Table of Contents

 

 

 

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

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**FORM 10-Q/A**

**(Amendment No. 1)**

** **
| **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF  1934** |
|----------------------------------------------------------------------------------------------------|
|                                                                                               |
| **For the  Quarter Ended March 31, 2009**                                                     |
| ** **                                                                                         |
| **Commission  File Number 001-33888**                                                              |

 

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**AmericanDefense Systems, Inc.**

(Exact Name of Registrant asSpecified in Its Charter)

 

| **Delaware**                                                     | ** ** | **83-0357690**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or Other  Jurisdiction of Incorporation or  Organization) |       | (I.R.S. Employer  Identification No.) |

 

**230 Duffy Avenue**

**Hicksville, NY 11801****(516) 390-5300**

(Address including zipcode, and telephone number, including area code, of principal executiveoffices)

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15 (d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See definition of “acceleratedfiler,” “large accelerated filer” and smaller reporting company” in Rule 12b-2of the Exchange Act.  (Check one):

 

| Large  Accelerated Filer  o |   | Accelerated  Filer  o         |
|---------------------------------------|--------|-----------------------------------------|
|                                  |   |                                    |
| Non-Accelerated  Filer  o   |   | Smaller  Reporting Company  x |

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

As of May 13, 2009, 39,760,952 shares of commonstock, par value $0.001 per share, of the registrant were outstanding.

 

 

 

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**EXPLANATORYNOTE**

 

This Amendment No. 1 on Form 10-Q/A filed (“AmendmentNo. 1”) to our Quarterly Report on Form 10-Q for the quarter ended March 31,2009, initially with the Securities and Exchange Commission on May 15,2009 (the “Original Filing”), is being filed to restate our consolidatedfinancial statements at, and for the three month period ended, March 31, 2009and the notes related thereto and the related sections of the Management’s Discussionand Analysis of Financial Condition and Results of Operations.  Management, with the concurrence of the AuditCommittee of our Board of Directors, has concluded that the financialstatements included in the Original Filing should be restated and no longer berelied upon due to (i) incorrect balance sheet classifications of our Series AConvertible Preferred Stock and warrants to purchase our common stock, andrelated incorrect recording of the changes in fair value of such reclassifiedwarrants, (ii) the capitalization of certain legal expenditures on our balancesheet that should have been expensed on our statement of operations, (iii)incorrect recording of the dividends on our Series A Convertible PreferredStock as dividends rather than as interest expense on our statement ofoperations, (iv) certain costs relating to the registration and exchangelisting of our common stock originally included in additional paid in capitalon our balance sheet that should have been expensed on our statement ofoperations, (v) incorrect balance sheet classification of our Assets fromDiscontinued Operations and Liabilities from Discontinued Operations, (vi)stock-based compensation expense with respect to stock option and common stockgrants made to an employee and certain directors that should have been added toour statement of operations, and (vii) incorrect balance sheet classificationof an asset from a prior asset acquisition. See Note 2 in the Notes to Consolidated Financial Statements included inthis Amendment No. 1 for a discussion of the corrections and areconciliation of amounts previously reported to those shown herein.

 

This Amendment No. 1 also reflects therestatement of our consolidated financial statements at, and for the yearended, December 31, 2008 (the “2008 Financial Statements”).  The restatement of the 2008 FinancialStatements was made to correct the accounting for (i) incorrect balancesheet classification of our Series A Convertible Preferred Stock andrelated investor warrants, (ii) incorrect balance sheet classification ofour Assets from Discontinued Operations and Liabilities from DiscontinuedOperations, (iii) incorrect recording of the dividends on our Series AConvertible Preferred Stock as dividends rather than as interest expense on ourstatement of operations, (iv) the capitalization of certain legal expenditureson our balance sheet that should have been expensed on our statement ofoperations, (v) certain costs relating to the registration and exchange listingof our common stock originally included in additional paid in capital on ourbalance sheet that should have been expensed on our statement of operations, and(vi) incorrect balance sheet classification of an asset from a prior assetacquisition.  The restatement of the 2008Financial Statements has been made in an amendment to our Annual Report on Form 10-Kfor the year ended December 31, 2008 filed with the SEC on April 15, 2010(“Form 10-K/A”).  For more information ofthe restatement of our 2008 Financial Statements, see Note 2 in the Notes toConsolidated Financial Statements included in this Amendment No. 1 andNote 2 in the Notes to Consolidated Financial Statements included in our Form 10-K/A.

 

Although this Amendment No. 1 sets forth theOriginal Filing in its entirety, this Amendment No. 1 only amends andrestates Items 1 and 2 of Part I of the Original Filing, in each case,solely as a result of, and to reflect the restatement, and to update ourassessment of our internal controls and procedures at March 31, 2009 asset forth in Part I, Item 4 to reflect the effects of the restatement, andPart II, Item 6 to reflect the filing of currently dated certifications ofour chief executive officer and chief financial officer.  No other information in the Original Filingis amended hereby.

 

Except for the foregoing amended and restatedinformation, this Amendment No. 1 continues to describe conditions as ofthe date of the Original Filing, and we have not updated the disclosures containedherein to reflect events that occurred at a later date.

 

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TABLE OF CONTENTS

 
| **PART I – FINANCIAL INFORMATION** |
|----------------------------------------------|
|                                         |   |
| Item 1.                                      | Condensed  Financial Statements |
|                                         | Consolidated Balance Sheets as of December 31,  2008 and March 31, 2009 (unaudited) |
|                                         | Consolidated Statements of Operations for the three  months ended March 31, 2008 and 2009 (unaudited) |
|                                         | Consolidated Statements of Cash Flows for the three months  ended March 31, 2008 and 2009 (unaudited) |
|                                         | Notes to Consolidated Financial Statements |
| Item  2.                                     | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
| Item 4.                                      | Controls  and Procedures |
|                                         |   |
| **PART II – OTHER INFORMATION**    |
|                                         |   |
| Item 1.                                      | Legal  Proceedings |
| Item 1A.                                     | Risk Factors |
| Item  2.                                     | Unregistered  Sales of Equity Securities and Use of Proceeds |
| Item  3.                                     | Defaults  Upon Senior Securities |
| Item  4.                                     | Submission  of Matters to a Vote of Security Holders |
| Item 5.                                      | Other Information |
| Item 6.                                      | Exhibits |
|                                         |   |
| **SIGNATURES**                               |

 

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**PART I**

 

**Item 1.    Consolidated Financial Statements**

 

AMERICANDEFENSE SYSTEMS, INC. and SUBSIDIARIES 

CONSOLIDATED BALANCE SHEETS

 
| ** **                                                                                                                                                                                                     | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                     | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| ** **                                                                                                                                                                                                     | ** ** | **(Unaudited)**    | ** ** | **(Audited)**         | ** ** |
| ** **                                                                                                                                                                                                     | ** ** | **(Restated)**     | ** ** | **(Restated)**        | ** ** |
| ** **                                                                                                                                                                                                     | ** ** | ** **         | ** ** | ** **            | ** ** |
| ASSETS                                                                                                                                                                                                         |       |               |       |                  |       |
|                                                                                                                                                                                                           |       |               |       |                  |       |
| CURRENT ASSETS                                                                                                                                                                                                 |       |               |       |                  |       |
| Cash                                                                                                                                                                                                           |       | $                  | 83,826     |                  | $          | 374,457 |   |
| Accounts receivable, net                                                                                                                                                                                       |       | 6,434,888          |       | 4,981,150             |       |
| Inventory                                                                                                                                                                                                      |       | 844,139            |       | 621,048               |       |
| Prepaid expenses and other current assets                                                                                                                                                                      |       | 1,647,846          |       | 2,088,801             |       |
| Costs in excess of billings on uncompleted contracts                                                                                                                                                           |       | 6,562,903          |       | 7,143,089             |       |
| Deposits                                                                                                                                                                                                       |       | 437,496            |       | 437,496               |       |
| Assets of discontinued operations                                                                                                                                                                              |       | —             |       | 736,613               |       |
|                                                                                                                                                                                                           |       |               |       |                  |       |
| TOTAL CURRENT ASSETS                                                                                                                                                                                           |       | 16,011,098         |       | 16,382,654            |       |
|                                                                                                                                                                                                           |       |               |       |                  |       |
| PROPERTY and EQUIPMENT,  net                                                                                                                                                                                   |       | 3,569,232          |       | 3,743,936             |       |
| DEFERRED FINANCING COSTS, net                                                                                                                                                                                  |       | 1,836,820          |       | 1,500,533             |       |
| NOTES RECEIVABLE                                                                                                                                                                                               |       | 925,000            |       | 925,000               |       |
| INTANGIBLE ASSET                                                                                                                                                                                               |       | 606,000            |       | 606,000               |       |
| GOODWILL                                                                                                                                                                                                       |       | 450,000            |       | 450,000               |       |
| DEFERRED TAX ASSET                                                                                                                                                                                             |       | 1,167,832          |       | 1,167,832             |       |
| other assets                                                                                                                                                                                                   |       | 159,559            |       | 159,560               |       |
|                                                                                                                                                                                                           |       |               |       |                  |       |
| TOTAL ASSETS                                                                                                                                                                                                   |       | $                  | 24,725,541 |                  | $          | 24,935,515 |   |
|                                                                                                                                                                                                           |       |               |       |                  |       |
| LIABILITIES AND SHAREHOLDERS’  EQUITY                                                                                                                                                                     |       |               |       |                  |       |
|                                                                                                                                                                                                           |       |               |       |                  |       |
| CURRENT LIABILITIES                                                                                                                                                                                            |       |               |       |                  |       |
| Accounts payable                                                                                                                                                                                               |       | $                  | 3,181,123  |                  | $          | 2,480,652 |   |
| Accrued payroll                                                                                                                                                                                                |       | 409,852            |       | —                |       |
| Accrued expenses                                                                                                                                                                                               |       | 386,447            |       | 755,615               |       |
| Line of credit                                                                                                                                                                                                 |       | 659,422            |       | 76,832                |       |
| Preferred stock, $.001 par value, 5,000,000 shares authorized,15,000 shares designated as  mandatorily redeemable Series A Convertible Preferred Stock (cumulative), 15,000 shares issued and outstanding |       | 11,809,196         |       | 10,981,577            |       |
| Warrant liabilities                                                                                                                                                                                            |       | 214,432            |       | 90,409                |       |
| Liabilities of discontinued operations                                                                                                                                                                         |       | —             |       | 736,613               |       |
|                                                                                                                                                                                                           |       |               |       |                  |       |
| TOTAL LIABILITIES                                                                                                                                                                                              |       | 16,660,472         |       | 15,121,698            |       |
|                                                                                                                                                                                                           |       |               |       |                  |       |
| COMMITMENTS AND  CONTINGENCIES                                                                                                                                                                                 |       |               |       |                  |       |
|                                                                                                                                                                                                           |       |               |       |                  |       |
| SHAREHOLDERS’ EQUITY                                                                                                                                                                                      |       |               |       |                  |       |
| Common Stock, $.001 par value: 100,000,000 shares authorized,39,585,960 and 39,585,960 shares issued and  outstanding as of March 31, 2009 and December 31, 2008,  respectively                      |       | 39,762             |       | 39,586                |       |
| Additional paid in capital                                                                                                                                                                                     |       | 10,383,344         |       | 11,096,031            |       |
| Accumulated deficit                                                                                                                                                                                            |       | (2,358,037         | )          | (1,321,800            | )          |
|                                                                                                                                                                                                           |       |               |       |                  |       |
| TOTAL SHAREHOLDERS’ EQUITY                                                                                                                                                                                |       | 8,065,069          |       | 9,813,817             |       |
|                                                                                                                                                                                                           |       |               |       |                  |       |
| TOTAL LIABILITIES AND  SHAREHOLDERS’ EQUITY                                                                                                                                                               |       | $                  | 24,725,541 |                  | $          | 24,935,515 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements 

 

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AMERICAN DEFENSE SYSTEMS,INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OFOPERATIONS

 
| ** **                                                                                                       | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                       | ** ** | **March 31,**     | ** ** |
| ** **                                                                                                       | ** ** | **2009**               | ** ** | **2008** | ** ** |
| ** **                                                                                                       | ** ** | **(Unaudited)**        | ** ** | **(Unaudited)** | ** ** |
| ** **                                                                                                       | ** ** | **(Restated)**         | ** ** | **(Restated)** | ** ** |
|                                                                                                             |       |                   |       |   |   |
| CONTRACT REVENUES EARNED                                                                                         |       | $                      | 9,489,702  |   | $ | 8,734,909 |   |
|                                                                                                             |       |                   |       |   |   |
| COST OF REVENUES EARNED                                                                                          |       | 5,453,109              |       | 5,335,036 |   |
|                                                                                                             |       |                   |       |   |   |
| GROSS PROFIT                                                                                                     |       | 4,036,593              |       | 3,399,873 |   |
|                                                                                                             |       |                   |       |   |   |
| OPERATING EXPENSES                                                                                               |       |                   |       |   |   |
| General and administrative expenses                                                                              |       | 2,073,995              |       | 1,395,059 |   |
| General and administrative salaries                                                                              |       | 1,073,037              |       | 1,136,596 |   |
| Marketing                                                                                                        |       | 733,794                |       | 632,307 |   |
| T2 expenses                                                                                                      |       | 113,602                |       | — |   |
| Research and development                                                                                         |       | 186,386                |       | 165,196 |   |
| Settlement of litigation                                                                                         |       | —                 |       | 57,377 |   |
| Depreciation                                                                                                     |       | 241,329                |       | 134,769 |   |
| Professional fees                                                                                                |       | —                 |       | 514,714 |   |
| Total operating expenses                                                                                         |       | 4,422,143              |       | 4,036,018 |   |
|                                                                                                             |       |                   |       |   |   |
| LOSS FROM OPERATIONS                                                                                             |       | (385,550               | )          | (636,145 | ) |
|                                                                                                             |       |                   |       |   |   |
| OTHER INCOME (EXPENSE)                                                                                           |       |                   |       |   |   |
|                                                                                                             |       |                   |       |   |   |
| Unrealized loss on  adjustment of fair valueSeries A  convertible preferred stock classified as a liability |       | (694,454               | )          | (1,428,665 | ) |
| Unrealized gain (loss) on warrant liabilities                                                                    |       | 80,672                 |       | (107,589 | ) |
| Other expense                                                                                                    |       | —                 |       | (9,046 | ) |
| Interest expense                                                                                                 |       | (342,730               | )          | (55,737 | ) |
| Interest expense - mandatory redeemable preferred stock                                                          |       | (375,000               | )          | — |   |
| Interest income                                                                                                  |       | 8,646                  |       | 31,123 |   |
| Finance charge                                                                                                   |       | —                 |       | (4,536 | ) |
| Total other income (expense)                                                                                     |       | (1,322,866             | )          | (1,574,450 | ) |
|                                                                                                             |       |                   |       |   |   |
| LOSS FROM CONTINUING  OPERATIONSBEFORE  INCOME TAXES                                                             |       | (1,708,416             | )          | (2,210,595 | ) |
|                                                                                                             |       |                   |       |   |   |
| INCOME TAX PROVISION  (BENEFIT)                                                                                  |       | —                 |       | — |   |
|                                                                                                             |       |                   |       |   |   |
| LOSS FROM CONTINUING  OPERATIONS                                                                                 |       | (1,708,416             | )          | (2,210,595 | ) |
|                                                                                                             |       |                   |       |   |   |
| LOSS FROM DISCONTINUEDOPERATIONS, NET OF TAXES                                                                   |       |                   |       |   |   |
| Loss from operations of discontinued division                                                                    |       | —                 |       | (489 | ) |
| Loss from disposal of discontinued division                                                                      |       | —                 |       | — |   |
|                                                                                                             |       | —                 |       | (489 | ) |
|                                                                                                             |       |                   |       |   |   |
| NET LOSS                                                                                                         |       | (1,708,416             | )          | (2,211,084 | ) |
|                                                                                                             |       |                   |       |   |   |
| NET LOSS ATTRIBUTABLE TOCOMMON SHAREHOLDERS                                                                      |       | $                      | (1,708,416 | ) | $ | (2,211,084 | ) |
|                                                                                                             |       |                   |       |   |   |
| Weighted Average Shares  Outstanding - Basic and Diluted                                                         |       | 39,585,960             |       | 39,124,616 |   |
|                                                                                                             |       |                   |       |   |   |
| EARNINGS PER SHARE - Basic  and Diluted                                                                          |       |                   |       |   |   |
| Loss from continuing operations                                                                                  |       | $                      | (0.04      | ) | $ | (0.06 | ) |
| (Loss) from discontinued operations                                                                              |       | $                      | —     |   | $ | (0.00 | ) |
| Net loss                                                                                                         |       | $                      | (0.04      | ) | $ | (0.06 | ) |

 

Theaccompanying notes are an integral part of these consolidated financialstatements 

 

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AMERICAN DEFENSE SYSTEMS, INC.

AND SUBSIDIARIES

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

For the three months ended March 31, 2009 and2008

 
| ** **                                                                              | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                              | ** ** | **March 31,**     | ** ** |
| ** **                                                                              | ** ** | **2009**               | ** ** | **2008** | ** ** |
| ** **                                                                              | ** ** | **(Restated)**         | ** ** | ** ** | ** ** |
|                                                                                    |       |                   |       |   |   |
| Cash flows from operating activities:                                                   |       |                   |       |   |   |
| Net loss                                                                                |       | $                      | (1,708,416 | ) | $ | (2,211,084 | ) |
|                                                                                    |       |                   |       |   |   |
| Adjustments to reconcile net loss to net cash used  in continuing operating activities: |       |                   |       |   |   |
| Change in fair  value associated with preferred stock and warrants                      |       | 613,778                |       | 1,536,254 |   |
| Stock based  compensation expense                                                       |       | 154,636                |       | 33,685 |   |
| Amortization of  deferred financing costs                                               |       | 147,424                |       | — |   |
| Discount on  Series A preferred stock                                              |       | 142,896                |       | — |   |
| Depreciation and  amortization                                                          |       | 241,329                |       | 134,769 |   |
| Changes in  operating assets and liabilities:                                           |       |                   |       |   |   |
| Accounts  receivable                                                                    |       | (1,453,738             | )          | 1,953,026 |   |
| Inventories                                                                             |       | (223,091               | )          | (57,382 | ) |
| Deposits and  other assets                                                              |       | —                 |       | 36,794 |   |
| Cost in excess  of billing on uncompleted contracts                                     |       | 580,186                |       | (3,685,895 | ) |
| Prepaid expenses  and other assets                                                      |       | (42,764                | )          | (103,681 | ) |
| Accounts payable  and accrued expenses                                                  |       | 741,164                |       | 665,436 |   |
| Due to related  party                                                                   |       | —                 |       | (91,993 | ) |
|                                                                                    |       |                   |       |   |   |
| Net cash used in continuing operating activities                                        |       | (806,596               | )          | (1,790,071 | ) |
|                                                                                    |       |                   |       |   |   |
| Net cash used in discontinued operations                                                |       | —                 |       | (235,145 | ) |
| Net cash used in  operating activities                                                  |       | (806,596               | )          | (2,025,216 | ) |
|                                                                                    |       |                   |       |   |   |
| Cash flows from continuing investing activities:                                        |       |                   |       |   |   |
| Purchase of  equipment                                                                  |       | (66,625                | )          | (368,238 | ) |
| Advances for  future acquisitions                                                       |       | —                 |       | (20,000 | ) |
| Cash paid for  acquisition in excess of cash received                                   |       | —                 |       | (100,000 | ) |
|                                                                                    |       |                   |       |   |   |
| Net cash used in investing activities                                                   |       | (66,625                | )          | (488,238 | ) |
|                                                                                    |       |                   |       |   |   |
| Cash flows from continuing financing activities:                                        |       |                   |       |   |   |
| Proceeds from  notes payable                                                            |       | —                 |       | 69,568 |   |
| Proceeds from  line of credit                                                           |       | 582,590                |       | — |   |
| Repayments of  short term financing                                                     |       | —                 |       | (6,342 | ) |
| Deferred  financing costs                                                               |       | —                 |       | (658,500 | ) |
| Proceeds from  sale of Series A Convertible                                        |       |                   |       |   |   |
| Preferred  Shares, net of of capitalization costs of $270,000                           |       | —                 |       | 11,303,500 |   |
|                                                                                    |       |                   |       |   |   |
| Net cash provided by financing activities                                               |       | 582,590                |       | 10,708,226 |   |
|                                                                                    |       |                   |       |   |   |
| NET INCREASE (DECREASE) IN CASH                                                         |       | (290,631               | )          | 8,194,772 |   |
|                                                                                    |       |                   |       |   |   |
| CASH AT BEGINNING OF YEAR                                                               |       | 374,457                |       | 1,479,886 |   |
|                                                                                    |       |                   |       |   |   |
| CASH AT END OF PERIOD                                                                   |       | $                      | 83,826     |   | $ | 9,674,658 |   |
|                                                                                    |       |                   |       |   |   |
| Supplemental disclosure of cash flow information:                                       |       |                   |       |   |   |
| Cash paid during  the year for interest                                                 |       | $                      | 384,730    |   | $ | 6,163 |   |
| Cash paid for  taxes                                                                    |       | $                      | —     |   | $ | — |   |
|                                                                                    |       |                   |       |   |   |
| Supplemental disclosure of non-cash financing  activities                               |       |                   |       |   |   |
| Stock options  issued in lieu of cash for compensation                                  |       | $                      | 29,192     |   | $ | 33,685 |   |
| Stock issued in  lieu of cash                                                           |       | $                      | 125,443    |   | $ | — |   |
|                                                                                    |       |                   |       |   |   |
| Assets and liabilities received in acquisition  American Anti-Ram, Inc.            |       |                   |       |   |   |
|                                                                                    |       |                   |       |   |   |
| Fixed assets                                                                            |       |                   |       | $ | 30,000 |   |
| Inventory                                                                               |       |                   |       | $ | 120,000 |   |
| Goodwill                                                                                |       |                   |       | $ | 280,000 |   |
| Accounts payable  and accrued expense                                                   |       |                   |       | $ | (30,000 | ) |
| Notes payable                                                                           |       |                   |       | $ | — |   |
| Shares issuable  in connection with acquisition                                         |       |                   |       | $ | (200,000 | ) |
| Cash paid in  connection with acquisition                                               |       |                   |       | $ | (100,000 | ) |
| Amounts due to  American Anti-Ram, Inc.                                            |       |                   |       | $ | (100,000 | ) |

 

Theaccompanying notes are an integral part of these consolidated financial statements

 

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**AMERICAN DEFENSE SYSTEMS, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.****             ****NATURE OF BUSINESS AND SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

 

**Organization**

 

AmericanDefense Systems, Inc. (the “Company” or “ADSI”) was incorporated under thelaws of the State of Delaware on December 6, 2002.

