UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Mark One)
x |
ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005 |
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TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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FOR THE TRANSITION PERIOD FROM TO
Commission File No. 001-33253
FORCE PROTECTION, INC.
(Exact name of issuer as specified in its charter)
Nevada |
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84-1383888 |
(State or other jurisdiction of |
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(I.R.S. Employer |
incorporation or organization) |
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Identification No.) |
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9801 Highway 78, Building No. 1, Ladson, SC |
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29456 |
(Address of principal executive offices) |
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(Zip Code) |
Registrants telephone number, including area code: (843) 740-7015
Securities registered under Section 12(b) of the Exchange Act:
None.
Securities registered under Section 12(g) of the Exchange Act:
Common stock, par value $0.001 per share.
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past twelve months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained in this form, and no disclosure will be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. (Check one).
Large accelerated filer o Accelerated filer o Non-accelerated filer x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The aggregate market value of the voting and non-voting common equity held by non-affiliates as of December 31, 2005 was $22,353,816 based on a total of 28,658,739 shares of our common stock held by non-affiliates on December 31, 2005 at the closing price of $0.78 per share.
We had 36,114,217 shares of common stock outstanding as of December 31, 2005.
Documents incorporated by reference: None.
TABLE OF CONTENTS
FORCE PROTECTION, INC. FORM 10-K/A
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Management has reevaluated the effectiveness of our disclosure controls and procedures as of December 31, 2005. As a result, management has concluded that our disclosure controls were not effective as of December 31, 2005, because of certain material weaknesses. Managements revised evaluation is contained, and the material weaknesses are described, in Item 9A of this Form 10-K/A.
We have also added a legend to the report of Michael Johnson & Co., LLC, with respect to our financial statements for the year ended December 31, 2003, included in Item 8 of this Form 10-K/A, describing our inability to obtain and file a reissued report. There are no changes to that report or to the financial statements and other information included in Item 8.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Force Protection, Inc.
We have audited the accompanying consolidated balance sheets of Force Protection, Inc. and subsidiary as of December 31, 2005 and 2004, and the related consolidated statements of income, stockholders equity and comprehensive income, and cash flows for each of the years in the two-year period ended December 31, 2005. These financial statements are the responsibility of the companys management. Our responsibility is to express an opinion on these financial statements based on our audits. The December 31, 2003 financial statements of Force Protection, Inc. and subsidiary were audited by another auditor who has ceased operations. That auditor expressed an unqualified opinion on those financial statements in his report dated March 2, 2004.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Force Protection Inc., and subsidiary as of December 31, 2005 and 2004, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the financial statements, certain errors resulting in adjustments to the Companys accounting for preferred stock and warrants issued to investors, accounting for stock-based compensation to employees and non-employees and accounting for rent expense on a straight-line basis as of December 31, 2005 and 2004, were discovered by management of the Company during the current year. Accordingly, the 2005 and 2004 financial statements have been restated to correct these errors.
As discussed above, the financial statements of Force Protection Inc., and subsidiary as of December 31, 2003, and for the year then ended were audited by other auditors who have ceased operations. As described in Note 1, these financial statements have been restated. We audited the adjustments described in Note 1 that were applied to restate the 2003 financial statements. In our opinion, such adjustments are appropriate and have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the 2003 financial statements of the Company other than with respect to such
adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2003 financial statements taken as a whole.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2, conditions exist which raise substantial doubt about the Companys ability to continue as a going concern. Managements plans in regard to these matters are also discussed in Note 2. The financial statements do not include any adjustments that might result from this uncertainty.
/s/ Jaspers + Hall, PC |
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Denver, Colorado
March 17, 2006 (except as to the restatement discussed in Note 1 to the consolidated financial
statements as to which the date is as of April 16, 2007)
INDEPENDENT AUDITORS REPORT
To the Board of Directors and Stockholders of Force Protection, Inc. and subsidiary
We have audited the accompanying consolidated balance sheets of Force Protection, Inc., and subsidiary (formerly known as Sonic Jet Performance, Inc.) as of December 31, 2003 and 2002, and the related consolidated statements of operations, stockholders equity (deficit) and cash flow for the years then ended. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Force Protection, Inc, and subsidiary, at December 31, 2003 and 2002, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Companys recurring losses from operations and its difficulties in generating sufficient cash flow to meet its obligation and sustain its operations raise substantial doubt about its ability to continue as a going concern. Managements plans concerning these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Michael Johnson & Co., LLC |
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Michael Johnson & Co., LLC |
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Denver, Colorado |
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March 2, 2004 |
The consolidated statements of income, cash flows and changes in stockholders equity of Force Protection, Inc. for the year ended December 31, 2003 have been audited by Michael Johnson & Co., LLC, independent public accountants. We have not been able to obtain a reissued report of Michael Johnson & Co., LLC of their audit report regarding such financial statements because Michael Johnson & Co., LLC is no longer registered with the PCAOB as required by Section 102 of the Sarbanes-Oxley Act of 2002. The absence of such reissued report from Michael Johnson & Co., LLC may limit a stockholders ability to assert claims against Michael Johnson & Co., LLC under Section 11(a) of the 1933 Act for any untrue statement of a material fact contained in the financial statements audited by Michael Johnson & Co., LLC or any omissions to state a material fact required to be stated in the financial statements.
