UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended June 30, 2004
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to __________
Commission file number 0-22273
FORCE PROTECTION, INC.
(Exact name of small business issuer as specified in its charter)
Colorado 84-1383888
-------------------- -----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
9801 Highway 78, #3, Ladson, SC 29456
--------------------------------------- ------------------
(Address of principal executive offices) (Zip Code)
(843) 740-7015
(Issuer's telephone number)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
State the number of shares outstanding of each of the Issuer's classes of common
equity, as of the latest practicable date:
As of June 30, 2004, the Issuer had outstanding 180,079,059 shares of its common
stock.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE) YES [ ] NO [X]
FORCE PROTECTION INC. AND SUBSIDIARY
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE
ITEM 1. FINANCIAL STATEMENTS
REPORT ON REVIEW BY INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANT 3
CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2004 4
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 2004 AND JUNE 30, 2003 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 2004 AND JUNE 30, 2003 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
ITEM 3. CONTROLS AND PROCEDURES 15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 15
ITEM 2. CHANGES IN SECURITIES
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REPORT ON REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
To the Board of Directors
Force Protection, Inc. and Subsidiary
We have reviewed the accompanying consolidated balance sheet of Force
Protection, Inc., and Subsidiary (formerly known Sonic Jet Performance, Inc.) as
of June 30, 2004 and the related statements of consolidated operations for the
three and six months ended June 30, 2004 and 2003 and cash flows for the six
months ended June 30, 2004 and 2003 included in the accompanying Securities and
Exchange Commission Form 10-QSB for the period ended June 30, 2004. These
financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States and
standards of PCAOB, the objective of which is the expression of an opinion
regarding the financial statements as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with accounting principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the balance sheet as of December 31, 2003, and
the related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended (not presented herein). In our report dated March
2, 2004, we expressed an unqualified opinion on those financial statements. In
our opinion, the information set forth in the accompanying balance sheet as of
June 30, 2004 is fairly stated in all material respects in relation to the
balance sheet from which it has been derived.
/s/ Michael Johnson & Co., LLC
Michael Johnson & Co., LLC.
Denver, Colorado
August 13, 2004
FORCE PROTECTION
CONSOLIDATED BALANCE SHEET
JUNE 30, 2004
(Unaudited)
ASSETS
Current Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,311,687
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 739,622
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128,228
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,419,987
-------------
Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,599,524
Other Assets
--------------
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
Fixed Assets, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 545,167
-------------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,144,691
-------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,172,300
Accrued payroll taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,752
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 724,999
Other accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156,013
-------------
General reserve. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 542,317
-------------
Loans payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,739
Current Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,655,120
-------------
Long term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127,013
-------------
Subordinated notes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
-------------
Shareholder's Equity:
Common, no par value, 300,000,000 authorized, issued and outstanding 180,079,059. 20,922,574
Preferred, no par value
Series B convertible preferred (9 shares issued and outstanding) . . . . . . . 22,500
Series C convertible preferred (109 shares issued and outstanding) . . . . . . . 1,090,000
Retained earnings, Includes 2004 Net Income /(loss). . . . . . . . . . . . . . . . (24,844,946)
Additional Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,170,930
Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500
------------
Shareholder's equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,362,558
-------------
Total Liabilities and Shareholders' Equity. . . . . . . . . . . . . . . $ 6,144,691
=============
The accompanying notes are an integral part of these financial statements
FORCE PROTECTION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Six months ended
June 30, June 30,
2003 2004 2003 2004
------------------ ----------------- ------------- -------------
Revenues . . . . . . . . . . . . . . . . . $ 606,785 $ 15,578 $ 703,134 $ 1,658,431
