UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x                              QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2007

OR

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

FOR THE TRANSITION PERIOD FROM                TO

COMMISSION FILE NUMBER: 001-33253

FORCE PROTECTION, INC.

 

9801 Highway 78, Building No. 1

Ladson, South Carolina

29456

Registrant’s telephone number:  (843) 740-7015

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

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

 

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

As of July 31, 2007, the registrant had 68,207,649 shares of common stock issued and outstanding.

Table of Contents

Part I: Financial Information
Item 1—Consolidated Financial Statements
Consolidated Statements of Operations For The Three and Six Months Ended June 30, 2007 and 2006
Consolidated Balance Sheets As of June 30, 2007 and December 31, 2006
Consolidated Statements of Cash Flows For The Six Months Ended June 30, 2007 and 2006
Notes To Consolidated Financial Statements
Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3—Quantitative and Qualitative Disclosures About Market Risk
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

 

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PART I — FINANCIAL INFORMATION

ITEM 1 — CONSOLIDATED FINANCIAL STATEMENTS

FORCE PROTECTION, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in dollars)

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2007			2006			2007			2006
Net sales		$	134,701,640		$	56,074,537		$	234,860,406		$	90,877,122
Cost of sales		101,944,855			45,917,751			179,573,991			74,082,567
		32,756,785			10,156,786			55,286,415			16,794,555
General and administrative expense		15,500,908			7,744,435			30,663,008			13,705,788
Research and development		3,305,514			641,215			8,147,333			1,304,805
Operating profit		13,950,363			1,771,136			16,476,074			1,783,962
Other income		1,106,423			20,873			2,894,516			47,922
Interest expense		(44,060		)	(818,985		)	(79,591		)	(1,626,309		)
Net earnings before taxes		15,012,726			973,024			19,290,999			205,575
Tax expense		5,385,898			—			7,185,898			—
Net earnings after taxes		9,626,828			973,024			12,105,101			205,575
Series D preferred stock dividend		—			(100,162		)	—			(261,277		)
Accretion of series D preferred stock to redemption value		—			(448,815		)	—			(933,565		)
Net earnings (loss) available to common shareholders		$	9,626,828		$	424,047		$	12,105,101		$	(989,267	)
Earnings (loss) per common share
Basic		$	0.14		$	0.01		$	0.18		$	(0.03	)
Diluted		$	0.14		$	0.01		$	0.18		$	(0.03	)
Weighted-average shares used to compute:
Basic		68,120,787			39,511,931			67,874,796			38,487,506
Diluted		68,918,528			39,511,931			68,908,746			38,487,506

 

The accompanying notes are an integral part of these financial statements.

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FORCE PROTECTION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in dollars)

		June 30,			December 31,
		2007			2006
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	37,870,579		$	156,319,004
Accounts receivable, net of allowance for contractual obligations of $12,301,428 and $6,068,087 for 2007 and 2006, respectively		91,239,318			36,011,568
Inventories		148,366,311			60,396,297
Other current assets		1,722,941			374,051
Current portion of deferred taxes		8,849,864			9,562,500
Total current assets		288,049,013			262,663,420
Long term portion of deferred taxes					2,763,991
Property and equipment, net		30,303,126			8,963,901
Intangible assets, net		1,836,111			—
Total assets		$	320,188,250		$	274,391,312
LIABILITIES & SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	68,022,122		$	38,653,813
Other accrued liabilities		5,404,961			2,968,859
Contract liabilities		4,397,653			1,850,000
Current portion of long term liabilities		221,685			71,685
Current tax liability		3,708,830			—
Deferred revenue		5,872,080			12,824,211
Total current liabilities		87,627,331			56,368,568
Long-term debt:
Other long term liabilities		428,435			167,937
Total liabilities		88,055,766			56,536,505
Commitments and Contingencies (See Note 12)
SHAREHOLDERS’ EQUITY
Preferred stock, $0.001 par value, authorized 10,000,000 shares		—			—
Common stock, $0.001 par value, 300,000,000 shares authorized, 68,207,649 shares at 6-30-2007 and 66,762,566 shares at 12-31-2006 issued and outstanding		68,208			66,763
Shares of common stock to be issued					31
Additional Paid-in Capital		251,332,091			249,694,850
Accumulated deficit		(19,267,815		)	(31,906,837		)
Total shareholders’ equity		232,132,484			217,854,807
Total liabilities and shareholders’ equity		$	320,188,250		$	274,391,312

 

The accompanying notes are an integral part of these financial statements.

