompanying statements of operations.

Share Based Payments

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

Warranties

The Company warrants that Aerospace goods delivered under its customer arrangements will conform to applicable technical standards and specifications and will be free from material and manufacture defects.  The warranty period is one year and extends to goods subject to normal use by the customer, as defined.  Management does not believe any significant warranty exposure exists at December 31, 2010.

Research and Development Costs

Research and development costs, which relate primarily to the development, design and testing of products, are expensed as incurred, until such time as management determines the project will have a future use and at that time, such development costs are capitalized and amortized over their useful life.  Research and development expense, is included in selling and administrative expenses, and was insignificant in 2010 and 2009.

Income Taxes

Income taxes are accounted for in accordance with ASC 740, Accounting for Income Taxes. ASC 740 requires the recognition of deferred tax assets and liabilities to reflect the future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and tax bases of the Company's assets and liabilities result in a deferred tax asset, ASC 740 requires an evaluation of the probability of being able to realize the future benefits indicated by such assets. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some, or all, of the deferred tax asset will not be realized.

The FASB has issued new standards, contained in the ASC, clarifying the accounting for uncertainty in income taxes recognized in annual financial statements for fiscal years beginning after December 15, 2008.  These standards require recognition and measurement of uncertain tax positions using a “more-likely-than-not” approach.  The Company adopted these standards at the beginning of 2009 with no material impact on its financial statements.

The Company’s policy for interest and penalties on material uncertain tax positions recognized in the financial statements is to classify as interest expense and operating expense, respectively.  The Company assessed its tax positions for all open tax years and concluded that they have no material liabilities to be recognized at this time.  The Company is no longer subject to federal, state, and local examination by tax authorities for tax years before 2007.

41

Advertising

Advertising costs are expensed as incurred.  For the years ended December 31, 2010 and 2009 advertising expense was $61,814 and $143,815, respectively.

Loss per common share

Basic earnings per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net loss by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. For the periods below, the Company excludes potentially dilutive securities such as convertible warrants and the convertible debenture from the loss per share calculations as their effect would have been anti-dilutive.

The following sets forth the computation of earnings per share.

 

 

 

**For the Year Ended**

** December 31,**

 

 

**2010**

 

 

**2009**

Net loss 

$

(1,476,650)

 

$

(2,038,623)

Weighted average shares outstanding 

 

59,281,322 

 

 

53,011,122 

Loss per share - basic and diluted 

$

(  .02)

 

$

(  .04)

The Company’s common stock equivalents include the following: 

 

 

**December 31,**

 

**December 31,**

 

 

**2010**

 

**2009**

Class C Warrants

 

-

 

2,146,667 

Class D Warrants 

 

1,428,574

 

1,857,146 

Class F Warrants 

 

1,300,000

 

1,900,000 

Class G Warrants 

 

-

 

800,000 

Options

 

4,050,000

 

- 

Total common stock equivalents          

 

6,778,574

 

6,703,813 

On January 29, 2010 individual investors exercised 600,000 Class F Warrants and received 534,624 shares of common stock.

On February 16, 2010 individual investors exercised 428,572 Class D Warrants and received 428,572 shares of common stock.

On March 29, 2010 individual investors exercised 800,000 Class G Warrants and received 800,000 shares of common stock.

 On June 30, 2010, the Company issued 1,951,515 shares of common stock following the cashless exercise of 2,146,667 MKM Class C Warrants.

 

 On September 3, 2010 the Company issued 4,050,000 stock options. See Note 12 for further details.

 

Recent accounting pronouncements

Effective July 1, 2009, the Company adopted ASC 105-10, “*Generally Accepted Accounting Principles – Overall." *ASC 105-10 establishes the ASC* *as the source of authoritative accounting principles recognized by 

42

the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. All guidance contained in the ASC carries an equal level of authority. The ASC superseded all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the ASC is non-authoritative. The FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates (“ASUs”). The FASB will not consider ASUs as authoritative in their own right. ASUs will serve only to update the ASC, provide background information about the guidance and provide the bases for conclusions on the change(s) in the Codification. References made to FASB guidance throughout this document have been updated for the ASC.

Effective June 30, 2009, the Company adopted three ASU’s which were intended to provide additional application guidance and enhanced disclosures regarding fair value measurements and impairments of securities. They also provide additional guidelines for estimating fair value in accordance with fair value accounting. The first update, as codified in ASC 820-10-65, provides additional guidelines for estimating fair value in accordance with fair value accounting. The second accounting update, as codified in ASC 320-10-65, changes accounting requirements for other-than-temporary-impairment (OTTI) for debt securities by replacing the current requirement that a holder have the positive intent and ability to hold an impaired security to recovery in order to conclude an impairment was temporary with a requirement that an entity conclude it does not intend to sell an impaired security and it will not be required to sell the security before the recovery of its amortized cost basis. The third accounting update, as codified in ASC 825-10-65, increases the frequency of fair value disclosures. These updates were effective for fiscal years and interim periods ended after June 15, 2009. The adoption of these accounting updates did not have a material impact on the Company’s financial statements.

Effective June 30, 2009, the Company adopted a new accounting standard for subsequent events, as codified in ASC 855-10. The update modifies the names of the two types of subsequent events either as recognized subsequent events (previously referred to in practice as Type I subsequent events) or non-recognized subsequent events (previously referred to in practice as Type II subsequent events). In addition, the standard modifies the definition of subsequent events to refer to events or transactions that occur after the balance sheet date, but before the financial statements are issued (for public entities) or available to be issued (for nonpublic entities). It also requires the disclosure of the date through which subsequent events have been evaluated. The update did not result in significant changes in the practice of subsequent event disclosures, and therefore the adoption did not have a material impact on the Company’s financial statements.

Effective July 1, 2009, the Company adopted FASB ASU No. 2009-05, *Fair Value Measurements and Disclosures (Topic 820)* (“ASU 2009-05”). ASU 2009-05 provided amendments to ASC 820-10, *Fair Value Measurements and Disclosures – Overall,* for the fair value measurement of liabilities. ASU 2009-05 provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using certain techniques. ASU 2009-05 also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of a liability. ASU 2009-05 also clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. Adoption of ASU 2009-05 did not have a material impact on the Company’s financial statements.

Reclassifications

Certain amounts in the 2009 financial statements have been reclassified to conform with 2010 presentation.  The reclassifications have no impact on net loss or retained deficit.

43

NOTE 2 - GOING CONCERN

As reflected in the accompanying consolidated financial statements, the Company has an accumulated deficit of $9,782,871 at December 31, 2010, net losses in the year ended December 31, 2010 of $1,476,650 and cash used in operations during the year ended December 31, 2010 of $379,033. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.

The attainment of sustainable profitability and positive cash flow from operations is dependent on certain future events. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Management may attempt to raise additional funds by way of a public or private offering of its securities. While the Company believes in the viability of its strategy to improve sales volume and its ability to raise additional funds, there can be no assurances to that effect.

Since its inception in 1996, the Company was involved in the development and sales of advanced scientific technologies. Sales of primarily momentum wheels through the years were sporadic but have been strong in 2010. The Company’s limited financial resources have prevented the Company from aggressively advertising its products and services to achieve consumer recognition. The ability of the Company to continue as a going concern is dependent on the Company’s ability to further implement its business plan to generate increased revenues and to raise additional funds.

The Company also seeks the acquisition, development, and commercialization of other advanced technologies. The ultimate success of the Company in attaining sustainable profitability and positive cash flow from operations is dependent upon the successful development and commercialization of these advanced technologies including the THOR and ODIN systems together with obtaining sufficient capital or financing to support management plans. Management believes that the actions presently being taken to further implement its business plan and generate additional revenues are adequate to meet its needs.

