Applied Digital Corp. 10-Q/A

Item 1. Financial Statements. FLIGHT SAFETY TECHNOLOGIES, INC. AND SUBSIDIARY BALANCE SHEETS Unaudited ASSETS November 30, 2008 May 31, 2008 Current assets: Cash and cash equivalents $ 67,354 $ 877,899 Contract receivables 113,318 64,396 Investment, at fair value - 125,000 Other current assets 119,932 60,512 300,604 Machinery and equipment, net of accumulated depreciation of $432,447 and $478,149, respectively 234,978 38,821 Other assets: Intangible assets, net of accumulated amortization of $16,392 and $10,662, respectively 307,458 68,188 Other receivables - 30,460 TOTAL ASSETS $ 843,040 $ 1,265,276 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 212,827 $ 187,574 Note payable 85,000 - Accrued expenses 159,735 289,739 457,562 Stockholders' equity: Preferred stock, $.001 par value, 5,000,000 shares authorized, none issued and outstanding - - Common stock, $.001 par value, 50,000,000 shares authorized, 8,981,363 and 8,431,510 shares outstanding, respectively 8,981 8,432 Additional paid-in-capital 13,842,776 13,470,027 Treasury stock, 36,300 shares, at cost (62,371) (62,371) Accumulated deficit (13,403,908) (12,628,125) 385,478 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 843,040 $ 1,265,276 The accompanying notes are an integral part of these financial statements FLIGHT SAFETY TECHNOLOGIES, INC. AND SUBSIDIARY STATEMENT OF OPERATIONS FOR THE THREE-MONTHS and SIX-MONTHS ENDED NOVEMBER 30, (unaudited) Three-months ended November 30, Six-months ended November 30, 2008 2007 2008 2007 Contract revenues $ 82,858 $ 75,144 $ 137,713 $ 121,345 Cost of revenues 35,997 35,265 61,036 78,016 Gross profit 46,861 39,879 76,677 43,329 Operating expenses: Selling, general and administrative 427,137 742,980 765,536 1,557,907 Depreciation and amortization 18,753 27,250 25,941 54,500 Research and development 69,644 84,338 90,726 193,760 Other income (24,281) - (24,281) - Total operating expenses 491,253 854,568 857,922 1,806,167 Operating loss (444,392) (814,689) (781,245) (1,762,838) Interest income, net 2,330 30,793 5,462 70,773 Loss before provision for income taxes (442,062) (783,896) (775,783) (1,692,065) Provision for income taxes - - - - NET LOSS $ (442,062) $ (783,896) $ (775,783) $ (1,692,065) Net loss per share: Basic $ (0.05) $ (0.09) $ (0.09) $ (0.21) Diluted $ (0.05) $ (0.09) $ (0.09) $ (0.21) Weighted average number of shares outstanding: Basic 8,919,307 8,278,116 8,662,153 8,252,041 Diluted 8,919,307 8,278,116 8,662,153 8,252,041 The accompanying notes are an integral part of these financial statements FLIGHT SAFETY TECHNOLOGIES, INC. AND SUBSIDIARY STATEMENTS OF CASH FLOW FOR THE SIX-MONTHS ENDED NOVEMBER 30, (unaudited) 2008 2007 Cash flows from operating activities: Net loss $ (775,783) $ (1,692,065) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 25,941 54,500 Share-based compensation 23,298 151,970 Gain on disposition of assets (18,393) - Changes in operating assets and liabilities: (Increase) decrease in contract receivables (18,462) (7,836) Decrease in other current assets and other Assets (59,420) 49,057 Increase (decrease) in accounts payable and accrued expenses (104,751) 202,251 Net cash used in operating activities (927,570) (1,242,123) Cash flows from investing activities: Purchase of furniture and equipment (20,000) - Proceeds from sale of investment securities 125,000 550,000 Proceeds from sale of assets 22,025 - Payments for patents and trademarks (95,000) (49,955) Net cash (used in) provided by investing activities 32,025 500,045 Cash flows from financing activities: Proceeds from installment note 85,000 - Net cash provided by financing activities 85,000 - Net increase (decrease) in cash and cash equivalents (810,545) (742,078) Cash and cash equivalents at beginning of period 877,899 2,439,911 Cash and cash equivalents at end of period $ 67,354 $ 1,697,833 Supplemental non-cash disclosures: Issuance of common stock for purchase of furniture and equipment and license fee $ 350,000 - The accompanying notes are an integral part of these financial statements FLIGHT SAFETY TECHNOLOGIES, INC. AND SUBSIDIARY STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE SIX-MONTHS ENDED NOVEMBER 30, 2007 and 2008 (Unaudited) Common Stock Additional Paid-in-Capital Treasury Stock Accumulated Deficit Stockholders' Equity Shares Amount Balance May 31, 2007 8,331,510 $ 8,332 $13,125,455 $(165,463) $ (9,341,826) $ 3,626,498 Issuance of treasury stock 32,228 103,092 135,320 Share-based compensation 16,650 16,650 Net loss (1,692,065) (1,692,065) Balance November 30, 2007 8,331,510 $ 8,332 $ 13,174,333 $ (62,371) $(11,033,891) $ 2,086,403 Balance May 31, 2008 8,431,510 $ 8,432 $ 13,470,027 $ (62,371) $(12,628,125) $ 787,963 Share-based compensation 23,298 23,298 Issuance of stock 549,853 549 349,451 350,000 Net loss (775,783) $ (775,783) Balance November 30, 2008 8,981,363 $ 8,981 $ 13,842,776 $ (62,371) $(13,403,908) $ 385,478 The accompanying notes are an integral part of these financial statements FLIGHT SAFETY TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2008 AND 2007 (Unaudited) Note 1. Basis of Presentation The interim consolidated financial statements include the accounts of Flight Safety Technologies, Inc. and it's newly formed wholly-owned subsidiary Advanced