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FORCE PROTECTION, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in dollars)

		Six Months Ended
		June 30
		2007			2006
		Unaudited
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings after taxes		$	12,105,101		$	205,575
Adjustments to reconcile net earnings to net cash (used in) provided by operating activities:
Depreciation and amortization		2,338,341			338,160
Deferred tax expense		3,477,068			—
Stock based compensation (FAS 123R)		860,904			362,808
Net change in definitization		6,233,341			175,989
Increase (decrease) in inventory reserve		3,284,807			1,507,659
Increase (decrease) in contract liabilities		2,547,653			944,041
Change in assets and liabilities:
Increase in accounts receivable		(61,461,091		)	(4,244,016		)
Decrease (increase) in inventories		(91,254,821		)	11,145,138
Increase in other current assets		(1,314,357		)	(26,682		)
Increase in accounts payable		29,368,309			7,211,839
Increase (decrease) in other accrued liabilities		2,436,102			(85,112		)
Increase in tax liability		3,708,830			—
Increase in deferred revenue		(6,952,131		)	(12,383,351		)
Net cash (used in) provided by operating activities		(94,621,944		)	5,152,048
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment—intangibles		(2,000,000		)	—
Purchase of property and equipment		(23,513,678		)	(2,348,493		)
Net cash used in investing activities		(25,513,678		)	(2,348,493		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of options		1,276,699			—
Preferred stock dividends paid		—			(377,553		)
Increase in long term liabilities		450,000			—
Payment on loans, net		—			(5,000,000		)
Payments on capitalized leases		(39,502		)	—
Issuance of common stock, net		—			5,970,735
Net cash provided by financing activities		1,687,197			593,182
Net increase (decrease) in cash		(118,448,425		)	3,396,737
Cash and cash equivalents—beginning of period		156,319,004			1,217,509
Cash and cash equivalents—end of period		$	37,870,579		$	4,614,246
Supplemental disclosure:
Cash paid for interest		$	44,060		$	1,609,239
Cash paid for taxes		$	700,000		$	338,160
Dividends and accretion on Series D convertible preferred stock		$	—		$	1,194,842
NON CASH INVESTING AND FINANCING ACTIVITY:
Note payable issued as consideration for non-compete agreement		$	450,000		$	—

 

The accompanying notes are an integral part of these financial statements.

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FORCE PROTECTION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

These notes are an integral part of the Company’s financial statements set forth above.

NOTE 1—BASIS OF PRESENTATION

The unaudited interim consolidated financial statements and related notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC. Accordingly, certain information and footnote disclosures normally included in complete financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. The accompanying unaudited interim consolidated financial statement and related notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Form 10-K/A for Force Protection, Inc. and its subsidiaries for the year ended December 31, 2006 filed July 12, 2007.

2006 Year End Amendment and Q2 Restatement

The financial information included in this Form 10-Q referring to the three and the six months ended June 30, 2006 has been restated for the effects of stock based compensation to employees (FAS 123R) and the effect on the basic earning per share (EPS) of accretion on preferred stock and the calculation of weighted average common shares used to compute diluted earnings per share.

Effects of Restatement

Stock Based Compensation

The Company has restated its calculation of stock based compensation (SFAS 123(R)) for the three and six months ended June 30, 2006. The impact is:

		Three Months ended			Six Months ended
		June 30, 2006			June 30, 2006
Increase in general and administrative cost		$	260,991		$	362,807
Decrease in net earnings		$	260,991		$	362,807
Decrease in net earnings available to common shareholders		$	260,991		$	362,807
Decrease in basic earnings per common share		$	(0.01	)	$	(0.01	)
Decrease in diluted earnings per common share		$	(0.01	)	$	(0.01	)

 

Earnings Per Share

The Company has reviewed the Financial Accounting Standards Board’s Statement of Financial Accounting Standard No. 128—Earnings Per Share (EPS) and determined that income available to common shareholders did not include the accretion related to preferred stock and the weighted average number of common shares outstanding used to calculate diluted earnings per share did not give effect to common shares issued upon conversion for the three and six months ended June 30, 2006. The impact is:

		Three Months ended			Six Months ended
		June 30, 2006			June 30, 2006
Decrease in net earnings available to common shareholders		$	448,815		$	933,565
Decrease in basic earnings per common share		$	(0.01	)	$	(0.03	)
Decrease in diluted earnings per common share		$	(0.01	)	$	(0.03	)

 

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of the Business

Force Protection, Inc. and its subsidiaries (the “Company”) design, manufacture and market blast and ballistics armored vehicles for sale to military customers.

