Applied Digital Corp. 10-Q

Item 1. Financial Statements. FLIGHT SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS Unaudited ASSETS February 28, 2009 May 31, 2008 Current assets: Cash and cash equivalents $ 389,796 $ 877,899 Customer receivables 1,075,328 64,396 Inventory 121,916 - Investment, at fair value - 125,000 Other current assets 91,776 60,512 1,678,816 Machinery and equipment, net of accumulated depreciation of $449,440 and $478,149, respectively 274,001 38,821 Other assets: Intangible assets, net of accumulated amortization of $104,589 and $10,662, respectively 2,523,619 68,188 Other receivable - 30,460 Total Assets $ 4,476,436 $ 1,265,276 Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 1,571,530 $ 187,574 Accrued expenses 286,477 289,739 Accrued dividends 31,663 - Notes payable and current portion of long-term debt 135,385 - 2,025,055 Long-term note payable 109,634 - Stockholders' equity: Series A, convertible preferred stock, $.001 par value authorized 70,000 shares, 24,400 issued and outstanding, less notes receivable of $29,333 2,410,667 - 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 13,854,425 13,470,027 Treasury stock, 36,300 shares, at cost (62,371) (62,371) Accumulated deficit (13,869,955) (12,628,125) 2,341,747 Total Liabilities and Shareholders' Equity $ 4,476,436 $ 1,265,276 The accompanying notes are an integral part of these consolidated financial statements FLIGHT SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE-MONTHS ENDED FEBRUARY 28, 2009 AND FEBRUARY 29, 2008 (unaudited) Three-months ended Nine-months ended 2009 2008 2009 2008 Revenues $ 1,531,804 $ 125,885 $ 1,669,517 $ 247,230 Cost of revenues 1,322,812 31,269 1,383,848 109,285 Gross profit 208,992 94,616 285,669 137,945 Operating expenses: Selling, general and administrative 449,364 791,777 1,214,900 2,349,685 Depreciation and amortization 105,190 27,250 131,131 81,750 Research and development 84,903 36,373 175,629 230,133 Other income - - (24,281) - Total operating expenses 639,457 855,400 1,497,379 2,661,568 Operating loss (430,465) (760,784) (1,211,710) (2,523,623) Interest income (expense), net (2,598) 12,217 2,864 82,990 Loss before provision for income taxes (433,063) (748,567) (1,208,846) (2,440,633) Provision for income taxes 1,321 - 1,321 - Net loss (434,384) (748,567) (1,210,167) (2,440,633) Dividends on preferred stock 31,663 - 31,663 - Net loss to common shareholders $ (466,047) $ (748,567) $(1,241,830) $ (2,440,663) Net loss per common share: Basic $ (0.05) $ (0.09) $ (0.14) $ (0.29) Diluted $ (0.05) $ (0.09) $ (0.14) $ (0.29) Weighted average number of common shares outstanding: Basic 8,945,063 8,372,133 8,755,420 8,300,465 Diluted 8,945,063 8,372,133 8,755,420 8,300,465 The accompanying notes are an integral part of these consolidated financial statements FLIGHT SAFETY TECHNOLOGIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE-MONTHS ENDED (unaudited) February 28, 2009 February 29, 2008 Cash flows from operating activities: Net loss to common shareholders $ (1,241,830) $ (2,440,633) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 131,131 81,750 Share-based compensation 34,947 142,224 Gain on disposition of assets (18,393) - Common stock issued pursuant to legal settlement - 185,000 Changes in operating assets and liabilities: Customer and other receivables (330,952) 10,897 Inventory (65,614) - Accrued dividends 31,663 - Other current assets 120,213 95,596 Accounts payable and accrued expenses (34,318) (23,830) Net cash used in operating activities (1,373,153) (1,948,996) Cash flows from investing activities: Purchase of furniture and equipment (22,050) - Proceeds from sale of investment securities 125,000 550,000 Proceeds from sale of assets 22,025 - Cash of business acquired 493,581 - Payments for patents and trademarks (95,000) (54,854) Net cash provided by investing activities 523,556 495,146 Cash flows from financing activities: Repayment of debt (49,173) - Sale of preferred stock, net of notes receivable issuance 410,667 - Net cash provided by financing activities 361,494 - Net decrease in cash and cash equivalents (488,103) (1,453,850) Cash and cash equivalents at beginning of period 877,899 2,439,911 Cash and cash equivalents at end of period $ 389,796 $ 986,061 Supplemental non-cash disclosures: Issuance of common stock for purchase of furniture and equipment and license fee $ 350,000 $ - Issuance of preferred stock for acquired business 2,000,000 - Issuance of notes payable to finance prepaid expenses 89,477 - Issuance of notes receivable in exchange for preferred tock 82,333 - Proceeds on asset sale offset by amounts due - 9,735 The accompanying notes are an integral part of these consolidated financial statements FLIGHT SAFETY TECHNOLOGIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE NINE-MONTHS ENDED FEBRUARY 28, 2009 AND FEBRUARY 29, 2008 Series A Convertible Preferred Stock Common Stock Additional Paid-in Capital Treasury Stock Accumulated Deficit Stockholders' Equity Shares Amount Notes Receivable 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 11,942 103,092 115,034 Common stock issued 100,000 100 184,900 185,000 Share-based compensation 27,190 27,190 Net