Plasma Products, Inc. On August 7, 2008, the Company executed a letter of intent with the University of Tennessee Research Foundation (UTRF) for the licensing of patent rights related to atmospheric glow plasma technology. The agreement provides for exclusive worldwide rights to commercialize the technology in all but a few fields of use. The letter of intent provides for an initial license fee of $150,000 payable in shares of common stock of the Company and minimum annual royalty payments starting in year two. Additionally, in a related transaction, on August 28, 2008, Advanced Plasma Products, Inc. purchased the assets of Atmospheric Glow Technologies, Inc., the previous licensee of this technology and a company in bankruptcy. These assets included essential instrument prototypes, engineering drawings, test equipment and a variety of facility related assets. We paid $125,000 in cash and issued 289,436 shares of our common stock valued at $200,000. On September 10, 2008 , we concluded our agreement with UTRF and subsequently issued 260,417 shares of our common stock as payment for the license fee. These interim financial statements for the three and six-months ended November 30, 2008 and November 30, 2007, included herein, have been prepared, without audit, pursuant to the rules and regulations of the SEC. Results for the periods presented are not necessarily indicative of results for the entire year. In the opinion of management, all adjustments, consisting of normal recurring adjustments, which are necessary for a fair statement of operating results for the interim periods have been made. These financial statements do not include all disclosures associated with annual financial statements and, accordingly, should be read in conjunction with our financial statements and related footnotes for the years ended May 31, 2008 and 2007 which are included in our annual report on Form 10-KSB filed on August 29, 2008. Certain reclassifications have been made to prior interim period balances in order to conform to the current year's presentation. Note 2 . Going Concern and Liquidity The report of our independent registered public accountant issued in conjunction with our audited financial statements and notes thereto for the year-ended May 31, 2008 indicated that there is substantial doubt about our ability to continue as a going concern. FLIGHT SAFETY TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2008 AND 2007 (Unaudited) (Continued) The Company has had recurring losses from operations that have diminished its financial resources. Our liquidity to date has primarily been provided by revenue from government contracts and proceeds from the sale of our equity securities. We have not been successful in securing any additional government funding and we will have to rely on the sale of our equity securities to generate sufficient working capital in order to successfully commercialize our newly acquired technology and to pay for our ongoing operations. As a result of the lack of government funding for our aviation security technologies, we have suspended all related research and develop work. As of November 30, 2008, we had cash on hand of $67,000 which would be insufficient to fund our operations through the current year. On January 14, 2009, we completed a series of transactions in order to generate additional cash resources. See Note 9 of Notes to Consolidated Financial Statements for a full description of the transactions. As a result of these transactions, the Company anticipates it will have sufficient cash resources into its fiscal 4 th quarter, at which time it will need to seek additional working capital. We anticipate the amount of such additional working capital could be in the range of approximately $350,000 to $500,000 but cannot predict or estimate such amount with certainty as the ultimate amount will depend on many variables, such as potential third party development or licensing fees, the pace and success of our product development and sales, and cash generated the by the transactions described in Note 9. In the event we are unable to secure additional working capital we will have to curtail our operations accordingly, thus slowing down our product development and marketing efforts. Any curtailment of our operations could have a material adverse effect on our operations and financial position. On September 29, 2008, we were delisted from the American Stock Exchange for failure to maintain the required listing standards. We are currently trading on the Over-the-counter market under the symbol "FLTS". Note 3. Summary of Significant Accounting Policies Use of Estimates In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the balance sheet date and the reported amounts of revenue and expenses during the reporting period. Material estimates that are particularly susceptible to significant change in the near term relate to the carrying values of investments, inventory, intangible assets, other receivables and the calculation of share-based compensation. Actual results could differ from those estimates. FLIGHT SAFETY TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2008 AND 2007 (Unaudited) (Continued) Share-Based Compensation: Effective June 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Share-Based