Cost of Sales. . . . . . . . . . . . . . . 604,684 296,526 836,437 1,528,479
Gross Profit . . . . . . . . . . . . . . . 2,101 (280,949) (133,304) 129,952
Operating Expenses:
Selling, General &
Administrative . . . . . . . . . . . . . . 1,343,921 1,673,385 2,992,448 3,278,018
Total Operating Expenses . . . . . . . . . 1,343,921 1,673,385 2,992,448 3,278,018
Loss from Operations . . . . . . . . . . . (1,341,820) (1,954,334) (3,125,752) (3,148,066)
Restructuring Expense. . . . . . . . . . . 514,499 - 514,499 -
Profit (Loss) after Restructuring Expense. (1,856,319) (1,954,334) (3,640,250) (3,148,066)
Other Income/Expense
Other Income . . . . . . . . . . . . . (59,810) 477 (45,352) 36,534
Interest Expense . . . . . . . . . . . (56,830) (4,133) (71,025) (44,447)
Total Other Income (Expense) . . . . . . . (116,640) (3,656) (116,377) (7,913)
Net Loss . . . . . . . . . . . . . . . . . $ (1,972,958) $ (1,957,990) $ (3,756,628) $ (3,155,978)
Basic loss per share . . . . . . . . . . . (0.0130) (0.008) (0.0304) (0.020)
Diluted loss per share . . . . . . . . . . (0.0087) (0.012) (0.0204) (0.013)
Weighted average common
shares outstanding
Basic . . . . . . . . . . . . . . . . . 102,851,320 158,473,264 102,851,320 158,473,264
Diluted . . . . . . . . . . . . . . . . 153,483,542 250,575,044 153,483,542 250,575,044
==================== ================== ============= =============
* Taken from the weighted average common shares outstanding as at the end of 06/30/04
The accompanying notes are an integral part of these financial statements
FORCE PROTECTION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Six Months
Ended Ended
June 30, 2003 June 30, 2004
Cash Flows From Operating Activities:
Net Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (3,756,628) $ (3,155,978)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . 155,834 34,405
Common Stock issued for services. . . . . . . . . . . . . . . . . . . . 1,689,904 70,841
Warranty & royalties. . . . . . . . . . . . . . . . . . . . . . . . . . 25,961 62,083
Restructuring expense . . . . . . . . . . . . . . . . . . . . . . . . . 514,499 -
Changes in assets and liabilities:
(Increase) in accounts receivable . . . . . . . . . . . . . . . . . . 150,705 (594,690)
(Increase) in inventories . . . . . . . . . . . . . . . . . . . . . . (2,748,694) (2,535,756)
(Increase) Decrease in other assets . . . . . . . . . . . . . . . . . 4,896 (120,928)
(Decrease) Increase in accounts payable . . . . . . . . . . . . . . . 286,397 405,303
(Decrease) Increase in payroll liabilities. . . . . . . . . . . . . . (16,940) 110,816
(Decrease) Increase in accrued expenses & deferred revenue. . . . . 1,596,902 552,862
(Decrease) Increase in reserves and other . . . . . . . . . . . . . . 7,502 370,219
Total adjustments . . . . . . . . . . . . . . . . . . . . . . . . 1,666,966 (1,812,174)
Net Cash Used in Operating Activities . . . . . . . . . . . . . . . . . . (2,089,662) (4,800,823)
--------------- ---------------
Cash Flow From Investing Activities:
Purchase of equipment. . . . . . . . . . . . . . . . . . . . . . . . . . 24,752 (236,099)
Proceeds from sale of property and equipment . . . . . . . . . . . . . . - -
Net Cash Provided By Investing Activities. . . . . . . . . . . . . . . . 24,752 (236,099)
Cash Flow From Financing Activities:
Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . 1,305,849 5,600,000
Proceeds from issuance of Preferred Stock. . . . . . . . . . . . . . . . (20,000)
Proceeds from convertible debt . . . . . . . . . . . . . . . . . . . . . -
Short term Debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 723,207 (369,387)
Payments from capitalized lease obligations. . . . . . . . . . . . . . . - (6,017)
Long Term Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 11,513 (24,461)
Notes Payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (124,036)
Additional Paid-in-capital . . . . . . . . . . . . . . . . . . . . . . . . - 993,733
Net Cash Provided By Financing Activities. . . . . . . . . . . . . . . . 2,020,569 6,069,832
--------------- ---------------
Effect of exchange rate on cash. . . . . . . . . . . . . . . . . . . . . . - 0
Increase in Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (44,341) 1,032,910
Beginning Balance (12/31/03 in reference to 2004). . . . . . . . . . . . . 144,476 278,777
Ending Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,135 1,311,687
The accompanying notes are an integral part of these financial statements
FORCE PROTECTION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - PRESENTATION OF INTERIM INFORMATION
In the opinion of the management of Force Protection, Inc. and Subsidiary, the
accompanying un-audited consolidated financial statements include all normal
adjustments considered necessary to present fairly the financial position as of
June 30, 2004, and the results of operations and cash flows for the three months
and six months ended June 30, 2004 and 2003. Interim results are not necessarily
indicative of results for a full year.
The consolidated financial statements and notes are presented as permitted by
Form 10-QSB, and do not contain certain information included in the Force
Protection's audited consolidated financial statements and notes for the fiscal
year ended December 31, 2003.
NOTE 2 - FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary. All significant inter-company balances,
transactions, and stockholdings have been eliminated.