Principles of Consolidation

The consolidated financial statements include the accounts of Force Protection, Inc., and its two wholly-owned subsidiaries, Force Protection Industries, Inc. and Force Protection Technologies, Inc.  All inter-company balances and transactions are eliminated in consolidation.

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General Statement

The SEC has issued Financial Reporting Release No. 60, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies,” (“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 company’s 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 statement.

The Company believes the following critical accounting policies and procedures, among others, affect its more significant judgments and estimates used in the preparation of the Company’s consolidated financial statements:

Revenue Recognition

The Company’s 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 Contract Management Agency (“DCMA”) acting as a contractual representative of the United States Government present at the Company’s facilities.  This DCMA representative inspects each vehicle as it is delivered by the Company and upon confirmation of the vehicle’s conformity with the contractual specifications the inspector or other contractually designated official 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 Company’s 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 the Company’s Ladson, South Carolina facility). These payments are recorded as “deferred revenue” and carried on the Company’s balance sheet 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 Company’s 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

The Company’s 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 to which the U.S. Government has agreed.  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 Company’s 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 definitization process, the Company maintains an allowance in a 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.

Historically, the Company has not encountered sales returns.  The Company does not anticipate sales returns in the future.

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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 valuation method.  An allowance for obsolescence and shrinkage 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 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:

 

Construction in progress projects are not depreciated until placed into service.

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.

Goodwill and Other Intangible Assets

The Company has no goodwill. Intangible assets include licenses, a non-compete agreement, customer list and purchase expertise. Such intangible assets are amortized on a straight line basis over their useful life of 3 to 7 years.

Foreign Currency Transaction

Assets and liabilities in foreign currencies are translated at the exchange rate prevailing at the balance sheet date. Revenues and expenses are translated at the exchange rate prevailing at the transaction date, and the resulting gains and losses are reflected in the statements of operations. Gains and losses arising from translation of a subsidiary’s foreign currency financial statements are shown as a component of shareholders’ equity (deficit) as accumulated comprehensive income (loss).

Joint Venture

On December 15, 2006, the Company entered into a Joint Venture (JV) Agreement (the “Agreement”) with General Dynamics Land Systems Inc. (“GDLS”), pursuant to which a joint venture named Force Dynamics LLC was formed and the Company agreed to work together with GDLS to win and execute a contract for the Mine Resistant Ambush Protected (“MRAP”) Vehicle Program and/or the Medium Mine Protected Vehicle Program (“MMPV”). Under the Agreement, the Program is defined to include any and all solicitations and requests for proposals for MRAP and/or MMPV production and lifecycle support and/or any follow on work that may be performed. The scope of work to be undertaken by the joint venture is limited to the use of the Company’s Cougar 4x4 and 6x6 armored vehicles for the MRAP Category I and Category II and the MRAP Category II for MMPV requirements. The joint venture’s board is made up of three designees from the Company and three designees from GLDS. The joint venture’s board will have authority to execute documents in accordance with the terms of the Agreement. Decisions of the joint venture’s board shall be made by majority vote. The Company agreed to operate the joint venture on the principle of equitable division of burden and benefit with GDLS. This means that

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parties are expected to contribute resources equally to the venture. The Company agreed to divide the joint venture revenues between the Company and GDLS on a 50%/50% basis. Wherever practicable, the joint venture will act as the prime contractor for joint venture work, and the Company, along with GDLS, shall act as the exclusive subcontractors. For the three and six months ended June 30, 2007 the joint venture had no activity as the MRAP contract has not been novated to the joint venture.

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 basis 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. The Company records a valuation allowance for any deferred tax allowance that it believes will not be realized.

Stock-Based Compensation

In December 2004, the Financial Accounting Standards Board (“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 entity’s equity instruments or that may be settled by the issuance of equity instruments. Effective 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 Statement 123, as originally issued.

Earnings (Loss) per Common Share

The Company utilizes SFAS No. 128, “Earnings per Share” to calculate earnings/loss per share. Basic earnings/loss per share is computed by dividing the earnings/loss available to common shareholders (as the numerator) by the weighted-average number of common shares outstanding (as the denominator). Diluted earnings/loss per share is computed similar to basic earnings/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 anti-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 shareholders). Earnings/loss available to common shareholders is derived from net income adjusted for preferred stock dividends and accretion on preferred stock.