 

OnMay 1, 2003, the stockholder of A. J. Piscitelli & Associates, Inc.(“AJP”) exchanged all of his issued and outstanding shares for shares ofAmerican Defense Systems, Inc. The exchange was accounted for as arecapitalization of the Company, wherein the stockholder retained all theoutstanding stock of American Defense Systems, Inc. At the time of theacquisition American Defense Systems, Inc. was substantially inactive.

 

OnNovember 15, 2007, the Company entered into an Asset Purchase Agreementwith Tactical Applications Group (“TAG”), a North Carolina based soleproprietorship, and its owner.   TAG hasa retail establishment located in Jacksonville, North Carolina that suppliestactical equipment to military and security personnel.  As discussed more fully in Note 8, theoperations of TAG were discontinued on January 2, 2009.

 

InJanuary 2008, American Physical Security Group, LLC (“APSG”) wasestablished as a wholly owned subsidiary of the Company for the purposes ofacquiring the assets of American Anti-Ram, Inc., a manufacturer of crashtested vehicle barricades. This acquisition represents a new product line forthe Company.  APSG is located in NorthCarolina.

 

**InterimReview Reporting**

 

The accompanying interim unaudited condensed financial statements havebeen prepared in accordance with generally accepted accounting principles forinterim financial information and with the instructions to Form 10-Q and Article 8of Regulation S-X. Accordingly, they do not include all of the information andfootnotes required by generally accepted accounting principles for completefinancial statements. In our opinion, all adjustments (consisting of normalrecurring accruals) considered necessary for a fair presentation have beenincluded. Operating results for the three month period ended March 31, 2009 are not necessarilyindicative of the results that may be expected for the year ending December 31,2009. For further information, refer to the financial statements and footnotesthereto included in the Company’s Form 10-K/A annual report for the yearended December 31, 2008 filed on April 15, 2010.

 

**Natureof Business**

 

TheCompany designs and supplies transparent and opaque armor solutions for bothmilitary and commercial applications. Its primary customers are United Statesgovernment agencies and general contractors who have contracts withgovernmental entities. These products, sold under Vista trademarks, are used intransport and fighting vehicles, construction equipment, sea craft and variousfixed structures which require ballistic and blast attenuation.

 

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**AMERICAN DEFENSE SYSTEMS, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

 

TheCompany also provides engineering and consulting services, develops and installsdetention and security hardware, entry control and monitoring systems,intrusion detection systems, and security glass. The Company also suppliesvehicle anti-ram barriers.  Its primarycustomer for these services and products are the detention and securityindustry.

 

**Principlesof Consolidation**

 

Theconsolidated financial statements include the accounts of American DefenseSystems, Inc. and its wholly-owned subsidiaries, A.J Piscitelli &Associates, Inc. and American Physical Security Group, LLC. The accountsof TAG have been presented as discontinued operations as discussed more fullyin Note 8.  All significant intercompanyaccounts and transactions have been eliminated in consolidation.

 

**Termsand Definitions**

 
| ADSI        |   | American Defense Systems, Inc. (the “Company”)   |
|-------------|--------|-----------------------------------------------------------------|
| AJP         |   | A.J. Piscitelli & Associates, Inc., a  subsidiary |
| APB         |   | Accounting Principles Board                                     |
| ARB         |   | Accounting Review Board                                         |
| APSG        |   | American Physical Security Group, LLC, a subsidiary             |
| EITF        |   | Emerging Issues Task Force                                      |
| FASB        |   | Financial Accounting Standards Board                            |
| FIN         |   | FASB Interpretation Number                                      |
| FSP         |   | FASB Staff Position                                             |
| GAAP        |   | Generally Accepted Accounting Principles                        |
| PCAOB       |   | Public Companies Accounting Oversight Board                     |
| SAB         |   | Staff Accounting Bulletin                                       |
| SEC         |   | Securities Exchange Commission                                  |
| SFAS or FAS |   | Statement of Financial Accounting Standards                     |
| TAG         |   | Tactical Applications  Group, a subsidiary                      |

 

**Use ofEstimates**

 

Thepreparation of financial statements and related disclosures in conformity withaccounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the amounts reportedin the consolidated financial statements and accompanying notes. Estimates areused for revenue recognition, income taxes and accrued liabilities amongothers. Actual results could differ materially from those estimates.

 

Significantestimates for all periods presented include cost in excess of billings,liabilities associated with the Series A Preferred Stock and Warrants andvaluation of deferred tax assets.

 

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**AMERICAN DEFENSE SYSTEMS, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

 

**Revenue and Cost Recognition**

 

The Company recognizesrevenue in accordance with the provisions of SAB 104, “Revenue Recognition”,which states that revenue is realized and earned when all of the followingcriteria are met:

 

(a) persuasiveevidence of the arrangement exists,

(b) deliveryhas occurred or services have been rendered,

(c) theseller’s price to the buyer is fixed and determinable and

(d) collectibilityis reasonably assured.

 

Under this provision,revenue is recognized upon satisfactory completion of specified inspection,wherein by contract, customer acceptance and delivery occurs and title passesto the customer.

 

ContractRevenue

 

*Cost inExcess of Billing*

 

Allcosts associated with uncompleted customer purchase orders under contract arerecorded on the balance sheet as a current asset called “Costs in Excess ofBillings on Uncompleted Contracts.”  Suchcosts include direct material, direct labor, and project-related overhead.  Upon completion of purchase order, costs arethen reclassified from the balance sheet to the statement of operations ascosts of revenue.  A customer purchaseorder is considered complete when a satisfactory inspection has occurred,resulting in customer acceptance and delivery.

 

*Billingin Excess of Cost*

 

Allbillings associated with uncompleted purchase orders under contract arerecorded on the balance sheet as a current liability called “Billings in Excessof Costs on Uncompleted Contracts.”  Uponcompletion of the purchase order, all such billings are reclassified from thebalance sheet to the statement of operations as revenues.  Due to the structure of the Company’scontracts, billing is not done until the purchase order is complete, thereforethere are no amounts recorded as liabilities as of March 31, 2009 or2008.  Contract retentions are includedin accounts receivable.

 

Retail Revenue

 

The Company recognizesrevenue from its retail location upon point of sale.   Due to the nature of the merchandise sold,the Company does not accept returns and, therefore, no provision for returnshas been recorded as of December 31, 2008 or 2007.  As a result of the discontinuing of TAGoperations, the Company does not anticipate generating retail revenue in thefuture. As discussed in Note 7, revenue generated for the three months ended March 31,2009 and 2008 from TAG retail operations was $0 and $685,211, respectively.

 

**Cashand Cash Equivalents**

 

TheCompany considers all highly liquid investments with maturities of three monthsor less at the time of purchase to be cash equivalents.

 

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**AMERICAN DEFENSE SYSTEMS, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

 

**Concentrations**

 

Cashand cash equivalents are maintained in financial institutions. Deposits heldwith banks may exceed the amount of insurance provided on such deposits.Generally, these deposits may be redeemed upon demand and therefore bearminimal risk.

 

TheCompany received certain of its components from sole suppliers. Additionally,the Company relies on a limited number of contract manufacturers and suppliersto provide manufacturing services for its products. The inability of anycontract manufacturer or supplier to fulfill supply requirements of the Companycould materially impact future operating results.

 

Forthe three months ended March 31, 2009 and 2008, the Company derived 90%and 97% of its revenues from various U.S. government entities.

 

**Inventories**

 

Inventoriesare stated at the lower of cost or market, with cost determined using thefirst-in, first-out method.

 

**Equipment**

 

Equipmentis stated at cost less accumulated depreciation. Depreciation is provided usinga straight-line method over an estimated useful life of three to five years.Expenditures for repairs and maintenance are charged to expense as incurred.

 

**Long-LivedAssets**

 

TheCompany reviews long-lived assets and certain identifiable assets related tothose assets for impairment whenever circumstances and situations change, suchthat there is an indication that the carrying amounts may not be recoverable.If the undiscounted cash flows of the long-lived assets are less than thecarrying amount, their carrying amounts are reduced to fair value, and animpairment loss is recognized.

 

**Goodwilland Indefinite-Lived Intangible Assets**

 

In accordance with SFAS 142, “Goodwill and OtherIntangible Assets,” goodwill, represents the excess of the purchase price over the fair value of netassets, including the amount assigned to identifiable intangible assets. TheCompany accounts for business combinations using the purchase method ofaccounting and accordingly, the assets and liabilities of the acquired entitiesare recorded at their estimated fair values at the acquisition date. The primarydriver that generates goodwill is the value of synergies between the acquiredentities and the company, which does not qualify as an identifiable intangibleasset.  The Company does not amortize thegoodwill balance.

 

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**AMERICAN DEFENSE SYSTEMS, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

 

The Company assesses goodwill and indefinite-lived intangibleassets for impairment annually during the fourth quarter, or more frequently ifevents and circumstances indicate impairment may have occurred. If the carryingvalue of a reporting unit’s goodwill exceeds its implied fair value, theCompany records an impairment loss equal to the difference. SFAS 142 alsorequires that the fair value of indefinite-lived purchased intangible assets beestimated and compared to the carrying value. The Company recognizes animpairment loss when the estimated fair value of the indefinite-lived purchasedintangible assets is less than the carrying value.

 

**AdvertisingCosts**

 

The Company expenses all advertising costs asincurred.

 

**Earningsper Share**

 

Basicearnings (loss) per share is computed using the weighted-average number ofcommon shares outstanding during the period. Diluted net income per share iscomputed using the weighted-average number of common shares and dilutivepotential common shares outstanding during the period. Diluted net loss pershare is computed using the weighted-average number of common shares andexcludes dilutive potential common shares outstanding, as their effect isanti-dilutive. Dilutive potential common shares would primarily consist ofemployee stock options and restricted common stock.

 

**FairValue of Financial Instruments**

 

Fairvalue of certain of the Company’s financial instruments including cash and cashequivalents, accounts receivable, accrued compensation, and other accruedliabilities approximate cost because of their short maturities.

 

Duringthe current quarter the Company adopted the provisions related to its financialassets and liabilities measured at fair value on a recurring basis.  Current U.S. generally accepted accountingprinciples establishes a fair value hierarchy that prioritizes the inputs usedto measure fair value.  The hierarchygives the highest priority to unadjusted quoted prices in active markets foridentical assets or liabilities (Level 1 measurement) and the lowest priorityto unobservable inputs (Level 3 measurements)

 

Thethree levels of the fair value hierarchy are as follows:

 

Level1 – Quoted prices are available in active markets for identical assets orliabilities. Active markets are those in which transactions for the asset orliability occur with sufficient frequency and volume to provide pricinginformation on an ongoing basis.

 

Level2 – Pricing inputs are other than quoted prices in active markets included inLevel 1, which are either directly or indirectly observable as of the reportingdate. Level 2 includes those financial instruments that are valued using modelsor other valuation methodologies. These models are primarily industry-standardmodels that consider various assumptions, including quoted forward prices forcommodities, time value, volatility factors, and current 

 

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**AMERICAN DEFENSE SYSTEMS, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

 

marketand contractual prices for the underlying instruments, as well as otherrelevant economic measures. Substantially all of these assumptions areobservable in the marketplace throughout the full term of the instrument, canbe derived from observable data or are supported by observable levels at whichtransactions are executed in the marketplace.

 

Level3 – Pricing inputs include significant inputs that are generally unobservablefrom objective sources. These inputs may be used with internally developedmethodologies that result in management’s best estimate of fair value. Level 3instruments include those that may be more structured or otherwise tailored tothe Company’s needs.

 

Financialassets and liabilities are classified in their entirety based on the lowestlevel of input that is significant to the fair value measurement. The Company’sassessment of the significance of a particular input to the fair valuemeasurement requires judgment, and may affect the valuation of fair valueassets and liabilities and their placement within the fair value hierarchylevels.

 

**IncomeTaxes**

 

The Companyaccounts for income taxes according to SFAS 109 “Accounting for Income Taxes”which requires an asset and liability approach to financial accounting forincome taxes. Deferred income tax assets and liabilities are computed annuallyfor the difference between the financial statement and tax bases of assets andliabilities that will result in taxable or deductible amounts in the future,based on enacted tax laws and rates applicable to the periods in which thedifferences are expected to affect taxable income. Valuation allowances areestablished when necessary to reduce deferred tax assets to the amount expectedto be realized. Income tax expense is the tax payable or refundable for theperiod, plus or minus the change during the period in deferred tax assets andliabilities.

 

TheCorporation adopted the provisions of FIN 48, “Accounting for Uncertainty inIncome Taxes, an interpretation of FASB Statement 109,” effective January 1,2007. FIN 48 prescribes a recognition threshold and a measurement attribute forthe financial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. Benefits from tax positions should be recognizedin the financial statements only when it is more likely than not that the taxposition will be sustained upon examination by the appropriate taxing authoritythat would have full knowledge of all relevant information. A tax position thatmeets the more-likely-than-not recognition threshold is measured at the largestamount of benefit that is greater than fifty percent likely of being realizedupon ultimate settlement. Tax positions that previously failed to meet themore-likely-than-not recognition threshold should be recognized in the firstsubsequent financial reporting period in which that threshold is met.Previously recognized tax positions that no longer meet themore-likely-than-not recognition threshold should be derecognized in the firstsubsequent financial reporting period in which that threshold is no longer met.FIN 48 also provides guidance on the accounting for and disclosure ofunrecognized tax benefits, interest and penalties. Adoption of FIN 48 did nothave a significant impact on the Company’s financial statements.

 

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**AMERICAN DEFENSE SYSTEMS, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

 

TheCompany files income tax returns in the U.S. federal jurisdiction and variousstates. The Company has not been subject to U.S. federal income taxexaminations by tax authorities nor state authorities since its inception in2000.

 

**Recentaccounting pronouncements**

 

*Business Combinations*

 

InDecember, 2007, the FASB issued SFAS 141 (revised 2007), “Business Combinations”(hereinafter “SFAS No. 141 (revised 2007)”). This statement establishesprinciples and requirements for how an acquirer a) recognizes and measures inits financial statements the identifiable assets acquired, the liabilitiesassumed and any noncontrolling interest in the acquiree, b) recognizes andmeasures the goodwill acquired in the business combination or a gain from a bargainpurchase and c) determines what information to disclose to enable users of thefinancial statements to evaluate the nature and financial effects of thebusiness combination. The scope of SFAS 141 (revised 2007) is broader than thescope of SFAS 141, which it replaces. The effective date of SFAS 141 (revised2007) is for all acquisitions in which the acquisition date is on or after thebeginning of the first annual reporting period beginning on or after December 15,2008. The adoption of this statement is not expected to have an immediatematerial effect on the Company’s consolidated financial condition or results ofoperations.

 

*NoncontrollingInterests in Consolidated Financial Statements — an amendment of ARB 51*

 

InDecember, 2007, the FASB issued SFAS 160, “Noncontrolling Interests inConsolidated Financial Statements — an amendment of ARB No. 51.” Thisstatement establishes accounting and reporting standards that require a) theownership interests in subsidiaries held by parties other than the parent beclearly identified, labeled and presented in the consolidated statement offinancial position with equity, but separate from the parent’s equity, b) theamount of consolidated net income attributable to the parent and to thenoncontrolling interest be clearly identified and presented on the face of theconsolidated statement of income, c) changes in a parent’s ownership interestwhile the parent retains its controlling financial interest in its subsidiarybe accounted for consistently, d) when a subsidiary is deconsolidated, anyretained noncontrolling  equityinvestment in the former subsidiary be initially measured at fair value and e)entities provide sufficient disclosures that clearly identify and distinguishbetween the interests of the parent and the interests of the noncontrollingowners. The effective date of this standard is for fiscal years and interimperiods beginning on or after December 15, 2008. Since the Company has nosuch arrangements as of March 31, 2009, the adoption of this statement didnot affect the Company’s consolidated financial condition or results ofoperations.

 

*Disclosure about Derivative Instruments and HedgingActivities*

 

InMarch 2008, the FASB issued SFAS 161, “Disclosure about Derivative Instruments and Hedging Activities,” an amendment of FASB Statement No. 133,(SFAS 161). This statement requires that objectives for using derivativeinstruments be disclosed in terms of underlying risk and accountingdesignation. The Company is required to adopt SFAS 161 on January 1, 2009.The adoption of SFAS 161 changed the disclosures of derivative instruments heldby the Company.

 

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**AMERICAN DEFENSE SYSTEMS, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

 

*Determination of the Useful Life of Intangible Assets*

 

InApril 2008, the FASB issued FSP FAS 142-3, “Determination of the UsefulLife of Intangible Assets,”, which amends the factors that should be consideredin developing renewal or extension assumptions used to determine the usefullife of intangible assets  under FASB 142 “Goodwill and Other IntangibleAssets.”  The intent of this FSP is to improve the consistency between theuseful life of a recognized intangible asset under SFAS 142 and the period ofthe expected cash flows used to measure the fair value of the asset under SFAS141 (revised 2007) “Business Combinations” and other U.S. generally acceptedaccounting principles.    The Company has considered FSP FAS142-3 in determining its useful life of intangible assets and has determinedthat the useful lives are consistent.  Asa result, the Company has determined that there was no impact of FSP FAS 142-3on its consolidated financial statements.

 

*The Hierarchy of Generally Accepted Accounting Principles*

 

In May 2008, the FASB issued SFAS 162, “TheHierarchy of Generally Accepted Accounting Principles.”  SFAS 162 identifies the sources of accountingprinciples and the framework for selecting the principles used in thepreparation of financial statements.  TheCompany will adopt SFAS 162 as of July 1, 2009.

 

*Accounting for Convertible Debt Instruments That May Be Settled inCash upon Conversion*

*(Including Partial Cash Settlement)*

 

InMay 2008, the FASB issued FSP APB 14-1, “Accounting for ConvertibleDebt Instruments That May Be Settled in Cash upon Conversion (IncludingPartial Cash Settlement).” The FSP clarifies the accounting for convertibledebt instruments that may be settled in cash (including partial cashsettlement) upon conversion.  The FSPrequires issuers to account separately for the liability and equity componentsof certain convertible debt instruments in a manner that reflects the issuer’snonconvertible debt (unsecured debt) borrowing rate when interest cost isrecognized.  The FSP requires bifurcationof a component of the debt, classification of that component in equity and theaccretion of the resulting discount on the debt to be recognized as part of interestexpense in our consolidated statement of operations.  The FSP requires retrospective application tothe terms of instruments as they existed for all periods presented.  The Company has adopted this FSP as of January 1,2009, however the is currently evaluating the potential impact of FSP APB 14-1upon its consolidated financial statements since no such debt instrumentsexist.

 

*Determining Whether an Instrument (or an Embedded Feature) Is Indexedto an entity’s Own Stock*

 

InJune 2008, the FASB ratified EITF 07-5, “Determining Whether an Instrument(or an Embedded Feature) Is Indexed to an Entity’s Own Stock” (EITF 07-5)  EITF 07-5 provides that an entity should usea two step approach to evaluate whether an equity-linked financial instrument(or embedded feature) is indexed to its own stock, including evaluating theinstrument’s contingent exercise and settlement provisions.  It also clarifies on the impact of foreigncurrency denominated strike prices and market-based employee stock optionvaluation instruments on the evaluation. EITF 07-5 is effective for fiscal years beginning after December 15,2008.  See Note 2 for the effect ofadoption of this pronouncement on the Company’s consolidated financial positionand results of operations.