2
FORCE
PROTECTION, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2005, 2004 and 2003
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2005 |
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2004 |
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2003 |
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Restated |
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Restated |
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Restated |
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ASSETS |
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Current Assets: |
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Cash |
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$ |
1,217,509 |
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$ |
2,264,406 |
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$ |
278,777 |
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Accounts receivable, net of allowance for contractual adjustments of $1,018,051 for 2005, $0 for 2004 and 2003 |
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3,666,358 |
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1,053,973 |
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144,932 |
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Inventories |
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32,486,776 |
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9,029,913 |
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827,337 |
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Other current assets |
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267,189 |
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241,910 |
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60,000 |
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Total current assets |
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37,637,832 |
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12,590,202 |
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1,311,046 |
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Investment in Xtreme Companies, Inc., net of valuation allowance |
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Property and equipment, net |
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2,138,703 |
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1,036,994 |
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309,068 |
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Total Assets |
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$ |
39,776,535 |
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$ |
13,627,196 |
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$ |
1,620,114 |
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LIABILITIES & SHAREHOLDERS EQUITY |
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LIABILITIES |
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Current Liabilities: |
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Accounts payable |
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$ |
14,688,855 |
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$ |
1,867,363 |
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$ |
715,066 |
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Other accrued liabilities |
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1,898,020 |
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1,354,466 |
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75,500 |
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Contract liabilities |
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1,686,062 |
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729,461 |
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180,384 |
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Loans payable |
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7,500,000 |
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360,975 |
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536,162 |
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Line of Credit |
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4,000,000 |
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176,961 |
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Deferred revenue |
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12,598,921 |
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2,645,716 |
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209,175 |
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Total Current Liabilities |
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38,371,858 |
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10,957,981 |
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1,893,248 |
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Long-term debt: |
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Other long term liabilities |
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110,732 |
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32,461 |
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Total Liabilities |
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38,371,858 |
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11,068,713 |
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1,925,709 |
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Preferred stock series D, $0.001 par value, authorized: 20,000 shares, issued and outstanding: 2005, 13,004 shares; 2004, 0 shares; 2003, 0 shares |
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7,901,438 |
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SHAREHOLDERS EQUITY |
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Preferred stock: $0.001 par value, authorized: 10,000,000 shares |
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Preferred stock Series A, $0.001 par value, authorized: 1,600 shares issued and outstanding: 2005, 0 shares; 2004, 0 shares; 2003, 0 shares |
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Preferred stock series B, $0.001 par value, authorized: 25 shares, issued and outstanding: 2005, 0 shares; 2004, 19.5 shares; 2003, 10 shares |
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Preferred stock series C, $0.001 par value, authorized: 150 shares, issued and outstanding: 2005, 0 shares; 2004, 0 shares; 2003, 130 shares |
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Common stock, $0.001 par value $0.001, authorized: 300,000,000, issued and outstanding: 2005, 36,144,216 shares; 2004, 19,357,938 shares; 2003, 10,190,021 shares |
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36,114 |
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19,358 |
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10,190 |
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Warrants |
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5,780,952 |
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2,602,800 |
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4,862,765 |
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Beneficial Conversion Feature |
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0 |
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19,102,306 |
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282,890 |
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Additional Paid-in Capital |
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38,714,893 |
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35,874,565 |
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18,805,887 |
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Accumulated deficit |
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(51,028,720 |
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(55,040,546 |
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(24,267,327 |
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Total Shareholders Equity |
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(6,496,761 |
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2,558,483 |
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(305,595 |
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Total Liabilities and Shareholders Equity |
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$ |
39,776,535 |
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$ |
13,627,196 |
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$ |
1,620,114 |
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The accompanying Notes are an integral part of these financial statements.
3
FORCE PROTECTION, INC. AND SUBSIDIARY
CONSOLIDATED INCOME STATEMENT
For the Years Ended December 31, 2005, 2004 and 2003
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2005 |
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2004 |
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2003 |
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Restated |
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Restated |
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Restated |
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Net sales |
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$ |
49,712,829 |
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$ |
10,272,757 |
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$ |
6,247,285 |
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Cost of sales |
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46,428,615 |
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11,266,998 |
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4,442,418 |
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Gross profit |
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3,284,214 |
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(994,241 |
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1,804,867 |
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General and administrative expense |
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18,914,277 |
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10,844,342 |
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4,861,584 |
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Operating loss |
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(15,630,063 |
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(11,838,583 |
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(3,056,717 |
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Other income |
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102,941 |
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569,760 |
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41,668 |
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Interest expense |
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(1,708,291 |
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(684,980 |
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(222,894 |
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Realized gain on derivative liability |
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2,830,791 |
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Impairment losses goodwill |
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(1,917,747 |
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Loss from continuing operations before taxes |
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(14,404,622 |
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(11,953,803 |
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(5,155,690 |
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Loss from discontinued operations |
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(2,932,179 |
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Net loss |
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$ |
(14,404,622 |
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$ |
(11,953,803 |
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$ |
(8,087,869 |
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Net loss |
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$ |
(14,404,622 |
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$ |
(11,953,803 |
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$ |
(8,087,869 |
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Accretion of Series D 6% convertible preferred stock |
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(2,041,697 |
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Preferred stock dividends |
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(778,530 |
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Net loss available to common shareholders |
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$ |
(17,224,849 |
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$ |
(11,953,803 |
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$ |
(8,087,869 |
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Basic loss per common share before discontinued operations |
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$ |
(0.51 |
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$ |
(0.62 |
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$ |
(0.63 |
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Basic loss per common share from discontinued operations |
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(0.36 |
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Basic loss per common share |
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$ |
(0.51 |
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$ |
(0.62 |
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$ |
(0.99 |
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Diluted loss per common share before discontinued operations |
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$ |
(0.51 |
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$ |
(0.62 |
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$ |
(0.63 |
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Diluted loss per common share from discontinued operations |
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(0.36 |
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Diluted loss per common share |
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$ |
(0.51 |
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$ |
(0.62 |
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$ |
(0.99 |
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Weighted-average shares used to compute: |
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Basic loss per share |
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33,926,573 |
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19,357,939 |
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8,185,153 |
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Diluted loss per share |
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33,926,573 |
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19,357,939 |
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8,185,153 |
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The accompanying Notes are an integral part of these financial statements.