NOTE 3 - INVENTORIES
Inventories at June 30, 2004 consisted of the following:
Raw materials and supplies $2,859,017
Work in process 504,075
Finished goods 56,895
Less provision 0
---------
Total $3,419,987
==========
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment at June 30, 2004 consisted of the following:
Furniture and fixtures $ 150,321
Machinery and equipment 447,949
Tooling - new products 104,798
Vehicles 500
Demo vehicles 192,530
--------
896,098
Less accumulated depreciation and
amortization (350,931)
--------
Total $ 545,167
==========
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Lease
-----
The Company leases its principal executive offices with Technical Solutions
Group in Ladson, South Carolina.
On July 15, 2004 Technical solutions Group entered into an additional lease of
142,500 square feet of another building in the same complex.
Technical Solutions Group, Inc. has a long-term lease of five years, with an
option to renew for another five years for the giving it a stable base for
future planning. The space substantially increases the Company's ability to
qualify for and fulfill larger contracts for its mine-protected vehicles.
Details of the two leases are explained below.
The term of the lease for Building Three is five years starting October 15,
2003. Annual rent is $215,000 for the first year plus utilities, taxes and
maintenance, and $258,000 base rental for the next four years.
The term of the lease for Building Two is five years starting July 15, 2004,
with an option to renew for another five years. Annual rent is $439,500 for the
first year plus utilities, taxes and maintenance, and $439,500 base rental for
the next four years, which may be adjusted by increases to the CPF by three to
seven percent.
Employment Agreements
----------------------
The Company anticipates formally establishing an executive and management
compensation plan. The current compensation in cash for the Company's executive
officers and managers is as follows: Mr. Kavanaugh - $180,000, Mr. Thebes -
$115,000, plus an allowance of $1,500, Mr. Watts $216,000 plus an expense
allowance, Mr. Barrett - $120,000, Mr. Edwards - $125,000, Mr. Hammick -
$105,000. Executive officer compensation is subject to review on a periodic
basis by the Board of Directors.
Royalty/Licensing Agreements
-----------------------------
On April 1, 2004, the Company entered into a new royalty agreement with J.J.Van
Eck covering the Typhoon - Long design. The Company will pay Mr. Van Eck $500.00
per vehicle sold based on the Typhoon - Long design he provided if used.
NOTE 6 - OTHER TRANSACTIONS
Capital Stock Transactions
----------------------------
During the three months ended June 30, 2004, the Company issued an aggregate of
3,188,275 restricted shares of its common stock for the exercise of warrants
generating $247,482.75 per a private placement offering dated April 10, 2002.
During the period of April 1, 2004 to June 30, 2004, the Company issued a total
of 1,012,016 restricted shares of common stock to three consultants for services
to be rendered to the Company related to the discontinued boat business valued
at $70,841.
On March 23, 2004, the Company closed on a private offering. This offering, sold
to six accredited investors, consisted of the following:
(a) 15,000,000 shares at $0.20 per share; generating $2,670,000 net proceeds.
(b) An "A" Warrant for each share purchased, exercisable at $0.24 per share. The
"A" Warrants expire March 23, 2006; and
(c) A "Green Shoe" warrant for each share purchased, exercisable at $0.20 per
share for a period of 180 days after the effective date of the registration
statement, commencing on the effective date of the registration statement.
During the three months ended June 30, 2004, "Green Shoe" warrants were
exercised at $0.20 generating $2,600,000. 13,000,000 shares were issued.
During the three months ended June 30, 2004, 9 shares of Series C preferred
stock were issued and 1 Series B share was converted to 10 Series C shares. 25
series C shares were converted into common and 725,000 common shares were
cancelled.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis covers material changes in our
financial condition since the year end December 31, 2003 and a comparison of
the results of operations for the three and six months ended June 30, 2004 to
the same period in 2003. This discussion and analysis should be read in
conjunction with our consolidated financial statements and related notes thereto
included elsewhere in this report and our Form 10-KSB for the year ended
December 31, 2003.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This Report on Form 10-QSB contains forward-looking statements, including,
without limitation, statements concerning our possible or assumed future results
of operations. These statements are preceded by, followed by or include the
words "believes," "could," "expects," "intends" "anticipates," or similar
expressions. Our actual results could differ materially from those anticipated
in the forward-looking statements for many reasons including the risks described
below and elsewhere in this report. Although we believe the expectations
reflected in the forward-looking statements are reasonable, they relate only to
events as of the date on which the statements are made, and our future results,
levels of activity, performance or achievements may not meet these expectations.
We do not intend to update any of the forward-looking statements after the date
of this document to conform these statements to actual results or to changes in
our expectations, except as required by law.