Payments (revised 2004)," (SFAS No. 123R) which requires the Company to measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. That cost is recognized over the period during which an employee is required to provide services in exchange for the award, the requisite service period (usually the vesting period). Under SFAS No. 123R, the Company provides an estimate of forfeitures at initial grant date. The Company elected the modified prospective transition method under SFAS 123R and accordingly has not restated periods prior to adoption. The Company recognized $11,648, $8,325, $23,298 and $16,650, as compensation expense related to employee stock options in each of the three and six-month periods ended November 30, 2008 and 2007, respectively. The fair value of each option grant is estimated as of the grant date using the Black-Scholes option pricing model. There were no options granted in each of the six-months ended November 30, 2008 and 2007, respectively. Loss Per Share: Basic loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. For the interim periods presented the effect of stock options and warrants was anti-dilutive; therefore, they were not included in the computation of diluted loss per share. The number of shares issuable upon the exercise of outstanding stock options and warrants that were excluded from the computation as their effect would be anti-dilutive, were 2,925,737, 3,840,716, 2,963,930, and 3,953,215 for the three and six-month periods ended November 30, 2008 and November 30, 2007, respectively. Cash and Cash Equivalents: For purposes of reporting cash flows the Company considers all highly liquid investments with maturities of three months or less at the date of purchase to be cash and cash equivalents. Revenue and Cost Recognition: Our prior contracts with the United States government and our maritime industry customers are cost-reimbursable contracts that provide for a fixed profit percentage (base fee) applied to our actual costs to complete the work. These contracts are subject to audit and adjustment by our customer, and are subject to cost limitations as provided by the contract and the Federal Acquisition Regulations. The government has audited and accepted our rates through our fiscal year ended May 31, 2006. For these contracts, revenue is recorded at the time services are performed based upon actual project costs incurred including a reimbursement for general, administrative, and overhead costs and the base fee. The general, administrative, and overhead costs are estimated periodically in accordance with government contract accounting regulations and may change based on actual costs incurred subject to approval. Revenue may be adjusted for our estimate of costs that may be categorized as disputed or unallowable as a result of cost overruns or the audit process. FLIGHT SAFETY TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2008 AND 2007 (Unaudited) (Continued) Project costs include all direct material, labor and subcontracting costs. General and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions and estimated profitability and final contract settlements may result in revisions to chargeable costs and revenue recorded and are recognized in the period in which the revisions are determined. Revenue related to additional claims under the contract is recorded at the lesser of actual costs incurred or the amount expected to be realized. Machinery and Equipment: Machinery and equipment are stated at original cost or fair value at date acquisition in the case of the bulk purchase of machinery and equipment purchased by Advanced Plasma Products, Inc. ("APP") less accumulated depreciation. Depreciation is computed using the straight-line method. Cost and accumulated depreciation of assets retired or disposed of are removed from the accounts. Gains and losses are recognized upon disposal of assets. The cost of maintenance and repairs is charged to operations as incurred, whereas significant repairs are capitalized. Estimated useful lives by asset class are as follows: Machinery & equipment 7 years Furniture & fixtures 10 years Automobiles 5 years Software 3 years Intangible Assets: At November 30, 2008, intangible assets consist of patent costs associated with, AWSM, TIICM™ and atmospheric glow technologies. Acquisition costs related to obtaining new patents are capitalized. Patent costs are being amortized using the straight-line method over the lesser of seventeen years from the date incurred or the remaining life of the underlying patent. In accordance with Statement of Financial Accounting Standards No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets" (SFAS 144) the Company assesses its patents for impairment whenever events or changes in circumstances indicate their carrying value may not be recoverable. Such circumstances may include a significant adverse change in legal factors or the business climate that could affect the value of the patents. The Company also considers the likelihood of obtaining required research and development funding. In determining recoverability, the Company must determine the asset's fair value, which may require Management to make significant assumptions about the future cash generating ability of the asset. If an asset is determined