4
FORCE
PROTECTION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
For the Years Ended December 31, 2005, 2004 and 2003
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Series B |
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Series C |
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Common Stock |
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Shares |
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Par |
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Shares |
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Par |
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Shares |
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Par |
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Warrants |
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BCF |
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Additional |
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Accumulated |
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Total |
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Balance, December 31, 2002 |
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10 |
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$ |
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32 |
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$ |
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5,963,202 |
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$ |
5,963 |
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$ |
2,210,577 |
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$ |
199,598 |
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$ |
14,483,478 |
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$ |
(16,096,166 |
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$ |
803,450 |
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Issuance of common stock for cash |
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2,429,272 |
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2,429 |
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2,652,188 |
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312,083 |
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2,966,700 |
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Issuance of common stock for conversion of debt |
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264,804 |
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265 |
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377,185 |
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377,450 |
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Issuance of common stock for services |
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738,791 |
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740 |
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1,232,169 |
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1,232,909 |
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Issuance of common stock for settlement |
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139,441 |
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139 |
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133,724 |
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133,863 |
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Issuance of common stock for compensation |
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166,065 |
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166 |
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272,856 |
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273,022 |
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Issuance of common stock for director compensation |
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75,000 |
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75 |
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130,425 |
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130,500 |
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Issuance of common stock for financing placement |
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109,279 |
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109 |
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(109 |
) |
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Revaluation of TSG acquisition |
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720,000 |
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720,000 |
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Issuance of preferred stock for cash |
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14 |
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140,000 |
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140,000 |
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|
|
|
|
|
|
|
||||||||
Issuance of preferred stock for conversion of debt |
|
|
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
280,000 |
|
|
|
280,000 |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Issuance of preferred stock for interest |
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
9,064 |
|
|
|
9,064 |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Issuance of preferred stock for services |
|
|
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
661,720 |
|
|
|
661,720 |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Issuance of preferred stock for compensation |
|
|
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
103,596 |
|
|
|
103,596 |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Redemption of preferred stock |
|
|
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
(50,000 |
) |
|
|
(50,000 |
) |
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Change in Beneficial Conversion Feature |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,292 |
|
|
|
(83,292 |
) |
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Common shares to be cancelled |
|
|
|
|
|
|
|
|
|
304,167 |
|
304 |
|
|
|
|
|
(304 |
) |
|
|
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,087,869 |
) |
(8,087,869 |
) |
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Balance, December 31, 2003 |
|
10 |
|
$ |
|
|
132 |
|
$ |
|
|
10,190,021 |
|
$ |
10,190 |
|
$ |
4,862,765 |
|
$ |
282,890 |
|
$ |
18,805,887 |
|
$ |
(24,267,327 |
) |
$ |
(305,595 |
) |
5
|
|
Series B |
|
Series C |