loss (2,440,633) (2,440,633) Balance February 29, 2008 - 8,431,510 $8,432 $13,349,487 $ (62,371) $(11,782,459) $1,513,089 Balance May 31, 2008 - - - 8,431,510 $8,432 $13,470,027 $ (62,371) $(12,628,125) $ 787,963 Share-based compensation 34,947 34,947 Issuance of stock 549,853 549 349,451 350,000 Sale of preferred stock 4,400 $ 440,000 $ (82,333) 357,667 Note payments 53,000 53,000 Acquisition of CFP 20,000 2,000,000 2,000,000 Net loss (1,210,167) (1,210,167) Dividend on preferred stock (31,663) (31,663) Balance February 28, 2009 24,400 $2,440,000 $ (29,333) 8,981,363 $8,981 $13,854,425 $ (62,371) $(13,869,955) $ 2,341,747 The accompanying notes are an integral part of these consolidated financial statements FLIGHT SAFETY TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED FEBRUARY 28, 2009 AND FEBRUARY 29, 2008 (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. ("APP") and as of January 1, 2009, its recently acquired wholly-owned subsidiary Cummins Family Produce, Inc. ("CFP"). 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. As of January 1, 2009, we acquired 100% of the outstanding stock of Cummins Family Produce, Inc., a potato packing business located in Idaho. The consideration we provided is the assumption of a bank promissory note in the amount of approximately $204,000 and 20,000 shares Preferred Stock (see note 10) 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 earnings before interest, taxes, depreciation and amortization calculated over the next two years, less the value of the bank promissory note assumed. Immediately prior to this transaction, CFP executed (a) a 5-year supply agreement with its primary 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 the prior owners. We believe that both agreements reflect current pricing in the industry. We have no rights to renew these agreements. See Notes 10 and 11 to our consolidated financial statements for a more detailed explanation of these transactions and for related party information. These interim financial statements for the three and nine-months ended February 28, 2009 and February 28, 2008, 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. 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. On January 14, 2009, we completed a series of transactions in order to generate recurring cash flow and working capital. See Notes 9 and 10 of Notes to Consolidated Financial Statements for a full description of the transactions. However, we anticipate that by the end of April 2009, we will need to secure additional working capital financing, until product revenues and cash flow from CFP create a sustainable operation, of which there can be no assurance. However, we cannot predict or estimate the timing or amount of our working capital needs with certainty as the timing and amounts 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 by the transaction described in Note 10. In the event we are unable to secure additional working capital as and when we need it, 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 receivables, inventory, intangible assets, and the calculation of share-based compensation. Actual results could differ from those estimates. 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 compensation expense related to employee stock options of $11,649 and $34,947 for the three and nine months ended February 28, 2009, respectively and $9,749 and $142,224 for the three and nine months ended February 28, 2008, 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 nine-months ended February 28, 2009 and February 29, 2008, respectively. Loss Per Share: Basic loss per share is computed by dividing net loss to common shareholders by the weighted average number of shares of common stock outstanding during the period. For the interim periods presented the effect of stock options, warrants and convertible preferred stock 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, warrants and convertible preferred stock that were excluded from the computation as their effect would be anti-dilutive, were 7,967,875 and 3,953,215 for the nine months ended February 28, 2009 and February 29, 2008, respectively. Cash and Cash Equivalents: For purposes of reporting cash flows we consider 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. 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. The Company recognizes revenue in accordance with the provision of the Securities and Exchange Commission Staff Accounting Bulletin ("SAB") No. 104 which establishes guidance in applying generally accepted accounting principles to revenue recognition in financial statements. SAB No. 104 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the price to the buyer is fixed or determinable; and (4) collectability is reasonably assured. The Company`s shipping terms are customarily FOB shipping point. Revenues for products sold in the normal course of business are recognized upon shipment when delivery terms are FOB shipping point and all other revenue recognition criteria have been met. In regards to our newly acquired potato packing business (CFP) the cost of product (the amount we pay to the growers) is determined by subtracting from our selling price previously negotiated packing fees with the respective growers. Inventory: Inventories consist primarily of a base stock of consumable parts as relates to APP and packing materials and packed and loose potatoes as relates to CFP. Inventories are valued at lower of cost or market as relates to APP and estimated selling price less packing fee as relates to CFP. Machinery and Equipment: Machinery and equipment are stated at original cost or fair value at the date of acquisition in the case of CFP and Advanced Plasma Products, Inc. 