NOTE 3 – MARKETABLE SECURITIES

The cost and fair value of marketable securities are as follows:

 

 

 

 

 

 

 

December 31, 2010

 

Amortized Cost

 

Unrealized Loss

 

Fair Value

Available for sale equity securities

$

508,442

$

4,379

$

504,063

Available for sale securities are carried in the financial statements at fair value.  Net unrealized holding losses on available-for-sale securities in the amount of $4,379 for the year ended December 31, 2010 have been included in other comprehensive loss.

The ASC defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and establishes a framework for measuring fair value.  GAAP establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.  The three levels are defined as follows:

Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2- inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.

44

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

At December 31, 2010, marketable securities consisted of an exchange traded bond fund that was measured using the Level 1 valuation hierarchy.

NOTE 4 – PROPERTY AND EQUIPMENT

The major classifications of equipment are summarized below:

 

 

 

**December 31,**

 

**December 31,**

 

 

**2010**

 

**2009**

       Computers and equipment 

$

135,065 

$

55,871 

       Furniture and fixtures 

 

49,564 

 

49,564 

       Demonstration units 

 

296,010 

 

244,090 

 

 

480,639 

 

349,525 

     Less accumulated depreciation

 

(206,234)

 

(137,704)

 

$

274,405 

$

211,821 

 

Depreciation expense for the years ending December 31, 2010 and 2009 was $68,530 and $62,679.

The Company has incurred $51,920 of capitalized THOR costs, recorded in demonstration units, still under construction and not amortized as of December 31, 2010.  Demonstration units also includes an ODIN unit available for testing by customers.

NOTE 5 – LOAN FEES

Loan fees are summarized below:

 

 

 

**December 31,**

 

**December 31,**

 

 

**2010**

 

**2009**

 

 

 

 

 

     Loan fees     

$

234,685 

$

234,685 

     Less accumulated amortization    

 

(234,685)

 

(104,842)

                                  

$

-- 

$

129,843 

Amortization expense for the years ending December 31, 2010 and 2009 was $129,843 and $78,228.

Loan fees are being amortized over the terms of the loans which are 36 months.  When a convertible note is converted to shares, any unamortized loan fees are expensed.

NOTE 6 – ACCOUNTS PAYABLE

The Company’s current accounts payable include $10,863 borrowed on revolving credit lines utilizing corporate credit cards which bear interest at an average rate of 11.39% per annum and call for total minimum monthly installment payments of $106 as of December 31, 2010. However, since amounts may be due on demand, it is the Company’s intent to pay such balances in their entirety during 2011; such amounts have been classified as current.  

The remaining accounts payable consist of ordinary inventory purchases and administrative expenses which were incurred in the operations of the Company and include $2,017,212 of trade accounts and other of $1,350.

45

The Company’s 2009 accounts payable include $5,393 borrowed on revolving credit lines utilizing corporate credit cards which bear interest at an average rate of 16.78% per annum and call for total minimum monthly installment payments of $80 as of December 31, 2009.  Since amounts may be due on demand, the Company paid the balances in their entirety during 2010; the amounts were classified as current.  

The remaining accounts payable consist of ordinary inventory purchases and administrative expenses which were incurred in the operations of the Company and include $1,158,637.

NOTE 7 – DEFERRED REVENUE

The Company has received $1,193,765 and $858,400, at December 31, 2010 and 2009, respectively, in cash for orders it intends to ship in the following six months.  Per the Company’s revenue recognition policy (see note 1), the revenue will be recognized when goods have been shipped to the customer.  Beginning in December 2010, the Company ceased the requirement of an advance payment on customer orders.

NOTE 8 - CONVERTIBLE DEBENTURE

On August 11, 2006, the Company issued a convertible debenture to CTCEG (Note 1), in the amount of $42,000 in exchange for cash received.  The stated interest rate is 4% per annum and the original maturity was extended to August 11, 2010.

During the third quarter of 2010, the Company made a payment of $49,134 against the amounts owed to CTCEG.  Of that payment $7,134 was applied to accrued but unpaid interest, and the remaining $42,000 was applied to reduce the principal amount owed to CTCEG.

NOTE 9 – NOTES PAYABLE

On July 3, 2008, the Company secured a financing arrangement with MKM Opportunity Master Fund, LLC ("MKM"). The financing consists of a $500,000 Convertible Note, with a conversion price of $0.50 per share, bearing interest at the rate of 8% per year, payable on a quarterly basis and has a term of three years due on July 3, 2011. On September 29, 2008, the Company reduced the conversion price to $0.35 per share.  In connection with the financing, MKM was also issued Class C Warrants to purchase up to 1,000,000 shares of the Company's common stock. The warrants contained an exercise price of $1.61 per share, but on May 27, 2009 the Company reduced the Class C Warrant exercise price to $0.20 per share. In connection with this financing arrangement, the Class C warrants were valued and recorded at $500,000.  Accordingly, the Company recorded an initial debt discount of $500,000 to be amortized over the term of the note and charged $250,685 and $166,667 to interest expense during the years ended December 31, 2010 and 2009, respectively.  

On March 22, 2010, MKM converted the entire amount of the $500,000 note into 1,428,572 shares of common stock at a conversion price of $0.35 per share.

On September 29, 2008, the Company secured a financing arrangement with MKM and other parties.  The financing consists of a $650,000 Convertible Note, with a conversion price of $0.35 per share, bearing interest at the rate of 8% per year, payable on a quarterly basis and has a term of three years due on September 29, 2011. In connection with the financing, MKM and other unrelated individuals were also issued Class D Warrants to purchase up to 1,857,146 shares of the Company's common stock. The warrants contained an exercise price of $0.75 per share, but on May 27, 2009 the Company reduced the Class D Warrant exercise price to $0.20 per share. In connection with this financing arrangement, the Class D warrants were valued and recorded at $650,000.  Accordingly, the Company recorded an initial debt discount of $650,000 to be amortized over the term of the note and charged $291,209 and $302,992 to interest expense during the years ended December 31, 2010 and 2009, respectively.

46

On September 29, 2009, the unrelated individual investors converted their $150,000 note into 428,571 shares of common stock at a conversion price of $0.35 per share.

On March 22, 2010, MKM converted the remaining $500,000 note into 1,428,572 shares of common stock at a conversion price of $0.35 per share.

The promissory notes are as follows:

 

 

**December 31,**

 

**December 31,**

 

 

**2010**

 

**2009**

Notes payable     

$

1,000,000

$

1,150,000 

Less:  principal conversions    

 

1,000,000

 

150,000 

Notes payable outstanding at December 31, 2010 and 2009

 

--

 

1,000,000 

    Less: unamortized discount on notes payable     

 

--

 

(541,893)

    Notes payable, net

 

--

 

458,107 

    Less current portion

 

--

 

-- 

Notes payable, net of discount of $-0- and $541,893,

      less current portion  

$

--

$

458,107 

NOTE 10 – SHAREHOLDERS’ EQUITY

On July 6, 2006 the Company granted 3,000,000 Class A warrants in connection with a two-year consulting agreement beginning July 6, 2006 to CTCEG (Note 1).  These warrants granted in connection with the consulting agreement include the following provisions: 1,000,000 warrants to purchase 1,000,000 shares at an exercise price of $1.00 per share when the per share market value closes at or above $1.00 for up to two years from the effective date of the registration statement registering the underlying shares; 1,000,000 warrants to purchase 1,000,000 shares at an exercise price of $1.50 per share when the per share market value closes at or above $1.50 for up to two years from the effective date of the registration statement registering the underlying shares; and, 1,000,000 warrants to purchase 1,000,000 shares at an exercise price of $2.00 per share when the per share market value closes at or above $2.00 for up to two years from the effective date of the registration statement registering the underlying shares.  The Company believes all of the Class A warrants expired on May 14, 2009. CTCEG is disputing whether these Class A warrants have expired.