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||
|
|
Shares |
|
Par |
|
Shares |
|
Par |
|
Shares |
|
Par |
|
Warrants |
|
BCF |
|
Additional |
|
Accumulated
|
|
Total |
|
||||||||
Balance, December 31, 2003 |
|
10 |
|
$ |
|
|
132 |
|
$ |
|
|
10,190,021 |
|
$ |
10,190 |
|
$ |
4,862,765 |
|
$ |
282,890 |
|
$ |
18,805,887 |
|
$ |
(24,267,327 |
) |
$ |
(305,595 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Issuance of common stock for cash |
|
|
|
|
|
|
|
|
|
2,982,717 |
|
2,983 |
|
|
|
|
|
7,200,234 |
|
|
|
7,203,217 |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Issuance of common stock for third party services |
|
|
|
|
|
|
|
|
|
163,501 |
|
163 |
|
|
|
|
|
496,793 |
|
|
|
496,956 |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Issuance of common stock for compensation - directors & employees |
|
|
|
|
|
|
|
|
|
616,682 |
|
617 |
|
|
|
|
|
1,431,187 |
|
|
|
1,431,804 |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Issuance of common stock for cash (Warrant net change) |
|
|
|
|
|
|
|
|
|
2,757,618 |
|
2,758 |
|
(2,259,965 |
) |
|
|
6,352,054 |
|
|
|
4,094,847 |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Cancellation of common shares |
|
|
|
|
|
|
|
|
|
(304,167 |
) |
(304 |
) |
|
|
|
|
304 |
|
|
|
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Issuance of common shares for debt |
|
|
|
|
|
|
|
|
|
20,421 |
|
20 |
|
|
|
|
|
124,956 |
|
|
|
124,976 |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Conversion of preferred stock to common stock |
|
(1 |
) |
|
|
(80 |
) |
|
|
2,931,145 |
|
2,931 |
|
|
|
|
|
(2,931 |
) |
|
|
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Conversion between preferred Series B and Series C |
|
11 |
|
|
|
(105 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Change in Beneficial Conversion Feature |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,819,416 |
|
|
|
(18,819,416 |
) |
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Issuance of preferred stock for cash |
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
10,000 |
|
|
|
10,000 |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Issuance of preferred stock for compensation |
|
|
|
|
|
38 |
|
|
|
|
|
|
|
|
|
|
|
1,316,081 |
|
|
|
1,316,081 |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Issuance of preferred stock for conversion of debt |
|
|
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
200,000 |
|
|
|
200,000 |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Rescission and redemption of preferred stock |
|
|
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
(60,000 |
) |
|
|
(60,000 |
) |
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,953,803 |
) |
(11,953,803 |
) |
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Balance, December 31, 2004 |
|
20 |
|
$ |
|
|
|
|
$ |
|
|
19,357,938 |
|
$ |
19,358 |
|
$ |
2,602,800 |
|
$ |
19,102,306 |
|
$ |
35,874,565 |
|
$ |
(55,040,546 |
) |
$ |
2,558,483 |
|
6
|
|
Series B |
|
Series C |
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||
|
|
Shares |
|
Par |
|
Shares |
|
Par |
|
Shares |
|
Par |
|
Warrants |
|
BCF |
|
Additional |
|
Accumulated |
|
Total |
|
||||||||
Balance, December 31, 2004 |
|
20 |
|
$ |
|
|
|
|
$ |
|
|
19,357,938 |
|
$ |
19,358 |
|
$ |
2,602,800 |
|
$ |
19,102,306 |
|
$ |
35,874,565 |
|
$ |
(55,040,546 |
) |
$ |
2,558,483 |
|
Issuance of common stock for cash |
|
|
|
|
|
|
|
|
|
185,321 |
|
185 |
|
|
|
|
|
513,806 |
|
|
|
513,991 |
|
||||||||
Issuance of common stock for compensation |
|
|
|
|
|
|
|
|
|
51,616 |
|
52 |
|
|
|
|
|
125,357 |
|
|
|
125,409 |
|
||||||||
Issuance of common stock for settlement agreements |
|
|
|
|
|
|
|
|
|
53,467 |
|
53 |
|
|
|
|
|
144,842 |
|
|
|
144,895 |
|
||||||||
Issuance of common stock for interest |
|
|
|
|
|
|
|
|
|
14,876 |
|
15 |
|
|
|
|
|
20,626 |
|
|
|
20,641 |
|
||||||||
Issuance of common stock for Series D dividends |
|
|
|
|
|
|
|
|
|
281,697 |
|
282 |
|
|
|
|
|
418,148 |
|
(418,430 |
) |
|
|
||||||||
Issuance of common stock to round up post split shares |
|
|
|
|
|
|
|
|
|
3,079 |
|
3 |
|
|
|
|
|
6,075 |
|
|
|
6,078 |
|
||||||||
Issuance of common stock for cash-warrants |
|
|
|
|
|
|
|
|
|
114,376 |
|
114 |
|
(122,903 |
) |
|
|
334,418 |
|
|
|
211,629 |
|
||||||||
Warrant issued for Series D placement |
|
|
|
|
|
|
|
|
|
|
|
|
|
200,071 |
|
|
|
(200,071 |
) |
|
|
|
|
||||||||
Conversion of Series D preferred stock to common stock |
|
|
|
|
|
|
|
|
|
1,331,429 |
|
1,331 |
|
|
|
|
|
1,440,694 |
|
|
|
1,442,025 |
|
||||||||
Accretion of Series D preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,041,697 |
) |
|
|
(2,041,697 |
) |
||||||||
Reclassification of Series D warrants from liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
5,173,409 |
|
|
|
|
|
|
|
5,173,409 |
|
||||||||
Cash dividends for Series D |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(100,020 |
) |
(100,020 |
) |
||||||||
Dividends for Series Daccrued |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(260,080 |
) |
(260,080 |
) |
||||||||
Conversion of Series B preferred stock to common stock |
|
(20 |
) |
|
|
|
|
|
|
14,803,750 |
|
14,804 |
|
|
|
|
|
(14,804 |
) |
|
|
|
|
||||||||
Change in Beneficial Conversion Feature |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,102,306 |
) |
|
|
19,102,306 |
|
|
|
||||||||
Common share grants cancelled |
|
|
|
|
|
|
|
|
|
(83,333 |
) |
(83 |
) |
|
|
|
|
(209,916 |
) |
|
|
(209,999 |
) |
||||||||
Stock based compensation (SFAS 123) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92,671 |
|
92,671 |
|
||||||||
Warrants-net (expired & issued) not including Series D |
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,072,425 |
) |
|
|
2,302,850 |
|
|
|
230,425 |
|
||||||||
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,404,621 |
) |
(14,404,621 |
) |
||||||||
Balance, December 31, 2005 |
|
|
|
$ |
|
|
|
|
$ |
|
|
36,114,216 |
|
$ |
36,114 |
|
$ |
5,780,952 |
|
$ |
|
|
$ |
38,714,893 |
|
$ |
(51,028,720 |
) |
$ |
(6,496,761 |
) |
7
FORCE
PROTECTION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2005,
2004 AND 2003
|
|
2005 |
|
2004 |
|
2003 |
|
|||
|
|
Restated |
|
Restated |
|
Restated |
|
|||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|||
Net loss |
|
(14,404,622 |
) |
(11,953,803 |
) |
(8,087,869 |
) |
|||
Loss from discontinued operations |
|
|
|
|
|
2,932,179 |
|
|||