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 7-10 years Furniture & fixtures 10 years Automobiles 5 years Software and computers 3-5 years Intangible Assets: At February 28, 2009, intangible assets consist of patent costs associated with, AWSM, TIICM™ and atmospheric glow technologies and the value of the supply contract between CFP and certain growers. 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. The supply contract is being amortized over its five-year term. 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 intangible assets 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 intangible assets. The Company also considers the likelihood of obtaining required research and development funding in relation to patent valuation. 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. Concentration of Credit Risk: The Company had amounts in excess of $250,000 in a single bank during the year. Amounts over $250,000 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. Our recent acquisition of CFP will create limitations on the use of our net operating loss carryforwards. 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 discontinued its match in September 2008. 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 adjustments as of February 28, 2009. At May 31, 2008 the investment consisted of an auction market preferred security, valued using Level 2 methodology. Note 4: Customer Receivables Customer receivables consisted of the following at: February 28, 2009 May 31, 2008 Contract receivables-billed $ 45,913 $ 64,396 Contract receivable-unbilled - 30,460 Customer receivables 1,029,415 - $ 1,075,328 $ 94,856 The amount classified as other receivables and contract receivable 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: February 28, 2009 May 31, 2008 Machinery and equipment $ 411,008 $ 225,163 Furniture and fixtures 42,792 16,177 Automobiles 52,730 122,278 Software and computers 216,911 153,352 723,441 516,970 Less accumulated depreciation (449,440) (478,149) $ 274,001 $ 38,821 Note 6: Intangible Assets Intangible assets currently consist of costs associated with the newly acquired atmospheric glow technology, the company's existing TIICM and AWSM technologies and a supply contract acquired through the acquisition of CFP (see Note 10). As more fully explained in Note 2, the Company has suspended all further research and development on the TIICM and AWSM technologies, having an aggregate carrying value $64,714. Accordingly, we continue to evaluate the carrying value of the TIICM and AWSM technologies to determine if those values have been impaired. Our intangibles are as follows at February 28, 2009: Cost Amortization Book Value Supply contract $ 2,304,358 $ 76,800 $ 2,227,558 Patents and trademarks 323,850 27,789 296,061 Totals $ 2,628,208 $ 104,589 $ 2,523,619 Note 7: Long-Term Note Payable Long-term debt consists of the following: Description Balance Bank installment note-6%-payable in equal monthly installments of $7,616 consisting of interest and principal. Note due May 15, 2011 $ 191,632 Less current portion (81,998) Long-term note payable $ 109,634 This note is personally guaranteed by one of our directors and former shareholder of CFP. Note 8: Stockholders' Equity Warrants: As of February 28, 2009 and May 31, 2008, the Company had 0 and 1,919,200 warrants outstanding, respectively, with exercise prices ranging from $3.30 to $5.40 and a weighted average exercise price of $3.49. All of the Company's warrants expired January 29, 2009. Stock Options: Under the Company's 2005 Stock Incentive Plan, there are 1,470,000 shares available for future awards at February 28, 2009. During the nine-month period ended February 28, 2009, no awards were made and 443,000 shares were cancelled. The weighted average exercise price of the 600,000 options outstanding is $3.50. The aggregate intrinsic value of the outstanding options is $0. As of February 28, 2009 there was $18,400 of total unrecognized compensation cost related to the non-vested stock options that is expected to be expensed over the next 2 fiscal quarters. Series A Convertible Preferred Stock: Each share of Series A Convertible Preferred Stock ("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, 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 liquidation 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. Note 9: Sale Of Shares Of Preferred Stock During the period January 13, 2009 through January 26, 2009, we sold 4,400 shares of our Preferred Stock for $100 per share to a group of investors (the "Investors") raising 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"). The Employees