OVERVIEW
We incorporated in the State of Colorado in November 1996. Our wholly-owned
subsidiary, Technical Solutions Group, Inc. incorporated in Nevada in 1997. We
acquired Technical Solutions Group in July 2002. Through our subsidiary,
Technical Solutions Group, we manufacture and market military vehicles that are
protected against landmines and hostile fire. These vehicles are typically used
to transport personnel safely in areas infested with landmines and for the
actual removal of landmines.
CRITICAL ACCOUNTING POLICIES
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 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 we use in applying
these most critical accounting policies have a significant impact on the results
we report in our financial statements.
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
As a general rule, financial information is accounted for and based on cost, not
current market value. Revenues and gains should be matched using the accrual
method with the expenses giving rise to the revenues and gains to determine
earnings for the period. Expenses are necessarily incurred to produce revenue.
Expenses are then "matched" in the same accounting period against the revenue
generated. Revenues are recognized when they are earned and expenses are
recognized in the same period as the related revenue (matching or using a
systematic and rational allocation or expensing in the period in which they
expire), not necessarily in the period in which the cash is received or expended
by the company. Other areas include:
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.
Goodwill
Under SFAS No. 142. Goodwill and other Intangible Assets, all goodwill
amortization ceased effective Jan.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.
We acquired Goodwill, which represents the excess of purchase price over fair
value of net assets, in the acquisition of Technical Solutions Group in June
2002. We follow SFAS 142, Goodwill and Intangible Assets, which requires us to
test goodwill 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.
Loss per Share
We utilize SFAS No. 128, "Earnings per Share." Basic loss per share is computed
by dividing loss available to common stockholders by the weighted-average number
of common shares outstanding. Diluted loss per share is computed similar to
basic loss per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if the
potential common shares had been issued and if the additional common shares were
dilutive.
Revenue Recognition
Our revenues are derived principally from the sale of blast and mine-protected
vehicles. Revenue from products and services are recognized at the time goods
are shipped or services are provided to the customer, with an appropriate
provision for returns and allowances. The estimated sales value of performance
under fixed-price and fixed-price incentive contracts in process is recognized
under the percentage-of-completion method of accounting in which the estimated
sales value is determined on the basis of physical completion to date (the total
contract amount multiplied by percent of performance to date less sales value
recognized in previous periods) and cost (including general and administrative)
are expensed as incurred. It is our policy to not recognize revenue until
customer acceptance and shipment to the customer. All advance payments are
treated as "deferred revenue".
Research and Development
We expense research and development cost as incurred.
COMPARISON OF THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2004 AS COMPARED TO
JUNE 30, 2003
The three months and six months ended June 30, 2004 were devoted to the facility
ramp-up of two contracts, one with the U.S. Marines and one with the U.S. Army,
valued at a total of $20,000,000 in sales. To date, our overall employee
headcount is at 113, up 84 people from the year ended 2003, with 16 operational
production cells. For the first six months of 2004, we have spent $593,192 on
Research and Development to further strengthen our position as leaders in mine
and blast protection worldwide.
Results of Operations
Net sales for the three months ended June 30, 2004 decreased by $ 591,207
compared to three months ended June 30, 2003. However, sales backlog increased
during the quarter to $19,999,000. The lack of sales during the quarter was
expected due to the timing of awarded contracts. Sales for the six months ended
June 30, 2004, influenced by 2003 orders finalized during the first quarter was
$1,658,431, a $955,297 increase over the six month period ended June 30, 2003.
Cost of sales for the six months ended June 30, 2004 was $1,528,479, or 92.16%
of sales, compared to 118.9% of sales in 2003. During the second quarter of
2003, with only $15,578 of sales, manufacturing costs were high in comparison
to sales due to the start up of two government contracts and the shipment of
spares. The cost of goods sold in the first quarter of 2004 were higher than we
have experienced in the past due to the percentage of spares shipments in
relation to product sales. Indirect cost accounted for 91% of cost of goods
sold during the quarter.
Selling, General and Administrative expenses for the three months ended June 30,
2004 were $1,673,385 and for the six months ended June 30, 2004 were
$3,278,018. As compared to the three and six months ended 2003, Selling,
General and Administrative expenses were up $329,464 and $285,570 respectively.
Incremental Research and Development expenditures of $91,386 during the second
quarter of 2004 slowed as compared to the rapid pace in the first quarter as
some focus was shifted to the rapid production ramp to satisfy our two new
contracts. For the six months ended June 30, 2004, excluding Research and
Development expenditures, Selling, General & Administrative spending, normalized
was $2,684,825 or 89.7% of the 2003 run rate. We incurred an incremental $29,229
of actual marketing expenses during the second quarter of 2004, due to
conferences, show participation and increased potential customer presentations.