During the period August 2006 through November 2006, the Company sold in private placement transactions 1,296,500 units at $1.00 per unit which consist of 1 share of common stock and 1 Class B warrant which can be exercised at $1.50 per share within 6 months from the effective date of a registration statement registering the units and the underlying shares reserved for the exercise of the warrants. A registration statement was required to be filed within 30 days from the date that the Company attains a shareholder base of 35 shareholders. This filing occurred on November 14, 2006 and was declared effective on May 14, 2007.  The Class B warrants’ contractual expiration date of November 13, 2007 has been extended several times by the board of directors, with the most recent extension occurring on December 23, 2008. The Class B warrants expired on April 4, 2009.

The Company established a price protection provision relating to the selling unit holders of the private placement securities named in the registration statement. The provision states that parties to the agreement are entitled to receive additional stock or warrants if the Company sells shares of stock or warrants for less than $1.00 per share of common stock and $1.50 per warrant prior to the time limitations specified which are one year from the effective date of the Registration Statement for common stock issued and six months from the effective date of the Registration Statement for warrants issued. The Company did not offer any additional securities that would have caused this provision to become effective prior to the applicable time limitations of the provisions, which expired in May 2008. Accordingly, the Company believes that the price protection provision had no accounting impact.

47

CTCEG, and Charles J. Scimeca, George Frudakis, and Tony N. Frudakis (formerly the shareholders of Quetzal Capital Funding 1, Inc.), were previously protected from dilution of their percentage ownership of the Company. Non-dilution rights, as defined by the registration rights agreement, mean that these parties shall continue to have the same percentage of ownership and the same percentage of voting rights of the class of the Company’s common stock regardless of whether the Company or its successors or its assigns may thereafter increase or decrease the authorized number of shares of the Company’s common stock or increase or decrease the number of shares issued and outstanding. The non-dilution rights, by the terms of the registration rights agreement, expired on May 14, 2009.  Language in prior filings inadvertently and mistakenly implied that these non-dilution rights had been extended until May 13, 2010, but no such extension was ever affected.  CTCEG is disputing whether these non-dilution rights have expired.

Common Stock Warrants

On July 3, 2008, the Company secured a financing arrangement with MKM (Note 9).  In connection with the financing, MKM was also issued Class C Warrants to purchase up to 1,000,000 shares of the Company's common stock. The warrants contain an exercise price of $1.61 per share. In connection with this financing arrangement, the Company valued and recorded the Class C warrants at $500,000.  On September 29, 2008 the Company issued an additional 1,146,667 warrants at $0.75 pursuant to section 2(c) of the Class C warrant agreement.  Subsequently, on May 27, 2009, the Company reduced the exercise price of the MKM Class C warrants to $0.20 per share.

On June 30, 2010, the Company issued 1,951,515 shares of common stock following the cashless exercise of 2,146,667 MKM Class C Warrants.

 

On September 29, 2008, the Company secured a financing arrangement with MKM and other unrelated parties in connection with the financing, MKM and other unrelated parties were also issued Class D Warrants to purchase up to 1,857,146 shares of the Company's common stock. The warrants contain****an exercise price of $0.75 per share.  In connection with this financing arrangement, the Company recorded the Class D warrants at $650,000.  Subsequently, on May 27, 2009, the Company reduced the exercise price of the MKM Class D warrants to $0.20 per share from $0.75 per share.  

On February 16, 2010, the Company issued 271,429 shares of common stock following the exercise of 271,429 Class D Warrants and received $54,286 in cash.

On August 23, 2010, the Company issued 157,143 shares of common stock following the exercise of 157,143 Class D Warrants and received $31,429 in cash.

On May 27, 2009 the Company issued 1,900,000 shares of common stock to MKM Capital Advisors and individual investors for $237,500 in cash.  In connection with the common stock purchase, MKM Capital Advisors and the individual investors were issued Class F Warrants to purchase up to 1,900,000 shares of the Company’s common stock at an exercise price of $0.20 per share.  A total of $302,600 was expensed to these warrants using the Black-Scholes pricing model with the following assumptions: share price of $0.16; Strike price of $0.20 per share; Time to expiration (days) of 1,826; Expected volatility of 254.69%; no dividends; and an annual interest rate based on 3-month U.S. Treasury Bill of 2.72.

On January 29, 2010, the Company issued 534,624 shares of common stock following the cashless exercise of 600,000 Class F Warrants.

On August 10, 2009 the Company issued 800,000 shares of common stock to individual investors for $100,000 in cash.  In connection with the common stock purchase, the individual investors were issued Class G Warrants to purchase up to 800,000 shares of the Company’s common stock at an exercise price of $0.20 per share.  A 

48

total of $143,623 was expensed to these warrants using the Black-Scholes pricing model with the following assumptions: share price of $0.18; Strike price of $0.20 per share; Time to expiration (days) of 1,826; Expected volatility of 270.54%; no dividends; and an annual interest rate based on 3-month U.S. Treasury Bill of 0.19%.

On March 29, 2010, the Company issued 800,000 shares of common stock following the exercise of 800,000 Class G Warrants and received $160,000 in cash.

 

Stock warrant activity for the year ended December 31, 2010 is summarized as follows:

 

 

 

 

**Weighted**

 

 

 

 

**average**

 

 

**Number**

 

**exercise**

 

 

**of shares**

 

** price**

    Outstanding at January 1, 2010

 

6,703,813 

$

0.20

        Granted 

 

-- 

 

--

        Forfeited        

 

-- 

 

--

        Exercised    

 

(3,975,239)

 

0.20

    Outstanding at December 31, 2010

 

2,728,574 

$

0.20

The following table summarizes the Company's Class D and Class F stock warrants outstanding at December 31, 2010:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Weighted**

 

 

**Weighted**

 

 

**Range of**

 

 

 

 

 

**Average**

 

 

**Average**

**Warrant**

 

**Exercise**

 

 

 

 

 

**Remaining**

 

 

**Exercise**

**Class**

 

**Price**

 

 

**Number**

 

 

**Life**

 

 

**Price**

D

$

0.20

 

 

1,428,574

 

 

4.75

 

$

0.20

F

$

0.20

 

 

1,300,000

 

 

3.50

 

$

0.20

NOTE 11 – STOCK GRANT

On August 1, 2009, the Board of Directors of the Company issued 25,000 shares of restricted common stock to an employee of the Company.  The Company recorded $3,750 in compensation expense based on the closing price of the stock on August 1, 2009.  

In 2009, the Board of Directors voted to compensate themselves in the form of restricted stock, based on 2,000 shares of restricted stock per month. Compensation commenced with respect to January 2009, but none was retroactive to 2008.  On or about October 7, 2009, each director (other than Lou Brothers and Larry Wilhide) received his entire stock award of 24,000 shares of restricted stock in one lump sum for payment of the entire year’s service, along with a $3,000 tax gross-up cash payment.  Neither Mr. Brothers nor Mr. Wilhide received any stock or cash compensation for his 2009 service as a director.