purchased an aggregate amount of $100,000 of Preferred Stock. Four of these employees purchased shares with a 20% cash payment and by executing a non-interest bearing promissory note payable semimonthly with a maturity date of March 31, 2009. One of these employees purchased shares with an 8% cash payment and by executing 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. We agree to indemnify Investors against damages they may suffer in the event of our breach of certain representations and warranties we have made. Reference is made to the Certificate and the Investor Purchase Agreement for a complete description of the terms of the Preferred Stock. The net proceeds were used for general working capital purposes. Note 10: Acquisition Of CFP With Shares Of Preferred Stock Pursuant to a Purchase Agreement dated as of January 13, 2009 (the "CFP Purchase Agreement"), the Company acquired 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. In exchange, the Company assumed a bank promissory note in the amount of approximately $204,000 owed by Mr. Cummins in connection with the operations of CFP and issued 20,000 shares Preferred Stock valued at $2 million. Under a performance based earn-out provision, the Company is 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 earnings before interest, taxes, depreciation, and amortization, calculated over the next two years, less the value of the bank promissory note assumed. Immediately prior to this transaction, CFP executed (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. The Company believes that both agreements reflect current pricing in the industry. The Company has 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 has substantially diluted 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, the Company agreed to indemnify the Purchaser against damages it may suffer in the event of our breach of certain representations and warranties the Company has made in that Agreement. The Purchaser also has agreed to indemnify the Company against damages in the event of breaches in representations and warranties it has made relating to CFP and the Purchaser. This acquisition was accounted for under the purchase method of accounting with results of operations for CFP included in our results beginning January 1, 2009. Under the purchase method of accounting, the assets and liabilities of CFP were recorded at their respective fair values as of January 1, 2009. The following condensed balance sheet of CFP discloses the amounts assigned to each major asset and liability caption at the acquisition date. The allocation of the final purchase price is subject to adjustment based upon future EBITDA and as additional information becomes available. January 1, 2009 unaudited ASSETS: Cash $ 493,581 Customer receivables 649,520 Other current assets 118,303 1,261,404 Equipment 53,966 Supply contract (1) 2,304,358 Total assets 3,619,728 LIABILITIES: Accounts payable 1,382,384 Accruals and other 113,813 1,496,197 Long-term note payable 123,531 Total liabilities 1,619,728 Net assets acquired $ 2,000,000 (1) the supply contract is being amortized over its 5-year term The following unaudited pro-forma condensed consolidated statements of operations for the nine-months ended February 28, 2009 and February 29, 2008, reflects the consolidated results of operations as if the acquisition of CFP had occurred as of June 1, 2008 and 2007. The historical information of CFP was not audited and the condensed financial information is based on the historical results of the Company and the unaudited results of CFP. Unaudited pro-forma data is not necessarily indicative of the results that would have occurred had the acquisition taken place at the beginning of the periods presented, nor of future results. Pro Forma Consolidated Combined Financial Statements For the Nine-Months Ended February 28, 2009 (unaudited) Historical Flight Safety (1) Historical CFP Pro Forma Acquisition Adjustments Pro Forma Combined Revenues $ 1,669,517 $ 4,471,509 $ 6,141,026 Cost of revenues 1,383,848 3,959,867 5,343,715 Gross profit 285,669 511,642 797,311 Operating expenses 1,497,379 847,094 $ 119,496 (2, 3) 2,463,969 Operating (loss) (1,211,710) (335,452) (119,496) (1,666,658) Interest income (expense), net 2,864 (8,880) - (6,016) Loss before provision for income taxes (1,208,846) (344,332) (119,496) (1,672,674) Income tax expense 1,321 - (1,321) (4) - Net loss (1,210,167) (344,332) (118,175) (1,672,674) Dividends on preferred stock 31,663 - - 31,663 Net loss to common shareholders $ (1,241,830) $ (344,332 ) $ (118,175) $ (1,704,337) Net loss per common share: Basic and diluted $ (0.14) $ (0.19) Weighted average number of shares outstanding: Basic and diluted 8,755,420 8,755,420 (1) Includes results of CFP from date of acquisition consisting of revenues of $1,527,604 and net income of $46,062. (2) Amortization of growers' supply contract for the period prior to acquisition ($268,800) (3) Adjustment for facility lease $149,304 (3) Elimination of state income tax provision Pro Forma Consolidated Combined Financial Statements For the Nine-Months Ended February 29, 2008 (unaudited) Historical Flight Safety Historical CFP Pro