During the third quarter of 2004, we incurred $130,000 of commission fees on the
$2,600,000 of raised capital during the second quarter of 2004.
For the three months ended June 30, 2004, other income/ expense was ($3,656).
Inactive accounts payable of $15,788 were settled. We earned $477 interest
income. Bank charges of $1,646, loan interest of $889 and penalty expenses of
$1,000 accounted for the majority of the ($4,133) of interest expense for the
quarter.
Net Loss for three months ended June 30, 2004 was $1,957,990 which was virtually
flat as compared to the June 30, 2003 loss of $1,972,958. For the six months
ended June 30, 2004 the net loss was $3,155,978 a decrease of $600,650 as
compared to the six months ended June 30, 2003. The decrease is attributed to
cost control and the discontinued boat operations. Year to date, research and
development activities, fund raising and demonstration expenses accounted for an
incremental $1,116,931 erosion of net income. Excluding these expenses, net loss
would have been $2,039,047 or 54.2% of the 2003 year to date run rate.
Business segment analysis of the three months ended June 30, 2004:
10-QSB Segment Information (000's) (approximate)
TSG Corp Total
--------------- ----- ------------ ----------- ----------------
Sales 16 16
Cost of sales 296 296
------------ ----------- ----------------
Gross profit (281) (281)
G.P. % (-)% (-)%
SG&A 1,360 313 1,673
--------------- ----- ------------ ----------- ----------------
Segment P&L (1,641) (313) (1,954)
------------- ------- ------------ ----------- ----------------
Mine and blast protected vehicles and spares provided approximately 100% of the
total sales and 100% of the total cost of goods sold.
Going Concern
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As shown in the financial
statements, during the year ended December 31, 2003, we incurred losses of
$5,321,623 and our current liabilities exceed our current assets by $360,652.
During the six months ended June 30, 2004, we incurred losses of $3,155,978,
however current assets exceeded current liabilities by $2,944,404.
Realization of a major portion of the assets in the accompanying balance sheet
is dependent upon our continued operations, obtaining additional financing, and
the success of our future operations.
Due to the nature of our business it is uncertain whether we will receive orders
impeding our cash situation and our ability to pay creditors.
Liquidity and Capital Resources
As of June 30, 2004, cash and cash equivalents were $ 1,311,687 compared to
$278,777 as of December 31, 2003 and $3,210,137 as of March 31, 2004. Our
principal sources of capital have been cash flow from operations, warrant
exercises, and the sale of common stock.
Operating Activities
The cash used by operating activities for the six months ended June 30, 2004 was
$4,800,823, as compared to $2,089,622 for the six months ended June 30, 2003.
The cash used can be attributable primarily to funding ongoing operations, with
sales loaded in the second half of the year, the U.S. Marine and U.S. Army
contract ramp-up of inventory ($2,535,756), and the development of the future
products.
Investing Activities
Our capital expenditures for the three months ended March 31, 2004 were $49,955,
related to investments in office and manufacturing equipment. Capital
expenditures for the three months ended June 30, 2004 were $186,144, related to
the cellular manufacturing ramp-up. We anticipate that our capital expenditures
during 2004 will increase significantly, as compared to 2003, due to contract
awards, the improvement of operating efficiencies, and additional manufacturing
capacity.
Financing Activities
On March 23, 2004, we closed on a private offering. This offering, sold to six
accredited investors, consisted of the following:
(a) 15,000,000 shares at $0.20 per share;
(b) An "A" Warrant for each share purchased, exercisable at $0.24 per share. The
"A" warrants expire March 23, 2006; and
(c) A "Green Shoe" warrant for each share purchased, exercisable at $0.20 per
share for a period of 180 days after the effective date of the registration
statement, commencing on the effective date of the registration statement.
We generated proceeds of $2,600,000 from the sale of common stock through the
exercise of green shoe warrants during the three months ended June 30, 2004.
Commission expense and fees totaled $130,000, which were paid in July 2004,
generating net proceeds of $2,470,000.
During the three months period ended June 30, 2004, we received $247,482.75
through the exercise of warrants ($0.01 and $0.10) that were originally issued
pursuant to an addendum to the private placement memorandum dated April 10,
2002.
During the six months ended June 30, 2004, we repaid $517,884 of notes payable
and short/long term debts.