On or about November 1, 2010, each director (other than Lou Brothers and Larry Wilhide) received 12,000 shares of restricted stock in one lump sum for payment of the entire year’s service, along with a $12,000 tax gross-up cash payment.  Neither Mr. Brothers nor Mr. Wilhide received any stock or cash compensation for his 2010 service as a director.

49

NOTE 12 – STOCK OPTIONS

On September 13, 2010, the Company granted certain employees and others the option to purchase 4,050,000 shares of the Company’s common stock at prices ranging from $1.35 - $1.49 per share.  The fair value of stock at the option grant date was determined to be $1.32 per share.  The options vest 660,000 on September 13, 2010, 660,000 on January 1, 2011, 620,000 on January 1, 2012, 620,000 on January 1, 2013, 620,000 on January 1, 2014, 620,000 on January 2, 2015, and 250,000 options will vest upon the completion of certain sales goals for ODIN and THOR, and are exercisable from vesting date through a period of ten years from the grant date. Management anticipates the average term of the options will be 5-7 years.

Using the Black-Scholes-Merton option pricing model, management has determined that the options have a value ranging from $1.29 to $1.33.  For the year ended December 31, 2010 the Company recognized compensation cost of $1,746,079 and an income tax benefit has not been reflected due to an increase in the deferred tax asset valuation allowance. As of December 31, 2010, there was $3,610,968 of total unrecognized compensation cost relating to nonvested stock options.  That cost is expected to be recognized in the years ending December 31, 2011, 2012, 2013, and 2014 in the amounts of $819,617, $819,617, $819,617 and $819,617, respectively, while $332,500 will be recognized upon the completion of certain sales goals for ODIN and THOR.

The assumptions used and the calculated fair value of the options are as follows:

Expected dividend yield

 

 

-0-

 

Risk-free interest rate

 

 

3.78% – 4.99%

 

Expected life in years

 

 

5-7

 

Expected volatility

 

 

180.00%

 

Weighted average of fair value of options granted

 

 

$1.32

 

The following is an analysis of options to purchase shares of the Company’s stock issued and outstanding:

 

 

**Total**

**Options**

 

**Weighted**

**Average**

**Exercise Price**

Total Options outstanding, January 1, 2010

--

 

-

    Granted

4,050,000

$

1.38

    Exercised

--

 

--

    Expired/cancelled

--

 

--

Total options outstanding, December 31, 2010

   4,050,000

 

1.38

 

 

 

 

Options exercisable, December 31, 2010

660,000

$

1.38

 

**  Nonvested   **

**Options**

 

**    Average     **

** Fair Value  **

**Nonvested options**

 

 

 

Nonvested options, January 1, 2010

--

$

--

Granted

4,050,000

 

1.32

Vested

(660,000)

 

1.32

Forfeited

--

 

 

Nonvested options, December 31, 2010

3,390,000

$

1.32

50

At December 31, 2010, vested exercisable options were outstanding for 660,000 shares at an exercise price between $1.35 and $1.49.  The weighted average value of the options is $1.32.  134,680 options have a remaining life of 4.7 years and expire on September 13, 2015 while 525,320 options have a remaining life of 9.7 years and expire on September 13, 2020.  The 3,390,000 nonvested options will vest over the next five years excluding 250,000 which will vest upon completion of certain sales goals for ODIN and THOR.

NOTE 13 – INCOME TAXES

There was no income tax expense or benefit for the years ended December 31, 2010 and 2009 due to the Company’s net losses and increases in its deferred tax asset valuation allowance.

Deferred income taxes reflect the income tax effect of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and amounts used for income taxes.  The Company’s deferred income tax assets and liabilities consist of the following at December 31, 2010 and 2009:

 

 

** 2010**

 

** 2009**

Deferred Tax Assets: 

 

 

 

 

     Stock options

$

456,724 

$

-- 

     Accruals

 

-- 

 

18,418 

     Net operating loss carryforwards

 

1,916,138 

 

2,005,653 

 

 

2,372,862 

 

2,024,071 

     Valuation allowance

 

(2,330,896)

 

(1,966,366)

 

$

41,996 

 $

57,705 

 

 

 

 

 

 

 

** 2010** 

 

**2009** 

Deferred Tax Liabilities

 

 

 

 

     Depreciation

$

41,996 

 $

57,705 

The table below summarizes the differences between the Company’s effective tax rate and the statutory federal rate for fiscal years 2010 and 2009:

 

 

 

** 2010**

 

 

** 2009**

Computed “expected” tax benefit

 

 

(33)

%

 

(33)

State taxes net of “expected” tax benefit

 

 

(6)

%

 

 (6)

Permanent differences

 

 

14 

%

 

-- 

Change in valuation allowance

 

 

25 

%

 

 39 

Effective tax rate

 

 

0 

%

 

 0 

Net operating loss carryforwards totaled approximately $4,900,000 at December 31, 2010.  The net operating loss carryforwards will begin to expire in the year 2028 if not utilized.  After consideration of all the evidence, both positive and negative, management has recorded a full valuation allowance at December 31, 2010 and 2009 due to the uncertainty of realizing the net deferred tax assets. The valuation allowance increased by approximately $365,000 for the year ended December 2010. Utilization of the Company’s net operating loss carryforwards may be limited based on changes in ownership as defined in Internal Revenue Code Section 382.

Income taxes are accounted for in accordance with ASC 740, Accounting for Income Taxes.  ASC 740 requires an evaluation of the probability of being able to realize the future tax benefits of deferred taxes.  A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some, or all, of the deferred tax asset will not be realized.  Due to ongoing losses and the establishment of a valuation allowance to offset net deferred tax assets, the Company did not record a tax benefit for the years ended December 31, 2010 and 2009.

51

NOTE 14 - DESCRIPTION OF LEASING ARRANGEMENTS

On September 1, 2006, the Company entered into a lease of 2,985 square feet of office space located at 50 E. River Center Boulevard, Suite 820, Covington, Kentucky. The term of the lease is for five years ending in August, 2011.  The Company has not decided whether it will vacate the premises upon expiration of the lease or seek to renew the lease terms.  

Under the terms of the lease, the Company shall pay additional rent to cover operating expenses of the property at a pro rata share deemed to be 0.928%, which will total approximately $19,402 for the initial twelve months.  These expenses are anticipated to increase at a 3% rate annually for the remaining term of the agreement.

On December 1, 2007, the Company entered into a lease of 2,700 square feet of warehouse space located at 1895 Airport Exchange Blvd, Building A, Erlanger, Kentucky. The term of the lease is for 37 months ending in December, 2010.  In December 2010, the Company renewed the lease for 12 months ending in December, 2011.

Under the terms of the lease, the Company shall pay additional rent to cover operating expenses of the property of approximately $349 per month.  Rent expense for the year ended December 31, 2010 and 2009 was $97,407 and $101,814, respectively.

The following is a schedule of future minimum lease payments required under the lease as of December 31, 2010:

**Period Ending**

 

 

 

**December 31**

 

** Amount**

 

2011

 

$

  53,370 

 

  

 

$

53,370 

 

NOTE 15 - RELATED PARTY TRANSACTIONS

At December 31, 2010 the Company owed Louis J. Brothers, the Company’s president and major shareholder, $124,846 for advances made to the Company. Such amount, which is included in the due to shareholder balance on the balance sheet at December 31, 2010 earns 6% annual interest quarterly, is unsecured and is due on demand. As of December 31, 2009, the Company owed Mr. Brothers the principal amount of $216,558 for advances made to the Company, plus accrued interest.  During 2010, the Company made payments of $150,000 against the amounts owed to Mr. Brothers.  Of that payment $58,288 was applied to accrued but unpaid interest, and the remaining $91,712 was applied to reduce the principal amount owed to Mr. Brothers.  The Company made a $25,000 payment to Mr. Brothers on January 24, 2011.