Loss from continuing operations |
|
(14,404,622 |
) |
(11,953,803 |
) |
(5,155,690 |
) |
|||
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |
|
|
|
|
|
|
|
|||
Depreciation and amortization |
|
386,152 |
|
207,271 |
|
104,334 |
|
|||
Realized gain on derivative liability |
|
(2,830,791 |
) |
|
|
|
|
|||
Impairment loss goodwill |
|
|
|
|
|
1,634,873 |
|
|||
Stock issued for services and compensation |
|
(84,590 |
) |
3,244,841 |
|
1,636,931 |
|
|||
Stock issued for settlement |
|
144,895 |
|
|
|
133,863 |
|
|||
Stock based compensation |
|
92,671 |
|
|
|
|
|
|||
Stock issued for interest |
|
20,641 |
|
|
|
|
|
|||
Change in assets and liabilities: |
|
|
|
|
|
|
|
|||
Decrease (increase) in accounts receivable |
|
(2,612,385 |
) |
(909,041 |
) |
21,310 |
|
|||
Decrease (increase) in inventories |
|
(23,456,863 |
) |
(8,202,576 |
) |
(640,874 |
) |
|||
Decrease (increase) in other current assets |
|
(25,279 |
) |
(181,910 |
) |
86,874 |
|
|||
Increase (decrease) in accounts payable |
|
12,821,492 |
|
1,152,297 |
|
(197,168 |
) |
|||
Increase (decrease) in other accrued liabilities |
|
543,554 |
|
1,603,942 |
|
(47,367 |
) |
|||
Increase (decrease) in contract liabilities |
|
956,601 |
|
549,077 |
|
(244,563 |
) |
|||
Deferred Revenue |
|
9,953,205 |
|
2,436,541 |
|
209,175 |
|
|||
Net cash used in operating activities |
|
(18,495,319 |
) |
(12,053,361 |
) |
(2,458,802 |
) |
|||
|
|
|
|
|
|
|
|
|||
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|||
Purchase of property and equipment |
|
(1,511,337 |
) |
(935,197 |
) |
(76,878 |
) |
|||
Proceeds from sale of assets |
|
62,721 |
|
|
|
|
|
|||
Net cash used in investing activities |
|
(1,448,566 |
) |
(935,197 |
) |
(76,878 |
) |
|||
|
|
|
|
|
|
|
|
|||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|||
Proceeds from convertible debt |
|
|
|
|
|
|
|
|||
Issuance of common stock, net |
|
513,991 |
|
11,298,064 |
|
2,186,350 |
|
|||
Issuance of Series D preferred stock, net |
|
15,305,965 |
|
|
|
|
|
|||
Issuance of Series C preferred stock, net |
|
|
|
|
|
140,000 |
|
|||
Redemption of preferred stock |
|
|
|
(50,000 |
) |
(50,000 |
) |
|||
Preferred Stock Dividends paid |
|
(100,020 |
) |
|
|
|
|
|||
Issuance of common stock for cash - warrants |
|
211,629 |
|
|
|
|
|
|||
Proceeds from (Payments on) loans, net |
|
7,139,025 |
|
(175,187 |
) |
479,355 |
|
|||
Proceeds from (Payments on) Line of Credit, net |
|
(4,000,000 |
) |
3,823,039 |
|
(50,453 |
) |
|||
Proceeds from (Payments on) long term liabilities |
|
(110,732 |
) |
78,271 |
|
(35,271 |
) |
|||
Payments on Capitalized lease |
|
(62,870 |
) |
|
|
|
|
|||
Net cash provided by Financing Activities |
|
18,896,988 |
|
14,974,187 |
|
2,669,981 |
|
|||
Net increase (decrease) in cash |
|
(1,046,897 |
) |
1,985,629 |
|
134,301 |
|
|||
|
|
|
|
|
|
|
|
|||
CASHbeginning of period |
|
$ |
2,264,406 |
|
$ |
278,777 |
|
$ |
144,476 |
|
CASHend of period |
|
$ |
1,217,509 |
|
$ |
2,264,406 |
|
$ |
278,777 |
|
|
|
|
|
|
|
|
|
|||
Supplemental cashflow information |
|
|
|
|
|
|
|
|||
Interest Paid |
|
$ |
1,010,160 |
|
$ |
454,512 |
|
$ |
38,726 |
|
Taxes Paid |
|
|
|
|
|
|
|
The accompanying Notes are an integral part of these financial statements.
8
FORCE
PROTECTION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These notes are an integral part of the Companys financial statements set forth above.
NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (RESTATED)
2005, 2004 AND 2003 RESTATEMENT
As discussed in the explanatory note to this Form 10-K/A and in Note 1 to the Companys financial statements included herein, the Company is restating its financial statements and other financial information for the years ended 2005, 2004 and 2003, and financial information for each of the quarters in the years 2005, 2004 and 2003. The restatement adjusts the Companys accounting for preferred stock and warrants issued to investors, accounting for stock-based compensation to employees and non-employees and accounting for rent expense on a straight-line basis.
The following tables set forth the effects of the error in accounting for the valuation of preferred stock and warrants issued to investors, accounting for stock-based compensation to employees and accounting for rent expense on a straight-line basis.
|
(Increase)/Decrease in net loss |
|
||||||||
|
|
2005 |
|
2004 |
|
2003 |
|
|||
|
|
|
|
|
|
|
|
|||
Total adjustment |
|
$ |
2,161,046 |
|
$ |
(1,707,970 |
) |
$ |
(2,766,245 |
) |
|
|
|
|
|
|
|
|
|||
Previously reported net loss |
|
$ |
(16,565,668 |
) |
$ |
(10,245,833 |
) |
$ |
(5,321,624 |
) |
|
|
|
|
|
|
|
|
|||
Percent variation from previously reported net loss |
|
13.0 |
% |
-16.7 |
% |
-52.0 |
% |
|
(Increase)/decrease in net loss |
|
|||||||||||
|
|
2005 |
|
||||||||||
Quarter |
|
4th Qtr. |
|
3rd Qtr. |
|
2nd Qtr. |
|
1st Qtr. |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Total adjustment |
|
$ |
(46,309 |
) |
$ |
(61,272 |
) |
$ |
(777,977 |
) |
$ |
3,046,604 |
|
Previously reported net income (loss) |
|
$ |
(7,108,180 |
) |
$ |
(5,605,211 |
) |
$ |
130,633 |
|
$ |
(3,982,910 |
) |
Percent variation from previously reported net loss |
|
0.7 |
% |
1.1 |
% |
-595.5 |
% |
-76.5 |
% |
|
(Increase)/decrease in net loss |
|
|||||||||||
|
|
2004 |
|
||||||||||
Quarter |
|
4th Qtr. |
|
3rd Qtr. |
|
2nd Qtr. |
|
1st Qtr. |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Total adjustment |
|
$ |
(375,754 |
) |
$ |
(649,028 |
) |
$ |
34,159 |
|
$ |
(717,347 |
) |
Previously reported net loss |
|
$ |
(3,854,612 |
) |
$ |
(3,236,792 |
) |
$ |
(1,957,990 |
) |
$ |
(1,196,439 |
) |
Percent variation from previously reported net loss |
|
9.7 |
% |
20.1 |
% |
-1.7 |
% |
60.0 |
% |
9
|
(Increase)/decrease in net loss |
|
|||||||
|
|
2003 |
|
||||||
Quarter |
|
4th Qtr. |
|
3rd Qtr. |
|
2nd Qtr. |
|
1st Qtr. |
|
|
|
|
|
|
|
|
|
|
|
Total adjustment |
|
$ (720,718 |
) |
$ (254,946 |
) |
$ (420,309 |
) |
$ (1,370,272 |
) |
Previously reported net loss |
|
$ (1,748,243 |
) |
$ 183,246 |
|
$ (1,972,958 |
) |
$ (1,783,669 |
) |
Percent variation from previously reported net loss |
|
41.2 |
% |
-139.1 |
% |
21.3 |
% |
76.8 |
% |
Nature of the Business
Force Protection, Inc. and subsidiaries (the Company) designs, manufactures and markets blast and ballastics armored vehicles for sale to military customers.