 

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**AMERICAN DEFENSE SYSTEMS, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

 

*Determining Whether Instruments Granted inShare-Based Payment Transactions Are Participating Securities*

 

InJune 2008, the FASB issued FSP EITF 03-6-1, “Determining WhetherInstruments Granted in Share-Based Payment Transactions Are ParticipatingSecurities.” The FSP addresses whether instruments granted in share-basedpayment transactions are participating securities prior to vesting and,therefore, need to be included in the earnings allocation in computing earningsper share under the two-class method. The FSP affects entities that accruedividends on share-based payment awards during the awards’ service period whenthe dividends do not need to be returned if the employees forfeit the award.This FSP is effective for fiscal years beginning after December 15, 2008.The adoption of FSP EITF 03-6-1 did not have a material impact on itsconsolidated financial position and results of operations.

 

*Determining the Fair Value of a Financial Asset Whenthe Market for That Asset is Not Active*

 

In October 2008, the FASB issued FSP FAS157-3, “Determining the Fair Value of a Financial Asset When the Market forThat Asset is Not Active.”  This FSPclarifies the application of SFAS 157, “Fair Value Measurements,” in a marketthat is not active.  The FSP alsoprovides examples for determining the fair value of a financial asset when themarket for that financial asset is not active. FSP FAS 157-3 was effective upon issuance, including prior periods forwhich financial statements have not been issued.  The impact of adoption wasnot material to the Company’s consolidated financial condition or results ofoperations.

 

*Equity Method Investment Accounting Considerations*

 

In November 2008, the FASB issued EITF 08-6, “EquityMethod Investment Accounting Considerations.” EITF 08-6 clarifies accounting for certain transactions and impairmentconsiderations involving the equity method. Transactions and impairment dealt with are initial measurement, decreasein investment value, and change in level of ownership or degree ofinfluence.  EITF 08-6 is effective on aprospective basis for fiscal years beginning on or after December 15,2008.  The adoption of EITF 08-6 did nothave a material impact on its consolidated financial position and results ofoperations.

 

*Accounting for Defensive Intangible Assets*

 

In November 2008, the FASB issued EITF 08-7, “Accountingfor Defensive Intangible Assets.”  EITF08-7 clarifies how to account for defensive intangible assets subsequent toinitial measurement.  EITF 08-7 appliesto all defensive intangible assets except for intangible assets that are usedin research and development activities. EITF 08-7 is effective for intangible assets acquired on or after thebeginning of the first annual reporting period beginning on or after December 15,2008.  The adoption of EITF 08-7 did nothave a material impact on its consolidated financial position and results ofoperations.

 

*Accounting for an Instrument (or an Embedded Feature)with a Settlement Amount That is Based on the Stock of an Entity’s ConsolidatedSubsidiary*

 

In November 2008, the FASB issued EITF 08-8, “Accounting for an Instrument (or anEmbedded Feature) with a Settlement Amount That is Based on the Stock of anEntity’s Consolidated Subsidiary.”  EITF08-8 clarifies whether a financial instrument for which the payoff to thecounterparty is based, in whole or in part, on the stock of an entity’sconsolidated subsidiary is indexed to the reporting entity’s own stock.  EITF 08-8 also clarifies whether or not 

 

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**AMERICAN DEFENSE SYSTEMS, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

 

stock should be precluded from qualifying for thescope exception of SFAS 133, “Accounting for Derivative Instruments and HedgingActivities,” or from being within the scope of EITF 00-19, “Accounting forDerivative Financial Instruments Indexed to, and Potentially Settled in, aCompany’s Own Stock.”  EITF 08-8 iseffective for fiscal years beginning on or after December 15, 2008, andinterim periods within those fiscal years. The adoption of EITF 08-8 did not have a material impact on itsconsolidated financial position and results of operations.

 

*Disclosures by Public Entities (Enterprises) aboutTransfers of Financial Assets and Interests in Variable Interest Entities*

 

In December 2008, the FASB issued FSP FAS140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) aboutTransfers of Financial Assets and Interests in Variable Interest Entities.”  This FSP amends SFAS 140, “Accounting forTransfers and Servicing of Financial Assets and Extinguishments of Liabilities,”to require public entities to provide additional disclosures about transfers offinancials assets.  FSP FAS 140-4 alsoamends FIN 46(R)-8, “Consolidation of Variable Interest Entities,” to requirepublic enterprises, including sponsors that have a variable interest entity, toprovide additional disclosures about their involvement with a variable interestentity.  FSP FAS 140-4 also requirescertain additional disclosures, in regards to variable interest entities, toprovide greater transparency to financial statement users.  FSP FAS 140-4 is effective for the firstreporting period (interim or annual) ending after December 15, 2008, withearly application encouraged.  Theadoption of FSP FAS 140-4 did not have a material impact on its consolidatedfinancial position and results of operations.

 

*Effective Date of FASB Interpretation No. 48 forCertain Nonpublic Enterprises*

 

In December 2008, the FASB issued FSP FIN48-3, “Effective Date of FASB Interpretation No. 48 for Certain NonpublicEnterprises.”  FSP FIN 48-3 defers theeffective date of FIN 48, “Accounting for Uncertainty in Income Taxes,” for certainnonpublic enterprises as defined in SFAS 109, “Accounting for Income Taxes.”  However, nonpublic consolidated entities ofpublic enterprises that apply U.S. generally accepted accounting principles(GAAP) are not eligible for the deferral. FSP FIN 48-3 was effective upon issuance.  The impact of adoption wasnot material to the Company’s consolidated financial condition or results ofoperations.

 

*Employers’ Disclosures about Postretirement BenefitPlan Assets*

 

In December 2008, the FASB issued FSP FAS 132(R)-1, “Employers’ Disclosures aboutPostretirement Benefit Plan Assets.” This FSP amends SFAS 132(R), “Employers’ Disclosures about Pensions andOther Postretirement Benefits,” to provide guidance on an employer’sdisclosures about plan assets of a defined benefit pension or otherpostretirement plan.  FSP FAS No. 132(R)-1also includes a technical amendment to SFAS 132(R) that requires anonpublic entity to disclose net periodic benefit cost for each annual periodfor which a statement of income is presented. The required disclosures about plan assets are effective for fiscalyears ending after December 15, 2009. The technical amendment was effective upon issuance of FSP FAS132(R)-1.  The Company is currentlyassessing the impact of FSP FAS 132(R)-1 on its consolidated financial positionand results of operations.

 

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**AMERICAN DEFENSE SYSTEMS, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

 

**2.      Restatements**

 

On November 20, 2009,the Company’s management and the Audit Committee of its Board of Directorsconcluded that the Company’s consolidated financial statements as of and forthe year ended December 31, 2008, as of and for the three months ended March 31,2009 and as of and for the three and six months ended June 30, 2010, should berestated and should no longer be relied upon as a result of certain errorsdiscovered as described below.

 

Series A Convertible Preferred Stock:

 

OnApril 14, 2009, the Company received a Notice of Triggering EventRedemption from the holder of 94% of the Series A Convertible PreferredStock. The notice demanded the full redemption of the holders’ shares of Series AConvertible Preferred Stock pursuant to a right to require the Company toredeem shares of Series A Convertible Preferred Stock provided under theCertificate of Designation, Preferences and Rights of the Series AConvertible Preferred Stock.  Theredemption right purportedly was triggered by the Company’s breach of certain covenantsas of December 31, 2008 under a Consent and Agreement, dated May 23,2008, between the Company and holders of the Series A ConvertiblePreferred Stock, which agreement and covenants are discussed in Note 11.  Although such redemption notice had beenreceived, the Series A Convertible Preferred Stock continued to bereflected as a long term liability as of December 31, 2008 due torestrictions that precluded the Company from satisfying such demand.  These restrictions were imposed pursuant tothe General Corporation Law of the State of Delaware (the “DGCL”), the Company’sstate of incorporation, which would prohibit the Company from satisfying suchredemption demand due to its lack of sufficient surplus, as such term isdefined under the DGCL.  In addition, theCompany was restricted, under its revolving line of credit with TD Bank, fromeffecting such a redemption.  Based onthese external restrictions, management determined that the Company could nothave satisfied the redemption demand without violating Delaware law and itscontractual obligations under its credit facility with TD Bank.

 

Management has reconsideredthe classification of the Series A Convertible Preferred Stock anddetermined that, notwithstanding the legal and contractual restrictions tosatisfying the demanded redemption, the obligation to redeem such preferredstock purportedly remained outstanding. Accordingly, management concluded that the Series A ConvertiblePreferred Stock should be classified as a current liability as of December 31,2008 and March 31, 2009, rather than a long term liability, in accordance withparagraph 5 of Statement of Financial Accounting Standard 78, which indicatesthat liabilities due within one year should be presented within the financialstatements as current liabilities.

 

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**AMERICAN DEFENSE SYSTEMS, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

 

Investor Warrants:

 

The company has restated its financial statements asof December 31, 2008 and March 31, 2009 to reclassify its derivative warrantliability associated with its detachable warrants issued to the investors inthe Series A Preferred Stock (see Note 8).  The warrant contains featuresthat allow the holder to request that the Company repurchase the warrant uponthe occurrence of certain events as defined in the agreement. The Companyre-evaluated the classification of this liability and determined that thewarrant holder’s right to “put” the warrant to the Company represented theability to request cash on demand and as such should be classified as a currentliability. The Company previously recorded the warrant liability as a long termliability.

 

Assets from Discontinued Operations and Liabilities from DiscontinuedOperations:

 

In order to reflect the nature of the assets and liabilities associatedwith the Company’s discontinued operations Management and its Audit Committeehave reclassified its balance sheet presentation from long term to short termat December 31, 2008.  This change was made to reflect that such assetsand liabilities would be realized within a period of less than one year.

 

Adoptionof EITF 07-5

 

EffectiveJanuary 1, 2009, the Company was required to analyze its outstandingfinancial instruments following the guidance of EITF 07-5: and thatpronouncements effect in interpreting Statement of Financial AccountingStandards (“SFAS”) Statement No. 133 “Accounting for DerivativeInstruments and Hedging Activities” (“SFAS 133”). The Company determined thatcertain warrants issued in 2005, 2006 and 2008 contained provisions whereby theexercise price could be adjusted upon certain financing transactions at a lowerprice per share could no longer be viewed as indexed to the Company’s commonstock. As such, the Company should have changed the accounting for thesewarrants to a “derivative” at fair value under SFAS 133. As a result the Companyrecorded the warrant liability at the fair value of the warrant of $166,775 asof January 1, 2009 and reclassified its issuance date fair value fromadditional paid-in-capital. The cumulative effect on adoption of EITF 07-5 asof January 1, 2009 is as follows:

 
| ** **                                             | ** ** | **Additional  Paid in  Capital** | ** ** | **Retained  Earnings** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|------------------------|------------|
| Balance December 31,  2008                        |       | $                                | 11,096,031 |                   | $          | (1,321,800 | ) |
| Cumulative effect of a  change in accounting principle |       | (837,954                         | )          | 672,179                |       |
|                                                   |       |                             |       |                   |       |
| Balance – January 1, 2009                    |       | $                                | 10,258,077 |                   | $          | (649,621 | ) |

 

Thederivative warrant liability is recorded at fair value in each subsequentreporting period with changes in fair value recorded in the statement ofoperations.

 

Registration Costs: 

 

The Company has restated its financial statements as of December 31,2008 to reclass approximately $1,561,000 of costs related to the registrationof the Company’s common stock with the SEC and listing on the American StockExchange.  The $1,561,000 costs wereoriginally recorded against additional paid in capital reflected accordingly inthe Company’s 2008 financial statements. Based on additional analyses and research of the $1,561,000 costs, theCompany has concluded that a more appropriate and conservative accountingtreatment would have been to expense such costs when incurred rather than chargeddirectly to additional paid in capital. Consequently, the Company has determined it should restate its financialstatements and expense the $1,561,000 costs when incurred for the year endedDecember 31, 2008.  Management also notesthere is no affect on total stockholders’ equity as a result of therestatement.  However, the restatementwill increase the net loss for the year ended December 31, 2008 and moreaccurately reflect retained earnings (accumulated deficit) and additional paidin capital and will result in retained earnings being an accumulated deficit atDecember 31, 2008. 

 

Certain legalexpenses:

 

The Company has restatedits financial statements as of December 31, 2008 and for the year then endedand as of March 31, 2009 and the three months then ended to reclassify andexpense certain legal fees that were originally capitalized in prepaid expensesand other current assets.  The legal expenses pertained to fees incurredrelated to a lawsuit.  The litigationfees of approximately $227,000 and $352,000 should have been expensed asincurred for the year ended December 31, 2008 and the three months ended March31, 2009, respectively.  In addition$222,700 of fees associated with the Series A Preferred Stock should have beenrecorded as deferred financing costs rather than a current asset.  As of December 31, 2008, the amortization ofthese costs should also be recorded as interest expense.

 

Dividends Paid:

 

The company has restatedits financial statements as of March 31, 2009 and for the three months thenended to reclassify on its Statement of Operations its presentation ofdividends accrued on its Series A Preferred Stock.  Under SFAS 150 “Accounting for CertainFinancial Instruments with Characteristics of both Liabilities and Equity”, theCompany is required to present dividends paid to its Preferred Stockholders asinterest expense due to the mandatory redemption feature on its Series APreferred Stock.  The Companyre-evaluated its presentation of Preferred Stock Dividends Accrued on itsStatement of Operations and reclassified $375,000 in dividends accrued tointerest expense.

 

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**AMERICAN DEFENSE SYSTEMS, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

 

Capitalization of certainlegal expenditures and the reclassification of the dividends accrued for theSeries A Preferred Stock Shareholders from “Preferred Stock dividends accrued”to “Interest Expense” on the Statement of Operations discussed above werematerial under Staff Accounting Bulletin No. 99, “Materiality” and StaffAccounting Bulletin No. 108, “Considering Effects of Prior MisstatementsWhen Quantifying Misstatements in Current Year Financial Statements” for the2008 period.  Management determined thatthe above errors were material for the year ended December 31, 2008 and thethree months ended March 31, 2009. Accordingly, management recommended to the Audit Committee that arestatement was required.

 

*Intangible Asset:*

* *

The Company has restated its financial statements asof December 31, 2008 and March 31, 2009 to reclassify an indefinite livedintangible asset of $606,000 from its acquisition of the assets of AmericanAnti-Ram to a long term asset. Previously this intangible asset was recorded asa current asset included in prepaid expenses and other current assets.

 

Stock basedCompensation

 

The Company, inreviewing its stock based compensation expense, determined that it had notrecorded certain expenses totaling $125,442 for the three months endedMarch 31, 2009 related to the grant of common stock and stock options toan employee and certain directors.

 

Management has conducted an additional review ofwhether the matters above were material under SAB 99, and SAB 108, for the 2008period. Management determined that the above errors were material for the yearended December 31, 2008 and three months ended March 31, 2009. Accordingly,management recommended to the Audit Committee that a restatement was required.

 

Theeffect of the restatements on specific amounts provided in the condensedconsolidated financial statements is as follows:

 

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AMERICAN DEFENSE SYSTEMS, INC. and SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS 

 
| ** **                                                                                                                                                                                                        | ** ** | **As of March 31, 2009** | ** ** | **As of  December 31, 2008** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                                                                                                                        | ** ** | **As Previously  Recorded**   | ** ** | **As  Restated**                  | ** ** | **As  Previously  Recorded** | ** ** | **As Restated** | ** ** |
| ** **                                                                                                                                                                                                        | ** ** | ** **                    | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| ASSETS                                                                                                                                                                                                            |       |                          |       |                              |       |   |   |   |   |
|                                                                                                                                                                                                              |       |                          |       |                              |       |   |   |   |   |
| CURRENT ASSETS                                                                                                                                                                                                    |       |                          |       |                              |       |   |   |   |   |
| Prepaid expenses and other current assets                                                                                                                                                                         |       | $                             | 3,539,842  |                              | $          | 1,647,846 |   | $ | 3,144,601 |   | $ | 2,088,801 |   |
| Assets of discontinued operations                                                                                                                                                                                 |       | —                        |       | —                            |       | — |   | 736,613 |   |
|                                                                                                                                                                                                              |       |                          |       |                              |       |   |   |   |   |
| TOTAL CURRENT ASSETS                                                                                                                                                                                              |       | 17,819,268                    |       | 16,011,098                        |       | 16,701,841 |   | 16,382,654 |   |
|                                                                                                                                                                                                              |       |                          |       |                              |       |   |   |   |   |
| DEFERRED  FINANCING COSTS, net                                                                                                                                                                                    |       | 1,130,409                     |       | 1,836,820                         |       | 1,277,833 |   | 1,500,533 |   |
| INTANGIBLE ASSETS                                                                                                                                                                                                 |       | —                        |       | 606,000                           |       | — |   | 606,000 |   |
| ASSETS OF DISCONTINUED OPERATIONS                                                                                                                                                                                 |       | —                        |       | —                            |       | 736,613 |   | — |   |
|                                                                                                                                                                                                              |       |                          |       |                              |       |   |   |   |   |
| TOTAL ASSETS                                                                                                                                                                                                      |       | $                             | 25,221,300 |                              | $          | 24,725,541 |   | $ | 25,162,615 |   | $ | 24,935,515 |   |
|                                                                                                                                                                                                              |       |                          |       |                              |       |   |   |   |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                                                                         |       |                          |       |                              |       |   |   |   |   |
|                                                                                                                                                                                                              |       |                          |       |                              |       |   |   |   |   |
| CURRENT  LIABILITIES                                                                                                                                                                                              |       |                          |       |                              |       |   |   |   |   |
| Preferred stock, $.001 par value, 5,000,000 shares  authorized, 15,000 shares designated as mandatorily redeemable Series A  Convertible Preferred Stock (cumulative), 15,000 shares issued and  outstanding |       | $                             | —     |                              | $          | 11,809,196 |   | $ | — |   | $ | 10,981,577 |   |
| Warrant liabilities                                                                                                                                                                                               |       | —                        |       | 214,432                           |       | — |   | 90,409 |   |
| Liabilities of discontinued operations                                                                                                                                                                            |       | —                        |       | —                            |       | — |   | 736,613 |   |
|                                                                                                                                                                                                              |       |                          |       |                              |       |   |   |   |   |
| TOTAL CURRENT  LIABILITIES                                                                                                                                                                                        |       | 4,553,018                     |       | 16,660,472                        |       | 3,313,099 |   | 15,121,698 |   |
|                                                                                                                                                                                                              |       |                          |       |                              |       |   |   |   |   |
| LONG TERM  LIABILITIES                                                                                                                                                                                            |       |                          |       |                              |       |   |   |   |   |
| Preferred stock, $.001 par value, 5,000,000 shares  authorized, 15,000 shares designated as mandatorily redeemable Series A Convertible  Preferred Stock (cumulative), 15,000 shares issued and outstanding  |       | 11,809,196                    |       | —                            |       | 10,981,577 |   | — |   |
| Warrant liabilities                                                                                                                                                                                               |       | 115,275                       |       | —                            |       | 90,409 |   | — |   |
| Liabilities of discontinued operations                                                                                                                                                                            |       | —                        |       | —                            |       | 736,613 |   | — |   |
|                                                                                                                                                                                                              |       |                          |       |                              |       |   |   |   |   |
| TOTAL  LIABILITIES                                                                                                                                                                                                |       | 16,477,489                    |       | 16,660,472                        |       | 15,121,698 |   | 15,121,698 |   |
|                                                                                                                                                                                                              |       |                          |       |                              |       |   |   |   |   |
| COMMITMENTS AND  CONTINGENCIES                                                                                                                                                                                    |       |                          |       |                              |       |   |   |   |   |
|                                                                                                                                                                                                              |       |                          |       |                              |       |   |   |   |   |
| SHAREHOLDERS’  EQUITY                                                                                                                                                                                        |       |                          |       |                              |       |   |   |   |   |
| Common Stock                                                                                                                                                                                                      |       | 39,587                        |       | 39,762                            |       | — |   | — |   |
| Additional paid in capital                                                                                                                                                                                        |       | 9,534,616                     |       | 10,383,344                        |       | 9,534,616 |   | 11,096,031 |   |
| Retained earnings (accumulated deficit)                                                                                                                                                                           |       | (830,392                      | )          | (2,358,037                        | )          | 466,715 |   | (1,321,800 | ) |
|                                                                                                                                                                                                              |       |                          |       |                              |       |   |   |   |   |
| TOTAL  SHAREHOLDERS’ EQUITY                                                                                                                                                                                  |       | 8,743,811                     |       | 8,065,069                         |       | 10,040,917 |   | 9,813,817 |   |
|                                                                                                                                                                                                              |       |                          |       |                              |       |   |   |   |   |
| TOTAL LIABILITIES  AND SHAREHOLDERS’ EQUITY                                                                                                                                                                  |       | $                             | 25,221,300 |                              | $          | 24,725,541 |   | $ | 25,162,615 |   | $ | 24,935,515 |   |

 

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**AMERICAN DEFENSE SYSTEMS, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

 

AMERICAN DEFENSE SYSTEMS, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OFOPERATIONS

 
| ** **                                               | ** ** | **Three Months Ended  March 31, 2009** | ** ** |
|----------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                               | ** ** | **As Previously  Recorded**                 | ** ** | **As  Restated** | ** ** |
|                                                     |       |                                        |       |   |   |
| OPERATING  EXPENSES                                      |       |                                        |       |   |   |
| General and administrative  expenses                     |       | $                                           | 1,648,478  |   | $ | 2,073,995 |   |
| Total operating expenses                                 |       | 3,996,626                                   |       | 4,422,143 |   |
|                                                     |       |                                        |       |   |   |
| INCOME  (LOSS) FROM OPERATIONS                           |       | 39,967                                      |       | (385,550 | ) |
|                                                     |       |                                        |       |   |   |
| OTHER  INCOME (EXPENSE)                                  |       |                                        |       |   |   |
|                                                     |       |                                        |       |   |   |
| Unrealized gain (loss) on warrant liabilities            |       | 14,054                                      |       | 80,672 |   |
| Interest expense                                         |       | (290,320                                    | )          | (342,730 | ) |
| Interest expense - mandatory  redeemable preferred stock |       | —                                      |       | (375,000 | ) |
| Total other income  (expense)                            |       | (962,074                                    | )          | (1,322,866 | ) |
|                                                     |       |                                        |       |   |   |
| LOSS FROM CONTINUING OPERATIONS                          |       | (922,107                                    | )          | (1,708,416 | ) |
|                                                     |       |                                        |       |   |   |
| NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS             |       | $                                           | (1,297,107 | ) | $ | (1,708,416 | ) |
|                                                     |       |                                        |       |   |   |
| Weighted  Average Shares Outstanding - Basic and Diluted |       | 39,585,960                                  |       | 39,585,960 |   |
| ** **                                               | ** ** | ** **                                  | ** ** | ** ** | ** ** |
| EARNINGS PER SHARE - Basic and Diluted                   |       |                                        |       |   |   |
| Income from continuing  operations                       |       | $                                           | (0.02      | ) | $ | (0.04 | ) |
| (Loss) from discontinued  operations                     |       | $                                           | —     |   | $ | — |   |
|  Net income (loss)                                  |       | $                                           | (0.03      | ) | $ | (0.04 | ) |

 

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**AMERICAN DEFENSE SYSTEMS, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

 

**3.****             ****COSTS IN EXCESS OF BILLINGS(BILLINGS IN EXCESS OF COSTS) ON UNCOMPLETED CONTRACTS AND ACCOUNTS RECEIVABLE**

 

Costsin Excess of Billings and Billing in Excess of Costs

 

Thecost in excess of billings on uncompleted contracts reflects the accumulatedcosts incurred on contracts in production but not completed.  Upon completion, inspection and acceptance bythe customer, the contract is invoiced and the accumulated costs are charged tostatement of operations as costs of revenues. During the production cycle of the contract, should any progressbillings occur or any interim cash payments or advances be received, suchbillings and/or receipts on uncompleted contracts are accumulated as billingsin excess of costs. The Company fully expects to collect net costs incurred inexcess of billing and periodically evaluates each contract for potentialdisputes related to contract overruns and uncollectable amounts.  There was no bad debt expense recorded forthe three months ended March 31, 2009 and 2008.