For the years ended December 31, 2010 and 2009, the Company incurred expenses for accounting services of $58,125 and 62,810, respectively, to a firm related to a member of the board of directors.

On August 11, 2006, CTCEG loaned the Company $42,000 as described in Note 8.During the third quarter of 2010, the Company made a payment of $49,134 against the amounts owed to Coast to Coast Equity Group, Inc.   Of that payment $7,134 was applied to accrued but unpaid interest, and the remaining $42,000 was applied to reduce the principal amount owed to Coast to Coast Equity Group, Inc.  

52

NOTE 16 – CONCENTRATION AND CREDIT RISK

During the year ended December 31, 2010, two customers accounted for 78% and 22% of the Company’s total revenues.  During the year ended December 31, 2009, one customer accounted for 100% the Company’s total revenues.  A reduction in sales from or loss of these customers could have a material adverse effect on the Company’s results of operations and financial condition.

Certain financial instruments potentially subject the Company to concentrations of credit risk. These financial instruments consist primarily of cash and accounts receivable.  The Company maintains its cash investments in high credit quality financial institutions. At various times, the Company has deposits in excess of the Federal Deposit Insurance Corporation limit.  The Company has not experienced any losses on these accounts.

The Company’s entire accounts receivable balance of $1,991,902 is from one customer. The customer is located in Asia.  The Company has not experienced any bad debts from this customer.

The Company receives its inventory from approximately eight suppliers.  The Company has an accounts payable balance to these suppliers of $1,912,577 and $1,107,305 for the years ended December 31, 2010 and 2009, respectively.

NOTE 17 – COMMITMENTS AND CONTINGENCIES

The Company is involved in litigation arising in the ordinary course of business.  While the ultimate outcome of these matters is not presently determinable, it is the opinion of management that the resolution of outstanding claims will not have a material adverse effect on the financial position or results of operations of the Company.

The Company settled several lawsuits in 2010 resulting in legal settlement income of $62,441.

The Company entered into a Consulting and Services Agreement (“CSA”) with Idaho State University (“ISU”). The CSA establishes a framework under which ISU, through the Idaho Accelerator Center (“IAC”), could assemble a THOR demonstration unit in Pocatello, Idaho.  In order to begin that project, the CSA requires the Company to propose a series of work orders setting forth work tasks, deliverables, due dates, IAC’s compensation and other commercial terms.  To date, no work orders have been issued or accepted.

The Company has entered into an agreement with a manufacturer to build a component for THOR.  The contract amount was $99,200 and the Company has incurred costs of  $44,600 as of December 31, 2010.

NOTE 18 – SUBSEQUENT EVENTS

We have evaluated the period from December 31, 2010 through the date the financial statements herein were issued for subsequent events requiring recognition or disclosure in the financial statements and we have identified the following events:

The Company made a $25,000 payment to Mr. Brothers on January 24, 2011 as partial repayment of a promissory note evidencing a loan Mr. Brothers made to the Company.

On March 11, 2011, Japan suffered an earthquake, tsunami, and a subsequent nuclear power reactor failure. While current indications are that these events will not have a material impact on the Company’s sales in Japan or elsewhere, the ultimate impact remains uncertain.

53

**ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES**.

As previously reported on Form 8-K, on October 14, 2010, R.R. Hawkins & Associates International was dismissed as the certifying accountant for the Company.  On October 11, 2010, the Company engaged Mountjoy Chilton Medley LLP.  In connection with that change, there have been no reportable events with the Company as set forth in Item 304(a)(i)(v) of Regulation S-K nor any disagreements of the type described in Item 304(a)(i)(iv) of Regulation S-K .

**ITEM 9A.  CONTROLS AND PROCEDURES.**

 

**Disclosure Controls and Procedures**

 

Under the supervision and with the participation of our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Exchange Act, as of December 31, 2010 (the "Evaluation Date"). Our disclosure controls and procedures are designed so that the information relating to the Company, including our consolidated subsidiaries, required to be disclosed in our SEC reports is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) accumulated and communicated to management, including our principal executive officer/principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

 

**Management's Report on Internal Control over Financial Reporting**

 

Our management is responsible for establishing and maintaining adequate control over financial reporting (as defined in Rule 13a-15(f) promulgated under the Exchange Act). Valley Forge Composite Technologies, Inc.’s internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting of the Company includes those policies and procedures that:

(1) pertain to the maintenance of records that in reasonable detail accurately and fairy reflect the transactions of the company.

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorization of management and directors of the Company; and

(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company’s financial statements.

All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error or circumvention through collusion of improper overriding of controls. Therefore, even those internal control systems determined to be effective can provide only reasonable assurance with respect to 

54

financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2010. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in *Internal Control-Integrated Framework*.  Our management has concluded that our internal control over financial reporting is not effective based on these criteria in light of the following material weaknesses:

Lack of Segregation of Duties and Qualified Internal Employees – Because of our limited staff, a limited number of people perform all financial duties.  Much of our financial accounting is performed by outside accountants not affiliated with our auditors.  We are considering hiring a full time controller to oversee our accounting functions.

 

**Changes in Internal Control over Financial Reporting**

 

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

 

The Company is not required by current SEC rules to include, and does not include, an auditor's attestation report. The Company's registered public accounting firm has not attested to Management's reports on the Company's internal control over financial reporting.

**ITEM 9B.  OTHER INFORMATION.**

Not Applicable.

**ITEM 10.**  **DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.**

**Directors and Executive Officers**

Prior to March 2008, the Company had a board of directors composed of two individuals, Louis J. Brothers and Larry Wilhide.  These board members, who are also the majority shareholders of the Company and are the Company’s only officers, will hold office indefinitely.

During March 2008 and April 2008, the Company appointed five additional board members: Andrew T. Gilinsky, Eugene Breyer, Dr. Victor E. Alessi, Raul A. Fernandez, and Richard S. Relac.

The following table sets forth the name and, age, and position of each officer and director of the Company.

**Name** 

 

**Age**

 

**Position** 

Louis J. Brothers 

 

58

 

Chairman of the Board of Directors,

 

 

 

 

Chief Executive Officer, and President

Larry K. Wilhide 

 

63

 

Director, Vice-President (Engineering)

Keith L. McClellan

 

55

 

Vice President, Secretary, and General Counsel

Andrew T. Gilinsky

 

50

  

Director

Richard S. Relac

 

70

 

Director

Eugene Breyer

 

63

  

Director

Raul A. Fernandez

 

61

 

Director

Dr. Victor A. Alessi

 

71

  

Director

55

**Background of Executive Officers, Directors and Significant Employees**

 

**Louis J. Brothers**

A founding shareholder of the Company, since 1997 Louis J. Brothers has been the president and chairman of the board of directors of the Company, and he became Chairman of the Board of Directors upon execution of the July 6, 2006 Share Exchange Agreement. Mr. Brothers has more than 20 years of experience in marketing, marketing support, product management and logistics in industrial products. Mr. Brothers 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. 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.  Mr. Brothers holds a Bachelor of Science Degree in Interdisciplinary Sciences from the University of Cincinnati.

 

**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 the Company 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 holds a Bachelors Degree in Mechanical Engineering.

**Keith L. McClellan, Esq., MBA**

Keith L. McClellan has served as the Company’s Vice President, Secretary and General Counsel since 2010.  He has worked as in-house counsel for two commercial banks and a public utility.  Since 1991, he has worked on business and legal issues associated with technology commercialization in aerospace, non destructive testing and materials characterization, including technologies utilizing particle beam accelerators.  Mr. McClellan is admitted to the Bar in Nevada and Kentucky.