to be impaired, the difference between the asset's fair value and book value is charged to expense in the period the impairment is identified. After an impairment loss is recognized, the adjusted carrying amount of the intangible asset becomes its new basis. Subsequent reversal of a previously recognized impairment loss is prohibited under SFAS 144. FLIGHT SAFETY TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2008 AND 2007 (Unaudited) (Continued) Concentration of Credit Risk: The Company had amounts in excess of $100,000 in a single bank during the year. Amounts over $100,000 are not covered by the Federal Deposit Insurance Corporation. Concentration of credit risk also exists with respect to investment securities and contract receivables. The concentrated risk associated with contract receivables is mitigated by the fact that these receivables are due primarily from the United States Government. The risk for investment securities is mitigated by an Investment Policy which, approved by the Board of Directors, restricts investing in fixed income securities below an "A" rating at the time of purchase and investments in asset backed securities, mortgage backed securities and collateralized mortgage obligations below a "AAA" rating at the time of purchase. Research and Development: Company sponsored research and development costs, including proposal costs and un-reimbursed expenditures for developmental activities, are charged to operations as incurred. Income Taxes: The Company uses the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. A valuation allowance is provided on deferred tax assets when it is more likely than not that some portion of the assets will not be realized. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period of enactment. Fair Values of Financial Instruments: The estimated fair value of financial instruments has been determined based on the available market information and appropriate valuation methodologies. The carrying amounts of cash and cash equivalents, accounts receivable (including other receivables), other current assets, accounts payable, notes payable and accrued expenses, approximate fair value at November 30, 2008 and May 31, 2008, because of the short maturity of these financial instruments. Retirement Savings Plan: Effective July 1, 2004, the Company established a Retirement Savings Plan (the "Plan") under the provisions of Section 401(k) of the Internal Revenue Code. Employees, as defined in the plan, are eligible to participate on their first day of employment. Under the terms of the Plan, the Company can match up to the employee's contribution of 5% of gross pay. The Company matching funds immediately vest 100%. The Company match for each of the three and six-months ended November 30, 2008 and 2007 were $0, $7,780, $7,456 and $23,431 respectively. FLIGHT SAFETY TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2008 AND 2007 (Unaudited) (Continued) Recent Accounting Pronouncements: Fair Values of Assets and Liabilities: The Company adopted Statement of Financial Accounting Standards No. 157 ("SFAS 157"), Fair Value Measurements , which provides a framework for measuring fair value under generally accepted accounting principles. This Statement became effective for the Company on June 1, 2008 and did not have a material impact on the Company's consolidated financial statements. The Company also adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115 . SFAS 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. The Company did not elect fair value treatment for any financial assets or liabilities upon adoption. SFAS 159 also became effective for the Company on June 1, 2008 and did not have a material impact on the Company's consolidated financial statements. In accordance with SFAS 157, the Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value: Level 1 - Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities. Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. For example, Level 2 assets and liabilities may include debt securities with quoted prices that are traded less frequently than exchange-traded instruments or mortgage loans held for sale, for which the fair value is based on what the securitization market is currently offering for mortgage loans with similar characteristics. Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. Also, the Company may be required, from time to time, to measure certain other financial assets on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. The Company had no such assets as of November 30, 2008. FLIGHT SAFETY TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2008 AND 2007 (Unaudited) (Continued) At May 31, 2008 the investment consisted of an auction market preferred security, valued using Level 2 methodology. Note 4: Contract Receivables Accounts receivable consisted of the following at: November 30, 2008 May 31, 2008 Contract receivables-billed $ 113,318 $ 64,396 Contract receivables-unbilled - 30,460 $ 113,318 $ 94,856 The amount classified as other receivables and contract receivables unbilled is a retained fee on a recently completed government contract. Note 5: Machinery and Equipment Property and equipment are summarized by major classifications as follows: November 30, May 31, 2008 2008 Machinery