 

Netcosts incurred in excess of billing consisted of the following as of March 31,2009 and December 31, 2008

 
| ** **                                                        | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                              |       |     |       |     |       |
| Cost in excess of billings on uncompleted  contracts              |       | $        | 6,562,903  |     | $          | 7,143,089 |   |
| Billings and/or receipts on uncompleted contracts                 |       | —   |       | —   |       |
| Net costs incurred in excess of billing on  uncompleted contracts |       | $        | 6,562,903  |     | $          | 7,143,089 |   |

 

AccountsReceivable

 

TheCompany records accounts receivable related to its long-term contracts, basedon billings or on amounts due under the contractual terms.  Accounts receivable consist primarily ofreceivables from completed contracts and progress billings on uncompletedcontracts.  Allowance for doubtfulaccounts is based upon a review of outstanding receivables, historicalcollection information, and existing economic conditions. Any amountsconsidered recoverable under the customer’s surety bonds are treated ascontingent gains and recognized only when received.

 

Accountsreceivable throughout the year may decrease based on payments received, creditsfor change orders, or back charges incurred. At March 31, 2009 and December 31,2008, the Company had $6,434,888 and $4,981,150, respectively, of accountsreceivable, of which the Company considers all to be fully collectible.  There was no bad debt expense recorded forthe years ended March 31, 2009 and December 31, 2008.

 

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**AMERICAN DEFENSE SYSTEMS, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

 

**4.      PROPERTY AND EQUIPMENT**

 

Propertyand equipment at March 31, 2009 and December 31, 2008 consisted ofthe following:

 
| ** **                                      | ** ** | **2009**  | ** ** | **2008**  | ** ** |
|-------------------------------------------------|------------|-----------|------------|-----------|------------|
|                                            |       |      |       |      |       |   |   |
| Leasehold improvements                          |       | $         | 1,749,367  |      | $          | 1,749,367 |   |
|                                            |       |      |       |      |       |
| General equipment                               |       | 732,745   |       | 666,120   |       |
| Light vehicles and trailers                     |       | 221,247   |       | 221,247   |       |
| T2 Demonstration range and firearms             |       | 744,454   |       | 744,454   |       |
| Office equipment                                |       | 855,294   |       | 855,294   |       |
| Furniture and fixtures                          |       | 163,658   |       | 163,658   |       |
| Aircraft                                        |       | 868,750   |       | 868,750   |       |
|                                            |       | 5,335,515 |       | 5,268,890 |       |
| Less: accumulated depreciation and amortization |       | 1,766,283 |       | 1,524,954 |       |
|                                            |       | $         | 3,569,232  |      | $          | 3,743,936 |   |

 

Forthe three months ended March 31, 2009 and 2008, the Company recorded$241,329 and $134,769 in depreciation and amortization expense, respectively.

 

TheCompany maintains its firearms under the custodianship of an individual inaccordance with New York State law. The firearms are used for testing anddemonstrating the effectiveness of the Company’s bullet resistant and blastmitigation products.

 

**5.    FAIR VALUE**

 

Asrequired by SFAS 157, financial assets and liabilities are classified based onthe lowest level of input that is significant to the fair value measurement.The Company’s assessment of the significance of a particular input to the fairvalue measurement requires judgment, and may affect the valuation of the fairvalue of assets and liabilities and their placement within the fair valuehierarchy levels.

 

TheCompany’s financial liabilities carried at fair value as of March 31, 2009are the Series A Preferred and derivative warrants.  Since the Series A Preferred valuationutilizes certain unobservable inputs that are based upon estimate, includingestimates on the initial stock prices, volatility based upon comparablecompanies and estimation of equity and debt positions, the Company considersthis to be a Level III input.  TheCompany’s Derivative Warrants were also carried at fair value and wereconsidered valued using a Level III input, through the date of settlement.

 

Thefollowing table discloses by level within the fair value hierarchy the Company’sassets and liabilities measured and reported on the Consolidated Balance Sheet:

 

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**AMERICAN DEFENSE SYSTEMS, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

 
| ** **                     | ** ** | ** ** | ** ** | **Fair Value  Measurements at March 31, 2009** | ** ** |
|--------------------------------|------------|------------|------------|-----------------------------------------------------|------------|
| ** **                     | ** ** | **Total**  | ** ** | **Level  1**                                        | ** ** | **Level  2** | ** ** | **Level  3** | ** ** |
| **Liabilitites:**              |       |       |       |                                                |       |   |   |   |   |
| Series A Preferred Shares |       | $          | 11,809,196 |                                                |       |   | $ | — |   | $ | 11,809,196 |   |
| Warrant Derivatives            |       | $          | 214,432    |                                                | $          | — |   | $ | — |   | $ | 214,432 |   |
| **Total Liabilities:**         |       | $          | 12,023,628 |                                                | $          | — |   | $ | — |   | $ | 12,023,628 |   |

 
| ** **                      | ** ** | ** ** | ** ** | **Fair Value Measurements at December 31, 2008** | ** ** |
|---------------------------------|------------|------------|------------|-------------------------------------------------------|------------|
| ** **                      | ** ** | **Total**  | ** ** | **Level  1**                                          | ** ** | **Level  2** | ** ** | **Level  3** | ** ** |
| **Liabilitites:**               |       |       |       |                                                  |       |   |   |   |   |
| Series A Preferred  Shares |       | $          | 10,981,577 |                                                  |       |   | $ | — |   | $ | 10,981,577 |   |
| Warrant Derivatives             |       | $          | 90,409     |                                                  | $          | — |   | $ | — |   | $ | 90,409 |   |
| **Total  Liabilities:**         |       | $          | 11,071,986 |                                                  | $          | — |   | $ | — |   | $ | 11,071,986 |   |

 

The following is a reconciliation of the beginning and ending balancesfor the Company’s assets measured at fair value on a recurring basis usingsignificant unobservable inputs (Level 3):

 

**FairValue Measurements Using Significant Unobservable Inputs (Level 3):**

 
| **Description**                                                                | ** ** | **(Level  3)** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------|------------|
| **Liabilities**                                                                |       |           |       |
| Balance at January 1, 2009                                                |       | $              | 11,071,986 |   |
| Cumulative effect of the change in accounting principal,  January 1, 2009 |       | 165,775        |       |
| Change in fair value included in operations                                    |       | 785,867        |       |
| Balance , March 31, 2009                                                  |       | $              | 12,023,628 |   |

 

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**AMERICAN DEFENSE SYSTEMS, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

 

**6.      COMMITMENTS AND CONTINGENCIES**

 

**LegalProceedings**

 

Southern California Gold Products d/b/a Gypsy Rack

 

OnJuly 10, 2007, the Company filed a lawsuit against a former subcontractor,Southern California Gold Products d/b/a Gypsy Rack, the subcontractor’sPresident and owner, Glenn Harris, and a designer, James McAvoy in the UnitedStates District Court, Eastern District of New York. Defendants moved to changevenue to the Central District of California based upon insufficient contacts tothe State of New York and on October 12, 2007 the matter was transferredto the United States District Court for the Central District of California,Case Number 07-CV-02779. On February 21, 2008, pursuant to the court’sorder, the Company filed an amended complaint. The amended complaint names onlySouthern California Gold Products and James McAvoy as defendants and assertssix counts as follows: misappropriation of trade secrets and confidentialinformation; breach of contract; unfair competition; conversion; violation ofthe Lanham Act; and interference with prospective economic advantage. Theamended complaint seeks to enjoin the defendants from misappropriating,disclosing, or using our confidential information and trade secrets, and recalland surrender all products and trade secrets wrongfully misappropriated orconverted by the defendants. It also seeks compensatory damages in an amount tobe established at trial together with prejudgment and post judgment interest,exemplary damages, disgorgement, restitution with interest, attorney’s fees andthe costs of suit.  Defendants filed ananswer to the amended complaint on April 16, 2008.  Shortly after the filing of the amendedanswer, defendants made a motion for summary judgment on, among others, thegrounds of collateral estoppel and res juditca. We filed opposition to the motion. The defendants motion and a subsequent application for an immediateinterlocutory appeal were denied.  Amediation settlement conference was held on October 31, 2008, which wasunsuccessful.  The discovery process iscontinuing and trial is currently set for August 25, 2009.

 

Breach of Contract

 

OnFebruary 29, 2008, a former employee commenced an action against theCompany for breach of contract arising from his termination of employment inthe Supreme Court of the State of New York, Nassau County. The Complaint seeksdamages of approximately $87,000. The Company filed an answer to the complaintand will be commencing discovery.  Meritorious defenses to the claimsexist and the Company intends to vigorously defend this action.

 

Breach of Contract

 

OnMarch 4, 2008, the Company’s former General Counsel, commenced an actionwith the United States Department of Labor, Occupational Safety and Health andSafety Administration, alleging retaliation in contravention of theSarbanes-Oxley Act. The Complaint seeks damages in excess of $3,000,000. TheCompany believes the allegations to be without merit and intend to vigorouslydefend against the action. On March 7, 2008, a second action was commencedagainst the Company for breach of contract and related issues arising from histermination of employment in New York State Supreme Court, Nassau County.  On May, 7 2008, the Company served a motionto dismiss the complaint, which is fully submitted to the Court. No amountshave been accrued for damages as the Company believes meritorious defenses tothe claims

 

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**AMERICAN DEFENSE SYSTEMS, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

 

exist.  The Company intends to vigorously defend thisaction. No further, significant actions have occurred and the matter is stillpending resolution at March 31, 2009.

 

**Financing**

 

Asof March 31, 2009 and 2008, the Company had access to $12 million dollarsof financing, respectively, with TD Bank, f/k/a Commerce Bank as follows:

 

$12Million Line of Credit — This line of credit allows the Company to borrow up to$12 Million dollars, limited to 80 — 85% of the total accounts receivable.  Under the line of credit, the Company ischarged interest at 1.75% over the libor rate. The line of credit repayment terms are due upon demand.  The balances as of March 31, 2009 and2008 were $659,422 and $76,832, respectively.

 

**7.      STOCKHOLDERS’ EQUITY**

 

**Warrants**

 

2005 Warrants

 

On June 30,2005, in connection with the closing of its 2005 private placement offering,the Company issued purchase warrants for up to 555,790 shares of common stockat the exercise price of $1.10 per share and with the expiration date of June 30,2010 (the “2005 Warrant”). Subsequent to the issuance of the 2005 Warrant, theCompany issued common stock at an effective price per share of $1.00 and, inaccordance with the terms of the 2005 Warrants agreement, the exercise pricewas adjusted to $1.00 per share and resulted in 611,369 warrants. The followingis a summary of the 2005 Warrants outstanding as of March 31, 2009:

 
| ** **                              | ** ** | **2005********Warrants** | ** ** | **Exercise********Price** | ** ** |
|-----------------------------------------|------------|--------------------------|------------|---------------------------|------------|
| Beginning balance, January 1, 2009 |       | 576,587                  |       | $                         | 1.00       |   |
| Add: Grants                             |       | —                   |       | n/a                       |       |
| Less: Exercised                         |       | —                   |       | n/a                       |       |
| Ending balance, March 31, 2009     |       | 576,587                  |       | $                         | 1.00       |   |

 

2006 Warrants

 

On October 24,2006, in accordance with the terms and conditions of the Company’s closing ofits 2005 private placement offering, the Company issued purchase warrants forup to 179,175 shares of common stock at the exercise price of $1.10 per shareand with the expiration date of June 30, 2010 (the “2006 Warrant”).Subsequent to the issuance of the 2006 Warrant, the Company issued common stockat an effective price per share of $1.00 and, in accordance with the terms ofthe 2006 Warrants agreement, the exercise price was adjusted to $1.00 per shareand resulted in 17,918 warrants. The following is a summary of the 2006Warrants outstanding as of March 31, 2009:

 
| ** **                              | ** ** | **2006********Warrants** | ** ** | **Exercise********Price** | ** ** |
|-----------------------------------------|------------|--------------------------|------------|---------------------------|------------|
| Beginning balance, January 1, 2009 |       | 197,093                  |       | $                         | 1.00       |   |
| Add: Grants                             |       | —                   |       | —                    |       |
| Less: Exercised                         |       | —                   |       | n/a                       |       |
| Ending balance, March 31, 2009     |       | 197,093                  |       | $                         | 1.00       |   |

 

**StockOption Plan**

 

Thefollowing is a summary of stock options outstanding at March 31, 2009.

 
| Beginning  balance – December 31, 2008 |   | 1,995,000 |   |
|--------------------------------------------------|--------|-----------|--------|
| Options issued                                   |   | 200,000   |   |
| Exercised                                        |   | —    |   |
| Forfeited or  expired                            |   | —    |   |
| Ending balance – December 31, 2008     |   | 2,195,000 |   |

 

OnJanuary 12, 2009, we issued options to purchase an aggregate of 100,000shares of our common stock to out consultants for services rendered.  The exercise price for each option is $2.00per share and each option vested immediately upon the issuance.

 

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**AMERICAN DEFENSE SYSTEMS, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

 

TheBlack-Scholes method option pricing model was used to estimate fair value as ofthe date of grant using the following assumptions:

 
| Risk-Free           |   | 2.99    | % |
|---------------------|--------|---------|---|
| Expected volatility |   | 45.00   | % |
| Forfeiture rate     |   | 10.00   | % |
| Expected life       |   | 5 Years |
| Expected dividends  |   | —  |

 

Basedon the assumptions noted above, the fair market value of the options issued wasvalued at $13,183 as of March 31, 2009.

 

**8.      SERIESA CONVERTIBLE PREFERRED STOCK, INVESTOR WARRANTS AND PLACEMENT WARRANTS**

 

TheCompany entered into a Securities Purchase Agreement (“Purchase Agreement”) on March 7,2008 to sell shares of its Series A Convertible Preferred Stock (“Series APreferred”) and warrants (“Investor Warrants”) to purchase shares of its commonstock, and to conditionally sell shares of the Company’s common stock, to threeinvestors. The investors have agreed to purchase an aggregate of 15,000 sharesof Series A Preferred and Investor Warrants to purchase up to 3,750,000shares of common stock, and to conditionally purchase 100,000 shares of commonstock. The aggregate purchase price for the Series A Preferred andInvestor Warrants is $15,000,000 and the aggregate purchase price for thecommon stock is $500,000.

 

*Series APreferred Stock*

 

TheSeries A Preferred Stock is redeemable on December 31, 2010 andconvertible into shares of common stock at $2.00 subject to adjustment shouldthe Company issue future common stock at a lesser price.  As a result, the Company elected to recordtheir hybrid instrument, preferred stock and conversion option together, atfair value in accordance with SFAS 133. Subsequent reporting period changes in fair value are to be reported inthe statement of operations.

 

Theproceeds from the issuance of the Series A Preferred and accompanyingcommon stock warrants, net of direct costs including the fair value of warrantsissued to placement agent in connection with the transaction, must be allocatedto the instruments based upon relative fair value upon issuance and must bemeasured initially at fair value.” Therefore, after the initial recording of the Series A Stock basedupon net proceeds received, the carrying value of the Series A Preferredmust be adjusted to the fair value at the date of issuance, with the differencerecorded as a loss.

 

Thevaluation of the Series A Preferred at March 31, 2009 is as follows:

 

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**AMERICAN DEFENSE SYSTEMS, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

 
| **Security**             | ** ** | **Face Value** | ** ** | **Fair Value** | ** ** | **Allocation of  proceeds** | ** ** | **Proceeds in excess  of fair value** | ** ** |
|--------------------------|------------|----------------|------------|----------------|------------|-----------------------------|------------|---------------------------------------|------------|
| Series A  Preferred |       | $              | 15,000,000 |           | $          | 11,809,196                  |       | $                                     | 13,459,474 |   | 1,650,278 |   |
| Warrants                 |       | —         |       | 115,275        |       | 1,540,526                   |       | 1,425,251                             |       |
|                     |       |           |       |           |       |                        |       |                                  |       |
|                     |       | $              | 15,000,000 |           | $          | 11,924,471                  |       | $                                     | 15,000,000 |   | $ | 3,075,529 |   |
|                          |            |                |            |                |            |                             |            |                                       |            |  |  |  |  |

 

OnApril 14, 2009, the Company received a Notice of Triggering EventRedemption purportedly pursuant to a redemption option provided under theCertificate of Designation, as more fully discussed in Note 10.  As such the Company  has reflected the Series A PreferredStock  liability as  a current liability.  The Company is precluded from satisfying sucha demand, due to its lack of sufficient surplus as such term is defined underDelaware law to effect the redemption demand, and restrictions under ourrevolving line of credit would nevertheless prohibit any such redemption.

 

Forthe three months ended March 31, 2009 and 2008, the Company has recorded anet loss on adjustment of fair value of their Series A Preferred of$694,454 and $1,428,665, respectively.

 

Investor Warrants

 

Inconnection with the closings under the Purchase Agreement, Investor Warrants topurchase up to 3,750,000 shares of Common Stock at $2.40 per share were issuedin addition to the 15,000 shares of Series A Preferred.  The warrant holder has a right based oncertain events to “put” the warrant back to the Company and receive cash.  As such the Company has recorded the warrantas a derivative liability at fair value with changes in fair value reported inthe statement of operations in accordance with SFAS 133.

 

Placement Agent Warrants

 

Inconnection with the sale of the Series A Preferred and Investor Warrants,the placement agent was entitled to receive warrants (Placement Agent Warrants)to purchase a total of 6% of the number of common stock issued in the financingor 675,000 shares.  The Placement AgentWarrants were accounted for as a transaction cost associated with the issuanceof the Series A Preferred.  ThePlacement Agent Warrants recorded at fair value at the date of issuance.  Under EITF 00-19 “Accounting for DerivativeFinancial Instruments Indexed to, and Potentially Settled in, a Company’s OwnStock”, the Company satisfies the criteria for classification of the PlacementAgent Warrants as equity.  The fair valueassociated with the 675,000 Placement Agent Warrants was $511,742.

 

Deferred Financing Costs

 

Deferredfinancing costs include the corresponding amount associated with the PlacementAgent Warrants as indicated above, along with all other costs associated withobtaining the Series A

 

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**AMERICAN DEFENSE SYSTEMS, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

 

Preferredfinancing.  Since the Series APreferred and Investor Warrants are classified as liabilities, the carryingvalue of the Placement Agent Warrants has been recorded as Other Assets on thebalance sheet and is amortized as additional financing costs over the term ofthe Series A Preferred using the interest method.