We repaid 3 promissory notes during the first quarter of 2004, finalized as of
May 7, 2004 by receipt of all the required paperwork, totaling $400,000 of
principle, all interest was forgiven. $150,000 of cash was repaid and 25 Series
C preferred shares were issued to settle all 3 promissory notes.
On September 20, 2003, we entered into an Investment Agreement with Dutchess
Private Equities Fund, also referred to as an Equity Line of Credit. That
agreement provides that, following notice to Dutchess, we may put to Dutchess up
to $3.5 million in shares of our common stock for a purchase price equal to 93%
of the lowest closing bid price on the Over-the-Counter Bulletin Board of our
common stock during the five day period following that notice. Each put will be
equal to either (a) 200% of the average daily volume of our common stock for the
10 trading days prior to the put notice date, multiplied by the average of the
three daily closing best bid prices immediately preceding the put or (b)
$10,000; provided that in no event will the put amount be more than $1,000,000
with respect to any single put. Under a March 23, 2004 private placement, we
have agreed not to utilize the equity line for a period of 6 months following
the effective registration of the shares underlying the private placement. The
shares underlying the private placement were registered on April 15, 2004.
On April 23, 2004, we announced award of a contract to deliver up to 27 Cougar
type vehicles. On May 17, 2004, we announced the award of a contract to deliver
21 Buffalo vehicles. Initial deliveries are scheduled to ship September 2004.
Substantial cash will be required for the inventory build and capital
infrastructure, negatively affecting liquidity and our current favorable cash
position. We expect to receive progress payments during production and except to
receive final payment per unit shipped within 45 days of acceptance by our
customer.
At the present time, we are not generating sufficient revenue to cover expenses.
Based on our current operating plan, we anticipate that additional financing
will be required to finance our operations and capital expenditures in 2004.
Accordingly, our future liquidity will depend on our ability to obtain necessary
financing from outside sources and our ability to execute our contract awards.
We currently believe that we have sufficient cash to continue for the next
Several months. Additionally, our $4,000,000 line of credit factoring facility
with G C Financial Services, Inc. and product shipments will provide enough cash
for the remainder of the year and into 2005. We may also consider issuing equity
to fund ongoing operations.
Our currently anticipated levels of revenues and cash flow are subject to many
uncertainties. Further, unforeseen events may occur that will require us to
raise additional funds. The amount of funds we need will depend upon many
factors, including without limitation, the extent and timing of sales of our
products, future product costs, the timing and costs associated with the
establishment and/or expansion, as appropriate, of our manufacturing,
development, engineering and customer support capabilities, the timing and cost
of our product development and enhancement activities and our operating results.
Until we generate cash flow from operations that will be sufficient to satisfy
our cash requirements, we will need to seek alternative means for financing our
operations and capital expenditures and/or postpone or eliminate certain
investments or expenditures. Potential alternative means for financing may
include leasing capital equipment, obtaining a line of credit, or obtaining
additional debt or equity financing. Additional financing may not be available,
or available on acceptable terms. The inability to obtain additional financing
or generate sufficient cash from operations could require us to reduce or
eliminate expenditures for capital equipment, research and development,
production or marketing of our products, or otherwise curtail or discontinue our
operations, which could have a material adverse effect on our business,
financial condition and results of operations. Furthermore, if we raise funds
through the sale of additional equity securities, the common stock currently
outstanding will be further diluted.
Inflation
We do not believe that inflation has had or is likely to have any significant
impact on our operations. However, with the current shortage of some types of
steel, the price of steel may increase significantly and could affect
profitability.
Subsidiary
As of June 30, 2004, we had one wholly-owned subsidiary, Technical
Solutions Group, Inc.
ITEM 3. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. Our management, with the
participation of our principal executive officer and principal financial
officer, has evaluated the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended) as of the end of the
period covered by this Quarterly Report on Form 10-QSB. Based on this
evaluation, our principal executive officer and principal financial officer
concluded that these disclosure controls and procedures are effective and
designed to ensure that the information required to be disclosed in our reports
filed or submitted under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the requisite time periods.
Changes in internal controls. There was no change in our internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934, as amended) that occurred during our last
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 22, 2004, the Utah Division of Securities submitted to us an Order to
Show Cause in an action before the Division of Securities of the Department of
Commerce of the State of Utah pertaining to an alleged sale of our securities in
Utah by an unlicensed broker-dealer and unlicensed agent. The Utah Division of
Securities sought a $1,000 fine in connection with this matter. On May 21,
2004, the action was settled for a payment by us of a $1,000 fine.