and equipment $ 403,836 $ 225,163 Furniture and fixtures 42,792 16,177 Automobiles 52,730 122,278 Software and computers 168,067 153,352 667,425 516,970 Less accumulated depreciation (432,447) (478,149) $ 234,978 $ 38,821 Note 6: Intangible Assets Intangible assets currently consist of costs associated with the newly acquired atmospheric glow technology, as well as the company's existing TIICM and AWSM technologies. As more fully explained in Note 2, above, the company has suspended all further research and development on the TIICM and AWSM technologies. Accordingly, we will be evaluating the carrying value of the TIICM and AWSM technologies to determine if those values have been impaired. The carrying values of TIICM and AWSM at November 30, 2008 were $53,196 and $12,676, respectively. FLIGHT SAFETY TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2008 AND 2007 (Unaudited) (Continued) Note 7: Note Payable Note payable consists of an installment note relating to the financing of certain insurance policies. The note is payable is 10 equal installments of $7,407 commencing December 22, 2008 after a $12,750 down payment. Interest is at 5.47% Note 8: Stockholders' Equity Warrants: As of both November 30, 2008 and May 31, 2008, the Company had 1,919,200 warrants outstanding with exercise prices ranging from $3.30 to $5.40 with an expiration date of January 29, 2009. The weighted average exercise price was $3.49. Stock Options: Under the Company's 2005 Stock Incentive Plan, there are 1,302,000 shares available for future awards at November 30, 2008. During the three and six-month period ended November 30, 2008, no award were made and 275,000 shares were cancelled. The weighted average exercise price of the 1,302,000 options outstanding is $3.50. The aggregate intrinsic value of the outstanding options is $0. As of November 30, 2008 there was $30,055 of total unrecognized compensation cost related to the non-vested stock options that is expected to be expensed over the next one and one-quarter years. Note 9: Subsequent Events We have filed with the Nevada Secretary of State a Certificate of Designations of the Powers, Preferences and Relative, Participating, Optional and Other Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions Thereof of Series A Convertible Preferred Stock for Flight Safety Technologies, Inc. (the "Certificate") designating a Series A Convertible Preferred Stock ("Preferred Stock"), par value $0.01 per share. Each share of Preferred Stock has a liquidating value of $100 per share, is convertible into 1,429 shares of Common Stock of the Company (subject to adjustment) and pays a cash dividend of 8% or a dividend in kind of 10%. The dividends are paid quarterly and are based on the original purchase price of the Preferred Stock. No dividends will accrue or be paid for any fiscal quarter where shares of our common stock, on a volume weighted average price, trade in excess of $0.14. Initially, each share of Preferred Stock will have the equivalent voting rights of 1,429 shares of common stock and will vote with our existing common shareholders as a group on all matters subject to shareholder vote. However, the Preferred Stock shareholders will not be able to vote on issues involving redemption or a liquidation event until there has been an affirmative vote on such issues by our common stock shareholders. In that event, FLIGHT SAFETY TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2008 AND 2007 (Unaudited) (Continued) they will be allowed to vote as a group with the Common Stock shareholders on such issues, in effect, giving them a veto right. In the event of a liquidation of the Company, the Preferred Stock will have a liquidating preference and will participate in any remaining liquidating proceeds on an as-converted basis with the common shareholders after receiving the liquidating value of their Preferred Stock. Each share of Preferred Stock is convertible at the option of the holder at any time into shares of our common stock by dividing the liquidity value of $100 by a conversion price of $0.07 per share of common stock. The number of shares of common stock issuable upon conversion is subject to antidilution protections if we issue additional shares of common stock at less than $0.07 per share and upon stock splits, dividends and certain other events. Reference is made to the Certificate of Designation for a complete description of the terms of the Preferred Stock. We will not register the shares of Preferred Stock or shares of common stock into which it may be converted with the U.S. Securities and Exchange Commission so as to make them eligible for publicly trading, and have no obligation or plans to do so in the future. Such shares will only be eligible to be sold or traded pursuant to the requirements of Rule 144, promulgated by the U.S. Securities and Exchange Commission, and applicable state securities laws. SALE OF SHARES OF PREFERRED STOCK TO INVESTORS Pursuant to a Purchase Agreement dated as of January 13, 2009 (the "Investor Purchase Agreement"), we are selling 4,400 shares of Preferred Stock for $100 per share to a group of investors (the "Investors") in order to raise an aggregate of $440,000 of equity for working capital purposes. Participating in this transaction are