Forma Acquisition Adjustments Pro Forma Combined Revenues $ 247,230 $ 5,011,531 $ 5,258,761 Cost of revenues 109,285 4,087,214 4,196,499 Gross profit 137,945 924,317 1,062,262 Operating expenses 2,661,568 667,969 $ 525,600 (1,2) 3,855,137 Operating (loss) (2,523,623) 256,348 (525,600) (2,792,875) Interest income (expense), net 82,990 (172,543) 172,543 (3) 82,990 Loss before provision for income taxes (2,440,633) 83,805 (353,057) (2,709,885) Income tax expense - - - - Net loss $ (2,440,633) $ 83,805 $ (353,057) $ (2,709,885) Net loss per common share: Basic and diluted $ (0.29) $ (0.33) Weighted average number of shares outstanding: Basic and diluted 8,330,465 8,330,465 (1) Amortization of growers supply contract ($345,600) (2) Adjustment for facility lease ($180,000) (3) Adjustment for facility lease CFP was formed in May 2008 in connection with the acquisition of a previously existing, potato packing and trucking business that was family owned and managed. During the period prior to the acquisition by CFP, the acquired business engaged in several significant transactions amongst its shareholders and other related parties that may not have been at arms-length. Further, we believe that historical financial statements of CFP and its predecessor prior to our acquisition of CFP would not be indicative of the operations of the ongoing business that we acquired due to the restructuring and streamlining of operations that occurred subsequent to May 2008. As a result, we believe that we cannot prepare audited financial statements. Had we been able to conduct an audit of the acquired business's historical financial statements, potential adjustments to the amounts included above may have come to our attention. Note 11: Related Party Transactions and Change in Control Mr. Wesley Cummins, a director and shareholder of the Company, 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. Amounts due from Southern Slope, Inc. at February 28, 2009 are $4,584 and are included in customer receivables on the consolidated balance sheet. Amounts due to Southern Slope, Inc. and Black Rock Ag, Inc. under the supply agreement at February 29, 2009 amount to $1,207,944 and are included in accounts payable on the consolidated balance sheet. 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 participated in the Preferred Stock offering. Mr. Kenneth Wood, President and Chief Executive Officer and a director of the Company participated in the Preferred Stock offering. Mr. Richard S. Rosenfeld, Chief Financial Officer, Vice president of Operations, Secretary/Treasurer participated in the Preferred Stock offering. As a result of these transactions, Mr. Wesley Cummins now exercises or controls 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. Note 12: Segment Information Information regarding segments is presented in accordance with SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." Based on the criteria outlined in SFAS 131, the Company's operations are classified into two reportable business segments as described below. Advanced Plasma Products, Inc. (APP): APP has exclusive proprietary rights to a series of patents relating to One Atmospheric Uniform Glow Discharge Plasma (OAUGDP®) technology, and the rights to develop products and capabilities based upon this technology. APP's OAUGDP® is a technology that electrically breaks down air creating highly reactive chemical species. This resultant unique plasma-generated chemistry is then used to produce desired outcomes such as alteration of material properties, destruction of microorganisms, and destruction of odor-causing chemicals. The Company is currently developing commercial products utilizing this technology as well as pursuing certain research and development projects and accordingly includes revenues from previous research and development contracts. Cummins Family Produce, Inc. (CFP): CFP is a potato packing facility that was acquired for its cash flow. See Note 10 for a fuller description. CFP was acquired as of January 1, 2009. Three-months ended Nine-months ended February 28, 2009 February 29, 2008 February 28, 2009 February 29, 2008 Revenues: APP $ 4,200 $ 125,885 $ 141,913 $ 247,230 CFP 1,527,604 - 1,527,604 - Consolidated revenues $ 1,531,804 $ 125,885 $1,669,517 $ 247,230 Operating income (loss): APP $ (186,057) $ 94,616 $ (281,415) $ 137,945 CFP 49,402 - 49,402 - Corporate (293,810) (855,400 (979,697) (2,661,568) Consolidated operating (loss) (430,465) (760,784) (1,211,710) (2,523,623) Interest income (expense), net (2,598) 12,217 2,864 82,990 Provision for income tax (1,321) - (1,321) - Net loss $ (434,384) $ (748,567) $(1,210,167) $(2,440,633) Depreciation and amortization: APP $ 18,513 $ - $ 30,078 $ - CFP 79,489 - 79,489 - Corporate 7,188 27,250 21,564 81,750 Consolidated depreciation and Amortization $ 105,190 $ 27,250 $ 131,131 $ 81,750 February 28, 2009 May 31, 2008 Total assets: APP $ 466,489 $ - CFP 3,657,179 - Corporate 352,768 1,265,276 Consolidated assets $ 4,476,436 $ 1,265,276 For the nine months ended February 28, 2009, 3 customers accounted for 42% of revenues of the CFP segment. All revenues are U.S. generated and all assets are U.S. based, for all segments.