 

Deferredfinancing costs included the following:

 

| Placement agent costs                         |   | $        | 900,000   |   |
|-----------------------------------------------|--------|----------|-----------|--------|
| Investor expenses                             |   | 60,000   |      |
| Legal and other related costs                 |   | 941,769  |      |
| Fair market value of placement agent warrants |   | 511,742  |      |
| Less: amortization                            |   | (576,691 | )         |
| Deferred financing costs, net                 |   | $        | 1,836,820 |   |

 

**9.      DISCONTINUEDOPERATIONS**

 

On January 2, 2009, theCompany entered into an agreement with the prior owners of TAG to sell theassets and liabilities back to TAG.  TAGwas accounted for as a discontinued operation under GAAP, which requires theincome statement and cash flow information be reformatted to separate thedivested business from the Company’s continuing operations.

 

The following amountsrepresent TAG’s operations and have been segregated from continuing operationsand reported as discontinued operations as of March 31, 2009 and March 31,2008.

 

| ** **               | ** ** | **2008** | ** ** |
|--------------------------|------------|----------|------------|
|                     |       |     |       |
| Contract Revenues Earned |       | $        | 685,210    |   |
| Cost of  Revenues Earned |       | 131,642  |       |
| Gross Profit             |       | 553,568  |       |
| Operating  Expenses      |       | (554,057 | )          |
| Other Expenses           |       | —   |       |
| Net Loss                 |       | $        | (489       | ) |

 

The following is a summaryof assets and liabilities of TAG discontinued operations as of March 31,2009 and December 31, 2008.

 

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**AMERICAN DEFENSE SYSTEMS, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

 

| ** **                  | ** ** | ** ** | ** ** | **2008** | ** ** |
|-----------------------------|------------|------------|------------|----------|------------|
|                        |       |       |       |     |       |
| Assets                      |       |       |       |     |       |
| Cash                        |       |       |       |     | $          | 75,103 |   |
| Inventory                   |       |       |       | 591,688  |       |
| Prepaid Expenses            |       |       |       | 174      |       |
| Property and Equipment, net |       |       |       | 69,648   |       |
| Deferred Financing Costs    |       |       |       |     |       |
| Total Assets                |       |       |       |     | $          | 736,613 |   |
|                        |       |       |       |     |       |
| Liabilities                 |       |       |       |     |       |
| Accounts Payable            |       |       |       |     | $          | 700,287 |   |
| Short Term Notes            |       |       |       | 36,326   |       |
| Total Liabilities           |       |       |       |     | $          | 736,613 |   |

 

In accordance with the termsof the agreement, the original owners of TAG agreed to repay $1,000,000 of theoriginal $2,000,000 in consideration as follows:

 
| 2009  |   | $ | 75,000    |   |
|-------|--------|---|-----------|--------|
| 2010  |   | $ | 100,000   |   |
| 2011  |   | $ | 175,000   |   |
| 2012  |   | $ | 275,000   |   |
| 2013  |   | $ | 375,000   |   |
| Total |   | $ | 1,000,000 |   |

 

TheCompany has included the entire amount as notes receivable on its balancesheet, of which $75,000 is included within other current assets and $925,000 isrecorded as a long term notes receivable. The original owners of TAG have collateralized the note receivable withtheir personal residence and the 250,000 shares issued to them on the date ofacquisition.  These shares are being heldby the Company in escrow since January 2009 and will be returned uponfinal payment toward the note receivable.

 

**10.    SUBSEQUENT EVENT**

 

Series APreferred Stock

 

TheCompany, West Coast Opportunity Fund, LLC (“WCOF”), Centaur ValuePartners, LP (“Centaur Value”) and United Centaur Master Fund (“UnitedCentaur”, and together with Centaur Value, “Centaur”) entered into aSecurities Purchase Agreement, dated March 7, 2008 (the “PurchaseAgreement”), pursuant to which WCOF and Centaur purchased  anaggregate of 15,000 shares of the Company’s Series A Convertible PreferredStock (the “Series A Preferred”) and warrants to acquire anaggregate of 3,750,000 shares of the Company’s common stock (the “Warrants”)for an aggregate purchase price of $15,000,000.

 

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**AMERICAN DEFENSE SYSTEMS, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

 

TheCompany, WCOF and Centaur entered into a Consent and Agreement of Series AConvertible Preferred Stockholders, dated May 23, 2008 (the “ConsentAgreement”), in which the parties agreed that the Company would not bepermitted to issue shares of common stock as dividends on, or upon conversionof, the Series A Preferred or upon the exercise of the Warrants in excessof a specified number of shares without the approval of the Company’sstockholders.  In the Consent Agreement, the Company covenanted, for thefiscal year ending December 31, 2008  (A) to achieve (i) Revenues(as that term is defined in the Consent Agreement) equal to or exceeding $50,000,000and (ii) Consolidated EBITDA (as that term is defined in the ConsentAgreement) equal to or exceeding $13,500,000, and (B) to publicly discloseand disseminate, and to certify to WCOF and Centaur, its operating results forsuch period, no later than February 15, 2009 (collectively, the “FinancialCovenants”).

 

TheCompany did not meet the Revenue and Consolidated EBITDA targets set forth inthe Consent Agreement and was not in a position to disclose or certify itsoperating results by February 15, 2009.

 

Underthe Consent Agreement, the breach of the Financial Covenants are each deemed a “TriggeringEvent” under Section 3(a)(vii) of the Company’s Certificate ofDesignations, Preferences and Rights of the Series A Convertible PreferredStock (the “Certificate of Designations”), giving the holders of the Series APreferred the right to require the Company to redeem all or a portion of suchholder’s Series A Preferred shares at a price per share as calculatedpursuant to Section 3(b)(i) of the Certificate of Designations. The Company had negotiated the key terms of a resolution to the foregoing withWCOF and Centaur, and, to that end entered into a Term Sheet with each of WCOFand Centaur dated February 13, 2009 (the “WCOF Term Sheet” and the “CentaurTerm Sheet”, respectively, and, collectively, the “Term Sheets”).

 

Inorder to allow the parties to negotiate definitive agreements relating to theforegoing and to consummate the same, WCOF and Centaur had agreed, subject tothe terms and conditions set forth in the letters of forbearance entered intoby the Company and each of WCOF and Centaur on February 13, 2009 toforbear from exercising their rights and remedies, including without limitationthe right to cause the redemption of the Series A Preferred shares as aresult of breaches of the Consent Agreement described above, until the earlierof (a) the date on which any Triggering Event (as defined in theCertificate of Designations), other than a breach of the Financial Covenants,shall occur or exist and (b) February 27, 2009.

 

TheForbearance Period expired effective February 27, 2009.  The Company received a notice of TriggeringEvent redemption purportedly pursuant to a redemption option provided under theCertificate of Designation (or Notice of Triggering Event Redemption) on April 14,2009 from a Series A Preferred Stockholder that holds approximately 94% ofsuch preferred stock.  The Series APreferred Stockholder has demanded that the Company immediately redeem 14,025shares of the Series A Preferred, which constitutes all of the shares of Series APreferred held by such Series A Preferred Stockholder, at an aggregateprice of $15,427,500.  The Series APreferred Stockholder has also demanded payment of $470,317 as dividends theyassert have accrued from January 1, 2009 through April 13, 2009, ontheir Series A Preferred at the cash 

 

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**AMERICAN DEFENSE SYSTEMS, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

 

dividendrate of 12%, as well as $70,000.00 in legal fees and expenses incurred inconnection with the negotiations relating to the breach of the FinancialCovenants pursuant to the forbearance letter dated February 13, 2009.  Due to restrictions on the payment ofdividends under our revolving line of credit with TD Bank, the Company has notpaid dividends on the Series A Preferred for 2009.

 

TheCompany currently does not have sufficient surplus as such term is definedunder Delaware law to effect the redemption sought by the Series APreferred Stockholder, and restrictions under the Company’s revolving line ofcredit would nevertheless prohibit any such redemption.  The Company continues to value the Series APreferred Stock and Investor Warrants at its fair value as of March 31,2009 of 11,924,471.

 

TDBank

 

OnApril 1, 2009, the Company received a Notice of Default from TD Bank(Lender), resulting from the violation of financial covenants.  The Lender has stated that they are notpresently taking action to enforce its rights and remedies under the Loandocuments, however they are not waiving their rights under any existing orfuture defaults or events of default.  TheLender will continue to make advances under the Revolving Credit, but it has noobligation to do so and may refuse an advance request in its sole discretionwithout notice.

 

TheLender has demanded that the Company provide unaudited consolidated financialstatements and a cash flow forecast within 20 days after each month end.  In addition, the Lender further demands that,in accordance with the terms of the loan agreement, the Company shall not makeRestricted Payments, including dividends payable on preferred stock.

 

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

 

*The following discussion and analysis of our financial condition andresults of operations should be read in conjunction with our consolidatedfinancial statements and related notes that appear elsewhere in this report andin our annual report on Form 10-K (SEC No. 001-33888) filed with theSecurities and Exchange Commission (or SEC) on April 15, 2009.*

 

*Except for statements of historical fact, certain information describedin this report contains “forward-looking statements” that involve substantialrisks and uncertainties. You can identify these statements by forward-lookingwords such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,”“may,” “should,” “will,” “would” or similar words. The statements that containthese or similar words should be read carefully because these statementsdiscuss our future expectations, contain projections of our future results ofoperations or of our financial position, or state other “forward-looking”information. We believe that it is important to communicate our futureexpectations to our investors. However, there may be events in the future thatwe are not able accurately to predict or control. Further, we urge you to becautious of the forward-looking statements which are contained in this reportbecause they involve risks, uncertainties and other factors affecting ouroperations, market growth, service and products. The factors listed in thesection captioned “Risk Factors” within Item 1A, “Description of Business,” in ourannual report on Form 10-K filed with the SEC on April 15, 2009, aswell as other cautionary language in such Form 10-K, describe suchrisks, uncertainties and events that may cause our actual results andachievements, whether expressed or implied, to differ materially from theexpectations we describe in our forward-looking statements. The occurrence ofany of the events described as risk factors could have a material adverseeffect on our business, results of operations and financial position.*

 

**Overview**

 

        We are a provider ofcustomized transparent and opaque armor solutions for tactical and non-tacticaltransport vehicles and construction equipment used by the military.

 

        We also provide physicalsecurity products for architectural hardening and perimeter defense, such asbullet and blast resistant transparent armor, walls and doors, as well asvehicle anti-ram barriers such as bollards, steel gates and steel wedges thatdeploy out of the ground.

 

        In 2008, we launched ournew live-fire interactive T2 Tactical Training System and have begun activemarketing of the system. T2 provides law enforcement officers, SWAT teammembers, tactical specialists and military operators with the opportunity tohone their firearms and combat skills, with their own weapons and ammunition,in conjunction with realistic video scenarios broadcast on a large screen,incorporating environmental factors such as heat, cold,

 

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sound and light effects. In addition toinstallation fees for T2 systems, we anticipate additional revenueopportunities for service and support of T2 facilities once installed, andexpect to offer training in the T2 as part of our American Institute forDefense and Tactical Studies.

 

        Alsoin 2008, in conjunction with the T2, we began offering courses and seminarsthrough our tactical training institute, the American Institute for Defense andTactical Studies. Course offerings include training in the fields of Counterterrorism,Fundamentalist Islam and Middle Eastern Mindset, Dignitary Protection, IEDTerrorist Tradecraft, Emergency Tactical Medicine, Post Suicide-Bombing Commandand Incident Response, Forensics and Hand-to-Hand Combat.

 

        Wefocus primarily on research and development, design and engineering,fabrication and providing component integration. Our armor solutions are usedin retrofit applications for equipment already in service, and we work withoriginal equipment manufacturers to provide armor solutions for new equipmentpurchased by the military. Similarly, our architectural hardening and otherphysical security products are incorporated in new construction, but are moreoften deployed in existing structures and facilities ranging from securecommercial buildings to military bases and other facilities.

 

        Ourtechnical expertise is in the development of lightweight composite ballistic,blast and bullet mitigating materials used to fortify and enhance capabilitiesof existing and in-service equipment and structures. We serve primarily thedefense market and our sales are highly concentrated within the U.S.government. Our customers include various branches of the U.S. military throughthe U.S. Department of Defense (or DoD) and to a much lesser extent other U.S.government, law enforcement and correctional agencies as well as private sectorcustomers.

 

        Ourrecent historical revenues have been generated primarily from two largecontracts and a series of purchase orders from a single customer.** **To continueexpanding our business, we are seeking to broaden our customer base and todiversify our product and service offerings. Our strategy to increase ourrevenue, grow our company and increase stockholder value involves the followingkey elements:

 

·                  increaseexposure to military platforms in the U.S. and internationally;

·                  formstrategic partnerships with original equipment manufacturers (OEMs);

·                  developstrategic alliances;

·                  capitalizeon increased homeland security requirements and non-military platforms;

·                  increasemarketing efforts relating to our new tactical training products and services;and

·                  focuson an advanced research and development program to capitalize on increaseddemand for new armor materials.

 

        Weare pursuing each of these growth strategies simultaneously, and expect one ormore of them to result in additional revenue opportunities within the next12 months.

 

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**Sources of Revenues**

 

        Wederive our revenues by fulfilling orders under master contracts awarded bybranches of the United States military, law enforcement and correctionsagencies and private companies involved in the defense market and othercustomer purchase orders. Under these contracts and purchase orders, we providecustomized transparent and opaque armor products for transport and constructionvehicles used by the military, group protection kits and spare parts. We alsoderive revenues from sales of our physical security products.

 

        Our contractbacklog as of March 31, 2009 and March 31, 2008 was $60.0 million and$35 million, respectively, and ofour $60 million of contract backlog as of March 31, 2009, we estimatethat $45.0 million will be filled in 2009. Accordingly, in order to maintainour current revenue levels and to generate revenue growth, we will need to winmore contracts with the U.S. government and other commercial entities, achievesignificant penetration into critical infrastructure and public safetyprotection markets, and successfully further develop our relationships withOEM’s and strategic partners. Notwithstanding the possible significant troopreductions in Afghanistan and Iraq, we expect that demand in those countriesfor armored military construction vehicles will continue in order to repairsignificant war damage and for nation-building purposes. In addition, we areexploring interest in armored construction equipment in other countries withmine-infested regions.

 

        Wecontinue to aggressively bid on projects and are in preliminary talks with anumber of international firms to pursue long-term government and commercialcontracts, including with respect to Homeland Security. While no assurances canbe given that we will obtain a sufficient number of contracts or that anycontracts we do obtain will be of significant value or duration, we areconfident that we will continue to have the opportunity to bid and wincontracts as we have in 2007 and 2008.

 

**Cost of Revenues and OperatingExpenses**

 

*        Costof Revenues.*    Costof revenues consists of parts, direct labor and overhead expense incurred forthe fulfillment of orders under contract. These costs are charged to expenseupon completion and acceptance of an order. Costs of revenue also includes thecosts of protyping and engineering, which are expensed upon completion of anorder as well. These costs are included as costs of revenue because they areincurred to modify products based upon government specifications and arereimbursable costs within the contract. These costs for the production of goodsunder contract are expensed when they are complete. We allocate overheadexpenses such as employee benefits, computer supplies, depreciation forcomputer equipment and office supplies based on personnel assigned to the job.As a result, indirect overhead expenses are included in cost of revenues andeach operating expense category.

 

*        Salesand Marketing.*    Expensesrelated to sales and marketing consist primarily of compensation for our salesand marketing personnel, sales commissions and incentives, trade shows andrelated travel.

 

        Asour revenues increase, we plan to continue to invest heavily in sales andmarketing by increasing the number of direct sales personnel in order to addnew customers and increase sales to our existing customers. We also plan toexpand our marketing activities in order to build brand 

 

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awareness and generate additional leads for ourgrowing sales personnel. We expect that in 2009, sales and marketing expenseswill remain at the same or a slightly higher level in absolute dollars but willdecrease as a percentage of revenues.

 

*        Researchand Development.*    Researchand development expenses are incurred as we perform ongoing evaluations ofmaterials and processes for existing products, as well as the development ofnew products and processes. Such expenses typically include compensation andemployee benefits of engineering and testing personnel, materials, travel andcosts associated with design and required testing procedures associated with ourproduct line. We expect that in 2009, research and development expenses willincrease in absolute dollars as we upgrade and extend our service offerings anddevelop new protections products, but will remain relatively consistent ordecrease slightly as a percentage of revenues. Research and development costsare charged to expense as incurred.

 

*        Generaland Administrative.*    Generaland administrative expenses consist of compensation and related expenses forexecutive, finance, accounting, administrative, legal, professional fees, othercorporate expenses and allocated overhead. We expect that in 2009, general andadministrative expenses will remain at the same or a slightly higher level inabsolute dollars but decrease as a percentage of revenues.

 

**Critical Accounting Policies**

 

        Ourconsolidated financial statements are prepared in accordance with accountingprinciples generally accepted in the United States. The preparation of theseconsolidated financial statements requires us to make estimates and assumptionsthat affect the reported amounts of assets, liabilities, revenues, costs andexpenses and related disclosures. On an ongoing basis, we evaluate ourestimates and assumptions. Our actual results may differ from these estimatesunder different assumptions or conditions.

 

        Webelieve that of our significant accounting policies, which are described inNote 1 to the consolidated financial statements, the following accountingpolicies involve a greater degree of judgment and complexity. Accordingly,these are the policies we believe are the most critical to aid in fullyunderstanding and evaluating our consolidated financial condition and resultsof operations.

 

*        Revenueand Cost Recognition.*    Werecognize revenue in accordance with the provisions of the Securities andExchange Commission (SEC) Staff Accounting Board (SAB) No. 104, “*Revenue Recognition”*, which states thatrevenue is realized and earned when all of the following criteria are met: (a) persuasiveevidence of the arrangement exists, (b) delivery has occurred or serviceshave been rendered, (c) the seller’s price to the buyer is fixed anddeterminable and (d) collectability is reasonably assured. Under thisprovision, revenue is recognized upon delivery and acceptance of the order.

 

        Werecognize revenue and report profits from purchases orders filled under mastercontracts under the completed contract method. Purchase orders received undermaster contracts may extend for periods in excess of one year. Contract costsare accumulated as deferred assets and 

 

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billings and/or cash received are charged to adeferred revenue account during the periods of construction. However, norevenues, costs or profits are recognized in operations until the period uponcompletion of the order. An order is considered complete when all costs, exceptinsignificant items, have been incurred and, the installation or product isoperating according to specification or the shipment has been accepted by thecustomer. Provisions for estimated contract losses are made in the period thatsuch losses are determined. As of March 31, 2009, there were no suchprovisions made.

 

        Allcosts associated with uncompleted purchase orders under contract are recordedon the balance sheet as a deferred asset called “Costs in Excess of Billings onUncompleted Contracts.” Upon completion of a purchase order, such associatedcosts are then reclassified from the balance sheet to the statement ofoperations as costs of revenue.

 

        Allbillings associated with uncompleted purchase orders under contract arerecorded on the balance sheet as a deferred liability called “Billings inExcess of Costs on Uncompleted Contracts”. Upon completion of a purchase order,all such associated billings would be reclassified from the balance sheet tothe statement of operations as revenues. Due to the structure of our contracts,billing is not done until the purchase order is complete, therefore there areno amounts recorded as deferred liabilities as of March 31, 2009.

 

*        Stock-BasedCompensation.*    Stockbased compensation consists of stock or options issued to employees, directorsand contractors for services rendered. We accounted for the stock issued usingthe estimated current market price per share at the date of issuance. Such costwas recorded as compensation in our statement of operations at the date ofissuance.

 

        InDecember 2007, we adopted our 2007 Incentive Compensation Plan pursuant towhich we have issued and intend to issue stock-based compensation from time totime, in the form of stock, stock options and other equity based awards. Ourpolicy for accounting for such compensation in the form of stock options is asfollows:

 

        Wehave adopted the provisions of Statement of Financial Accounting Standard No. 123(R),*Share-Based Payment* (SFAS No. 123R).In accordance with SFAS No. 123R, we will use the Black-Scholes optionpricing model to measure the fair value of our option awards granted after June 15,2005. The Black-Scholes model requires the input of highly subjectiveassumptions including volatility, expected term, risk-free interest rate and dividendyield. In 2005, the SEC issued Staff Accounting Bulletin (SAB) No. 107(SAB No. 107) which provides supplemental implementation guidance for SFASNo. 123R.

 

        Becausewe have only recently become a public entity, we will have a limited tradinghistory. The expected term of an award is based on the “simplified” methodallowed by SAB No. 107, whereby the expected term is equal to the midpointbetween the vesting date and the end of the contractual term of the award. Therisk-free interest rate will be based on the rate on U.S. Treasury zero couponissues with maturities consistent with the estimated expected term of theawards. We have not paid and do not anticipate paying a dividend on our commonstock in the foreseeable future and accordingly, use an expected dividend yieldof zero. Changes in these 

 

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assumptions can affect the estimated fair valueof options granted and the related compensation expense which may significantlyimpact our results of operations in future periods.