our two senior executives and three key employees (together "Employees"). Payment will be in the form of cash at closing, except for the employees who will purchase an aggregate amount of $100,000 of Preferred Stock. Four of these employees will purchase shares with a 20% cash payment at closing and by executing a non-interest bearing promissory note payable semimonthly with a maturity date of March 31, 2009. One of these employees will purchase shares with an 8% cash payment at closing and execute a non-interest bearing promissory note payable semimonthly with a maturity date of October 31, 2009. These notes are nonrecourse and collateralized solely by the employee's Preferred Stock. The Preferred Stock sold herewith, is convertible at $0.07 per share into a total of 6,285,714 shares of the Company's common stock, significantly diluting our existing common stock shareholders. In the Investor Purchase Agreement, we agree to indemnify investors against damages they may suffer as a result of our breach of certain representations and warranties we have made in that Agreement. Reference is made to the Certificate and the Investor Purchase Agreement for a complete description of the terms of the Preferred Stock. FLIGHT SAFETY TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2008 AND 2007 (Unaudited) (Continued) DESCRIPTION OF OUR ACQUISITION OF CFP WITH SHARES OF PREFERRED STOCK Pursuant to a Purchase Agreement dated as of January 13, 2009 (the "CFP Purchase Agreement"), we are acquiring from the Cummins Family Limited Partnership, an Idaho limited partnership (the "Purchaser"), 100% of the outstanding stock of Cummins Family Produce, Inc., ("CFP") a potato packing business located in Idaho. The general partner and majority limited partner of the Purchaser is Cummins Family Holdings, LLC, an Idaho limited liability company controlled by Mr. Wes Cummins, a director of the Company. The consideration we are providing is the assumption of a bank promissory note in the amount of approximately $211,000 owed by Mr. Cummins in connection with the operations of CFP and 20,000 shares Preferred Stock we will issue at closing, valued at $2 million. Under a performance based earn-out provision, we are obligated to issue an additional number of shares of Preferred Stock, such that the total purchase price is equal to 4.25 times the yearly average EBITDA calculated over the next two years, less the value of the bank promissory note assumed. Immediately prior to this transaction, CFP will execute (a) a 5-year supply agreement with Southern Slope, Inc., and Black Rock Ag., Inc. (together the "Growers") who will provide their entire potato harvest to the packing facility and (b) a 5-year lease agreement whereby CFP will lease the packing facility and equipment from Cummins Family Holdings, LLC. We believe that both agreements reflect current pricing in the industry. We have no rights to renew these agreements. Mr. Cummins is a majority shareholder in Southern Slope, Inc. and family members of his are the majority shareholders in Black Rock Ag., Inc. The Preferred Stock initially issued to the Purchaser in regard to this transaction is convertible at $0.07 per share into a total of 28,571,429 shares of our common stock and will substantially dilute our existing common shareholders. As a result of this transaction, Mr. Cummins will control over 60% of the voting shares of the Company. In the CFP Purchase Agreement, we agree to indemnify the Purchaser against damages it may suffer as a result of our breach of certain representations and warranties we have made in that Agreement. The Purchaser also has agreed to indemnify us against damages that may result if it breaches certain representations and warranties it has made relating to CFP and the Purchaser. Reference is made to, and each investor in the Preferred Stock must review, the CFP Purchase Agreement for a complete description of the terms of the CFP transactions. RELATED PARTY TRANSACTIONS As previously stated, Mr. Wesley Cummins is a director and shareholder of the Company, and holds a controlling interest in Cummins Family Limited Partnership, Cummins Family Holdings, LLC and Southern Slope, Inc. Mr. Wesley Cummins' family members hold a controlling interest in Black Rock Ag., Inc. FLIGHT SAFETY TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2008 AND 2007 (Unaudited) (Continued) Mr. James Schwartz, a director of the Company, is the managing member of Harvey Partners, LLC, a Delaware limited liability company that is the manager of Harvey SMidCap Fund LP, a Delaware limited partnership, and Harvey SMidCap Offshore Fund, Ltd., a Cayman Islands exempted company, which are participating in the Preferred Stock offering. Mr. Kenneth Wood, President and Chief Executive Officer and a director of the Company is participating in the Preferred Stock offering. Mr. Richard S. Rosenfeld, Chief Financial Officer, Vice president of Operations, Secretary/Treasurer is participating in the Preferred Stock offering. CHANGE IN CONTROL As a result of these transactions, Mr. Wesley Cummins will exercise or control in excess of 60% of the voting power of the Company. This change in control will also create limitations to the use of the Company's existing net operating tax loss carryforwards.