On June 26, 2003, Albert Mardikian, a shareholder and holder of certain designs
and components, filed a complaint against us in the Orange Country Superior
Court. The complaint alleges breach of contract of the license agreement dated
December 27, 2001 between Mr. Mardikian, Mardikian Marine Design, and us. The
complaint further alleges breach of an employment and agency agreement between
Mr. Mardikian and us, and fraud, conversion and unfair competition. The
plaintiff sought declaratory relief, compensatory damages of $700,000,
actual damages of $346,000, disgorgement of profits, civil penalties pursuant to
the California Business and Professions Code Section 17206, reasonable
attorney's fees and cost of suit incurred. On June 2, 2004 the complaint was
settled for a royalty payment by us of $45,000.
In July 2003, Peggy Gonzales and Edward Huerta filed a claim against us in the
Cameron County District Court in Brownsville, Texas. The claim related to a
vortex boat purchased by the plaintiff and alleged vessel defects. The claim
was for unquantified damages. On June 2, 2004, the claim was settled for a
payment by us of $16,000.
ITEM 2. CHANGES IN SECURITIES
(a)
On June 1, 2004, we restated the Certificate of Designation for Series B
Convertible Preferred Stock to change the automatic conversion of the Series B
Convertible Preferred Stock into common stock date to December 27, 2004 and to
provide that in its discretion, our Board of Directors may, by resolution and
without further action by the Series B Shareholders, extend the date of such
automatic conversion.
On July 20, 2004, we reduced the exercise price of outstanding A warrants
and Green Shoe warrants to $0.12 for thirty calendar days following July 20,
2004. Thereafter, the A warrants and the Green Shoe warrants revert back to
their original terms.
(b) Not Applicable.
(c) We sold the following unregistered (restricted) securities during the
quarter ended June 30, 2004:
During the period of April 1, 2004 through June 30, 2004, we issued a total of
3,188,275 shares of common stock to exercise warrants, valued at a total of
$247,482.75 (average of $0.07762 per share).
During the period of April 1, 2004 through June 30, 2004, we issued a net total
of 712,016 shares of common stock, valued at $142,403 ($0.20 per share) to two
consultants as compensation for the discontinued boat segment. On April 21,
2004, we issued a total of 50,000 shares of common stock to one consultant as
compensation in such capacity, valued at a total of $10,000 ($0.20 per share).
During the period of April 1, 2004 to June 30, 2004, we issued a total of
1,012,016 restricted shares of common stock to three consultants for services to
be rendered to us related to the discontinued boat business valued at $70,841.
The sales set forth above were undertaken under Regulation D under the
Securities Act of 1933, as amended ("Act"), by the fact that:
- the sales were made to a sophisticated or accredited investors, as defined in
Rule 502;
- the Registrant gave each purchaser the opportunity to ask questions and
receive answers concerning the terms and conditions of the offering and to
obtain any additional information which the Registrant possessed or could
acquire without unreasonable effort or expense that is necessary to verify the
accuracy of information furnished;
- at a reasonable time prior to the sale of securities, the Registrant advised
each purchaser of the limitations on resale in the manner contained in Rule
502(d)2;
- neither the Registrant nor any person acting on its behalf sold the securities
by any form of general solicitation or general advertising; and
- the Registrant exercised reasonable care to assure that each purchaser of the
securities is not an underwriter within the meaning of Section 2(11) of the
Securities Act of 1933 in compliance with Rule 502(d).
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
On June 30, 2004 we announced an Insider Lockup Agreement. Our Board of
Directors and executive officers, with limited exceptions, agreed not to sell
any shares of Force Protection stock in the public markets until December 27,
2004.
On April 21, 2004, our subsidiary, Technical Solutions Group, was awarded a
contract to manufacture and deliver up to 27 Cougar type mine and ballistic
protected vehicles to the U.S. Marines. The 27 vehicles, training programs and
consumable spare parts have a total value of $9.7 million. Initial deliveries
are scheduled to begin in September 2004 and all of the initial release will be
delivered before the end of the year.
On May 17, 2004, we announced that our subsidiary, Technical Solutions Group,
was awarded a contract to manufacture and deliver up to 21 Buffalo type mine and
ballistic protected vehicles to the U.S. Army. The 21 vehicles, training
programs and consumable spare parts have a total value of $15.3 million. The
initial release will be delivered before the end of the year.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Number Description
-------------------
3.1 Articles of Incorporation (filed as Exhibit 3.(i) to the Registrant's
General Form for Registration of Securities of Small Business Issuer on Form
10-SB filed on March 24, 1997 and incorporated herein by reference).
3.2 Articles of Amendment to the Articles of Incorporation, dated December 24,
1996 (filed as Exhibit 3.(iv) to the Registrant's Report on Form 10-KSB filed on
April 15, 1998 and incorporated herein by reference).