 

        Stock-basedcompensation expense recognized will be based on the estimated portion of theawards that are expected to vest. We will apply estimated forfeiture ratesbased on analyses of historical data, including termination patterns and otherfactors.

 

        Werecognized $154,636 and $33,685 in stock compensation expense as of March 31,2009 and March 31, 2008, respectively.

 

**Series A ConvertiblePreferred Stock, Investor Warrants and Placement Agent Warrants**

 

*Series AConvertible Preferred Stock*

 

        The Series AConvertible Preferred Stock (or Series A Preferred) is redeemable on December 31,2010 and convertible into shares of common stock at $2.00 subject to adjustmentshould we issue future common stock at a lesser price.  As a result, we have elected to record itshybrid instrument, preferred stock and conversion option together, at fairvalue in accordance with SFAS 133. Subsequent reporting period changes in fair value are to be reported inthe statement of operations.

 

        The proceeds from the issuance of the Series APreferred and accompanying common stock warrants, net of direct costs includingthe fair value of warrants issued to placement agent in connection with thetransaction, must be allocated to the instruments based upon relative fairvalue upon issuance and must be measured initially at fair value.  Therefore, after the initial recording of theSeries A Stock based upon net proceeds received, the carrying value of theSeries A Preferred must be adjusted to the fair value at the date ofissuance, with the difference recorded as a loss.  On March 7, 2008, thedate of initial issuance, we recorded a derivative liability of $9,832,497. OnApril 4, 2008, the date of the second issuance, we recorded a derivativeliability of $3,626,977.  Theseliabilities were subsequently adjusted to fair value as of March 31, 2009,which resulted in a net loss of $694,454. As of March 31, 2009, theSeries A Preferred liability was $11,809,196.

 

*        InvestorWarrants.*    Thewarrants issued with the Series A Preferred (or Investor Warrants) meetthe criteria under SFAS 133 “Accounting for Derivative Instruments andHedging Activities”. Under SFAS 133, the warrants are recorded at fairvalue upon the date of issuance, with changes in the value fair valuerecognized as a gain or loss as they occur. On March 7, 2007, the date ofinitial issuance, we recorded a derivative liability of $1,142,503. On April 4,2008, the date of the second issuance, we recorded a derivative liability of$398,023.  As of December 31, 2008,the Investor Warrant liability was $115,275. These liabilities were subsequently adjusted to fair value as of March 31,2009, which resulted in a net gain of $14,054. The Investor Warrants meet the criteria under EITF 01-6 “TheMeaning of Indexed to a Company’s Own Stock”, which provides guidance as towhether a contract is indexed to a company’s own stock. However, since thewarrants do not meet the criteria for reporting as an  

 

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equityinstruments under EITF 00-19 “Accounting for Derivative FinancialInstruments Indexed to, and Potentially Settled in, a Company’s Own Stock”, thefair value of the Investor Warrants is included as a current liability.

 

*        PlacementAgent Warrants.*    Thewarrants issued to the Placement Agent with respect to the sale of the Series APreferred and Investor Warrants (or Placement Agent Warrants) were accountedfor as a transaction cost associated with the issuance of the Series APreferred. The Placement Agent Warrants are recorded at fair value at the dateof issuance. Under EITF 00-19 “Accounting for Derivative FinancialInstruments Indexed to, and Potentially Settled in, a Company’s Own Stock”, wesatisfy the criteria for classification of the Placement Agent Warrants asequity. We have recorded the corresponding amount recorded as a DeferredFinancing Cost. Since the Series A Preferred and Investor Warrants areclassified as liabilities, the carrying value of the Placement Agent Warrantshas been recorded as an other asset and is amortized as additional financingcosts over the term of the Series A Preferred using the interest method.At the date of each issuance, we recorded $1,033,433 and $868,336 in deferredfinancing costs and amortized $147,424 as interest expense as of March 31,2009.

 

***Comparison of the Three Months EndedMarch 31, 2009 and 2008***

 

*Revenues.*  Revenuesfrom continuing operations for the three months ended March 31, 2009 wasapproximately $9.4 million, an increase of approximately $700,000, or 8%, overrevenues of approximately $8.7 million in the comparable period in 2008. This increase was due primarily to increased order fulfillment under our MarineCorp Contract No. M67854-07-D-5023 during the first quarter of 2009 versusthe same quarter in 2008, including orders that had been expected in the fourthquarter of 2008 that were delayed into the first quarter of 2009.  Therevenue increase also was due to additional sales generated from our physicalsecurity product business for the three months ended March 31, 2009 ofapproximately $963,000, an increase of approximately $800,000 or 490% overrevenues of approximately $163,000 for the three months ended March 31,2008.

 

Revenues from discontinued operations fromthe tactical application retail outlet for the three months ended March 31,2008 was approximately $685,000.  Therewere no revenues generated from discontinued operations during the three monthsended March 31, 2009.

 

*Cost ofRevenues.* Cost of revenues for the three months ended March 31,2009 was approximately $5.4 million, an increase of approximately $100,000, or2%, over cost of revenue of $5.3 million in the comparable period in2008.  This increase was related to our increased production costs underthe Marine Corp. sales contract mentioned above.  The costs of revenuealso increased due to additional costs of sales from our physical securityproduct business, which had just commenced during the first quarter of March 31,2008.

 

Cost of revenues from discontinued operationsfrom the tactical application retail outlet for the three months ended March 31,2008 was approximately $131,000.  Therewere no costs of revenues generated from discontinued operations for the threemonths ended March 31, 2009.

 

*Grossprofit margin*.   The gross profit margin for the threemonths ended March 31, 2009 and March 31, 2008 were approximately $4million and $3.4 million, respectively.  The 

 

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gross profit margin percentage was 42.5% and 39% for the three monthsended March 31, 2009 and March 31, 2008, respectively. The increasein gross profit margin percentage from continuing operations from 2008 to 2009resulted primarily from a reduction in overall costs incurred during the threemonths ended March 31, 2009 that were associated with production on theMarine Corp. sales contract.

 

*Sales andMarketing Expenses.*  Sales and marketing expenses for thethree months ended March 31, 2009 and March 31, 2008 wereapproximately $733,000 and $632,000, respectively, representing an increase of$101,000, or 16%.  The increase was due primarily to an increase in tradeshow expenses and related expenses from marketing T2, along with our currentproduct line for the three months ended March 31, 2009.  We did not offer the T2 during the threemonths ended March 31, 2008 and, therefore, incurred no marketing expensefor its promotion.  There were no salesor marketing expenses for discontinued operations.

 

*Researchand Development Expenses.*  Research and development expensesfor the three months ended March 31, 2009 and March 31, 2008 wereapproximately $186,000 and $165,000, respectively.  The increase of$21,000 or 12% from 2008 to 2009 was the result of additional testing andimprovements of existing products and continued work on our products indevelopment.  There were no research anddevelopment expenses for discontinued operations.

 

*General and Administrative Expenses.*  Generaland administrative expenses from continuing operations for the three monthsended March 31, 2009 and March 31, 2008 were approximately $2.1million and $1.4 million, respectively.  The increase of approximately $700,000,or 50%, was primarily due to general increases in expenses, such as general andliability insurance, rent and general supplies, which approximated$190,000.  We also incurred additional general and administrative expensesassociated with the facilities for our physical security product business ofapproximately $60,000.  We also incurredapproximately $350,000 in legal expenses associated with ongoing litigation.

 

General and administrative expensesassociated with discontinued operations was approximately $554,000 for thethree months ended March 31, 2008. There were no such expenses incurred during the three months ended March 31,2009.

 

*Generaland Administrative Salaries Expense.*  General andadministrative salaries expense for the three months ended March 31, 2009and March 31, 2008 were approximately $1.07 million and $1.13 million,respectively.  The net decrease of $60,000, or 5% was due to the decreasein salary expense at the Hicksville facility and the reduction of salaryexpense associated with the tactical application retail outlet that wasdiscontinued in 2008.  As of March 31, 2009, there were 39 employeesthat were classified as general and administrative personnel, versus 41employees as of March 31, 2008.

 

*Depreciationexpense.*  Depreciation expense was approximately$241,000 and $135,000 for the three months ended March 31, 2009 and March 31,2008, respectively.  The increase of 

 

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$106,000, or 79%, was theresult of our higher property and equipment balance as of March 31, 2009versus March 31, 2008.  Thisincrease was the result of additional leasehold improvements and equipmentassociated with the expansion of our facility during 2008, property andequipment purchased 2008 for our physical security product business, and T2equipment.  This higher capital balanceas of March 31, 2009 resulted in higher depreciation expense.

 

*Other(income) and expense.*  As a result of our agreement to sellour Series A Convertible Preferred Stock and warrants to purchase commonstock, we incurred losses which occurred upon the valuation of the stock. Such valuation took into account the features, rights and obligations of theconvertible preferred stock, which ultimately resulted in a higher fair valuethan the proceeds received.  Since the Series A ConvertiblePreferred Stock and related Investor Warrants are required to be recorded atfair value, we recorded a loss on such securities.  We experienced a loss on adjustment of fairvalue with respect to our Series A Convertible Preferred Stock of $694,000and $1.4 million for the three months ended March 31, 2009 and 2008,respectively.  We also recognized a gain ofapproximately $81,000 and a loss on the related investor warrants of $107,000as of March 31, 2009 and 2008, respectively.  In addition, weincurred interest expense associated with the amortization of the deferredfinancing costs and discount on the Series A Convertible Preferred Stockof $290,320 and $54,752 for the three months ended March 31, 2009 and2008.  We also incurred interest expenseof $375,000 for the three months ended March 31, 2009 associated with dividendsaccrued on our Series A Convertible Preferred Stock.

 

**Liquidity and Capital Resources**

 

The primary sources of our liquidity during the quarter ended March 31,2009 have come from operations and to a lesser extent under our bank creditfacility.  As of March 31, 2009, ourprincipal sources of liquidity were net accounts receivable of approximately$6.4 million and costs in excess of billings of approximately $6.6 million andborrowings under our revolving credit facility with TD Bank of approximately$591,000.

 

As of March 31, 2008, our principal sources of liquidity were cashand cash equivalents totaling approximately $9.8 million, net accountsreceivable of approximately $4.8 million and costs in excess of billings ofapproximately $8.7 million.  The primary sources of our liquidity duringthe three months ended March 31, 2008 came from operations and theproceeds from the sale of our Series A Convertible Preferred Stock.

 

On March 7, 2008, we entered into an agreement to sell shares ofour Series A Convertible Preferred Stock and warrants to purchase ourcommon stock, and to conditionally sell shares of our common stock, to threeinvestors. The aggregate purchase price of the preferred stock and warrants is$15.0 million and the aggregate purchase price of the common stock is$0.5 million.  An initial closing on the sale of the preferred stockand warrants was held on March 7, 2008 in which we received gross proceedsof $10,975,000. A subsequent closing took place on April 4, 2008 in whichwe received gross proceeds of $4,025,000.

 

  On April 14,2009, we received a Notice of Triggering Event Redemption purportedly pursuantto a redemption option provided under the Series A Convertible PreferredStock Certificate of Designations from the holder of approximately 94% of our Series AConvertible Preferred Stock, resulting from the breach of certain financialcovenants and the purported 

 

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occurrenceof a Triggering Event (as defined under the Series A Convertible PreferredStock Certification of Designations) resulting from such breach. The Series APreferred Stockholder has demanded that we immediately redeem14,025 shares of our Series A Convertible Preferred Stock, whichconstitutes all of the shares of such preferred stock held by the stockholder,at an aggregate price of $15,427,500.00. The Series A PreferredStockholder has also demanded that we pay $470,317.81 as dividends it assertshave accrued from January 1, 2009 through April 13, 2009, on itspreferred stock at the cash dividend rate of 12%, as well as $70,000.00 inlegal fees and expenses the stockholder states that it has incurred in connectionwith the negotiations relating to the breach of the financial covenantspursuant to the forbearance letter dated February 13, 2009. Due torestrictions on the payment of dividends under our revolving line of creditwith TD Bank, we have not paid dividends on the Series A Preferredfor 2009.  We continue to negotiate withthe holders of our Series A Convertible Preferred Stock to resolve theforegoing matters.

 

In May 2007, we entered into a loanagreement with Commerce Bank, N.A. (now known as TD Bank) pursuant to which wehave access to a revolving credit facility up to a maximum of $12.0 milliondepending upon the periodic balance of our qualified accounts receivable.  As of March 31, 2009 and 2008, $591,000and $0, respectively, was outstanding under the revolving credit facility.  As part of the same loan facility, weborrowed approximately $68,000 under a term loan due July 1, 2010, whichis payable in equal monthly installments. As of March 31, 2009 and March 31, 2008, approximately $68,000and $120,000 was outstanding under the term loan, respectively.  The credit facility is secured by all of ourassets, and bears interest at a variable rate equal to LIBOR plus a margin ofbetween 1.75% and 2.45%.

 

 On April 1, 2009, we received a Notice of Default from ourprimary lender, TD Bank, resulting from the violation of certain financialcovenants. The bank has stated that it is not presently taking action toenforce its rights and remedies under our existing revolving line of creditwith the bank, however they are not waiving their rights under any exiting orfuture defaults or events of default. The bank has indicated that it willcontinue to make advances under the credit line, but it has no obligation to doso and may refuse an advance request in its sole discretion without notice. Inthe event the bank does refuse to make one or more advances, we mayunexpectedly be unable to meet our working capital obligations which could harmour reputation and our business. The bank has demanded that we provide unauditedconsolidated financial statements and a cash flow forecast within 20 daysafter each month end. We currently are evaluating alternative financingsources.

 

Subsequently, on April 27, 2009, we entered into a ForbearanceAgreement and Amendment to Loan Agreement with the bank, pursuant to which thebank has agreed to forbear from exercising its default-related rights andremedies with respect to the defaults specified in the Notice of Default,including without limitation acceleration and foreclosure, and continue toprovide advances and other financial accommodations under the Loan Agreementuntil June 15, 2009 (or Forbearance Period) unless such Forbearance Periodis earlier terminated as a result of any Forbearance Default (as such term isdefined in the Forbearance Agreement). Notwithstanding the foregoing, the bank will have no obligation to makeany advance if, after giving effect thereto, the aggregate principal amount ofthe Advances plus outstanding letters of audit issued by the lender for theaccount of our company and subsidiaries would exceed $2,000,000 prior to May 15,2009 and $1,000,000 as of May 15, 2009 and thereafter.  Under the 

 

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ForbearanceAgreement, we have agreed, among other things, (i) not to make anyRestricted Payment (as such term is defined in the Loan Agreement), other thana stock dividend payable in our common stock and approved by the Lender in itssole discretion, (ii) to use their best efforts to obtain a refinancing, (iii) toprovide certain monthly financial information as set forth in the ForbearanceAgreement and (iv) to pay the Advances, the Term Loan (as such term is definedin the Loan Agreement) and all other obligations in full by June 15,2009.  Our failure to comply with any of the foregoing shall constitute aForbearance Default under the Forbearance Agreement, which can result intermination of the Forbearance Agreement.

 

We believe that our current cash, cash equivalents, net accountsreceivable and costs in excess of billings together with our expected cashflows from operations will be sufficient to meet our anticipated cashrequirements for working capital and capital expenditures for at least the next12 months, subject to the matters concerning TD Bank and the Series Aredemptions.

 

*Cash Flows from Operating Activities.*Net cash usedin operating activities was approximately $807,000 for the three months ended March 31,2009 compared to net cash used in operating activities of approximately $2.0million for the three months ended March 31, 2008.  Net cash used in operating activities in 2009consisted primarily of changes in our operating assets and liabilities ofapproximately $400,000, including changes in accounts receivable, cost inexcess of billing, prepaid expense, accounts payable and accruedliabilities.  The changes in accounts receivable and costs in excess ofbilling of $1.5 million and $580,000, respectively, reflects the increases inprojects in process as of March 31, 2009. Our prepaid expenses and other current assets decreased approximately $43,000due to amounts paid in advance in connection with the prepayment of legalexpense and marketing expenses.  Net cashused in operating activities for the three months ended March 31, 2008consisted primarily of changes in operating assets and liabilities ofapproximately $1.3 million, including changes in accounts receivable, cost inexcess of billing, accounts payable and accrued liabilities.  Thesechanges in accounts receivable and cost in excess of billing resulted from theincrease in projects completed and invoiced to customers.  In addition,the changes in accounts payable and accrued liabilities reflect the relatedincrease in expenses incurred, with no funds paid out.

 

As of March 31, 2009, we had netoperating loss carryforwards of approximately $4.6 million available toreduce future taxable income. In the future, we may utilize our net operatingloss carryforwards and would begin making cash tax payments at that time. Inaddition, the limitations on utilizing net operating loss carryforwards andother minimum taxes may also increase our overall tax obligations. We expectthat if we generate taxable income and/or we are not allowed to use netoperating loss carryforwards, our cash generated from operations will beadequate to meet our income tax obligations.

 

*Net Cash Used In Investing**Activities.*  Net cash used in investing activities forthe three months ended March 31, 2009 and 2008 was approximately $66,000and $488,000, respectively.  Net cash used in investing activities duringthese periods consisted primarily of cash paid for the acquisition of equipmentand leasehold improvements and cash paid out for the acquisition of assets inexcess of cash received.

 

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*Net Cash Provided by Financing**Activities.*  Net cash provided byfinancing for the three months ended March 31, 2009 and 2008 wasapproximately $583,000 and $10.7 million, respectively. Net cash provided byfinancing activities during 2009 consisted of proceeds from the line of creditof approximately $583,000.  Net cashprovided by financing activities during 2008 consisted primarily of proceeds of$11.3 million received from the sale of the Series A Preferred Stock,net of deferred financing costs of $658,500, and approximately $70,000 receivedfrom the term loan, offset by repayments of short term financing ofapproximately $6,300.

 

**Item 4.    Controls and Procedure**

 

**Evaluationof Disclosure Controls and Procedures**

 

        Anevaluation was carried out under the supervision and with the participation ofour management, including our Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of the design and operation of our disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of theend of the period covered by this report. Based on the evaluation of ourdisclosure controls and procedures, our Chief Executive Officer and our ChiefFinancial Officer determined that a material weakness exists with respect toour reporting of complex and non-routine transactions. As a result of thismaterial weakness, on November 20, 2009 we determined that restatementswere required for our financial statements in our Annual Report for the yearended December 31, 2008 and our Quarterly Reports for the quarters ended March 31,2009 and June 30, 2009.  

 

        Toaddress this material weakness, we have engaged outside experts to providecounsel and guidance in areas where we cannot economically maintain therequired expertise internally (e.g., with the appropriate classifications andtreatments of complex and non-routine transactions).

 

        Asa result of the material weakness identified with respect to our reporting ofcomplex transactions, our Chief Executive Officer and Chief Financial Officer haveconcluded that our disclosure controls and procedures were not effective toensure that the information required to be disclosed by us in the reports thatwe file or submit under the Exchange Act was recorded, processed, summarizedand reported within the time periods specified in the SEC’s rules and formsand that such information required to be disclosed is accumulated and communicatedto management, including our Chief Executive Officer and Chief FinancialOfficer, to allow timely decisions regarding required disclosure.

 

**Changes in Internal Controls**

 

        Therewere no changes in our internal controls over financial reporting during thequarter ended March 31, 2009 that have materially affected, or arereasonably likely to affect, our internal control over financial reporting.

 

**Limitations on the Effectiveness of Controls**

 

        Our management, including our CEO andCFO, does not expect that our Disclosure Controls and internal controls willprevent all error and all fraud. A control system, no matter how well conceivedand operated, can provide only reasonable, not absolute, assurance that theobjectives of the control system are met. Further, the design of a controlsystem must reflect the fact that there are resource constraints, and thebenefits of controls must be considered relative to their costs. Because of theinherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud, ifany, with American Defense Systems have been detected. These inherentlimitations include the realities that judgments in decision-making can befaulty and that breakdowns can occur because of simple error or mistake.Additionally, controls can be circumvented by the individual acts of somepersons, by collusion of two or more people or by management override of thecontrols.

 

        The design of any system of controls alsois based in part upon certain assumptions about the likelihood of futureevents, and there can be no assurance that any design will succeed in achievingits stated goals under all potential future conditions; over time, a controlmay become inadequate because of changes in conditions or the degree ofcompliance with the policies or procedures may deteriorate. Because of theinherent limitations in a cost-effective control system, misstatements due toerror or fraud may occur and may not be detected.