**Andrew T. Gilinsky**

Mr. 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.  

 

**Eugene Breyer**

Mr. Breyer’s spouse is the sister of Mr. Brother’s spouse. From December 1999 through the present, Mr. Breyer has been employed as the director of human resources for Cincinnati State Technical and Community College.

**Dr. Victor E. Alessi**

From 1999 until September 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 September 2007, Dr. Alessi has been retired.

56

**Raul A. Fernandez**

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.

**Richard S. Relac**

Mr. Relac is a professional linguist and since January 2006 has been self-employed in this capacity.  From 1983 to January 2002, Mr. Relac served the National Security Agency as an intelligence analyst and reporter, 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 to Bonneauville Borough, Pennsylvania. He ceased being a council member in March 2009.  Also in January 2006, Mr. Relac commenced his free-lance translating service with Valley Forge Composite Technologies, Inc. as his primary customer. Mr. Relac currently operates his translating service.   

**Corporate Governance  **

The Board of Directors held formal telephonic meetings in January, February, March, April, June, September, and met in person in November of 2010.  Meetings of the board have been conducted by telephone.  We have never held an annual meeting of shareholders because all actions requiring shareholder approval have been conducted by the written consent of our majority shareholders, Messrs. Brothers and Wilhide.  We anticipate that we will begin to hold annual shareholder meetings when we enter into the operational phase of our core business plan.  

**Audit Committee and Audit Committee Financial Expert  **

We do not have an audit committee or an audit committee financial expert sitting on the board.  Due to our stagnant growth during 2009, we did not expand our board of directors as expected to include an audit committee or an audit committee financial expert.  It is not likely that we will expand the board in 2011 to include an audit committee or an audit committee financial expert unless and until we enter into the operational phase of our core business plan.

**Board of Directors Nominating Committee**

We do not have a standing board of directors nominating committee or a committee performing similar functions. Messrs. Brothers and Wilhide at all times from the inception of VLYF to March 2008 were the only directors of the Company.  In March and April 2008, Messrs. Brothers and Wilhide appointed five directors to serve indefinitely. We do not anticipate needing a nominating committee at least until we choose to add additional directors or to fill a vacant position.

**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 “Corporate Governance” tab.

57

**ITEM 11.**  **EXECUTIVE COMPENSATION.**

The Company paid compensation to each of the executive officers in the following amounts during fiscal year 2010:

**SUMMARY COMPENSATION TABLE**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Annual Compensation**

 

**Long-Term**

**Compensation**

**Name and**

**Principal**

**Position**

**Fiscal**

**Year**

**Salary**

**($)**

**Bonus**

**($)**

**Stock**

**Awards**

**($)**

**Option**

**Awards**

**($)**

**All**

**Other**

** ($)**

**Total**

**($)**

**Awards**

**($)**

**Payouts**

**($)**

 

 

 

 

 

 

 

 

 

 

**Louis J. Brothers**

 

 

 

 

 

 

 

 

 

(Chief Executive Officer)

2010

$134,500

 

 

 660,012

 

$794,512

 

 

(Chief Executive Officer)

2009

$134,308

 

 

 

 

$134,308

 

 

 

 

 

 

 

 

 

 

 

 

**Larry K. Wilhide**

 

 

 

 

 

 

 

 

 

(Vice-President and Director)

2010

$100,850

 

 

 660,012

 

$760,862

 

 

(Vice-President and Director)

2009

$100,131

 

 

 

 

$100,131

 

 

 

 

 

 

 

 

 

 

 

 

**Keith L. McClellan**

 

 

 

 

 

 

 

 

 

(Vice President, Secretary and General Counsel) 

2010

$45,000

 

 

266,000

 

$311,000

 

 

**OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END**

**OPTION AWARDS**

 

 

Number of Securities Underlying Unexercised Options # Exercisable

Number of Securities Underlying Unexercised Options # Unexercisable

Option Exercise Price

Option Expiration Date

Lou Brothers

 

 

 

 

ISO (1)

67,340

336,700

$1.49

September 13, 2015

Nonqualified (2)

182,660

913,300

1.35

September 13, 2020

 

 

 

 

 

Larry Wilhide

 

 

 

 

ISO (1)

67,340

336,700

1.49

September 13, 2015

Nonqualified (2)

182,660

913,300

1.35

September 13, 2020

 

 

 

 

 

Keith McClellan

 

 

 

 

ISO (3)

74,074

370,370

1.35

September 13, 2020

Nonqualified (4)

25,926

129,630

1.35

September 13, 2020

Footnotes:

(1)

These options vest at a rate of 67,340 shares on each of January 1, 2011, 2012, 2013, 2014 and January 2, 2015.

(2)

These options vest at a rate of 182,660 shares on each of January 1, 2011, 2012, 2013, 2014 and January 2, 2015.

(3)

These options vest at a rate of 74,074 shares on each of January 1, 2011, 2012, 2013, 2014 and January 2, 2015.

(4)

These options vest at a rate of 25,926 shares on each of January 1, 2011, 2012, 2013, 2014 and January 2, 2015.

58

 

**Payments to Management**

 

Messrs. Brothers and Wilhide each are protected by the Company’s indemnification policy for directors and officers (set forth below).  No other fringe benefits for either of them have been awarded in fiscal year 2010 or are contemplated at this time, other than customary fringe benefits available generally to all employees.  No other form of compensation or incentive compensation was paid or awarded to either of them in fiscal year 2009.  The incentive compensation for 2010 is set forth below. 

Vested stock options were awarded to Mr. Brothers, Mr. Wilhide and Mr. McClellan on September 13, 2010.  Mr. Brothers and Mr. Wilhide each received 67,340 Incentive Stock Options with an exercise price of $1.49 per option and 182,660 non qualified options with an exercise price of $1.35 per option.  Mr. McClellan’s option award includes 74,074 Incentive Stock Options and 25,296 non qualified stock options, all with an exercise price of $1.35.   Additional nonvested stock options were awarded to each of these individuals as described in the immediately preceding table.

In the future, Mr. Brothers and all other employees will receive commissions from their individual efforts resulting in customer purchase orders for THOR and ODIN units.

**Indemnification of Directors and Officers**

Our bylaws contain the broadest form of indemnification for our officers and directors permitted under Florida law.  Our bylaws generally provide as follows:

The Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by, or in the right of the Company) by reason of the fact that he or she is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of any other corporation, partnership, joint venture, trust or other enterprise against expenses (including attorney's fees), judgments, fines, amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding, including any appeal thereof, if he or she acted in good faith in a manner he reasonably believed to be in, or not opposed to the best interests of the Company, and with respect to any criminal action or proceeding, had no reasonable cause to believe that his or her conduct was unlawful.  The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of no contenders or its equivalent shall not create, of itself, a presumption that the person did not act in good faith or in a manner which he or she reasonably believed to be in, or not opposed to, the best interests of the Company or, with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful.

To the extent that a director, officer, employee or agent of the Company has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to above, or in any defense of any claim, issue or matter therein, he or she shall be indemnified against expenses, including attorneys fees, actually and reasonably incurred by him in connection therewith.

 

Any indemnification shall be made only if a determination is made that indemnification of the director, officer, employee or agent is proper in the circumstances because such person has met the applicable standard of conduct set forth above. Such determination shall be made either (1) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (2) by the shareholders who were not parties to such action, suit or proceeding.  If neither of the above determinations can occur because the Board of Directors consists of a sole director or the Company is owned by a sole shareholder, which is controlled by the sole officer and director, then the sole officer and director or sole shareholder shall be allowed to make such determination.