10
Principles of Consolidation
The consolidated financial statements include the accounts of Force Protection, Inc., and its two wholly owned subsidiaries, Force Protection Industries, Inc. (formerly Technical Solutions Group, Inc.) and TSG International, Inc. All inter-company balances and transactions are eliminated in consolidation.
General Statement
The Securities and Exchange Commission has issued Financial Reporting release No. 60, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, or FRR 60, suggesting companies provide additional disclosure and commentary on their most critical accounting policies. In FRR 60, the SEC defined the most critical accounting policies as the ones that are most important to the portrayal of a companys financial condition and operating results, and require management to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. The methods, estimates and judgments the Company uses in applying these most critical accounting policies have a significant impact on the results the Company reports in its financial statements.
We believe the following critical accounting policies and procedures, among others, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:
· Revenue recognition;
· Inventory cost and Associated Reserves; and
· Allocation of direct and indirect cost of sales.
· Valuation of derivative instruments
· Valuation of preferred stock and common stock issuances in lieu of cash compensation
Revenue Recognition
The Companys revenue is derived principally from the sale of its vehicles and associated spare parts and training services. Revenue from product sales and spare part sales, net of an allowance for contractual adjustments, is recognized when the products or spare parts are delivered to and formally accepted by the customer. The Company defines formal acceptance as taking place when a representative of the United States government signs the United States Form DD250 entitled Material Inspection and Receiving Report which under the Federal Acquisition Regulations signifies contractual inspection and acceptance of the work performed by the contractor. It also acts as the contractual invoice creating payment liability on the United States Government. In accordance with standard industry practice, there is a representative from the United States Defense Contractor Manufacturing Agency (DCMA) acting as a contractual representative of the United States Government present at the Companys facilities. This DCMA representative inspects each vehicle as it is delivered by the Company and upon confirmation of the vehicles conformity with the contractual specifications the inspector signs the Form DD250 and formally accepts delivery of the vehicle. The Company only recognizes revenues arising from its U.S. Government contracts upon execution of the Form DD250 by the DCMA inspector. Under some of the Companys U.S. Government contracts, it receives performance based payments based on completion of specific milestones stipulated under the contract (for example, delivery of raw material to our Ladson facility). These payments are recorded as deferred revenue and carried on the Companys balance sheet as until the final delivery of the products and formal acceptance by the U.S. Government pursuant to the Form DD250. Upon acceptance of the products and the execution of the Form DD250, the Company recognizes the full sale price of the product as revenue.
Revenues from services provided are recorded in accordance with specific contractual terms. Services have historically consisted of the Company providing on-site personnel on an as-needed basis in a timely manner, and have generally been provided in foreign locations.
The Company negotiates contracts with its customers which may include revenue arrangements with multiple deliverables, as outlined by Emerging Issues Task Force No. 00-21 (EITF 00-21). The Companys accounting policies are defined such that each deliverable under a contract is accounted for separately. Historically, the Company has negotiated and signed contracts with its customers which outline the contract amount and specific terms and conditions associated with each deliverable. Allowance for contractual adjustments is recorded as a reduction to revenue.
11
Allowance for Contractual Adjustments
The Companys contracts with the U.S. Government are negotiated as a sole source or open competition bid process. A sole source process is one in which the Company is the sole bidder for the contract. An open competition could involve various bidders. Once a bid is accepted, the U.S. Government expects work to commence immediately. An open competition results in a final agreed-upon contract price which the U.S. Government has agreed to. A sole source process results in an agreed-upon contract with the U.S. Government, subject to an adjustment process at a later date, termed the definitization process. The definitization process commences upon delivery of a product, whereby the U.S. Government completes a detailed review of the Companys costs involved in the manufacturing and delivery process. The U.S. Government and the Company then work to determine an adequate and fair final contract price. As a result of the potential adjustments related to the definization process, the Company maintains an allowance for contractual adjustments account. This account is reviewed on a monthly basis to determine adequate adjustments, if necessary. The allowance is maintained and deemed adequate based on the analysis of historical data and calculation of pro-rata percentages of current contracts in place, which remain subject to the definitization process.
The Company does not maintain an allowance for doubtful accounts. The Companys significant sales for 2005, 2004, and 2003 involved contracts signed with the U.S. Government. The Company does not believe an allowance for doubtful accounts is necessary due to the credit-worthiness of the U.S. Government.
Historically, the Company has not encountered sales returns. The Company does not anticipate sales returns in the future.
Research and Development
Research, development, and engineering costs are expensed as incurred, in accordance with SFAS No. 2, Accounting for Research and Development Costs. Research, development, and engineering expenses primarily include payroll and headcount related costs, contractor fees, infrastructure costs, and administrative expenses directly related to research and development support.
Cash Equivalents
For purposes of reporting cash flows, the Company considers all highly liquid debt instruments purchased with maturity of three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. The cost is determined under the first-in-first-out method base (FIFO) valuation method. An allowance for excess or obsolete inventory is maintained by the Company. The Company determines an appropriate balance in this account based on historical data and specific identification of certain inventory items.
Property, Plant and Equipment
Property and equipment are stated at cost or at the value of the operating agreement. The Company capitalizes additions and improvements which include all material, labor and engineering cost to design, install or improve the asset. Routine repairs and maintenance are expensed as incurred. Depreciation and amortization are computed using the straight-line method over the following estimated useful lives:
Building and improvements |
|
20 years |
Furniture and fixtures |
|
3 years |
Machinery and equipment |
|
7 years |
Tooling and molds |
|
7 years |
Vehicles |
|
5 years |
Impairment of Long-Lived Assets
The Company reviews long-lived assets to be held and used for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, the Company would recognize an impairment loss based on the estimated fair value of the asset.