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.

Recent Accounting Pronouncements

In June 2006, the FASB issued FIN No. 48 “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109.” FIN No. 48 established a single model to address accounting for uncertain tax positions. FIN No. 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN No. 48 also provides guidance on de-recognition, measurement classification, interest and penalties, accounting in interim periods, disclosure and transition.  FIN No. 48 was effective for the Company in the first quarter of fiscal 2007.  The adoption of FIN No. 48 did not have a material effect on the Company’s financial position, results of operations or cash flows.

In December 2006, the FASB issued a Staff Position (“FSP”) on EITF 00-19-2, “Accounting for Registration Payment Arrangements (“FSP EITF 00-19-2”).”  This FSP specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with SFAS No. 5, “Accounting for Contingencies”.  If the transfer of consideration under a registration payment arrangement is probable and can be reasonably estimated at inception, the contingent liability under the registration payment arrangements is included in the allocation of proceeds from the related financing transaction (or recorded subsequent to the inception of a prior financing transaction) using the measurement guidance in SFAS No. 5.  This FSP is effective immediately for registration payment arrangements and the financial instruments subject to those arrangements that are entered into or modified subsequent to the issuance of the FSP.  For prior arrangements, the FSP is effective for financial statements issued for fiscal years beginning after December 15, 2006 and interim periods within those years.  The Company adopted the FSP effective January 1, 2007.  See Note 12, Commitments and Contingencies.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of SFAS No. 115”.  This statement permits, but does not require, entities to measure many financial instruments at fair value.  The objective is to provide entities with an opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.  Entities electing this option will apply it when the entity first recognizes an eligible instrument and will report unrealized gains and losses on such instruments in current earnings.  This statement 1) applies to all entities, 2) specifies certain election dates, 3) can be applied on an instrument-by-instrument basis with some exceptions, 4) is irrevocable and 5) applies only to entire instruments.  One exception is demand deposit liabilities which are explicitly excluded as qualifying for fair value.  With respect to SFAS No. 115, available for sale and held to maturity securities at the effective date are eligible for the fair value option at that date.  If the fair value option is elected for those securities at the effective date, cumulative unrealized gains and losses at that date shall be included in the cumulative-effect adjustment and thereafter, such securities will be accounted for as trading securities.  SFAS No. 159 is effective for the Company on January 1, 2008.  Earlier adoption is permitted in 2007 if the Company also elects to apply the provisions of SFAS No. 157.  The Company did not early adopt SFAS No. 159 and believes that it is unlikely that it will expand its use of fair value accounting upon the January 1, 2008 effective date.

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NOTE 3 — CONCENTRATIONS

The Company’s future operations and continued expansion is subject to a significant concentration risk.  During the three months ended June 30, 2007 and June 30, 2006, the Company’s revenues from military units of the U.S. Government accounted for 98% and 96% of total revenues, respectively.  During the six months ended June 30, 2007 and June 30, 2006, the Company’s revenues from military units of the U.S. Government accounted for 97% and 89% of total revenues, respectively.  The Company’s accounts receivable from military units of the U.S. Government as of June 30, 2007 and December 31, 2006 amounted to 99% and 81%, respectively, of total accounts receivable.

NOTE 4 — STOCK BASED COMPENSATION PLANS

The Company does not have a formal stock option plan. However, the Company has issued stock options to its employees.

Compensation cost related to stock options recognized in operating results (included in selling, general, and administrative expenses) under SFAS 123R was $420,661 and $860,904 for the three and six months ended June 30, 2007, respectively. Compensation cost related to stock options was $101,816 and $362,808 for the three and six months ended June 30, 2006, respectively.

The following table summarizes the attributes used by the Company to determine compensation cost for stock options consistent with requirements of SFAS 123R. No stock options were granted during the six months ended June 30, 2007.