59

Expenses incurred in defending any action, suit or proceeding may be paid in advance of the final disposition of such action, suit or proceeding as authorized in the manner provided above upon receipt of any undertaking by or on behalf of the director, officer, employee or agent to repay such amount if it shall is ultimately determined that such person is not entitled to be indemnified by the Company.

The indemnification provided shall be in addition to the indemnification rights provided pursuant to Chapter 607 of the Florida Statutes, and shall not be deemed exclusive of any other rights to which any person seeking indemnification may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in such person's official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent of the Company and shall inure to the benefit of the heirs, executors and administrators of such a person.

The description of the indemnification rights herein is subject to, and qualified by, the actual indemnification provisions set forth in the Company’s bylaws.

**Director Compensation**

The following table summarizes all compensation paid to our directors during 2010. After the close of 2008, the board of directors voted to compensate themselves in the form of cash and restricted stock. Compensation commenced in January 2009 and none is retroactive to 2008.  All Directors, except Mr. Bothers and Mr. Wilhide, received restricted stock as compensation in 2010 and cash compensation. 

 

 

 

 

 

 

 

 

**DIRECTOR COMPENSATION**

 

Name

Fees

Earned

or Paid in

Cash

Stock

Awards

Option

Awards

Non-Equity

Incentive

Plan

Compen-

sation

Nonqualified

Deferred

Compen-

sation

Earnings

All

Other

Compen-

sation

Total

Louis J. Brothers

 

 

 

 

 

--

--

Larry K. Wilhide

 

 

 

 

 

--

--

Andrew T. Gilinsky

$12,000

$23,640

 

 

 

--

$35,640

Eugene Breyer

12,000

23,640

 

 

 

--

35,640

Dr. Victor E. Alessi

12,000

23,640

 

 

 

--

35,640

Raul A. Fernandez

12,000

23,640

 

 

 

--

35,640

Richard S. Relac

12,000

23,640

 

 

 

--

35,640

**ITEM 12. ** **SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.**

 

The Company has 61,320,774 shares of common stock issued and outstanding as of December 31, 2010.  The table below provides current ownership figures, and also figures that assume and project the exercise of all Class D, and F warrants and options, which would raise the issued and outstanding shares upon such exercise to 68,099,348 shares. ** **Over the next five years, Directors and Executive Officers will receive an additional 3,000,000 vested options if they remain employed by the Company.    There are no preconceived arrangements providing for a specific change of control of management of the Company upon the happening of certain future events.

60

All figures as of December 31, 2010

 

 

 

 

 

 

 

 

 

 

 

 

**Name**

 

**Common Shares**

**Beneficially Owned**

 

**Common Shares Issuable Upon Exercise Of Warrants**

**Total**

 

**% of currently outstanding shares(1)**

**% of outstanding shares fully diluted (2)**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

***Directors and Executive Officers***

 

 

 

 

 

 

 

 

 

Louis J. Brothers & Roe Brothers, Ten Ent(5)

 

 

19,130,000

 

 

 

19,130,000

 

 

31.2

29.9

Larry K. Wilhide & Pat Wilhide, Ten Ent(6)

 

 

19,130,000

 

 

 

19,130,000

 

 

31.2

29.9

Dr. Victor E. Alessi

 

 

36,000

 

 

 

36,000

 

 

*

*

Raul A. Fernandez

 

 

36,000

 

 

 

36,000

 

 

*

*

Richard S. Relac

 

 

41,000

 

 

 

41,000

 

 

*

*

Andrew T. Gilinsky

 

 

56,000

 

 

 

56,000

 

 

*

*

Eugene Breyer

 

 

36,000

 

 

 

36,000

 

 

*

*

  

 

 

 

 

 

 

 

 

 

 

 

***Others***

 

 

 

 

 

 

 

 

 

 

 

**MKM Opportunity Master Fund, Ltd. (3)**

 

 

**3,457,144**

 

 

**2,728,574**

**6,185,718**

 

 

**9.99 (4)**

**9.7 (4)**

  

 

 

 

 

 

 

 

 

 

 

 

All Directors and Executive Officers as a Group (7 persons)

 

 

38,455,000

 

 

 

38,455,000

 

 

62.7

60.0

       *

 Denotes beneficial ownership less than 1% of the Company’s Common Stock.

(1)

 Calculated with respect to each beneficial owner in accordance with Exchange Act Rule 13d-3.

(2)

Calculated assuming the exercise of all warrants held by all beneficial owners.

(3)

MKM Opportunity Master Fund, Ltd.’s (“MKM”) address is c/o MKM Capital Advisors, LLC, 644 Broadway, 4th Floor, New York, NY 10012.

(4)

All warrants held by MKM include a limitation on exercise, which provides that at no time will MKM be entitled to exercise any number of Warrants that would result in the beneficial ownership by MKM of more than 9.99% of the outstanding shares of the Company’s Common Stock.  Without this limitation, MKM would be deemed to beneficially own 10.4% of the Company’s Common Stock (assuming exercise of MKM’s warrants) and 10.3% of the Company’s Common Stock if all outstanding warrants were exercised by MKM and all other warrant holders.

(5)

Includes 250,000 options vested on September 13, 2010.

(6)

Includes 250,000 options vested on September 13, 2010.

**ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS, AND DIRECTOR INDEPENDENCE**

**Director Independence**

Our independent directors are Messrs. Fernandez and Relac and Dr. Alessi.  Our definition of “independent” is that of NASDAQ Marketplace Rule 4200(a)(15). However, the Company’s securities are not listed on any platform in the NASDAQ Stock Market.

61

**Transactions with Related Persons**

At December 31, 2010 the Company owed Louis J. Brothers, the Company’s president and major shareholder, $124,846 for advances made to the Company. Such amount, which is included in the due to shareholders balance on the balance sheet at December 31, 2010 earns 6% annual interest compounded quarterly, and is due on demand.

The Company paid Rosemary A. Brothers, the wife of director Louis J. Brothers, $42,275 for administrative services.  Rosemary A. Brothers is, as of the filing date of this report, one of two full time administrative employees.

For the years ended December 31, 2010 and 2009, the Company incurred expenses for accounting services of $58,125 and 62,810, respectively, to a firm related to a member of the board of directors.

**Transactions with Promoters**

On July 6, 2006, Quetzal Capital 1, Inc., a Florida corporation (“QC1”) entered into a share exchange agreement with VFDS’ predecessor Pennsylvania corporation. Under the share exchange agreement, QC1 issued 40,000,000 shares of its common stock to VFDS shareholders for the acquisition of all of the outstanding capital stock of VFDS.  For financial accounting purposes, the exchange of stock was treated as a recapitalization of VFDS with the former shareholders of QC1 retaining 5,000,000 shares (or approximately 11%) of the public company.  Prior to the merger, QC1 was a reporting shell corporation with no operations. The share exchange was approved by QC1 and its sole shareholder, Quetzal Capital Funding I, Inc. (“QCF1”), and by VFDS’ board of directors and a majority of its shareholders.   QC1 changed its name to Valley Forge Composite Technologies, Inc., a Florida corporation, and is referred to throughout this report as the “Company.”  The three shareholders of QC1 were the same shareholders of Coast To Coast Equity Group, Inc., which entered into a consulting agreement with the newly merged Company.