12
Goodwill
Under SFAS No. 142, Goodwill and other Intangible Assets, all goodwill amortization ceased effective January 1, 2002. Rather, goodwill is now subject to only impairment reviews. A fair-value based test is applied at the reporting level. This test requires various judgments and estimates. A goodwill impairment loss will be recorded for any goodwill that is determined to be impaired. Goodwill is tested for impairment at least annually.
The Company acquired Goodwill, which represents the excess of purchase price over fair value net assets, in the acquisition of Technical Solutions Group, Inc. in June 2002. The Company follows SFAS 142, Goodwill and Intangible Assets, which requires the Company to test for potential impairment annually. When the carrying value exceeds fair value, the impairment is the difference between the carrying value of goodwill and the implied value. The implied value of goodwill is the difference between the fair value for the unit as a whole and the value of individual assets and liabilities using an as-if purchase price.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. The asset and liability method accounts for deferred income taxes by applying enacted statutory rates in effect for periods in which the difference between the book value and the tax bases of assets and liabilities are scheduled to reverse. The resulting deferred tax asset or liability is adjusted to reflect changes in tax laws or rates. Because the Company has incurred losses from operations, no benefit is realized for the tax effect of the net operating loss carry-forward due to the uncertainty of its realization.
Stock-Based Compensation
The Company applied the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations in accounting for those plans through June 30, 2005.
In December 2004, FASB issued Statement No. 123(R), Share-Based Payment, which establishes accounting standards for transactions in which an entity receives employee services in exchange for (a) equity instruments of the entity or (b) liabilities that are based on the fair value of the entitys equity instruments or that may be settled by the issuance of equity instruments. Effective on July 1, 2005, the Company adopted SFAS 123(R), which requires the Company to recognize the grant-date fair value of stock options and equity based compensation issued to employees in the statement of operations. The statement also requires that such transactions be accounted for using the fair-value-based method, thereby eliminating use of the intrinsic method of accounting in APB No. 25, Accounting for Stock Issued to Employees, which was permitted under SFAS 123, as originally issued.
Loss per Share
The Company utilizes SFAS No. 128, Earnings per Share to calculate gain/loss per share. Basic gain/loss per share is computed by dividing the gain/loss available to common stockholders (as the numerator) by the weighted-average number of common shares outstanding (as the denominator). Diluted gain/loss per share is computed similar to basic gain/loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if all potential common stock (including common stock equivalents) had all been issued, and if such additional common shares were dilutive. Under SFAS No. 128, if the additional common shares are dilutive, they are not added to the denominator in the calculation. Where there is a loss, the inclusion of additional common shares is anti-dilutive (since the increased number of shares reduces the per share loss available to common stock holders). For all periods, the Company has experienced a net loss, and thus common stock equivalents have been excluded from the calculation of diluted loss per share.
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates and assumptions are periodically reviewed and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary.
13
Reclassifications
Certain reclassifications to the Companys balance sheet and income statement have been made in 2005, in order for the 2004 and 2003 financial statements to conform to the presentation of these financial statements. These reclassifications did not impact the Companys net loss for the years ended December 31, 2005, 2004 and 2003, respectively.
Recent Accounting Pronouncements
In November 2004, the FASB issued Statement No. 151, Inventory Costs, to amend the guidance in Chapter 4, Inventory Pricing, of the FASB Accounting Research Bulletin No. 43, Restatement and Revision of Accounting Research Bulletins, which will become effective for the Company in fiscal year 2006. Statement No. 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted materials. The Statement requires that those items be recognized as current-period charges. Additionally, Statement No. 151 requires that allocation of fixed production overhead to the costs of conversion be based on normal capacity of the production facility. The Company is currently following Statement No. 151 and does not believe that Statement No. 151 will have a significant impact on its financial condition and results of operations.
In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations (FIN 47). FIN 47 provides guidance relating to the identification of and financial reporting for legal obligations to perform an asset retirement activity. The Interpretation requires recognition of a liability for the fair value of a conditional asset retirement obligation when incurred if the liabilitys fair value can be reasonably estimated. FIN 47 also defines when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The provision is effective no later than the end of fiscal years ending after December 15, 2005. The Company will adopt FIN 47 beginning the first quarter of fiscal year 2006 and does not believe the adoption will have a material impact on its consolidated financial position or results of operations or cash flows.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (SFAS 154) which replaces Accounting Principles Board Opinions No. 20 Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial StatementsAn Amendment of APB Opinion No. 28. SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application, or the latest practicable date, as the required method for reporting a change in accounting principle and the reporting of a correction of an error. SFAS 154 is effective for accounting changes and a correction of errors made in fiscal years beginning after December 15, 2005 and is required to be adopted by the Company in the first quarter of 2006. The Company is currently evaluating the effect that the adoption of SFAS 154 will have on its results of operations and financial condition but does not expect it to have a material impact.
In June 2005, the Emerging Issues Task Force, or EITF, reached a consensus on Issue 05-6, Determining the Amortization Period for Leasehold Improvements, which requires that leasehold improvements acquired in a business combination or purchased subsequent to the inception of a lease be amortized over the lesser of the useful life of the assets or a term that includes renewals that are reasonably assured at the date of the business combination or purchase. EITF 05-6 is effective for periods beginning after July 1, 2005. We do not expect the provisions of this consensus to have a material impact on the financial position, results of operations or cash flows.