		For the three months ended June 30					For the six months ended June 30
Valuation assumptions		2007		2006			2007		2006
Stock price on date of grant		—		$	3.65		—		$	0.77-$7.48
Exercise Price		—		$	1.38 - $4.70		—		$	0.72 - $4.70
Expected option term (in years)		—		2			—		2
Expected duration from grant to expiration date (in years)		—		4 and 5			—		4 and 5
Option vesting term (in years)		—		1			—		1
Expected volatility		—		45.82		%	—		45.82-70.31		%
Risk-free interest rate		—		4.40		%	—		4.40-4.97		%
Expected forfeiture rate		—		5		%	—		5		%
Estimated corporate tax rate		—		38.5		%	—		38.5		%
Expected dividend yield		—		0		%	—		0		%

 

The following table summarizes information about stock option activity for the three and six months ended June 30, 2007.

 

The following table summarizes information about non-vested stock grants activity for the six months ended June 30, 2007.

 

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NOTE 5 — TAXES

The FASB has issued Statement of Financial Accounting Standards Number 109 “Accounting for Income Taxes”, which requires the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities.

The Company’s net deferred tax asset consists of the following as of:

 

As of June 30, 2007 the Company has no available operating loss carry-forwards.

The following is a reconciliation of the provision for income taxes at the U.S. federal income tax rate to the income taxes reflected in the Consolidated Statements of Operations:

 

NOTE 6 — EARNINGS/LOSS PER SHARE

The Company utilizes SFAS No. 128, “Earnings per Share” to calculate earnings/loss per share. Basic earnings/loss per share is computed by dividing the earnings/loss available to common shareholders (as the numerator) by the weighted-average number of common shares outstanding (as the denominator). Diluted earnings/loss per share is computed similar to basic earnings/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, 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 stockholders), and if the additional common shares are anti-dilutive, they are not added to the denominator in the calculation. For the three and six month periods ended June 30, 2006 the following common stock equivalents have been excluded from the calculation of the diluted loss per share.

 

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Earnings Per Share Computation

		For the three months ended June 30						For the six  months ended June 30
		2007			2006			2007			2006
Basic earning (loss) per common share computation
Net earnings (loss) available to common shareholders		$	9,626,828		$	424,047		$	12,105,101		$	(989,267	)
Weighted- average shares used to compute:
Basic earnings per share		68,120,787			39,511,931			67,874,796			38,487,506
Earnings (loss) per share of common stock:
Basic		$	0.14		$	0.01		$	0.18		$	(0.03	)

 

		For the three months ended June 30						For the six months ended June 30
		2007			2006			2007			2006
Dilutive earning (loss) per common share computation
Net earnings (loss) available to common shareholders		$	9,626,828		$	424,047		$	12,105,101		$	(989,267	)
Weighted- average shares used to compute:
Basic earnings per share		68,120,787			39,511,931			67,874,796			38,487,506
Dilutive effect of stock options		663,713			Anti-dilutive			893,409			Anti-dilutive
Dilutive effect of stock grants		134,028			Anti-dilutive			140,541			Anti-dilutive
Dilutive weighted earnings per share		68,918,528			39,511,931			68,908,746			38,487,506
Earnings (loss) per share of common stock:
Assuming dilution		$	0.14		$	0.01		$	0.18		$	(0.03	)

 

NOTE 7 — ACCOUNTS RECEIVABLES & “DEFINITIZATION”

The majority of the Company’s contracts are with the United States Government and as such they are “public sector” contracts subject to the Federal Acquisition Regulations set forth in Title 41 of the United States Code (“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 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.

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Below is a table detailing activity within the allowance for contractual adjustments account for the six months ended June 30, 2007 and June 30, 2006, respectively.

 

 

The MRAP sole source contract was definitized on July 31, 2007. The increase in the allowance for contractual adjustments as of June 30, 2007 is due primarily to adjust the undefinitized price to the definitized price for sales recorded through June 30, 2007.

The Company does not maintain an allowance for doubtful accounts.  The Company’s significant sales for the quarter ended June 30, 2007 and June 30, 2006 involved contracts signed with the U.S. Government.

Historically, the Company has not encountered sales returns.  The Company does not anticipate sales returns in the future.

NOTE 8—INVENTORIES

Inventories consisted of the following:

 

As of June 30, 2007 there were vehicles which had been inspected and accepted by the customer but the customer had not taken title (signed Form DD250). These vehicles were accounted for as finished goods.

NOTE 9 —ASSETS PURCHASED

On March 9, 2007, the Company purchased the Research and Developmental Testing Facility of NEWTEC Services Group, Inc., located near Edgefield, SC for $5,500,000.  The Company intends to use the facility to expand the Company’s research and development activities and support the verification and quality control validation of the Company’s armored vehicles used to protect military personnel against explosive threats. The acquisition consisted of land - $2,100,000, furniture and fixtures - $800,000, procedure manuals -$600,000 and intangible assets - $2,000,000.  These assets were reported in accordance with SFAS141.