 

**PART II**

 

**Item 1.  Legal Proceedings**

 

On July 10,2007, we filed a lawsuit against a former subcontractor, Southern CaliforniaGold Products d/b/a Gypsy Rack, the subcontractor’s President and owner, GlennHarris, and a designer, James McAvoy in the United States District Court,Eastern District of New York. Defendants moved to change venue to the CentralDistrict of California based upon insufficient contacts to the State of NewYork and on October 12, 2007 the matter was transferred to the United StatesDistrict Court for the Central District of California, CaseNumber 07-CV-02779. On February 21, 2008, pursuant to the court’sorder, we filed an amended complaint. The amended complaint names only SouthernCalifornia Gold Products and James McAvoy as defendants and asserts six countsas follows: misappropriation of trade secrets and confidential information;breach of contract; unfair competition; conversion; violation of the LanhamAct; and interference with prospective economic advantage. The amendedcomplaint seeks to enjoin the defendants from misappropriating, disclosing, orusing our confidential information and trade secrets, and recall and surrenderall products and trade secrets wrongfully misappropriated or converted by thedefendants. It also seeks compensatory damages in an amount to be establishedat trial together with prejudgment and post judgment interest, exemplarydamages, disgorgement,

 

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restitution with interest, attorney’s fees andthe costs of suit. Defendants filed an answer to the amended complaint on April 16,2008. Shortly after the filing of the amended answer, defendants made a motionfor summary judgment on, among others, the grounds of collateral estoppel andres judicata. We filed opposition to the motion. The defendants motion and asubsequent application for an immediate interlocutory appeal were denied. Amediation settlement conference was held on October 31, 2008, which wasunsuccessful. The discovery process is continuing and oral arguments on motionfor summary judgment are scheduled for May 18, 2009.   Trial is currently set for August 25,2009.

 

On February 29,2008, Roy Elfers, a former employee commenced an action against us for breachof contract arising from his termination of employment in the Supreme Court ofthe State of New York, Nassau County. The Complaint seeks damages ofapproximately $87,000. We filed an answer to the complaint and will becommencing discovery. Meritorious defenses to the claims exist and we intend tovigorously defend this action.

 

On March 4,2008, Thomas Cusack, our former General Counsel, commenced an action with theUnited States Department of Labor, Occupational Safety and Health and SafetyAdministration, alleging retaliation in contravention of the Sarbanes-OxleyAct. Mr. Cusack seeks damages in excess of $3,000,000. On April 2,2008, we filed a response to the charges. We believe the allegations to bewithout merit and intend to vigorously defend against the action. On March 7,2008, Mr. Cusack also commenced a second action against us for breach ofcontract and related issues arising from his termination of employment in NewYork State Supreme Court, Nassau County. On May 7, 2008, we served amotion to dismiss the complaint, and on or about September 26, 2008, theCourt dismissed several claims (tortious interference with a contract, tortiousinterference with economic opportunity, fraudulent inducement to enter into acontract and breach of good faith and fair dealing). The remaining claims are Mr. Cusack’sbreach of contract claims and claims seeking the lifting of the transferrestrictions on his stock. On October 13, 2008, Mr. Cusack filed anamended complaint as to the remaining claims, and on November 5, 2008, wefiled an answer to the complaint and filed counterclaims against Mr. Cusackfor fraud.  The parties have commenced documentary discovery, whichwill be followed by depositions. Meritorious defenses to the claims exist andwe intend to vigorously defend this action.

 

**Item 1A.  Risk Factors**

 

Our business,industry and common stock are subject to numerous risks and uncertainties. Thediscussion below sets forth all of such risks and uncertainties that arematerial. Any of the following risks, if realized, could materially andadversely affect our revenues, operating results, profitability, financialcondition, prospects for future growth and overall business, as well as thevalue of our common stock.

 

**Risks Relating to Our Company**

 

***We depend onthe U.S. Government for a substantial amount of our sales and our growth in thelast few years has been attributable in large part to U.S. wartime spending insupport of troop deployments in Iraq and Afghanistan. If such troop levels arereduced significantly, our***

 

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***business maybe harmed; and if we do not continue to experience demand for our productswithin the U.S. Government, our business may fail.***

 

        Weserve primarily the defense market and our sales are highly concentrated withinthe U.S. government. Customers for our products include the U.S. Department ofDefense, including the U.S. Marine Corps and TACOM, and the U.S. Department ofHomeland Security. Government tax revenues and budgetary constraints, whichfluctuate from time to time, can affect budgetary allocations for thesecustomers. Many government agencies have in the past experienced budgetdeficits that have led to decreased spending in defense, law enforcement andother military and security areas. Our results of operations may be subject tosubstantial period-to-period fluctuations because of these and other factorsaffecting military, law enforcement and other governmental spending.

 

        U.S.defense spending historically has been cyclical. Defense budgets have receivedtheir strongest support when perceived threats to national security raise thelevel of concern over the country’s safety, such as in Iraq and Afghanistan. Asthese threats subside, spending on the military tends to decrease. Accordingly,while U.S. Department of Defense funding has grown rapidly over the past fewyears, there is no assurance that this trend will continue. Rising budgetdeficits, the cost of the war on terror and increasing costs for domesticprograms continue to put pressure on all areas of discretionary spending, andthe new administration has signaled that this pressure will most likely impactthe defense budget. A decrease in U.S. government defense spending, includingas a result of planned significant U.S. troop level reductions in Iraq or Afghanistan,or changes in spending allocation could result in our government contractsbeing reduced, delayed or terminated. Reductions in our government contracts,unless offset by other military and commercial opportunities, could adverselyaffect our ability to sustain and grow our future sales and earnings within theU.S. Department of Defense.

 

***Our revenuesin 2008 and the first three months of 2009 have been concentrated in a smallnumber of contracts obtained through the U.S. Department of Defense and theloss of, or reduction in estimated revenue under, any of these contracts, orthe inability to contract further with the U.S. Department of Defense couldsignificantly reduce our revenues and harm our business.***

 

        During2008 and the first three months of 2009, two contracts with the U.S. Departmentof Defense represented approximately 75% of our revenue. While we believe wehave satisfied and continue to satisfy the terms of these contracts, there canbe no assurance that we will continue to receive orders under such contracts.Our government customers generally have the right to cancel any contract, orongoing or planned orders under any contract, at any time. If any of these twocontracts were canceled, there are significant reductions in expected ordersunder any of the contracts, or we were unable to contract further with the U.S.Department of Defense, our revenues could significantly decrease and ourbusiness could be severely harmed.

 

***We arecurrently in breach of certain financial covenants relating to our Series AConvertible Preferred Stock, and the holder of approximately 94% of our Series AConvertible Preferred Stock has exercised its right to cause us to redeem suchshares of stock, which right purportedly has been triggered because of suchbreach. If we are required to redeem such***

 

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***Series AConvertible Preferred Stock, we will need to secure additional financing. If weare unable to obtain such financing or the cost of obtaining such financing isprohibitive, our business would be significantly harmed.***

 

        Inconnection with our application to list shares of our common stock on theAmerican Stock Exchange (now known as the NYSE Amex), we entered into a consentagreement with the holders of our Series A Convertible Preferred Stock. Wedid not meet the financial performance targets set forth in the consentagreement, which was filed as an exhibit to our Current Report on Form 8-Kfiled with the SEC on March 27, 2008. Our breach purportedly gives theholders of the Series A Convertible Preferred Stock the right to requireus to redeem all or a portion of their shares of such stock. We have filedCurrent Reports on Form 8-K with the SEC on February 17, 2009 and March 4,2009 regarding the foregoing. On April 14, 2009, we received a notice fromthe holder of approximately 94% of our Series A Convertible PreferredStock that it is exercising such redemption right. The Series AConvertible Preferred Stockholder has also demanded that we pay them 12%dividends they assert accrued from January 1, 2009 to April 13, 2009,on its Series A Convertible Preferred Stock, in cash, as well as certainof their legal fees in connection with related matters. We currently do nothave sufficient surplus as such term is defined under Delaware law to effectthe redemption sought by the stockholder described above, and restrictionsunder our revolving line of credit with our primary lender would neverthelessprohibit any such redemption. Although we continue to negotiate with our Series APreferred Stockholders to resolve the foregoing, if we are required to redeemsuch Series A Convertible Preferred Stock, we will need to secureadditional financing. If we are unable to obtain such financing or the cost ofobtaining such financing were prohibitive, our business would be significantlyharmed. See “Item 2.  Management’sDiscussion and Analysis of Financial Condition and Results ofOperations—Liquidity and Capital Resources” for additional information.

 

***We arerequired to comply with complex procurement laws and regulations, and the costof compliance with these laws and regulations, and penalties and sanctions forany non-compliance could adversely affect our business.***

 

        Weare required to comply with laws and regulations relating to the administrationand performance of U.S. government contracts, which affect how we do businesswith our customers and impose added costs on our business. Among the moresignificant laws and regulations affecting our business are the following:

 

· The FederalAcquisition Regulations: Along with agency regulations supplemental to theFederal Acquisition Regulations, comprehensively regulate the formation,administration and performance of federal government contracts;

 

· The Truth inNegotiations Act: Requires certification and disclosure of all cost and pricingdata in connection with contract negotiations;

 

· The Cost AccountingStandards and Cost Principles: Imposes accounting requirements that govern ourright to reimbursement under certain cost-based federal government contracts;and

 

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· Laws, regulationsand executive orders restricting the use and dissemination of informationclassified for national security purposes and the export of certain productsand technical data. We engage in international work falling under thejurisdiction of U.S. export control laws. Failure to comply with these controlregimes can lead to severe penalties, both civil and criminal, and can includedebarment from contracting with the U.S. government.

 

        Ourcontracting agency customers periodically review our performance under andcompliance with the terms of our federal government contracts. We alsoroutinely perform internal reviews. As a result of these reviews, we may learnthat we are not in compliance with all of the terms of our contracts. If agovernment review or investigation uncovers improper or illegal activities, wemay be subject to civil or criminal penalties or administrative sanctions,including

 

· Termination ofcontracts;

 

· Forfeiture ofprofits;

 

· Cost associated withtriggering of price reduction clauses;

 

· Suspension ofpayments;

 

· Fines; and

 

· Suspension ordebarment from doing business with federal government agencies.

 

        Ifwe fail to comply with these laws and regulations, we may also suffer harm toour reputation, which could impair our ability to win awards of contracts inthe future or receive renewals of existing contracts. If we are subject tocivil and criminal penalties and administrative sanctions or suffer harm to ourreputation, our current business, future prospects, financial condition, oroperating results could be materially harmed. In addition, we are subject toindustrial security regulations of the U.S. Department of Defense and otherfederal agencies that are designed to safeguard against unauthorized release oraccess to classified information by foreign nationals.

 

***Governmentcontracts are usually awarded through a competitive bidding process thatentails risks not present in the acquisition of commercial contracts.***

 

        Asignificant portion of our contracts and task orders with the U.S. governmentis awarded through a competitive bidding process. We expect that much of thebusiness we seek in the foreseeable future will continue to be awarded throughcompetitive bidding. Budgetary pressures and changes in the procurement processhave caused many government customers to increasingly purchase goods andservices through indefinite delivery/indefinite quantity, or IDIQ contracts,General Services Administration, or GSA schedule contracts and othergovernment-wide acquisition contracts, or GWACs. These contracts, some of whichare awarded to multiple

 

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contractors, have increased competition andpricing pressure, requiring us to make sustained post-award efforts to realizerevenue under each such contract. Competitive bidding presents a number ofrisks, including without limitation:

 

· the need to bid onprograms in advance of the completion of their design, which may result inunforeseen technological difficulties and cost overruns;

 

· the substantial costand managerial time and effort that we may spend to prepare bids and proposals forcontracts that may not be awarded to us;

 

· the need to estimateaccurately the resources and cost structure that will be required to serviceany contract we award; and

 

· the expense anddelay that may arise if our or our partners’ competitors protest or challengecontract awards made to us or our partners pursuant to competitive bidding, andthe risk that any such protest or challenge could result in the resubmission ofbids on modified specifications, or in the termination, reduction ormodification of the awarded contract.

 

        Ifwe are unable to consistently win new contract awards over any extended period,our business and prospects will be adversely affected, and that could cause ouractual results to be adversely affected. In addition, upon the expiration of acontract, if the customer requires further services of the type provided by thecontract, there is frequently a competitive rebidding process. There can be noassurance that we will win any particular bid, or that we will be able to replacebusiness lost upon expiration or completion of a contract, and the terminationor non-renewal of any of our significant contracts would cause our actualresults to be adversely affected.

 

***The U.S.government may reform its procurement or other practices in a manner adverse tous.***

 

        Becausewe derive a significant portion of our revenues from contracts with the U.S.government or its agencies, we believe that the success and development of ourbusiness will depend on our continued successful participation in federalcontracting programs. The current administration has signed a Memorandum forthe Heads of Executive Departments and Agencies on Government Contracting,which orders significant changes to government contracting, including thereview of existing federal contracts to eliminate waste and the issuance ofgovernment-wide guidance to implement reforms aimed at cutting wastefulspending and fraud. The federal procurement reform called for in the Memorandumrequires the heads of several federal agencies to develop and issue guidance onreview of existing government contracts and authorizes that any contractsidentified as wasteful or otherwise inefficient be modified or cancelled. Ifany of our contracts were to be modified or cancelled, our actual results couldbe adversely affected and we can give no assurance that we would be able toprocure new U.S. Government contracts to offset the revenues lost as a resultof any modification or cancellation of our contracts. In addition, there may besubstantial costs or management time required to respond to government reviewof any of our current contracts, which could delay or otherwise adverselyaffect our ability to compete for or perform contracts. Further, if the orderedreform of the U.S. Government’s procurement practices involves the adoption ofnew cost-accounting

 

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standards or the requirement that competitorssubmit bids or perform work through teaming arrangements, that could be costlyto satisfy or could impair our ability to obtain new contracts. The reform mayalso involve the adoption of new contracting methods to GSA or othergovernment-wide contracts, or new standards for contract awards intended toachieve certain socio-economic or other policy objectives, such as establishingnew set-aside programs for small or minority-owned businesses. In addition, theU.S. government may face restrictions from other new legislation orregulations, as well as pressure from government employees and their unions, onthe nature and amount of services the U.S. government may obtain from privatecontractors. These changes could impair our ability to obtain new contracts.Any new contracting methods could be costly or administratively difficult forus to implement and, as a result, could harm our operating results.

 

***Ourcontracts with the U.S. government and its agencies are subject to audits andcost adjustments.***

 

        U.S.government agencies, including the Defense Contract Audit Agency, or the DCAA,routinely audit and investigate government contracts and government contractors’incurred costs, administrative processes and systems. Certain of theseagencies, including the DCAA, review our performance on contracts, pricingpractices, cost structure and compliance with applicable laws, regulations andstandards. They also review the adequacy of our internal control systems andpolicies, including our purchase, property, estimation, compensation andmanagement information systems. Any costs found to be improperly allocated to aspecific contract will not be reimbursed, and any such costs already reimbursedmust be refunded. Moreover, if any of the administrative processes and systemsare found not to comply with requirements, we may be subjected to increasedgovernment scrutiny and approval that could delay or otherwise adversely affectour ability to compete for or perform contracts. Therefore, an unfavorableoutcome of an audit by the DCAA or another government agency could cause actualresults to be adversely affected and differ materially from those anticipated.If a government investigation uncovers improper or illegal activities, we maybe subject to civil and criminal penalties and administrative sanctions,including termination of contracts, forfeitures of profits, suspension ofpayments, fines and suspension or debarment from doing business with the U.S.government. In addition, we could suffer serious reputational harm ifallegations of impropriety were made against us. Each of these events couldcause our actual results to be adversely affected.

 

***A portion ofour business depends upon obtaining and maintaining required securityclearances, and our failure to do so could result in termination of certain ofour contracts or cause us to be unable to bid or re-bid on certain contracts.***

 

        Obtainingand maintaining personal security clearances (or PCLs) for employees involves alengthy process, and it can be difficult to identify, recruit and retainemployees who already hold security clearances. If our employees are unable toobtain or retain security clearances, or if such employees who hold securityclearances terminate their employment with us, the customer whose work requirescleared employees could terminate the contract or decide not to exerciseavailable options, or to not renew it. To the extent we are not able to engageemployees with the required security clearances for a particular contract, wemay not be able to bid on or win new contracts, or effectively re-bid onexpiring contracts, which could adversely affect our business.

 

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        Afacility security clearance (or FCL) is an administrative determination by theDefense Security Service (DSS), a U.S. Department of Defense component, that aparticular contractor facility has the requisite level of security, procedures,and safeguards to handle classified information requirements for access toclassified information. Our ability to obtain and maintain facility securityclearances has a direct impact on our ability to compete for and perform U.S.government contracts, the performance of which requires access to classifiedinformation. Our ability to so obtain or maintain any facility securityclearance level could result in the termination, non-renewal or our inabilityto obtain certain U.S. government contracts, which would reduce our revenuesand harm our business.

 

***We may notrealize the full amount of revenues reflected in our backlog, which could harmour operations and significantly reduce our future revenues.***

 

        Therecan be no assurances that our backlog estimates will result in actual revenuesin any particular fiscal period because our customers may modify or terminateprojects and contracts and may decide not to exercise contract options. Wedefine backlog as the future revenue we expect to receive from our contracts.We include potential orders expected to be awarded under IDIQ contracts. Ourrevenue estimates for a particular contract are based, to a large extent, onthe amount of revenue we have recently recognized on that contract, our experiencein utilizing capacity on similar types of contracts, and our professionaljudgment. Our revenue estimate for a contract included in backlog can be lowerthan the revenue that would result from our customers utilizing all remainingcontract capacity. Our backlog includes estimates of revenues the receipt ofwhich require future government appropriation, option exercise by our clientsand/or is subject to contract modification or termination. At March 31,2009, our backlog was approximately $60 million, of which $45 million isestimated to be realized in 2009. These estimates are based on our experienceunder such contracts and similar contracts, and we believe such estimates to bereasonable. However, we believe that the receipt of revenues reflected in ourbacklog estimate for the following twelve months will generally be more certainthan our backlog estimate for periods thereafter. If we do not realize asubstantial amount of our backlog, our operations could be harmed and ourfuture revenues could be significantly reduced.

 

***We havebreached certain financial covenants under our revolving line of credit with TDBank and the partial or complete loss of such revolving line may impact ourability to timely meet our working capital requirements.***

 

        OnApril 1, 2009, we received a Notice of Default from our primary lender, TDBank, resulting from the violation of certain financial covenants under theLoan Agreement, dated May 2, 2007, as amended, and as assumed by one ofour subsidiaries. The bank has stated that it is not presently taking action toenforce its rights and remedies under our existing revolving line of creditwith the bank, however they are not waiving their rights under any exiting orfuture defaults or events of default. The bank has indicated that it willcontinue to make advances under the Loan Agreement, but it has no obligation todo so and may refuse an advance request in its sole discretion without notice.

 

        Subsequently,on April 27, 2009, we entered into a Forbearance Agreement and Amendmentto Loan Agreement with the bank, pursuant to which the bank has agreed toforbear

 

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from exercising its default-related rights and remedies with respect tothe defaults specified in the Notice of Default, including without limitationacceleration and foreclosure, and continue to provide advances and otherfinancial accommodations under the Loan Agreement until June 15, 2009 (orForbearance Period) unless such Forbearance Period is earlier terminated as aresult of any Forbearance Default (as such term is defined in the ForbearanceAgreement).  Notwithstanding theforegoing, the bank will have no obligation to make any advance if, aftergiving effect thereto, the aggregate principal amount of the Advances plusoutstanding letters of audit issued by the lender for the account of ourcompany and subsidiaries would exceed $2,000,000 prior to May 15, 2009 and$1,000,000 as of May 15, 2009 and thereafter.  Under the ForbearanceAgreement, we have agreed, among other things, (i) not to make anyRestricted Payment (as such term is defined in the Loan Agreement), other thana stock dividend payable in our common stock and approved by the Lender in itssole discretion, (ii) to use their best efforts to obtain a refinancing, (iii) toprovide certain monthly financial information as set forth in the ForbearanceAgreement and (iv) to pay the Advances, the Term Loan (as such term isdefined in the Loan Agreement) and all other obligations in full by June 15,2009.  Our failure to comply with any of the foregoing shall constitute aForbearance Default under the Forbearance Agreement, which can result intermination of the Forbearance Agreement. The Forbearance Agreement has been filed as an exhibit to the Form 8-Kfiled with the SEC on May 1, 2009.

 

        Inthe event we violate any covenants in the Loan Agreement or fail to comply withadditional covenants set forth in the Forbearance Agreement during theForbearance Period, the bank can refuse to make one or more advances andterminate the Forbearance Agreement, and we may unexpectedly be unable to meetour working capital obligations which could harm our reputation and ourbusiness.

 

***U.S.government contracts often contain provisions that are typically not found incommercial contracts and that are unfavorable to us, which could adverselyaffect our business.***

 

        U.S.government contracts contain provisions and are subject to laws and regulationsthat give the U.S. government rights and remedies not typically found incommercial contracts, including without limitation, allowing the U.S.government to:

 

· terminate existingcontracts for convenience, as well as for default;

 

· establishlimitations on future services that can be offered to prospective customersbased on conflict of interest regulations;

 

· reduce or modifycontracts or subcontracts;

 

· cancel multi-yearcontracts and related orders if funds for contract performance for anysubsequent year become unavailable;

 

· decline to exercisean option to renew a multi-year contract;

 

· claim intellectualproperty rights in products provided by us; and

 

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· suspend or bar usfrom doing business with the federal government or with a governmental agency.