NOTE 2GOING CONCERN
The Companys financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the normal course of business. The Company had cumulative recurring losses of $50,668,620 as of December 31, 2005 and negative cash flows from operations during the year ending December 31, 2005 of $18,495,319. The ability of the Company to operate as a going concern depends upon its ability to obtain outside sources of working capital and/or generate positive cash flow from operations. Management is aware of these requirements and is undertaking specific measures to address these liquidity concerns. Specifically, to increase revenues the Company has focused on increasing its production capacity to maximize revenues from vehicles sales and has continued to expand its integrated logistics support function to meet the increased demand for spare parts and other support services. The efforts by the Company in these regards have been dramatic, as the Company has been able to increase its average monthly vehicle production from four vehicles per month to the current average of 15 vehicles per month, resulting in an annual production increase of 407% from 2004. The Company is also undertaking to increase its gross profitability by reducing the direct costs to manufacture its products, by focusing on continual improvement of manufacturing processes and reducing rework and waste resulting from internal inefficiencies. At the same time, the Company is working to reduce the percentage of its G&A expenses with respect to revenues through workforce balancing and cost planning initiatives. The Company
14
anticipates that these efforts will lead to positive cash flows and profitability during 2006. Finally, to provide additional liquidity, the Company continues to explore various asset-based debt financing options, including long term loans, revolving lines of credit and accounts receivable factoring arrangements. Notwithstanding the foregoing, there can be no assurance that the Company will be successful in obtaining such financing, that it will have sufficient funds to execute its business plan or that it will generate positive operating results. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.
NOTE 3 CONCENTRATIONS
The Companys future operations and continued expansion is subject to a significant concentration risk. During the years ended December 31, 2005, 2004 and 2003, the Companys revenues from military units of the U.S. Government accounted for 100% of total revenues, respectively. The Companys accounts receivable from military units of the U.S. Government at December 31, 2005, 2004 and 2003 amounted to 100% of total accounts receivable, respectively. However, the Company currently has a significant backlog and has signed contracts to provide additional products of significant value to the U.S. Government and its first international customer, the British Ministry of Defense.
NOTE 4 ACCOUNTS RECEIVABLES DEFINITIZATION
The majority of the Companys contracts are with the United States Government and as such they are public sector contracts subject to the Federal Acquisition Regulations set out at Title 41 of the United States Code (the FAR), and may result either from competitive bidding or may be awarded as sole source contracts subject to definitization as provided under FAR Section 252.217-7027.
Following the award of a sole source contract, a central component of the definitization process is the negotiation and finalization of the contract price between the contractor and the United States contracting officer. As part of this process, the parties make a mutual determination of the direct material and labor costs for the work based upon the bill of materials and other purchasing information and then the parties mutually agree upon rates for the indirect labor costs and the General and Administrative costs and upon a fee (or profit). While the direct material costs and labor can be established through objective evidence, the rates and fee are more subjective and are based upon an analysis of multiple factors including historical performance data and projected operational factors. The contractor has the right to submit proposed rates and fee, but these are subject to final review and approval by the contracting officer, who may insist on using alternate rates and fee. As provided in section 252.217-7027(c):
If agreement on a definitive contract action to supersede this undefinitized contract action is not reached by the target date in paragraph (b) of this clause, or within any extension of it granted by the Contracting Officer, the Contracting Officer may, with the approval of the head of the contracting activity, determine a reasonable price or fee in accordance with subpart 15.4 and part 31 of the FAR, subject to Contractor appeal as provided in the Disputes clause.
Finally, although both parties make an effort to definitize the contract as quickly as possible, the process is time consuming and can take months (or even years) to complete. During the definitization process the contractor is required to perform the contract work and to make deliveries under the contract before the final contract price has been established. For this reason, as part of the original letter award, the contractor provides a rough order of magnitude (ROM) price to be used for invoicing and accounting purposes pending definitization.
As a result of the potential adjustments related to the definitization process, the Company maintains an allowance for contractual adjustments account. This account is reviewed on a regular basis to determine adequate adjustments, if necessary. The allowance is evaluated and deemed adequate based on the analysis of historical data and calculation of pro-rata percentages of current contracts in place, which remain subject to the definitization process.
Below is a table detailing activity within the allowance for contractual adjustments account for the years ended December 31, 2005, 2004, and 2003 respectively.
|
Year Ended |
|
Year Ended |
|
Year Ended |
|
||||
Beginning balance |
|
$ |
|
|
$ |
|
|
$ |
|
|
Additions to allowance |
|
1,018,051 |
|
|
|
|
|
|||
Reduction to allowance |
|
|
|
|
|
|
|
|||
Ending balance |
|
$ |
1,018,051 |
|
$ |
|
|
$ |
|
|
15
The Company does not maintain an allowance for doubtful accounts. The Companys significant sales for the years ended December 31, 2005, 2004 and 2003 involved contracts signed with the U.S. Government. The Company does not believe an allowance for doubtful accounts is necessary due to the credit-worthiness of the U.S. Government.
Historically, the Company has not encountered sales returns. The Company does not anticipate sales returns in the future.
NOTE 5 INVESTMENT IN XTREME COMPANIES, INC.
On June 1, 2003, and modified on September 15, 2003, the Company sold the asset associated with its boat business to Rockwell Power Systems, Inc., which subsequently merged with Xtreme Companies, Inc, now called Challenger Powerboats, Inc., a public company traded on the Over the Counter Bulletin Board. As consideration for the sale, the Company received 1/3 of Challenger Powerboats outstanding common stock, which was distributed directly to the Companys common stock shareholders. Additionally, the Company was to receive 500 shares of Challenger Powerboats Series A preferred stock. The Company has been in communications with Challenger Powerboats but has yet to receive these shares. The Company has elected to account for the investment in Challenger Powerboats Series A preferred stock under the cost method and has provided for a full valuation allowance against the fair market value of these shares as of December 31, 2005, 2004 and 2003, respectively.
|
2005 |
|
2004 |
|
2003 |
|
||||
Challenger Powerboat Inc. Series A preferred stock |
|
$ |
|
|
$ |
|
|
$ |
|
|
Valuation Allowance |
|
( |
) |
( |
) |
( |
) |
|||
Net Investment in Challenger Powerboat Inc. |
|
$ |
|
|
$ |
|
|
$ |
|
|
NOTE 6INVENTORIES
Property, Plant and Equipment at December 31, 2005, 2004 and 2003 consisted of the following:
|
2005 |
|
2004 |
|
2003 |
|
||||
Raw materials and supplies |
|
$ |
15,222,503 |
|