On March 22, 2007, the Company purchased real and personal property located in Summerville, SC for $4,100,000. The Company intends to use the facility as a product development and logistic services training center. The acquisition consisted of land - $1,320,000, building -  $2,502,000 and furniture and fixtures - $278,000.

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NOTE 10—PROPERTY AND EQUIPMENT

Property and Equipment at June 30, 2007 and December 31, 2006:

 

During the first quarter of 2007, the Company entered into a contract to build a 90,000 square foot warehouse facility in Ladson, SC. As of June 30, 2007, the Company has expended $4,271,631 in progress payments (accounted for as construction in progress) against the total contract.

In June 2007, the Company made a down payment of $1,529,836 to Superior Controls of Plymouth, Michigan to begin work on a $15,300,000 low volume automotive assembly line at the Ladson facility.

In the second quarter of 2007 the Company spent $1,200,000 on a systems network upgrade and $3,400,000 on building and manufacturing improvements.

See Note 9 — Assets Purchased for explanation of additional property plant and equipment increases.

Depreciation expense for the six months ended June 30, 2007 and June 30, 2006 was $1,539,212 and $338,160, respectively.

NOTE 11 — ACQUIRED INTANGIBLE ASSETS

As a result of the acquisition of the Research and Development Testing Facility (explained in Note 9), the following is a summary of the intangible assets acquired:

 

Amortization expense for the Research and Development Testing Facility for the six months ended June 30, 2007 was $163,889. Estimated aggregate amortization expenses for each of the next three years is $466,667, $466,667, and $429,167.

NOTE 12—COMMITMENTS AND CONTINGENCIES

Other Accrued Liabilities

The Company’s other accrued liabilities include the following:

 

Liquidated Damages

On December 20, 2006, the Company completed a private placement of 13,000,000 shares of its common stock to institutional investors at $11.75 per share, resulting in gross proceeds of $152,750,000.  The proceeds, net of commissions, were $146,640,000.

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Per the Securities Purchase Agreement, the Company agreed to file a registration statement to register all 13,000,000 shares of common stock for resale and distribution under the Securities Act of 1933, as amended,  within 30 calendar days (January 19, 2007) and cause the registration statement to be declared effective no later than 120 calendar days (April 19, 2007). If the registration statement registering these shares is not declared effective on or before the effective date by the SEC, then the Company shall deliver to each purchaser, as liquidated damages, an amount equal to one and one third percent (1 1/3%) for each thirty (30) days (or such lesser pro-rata amount for any period of less than thirty (30) days) of the total purchase price of the securities purchased and still held by such purchaser pursuant to the Securities Purchase Agreement on the first day of each thirty (30) day or shorter period for which liquidated damages are calculable. The registration statement became effective July 26, 2007. In accordance with FSP EITF 00-19-2 — Accounting for Registration Payment Arrangements, the Company has recorded $4,860,658 during the three months ended March 31, 2007 based on our original estimate of timing and completing the registration of common stock and an additional charge for liquidated damages of $1,775,820 as of June 30, 2007. Liquidated damage expense for the three and six months ended June 30, 2007 was $1,775,820 and $6,636,478, respectively.

Contract Liabilities

The Company’s sales contracts generally include a warranty such that the Company’s products are free from defects in design, material, and workmanship for a period of one year from the acceptance date.  The warranty does not apply to any damage or failure to perform caused by the misuse or abuse of the vehicle, combat damage, fair wear and tear items (brake shoes, track pads, wiper blades, etc.), or by the customer’s failure to perform proper maintenance or service on the supplies.

The Company routinely reviews its exposure for warranty costs and determines warranty and pricing reserves based on historical data and known events. Below is a table detailing the Company’s accruals for warranty-related costs as of June 30, 2007 and December 31, 2006:

 

Gain Share Program

On March 1, 2007, the Board of Directors approved a quarterly gain share program. The program will distribute 10% of each quarter’s net earnings equally to employees.

Construction in Progress

During the first quarter of 2007, the Company entered into a contract to build a 90,000 square foot warehouse facility in Ladson, SC. As of June 30, 2007, the Company has expended $4,271,631 in progress payments (accounted for as construction in progress) against the total contract of $4,474,000. The construction was completed in July 2007.  The remaining construction in progress is associated with the ongoing development and implementation of various business operating systems software.