The Company had a consulting contract with Coast To Coast Equity Group, Inc.  The contract is for a two-year period.  The full text of the contract is attached to the Company’s Form 8-K filed on July 11, 2006 and is incorporated herein by reference.  The terms of the contract generally provide that Coast To Coast Equity Group, Inc. will not be paid cash but will be paid three million warrants to purchase up to three million shares of Company common stock.  Those warrants have now expired.  

Coast To Coast Equity Group, Inc., Charles, J. Scimeca, Tony N. Frudakis, and George Frudakis were previously protected from dilution of their percentage ownership of the Company by certain non-dilution rights. The non-dilution rights, by the terms of the registration rights agreement (attached hereto as Exhibit 4.1), expired on May 14, 2009.  Language in prior filings inadvertently and mistakenly implied that these non-dilution rights had been extended until May 13, 2010, but no such extension was ever effected.

On August 11, 2006, the Company issued a convertible debenture to CTCEG in the amount of $42,000 in exchange for cash received.  The interest rate is 4% per annum and runs from August 11, 2006.   The sale was conducted in a private transaction exempt from registration pursuant to pursuant to Sections 4(2) or 4(6) of the Securities Act.

On August 22, 2007, the Company entered into an agreement with CTCEG to sell 333,333 shares of common stock at $1.50 per share on demand of the Company.  The Company established a price protection provision relating to the selling price of common stock per the agreement.  The provision states that parties to the agreement are entitled to receive additional stock if the Company sells shares of stock for less than $1.50 per share of common stock to an investor prior to the time limitations specified which is one (1) year from the effective date of the agreement.  As of December 31, 2007, the Company had sold 271,333 shares for 

62

$407,000.  The Company has the right to sell an additional 62,000 shares with a value of $93,000 to CTCEG by August 21, 2008.

For a transaction on February 15, 2008, the Company on August 8, 2008 issued CTCEG 200,000 shares of restricted common stock to reimburse it for its assignment of 200,000 registered Class A warrants to Debra Elenson without compensation from Ms. Elenson. On or about February 15, 2008, Ms. Elenson exercised the warrants. The issue was conducted in a private transaction exempt from registration pursuant to pursuant to Sections 4(2) or 4(6) of the Securities Act.

For a May 8, 2008 transaction, the Company on August 8, 2008 issued 1,200,000 shares of restricted common stock to reimburse CTCEG’s principals Charles Scimeca and Tony Frudakis for their sale of 1,200,000 shares of registered Company stock to Daniel Katz at a discount to market to induce Mr. Katz to enter an investment banking agreement. The Company issued an additional 360,000 shares to CTCEG to compensate it for its federal tax liability. The issue was conducted in a private transaction exempt from registration pursuant to pursuant to Sections 4(2) or 4(6) of the Securities Act.

**ITEM 14.  PRINCIPAL ACCOUNTANTS FEES AND SERVICES.**

**Audit Fees**

We paid R.R. Hawkins & Associates International, P.C. (“Hawkins”) $25,000 for auditing the financial statements for the year ended December 31, 2009.  We paid Mountjoy Chilton Medley, LLP (“MCM”) $52,000 for auditing our financial statements for the year ended December 31, 2010

In 2009 we paid Hawkins $9,000 for the review of our quarterly financial statements, review of our Forms 10-Q and services that are normally provided by the accountant in connection with non year end statutory and regulatory filings on engagements in 2009.

In 2010 we paid Hawkins $16,300 for the review of two of our quarterly financial statements, review of our Forms 10-Q and services that are normally provided by the accountant in connection with non year end statutory and regulatory filings on engagements in 2010.

In 2010 we paid MCM $6,500 for the review of our September 30, 2010 quarterly financial statements, review of our Form 10-Q and services that are normally provided by the accountant in connection with non year end statutory and regulatory filings on engagements in 2010.

**Audit Related Fees**

No fees were paid to Hawkins or MCM for audit related services.

**Tax Fees**

No fees were paid to Hawkins or MCM for taxes. 

**All Other Fees**

No fees were paid to Hawkins or MCM for other services.

63

**PART IV**

**ITEM 15 EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES**

**INDEX OF EXHIBITS**

**Exhibit No.**

 

**Description**

 

2.1

Share Exchange Agreement Between Quetzal Capital 1, Inc. and the Shareholders of Valley Forge Composite Technologies, Inc., dated July 6, 2006, incorporated by reference to Exhibit 2.1 to the Company’s current report on Form 8-K filed on July 11, 2006.

 

3.1

Articles of Amendment by Quetzal Capital 1, Inc., incorporated by reference to Exhibit 3 to the Company’s current report on Form 8-K filed on July 11, 2006.

 

3.2

Bylaws of Valley Forge Composite Technologies, Inc. incorporated by reference to Exhibit 3.2 to the Company’s annual report on Form 10-K for December 31, 2009 filed on April 14, 2010

 

4.1

Registration Rights Agreement, dated July 6, 2006, incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed on July 11, 2006.

 

4.2

Securities Purchase Agreement dated as of July 3, 2008 between Valley Forge Composite Technologies, Inc. and various buyers, incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed on July 8, 2008

 

4.3

Form of Senior Convertible Note, incorporated by reference to Exhibit 10.2 to the Company’s current report on Form 8-K filed on July 8, 2008

 

4.4

Form of Warrant, incorporated by reference to Exhibit 10.3 to the Company’s current report on Form 8-K filed on July 8, 2008.

 

4.5

Securities Purchase Agreement dated as of September 29, 2008, between Valley Forge Composite Technologies, Inc. and various buyers, incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed on September 30, 2008.

 

4.6

Form of Senior Convertible Note, incorporated by reference to Exhibit 10.2 to the Company’s current report on Form 8-K filed on September 30, 2008.

 

4.7

Form of Warrant, incorporated by reference to Exhibit 10.3 to the Company’s current report on Form 8-K filed on September 30, 2008.

 

4.8

Securities Purchase Agreement dated as of May 27, 2009, between Valley Forge Composite Technologies, Inc. and various buyers, incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed on June 4, 2009.

 

4.9

Form of Warrant, incorporated by reference to Exhibit 10.2 to the Company’s current report on Form 8-K filed on June 4, 2009.

 

4.10

Securities Purchase Agreement dated as of August 10, 2009 between Valley Forge Composite Technologies, Inc. and various buyers, incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed on August 17, 2009.

 

4.11

Form of Warrant, incorporated by referenced to Exhibit 10.2 to the Company’s current report on Form 8-K filed on August 17, 2009.

 

10.1

Cooperative Research and Development Agreement between the Regents of the University of California and Valley Forge Composite Technologies, Inc., dated April 17, 2003. incorporated by reference to Exhibit 10.1 to the Company’s annual report on Form 10-K for December 31, 2009 filed on April 14, 2010

 

21.1

List of Subsidiaries, incorporated by reference to Exhibit 21.1 to the Company’s Annual Report on Form 10-K filed on April 15, 2009

 

31.1**

13a-14(a)-15d-14(a) Certification - Louis J Brothers

 

31.2**

13a-14(a)-15d-14(a) Certification - Louis J Brothers

 

32.1**

18 U.S.C. § 1350 Certification - Louis J Brothers

 

32.2**

18 U.S.C. § 1350 Certification - Louis J Brothers

 

 

** FILED HEREWITH

64

**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

 

 

 

**Valley Forge Composite Technologies, Inc.**

 

 

 

 

 

Date: April 08, 2011

By:

*   /s/ Louis J. Brothers*

 

 

 

Louis J. Brothers

 

 

 

President, Chief Executive Officer,

Chief Financial Officer, and Chairman of the Board

(Principal Executive Officer, Principal Financial and

Accounting Officer)

 

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