3.3 Articles of Amendment to the Articles of Incorporation, dated November 2,
1998 (filed as Exhibit 3.(I) to the Registrant's Current Report on Form 8-K
filed on December 16, 1998 and incorporated herein by reference).
3.4 Articles of Amendment to Articles of Incorporation (filed as Appendix A to
the Registrant's Proxy Statement on Form DEF 14A filed on March 27, 2002 and
incorporated herein by reference).
3.5 Articles of Amendment to the Articles of Incorporation.
3.6 Articles of Amendment to Articles of Incorporation.
3.7 Bylaws for the Registrant (filed as Exhibit 3.(ii) to the Registrant's
General Form for Registration of Securities of Small Business Issuer on Form
10-SB filed on March 24, 1997 and incorporated herein by reference).
4.1 Restated Certificate of Designation of Series B Convertible Preferred Stock,
dated June 1, 2004.
4.2 Restated Certificate of Designation of Series C Convertible Preferred Stock,
dated June 17, 2004.
4.3 Certificate of Designation for Series A Convertible Preferred Stock (filed
as Exhibit 7.4 to the Registrant's Current Report on Form 8-K filed July 6, 1998
and incorporated herein by reference).
10.1 Investment Agreement between the Registrant and Dutchess Private Equities
Fund, L.P., dated January 26, 2004 (filed as Exhibit 10.8 to the Registrant's
SB-2 filed on January 27, 2004 and incorporated herein by reference).
10.2 Registration Rights Agreement between the Registrant and Dutchess Private
Equities Fund, L.P., dated January 26, 2004 (filed as Exhibit 10.9 to the
Registrant's SB-2 filed on January 27, 2004 and incorporated herein by
reference).
10.3 Placement Agent Agreement between the Registrant, Charleston Capital, LLC,
and Dutchess Private Equities Fund, L.P., dated January 27, 2004 (filed as
Exhibit 10.10 to the Registrant's SB-2 filed on January 27, 2004 and
incorporated herein by reference).
10.4 Form of Subscription Agreement between the Registrant and Gamma Opportunity
Capital Partners, LP, Longview Fund, LP, Alpha Capital Aktiengesellschaft,
Domino International Ltd, Magellan International Ltd, and Mountain Ridge Capital
LLC, dated March 23, 2004 (filed as Exhibit 4 to the Registrant's Form 8-K filed
on March 26, 2004 and incorporated herein by reference).
10.5 Employment Offer Letter between the Registrant and Frank Kavanaugh dated
March 31, 2003 (filed as Exhibit 10.16 to the Registrant's Report on Form
10-KSB/A filed on April 21, 2003 and incorporated herein by reference).
10.6 Employment Offer Letter between the Registrant and Michael Watts, dated
June 20, 2002 (filed as Exhibit 10.1 to the Registrant's Quarterly Report on
10-QSB filed on November 18, 2003 and incorporated herein by reference).
10.7 Employment Offer Letter between the Registrant and Walter Wright dated
April 1, 2003 (filed as Exhibit 10.17 to the Registrant's Report on Form
10-KSB/A filed on April 21, 2003 and incorporated herein by reference).
10.8 Sonic Jet Corporation 2000 Stock Option Plan & Advisory and Consulting
Agreement dated May 1, 2000 (filed as Appendix A to the Registrant's Information
Statement on Form 14C filed June 30, 2000 and incorporated herein by reference).
10.9 Non-Employee Directors and Consultants Retainer Stock Plan, dated September
30, 2003 (filed as Exhibit 4 to the Registrant's Form S-8 filed on November 7,
2003 and incorporated herein by reference).
10.10 Employment Agreement between the Registrant and Thomas Thebes.
10.11 Letter re: Lease Agreement between the Registrant and Aerospace/Defense,
Inc., dated July 13, 2004.
10.12 Industrial Lease between the Registrant and Aerospace/Defense, Inc., dated
September 2, 2003.
10.13 Royalty Agreement J.J. Van Eck, dated April 1, 2004.
10.14 Contract between the Registrant and the U.S. Marines, April 21, 2004.
31.1 Certification of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes- Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes- Oxley Act of 2002.
32.1 Certification of Officers pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None.
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the Exchange Act,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Force Protection, Inc.
(Registrant)
Dated: August 13, 2004 By: /s/ Michael Watts
--------------------
Michael Watts
Chief Executive Officer
Dated: August 13, 2004 By: /s/ Thomas H. Thebes
-----------------------
Thomas H. Thebes,
Chief Financial Officer