In June of 2007, the Company made a down payment of $1,529,836 to Superior Controls of Plymouth, Michigan to begin work on a $15,300,000 low volume automotive assembly line at the Ladson facility.  Progress payments totaling $12,238,691 are due over the remainder of 2007 with the final payment of $1,529,836 due upon completion of the project in January of 2008.

Legal Proceedings

The Company may be involved from time to time in ordinary litigation that will not have a material effect on its operations or finances. The Company is not aware of any pending or threatened litigation against the Company or its officers and directors in their capacity as such that could have a material impact on the Company’s operations or finances.

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NOTE 13—LONG-TERM LIABILITIES

In October of 2006, the Company acquired capital equipment valued at $234,875 using a note with implied interest of 11.25% from the supplier with a repayment based on usage of materials used with the equipment.  It is expected that based on usage estimates the note payments in 2007, 2008, and 2009 will be $92,608, $92,608 and $69,456, respectively.

As part of the purchase of NEWTEC Services Group, Inc, a non-compete arrangement was agreed upon where the President of NEWTEC Services Group Inc., would not operate a competitive business during the period of employment with the Company and for two years thereafter.  As part of the non-compete provision, $450,000 was withheld payable in three equal installments of $150,000 on January 1 of 2008, 2009, and 2010.

NOTE 14—SHAREHOLDERS’ EQUITY

During the three months ended June 30, 2007, the Company recorded the following transactions within its shareholders’ equity accounts:

Per Board of Director Resolution, a 20,513 share common stock grant was issued. The valuation of these shares was recorded under SFAS123R.

Employees exercised stock options to purchase 176,800 shares of the Company’s common stock valued at $295,970. The valuation of these shares was recorded under SFAS123R.

NOTE 15 — VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

The following table summarizes information about accounts and reserves for the three months ending June 30, 2007:

					For the three months ending March 31									For the three months ending June 30
Description		Balance at  beginning  of period			Additions  charged to cost  and expenses			Write-offs			Balance  March 31			Additions  charged to  cost and  expenses			Write-offs			Balance  June 30
Revenue based provisions
2007		$	6,068,087		$	2,814,664		$	2,049,305		$	6,833,446		$	9,735,647		$	4,267,665		$	12,301,428
2006		$	1,018,051		$	869,520		$	423,916		$	1,463,655		$	216,213		$	485,828		$	1,194,040
Allowance for inventory losses
2007		$	2,423,613		$	—		$	298,830		$	2,124,783		$	7,672,006		$	4,088,369		$	5,708,420
2006		$	498,281		$	150,000		$	—		$	648,281		$	2,574,647		$	1,216,988		$	2,005,940
Contract liabilities
2007		$	1,850,000		$	527,043		$	527,043		$	1,850,000		$	2,572,430		$	24,777		$	4,397,653
2006		$	380,045		$	239,904		$	—		$	619,949		$	334,321		$	211,942		$	742,328

 

NOTE 16—SUBSEQUENT EVENTS

On July 12, 2007 we announced the purchase of a new 430,000 square foot facility in Roxboro, NC. We plan to use this facility for additional capacity for current and future products including our new Cheetah vehicle line.

On July 20, 2007, we entered into a Loan Agreement (the “Loan Agreement”) with Wachovia Bank, National Association (“Wachovia”), pursuant to which we agreed to certain terms that govern a revolving credit facility made available to the Registrant by Wachovia.  Concurrently with the execution of the Loan Agreement, the Registrant issued a promissory note to Wachovia in the original principal amount of $50,000,000 (the “Note”).  The unpaid principal balance of the Note accrues interest at a floating rate per annum equal to the 1-month LIBOR market index rate plus 2.0%.  Accrued interest is due and payable on a monthly basis, starting on August 31, 2007 and all outstanding principal is due and payable on September 30, 2007, unless extended by Wachovia. We entered into this agreement to assure continued flow of cash while administrative contractual payment issues were worked out with government payment offices on recently established MRAP programs.

On August 1, 2007, we were awarded work totaling $5.3 million to produce more than 40 articulating interrogation arms for the Iraqi Light Armored Vehicle (ILAV). As part of this award, a total of 22 additional new vehicles will also be produced and scheduled for December 2007.

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