 

***Theownership, control or influence of our company by foreigners could result inthe termination, non-renewal or our inability to obtain certain U.S. governmentcontracts, which would reduce our revenues and harm our business.***

 

        Weare subject to industrial security regulations of the U.S. Department ofDefense and other federal agencies that are designed to safeguard againstunauthorized access by foreigners and others to classified and other sensitiveinformation. If we were to come under foreign ownership, control or influence,our clearances could be revoked and our U.S. government customers couldterminate, or decide not to renew, our contracts, and such a situation couldalso impair our ability to obtain new contracts and subcontracts. Any suchactions would reduce our revenues and harm our business.

 

***We depend onour suppliers and three, in particular, currently provide us with approximately55% to 65% of our supply needs. If we can not obtain certain components for ourproducts or we lost our key supplier, we might have to develop alternativedesigns that could increase our costs or delay our operations.***

 

        Wedepend upon a number of suppliers for components of our products. Of thesesuppliers, Action Group supplies approximately 35% and Standard Bent Glass andRed Dot each supply between 10% and 15% of our overall supply needs. Moreover,Action Group supplies all of our steel pieces and hardware, Standard Bent Glasssupplies all of our glass requirements and Red Dot supplies all of our vehicleair conditioning and heating equipment for our CPKs. There is an inherent riskthat certain components of our products will be unavailable for prompt deliveryor, in some cases, discontinued. We have only limited control over anythird-party manufacturer as to quality controls, timeliness of production,deliveries and various other factors. Should the availability of certaincomponents be compromised through the loss of, or impairment of therelationship with, any of our three key suppliers or otherwise, it could forceus to develop alternative designs using other components, which could add tothe cost of goods sold and compromise delivery commitments. If we are unable toobtain components in a timely manner, at an acceptable cost, or at all, we mayneed to select new suppliers, redesign or reconstruct processes we use to buildour transparent and opaque armored products. We may not be able to manufactureone or more of our products for a period of time, which could materiallyadversely affect our business, results from operations and financial condition.

 

***If we failto keep pace with the ever-changing market of security-related defenseproducts, our revenues and financial condition will be negatively affected.***

 

        Thesecurity-related defense product market is rapidly changing, with evolvingindustry standards. Our future success will depend in part upon our ability tointroduce new products, designs, technologies and features to meet changingcustomer requirements and emerging industry standards; however, there can be noassurance that we will successfully introduce new products or features to ourexisting products or develop new products that will achieve market acceptance.Any delay or failure of these products to achieve market acceptance wouldadversely

 

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affect our business. In addition, there can beno assurance that products or technologies developed by others will not renderour products or technologies non-competitive or obsolete. Should we fail tokeep pace with the ever-changing nature of the security-related defense productmarket, our revenues and financial condition will be negatively affected.

 

        Webelieve that, in order to remain competitive in the future, we will need tocontinue to invest significant financial resources to develop new and adapt ormodify our existing offerings and technologies, including through internalresearch and development, acquisitions and joint ventures or other teamingarrangements. These expenditures could divert our attention and resources fromother projects, and we cannot be sure that these expenditures will ultimatelylead to the timely development of new offerings and technologies. Due to thedesign complexity of our products, we may in the future experience delays incompleting the development and introduction of new products. Any delays couldresult in increased costs of development or deflect resources from otherprojects. In addition, there can be no assurance that the market for ourofferings will develop or continue to expand as we currently anticipate. Thefailure of our technology to gain market acceptance could significantly reduceour revenues and harm our business. Furthermore, we cannot be sure that ourcompetitors will not develop competing technologies which gain marketacceptance in advance of our products.

 

***We may besubject to personal liability claims for our products and if our insurance isnot sufficient to cover such claims, our expenses may increase substantially.***

 

        Ourproducts are used in applications where the failure to use our productsproperly or their malfunction could result in bodily injury or death. We may besubject to personal liability claims and our insurance may not be adequate tocover such claims. As a result, a significant lawsuit could adversely affectour business. We may be exposed to liability for personal injury or propertydamage claims relating to the use of the products. Any future claim against usfor personal injury or property damage could materially adversely affect thebusiness, financial condition, and results of operations and result in negativepublicity. We currently maintain insurance for this type of liability as wellas seek SAFETY Act certification for our products where we deem appropriate.However, even if we do purchase insurance, we may experience legal claimsoutside of our insurance coverage, or in excess of our insurance coverage, orthat insurance will not cover. Even if we are not found liable, the costs ofdefending a lawsuit can be high.

 

***We aresubject to substantial competition and we must continue research anddevelopment to remain competitive.***

 

        Weare subject to significant competition that could harm our ability to winbusiness and increase the price pressure on our products. We face strongcompetition from a wide variety of firms, including large, multinational,defense and aerospace firms. Most of our competitors have considerably greaterfinancial, marketing and technological resources than we do, which may make itdifficult to win new contracts and we may not be able to compete successfully.Certain competitors operate larger facilities and have longer operatinghistories and presence in key markets, greater name recognition, largercustomer bases and significantly greater financial, sales and marketing,manufacturing, distribution, technical and other resources. As a result, these

 

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competitors may be able to adapt more quicklyto new or emerging technologies and changes in customer requirements. They mayalso be able to devote greater resources to the promotion and sale of theirproducts. Moreover, we may not have sufficient resources to undertake thecontinuing research and development necessary to remain competitive.

 

***We mustcomply with environmental regulations or we may have to pay expensive penaltiesor clean up costs.***

 

        Weare subject to federal, state, local and foreign laws, and regulationsregarding protection of the environment, including air, water, and soil. Ourmanufacturing business involves the use, handling, storage, discharge anddisposal of, hazardous or toxic substances or wastes to manufacture ourproducts. We must comply with certain requirements for the use, management,handling, and disposal of these materials. If we are found responsible for anyhazardous contamination, we may have to pay expensive fines or penalties orperform costly clean-up. Even if we are charged, and later found notresponsible, for such contamination or clean up, the cost of defending thecharges could be high. Authorities may also force us to suspend production,alter our manufacturing processes, or stop operations if we do not comply withthese laws and regulations.

 

***We may notbe able to adequately safeguard our intellectual property rights and tradesecrets from unauthorized use, and we may become subject to claims that weinfringe on others’ intellectual property rights.***

 

        Werely on a combination of patents, trade secrets, trademarks, and otherintellectual property laws, nondisclosure agreements and other protectivemeasures to preserve our proprietary rights to our products and productionprocesses. We currently have a number of U.S. pending patent applications.

 

        These measures afford only limited protection and may not precludecompetitors from developing products or processes similar or superior to ours.Moreover, the laws of certain foreign countries do not protect intellectualproperty rights to the same extent as the laws of the United States.

 

        Althoughwe implement protective measures and intend to defend our proprietary rights,these efforts may not be successful. From time to time, we may litigate withinthe United States or abroad to enforce our licensed patents, to protect ourtrade secrets and know-how or to determine the enforceability, scope and validityof our proprietary rights and the proprietary rights of others. Enforcing ordefending our proprietary rights could be expensive, require management’sattention and might not bring us timely or effective relief.

 

        Furthermore,third parties may assert that our products or processes infringe their patentrights. Our patents, if granted, may be challenged, invalidated orcircumvented. Although there are no pending or threatened intellectual propertylawsuits against us, we may face litigation or infringement claims in thefuture. Infringement claims could result in substantial costs and diversion ofour resources even if we ultimately prevail. A third party claiminginfringement may also obtain an injunction or other equitable relief, whichcould effectively block the distribution 

 

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or sale of allegedly infringing products.Although we may seek licenses from third parties covering intellectual propertythat we are allegedly infringing, we may not be able to obtain any suchlicenses on acceptable terms, if at all.

 

***We depend onmanagement and other key personnel and we may not be able to execute ourbusiness plan without their services.***

 

        Oursuccess and our business strategy depend in large part on our ability toattract and retain key management and operating personnel. Such individuals arein high demand and are often subject to competing employment offers. We dependto a large extent on the abilities and continued participation of our executiveofficers and other key employees. We presently maintain “key man” insurance onAnthony Piscitelli, our President and Chief Executive Officer. We believe that,as our activities increase and change in character, additional experiencedpersonnel will be required to implement our business plan. Competition for suchpersonnel is intense and we may not be able to hire them when required, or havethe ability to attract and retain them.

 

***We depend onthe use of our operating facilities, which currently are nearing capacity. Tothe extent our growth strategy is successful, our operations could requireadditional space by the end of 2009 which, if not obtained on a cost-effectivebasis, could adversely affect our results of operations and financialconditions.***

 

        Oursuccess depends on the use of current operating facilities. However, the use ofour facilities is quickly becoming maximized. To the extent our growth strategyis successful, we may require the acquisition or lease of additional propertyby the end of 2009 in order to effectively increase operating capabilities.Obtaining additional space may result in the investment of substantial time andcapital and may not prove cost-effective, which could harm our results ofoperations and financial condition.

 

***We maypartner with foreign entities, and domestic entities with foreign contacts,which may affect our business plans.***

 

        Werecognize that there may be opportunities for increased product sales in boththe domestic and global defense markets. We have recently initiated plans tostrategically team with foreign entities as well as domestic entities withforeign business contacts in order to better compete for both domestic andforeign military contracts. In order to implement these plans, we may incursubstantial costs which may include additional research and development,prototyping, hiring personnel with specialized skills, implementing andmaintaining technology control plans, technical data export licenses,production, product integration, marketing, warehousing, finance charges,licensing, tariffs, transportation and other costs. In the event that workingwith foreign entities and/or domestic entities with foreign business contactsproves to be unsuccessful, this may ineffectively use our resources which mayaffect our profitability and the costs associated with such work may precludeus from pursuing alternative opportunities.

 

        Ifinternational sales grow, we may be exposed to certain unique and potentiallygreater risks than are presented in our domestic business. Internationalbusiness is sensitive to changes in 

 

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the in the budgets and priorities ofinternational customers, which may be driven by potentially volatile worldwideeconomic conditions, regional and local economic and political factors, as wellas U.S. foreign policy. International sales will also expose us to localgovernment laws, regulations and procurement regimes which may differ from U.S.Government regulation, including import-export control, exchange control,investment and repatriation of earnings, as well as to varying currency andother economic risks. International contracts may also require the use offoreign representatives and consultants or may require us to commit tofinancial support obligations, known as offsets, and provide for penalties ifwe fail to meet such requirements. As a result of these and other factors, wecould experience award and funding delays on international projects or couldincur losses on such projects, which could negatively impact our results of operationsand financial condition.

 

***We arepresently classified as a small business and the loss of our small businessstatus may adversely affect our ability to compete for government contracts.***

 

        Weare presently classified as a small business as determined by the SmallBusiness Administration based upon the North American Industry ClassificationSystems (NAICS) industry and product specific codes which are regulated in theUnited States by the Small Business Administration. While we do not presentlyderive a substantial portion of our business from contracts which are set-asidefor small businesses, we are able to bid on small business set-aside contractsas well as contracts which are open to non-small business entities. It is alsopossible that we may become more reliant upon small business set-asidecontracts. Our continuing growth may cause us to lose our designation as asmall business, and additionally, as the NAICS codes are periodically revised,it is possible that we may lose our status as a small business and may sustainan adverse impact on our current competitive advantage. The loss of smallbusiness status could adversely impact our ability to compete for governmentcontracts, maintain eligibility for special small business programs and limitour ability to partner with other business entities which are seeking to teamwith small business entities that may be required under a specific contract.

 

***We intend topursue international sales opportunities which may require export licenses andcontrols.***

 

        Inorder to pursue international sales opportunities, we have initiated a programto obtain product classifications, commodity jurisdictions, licenses,technology control plans, technical data export licenses and export relatedprograms. Due to our diverse products, it is possible that some products may besubject to classification under the United States State DepartmentInternational Traffic in Arms Regulations (ITAR). In the event that a productis classified as an ITAR-controlled item, we will be required to obtain an ITARexport license. While we believe that we will be able to obtain such licenses,the denial of required licenses and/or the delay in obtaining such licenses mayhave a significant adverse impact on our ability to sell productsinternationally. Alternatively, our products may be subject to classificationunder the United States Commerce Department’s Export Administration Regulations(EAR). We also anticipate that we may be required to comply with internationalregulations, tariffs and controls and we intend to work closely withexperienced freight forwarders and advisors. We anticipate that an 

 

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internal compliance program for internationalsales will require the commitment of significant resources and capital.

 

***We havemade, and expect to continue to make, strategic acquisitions and investments,and these activities involve risks and uncertainties.***

 

        Inpursuing our business strategies, we continually review, evaluate and considerpotential investments and acquisitions. In evaluating such transactions, we arerequired to make difficult judgments regarding the value of business opportunities,technologies and other assets, and the risks and cost of potential liabilities.Furthermore, acquisitions and investments involve certain other risks anduncertainties, including the difficulty in integrating newly-acquiredbusinesses, the challenges in achieving strategic objectives and other benefitsexpected from acquisitions or investments, the diversion of our attention andresources from our operations and other initiatives, the potential impairmentof acquired assets and the potential loss of key employees of the acquiredbusinesses.

 

***The outcomeof litigation in which we have been named as a defendant is unpredictable andan adverse decision in any such matter could have a material adverse effect onour financial position or results of operations.***

 

        Weare defendants in a number of litigation matters. These matters may divertfinancial and management resources that would otherwise be used to benefit ouroperations. Although we believe that we have meritorious defenses to the claimsmade in the litigation matters to which we have been named a party and intendto contest each lawsuit vigorously, no assurances can be given that the resultsof these matters will be favorable to us. An adverse resolution or outcome ofany of these lawsuits, claims, demands or investigations could have a negativeimpact on our financial condition, results of operations and liquidity.

 

***Unanticipatedchanges in our tax provisions or exposure to additional income tax liabilitiescould affect our profitability.***

 

        Weare subject to income taxes in the United States. In the ordinary course of ourbusiness, there are many transactions and calculations where the ultimate taxdetermination is uncertain. Furthermore, changes in domestic or foreign incometax laws and regulations, or their interpretation, could result in higher orlower income tax rates assessed or changes in the taxability of certain salesor the deductibility of certain expenses, thereby affecting our income taxexpense and profitability. Although we believe our tax estimates arereasonable, the final determination of tax audits could be materially differentfrom our historical income tax provisions and accruals. Additionally, changesin the geographic mix of our sales could also impact our tax liabilities andaffect our income tax expense and profitability.

 

**Risks Relating to Our CommonStock**

 

***If we failto maintain an effective system of internal controls over financial reporting,we may not be able to report accurately our financial results. This could havea material adverse effect on our share price.***

 

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        Effectiveinternal controls are necessary for us to provide accurate financial reports.We are beginning to evaluate how to document and test our internal controlprocedures to satisfy the requirements of Section 404 of the SarbanesOxley Act of 2002 and the related rules of the SEC, which require, amongother things, our management to assess annually the effectiveness of ourinternal control over financial reporting and our independent registered publicaccounting firm to issue a report on that assessment. During the course of thisdocumentation and testing, we may identify significant deficiencies or materialweaknesses that we may be unable to remediate before the deadline for thosereports.

 

        Therecan be no assurance that we will maintain adequate controls over our financialprocesses and reporting in the future or that those controls will be adequatein all cases to uncover inaccurate or misleading financial information thatcould be reported by members of management. If our controls failed to identifyany misreporting of financial information or our management or independentregistered public accounting firm were to conclude in their reports that ourinternal control over financial reporting was not effective, investors couldlose confidence in our reported financial information and the trading price ofour shares could drop significantly. In addition, we could be subject tosanctions or investigations by the stock exchange upon which our common stockmay be listed, the SEC or other regulatory authorities, which would requireadditional financial and management resources.

 

***Volatilityof our stock price could adversely affect stockholders.***

 

        Themarket price of our common stock could fluctuate significantly as a result of:

 

· quarterly variations in our operating results;

 

· cyclical nature of defense spending;

 

· interest rate changes;

 

· changes in the market’s expectations about our operating results;

 

· our operating results failing to meet the expectation of securities analystsor investors in a particular period;

 

· changes in financial estimates and recommendations by securities analystsconcerning our company or the defense industry in general;

 

· operating and stock price performance of other companies that investors deemcomparable to us;

 

· news reports relating to trends in our markets;

 

· changes in laws and regulations affecting our business;

 

· material announcements by us or our competitors;

 

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· sales of substantial amounts of common stock by our directors, executiveofficers or significant stockholders or the perception that such sales couldoccur; and

 

· general economic and political conditions such as recessions and acts ofwar or terrorism.

 

        Fluctuationsin the price of our common stock could contribute to the loss of all or part ofan investor’s investment in the company.

 

***We currentlydo not intend to pay dividends on our common stock and consequently your onlyopportunity to achieve a return on your investment is if the price of commonstock appreciates.***

 

        Wecurrently do not plan to declare dividends on our common stock in theforeseeable future. Any payment of cash dividends will depend upon ourfinancial condition, capital requirements, earnings and other factors deemedrelevant by our board of directors. Further, our credit facility restricts ourability to pay cash dividends. Agreements governing future indebtedness willlikely contain similar restrictions on our ability to pay cash dividends.Consequently, your only opportunity to achieve a return on your investment inour company will be if the market price of our common stock appreciates and yousell your common stock at a profit.

 

***Provisionsin our certificate of incorporation and bylaws or Delaware law mightdiscourage, delay or prevent a change of control of our company or changes inour management and, therefore, depress the trading price of our stock.***

 

        Ouramended and restated certificate of incorporation and bylaws contain provisionsthat could depress the trading price of our common stock by acting todiscourage, delay or prevent a change in control of our company or changes inour management that the stockholders of our company may deem advantageous.These provisions:

 

· establish a classified board of directors so that not all members of ourboard of directors are elected at one time;

 

· provide that directors may only be removed “for cause” and only with theapproval of 66 2/3 percent of our stockholders;

 

· provide that only our board of directors can fill vacancies on the boardof directors;

 

· require super-majority voting to amend our bylaws or specified provisionsin our certificate of incorporation;

 

· authorize the issuance of “blank check” preferred stock that our board ofdirectors could issue to increase the number of outstanding shares and todiscourage a takeover attempt;

 

· limit the ability of our stockholders to call special meetings ofstockholders;

 

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· prohibit stockholder action by written consent, which requires all stockholderactions to be taken at a meeting of our stockholders;

 

· provide that the board of directors is expressly authorized to adopt,amend, or repeal our bylaws, subject to the rights of our stockholders to dothe same by super-majority vote of stockholders; and

 

· establish advance notice requirements for nominations for election to ourboard of directors or for proposing matters that can be acted upon bystockholders at stockholder meetings.

 

        Inaddition, Section 203 of the Delaware General Corporation Law maydiscourage, delay or prevent a change in control of our company.

 

        Theseand other provisions contained in our amended and restated certificate ofincorporation and bylaws could delay or discourage transactions involving anactual or potential change in control of us or our management, includingtransactions in which our stockholders might otherwise receive a premium fortheir shares over then current prices, and may limit the ability ofstockholders to remove our current management or approve transactions that ourstockholders may deem to be in their best interests and, therefore, couldadversely affect the price of our common stock.

 

**Item 2.           UnregisteredSales of Equity Securities and Use of Proceeds**

 

On January 12,2009, we issued options to purchase an aggregate of 100,000 shares of ourcommon stock to consultants for services rendered.  The exercise price for each option is $2.00per share and each option vested immediately upon the issuance.

 

The foregoing grants were exempt fromregistration under the Securities Act, pursuant to Section 4(2) and Rule 506promulgated thereunder as transactions with accredited investors by an issuernot involving a public offering.

 

**Item 3.****           ****DefaultsUpon Senior Securities**

 

               None.

 

**Item 4.****           ****Submissionof Matters to a Vote of Security Holders**

 

                None.

 

**Item 5.           OtherInformation**

 

   None.

 

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** **

**Item 6.           Exhibits**

 
| **Exhibit Number** | ** ** | **Exhibit**                                                                                                                                                                                               |
|-------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                    |       |                                                                                                                                                                                                      |
| 31.1*                   |       | Certification of Chairman  and Chief Executive Officer pursuant to Rule 13a-14(a) and  Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934,  as amended.*                |
| 31.2*                   |       | Certification of Chief  Financial Officer pursuant to Rule 13a-14(a) and  Rule 15d-14(a), promulgated under the Securities Act of 1934, as  amended.*                                      |
| 32.1*                   |       | Certification of Chairman  and Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.* |

 

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*     Filed herewith.

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                 | AMERICAN DEFENSE SYSTEMS, INC. |
|----------------------|--------------------------------|
|                 |                           |
|                 |                           |   |
| Date: April 15, 2010 | By:                            | /s/ Gary Sidorsky |
|                 |                           | Chief Financial Officer |

 

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**Index to Exhibits**

 
| **Exhibit Number** | ** ** | **Exhibit**                                                                                                                                                                                   |
|--------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1               |       | Certification of Chairman and Chief Executive Officer pursuant to Rule 13a-14(a)  and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as  amended.                     |
| 31.2               |       | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and  Rule 15d-14(a), promulgated under the Securities Act of 1934, as amended.                                            |
| 32.1               |       | Certification of Chairman and Chief Executive Officer and Chief Financial  Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906  of the Sarbanes-Oxley Act of 2002. |

 

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